<PAGE>
As filed with the Securities and Exchange Commission on October 19, 1999
Registration No. 333-85997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
Amendment No. 2 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>
1160 Bordeaux Drive
Sunnyvale, California 94089
(408) 745-9600
(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.
1160 Bordeaux Drive Sunnyvale, California 94089 (408) 745-9600
(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 19, 1999
PRELIMINARY PROSPECTUS
4,000,000 Shares
[LOGO OF SONICWALL, INC.]
$ 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 54
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 to read about the risks you should consider before
buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
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................................. $ $
Proceeds to the selling shareholders (1)........................ $ $
</TABLE>
-----------
(1) The underwriters may purchase up to an additional 600,000 shares from
Sreekanth Ravi and Sudhakar Ravi, two of our executive officers and principal
shareholders, at the initial public offering price less the underwriting
discount, solely to cover over-allotments.
The underwriters expect to deliver the shares in New York, New York on or about
November , 1999.
-----------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
The date of this prospectus is November , 1999
<PAGE>
Title: SonicWALL (logo)
[PICTURE OF SONICWALL PRODUCTS]
Firewall Security
Blocks access to the network by unauthorized persons.
Virtual Private Networking
Enables secure communications between branch offices and their corporate
networks.
Content Filtering
Blocks objectionable websites.
[SonicWALL, Inc. LOGO]
GATEFOLD ARTWORK TEXT:
Title: SonicWALL (logo) Internet Security Appliances
Corporate Firewall
Our products are compatible with Internet security products for large corporate
networks such as Check Point Software's Firewall-1. We have no affiliation with
these companies.
Virtual Private Networking
With SonicWALL, mobile workers can use VPN to connect securely to the office.
Mobile Worker
Cable Modem or DSL Connection
Virtual Private Networking (branch office)
A SonicWALL may be deployed at each branch office for complete Internet
security: firewalling, VPN and content filtering.
Firewall Security
With SonicWALL, small to medium size businesses can deploy Internet security.
SonicWALL DMZ protects Web and e-commerce servers deployed by these businesses.
Content Filtering
With SonicWALL with content filtering schools and libraries can protect
children from objectionable Web sites as well as secure the network from
Internet hackers.
Firewall Security: Blocks access to the network by unauthorized
persons..Virtual Private Networking (VPN): Enables secure communications
between branch offices and their corporate networks..Content Filtering: Block
objectionable websites.
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.
An investment in our shares involves a high degree of risk. The risks
associated with investing in our stock include the following. We have incurred
losses during the last three years. We may not achieve profitability in the
future. We compete in a highly competitive market and competition may
intensify. After the offering, our officers and directors and their affiliates
will own approximately 66.4% of our outstanding stock and, if acting together,
would be able to significantly influence all matters requiring shareholder
approval. We depend on three distributors for over 57% of our revenue. Due to
any of these risks, the trading price of our common stock could decline and you
could lose all or part of your investment. Read this entire prospectus
carefully, especially the risks described under "Risk Factors."
SonicWALL, Inc.
SonicWALL, Inc. designs, develops, manufactures and sells Internet security
infrastructure products designed to provide secure Internet access to our
broadband customers. Broadband access, such as digital subscriber line, or DSL,
and cable modems, allows users to connect to the Internet at speeds
significantly greater than analog modems. We believe our security appliances
provide high performance, robust, reliable, easy-to-use and affordable Internet
security. We also sell content filtering services on an annual subscription
basis. We sell our products to customers in the small to medium enterprise,
branch office, telecommuter and education markets. Small to medium enterprises
are generally considered to have less than 1,000 people. As of September 30,
1999, we had sold more than 18,000 of our Internet security appliances
worldwide.
From inception in 1991 through 1996, we derived substantially all of our
revenue from the sale of Ethernet products for Apple Computer Inc. Macintosh
computers. These products included network interface cards which enable Apple
Macintosh computers to connect to computer networks using Ethernet protocols.
In 1998, we made a strategic business decision to concentrate our resources in
the Internet security market due to our belief that this market had better
long-term growth prospects. As a result, we intend to stop shipments of our
Ethernet product line by December 1999. 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. In 1998, our Internet security products represented approximately 31%
of our total revenue and in the nine months ended September 30, 1999, they
represented 88% of our total revenue. In 1998, our Ethernet products
represented approximately 69% of our total revenue and in the nine months ended
September 30, 1999, Ethernet products represented approximately 12% of our
total revenue.
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. In addition, these solutions often require additional
products to incorporate enhanced functionalities such as virtual private
networking and content filtering. We believe the expense and complexity of
these solutions make them impractical for the majority of small to medium
enterprises, branch offices, telecommuters and education users. These users are
increasingly demanding robust, reliable, easy-to-use and affordable Internet
security products.
Our SonicWALL product line provides our customers with a comprehensive
integrated security solution that includes a firewall, content filtering and
virtual private networking. A firewall blocks access to the network by
unauthorized persons. Content filtering blocks access to objectionable web
sites. Virtual private networking
3
<PAGE>
enables secure communications between branch offices or telecommuters and their
corporate networks. We believe 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 are designed to enable customers to reduce
purchase costs and avoid hiring costly IT personnel. Our SonicWALL products are
designed to maximize reliability and uptime, can be used in networks ranging in
size from 1 to 1,000 users, and are fully compatible with more expensive
enterprise security products offered by, among others, Check Point Software
Technologies, Ltd. and Cisco Systems, Inc.
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 1160 Bordeaux Drive, Sunnyvale, California 94089, and our telephone number
is (408) 745-9600. 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>
<C> <S>
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
growth and capital
expenditures to expand
our administrative
infrastructure and
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 September 30, 1999. This number excludes
1,131,760 shares of common stock reserved for issuance under our stock plans
and 3,586,500 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 Nine Months Ended
31, September 30,
----------------------- ------------------
1996 1997 1998 1998 1999
------ ------ ------- -------- --------
Statement of Operations Data: (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
Internet security............... $ -- $ 250 $ 2,349 $ 924 $ 10,677
Ethernet........................ 9,356 9,092 5,166 4,456 1,474
------ ------ ------- -------- --------
Total revenue.................. 9,356 9,342 7,515 5,380 12,151
Cost of revenue.................. 5,915 4,842 3,308 2,485 3,462
------ ------ ------- -------- --------
Gross margin..................... 3,441 4,500 4,207 2,895 8,689
Operating expenses
Research and development........ 1,048 1,983 2,051 1,417 2,198
Sales and marketing............. 1,665 2,468 2,870 2,082 3,408
General and administrative...... 432 644 753 541 1,189
Deferred stock compensation..... -- -- 42 -- 1,301
------ ------ ------- -------- --------
Total operating expenses....... 3,145 5,095 5,716 4,040 8,096
Income (loss) from operations.... 296 (595) (1,509) (1,145) 593
Other income (expense), net...... 22 29 54 36 205
------ ------ ------- -------- --------
Income (loss) before income
taxes........................... 318 (566) (1,455) (1,109) 798
Benefit from (provision for)
income taxes.................... (350) 99 (6) -- (787)
------ ------ ------- -------- --------
Net income (loss) ............... $ (32) $ (467) $(1,461) $ (1,109) $ 11
====== ====== ======= ======== ========
Basic net income (loss) per
share........................... $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ====== ======= ======== ========
Diluted net income (loss) per
share........................... $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ====== ======= ======== ========
Shares used in computing basic
net income (loss) per share..... 8,460 8,461 11,251 10,290 16,367
====== ====== ======= ======== ========
Shares used in computing diluted
net income (loss) per share..... 8,460 8,461 11,251 10,290 19,421
====== ====== ======= ======== ========
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........................... 18,727
========
Shares used in computing pro
forma diluted net income per
share........................... 19,421
========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------
(unaudited)
Pro Forma
Combined Consolidated Actual Pro Forma as Adjusted
Balance Sheet Data: ------- --------- -----------
<S> <C> <C> <C>
Cash and cash
equivalents............ $ 8,766 $ 8,766 $48,466
Total assets............ 15,107 15,107 54,807
Redeemable Series A
convertible preferred
stock.................. 4,971 -- --
Total shareholders'
equity................. 3,168 8,139 47,839
</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 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 through 1996, we derived substantially all of our revenue
from the sale of Ethernet 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 revenue were $9,356,000,
$9,092,000, and $5,166,000 and represented approximately 100%, 97%, and 69%,
respectively, of our total revenue. For the nine-month period ended September
30, 1999, Ethernet product revenue was approximately $1,474,000 and represented
12.1% of our total revenue.
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 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 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. As of September 30, 1999, we had 53 employees, an increase of
approximately 104%. 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. We do not know if we will be
profitable in the future.
We incurred losses of $32,000 in 1996, $467,000 in 1997 and $1,461,000 in
1998, which represented 0.3%, 5.0% and 19.5%, respectively, of total revenue.
We made $11,000 in profit, or less than 1% of revenue, for the nine months
ended September 30, 1999. We do not know if we will be able to achieve
profitability in the future. If we are not able to achieve profitability, your
investment may decline in value.
6
<PAGE>
Because we recently introduced our Internet security products, we cannot
predict our future operating results or our future revenues from these
products.
Because we recently changed our business focus from Ethernet 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.
Our limited experience with sales of Internet security products is one of
many factors underlying our inability to predict 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 depend on three major distributors for over 57% 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 distributors have
accounted for a significant portion of our revenue. Two of our distributors,
Ingram Micro, Inc. and Tech Data Corp., both of which are global computer
equipment and accessory distributors, account for approximately 46% of our
revenue. In 1998, sales to Ingram Micro accounted for 34% of our revenue. For
the nine months ended September 30, 1999, sales to Ingram Micro, Tech Data and
Sumitomo Metal Systems Development Company, a computer equipment and accessory
distributor in Japan, accounted for 35%, 11% and 11% of our revenue,
respectively. We cannot assure you that any 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.
We anticipate that sales of our products to relatively few customers will
continue to account for a significant portion of our revenue. 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. In addition, as of September 30, 1999, Ingram Micro, Tech Data, and
Sumitomo Metal represented $1.4 million, $0.6 million, and $0, respectively, of
our accounts receivable, constituting 56%, 23% and 0%, respectively, of total
receivables on such date. Although we have experienced no difficulties in
receiving timely payment of accounts receivable from these distributors, the
failure of any of these distributors to pay us in a timely manner would
adversely affect our payments to suppliers and our creditworthiness, which
would make it more difficult to conduct business.
Although we have limited one year agreements with Ingram Micro, Tech Data
and Sumitomo Metal, 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.
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; and
. receive discounts based upon expected volumes of products purchased
or resold in a given period.
7
<PAGE>
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. 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.
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. This 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 such products held in their inventory based upon the new list
price. As of September 30, 1999, we estimate that approximately $1.2 million of
our products were in our distributors' inventory and therefore subject to price
protection. This amount represented approximately 10% of our revenue for the
nine-month period ending at such date. We have provided less than $100,000 of
credits under our price protection policies in the past three fiscal years.
Future credits for price protection will depend on the percentage of our price
reductions for the products in inventory and our ability to manage the level of
our major distributors' inventory. New product introductions or price
reductions by us or our competitors could result in significant product price
adjustments. If future price protection adjustments are higher than expected,
our future results of operations could be materially adversely affected.
We are dependent on international sales for a substantial amount of our
revenue. We face the risks of international business and associated currency
fluctuations, which might adversely affect our operating results.
International revenue represented 32% of total revenue in 1998 and 33% of
total revenue for the nine months ended September 30, 1999. For the nine months
ended September 30, 1999, revenue from Japan represented 15% of our total
revenue, and revenue from Europe, the Middle East and Africa collectively
represented approximately 13% of our total revenue. We expect that
international revenue will continue to represent a substantial portion of our
total revenue in the foreseeable future. Our risks of doing business abroad
include our ability to maintain distribution relationships on favorable terms.
To the extent we are unable to favorably renew our distribution agreements or
make alternative arrangements, revenue may decrease from our international
operations. We also face risks associated with general economic conditions and
regulatory uncertainties associated with our international sales. 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.
We are subject to the risks of conducting business internationally,
including potential foreign government regulation of our technology, and
general geopolitical risks associated with political and economic instability,
changes in diplomatic and trade relationships, and foreign countries' laws
affecting the Internet generally.
Delays in deliveries from our component suppliers could cause our revenue to
decline and adversely affect our results of operations.
Our SonicWALL products incorporate 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
8
<PAGE>
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. This could cause a loss of revenue which would adversely affect our
results of operations. 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 some circumstances. Defending a lawsuit, 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. 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 twelve 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
9
<PAGE>
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 or 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.
Undetected product errors or defects could result in loss of revenue, delayed
market acceptance and claims against us.
We offer a one-year warranty on all of our products, allowing the end user
to receive a repaired or replacement product for any defective unit.
Historically, refunds based on product warranty claims have been insignificant.
Although we have discovered few errors or defects in our products, our products
may contain undetected errors or defects. If there is a product failure, we may
have to replace all affected products without being able to book revenue for
such replacement units, or we may have to refund the purchase price for such
units. Because of our 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. In
the nine months ended September 30, 1999, refunds attributable to errors or
defects in products amounted to less than 1% of total revenue for the period.
10
<PAGE>
If we do not retain our key employees and attract 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 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.
11
<PAGE>
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 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 some 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.
12
<PAGE>
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.
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 have information concerning the Year 2000 compliance status for
all 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.
13
<PAGE>
We do not currently have any contingency plans with respect to Year 2000
worst case scenarios. In the worst case scenario, any Year 2000 related failure
of any of our critical suppliers or customers could cause a significant
disruption of our assembly operations or sales channels and could result in our
inability to conduct business without interruption. If, in the worst 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 such instance, our revenues may be adversely
affected, our maintenance, technical support and management costs could
increase and our reputation could be damaged. 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.
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
administrative infrastructure. 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 majority of 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 they will own approximately 66.4% of our stock ownership after the
offering, our officers, directors and their affiliates 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 66.4% 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.
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."
14
<PAGE>
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.
Substantial future sales of our common stock in the public market could cause
our stock price to fall.
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 September 30, 1999, assuming no exercise of
outstanding options after September 30, 1999. Of these shares, the 4,000,000
shares sold in this offering will be freely tradable, and 19,600,594 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...................... 16,889,194
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 ability to
raise the amount of money we need to execute our business plan could be
adversely affected. See "Description of Capital Stock--Registration Rights."
Bear, Stearns & Co. Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. See "Shares Eligible for Future Sale."
You will experience substantial dilution in the value of your shares
immediately following this offering.
The price of the shares is substantially higher than the net tangible book
value per share. If you buy any shares in the offering, you will incur
immediate and substantial dilution in the pro forma net tangible book value of
each share. If others exercise options to purchase our common stock, you will
suffer further dilution. See "Dilution."
15
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus include
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future events, including, among
other things:
. implementing our business strategy;
. developing and introducing new products;
. obtaining and expanding market acceptance of the products we offer;
. meeting our requirements with our customers; and
. competition in the Internet security market.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations
and assumptions and are subject to a number of risks and uncertainties. A
description of some 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.
USE OF PROCEEDS
Our net proceeds from the sale and issuance of 4,000,000 shares of common
stock will be approximately $39.7 million, at an assumed initial public
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 are conducting this offering primarily to increase our equity capital,
create a public market for our common stock and to facilitate future access by
us to public equity markets. We do not have specific uses planned for much of
the offering proceeds. Of the net proceeds, we currently expect to use
approximately $3.0 million for growth and capital expenditures to expand our
administrative infrastructure. We intend to use the remaining net proceeds of
this offering for general corporate purposes, including working capital.
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.
16
<PAGE>
CAPITALIZATION
The following table shows as of September 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; and
. 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>
September 30, 1999
----------------------------------------
(unaudited)
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.... 7,494 12,465 52,165
Deferred stock compensation............ (3,029) (3,029) (3,029)
Notes receivable from shareholders..... (300) (300) (300)
Accumulated deficit.................... (997) (997) (997)
----------- ----------- -----------
Total shareholders' equity........... 3,168 8,139 47,839
----------- ----------- -----------
Total capitalization................. $ 8,139 $ 8,139 $ 47,839
=========== =========== ===========
</TABLE>
The number of shares of common stock issued and outstanding as of September
30, 1999 excludes:
. 1,131,760 shares available for grant under our stock option plans;
. 3,586,500 shares of common stock issuable upon exercise of options
outstanding under our stock option plans, at a weighted average
exercise price of $3.82 per share, of which options to purchase
576,790 shares are currently exercisable; and
. 250,000 shares of common stock available for issuance under our
employee stock purchase plan.
17
<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 September 30, 1999, after giving
effect to the conversion of all outstanding redeemable Series A convertible
preferred stock into common stock, was $6,601,000, or $0.34 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 September 30, 1999
would have been $46.3 million, or $1.96 per share. This represents an immediate
increase in the net tangible book value of $1.62 per share to existing
shareholders and an immediate dilution of $9.04 per share to new investors, or
approximately 82% 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 September 30,
1999........................................................ 0.34
Increase per share attributable to the offering ............. 1.62
----
Net tangible book value per share after this offering.......... 1.96
------
Dilution per share to new investors............................ $ 9.04
======
</TABLE>
The following table shows, at September 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.. 19,600,594 83.1 $12,465,000 22.1 $ 0.64
New Investors.......... 4,000,000 16.9 44,000,000 77.9 11.00
---------- ----- ----------- -----
Total................ 23,600,594 100.0% $56,465,000 100.0%
========== =========== =====
</TABLE>
The number of shares of common stock issued and outstanding as of September
30, 1999 excludes:
. 1,131,760 shares available for grant under our stock option plans;
. 3,856,000 shares of common stock issuable upon exercise of options
outstanding under our stock option plans, at a weighted average
exercise price of $3.82 per share, of which options to purchase
576,790 shares are currently exercisable; and
. 250,000 shares of common stock available for issuance under our
employee stock purchase plan.
18
<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 balance sheet data at December 31, 1997 and 1998 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 nine months ended September 30, 1998 and 1999, and the consolidated balance
sheet data at September 30, 1999 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>
Nine Months
Ended
Year Ended December 31, September 30,
---------------------------------------- ----------------
Statement of Operations 1994 1995 1996 1997 1998 1998 1999
Data: ------ ------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Internet security...... $ -- $ -- $ -- $ 250 $ 2,349 $ 924 $10,677
Ethernet............... 8,996 10,482 9,356 9,092 5,166 4,456 1,474
------ ------- ------ ------ ------- ------- -------
Total revenue........ 8,996 10,482 9,356 9,342 7,515 5,380 12,151
Cost of revenue......... 5,971 6,411 5,915 4,842 3,308 2,485 3,462
------ ------- ------ ------ ------- ------- -------
Gross margin............ 3,025 4,071 3,441 4,500 4,207 2,895 8,689
Operating expenses
Research and
development........... 1,077 1,241 1,048 1,983 2,051 1,417 2,198
Sales and marketing.... 1,322 1,856 1,665 2,468 2,870 2,082 3,408
General and
administrative........ 221 529 432 644 753 541 1,189
Deferred stock
compensation.......... -- -- -- -- 42 -- 1,301
------ ------- ------ ------ ------- ------- -------
Total operating
expenses............ 2,620 3,626 3,145 5,095 5,716 4,040 8,096
------ ------- ------ ------ ------- ------- -------
Income (loss) from
operations............. 405 445 296 (595) (1,509) (1,145) 593
Other income (expense),
net.................... (8) (30) 22 29 54 36 205
------ ------- ------ ------ ------- ------- -------
Income (loss) before
income taxes........... 397 415 318 (566) (1,455) (1,109) 798
Benefit from (provision
for) income taxes...... (99) (164) (350) 99 (6) -- (787)
------ ------- ------ ------ ------- ------- -------
Net income (loss)....... $ 298 $ 251 $ (32) $ (467) $(1,461) $(1,109) $ 11
====== ======= ====== ====== ======= ======= =======
Basic net income (loss)
per share.............. $ 0.03 $ 0.03 $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ======= ====== ====== ======= ======= =======
Diluted net income
(loss) per share....... $ 0.03 $ 0.02 $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ======= ====== ====== ======= ======= =======
Shares used in
calculation of basic
net income (loss) per
share.................. 9,294 9,626 8,460 8,461 11,251 10,290 16,367
====== ======= ====== ====== ======= ======= =======
Shares used in
calculation of diluted
net income (loss) per
share.................. 9,748 11,224 8,460 8,461 11,251 10,290 19,421
====== ======= ====== ====== ======= ======= =======
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.............. 18,727
=======
Shares used in the
calculation of pro
forma diluted net
income per share....... 19,421
=======
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------- September 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 $ 8,766
Total assets................. 3,320 2,810 3,448 2,374 4,751 15,107
Redeemable Series A
convertible preferred
stock....................... -- -- -- -- -- 4,971
Total shareholders' equity... $ 702 $ 963 $ 932 $ 465 $1,488 $ 3,168
</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.
19
<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
From inception through 1996, we derived substantially all of our revenue
from the development and marketing of Ethernet products for Apple Macintosh
computers. These products included network interface cards which enable Apple
Macintosh computers to connect to computer networks using Ethernet protocols.
In 1998, we made a strategic business decision to concentrate our resources in
the Internet security market due to our belief that this market had better
long-term growth prospects. As a result, we intend to stop shipments of our
Ethernet product line by December 1999. 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. Our
shift to selling Internet security products 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. In 1998, our Internet security products represented
approximately 31% of our total revenue and in the nine months ended September
30, 1999, they represented 88% of our total revenue. In 1998, our Ethernet
products represented 69% of our total revenue and in the nine months ended
September 30, 1999, Ethernet products represented approximately 12% of our
total revenue.
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 nine months ended
September 30, 1999, sales to Ingram Micro accounted for 34% and 35% of our
total revenue, respectively. In the nine months ended September 30, 1999, sales
to Tech Data and Sumitomo Metal accounted for 11% and 11%, respectively, 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 revenue. We generally
recognize revenue when we ship products to our customers. Agreements with many
of our distributors provide for stock rotation, price protection and co-op
advertising rights. Stock rotation rights provide a distributor the right to
exchange unsold inventory for alternative products. The value of stock that can
be rotated is generally limited to 15% of the prior quarter's purchases. Co-op
advertising rights provide a distributor the right to be reimbursed up to 3% of
the prior quarter's sales for costs it has incurred associated with advertising
our products. We provide an allowance for sales returns, price protection
rights and reserves for warranty and co-op advertising costs at the time of
revenue recognition. Ingram Micro's right to return or rotate its stock on-hand
is unlimited, and therefore we recognize revenue for product sales to Ingram
Micro when it has sold the product to its customers. Ingram Micro does not have
the right to return non-defective products to us if a customer of Ingram Micro
returns such a product to Ingram Micro. 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.
20
<PAGE>
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 significant
customers experiences financial difficulties, our sales to these customers may
be reduced, and we may have difficulty 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 August 1998, we acquired all the partnership interest of AckFin Networks,
a California general partnership, in exchange for an aggregate of 5,426,184
shares of all common stock with an estimated value of $0.90 per share, or
$4,883,000, and the assumption of $150,000 in liabilities. The controlling
partners of AckFin were the same individuals as all majority shareholders of
the Company and, therefore, were deemed to be a control group for purposes of
determining the amount of purchase price to be "stepped-up." The value of the
exchanged shares for AckFin was accounted for as a reorganization of entities
under common control. Accordingly, net assets acquired were valued by applying
carryover basis to the control group interest and a stepped-up basis to the
minority interest. The step-up of the minority interest resulted in an
intangible asset of $2,517,000. This intangible asset was attributed to
acquired technology and will be amortized over a period of three years. Since
this transaction occurred between entities that were under common control, the
financial results of AckFin have been combined with our results for the period
since the inception of AckFin, April 1997, through the date of exchange, August
1998. 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. AckFin did not have any revenue transactions with unrelated third
parties. Except for the expenses noted above, all other financial transactions
for AckFin were eliminated upon combination with SonicWALL, Inc.
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 $4.3 million in
additional deferred stock compensation for stock options granted in the nine
months ended September 30, 1999, at prices subsequently deemed to be below fair
market value on the date of grant. We amortized approximately $1.3 million of
deferred stock compensation for the nine months ended September 30, 1999.
21
<PAGE>
Results of Operations
The following table sets forth financial data for the periods indicated as a
percentage of total revenue:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
--------------------- ---------------------
1996 1997 1998 1998 1999
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue
Internet Security............. -- % 2.7% 31.3% 17.2% 87.9%
Ethernet...................... 100.0 97.3 68.7 82.8 12.1
----- ----- ----- --------- ---------
Total revenue................ 100.0 100.0 100.0 100.0 100.0
Cost of revenue................ 63.2 51.8 44.0 46.2 28.5
----- ----- ----- --------- ---------
Gross margin................... 36.8 48.2 56.0 53.8 71.5
Operating expenses
Research and development...... 11.2 21.3 27.3 26.3 18.1
Sales and marketing........... 17.8 26.4 38.2 38.7 28.0
General and administrative.... 4.6 6.9 10.0 10.1 9.8
Deferred stock compensation... -- -- 0.6 -- 10.7
----- ----- ----- --------- ---------
Total operating expenses..... 33.6 54.6 76.1 75.1 66.6
----- ----- ----- --------- ---------
Income (loss) from operations 3.2 (6.4) 20.1 (21.3) 4.9
Other income (expense), net.... 0.2 0.3 0.7 0.7 1.7
----- ----- ----- --------- ---------
Income (loss) before income
taxes......................... 3.4 (6.1) (19.4) (20.6) 6.6
Benefit from (provision for)
income taxes.................. (3.7) 1.1 (0.1) -- (6.5)
----- ----- ----- --------- ---------
Net income (loss).............. (0.3)% (5.0)% (19.5)% (20.6)% 0.1%
===== ===== ===== ========= =========
</TABLE>
Nine Months Ended September 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 nine months
of 1998 we were in the early stages of our sales and marketing efforts for this
product. Accordingly, Internet security revenue in the nine months ended
September 30, 1998 was minimal. Revenue from sales of our security appliance
products increased to $10.7 million in the nine months ended September 30, 1999
from $0.9 million in the nine months ended September 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 $1.5
million in the nine months ended September 30, 1999 from $4.5 million in the
nine months ended September 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 $3.5 million in the nine months ended
September 30, 1999 from $2.5 million in the nine months ended
22
<PAGE>
September 30, 1998, primarily as a result of increased product sales. Gross
margin increased to $8.7 million, or 72% of total revenue, in the nine months
ended September 30, 1999 from $2.9 million, or 54% of total revenue, in the
nine months ended September 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 revenue 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 original 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, amortization of acquired
technology from AckFin, and equipment and supplies associated with enhancing
existing products and developing new products. Research and development
expenses increased to $2.2 million in the nine months ended September 30, 1999
from $1.4 million in the nine months ended September 30, 1998. Research and
development spending increased in the nine months ended September 30, 1999 by
approximately $1.1 million related to the hiring of additional personnel,
amortization of acquired technology of approximately $0.6 million 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 nine months
ended September 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 $3.4 million in the nine months ended September
30, 1999 from $2.1 million in the nine months ended September 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 nine months ended
September 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 $1.2 million for the nine months ended
September 30, 1999 from $0.5 million in the nine months ended September 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.
Deferred stock compensation. Amortization of deferred stock compensation was
$1,301,000 in the nine months ended September 30, 1999. This amortization
relates to deferred compensation of $4.3 million, related to stock options
granted in the nine months ended September 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 nine months ended September
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
$0.2 million for the nine months ended September 30, 1999 from $36,000 in the
nine months ended September 30, 1998. This increase was related primarily to
higher interest earnings on cash that increased in amount from $1.5 million to
$8.8 million in the comparable period.
Provision for income taxes. The provision for income taxes in the nine
months ended September 30, 1999 was $0.8 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 nine months ended September 30,
1999 was 37.5% before the
23
<PAGE>
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 nine
months ended September 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 our Ethernet products in
January 1997.
Research and development. Research and development expenses increased to
$2.1 million in 1998 from $2.0 million in 1997, and increased from $1.0 million
in 1996. This increase from 1997 to 1998 relates primarily to amortization of
acquired technology offset in part by 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.
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 seven
quarters ended September 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
24
<PAGE>
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, September 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Internet Security...... $ 157 $ 248 $ 519 $1,425 $2,251 $3,223 $5,203
Ethernet............... 1,546 1,355 1,555 710 813 403 258
------ ------ ------ ------ ------ ------ ------
Total revenue........ 1,703 1,603 2,074 2,135 3,064 3,626 5,461
------ ------ ------ ------ ------ ------ ------
Cost of revenue......... 833 819 833 823 943 1,055 1,464
------ ------ ------ ------ ------ ------ ------
Gross margin............ 870 784 1,241 1,312 2,121 2,571 3,997
Operating expenses
Research and
development........... 385 437 595 634 658 723 817
Sales and marketing.... 661 739 682 788 811 1,043 1,554
General and
administrative........ 184 125 232 212 332 362 495
Deferred stock
compensation.......... -- -- -- 42 15 768 518
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,230 1,301 1,509 1,676 1,816 2,896 3,384
------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations............. (360) (517) (268) (364) 305 (325) 613
Other income (expense),
net.................... 9 13 14 18 41 91 73
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (351) (504) (254) (346) 346 (234) 686
Provision for income
taxes.................. -- -- -- 6 135 200 452
------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ (351) $ (504) $ (254) $ (352) $ 211 $ (434) $ 234
====== ====== ====== ====== ====== ====== ======
<CAPTION>
As a Percentage of Revenue
---------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Internet Security...... 9.2 % 15.5 % 25.0 % 66.7 % 73.5% 88.9 % 95.3%
Ethernet............... 90.8 84.5 75.0 33.3 26.5 11.1 4.7
------ ------ ------ ------ ------ ------ ------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------ ------ ------ ------
Cost of revenue......... 48.9 51.1 40.2 38.5 30.8 29.1 26.8
------ ------ ------ ------ ------ ------ ------
Gross margin............ 51.1 48.9 59.8 61.5 69.2 70.9 73.2
Operating expenses
Research and
development........... 22.6 27.3 28.7 29.7 21.5 19.9 15.0
Sales and marketing.... 38.8 46.1 32.9 36.9 26.4 28.8 28.5
General and
administrative........ 10.8 7.8 11.2 9.9 10.8 10.0 9.0
Deferred stock
compensation.......... -- -- -- 2.0 0.5 21.2 9.5
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 72.2 81.2 72.8 78.5 59.2 79.9 62.0
Income (loss) from
operations............. (21.1) (32.3) (13.0) (17.0) 10.0 (9.0) 11.2
Other income (expense),
net.................... 0.5 0.8 0.7 0.8 1.3 2.5 1.3
------ ------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... (20.6) (31.5) (12.3) (16.2) 11.3 (6.5) 12.5
Provision for income
taxes.................. -- -- -- 0.3 4.4 5.5 8.3
------ ------ ------ ------ ------ ------ ------
Net income (loss)....... (20.6)% (31.5)% (12.3)% (16.5)% 6.9% (12.0)% 4.2%
====== ====== ====== ====== ====== ====== ======
</TABLE>
Internet security revenue. Internet security revenue has increased in each
of the seven quarters ended September 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 three 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.
25
<PAGE>
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
seven quarters ended September 30, 1999 to $3.4 million in the quarter ended
September 30, 1999 from $1.2 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 nine months ended September 30, 1999, we generated $2.6
million in cash from operating activities. This increase resulted from a
significant increase in Internet security revenue, offset in part by a $1.6
million increase in accounts receivable and a $0.2 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 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 $0.2 million in the nine months ended September 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 September 30, 1999 consisted of $8.8
million in cash and cash equivalents. As of September 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 10.0% at September 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 September 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 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 will be available on acceptable terms
or at all.
Any time after February 17, 2004, all currently outstanding shares of
preferred stock are eligible to be redeemed in full upon a written notice by at
least 67% of the holders of the outstanding preferred stock. In the event of
redemption, we would be required to pay the preferred shareholders
approximately $5.0 million. However, upon completion of this offering, all such
shares of preferred stock are automatically converted to common stock and this
contingency would not apply. We do not have any other debt, long-term
obligations or long-term capital commitments.
26
<PAGE>
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 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.
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<PAGE>
We do not have information concerning the Year 2000 compliance status for
all of our customers. We are in the process of evaluating written compliance
statements from our three largest distributors, Ingram Micro, Tech Data and
Sumitomo Metal. 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 implement a plan that adequately
addresses the Year 2000 problem in a timely manner. If, in the worst 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 such instance our revenue may be adversely affected,
our maintenance, technical support and management costs could increase and our
reputation could be damaged.
Contingency Plan
We currently 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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<PAGE>
BUSINESS
Overview
SonicWALL, Inc. designs, develops, manufactures and sells Internet security
infrastructure products designed to provide secure Internet access to our
broadband customers. Broadband access, such as digital subscriber line, or DSL,
and cable modems, allows users to connect to the Internet at speeds
significantly greater than analog modems. We believe our security appliances
provide high performance, robust, reliable, easy-to-use and affordable Internet
security. We also sell content filtering services on an annual subscription
basis. We sell our products to customers in the small to medium enterprise,
branch office, telecommuter and education markets. As of September 30, 1999, we
had 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 we believe 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 are designed
to 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 hardware design without moving parts, our SonicWALL products are
designed to maximize reliability and uptime. The SonicWALL product line can be
used in networks ranging in size from 1 to 1,000 users and is fully compatible
with more expensive enterprise 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 small to medium enterprises 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. provides Internet security products designed for broadband
access customers in the small to medium enterprise, branch office, telecommuter
and education markets. We believe our security appliances provide high
performance, 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 had 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 hardware 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 small to medium enterprise, 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. The terms of our agreements with these
customers are variable. Com21 is licensed to incorporate our
technology in its products. Ramp Networks sells our products under
its own name, as does 3COM Corporation. We manufacture the products
which Ramp Networks and 3COM Corporation purchase from us for resale
through their own distribution channels. In the nine months ended
September 30, 1999, our original equipment manufacturer revenue was
approximately 9% of total revenue. 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.
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. Continue to Develop New Products and Reduce Manufacturing Costs. We
intend to use our product design and development expertise to expand
our product offerings and reduce our manufacturing costs. New
products and services may include offerings such as bandwidth
management, e-mail spam filtering and virus scanning. We are working
to achieve a higher level of Application Specific Integrated
Circuit, or ASIC, design and integration to reduce product costs and
increase product performance. We believe that these new product
offerings and associated cost reductions will strengthen our market
position and assist us in penetrating new markets.
Products and Services
We believe the SonicWALL product line 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 has three 10Base-T Ethernet ports and 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. The DMZ
port enables the secure use of public Web and e-commerce servers without
exposing the private network to Internet based attacks. SonicWALL DMZ protects
the computers on the LAN port and the public servers on the DMZ port 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 faster connections, 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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[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 line 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 seminars. 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.
Distributors accounted for approximately 87% of our total revenue for the nine
months ended September 30, 1999. Resellers, which include systems integrators,
ISPs, dealers, mail order catalogs and online catalogs, generally purchase our
products from our distributors and then sell our products to end-users in our
target markets. Except for our Sonic Platinum level resellers described below,
we do not have purchase agreements with or sell directly to our resellers. Our
distributor and reseller agreements are non-exclusive.
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 customers, 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 internal sales staff 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, 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 35% in the nine months ended September 30,
1999. Tech Data began distributing our Internet security products in February
1999, and in the nine months ended September 30, 1999, accounted for
approximately 11% of total revenue.
Domestic resellers receive 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 resellers all
source our products through a distributor. We also have a Sonic Platinum level
program for selected resellers which includes sales leads, access to additional
discounted demonstration units and market development funds. We sell directly
to these Platinum level resellers.
37
<PAGE>
International Channel. We believe there is a strong international market for
our products. International sales represented 32% of our revenue in 1998 and
approximately 33% of revenue in the nine months ended September 30, 1999. Sales
to Japan accounted for 15% of total revenue in the nine months ended
September 30, 1999. Sumitomo Metal Systems Development Company, a distributor
in Japan, accounted for 11% of total revenue in the nine months ended September
30, 1999 and is our largest international distributor.
We direct all of our international resellers to the appropriate distributor
in each territory. We support our international distributors 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. Additional key
international distributors include ME Networks in Switzerland, Tekdata
Distribution in England, DataWorld in Hong Kong and Allasso in England.
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
supplier of cable modems, Ramp Networks, a provider of networking equipment to
small businesses, and 3COM Corporation. The terms of our agreements with these
customers are variable. Com21 is licensed to incorporate our technology in its
cable modem products. Ramp Networks sells our products under its own name, as
does 3COM Corporation. We manufacture the products which Ramp Networks and 3COM
Corporation purchase from us for resale through their own distribution
channels. In the nine months ended September 30, 1999, our original equipment
manufacturer revenue accounted for approximately 9.1% of total revenue.
Customer Service and Technical Support
We offer our customers a comprehensive range of support programs through a
customer service and technical support organization which provides product
maintenance and technical support services on a worldwide basis. Our technical
support staff is located in Santa Clara, California. In addition to standard
support, we offer premium support services which an end user customer located
in the United States can purchase from us or our channel partners.
Standard Support. Included during the warranty period, standard support is a
unique Web-based technical support mechanism whereby distributors, channel
partners, and end users can use our extensive on-line technical support
resource database. If the resource database does not answer a question, the
user can immediately enter a query or "trouble ticket" on-line and our customer
service organization will then generate a response via phone, fax, or e-mail.
Premium Support. Available for purchase only in the continental United
States, our annual subscription-based Premium Support program offers extended
benefits to the Standard Support offering. Premium Support benefits include:
. expedited response time;
. access to a dedicated toll-free support telephone number;
. overnight replacement of defective units; and
. free shipping for units which we authorize for return.
Our products include a standard one-year warranty, which can be extended at
additional cost. The warranty provides access to our standard technical support
services along with repair or replacement guarantees for units with product
defects.
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<PAGE>
Customers
We sell over 95% of our products through distributors and original equipment
manufacturers. As of September 30, 1999, we had sold more than 18,000 Internet
security appliances. The following lists our top five international and
domestic distributors based on revenues in the nine months ended September 30,
1999, and our current original equipment manufacturers. The top five domestic
distributors each represent between 1% and 35% of our total revenue. The top
five international distributors each represent between 1% and 11% of our total
revenue.
<TABLE>
<S> <C> <C>
Top 5
Domestic
Distributors Top 5 International Distributors Original Equipment Manufacturers
. Ingram
Micro .Sumitomo Metal Systems (Japan) .3COM Corp.
. Tech Data .ME Networks (Switzerland) .Com21
. StarCom .Tekdata (England) .Ramp Networks
. Sound
Business
Systems .DataWorld (Hong Kong)
. VITTS .Allasso (England)
</TABLE>
End Users
Although we do not sell directly to end users, more than 50% of the products
we have sold to date have been registered for use with us by our end users in
our target markets. The following is a representative list of end users who
have deployed one or more SonicWALL products.
<TABLE>
<S> <C> <C>
. Albany County School .Commercial Bank of San Francisco .Microsoft Corporation
District
. American Express .Compaq Computer Corporation .NEC
. Bank of Nova Scotia .Duke University .Pixar
. Centurion/Bank of Ireland .General Magic .PricewaterhouseCoopers LLP
. Charlotte Hornets .Johns Hopkins University .Santa Clara County California Library
. City of Santa Cruz .Los Angeles Lakers .Sun Microsystems
. Comision Federal de .Lucent Technologies .Wells Fargo
Electricidad
</TABLE>
Technology
We have designed our SonicWALL products using a unique combination of
proprietary hardware and software that delivers comprehensive Internet security
with what we believe are exceptional ease-of-use and industry-leading
price/performance.
The SonicWALL product line 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 line 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 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
39
<PAGE>
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 products 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. We believe 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 $2,051,000 respectively on research and
development.
40
<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. 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. 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 some of our 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
41
<PAGE>
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.
Manufacturing
We currently outsource our manufacturing to one contract manufacturer, Flash
Electronics, under an agreement which may be cancelled upon 180 days prior
notice by either party. 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 September 30, 1999, we had 53 employees. Of these, 28 were employed in
sales and marketing, 5 in finance and administration, 10 in research and
development and 10 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 Sunnyvale, California. We occupy approximately 32,256
square feet in this facility, under a lease that expires in September 2004.
Legal Proceedings
We currently are not a party to any material legal proceeding.
42
<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).. 35 Vice President, Finance, Chief Financial Officer and Secretary
Steven R. Perricone..... 39 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. The board of directors is
elected annually by shareholders, and members of the board serve until the next
annual meeting of shareholders unless they resign before such meeting. The last
annual shareholders meeting was held in September, 1999.
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 LLP, where he was
involved primarily with high technology clients. Mr. Sheridan received a
bachelor's degree in commerce from Santa Clara University and is a Certified
Public Accountant.
43
<PAGE>
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.
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. Since July, 1999, Mr.
Shrigley has been a venture partner of Sevin Rosen Funds, a venture capital
firm. 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, two
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.
44
<PAGE>
Committees of the Board of Directors
The compensation committee of our board of directors consists of Messrs.
Shrigley and Williams. The compensation committee:
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plan; and
. makes recommendations to the board of directors regarding these
matters.
The audit committee consists of Messrs. Petruzzelli and Williams. The audit
committee:
. makes recommendations to the board of directors regarding the
selection of independent auditors;
. 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
45
<PAGE>
law. We have entered into indemnification agreements with our directors and
officers containing provisions that are in some respects broader than the
specific indemnification provisions contained in the California Corporations
Code. The indemnification agreements may require us:
. to indemnify our directors and officers against liabilities that may
arise by reason of their status or service as directors or officers,
other than liabilities arising from willful misconduct of a culpable
nature;
. to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified; and
. to obtain directors' and officers' insurance if available on
reasonable terms.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation 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, Secretary
</TABLE>
- ----------
(1) Cash payment in lieu of vacation days
(2) Hired in May 1999
46
<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 $100,000 in fiscal 1998. The table
includes the potential realizable value over the ten-year term of the options,
based on assumed rates of stock appreciation of 5% and 10%, compounded
annually. The assumed rates of appreciation are prescribed by the Securities
and Exchange Commission for illustrative purposes only and are not intended to
forecast or predict future stock prices. Any actual gains on option exercises
will depend on the future performance of our stock.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------
Potential Realizable
Value at Assumed Annual
Number of Percent of Rates of Stock Price
Securities Total Options Appreciation for Option
Underlying Granted to Exercise Term
Options Employees in Price Expiration -----------------------
Name Granted(#) Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ---------- ------------- -------- ---------- ----------- -----------
<S> <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 $10,675,705 $17,043,700
Michael J. Sheridan(1).. 0 N/A N/A N/A N/A N/A
</TABLE>
- ----------
(1) Hired in May 1999
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 $11.00 per share as the fair market
value at December 31, 1998.
Aggregate Option Exercises FY-End Option Values
<TABLE>
<CAPTION>
Number of
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options at
Acquired Fiscal Year End (#) Fiscal Year-End($)
on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sreekanth Ravi.......... 1,067,440 $11,645,770 0 0 N/A N/A
Sudhakar Ravi........... 1,067,440 $11,645,770 0 0 N/A N/A
Steven R. Perricone..... 0 0 111,600 488,400 $1,213,650 $5,311,350
Michael J. Sheridan..... 0 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;
47
<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
may 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 September 30, 1999:
. a total of 7,358,324 shares have been authorized for issuance under
the 1994 and 1998 stock option plans;
. options to purchase an aggregate of 3,586,500 shares of common stock
were outstanding under the 1994 stock option plan and 1998 stock
option plan at a weighed average exercise price of $3.82;
48
<PAGE>
. 2,640,064 shares had been issued upon exercise of outstanding
options, net of repurchases, under the 1994 and 1998 stock option
plans; and
. 1,131,760 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
49
<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.
50
<PAGE>
CERTAIN TRANSACTIONS AND BUSINESS RELATIONSHIPS
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 5,426,184 shares of common stock and the assumption of
$150,000 in liabilities. The controlling partners of AckFin were Sreekanth
Ravi and Sudhakar Ravi, executive officers and directors of SonicWALL, Inc.
Additional partners were Ravi Anne and Bruce Wonnacott. The deemed fair
market value of our common stock on the date of acquisition was $0.90 per
share, resulting in an aggregate value of $4.9 million of common stock
issued in this transaction. The assets acquired consisted of intellectual
property associated with Internet security.
(2) On December 23, 1998, we extended two loans in the aggregate amount of
$96,069.60 to Sreekanth Ravi, Chairman of the Board, 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, 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, Chief Financial Officer, and Secretary 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 September 30, 1999, aggregate
principal and interest of approximately $308,000 were outstanding under the
loan.
(6) On August 6, 1999 Sreekanth Ravi, Chairman of the Board, Chief Executive
Officer and President, 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. On August 11,
1999, 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.
Robert Williams, a director of the Company, is a managing member of Bay
Sonic Investors, LLC. In addition, on August 6, 1999, Sreekanth Ravi sold
38,354 shares of
51
<PAGE>
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 F. Petruzzelli, a director of SonicWALL, Inc. is a partner of
Manatt, Phelps & Phillips, LLP, legal counsel to SonicWALL, Inc. In 1998,
SonicWALL, Inc. paid Wise & Shepard LLP, a law firm of which Mr.
Petruzzelli was then a partner, $88,772 in legal fees and expenses. In
June 1999, Wise & Shepard LLP merged into Manatt, Phelps & Phillips, LLP
and Mr. Petruzzelli became a partner of Manatt, Phelps & Phillips, LLP.
For the nine months ended September 30, 1999, SonicWALL, Inc. had paid
Wise & Shepard LLP and Manatt, Phelps & Phillips LLP an aggregate of
$55,894 in legal fees and expenses.
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."
52
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
Principal Shareholders
The following table provides information regarding the actual beneficial
ownership of our outstanding common stock as of September 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 19,600,594 shares of common
stock outstanding as of September 30, 1999, together with options that are
exercisable within 60 days of September 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 Before After
Name and Address September 30, 1999 Offering Offering
- ---------------- ------------------ -------- --------
<S> <C> <C> <C>
Sreekanth Ravi(1)........................ 5,193,286 26.5% 22.0%
Sudhakar Ravi(2)......................... 5,193,286 26.5% 22.0%
Steven R. Perricone(3)................... 248,000 1.3% 1.1%
Michael J. Sheridan...................... 300,000 1.5% 1.3%
Bay Partners SBIC II, L.P.(4)............ 2,301,400 11.7% 9.8%
Bay Sonic Investors, LLC(5).............. 2,232,364 11.4% 9.5%
Ravi Anne................................ 1,156,546 5.9% 4.9%
Bruce Wonnacott.......................... 1,111,546 5.7% 4.7%
Jerrold F. Petruzzelli(6)................ 100,000 *% * %
David Shrigley(7)........................ 84,354 *% * %
Robert M. Williams(8).................... 28,768 *% * %
All directors and executive officers as a
group (7 persons)(9).................... 15,681,458 80% 66.4%
</TABLE>
- ----------
* Less than 1%.
(1) Includes 600,000 shares transferred to a family trust.
(2) Includes 600,000 shares transferred to a family trust.
(3) Includes 248,000 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.
53
<PAGE>
(5) On August 6, 1999, Sreekanth Ravi and Sudhakar Ravi sold an aggregate of
1,832,364 shares of common stock to Bay Sonic Investors, LLC, and Ravi Anne
and Bruce Wonnacott sold an aggregate of 400,000 shares of common stock to
Bay Sonic Investors, LLC. See Note (6) in Certain Transactions and Business
Relationships above. Bay Sonic Investors, LLC is an affiliate of Robert
Williams, a director of SonicWALL, Inc. Mr. Williams is a managing member
of Bay Sonic Investors and as such may be deemed to have voting control of
the shares held by Bay Sonic Investors, LLC.
(6) Includes 5,000 shares held on behalf of a minor child in an irrevocable
trust of which Mr. Petruzzelli is the sole trustee. The address for Mr.
Petruzzelli is 3030 Hansen Way, Suite 100, Palo Alto, California 94304.
(7) Includes 4,000 shares held by children residing in the same household as
Mr. Shrigley. The address for Mr. Shrigley is 471 Santa Rosa Drive, Los
Gatos, California 95032.
(8) See note (4) above. The address for Mr. Williams is 10600 N. De Anza
Boulevard, Suite 100, Cupertino, California 95014.
(9) Includes 248,000 shares of common stock issuable upon exercise of
immediately exercisable options.
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
Percentage of Shares of
Beneficial Shares of Beneficial Common Stock
Ownership Common Stock Ownership Outstanding
Prior to Before Number of After After
Over-allotment Over-allotment Shares Over-allotment Over-allotment
Name Exercise Exercise Being Offered Exercise Exercise
- ---- -------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Sreekanth Ravi 5,193,286 22.0% 300,000 4,893,286 20.7%
Sudhakar Ravi 5,193,286 22.0% 300,000 4,893,286 20.7%
</TABLE>
54
<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 September 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.
55
<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 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 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, 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, 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.
56
<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 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 described 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.
57
<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 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
September 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 15,681,458
shares of common stock, and shareholders of SonicWALL, Inc. holding an
aggregate of 3,919,136 shares of common stock have entered into lock-up
agreements 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
58
<PAGE>
subject to 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 7,358,324 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. Subject to limited exceptions, 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 (including an
exception for a registration of shares in connection with an employee benefit
plan or merger).
59
<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............................................................ 4,000,000
=========
</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>
60
<PAGE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,100,000. 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 persons associated with us, such as associates of some
of our employees and selected employees of companies with which we are
developing or have commercial relationships. 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 and will not
be subject to resale restrictions.
We will not have any Internet distribution of our common stock.
We and our executive officers, directors and our current shareholders, who
own in the aggregate 19,600,594 shares of common stock, have agreed not to,
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 during the 180-day period
following the date of this prospectus, subject to limited exceptions, without
the prior written consent of Bear, Stearns & Co., Inc.
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.
61
<PAGE>
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
76 filed public offerings of equity securities, of which 49 have been
completed, and has acted as a syndicate member in an additional 38 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
LEGAL MATTERS
The validity of the common stock offered in this offering will be passed
upon for us by Manatt, Phelps & Phillips, LLP of Palo Alto, California. Jerrold
F. Petruzzelli, a partner of Manatt, Phelps & Phillips, LLP, is a director of
SonicWALL, Inc. and owns or has voting control over 100,000 shares of
SonicWALL, Inc. common stock. Legal matters in connection with the offering
will be passed upon for the underwriters by Latham & Watkins, San Francisco,
California.
EXPERTS
The combined consolidated financial statements as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998,
included in this Prospectus and the financial statement schedule 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.
62
<PAGE>
SONICWALL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Combined Consolidated Balance Sheets....................................... F-3
Combined Consolidated Statements of Operations............................. F-4
Combined Consolidated Statements of Shareholders' Equity .................. F-5
Combined Consolidated Statements of Cash Flows............................. F-6
Notes to Combined 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 combined consolidated balance sheets and
the related combined consolidated statements of operations, of shareholders'
equity 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 the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, 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, except for
Note 10 which is as of
October 8, 1999
F-2
<PAGE>
SONICWALL, INC.
COMBINED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
Shareholders'
December 31, Equity
------------- September 30, September 30,
1997 1998 1999 1999
------ ------ ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......... $ 787 $1,051 $ 8,766
Accounts receivable, net of
allowance for doubtful accounts
of $121, $193, and $398.......... 564 677 2,043
Inventories....................... 351 331 506
Deferred income taxes............. 277 366 1,556
Prepaid expenses and other current
assets........................... 301 31 381
------ ------ -------
Total current assets............. 2,280 2,456 13,252
Property and equipment, net......... 55 107 247
Intangibles and other assets........ 39 2,188 1,608
------ ------ -------
Total assets................... $2,374 $4,751 $15,107
====== ====== =======
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................. $ 663 $ 549 $ 946
Accrued payroll and related
benefits......................... 157 145 850
Other accrued liabilities ........ 310 748 1,806
Deferred revenue.................. 684 1,512 2,980
Income taxes payable.............. 95 309 386
------ ------ -------
Total current liabilities........ 1,909 3,263 6,968
------ ------ -------
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:
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 2,732 7,494 12,465
Deferred stock compensation....... -- (6) (3,029) (3,029)
Notes receivable from
shareholders..................... -- (230) (300) (300)
Retained earnings (accumulated
deficit)......................... 453 (1,008) (997) (997)
------ ------ ------- -------
Total shareholders' equity....... 465 1,488 3,168 $ 8,139
------ ------ ------- -------
Total liabilities, redeemable
preferred stock and
shareholders' equity.......... $2,374 $4,751 $15,107
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-3
<PAGE>
SONICWALL, INC.
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended September
December 31, 30,
----------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue
Internet security................ $ -- $ 250 $ 2,349 $ 924 $10,677
Ethernet......................... 9,356 9,092 5,166 4,456 1,474
------ ------ ------- ------- -------
Total revenue.................. 9,356 9,342 7,515 5,380 12,151
------ ------ ------- ------- -------
Cost of revenue
Internet security................ -- 225 1,035 646 2,829
Ethernet......................... 5,915 4,617 2,273 1,839 633
------ ------ ------- ------- -------
Total cost of revenue.......... 5,915 4,842 3,308 2,485 3,462
------ ------ ------- ------- -------
Gross margin....................... 3,441 4,500 4,207 2,895 8,689
Operating expenses
Research and development......... 1,048 1,983 2,051 1,417 2,198
Sales and marketing.............. 1,665 2,468 2,870 2,082 3,408
General and administrative....... 432 644 753 541 1,189
Deferred stock compensation...... -- -- 42 -- 1,301
------ ------ ------- ------- -------
Total operating expenses....... 3,145 5,095 5,716 4,040 8,096
------ ------ ------- ------- -------
Income (loss) from operations...... 296 (595) (1,509) (1,145) 593
Other income (expense), net........ 22 29 54 36 205
------ ------ ------- ------- -------
Income (loss) before income taxes.. 318 (566) (1,455) (1,109) 798
Benefit from (provision for) income
taxes............................. (350) 99 (6) -- (787)
------ ------ ------- ------- -------
Net income (loss).................. $ (32) $ (467) $(1,461) $(1,109) $ 11
====== ====== ======= ======= =======
Net income (loss) per share
Basic............................ $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ====== ======= ======= =======
Diluted.......................... $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ====== ======= ======= =======
Shares used in computing net income
(loss) per share
Basic............................ 8,460 8,461 11,251 10,290 16,367
====== ====== ======= ======= =======
Diluted.......................... 8,460 8,461 11,251 10,290 19,421
====== ====== ======= ======= =======
Pro forma net income per share
Basic............................ $ --
=======
Diluted.......................... $ --
=======
Shares used in computing pro forma
net income per share
Basic............................ 18,727
=======
Diluted.......................... 19,421
=======
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-4
<PAGE>
SONICWALL, INC.
COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Notes Retained
Common Stock Deferred Receivable Earnings Total
------------------ Stock From (Accumulated Shareholders'
Shares Amount Compensation Shareholders Deficit) Equity
---------- ------ ------------ ------------ ------------ -------------
<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.................. 2,384,880 230 -- (230) -- --
Issuance of common stock
for acquisition........ 5,426,184 2,442 -- -- -- 2,442
Deferred stock
compensation........... -- 48 (48) -- -- --
Amortization of deferred
stock compensation..... -- -- 42 -- -- 42
Net loss................ -- -- -- -- (1,461) (1,461)
---------- ------ ------- ----- ------- -------
Balance at December 31,
1998................... 16,272,164 2,732 (6) (230) (1,008) 1,488
Issuance of common
stock.................. 451,676 438 -- (300) -- 138
Payments of notes
receivable from
shareholders........... -- -- -- 230 -- 230
Deferred stock
compensation........... -- 4,324 (4,324) -- -- --
Amortization of deferred
stock compensation..... -- -- 1,301 -- -- 1,301
Net income.............. -- -- -- -- 11 11
---------- ------ ------- ----- ------- -------
Balance at September 30,
1999 (unaudited)....... 16,723,840 $7,494 $(3,029) $(300) $ (997) $ 3,168
========== ====== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-5
<PAGE>
SONICWALL, INC.
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
----------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ (32) $ (467) $(1,461) $(1,109) $ 11
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization.... 78 63 405 195 669
Liabilities acquired............. -- -- (75) (75) --
Provision for allowance for
doubtful accounts............... -- 52 122 53 216
Amortization of deferred stock
compensation.................... -- -- 42 -- 1,301
Changes in operating assets and
liabilities:
Accounts receivable............ 488 (252) (235) (456) (1,582)
Inventories.................... (206) 1,031 20 81 (175)
Prepaid expenses and other
current assets................ (31) (235) 270 224 (350)
Deferred income taxes.......... (73) 38 (89) 115 (1,190)
Other assets................... -- (19) 18 19 (49)
Accounts payable............... (407) (150) (114) (195) 397
Accrued payroll and related
benefits...................... -- 107 (12) 120 705
Other accrued liabilities...... 69 (43) 438 856 1,058
Deferred revenue............... 1,046 (362) 828 888 1,468
Income taxes payable........... 43 (158) 214 4 77
------ ------ ------- ------- -------
Net cash provided by (used in)
operating activities............... 975 (395) 371 720 2,556
------ ------ ------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment........................ (10) (11) (107) (27) (180)
------ ------ ------- ------- -------
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 -- -- 230
Payments under line of credit
agreement........................ (50) -- -- -- --
------ ------ ------- ------- -------
Net cash provided by (used in)
financing activities............... (74) 157 -- -- 5,339
------ ------ ------- ------- -------
Net increase (decrease) in cash and
cash equivalents................... 891 (249) 264 693 7,715
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 $ 1,480 $ 8,766
====== ====== ======= ======= =======
Supplemental disclosure of cash flow
information:
Cash paid for income taxes........ $ 380 $ 151 $ 1 $ -- $ 1,900
====== ====== ======= ======= =======
Supplemental disclosure of noncash
investing and financing activities:
Issuance of notes receivable upon
the exercise of stock options.... $ -- $ -- $ 230 $ -- $ 300
====== ====== ======= ======= =======
Acquisition of minority interest in
AckFin Networks.................... $ -- $ -- $ 2,517 $ 2,517 $ --
====== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined consolidated
financial statements.
F-6
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED 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 its customers to securely utilize Internet applications and services as
an integral part of their business.
The following is a summary of the Company's significant accounting policies:
Combined Consolidation
The combined 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 both combination and
consolidation.
In August 1998, the Company acquired all the partnership interest of AckFin
Networks ("AckFin"), a California general partnership, in exchange for an
aggregate of 5,426,184 shares of the Company's common stock (estimated value of
$0.90 per share, or $4,883,000) and the assumption of $150,000 in liabilities.
The controlling partners of AckFin were the same individuals as the majority
shareholders of the Company and, therefore, were deemed to be a control group
for purposes of determining the amount of purchase price to be "stepped-up."
The value of the exchanged shares for AckFin was accounted for as a
reorganization of entities under common control. Accordingly, net assets
acquired were valued by applying carryover basis to the control group interest
and a stepped-up basis to the minority interest. The step-up of the minority
interest resulted in an intangible asset of $2,517,000. This intangible asset
was attributed to acquired technology and will be amortized over a period of
three years. Since this transaction occurred between entities that were under
common control, since the inception of AckFin, the financial results of AckFin
have been combined with the results of the Company for the period since the
inception of AckFin (April 1997) through the date of exchange (August 1998).
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. AckFin did not have any revenue transactions with unrelated third
parties. Except for the expenses noted above, all other financial transactions
for AckFin were eliminated upon combination with the Company.
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 interim financial statements as of September 30, 1999 and
for the nine months ended September 30, 1998 and 1999 are unaudited. In the
opinion of management, these unaudited interim 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 financial data and other
information disclosed in the notes to the financial statements for these
periods is unaudited.
F-7
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Fair value
The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values due to their relatively short
maturities. The Company does not hold or issue financial instruments for
trading purposes.
Concentration of credit risk, foreign operations and significant customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its temporary cash
investments in money market accounts and mutual funds with high credit quality
financial institutions. The Company's accounts receivable are derived from
revenue earned from customers located in the U.S. and certain foreign countries
and regions, including Europe, Canada, Japan and Australia. Sales to foreign
customers for the year ended December 31, 1996, 1997, 1998 and the nine months
ended September 30, 1999, all of which were denominated in U.S. dollars,
accounted for 40%, 36%, 32% and 33% 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 nine months ended September 30,
1999, three customers accounted for 57% of the Company's revenue and at
September 30, 1999, and two customers accounted for 80% 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 nine months ended September 30, 1999 was $40,000.
Intangibles and other assets
Acquired technology is amortized to expense on a straight line basis over
three years.
F-8
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment from
the carrying value of long-lived assets, if any, based on the fair value of
such assets.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25 ,
compensation costs is determined based on the difference, if any, on the grant
date between the fair value of the Company's stock and the amount an employee
must pay to acquire the stock. Compensation expense is recognized over the
vesting period.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
96-18.
Revenue recognition
Revenue is generally recognized at the time of shipment if collectibility is
probable and no significant obligations remain. Sales to distributors are
subject to agreements allowing certain rights of return, cooperative
advertising, stock balancing rights and price protection. The largest
distributor has the right to return products that have not been sold to end
users for full credit subject to a restocking fee. Revenue from sales to this
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
list prices are reduced by the Company. In the years ended December 31, 1996,
1997 and 1998 and the nine months ended September 30, 1999, the Company
provided approximately $100,000, $300,000, $400,000 and $900,000, respectively,
of revenue reserves related to risks of product returns, stock rotation rights
and price protection rights. As of December 31, 1997 and 1998 and September 30,
1999, deferred revenues included approximately $400,000, $800,000 and $1.7
million, respectively, related to these reserves.
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. In the years ended December 31, 1996, 1997 and 1998 and
the nine months ended September 30, 1999, the Company provided approximately
$25,000, $25,000, $100,000 and $220,000 of warranty reserves, respectively. As
of December 31, 1997 and 1998 and September 30, 1999, the accompanying balance
sheets include a warranty accrual of approximately $25,000, $130,000 and
$350,000, respectively.
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
F-9
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company. The Company accrues for co-operative advertising as the related
revenue is recognized. In the years ended December 31, 1996, 1997 and 1998 and
the nine months ended September 30, 1999, the Company recorded provisions for
co-op advertising costs of $538,000, $664,000, $502,000 and $364,000,
respectively. As of December 31, 1997 and 1998 and September 30, 1999, the
accompanying balance sheets include an accrual for co-op advertising costs of
$79,000, $125,000 and $307,000, respectively.
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 $607,000 for the years ended December
31, 1996, 1997 and 1998 and the nine months ended September 30, 1999,
respectively.
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.
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.
F-10
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Nine Months
Year Ended December Ended
31, September 30,
----------------------- ----------------
Historical 1996 1997 1998 1998 1999
- ---------- ------ ------ ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).................. $ (32) $ (467) $(1,461) $(1,109) $ 11
------ ------ ------- ------- -------
Denominator:
Weighted average common shares
outstanding....................... 8,460 8,461 11,251 10,290 16,496
Weighted average unvested common
shares subject to repurchase...... -- -- -- -- 129
------ ------ ------- ------- -------
Denominator for basic calculation.. 8,460 8,461 11,251 10,290 16,367
Common stock equivalents........... -- -- -- -- 3,054
------ ------ ------- ------- -------
Denominator for diluted
calculation....................... 8,460 8,461 11,251 10,290 19,421
Basic net income (loss) per share.... $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ====== ======= ======= =======
Diluted net income (loss) per share.. $ -- $(0.06) $ (0.13) $ (0.11) $ --
====== ====== ======= ======= =======
<CAPTION>
Pro forma
- ---------
<S> <C> <C> <C> <C> <C>
Shares used above 16,367
Pro forma adjustment to reflect
weighted effect of assumed
conversion of redeemable
convertible preferred stock....... 2,360
-------
Shares used in computing pro forma
basic net income per share........ 18,727
=======
Pro forma basic net income per
share............................. $ --
=======
Pro forma diluted.................... 19,421
=======
Pro forma diluted net income per
share............................. $ --
=======
</TABLE>
Outstanding options to purchase 2,396,880, 2,494,880 and 1,163,676 shares of
common stock at an average exercise price of $0.09, $0.10 and $0.13 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, respectively, as their effect
would have been anti-dilutive.
The accompanying pro forma shareholders' equity at September 30, 1999
reflects the conversion of the redeemable Series A convertible preferred stock
at September 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.
F-11
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company issued from the 1998 Plan 300,000 shares upon the
exercise of certain stock options. At September 30, 1999, 275,000 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,
------------- September 30,
1997 1998 1999
----- ------ -------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Inventories:
Raw materials................................. $ 82 $ 49 $ 211
Work-in-process............................... 2 13 64
Finished goods................................ 267 269 231
----- ------ ------
$ 351 $ 331 $ 506
===== ====== ======
Property and equipment:
Equipment..................................... $ 299 $ 161 $ 337
Leasehold improvements........................ 5 5 5
Software...................................... 49 53 57
Transportation................................ 38 94 94
----- ------ ------
391 313 493
Less: accumulated depreciation................ (336) (206) (246)
----- ------ ------
$ 55 $ 107 $ 247
===== ====== ======
Intangibles and other assets:
Acquired technology........................... $ -- $2,517 $2,517
Other Assets.................................. 39 21 70
----- ------ ------
39 2,538 2,587
Less: amortization............................ (--) (350) (979)
----- ------ ------
$ 39 $2,188 $1,608
===== ====== ======
</TABLE>
Note 3--Line of Credit:
At September 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 10% at September 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 September 30, 1999.
Note 4--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.
F-12
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 5--Shareholders' Equity:
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.
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 a total of
7,358,324 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.
F-13
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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... 549,612 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... 451,612 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... 1,647,936 1,163,676 $0.08-0.25 $0.13
Authorized..................... 2,358,324
Granted........................ (2,884,500) 2,884,500 $0.50-8.50 $4.86
Exercised...................... -- (451,676) $0.08-1.50 $0.97
Canceled....................... 10,000 (10,000) $0.13-0.25 $0.19
---------- ---------- ---------- -----
Balance at September 30, 1999
(unaudited)................... 1,131,760 3,586,500 $0.08-8.50 $3.82
========== ========== ========== =====
</TABLE>
The following table summarizes information regarding stock options
outstanding at September 30, 1999 (unaudited):
<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-$0.25................. $0.13 1,112,000 8.55 470,868 $0.13
$0.50-$1.50................. $1.08 648,000 9.67 101,758 $1.01
$2.50-$3.50................. $3.12 419,000 9.83 -- $ --
$7.50-$8.50................. $8.21 1,407,500 9.93 4,164 $7.50
----- --------- ---- ------- -----
$3.82 3,586,500 9.44 576,790 $ .34
===== ========= ==== ======= =====
</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 nine months ended September 30, 1999 was $18,025,700
which exceeded the aggregate exercise price of these options by $4,324,000.
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 $0.05 and $0.96, respectively.
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
F-14
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 income (loss)
would have been changed to the pro forma amounts indicated below, in thousands:
<TABLE>
<CAPTION>
Year Ended December
31, Nine Months Ended
--------------------- September 30,
1996 1997 1998 1999
----- ----- ------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
Net income (loss)--as reported.... $ (32) $(467) $(1,461) $ 11
Net income (loss)--pro forma...... $(189) $(471) $(1,469) (139)
</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 nine months ended September 30,
1999 of $0.05, $0.13, $0.05 and $2.24, 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 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, Nine Months Ended
----------------- September 30,
1996 1997 1998 1999
---- ----- ---- -----------------
(unaudited)
<S> <C> <C> <C> <C>
Current tax expense (benefit):
Federal............................... $336 $(138) $ 94 $ 1,558
State................................. 87 1 1 419
---- ----- ---- -------
423 (137) 95 1,977
---- ----- ---- -------
Deferred tax expense (benefit):
Federal............................... (65) 32 (89) (1,078)
State................................. (8) 6 -- (112)
---- ----- ---- -------
(73) 38 (89) (1,190)
---- ----- ---- -------
$350 $ (99) $ 6 $ 787
==== ===== ==== =======
</TABLE>
F-15
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Pre-tax income (loss) per books .................. $ 318 $ (566) $ (1,455)
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) $ (734)
====== ====== ========
</TABLE>
The tax provision for the nine months ended September 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
nine months ended September 30, 1999 (unaudited):
<TABLE>
<S> <C>
Pre-tax income per books............................................. $ 798
Non-deductible deferred stock compensation........................... 1,301
------
Adjusted income before taxes......................................... 2,099
Estimated effective tax rate......................................... 37.5%
------
Provision for income taxes........................................... $ 787
======
</TABLE>
Deferred tax assets comprise the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------------- -------------
(unaudited)
<S> <C> <C> <C>
Inventory reserves.............................. $ 77 $ 93 $ 121
Deferred revenue................................ 10 560 361
Other reserves & accruals....................... 190 372 1,215
----- ------- ------
277 1,025 1,697
Valuation allowance............................. -- (659) (141)
----- ------- ------
$ 277 $ 366 $1,556
===== ======= ======
</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 September 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.
F-16
<PAGE>
SONICWALL, INC.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Nine Months
Year Ended December Ended
31, September 30,
-------------------- --------------
1996 1997 1998 1998 1999
------ ------ ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
United States............................ $5,623 $5,986 $5,080 $3,722 $ 8,184
Other.................................... 3,733 3,356 2,435 1,658 3,967
------ ------ ------ ------ -------
Total.................................... $9,356 $9,342 $7,515 $5,380 $12,151
====== ====== ====== ====== =======
</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 15% of total
revenue for the nine months ended September 30, 1999.
Note 9--Commitments and Contingencies:
The Company leases its facility under an operating lease which expires in
2001. Future minimum rental payments under the lease are $234,000 in 1999 and
$202,000 in 2000. Rent expense for the years ended December 31, 1997 and 1998
was $118,000 and $163,000, respectively. Rent expense for the nine months ended
September 30, 1999 was $172,000.
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
Facility Lease
In September 1999 the Company entered into a 5 year operating lease
agreement for a new location for its facility which it began occupying in
October 1999. Future minimum rental payments related to this lease for the
period ending December 31, is $131,000 in 1999, $527,000 in 2000, $547,000 in
2001, $566,000 in 2002, $585,000 in 2003 and $450,000 thereafter.
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.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 29
Management............................................................... 43
Certain Transactions and Business Relationships.......................... 51
Principal and Selling Shareholders....................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Where You Can Find More Information...................................... 62
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
----------------
PRELIMINARY PROSPECTUS
----------------
Bear, Stearns & Co. Inc.
Hambrecht & Quist
Thomas Weisel Partners LLC
November , 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................................................ 5,560
Nasdaq National Market listing fee............................. 90,000
Blue Sky fees and expenses..................................... 15,000
Printing and engraving expenses................................ 335,000
Legal fees and expenses ....................................... 380,000
Accounting fees and expenses................................... 250,000
Transfer Agent and Registrar fees.............................. 50,000
Miscellaneous expenses......................................... 79,094
----------
Total........................................................ $1,220,000
==========
</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, Inc. has issued and sold the following
securities:
(1) SonicWALL, Inc. issued and sold 2,586,556 shares of its common stock
to officers, directors, employees and consultants for an aggregate purchase
price of approximately $630,630 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 5,426,184
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.
10.14 Lease dated September 27, 1999 by and between AMB Property, L.P. as
Landlord and SonicWALL, Inc. as tenant.
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.
++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 Sunnyvale,
State of California, on the 19th 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 19, 1999
____________________________________ Officer and Director
Sreekanth Ravi (Principal Executive
Officer)
/s/ Sudhakar Ravi Vice President, Engineering October 19, 1999
____________________________________ and Director
Sudhakar Ravi
/s/ Robert M. Williams Director October 19, 1999
____________________________________
Robert M. Williams
/s/ David Shrigley Director October 19, 1999
____________________________________
David Shrigley
/s/ Jerrold F. Petruzzelli Director October 19, 1999
____________________________________
Jerrold F. Petruzzelli
/s/ Michael J. Sheridan Vice President, Finance and October 19, 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 combined consolidated financial
statements of SonicWall, Inc. as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998, 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
Nine months ended September 30,
1999 (unaudited)
Allowance for doubtful accounts.. 193 216 11 398
</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.
10.14 Lease dated September 27, 1999 by and between AMB Property, L.P. as
Landlord and SonicWALL, Inc. as Tenant.
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.
++ 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 1.1
SonicWALL, Inc.
4,000,000 Shares of Common Stock
UNDERWRITING AGREEMENT
October ___, 1999
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST LLC
THOMAS WEISEL PARTNERS LLC
<PAGE>
L&W Draft: 9/29/99
SonicWALL, Inc.
[_] Shares of Common Stock
UNDERWRITING AGREEMENT
_____, 1999
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST LLC
THOMAS WEISEL PARTNERS LLC
<PAGE>
[_] Shares of Common Stock
SonicWALL, Inc.
UNDERWRITING AGREEMENT
----------------------
[__] 1999
Bear, Stearns & Co. Inc.
Hambrecht & Quist LLC and
Thomas Weisel Partners LLC
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Ladies and Gentlemen:
SonicWALL, Inc., a corporation organized and existing under the laws
of California (the "Company"), proposes, subject to the terms and conditions
-------
stated herein, to issue and sell to Bear, Stearns & Co. Inc. ("Bear Stearns"),
------------
Hambrecht & Quist LLC and Thomas Weisel Partners LLC (collectively, the
"Underwriters") an aggregate of [_________] shares (the "Firm Shares") of its
------------ -----------
common stock, no par value per share (the "Common Stock"). In addition, for the
------------
sole purpose of covering over-allotments in connection with the sale of the Firm
Shares, certain individuals identified on Schedule II hereto (each a "Selling
-------
Shareholder" and together the "Selling Shareholders") propose, at the option of
- ----------- --------------------
the Underwriters, to sell to the Underwriters, up to [_______] shares (the
"Additional Shares") of Common Stock owned by the Selling Shareholders. The Firm
- -------------------
Shares and any Additional Shares purchased by the Underwriters are referred to
herein as the "Shares". The Shares are more fully described in the Registration
------
Statement referred to below.
1. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Shareholders. (a) The Company represents and warrants to, and agrees with, each
- ------------
of the Underwriters that:
(i) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-85997),
----------
and any amendments thereto, and related preliminary prospectuses for the
registration under the Securities Act of 1933 (the "Securities Act") of
--------------
shares of common stock, which registration statement, as so amended, has
been declared effective by the Commission and copies of which have
heretofore been delivered to the Underwriters. Such registration statement
(and any registration statement increasing the size of the offering (a
"Rule 462(b) Registration Statement") filed pursuant to Rule 462(b) under
------------------------------------
the Securities Act), in the respective forms in which they were declared
effective, as amended, including all exhibits thereto, are each hereinafter
referred to as the "Registration Statement". Other than a Rule 462(b)
----------------------
<PAGE>
Registration Statement, which became effective upon filing, no other
document with respect to the Registration Statement has heretofore been
filed with the Commission (other than prospectuses filed pursuant to Rule
424(b) of the rules and regulations of the Commission under the Securities
Act (the "Securities Act Regulations"), each in the form heretofore
--------------------------
delivered to the Underwriters). No stop order suspending the effectiveness
of either the Registration Statement or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose has
been initiated or, to the Company's knowledge, threatened by the
Commission. The Company, if required by the Securities Act Regulations,
proposes to file the Prospectus with the Commission pursuant to Rule 424(b)
of the Securities Act Regulations. The Prospectus, in the form in which it
is to be filed with the Commission pursuant to Rule 424(b) of the
Securities Act Regulations, is hereinafter referred to as the "Prospectus",
----------
except that if any revised prospectus or prospectus supplement shall be
provided to the Underwriters by the Company for use in connection with the
offering and sale of the Shares (the "Offering") which differs from the
--------
Prospectus (whether or not such revised prospectus or prospectus supplement
is required to be filed by the Company pursuant to Rule 424(b) of the
Securities Act Regulations), the term "Prospectus" shall refer to such
revised prospectus or prospectus supplement, as the case may be, from and
after the time it is first provided to the Underwriters for such use; and,
provided, further, that the term "Prospectus" shall be deemed to include
any wrapper or supplement thereto prepared in connection with the
distribution of any Reserved Shares (as defined in Section 2(f), below).
Any preliminary prospectus or prospectus subject to completion included in
the Registration Statement or filed with the Commission pursuant to Rule
424 under the Securities Act is hereafter called a "Preliminary
-----------
Prospectus". All references in this Agreement to the Registration
----------
Statement, the Rule 462(b) Registration Statement, a Preliminary Prospectus
and the Prospectus, or any amendments or supplements to any of the
foregoing, shall be deemed to include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval System ("EDGAR").
-----
(ii) The Registration Statement and the Prospectus, at the time the
Registration Statement became effective and as of the Closing Date referred
to in Section 2 hereof, complied and comply in all material respects with
the requirements of the Securities Act and the Securities Act Regulations,
and did not and as of the Closing Date do not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus, as of the date hereof (unless the term "Prospectus" refers to a
prospectus that has been provided to the Underwriters by the Company for
use in connection with the offering of the Shares which differs from the
Prospectus filed with the Commission pursuant to Rule 424(b) of the
Securities Act Regulations, in which case at the time it is first provided
to the Underwriters for such use) and on the Closing Date, does not and
will not include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this Section 1(ii)
shall not apply to statements in or omissions from the Registration
Statement or Prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing
by any Underwriter expressly for use in the Registration Statement or the
Prospectus. Each Preliminary Prospectus and Prospectus filed as part of the
Registration Statement, as part of any amendment thereto or pursuant to
Rule 424 under the Securities Act Regulations, if filed by electronic
transmission pursuant to EDGAR (except as
2
<PAGE>
may be permitted by Regulation S-T under the Securities Act) was identical
to the copy thereof delivered to the Underwriters for use in connection
with the offer and sales of the Shares. There are no contracts or other
documents required to be described in the Prospectus or to be filed as
exhibits to the Registration Statement under the Securities Act that have
not been described or filed therein as required, and there are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required to be described in the Prospectus
that have not been described therein as required.
(iii) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus. Each of the Company and each
subsidiary is duly qualified as a foreign corporation to transact business
and is in good standing in the State of California and each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except for
such jurisdictions (other than the State of California) where the failure
to so qualify or to be in good standing would not, individually or in the
aggregate, result in a material adverse change, or any development that
could reasonably be expected to result in a material adverse change, in the
condition, financial or otherwise, or in the business, operations or
prospects, whether or not arising from transactions in the ordinary course
of business, of the Company and its subsidiaries, considered as one entity
(any such change is called a "Material Adverse Change"). Except for Sonic
-----------------------
Systems International, Inc., the Company does not own or control, directly
or indirectly, any corporation, association or other entity.
(iv) All of the outstanding shares of capital stock of the Company
have been duly authorized, validly issued, and are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights. The Shares, when issued, delivered and sold in accordance with this
Agreement, will be duly authorized and validly issued, fully paid and
nonassessable, and will not have been issued in violation of or subject to
any preemptive or similar rights. At September 30, 1999, after giving
effect to the issuance and sale of the Shares pursuant hereto and the
application of the net proceeds from the sale thereof, the Company had the
pro forma consolidated capitalization as set forth in the Prospectus under
the caption "Capitalization".
(v) All of the outstanding capital stock of each subsidiary of
the Company is owned, directly or indirectly, by the Company, free and
clear of any security interest, claim, lien, limitation on voting rights or
encumbrance; and all such securities have been duly authorized, validly
issued, and are fully paid and nonassessable and were not issued in
violation of any preemptive or similar rights.
(vi) Except as disclosed in the Prospectus, there are not
currently, and will not be as a result of the Offering, any outstanding
subscriptions, rights, warrants, calls, commitments of sale or options to
acquire, or instruments convertible into or exchangeable for, any capital
stock or other equity interest of the Company or any of its subsidiaries.
(vii) The Common Stock (including the Shares) is registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act") and is listed for
------------
3
<PAGE>
quotation on the Nasdaq National Market ("Nasdaq"), and the Company has
------
taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or delisting
the Common Stock from Nasdaq, nor has the Company received any notification
that the Commission or Nasdaq is contemplating terminating such
registration or listing.
(viii) The Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby, including, without
limitation, the corporate power and authority to issue, sell and deliver
the Shares as provided herein and the power to effect the Use of Proceeds
as described in the Prospectus.
(ix) This Agreement has been duly and validly authorized, executed
and delivered by the Company and is the legally valid and binding agreement
of the Company, enforceable against it in accordance with its terms, except
insofar as indemnification and contribution provisions may be limited by
applicable law or equitable principles and subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization or similar
laws affecting the rights of creditors generally and subject to general
principles of equity.
(x) Neither the Company nor any of its subsidiaries is, or, after
giving effect to the offering of the Shares, will be (a) in violation of
its charter, (b) in violation of its bylaws, (c) in default in the
performance of any bond, debenture, note, indenture, mortgage, deed of
trust or other agreement or instrument to which it is a party or by which
it is bound or to which any of its properties is subject, or (d) in
violation of any local, state or federal law, statute, ordinance, rule,
regulation, requirement, judgment or court decree applicable to the
Company, its subsidiaries or any of their assets or properties (whether
owned or leased) other than, in the case of clauses (b), (c) and (d), any
default or violation that could not reasonably be expected to (1)
individually or in the aggregate, result in a material adverse effect on
the properties, business, results of operations, condition (financial or
otherwise), affairs or prospects of the Company and its subsidiaries, taken
as a whole, (2) interfere with or adversely affect the sale of the Shares
pursuant hereto or (3) in any manner draw into question the validity of
this Agreement (any of the events set forth in clauses (1), (2) or (3), a
"Material Adverse Effect"). There exists no condition that, with notice,
-----------------------
the passage of time or otherwise, would constitute a default under any such
document or instrument, except as disclosed in the Prospectus, except for
any such condition which would not reasonably be expected to result in a
Material Adverse Effect.
(xi) None of (a) the execution, delivery or performance by the
Company of this Agreement, (b) the issuance and sale of the Shares and (c)
consummation by the Company of the transactions contemplated hereby
violate, conflict with or constitute a breach of any of the terms or
provisions of, or a default under (or an event that with notice or the
lapse of time, or both, would constitute a default), or require consent
which has not been obtained under, or result in the imposition of a lien on
any properties of the Company or any of its subsidiaries, or an
acceleration of any indebtedness of the Company or any of its subsidiaries
pursuant to, (1) the charter or bylaws of the Company or any of its
subsidiaries, (2) any bond, debenture, note, indenture, mortgage, deed of
trust or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or its subsidiaries or
their properties is or may be bound, (3) any statute, rule or regulation
applicable to the Company or any of its subsidiaries or any of their assets
or
4
<PAGE>
properties or (4) any judgment, order or decree of any court or
governmental agency or authority having jurisdiction over the Company or
any of its subsidiaries or any of their assets or properties, except in the
case of clauses (2), (3) and (4) for such violations, conflicts, breaches,
defaults, consents, impositions of liens or accelerations that (x) would
not singly, or in the aggregate, have a Material Adverse Effect or (y)
which are disclosed in the Prospectus. Other than as described in the
Prospectus, no consent, approval, authorization or order of, or filing,
registration, qualification, license or permit of or with, (A) any court or
governmental agency, body or administrative agency, or (B) any other person
is required for (1) the execution, delivery and performance by the Company
of this Agreement, (2) the issuance and sale of the Shares and the
transactions contemplated hereby, except (x) such as have been obtained and
made under the Securities Act and state securities or Blue Sky laws and
regulations or such as may be required by the NASD or (y) where the failure
to obtain any such consent, approval, authorization or order of, or filing
registration, qualification, license or permit would not reasonably be
expected to result in a Material Adverse Effect.
(xii) Except as set forth in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to Company's
knowledge, threatened (a) against or affecting the Company or any of its
subsidiaries, (b) which has as the subject thereof any officer or director
(in any such capacity) of, or property owned or leased by, the Company or
any of its subsidiaries or (c) relating to environmental or discrimination
matters, where in any such case (1) there is a reasonable possibility that
such action, suit or proceeding might be determined adversely to the
Company or such subsidiary and (2) any such action, suit or proceeding, if
so determined adversely, would reasonably be expected to result in a
Material Adverse Change or adversely affect the consummation of the
transactions contemplated by this Agreement. No material labor dispute with
the employees of the Company or any of its subsidiaries exists or, to the
Company's knowledge, is threatened or imminent.
(xiii) No action has been taken and no statute, rule, regulation or
order has been enacted, adopted or issued by any governmental agency that
prevents the issuance of the Shares or prevents or suspends the use of the
Prospectus; no injunction, restraining order or order of any nature by a
federal or state court of competent jurisdiction has been issued that
prevents the issuance of the Shares, prevents or suspends the sale of the
Shares in any jurisdiction referred to in Section 4(d) hereof or that could
adversely affect the consummation of the transactions contemplated by this
Agreement or the Prospectus; and every request of any securities authority
or agency of any jurisdiction for additional information has been complied
with in all material respects.
(xiv) Except as would not, individually or in the aggregate,
reasonably be expected to result in a Material Adverse Change, (a) to the
Company's knowledge, neither the Company nor any of its subsidiaries is in
violation of any federal, state, local or foreign law or regulation
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, groundwater,
land surface or subsurface strata) or wildlife, including without
limitation, laws and regulations relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances, petroleum and petroleum
products (collectively, "Materials of Environmental Concern"), or otherwise
----------------------------------
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environmental
Concern (collectively, "Environmental Laws"),
5
<PAGE>
which violation includes, but is not limited to, noncompliance with any
permits or other governmental authorizations required for the operation of
the business of the Company or its subsidiaries under applicable
Environmental Laws, or noncompliance with the terms and conditions thereof,
nor has the Company or any of its subsidiaries received any written
communication, whether from a governmental authority, citizens group,
employee or otherwise, that alleges that the Company or any of its
subsidiaries is in violation of any Environmental Law; (b) there is no
claim, action or cause of action filed with a court or governmental
authority, no investigation with respect to which the Company or any of its
subsidiaries has received written notice, and no written notice by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location
owned, leased or operated by the Company or any of its subsidiaries, now or
in the past (collectively, "Environmental Claims"), pending or, to
--------------------
Company's knowledge, threatened against the Company or any of its
subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law; and (c) to the Company's knowledge,
there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the
release, emission, discharge, presence or disposal of any Material of
Environmental Concern, that reasonably could result in a violation of any
Environmental Law or form the basis of a potential Environmental Claim
against the Company or any of its subsidiaries or against any person or
entity whose liability for any Environmental Claim the Company or any of
its subsidiaries has retained or assumed either contractually or by
operation of law.
(xv) The Company and each of its subsidiaries has (a) good and
marketable title to all of the properties and assets described in the
Prospectus or the financial statements included in the Prospectus as owned
by it, free and clear of all liens, charges, encumbrances and restrictions,
except such as are described in the Prospectus or as would not have a
Material Adverse Effect, (b) peaceful and undisturbed possession to the
extent described in the Prospectus under all material leases to which it is
a party as lessee, (c) all licenses, certificates, permits, authorizations,
approvals, franchises and other rights from, and has made all declarations
and filings with, all federal, state and local authorities all self-
regulatory authorities and all courts and other tribunals (each an
"Authorization") necessary to engage in the business conducted by the
-------------
Company and its subsidiaries in the manner described in the Prospectus,
except as described in the Prospectus and except insofar as the failure to
obtain any such Authorization would not reasonably be expected to have a
Material Adverse Effect, and no such Authorization contains a materially
burdensome restriction that is not disclosed in the Prospectus and (d) not
received any notice that any governmental body or agency is considering
limiting, suspending or revoking any such Authorization. Except where the
failure to be in full force and effect would not have a Material Adverse
Effect, all such Authorizations are valid and in full force and effect and
the Company and each of its subsidiaries is in compliance in all material
respects with the terms and conditions of all such Authorizations and with
the rules and regulations of the regulatory authorities having jurisdiction
with respect thereto. All material leases to which the Company and each of
its subsidiaries is a party are valid and binding and no default by the
Company or any of its subsidiaries has occurred and is continuing
thereunder and, to the Company's knowledge, no material defaults by the
6
<PAGE>
landlord are existing under any such lease that could reasonably be
expected to result in a Material Adverse Effect.
(xvi) Except as described in the Prospectus, the Company and its
subsidiaries own, possess or have the right to employ sufficient patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, software, systems or procedures), trademarks,
service marks and trade names, inventions, computer programs, technical
data and information (collectively, the "Intellectual Property Rights")
----------------------------
reasonably necessary to conduct their businesses as now conducted. The
Intellectual Property Rights presently employed by the Company and its
subsidiaries in connection with the businesses now operated by them or
which are proposed to be operated by them are owned, to the Company's
knowledge, free and clear of and without violating any right, claimed
right, charge, encumbrance, pledge, security interest, restriction or lien
of any kind of any other person and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing except as
would not reasonably be expected to have a Material Adverse Effect. To the
Company's knowledge, the use of the Intellectual Property in connection
with the business and operations of the Company and its subsidiaries does
not infringe on the rights of any person, except as could not reasonably be
expected to have a Material Adverse Effect.
(xvii) None of the Company or any of its subsidiaries, or, or to the
knowledge of the Company, any of their respective officers, directors,
partners, employees, agents or affiliates or any other person acting on
behalf of the Company or any of its subsidiaries has, directly or
indirectly, given or agreed to give any money, gift or similar benefit
(other than legal price concessions to customers in the ordinary course of
business) to any customer, supplier, employee or agent of a customer or
supplier, official or employee of any governmental agency (domestic or
foreign), instrumentality of any government (domestic or foreign) or any
political party or candidate for office (domestic or foreign) or other
person who was, is or may be in a position to help or hinder the business
of the Company or any of its subsidiaries (or assist the Company or any of
its subsidiaries in connection with any actual or proposed transaction)
which (a) would reasonably be expected to subject the Company, or any other
individual or entity to any damage or penalty in any civil, criminal or
governmental litigation or proceeding (domestic or foreign), (b) if not
given in the past, would reasonably be expected to have had a Material
Adverse Effect or (c) if not continued in the future, would reasonably be
expected to have a Material Adverse Effect.
(xviii) All material tax returns required to be filed by the Company
and its subsidiaries in all jurisdictions have been so filed. All taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due or claimed to be due from such entities or that are due
and payable have been paid, other than those being contested in good faith
and for which adequate reserves have been provided or those currently
payable without penalty or interest. To the knowledge of the Company, there
are no material proposed additional tax assessments against the Company or
any of its subsidiaries or the assets or property of the Company or any of
its subsidiaries. The Company has made adequate charges, accruals and
reserves in the applicable financial statements included in the Prospectus
in respect of all federal, state and foreign income and franchise taxes for
all periods as to which the tax liability of the Company or any of its
consolidated subsidiaries has not been finally determined.
7
<PAGE>
(xix) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").
----------------------
(xx) Except as disclosed in the Prospectus, there are no holders of
securities of the Company or any of its subsidiaries who, by reason of the
execution by the Company of this Agreement to which it is a party or the
consummation by the Company or any of its subsidiaries of the transactions
contemplated hereby, have the right to request or demand that the Company
or any of its subsidiaries register under the Securities Act or analogous
foreign laws and regulations securities held by them, other than such that
have been duly waived.
(xxi) The Company and its subsidiaries each maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that: (a) transactions are executed in accordance with management's general
or specific authorizations; (b) transactions are recorded as necessary to
permit preparation of financial statements in conformity in all material
respects with generally accepted accounting principles and to maintain
accountability for assets; and (c) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxii) Each of the Company and its subsidiaries are insured by
recognized, financially sound institutions with policies in such amounts
and with such deductibles and covering such risks as are customary for
similarly situated businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction and acts of vandalism. The
Company has no reason to believe that it or any subsidiary will not be able
(a) to renew its existing insurance coverage as and when such policies
expire or (b) to obtain comparable coverage from similar institutions as
may be necessary or appropriate to conduct its business as now conducted
and at a cost that would not result in a Material Adverse Change.
(xxiii) The Company has not (a) taken, directly or indirectly, any
action designed to, or that might reasonably be expected to, cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares or (b) since the
date of the Preliminary Prospectus (1) sold, bid for, purchased or paid any
person any compensation for soliciting purchases of, the Shares or (2) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(xxiv) The Company and its subsidiaries and any "employee benefit
plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations
thereunder (collectively, "ERISA")) established or maintained by the
-----
Company, its subsidiaries or their "ERISA Affiliates" (as defined below)
are in compliance in all material respects with ERISA. "ERISA Affiliate"
---------------
means, with respect to the Company or a subsidiary, any member of any group
of organizations described in Sections 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended, and the regulations and
published interpretations thereunder (the "Code") of which the Company or
----
such subsidiary is a member. No "reportable event" (as defined under ERISA)
has occurred or is reasonably expected to occur with respect to any
8
<PAGE>
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their
ERISA Affiliates, if such "employee benefit plan" were terminated, would
have any "amount of unfunded benefit liabilities" (as defined under ERISA).
Neither the Company, its subsidiaries nor any of their ERISA Affiliates has
incurred or reasonably expects to incur any liability under (a) Title IV of
ERISA with respect to termination of, or withdrawal from, any "employee
benefit plan" or (b) Sections 412, 4971, 4975 or 4980B of the Code. Each
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates that is intended to be
qualified under Section 401(a) of the Code is so qualified and nothing has
occurred, whether by action or failure to act, which would cause the loss
of such qualification.
(xxv) Except as otherwise disclosed in the Prospectus, subsequent to
the respective dates as of which information is given in the Prospectus:
(a) there has been no Material Adverse Change; (b) the Company and its
subsidiaries, considered as one entity, have not incurred any material
liability or obligation, indirect, direct or contingent, not in the
ordinary course of business nor entered into any material transaction or
agreement not in the ordinary course of business; (c) there has been no
dividend or distribution of any kind declared, paid or made by the Company
or, except for dividends paid to the Company or other subsidiaries, any of
its subsidiaries on any class of capital stock or repurchase or redemption
by the Company or any of its subsidiaries of any class of capital stock;
(d) there has been no capital expenditure or commitment by the Company or
any of its subsidiaries exceeding $100,000, either individually or in the
aggregate except in the ordinary course of business as generally
contemplated by the Prospectus; (e) there has been no change in accounting
methods or practices (including any change in depreciation or amortization
policies or rates) by the Company or any of its subsidiaries; (f) there has
been no revaluation by the Company or any of its subsidiaries of any of
their assets; (g) there has been no increase in the salary or other
compensation payable or to become payable by the Company or any of its
subsidiaries to any of their officers, directors, employees or advisors,
nor any declaration, payment or commitment or obligation of any kind for
the payment by the Company or any of its subsidiaries of a bonus or other
additional salary or compensation to any such person; (h) there has been no
amendment or termination of any material contract, agreement or license to
which the Company or any subsidiary is a party or by which it is bound; (i)
there has been no waiver or release of any material right or claim of the
Company or any subsidiary, including any write-off or other compromise of
any material account receivable of the Company or any subsidiary; and (j)
there has been no change in pricing or royalties set or charged by the
Company or any subsidiary to their respective customers or licensees or in
pricing or royalties set or charged by persons who have licensed
Intellectual Property Rights to the Company or any of its subsidiaries.
(xxvi) PricewaterhouseCoopers LLP, who have expressed their opinion
with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) and supporting schedules
included in the Prospectus are independent public or certified public
accountants within the meaning of Regulation S-X under the Securities Act
and the Exchange Act.
(xxvii) The financial statements, together with the related notes,
included in the Prospectus present fairly in all material respects the
consolidated financial position of the Company and its subsidiaries as of
and at the dates indicated and the results of their
9
<PAGE>
operations and cash flows for the periods specified. Such financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto.
The financial data set forth in the Prospectus under the captions
"Prospectus Summary--Summary Financial Data", "Selected Financial Data" and
"Capitalization" fairly present the information set forth therein on a
basis consistent with that of the audited financial statements contained in
the Prospectus.
(xxviii) Except pursuant to this Agreement, there are no contracts,
agreements or understandings between the Company and any other person that
would give rise to a valid claim against the Company or either of the
Underwriters for a brokerage commission, finder's fee or like payment in
connection with the issuance, purchase and sale of the Shares.
(xxix) The statements (including the assumptions described therein)
included in the Prospectus (a) are within the coverage of Rule 175(b) under
the Securities Act to the extent such data constitute forward looking
statements as defined in Rule 175(c) and (b) were made by the Company with
a reasonable basis and reflect the Company's good faith estimate of the
matters described therein.
(xxx) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to
this Agreement shall be deemed to be a representation and warranty by the
Company to the Underwriters as to the matters covered thereby.
(b) Each Selling Shareholder, severally and not jointly,
represents and warrants to, and agrees with the several Underwriters that:
(i) The execution, delivery and performance of this
Agreement by such Selling Shareholder and the consummation of the transactions
contemplated hereby and thereby will not (A) conflict with or result in the
breach of any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a default)
or require consent under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of such Selling Shareholder
pursuant to the terms of, any agreement, instrument, franchise, license or
permit to which such Selling Shareholder is a party or by which such Selling
Shareholder or any of its property or assets may be bound including, without
limitation, the terms of any trust or similar agreement under which such Selling
Shareholder was formed, or (B) violate or conflict with any judgment, decree,
order, statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over such Selling Shareholder or
its properties or assets.
(ii) Such Selling Shareholder has, and will have at the time
of delivery of the Shares to be sold by it, full legal right, power, authority
and capacity, and, except as required under the Securities Act and state
securities and Blue Sky laws, all necessary consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits of and from
all public, regulatory or governmental agencies and bodies, as are required for
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby and thereby, including the sale,
assignment, transfer and delivery of the Shares to be sold, assigned,
transferred and delivered by such Selling Shareholder hereunder.
10
<PAGE>
Park Avenue, New York, New York, or such other location as may be mutually
acceptable, upon delivery of the certificates for the Additional Shares to the
Underwriters.
(f) The Company and the Underwriters agree that up to 5% of the Firm
Shares to be purchased by the Underwriters (the "Reserved Shares") shall be
---------------
reserved for sale by the Underwriters to certain individuals and entities having
relationships with the Company or its employees, as part of the distribution of
the Shares by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. (the "NASD") and all other applicable laws, rules and
----
regulations. To the extent that such Reserved Shares are not orally confirmed
for purchase by such individuals and entities having business relationships with
the Company by the end of the first business day after the date of this
Agreement, such Reserved Shares may be offered to the public as part of the
public offering contemplated hereby.
3. Offering. Upon the Underwriters' authorization of the release of the
--------
Firm Shares, the Underwriters propose to offer the Shares for sale to the public
upon the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with each of
------------------------
the Underwriters that:
(a) The Company will notify the Underwriters immediately (and, if
requested by the Underwriters, will confirm such notice in writing) (i) when
any post-effective amendment to the Registration Statement becomes effective,
(ii) of any request by the Commission for any amendment of or supplement to
the Registration Statement or the Prospectus or for any additional
information, (iii) of the mailing or the delivery to the Commission for filing
of the Prospectus or any amendment of or supplement to the Registration
Statement or the Prospectus or any document to be filed pursuant to the
Exchange Act during any period when the Prospectus is required to be delivered
under the Securities Act, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of either Registration Statement or any
post-effective amendment thereto or of the initiation, or the threatening, of
any proceedings therefor, (v) of the receipt of any comments or inquiries from
the Commission, and (vi) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Shares for sale in
any jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time,
the Company will make every reasonable effort to prevent the issuance of any
such stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any post-effective amendment to the
Registration Statement or any amendment of or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs from
the prospectus filed with the Commission pursuant to Rule 424(b) of the
Securities Act Regulations, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Securities Act Regulations) to
which the Underwriters or Underwriters' Counsel (as hereinafter defined) shall
reasonably object, will furnish the Underwriters with copies of any such
amendment or supplement a reasonable amount of time prior to such proposed
filing or use, as the case may be, and will not file any such amendment or
supplement or use any such prospectus to which the Underwriters or counsel for
the Underwriters shall reasonably object.
(b) For such period of time as in the judgment of counsel for the
Underwriters a Prospectus is required to be delivered in connection with sales
by an Underwriter, any event shall occur as a result of which the Prospectus
would, in the judgment of counsel to the Underwriters (which may be internal
counsel for such Underwriter) or the Company include an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not
12
<PAGE>
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $[__], the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Firm Shares shall be made at the office of Bear, Stearns &
Co. Inc., 245 Park Avenue, New York, New York, or at such other place as shall
be agreed upon by the Underwriters and the Company, at 10:00 A.M. on [__], 1999
(unless postponed in accordance with the provisions of Section 9 hereof) after
the determination of the public offering price of the Firm Shares, or such other
time not later than ten business days after such date as shall be agreed upon by
the Underwriters and the Company (such time and date of payment and delivery
being herein called the "Closing Date"). Payment shall be made to the Company by
wire transfer in same day funds, against delivery to the Underwriters of
certificates for the Shares to be purchased by them. Certificates for the Firm
Shares shall be registered in such name or names and in such authorized
denominations as the Underwriters may request in writing at least two full
business days hours prior to the Closing Date. The Company will permit the
Underwriters to examine and package such certificates for delivery at least one
full business day prior to the Closing Date.
(c) In addition, each Selling Shareholder hereby grants to the
Underwriters the option to purchase up to that number of Additional Shares
identified on Schedule II at the same purchase price per share to be paid by the
Underwriters to the Company for the Firm Shares as set forth in this Section 2,
for the sole purpose of covering over-allotments in the sale of Firm Shares by
the Underwriters. This option may be exercised at any time, in whole or in part,
on or before the thirtieth day following the date of the Prospectus, by written
notice by the Underwriters to each Selling Shareholder. Such notice shall set
forth the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by the Underwriters,
when the Additional Shares are to be delivered (such date and time being herein
sometimes referred to as the "Additional Closing Date"); provided, however, that
-----------------------
the Additional Closing Date shall not be earlier than the Closing Date or
earlier than the second full business day after the date on which the option
shall have been exercised nor later than the eighth full business day after the
date on which the option shall have been exercised (unless such time and date
are postponed in accordance with the provisions of Section 9 hereof).
Certificates for the Additional Shares shall be registered in such name or names
and in such authorized denominations as the Underwriters may request in writing
at least two full business days prior to the Additional Closing Date. Each
Selling Shareholder will permit the Underwriters to examine and package such
certificates for delivery at least one full business day prior to the Additional
Closing Date.
(d) The number of Additional Shares to be sold to each
Underwriter shall be the number that bears the same ratio to the aggregate
number of Additional Shares being purchased as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to the total number of Firm
Shares being purchased from the Company, subject, however, to such adjustments
to eliminate any fractional shares as the Underwriters in their sole discretion
shall make.
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<PAGE>
(e) Payment for the Additional Shares shall be made by wire
transfer in same day funds each payable to the order of the Selling Shareholder
at the office of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York,
or such other location as may be mutually acceptable, upon delivery of the
certificates for the Additional Shares to the Underwriters.
(f) The Company and the Underwriters agree that up to [__] of
the Firm Shares to be purchased by the Underwriters (the "Reserved Shares")
--------------
shall be reserved for sale by the Underwriters to certain individuals and
entities having business relationships with the Company, as part of the
distribution of the Shares by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") and all other applicable
----
laws, rules and regulations. To the extent that such Reserved Shares are not
orally confirmed for purchase by such individuals and entities having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Shares may be offered to the public as
part of the public offering contemplated hereby.
3. Offering. Upon the Underwriters' authorization of the release of
--------
the Firm Shares, the Underwriters propose to offer the Shares for sale to the
public upon the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
each of the Underwriters that:
(a) The Company will notify the Underwriters immediately
(and, if requested by the Underwriters, will confirm such notice in
writing) (i) when any post-effective amendment to the Registration
Statement becomes effective, (ii) of any request by the Commission for any
amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to
the Commission for filing of the Prospectus or any amendment of or
supplement to the Registration Statement or the Prospectus or any document
to be filed pursuant to the Exchange Act during any period when the
Prospectus is required to be delivered under the Securities Act, (iv) of
the issuance by the Commission of any stop order suspending the
effectiveness of either Registration Statement or any post-effective
amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments or inquiries from
the Commission, and (vi) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Shares for sale
in any jurisdiction or the initiation or threatening of any proceeding for
that purpose. If the Commission shall propose or enter a stop order at any
time, the Company will make every reasonable effort to prevent the issuance
of any such stop order and, if issued, to obtain the lifting of such order
as soon as possible. The Company will not file any post-effective amendment
to the Registration Statement or any amendment of or supplement to the
Prospectus (including any revised prospectus which the Company proposes for
use by the Underwriters in connection with the offering of the Shares which
differs from the prospectus filed with the Commission pursuant to Rule
424(b) of the Securities Act Regulations, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the
Securities Act Regulations) to which the Underwriters or Underwriters'
Counsel (as hereinafter defined) shall reasonably object, will furnish the
Underwriters with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may
13
<PAGE>
be, and will not file any such amendment or supplement or use any such
prospectus to which the Underwriters or counsel for the Underwriters shall
reasonably object.
(b) For such period of time as in the judgment of counsel for the
Underwriters a Prospectus is required to be delivered in connection with
sales by an Underwriter, any event shall occur as a result of which the
Prospectus would, in the judgment of counsel to the Underwriters (which may
be internal counsel for such Underwriter) or the Company include an untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it
shall be necessary at any time to amend or supplement the Prospectus or
either Registration Statement to comply with the Securities Act or the
Securities Act Regulations, the Company will notify the Underwriters
promptly and prepare and file with the Commission an appropriate amendment
or supplement (in form and substance satisfactory to the Underwriters)
which will correct such statement or omission or which will effect such
compliance.
(c) The Company has delivered to the Underwriters four conformed
copies of the Registration Statement as originally filed, including
exhibits, and all amendments thereto, and the Company will promptly deliver
to each of the Underwriters, from time to time during the period that the
Prospectus is required to be delivered under the Securities Act, such
number of copies of the Prospectus and the Registration Statement, and all
amendments of and supplements to such documents, if any, as the
Underwriters may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with the
Underwriters, to qualify the Shares for offering and sale under the
securities laws relating to the offering or sale of the Shares of such
jurisdictions as the Underwriters may reasonably designate and to maintain
such qualification in effect for so long as required for the distribution
thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a
general consent to service of process.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Securities Act) to its security holders and to the
Underwriters as soon as practicable, but not later than 45 days after the
end of its fiscal quarter in which the first anniversary date of the
effective date of the Registration Statement occurs (or if such fiscal
quarter is the Company's fourth fiscal quarter, not later than 90 days
after the end of such quarter), an earnings statement (in form complying
with the provisions of Rule 158 of the Regulations) covering a period of at
least twelve consecutive months beginning after the effective date of the
Registration Statement (as defined in Rule 158(c) under the Securities
Act).
(f) During the period of 180 days from the date of the Prospectus,
the Company will not, directly or indirectly, without the prior written
consent of Bear Stearns, 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
excercisable or exchangeable for common stock, except that the Company may
(i) issue shares of Common Stock and options to purchase Common Stock under
its 1998 and 1994 Stock Option Plans and
14
<PAGE>
1999 Employee Stock Purchase Plans (as such terms are used in the
Prospectus) in the form in which they are in effect on the date of the
Prospectus, (ii) shares of Common Stock upon exercise of warrants to
purchase Common Stock that were issued and outstanding on the date of the
Prospectus, or (iii) shares of Common Stock issuable upon conversion of
convertible securities that were issued and outstanding on the date of the
Prospectus.
(g) During a period of three years from the date of the
Prospectus, the Company will furnish to the Underwriters copies of (i) all
reports to its shareholders; and (ii) all reports, financial statements and
proxy or information statements filed by the Company with the Commission or
any national securities exchange.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(i) If the Company elects to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement, no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission, and all requests for
additional information on the part of the Commission shall have been
complied with to the Underwriters' reasonable satisfaction.
(j) The Company, during the period when the Prospectus is
required to be delivered under the Securities Act or the Exchange Act, will
use commercially reasonable efforts to file all documents required to be
filed with the Commission pursuant to Sections 13, 14 or 15 of the Exchange
Act within the time periods required by the Exchange Act and the rules and
regulations thereunder.
5. Payment of Expenses. Whether or not the transactions contemplated
-------------------
in this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereto (including all
exhibits thereto), any Preliminary Prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), printing, duplicating and distributing the
underwriting documents (including this Agreement and the Agreement Among
Underwriters) and all other documents related to the public offering of the
Shares (including those supplied to the Underwriters in quantities as
hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to
the Underwriters, including any transfer or other taxes payable thereon, (iii)
the qualification of the Shares under state or foreign securities or Blue Sky
laws, including the costs of printing and mailing a preliminary and final "Blue
Sky Memorandum" and the reasonable fees of counsel in connection therewith and
such counsel's disbursements in relation thereto, (iv) listing of the Shares for
quotation on the Nasdaq, (v) filing fees of the Commission and the NASD, (vi)
the cost of printing certificates representing the Shares, (vii) the cost and
charges of any transfer agent or registrar and (viii) all out-of-pocket costs
and expenses of the Underwriters, including the reasonable fees and
disbursements of counsel for the Underwriters, in connection with matters
related to the Reserved Shares.
15
<PAGE>
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and each Selling Shareholder herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 6,
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
------------
Additional Closing Date, if different, for the Additional Shares), to the
absence from any certificates, opinions, written statements or letters furnished
to the Underwriters or to Latham & Watkins ("Underwriters' Counsel") pursuant to
---------------------
this Section 6 of any material misstatement or omission, to the performance in
all material respects by the Company of its obligations hereunder, and to all of
the following additional conditions:
(a) On the Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under
the Securities Act or proceedings therefor initiated or, to the Company's
knowledge, threatened by the Commission. The Prospectus shall have been
filed or transmitted for filing with the Commission pursuant to Rule 424(b)
of the Securities Act Regulations within the prescribed time period, and
prior to Closing Date the Company shall have provided evidence satisfactory
to the Underwriters of such timely filing or transmittal.
(b) All of the representations and warranties of the Company and
each Selling Shareholder contained in this Agreement shall be true and
correct on the date hereof and on the Closing Date with the same force and
effect as if made on and as of the date hereof and the Closing Date,
respectively. The Company shall have performed or complied in all material
respects with all of the agreements herein contained and required to be
performed or complied with by them at or prior to the Closing Date.
(c) The Prospectus shall have been printed and copies
distributed to the Underwriters not later than 10:00 a.m., New York City
time, on the second business day following the date of this Agreement or at
such later date and time as to which the Underwriters may agree, and no
stop order suspending the qualification or exemption from qualification of
the Shares in any jurisdiction referred to in Section 4(d) shall have been
issued and no proceeding for that purpose shall have been commenced or
shall be pending or threatened.
(d) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the
issuance of the Shares; no action, suit or proceeding shall have been
commenced and be pending against or affecting or, to the best knowledge of
the Company, threatened against, the Company before any court or arbitrator
or any governmental body, agency or official that (1) could reasonably be
expected to result in a Material Adverse Effect and (2) has not been
disclosed in the Prospectus.
(e) Since the respective dates as of which information is given
in the Prospectus, (i) there shall not have been any Material Adverse
Change, or any development that is reasonably likely to result in a
Material Adverse Change, in the capital stock or the long-term debt, or
material increase in the short-term debt, of the Company or any of its
subsidiaries from that set forth in the Prospectus, (ii) no dividend or
distribution of any kind shall have been declared, paid or made by the
Company or any of its subsidiaries on any class of its capital stock, other
than as described in the Prospectus, (iii) neither the Company nor
16
<PAGE>
any of its subsidiaries shall have incurred any liabilities or obligations,
direct or contingent, that are material, individually or in the aggregate,
to the Company and its subsidiaries, taken as a whole, and that are
required to be disclosed on the latest balance sheet or notes thereto
included in the Prospectus in accordance with generally accepted accounting
principles and are not so disclosed. Since the date hereof and since the
dates as of which information is given in the Prospectus, there shall not
have occurred any Material Adverse Effect.
(f) The Underwriters shall have received a certificate, dated
the Closing Date, signed on behalf of the Company by each of the Company's
Chief Executive Officer and Chief Financial Officer in form and substance
reasonably satisfactory to the Underwriters, confirming, as of the Closing
Date, the matters set forth in paragraphs (a), (b), (d) and (e) of this
Section 6 and that, as of the Closing Date, the obligations of the Company
to be performed hereunder on or prior thereto have been duly performed in
all material respects.
(g) The Underwriters shall have received on the Closing Date an
opinion, dated the Closing Date, in form and substance satisfactory to the
Underwriters and counsel to the Underwriters, of Manatt, Phelps & Phillips,
LLP, counsel for the Company, to the effect set forth in Exhibit A hereto.
---------
(h) The Underwriters shall have received on the Closing Date an
opinio dated the Closing Date, in form and substance satisfactory to the
Underwriters and counsel to the Underwriters, of Manatt, Phelps & Phillips,
LLP, counsel to the Selling Shareholders to the effect set forth in Exhibit
-------
B hereto.
-
(i) All proceedings taken in connection with the sale of the
Firm Shares and the Additional Shares as herein contemplated shall be in
form and substance reasonably satisfactory to the Underwriters and to
Underwriters' Counsel, and the Underwriters shall have received from
Underwriters' Counsel a favorable opinion, dated as of the Closing Date
with respect to the issuance and sale of the Shares, the Registration
Statement and the Prospectus and such other related matters as the
Underwriters may reasonably require, and the Company shall have furnished
to Underwriters' Counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(j) At the time this Agreement is executed and at the Closing
Date, the Underwriters shall have received a letter from
PricewaterhouseCoopers LLP, independent public accountants for the Company,
dated, respectively, as of the date of this Agreement and as of the Closing
Date addressed to the Underwriters and in form and substance reasonably
satisfactory to the Underwriters, containing statements and information of
the type ordinarily included in auditors' "comfort letters" to underwriters
with respect to financial statements and certain information of the Company
and its subsidiaries contained or incorporated by reference (if any) in the
Registration Statement and the Prospectus.
(k) At the time this Agreement is executed, the Underwriters
shall have received a "lock-up" agreement, substantially in the form
attached as Exhibit C hereto, from each of the officers, directors and
---------
shareholders of the Company.
(l) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq.
17
<PAGE>
(m) At the time this Agreement is executed and at the Closing
Time, the NASD shall not have withdrawn, or given notice of an intention to
withdraw, its approval of the fairness of the underwriting terms and
arrangements of the offering of the Shares by the Underwriters.
(n) All opinions, certificates, letters and other documents
required by this Section 6 to be delivered by the Company and each Selling
Shareholder will be in compliance with the provisions hereof only if they
are reasonably satisfactory in form and substance to the Underwriters. The
Company and each Selling Shareholder will furnish the Underwriters with
such conformed copies of such opinions, certificates, letters and other
documents as Bear Stearns shall reasonably request. Prior to the Closing
Date, the Company and each Selling Shareholder shall have furnished to the
Underwriters such further information, certificates and documents as the
Underwriters may reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to the Underwriters or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to the Underwriters and
to Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by the Underwriters at, or at any time prior to, the Closing Date and
the obligations of the Underwriters to purchase the Additional Shares may be
canceled by the Underwriters at, or at any time prior to, the Additional Closing
Date. Notice of such cancellation shall be given to the Company and each Selling
Shareholder in writing, or by telephone, telex or telegraph, confirmed in
writing.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act
against any and all losses, liabilities, claims, damages and expenses whatsoever
as incurred (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in
either Registration Statement, as originally filed or any amendment thereof, or
any related preliminary prospectus or the Prospectus, or in any supplement
thereto or amendment thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that the Company will not be liable in any such case [(i)] to the extent but
only to the extent that any such loss, liability, claim, damage or expense
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter expressly for use therein [and (ii) with respect to any
preliminary prospectus or preliminary prospectus supplement to the extent that
any such loss, claim, damage or liability results from the fact that an
Underwriter sold Shares to a person as to whom it shall be established that
there was not sent or given, at or prior to written confirmation of such sale, a
copy of the prospectus or prospectus supplement as then amended or supplemented
in any case where such delivery is
18
<PAGE>
required by the Securities Act if the Company has previously furnished copies
thereof in sufficient quantity to such Underwriter and with sufficient time to
effect a recirculation pursuant to Rule 461 under the Securities Act and the
loss, claim, damage or liability of the Underwriters results from an untrue
statement or omission of a material fact contained in the preliminary prospectus
or preliminary prospectus supplement which was identified in writing prior to
the effective date of the registration statement to such underwriter and
corrected in the prospectus or prospectus supplement as then amended, and such
correction would have cured the defect giving rise to such loss, claim, damage
or liability.] This indemnity agreement will be in addition to any liability
which the Company may otherwise have including under this Agreement.
(b) Each Selling Shareholder agrees, severally and not jointly,
to indemnify and hold harmless each Underwriter, its directors, its officers and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act to the same extent as
the foregoing indemnity from the Company to each Underwriter, but only with
reference to information relating to such Selling Shareholder furnished in
writing by or on behalf of such Selling Shareholder expressly for use in the
Registration Statement, the prospectus or any preliminary prospectus.
Notwithstanding the foregoing, the aggregate liability of such Selling
Shareholder pursuant to the provisions of this paragraph shall be limited to an
amount equal to the total proceeds (before deducting underwriting discounts and
commissions and expenses) received by such Selling Shareholder from the sale of
Shares owned by it hereunder.
(c) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, and each Selling Shareholder against any and all losses, liabilities,
claims, damages and expenses whatsoever as incurred (including but not limited
to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Securities Act, the Exchange Act or otherwise, insofar
as such losses, liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in either Registration Statement, as
originally filed or any amendment thereof, or any related preliminary
prospectus, preliminary prospectus supplement or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through Bear, Stearns & Co. Inc.
expressly for use therein; provided, however, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement.
(d) Promptly after receipt by an indemnified party under
Subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each
19
<PAGE>
party against whom indemnification is to be sought in writing of the
commencement thereof (but the failure so to notify an indemnifying party shall
not relieve the indemnifying party from any liability which it may have under
this Section 7, except to the extent that the indemnifying party has been
prejudiced in any material respect by such failure or from any liability that it
may have otherwise). In case any such action is brought against any indemnified
party, and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to the extent it
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume the
defense thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have the
right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense of
such action, (ii) the indemnifying parties shall not have employed counsel to
have charge of the defense of such action within a reasonable time after notice
of commencement of the action, or (iii) such indemnified party or parties shall
have reasonably concluded that there may be defenses available to it or them
which are different from or additional to those available to one or all of the
indemnifying parties (in which case the indemnifying parties shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
indemnifying parties. Anything in this Subsection to the contrary
notwithstanding, an indemnifying party shall not be liable for any settlement of
any claim or action effected without its written consent; provided, however,
that such consent was not unreasonably withheld.
8. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company) as incurred to which the Company and one
or more of the Underwriters may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other hand shall be deemed to be in
the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and (y) the underwriting discounts and commissions received by
the Underwriters, respectively, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Company and the
Underwriters shall be determined by
20
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reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Securities Act or Section
20(a) of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed the Registration
Statement and each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties, notify each party or parties from whom contribution may be sought,
but the omission to so notify such party or parties shall not relieve the party
or parties from whom contribution may be sought from any obligation it or they
may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default relates
do not (after giving effect to arrangements, if any, made by the Underwriters
pursuant to Subsection (b) below) exceed in the aggregate 10% of the number of
Firm Shares or Additional Shares, the Firm Shares or Additional Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase shall be purchased by the non-defaulting Underwriters in proportion to
the respective proportions which the numbers of Firm Shares set forth opposite
their respective names in Schedule I hereto bear to the aggregate number of Firm
Shares set forth opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Additional Shares, as the case may be, the Underwriters may
in their discretion arrange for themselves or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase such Firm Shares or Additional Shares, as the case may be,
21
<PAGE>
to which such default relates on the terms contained herein. In the event that
within 5 calendar days after such a default the Underwriters do not arrange for
the purchase of the Firm Shares or Additional Shares, as the case may be, to
which such default relates as provided in this Section 9, this Agreement, or in
the case of a default with respect to the Additional Shares, the obligations of
the Underwriters to purchase and of the Company to sell the Additional Shares,
shall thereupon terminate, without liability on the part of the Company with
respect thereto (except in each case as provided in Section 5, 7(a) and 8
hereof) or the Underwriters, but nothing in this Agreement shall relieve a
defaulting Underwriter or Underwriters of its or their liability, if any, to the
other Underwriters and the Company for damages occasioned by its or their
default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
the Underwriters or the Company shall have the right to postpone the Closing
Date or Additional Closing Date, as the case may be for a period, not exceeding
five business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the Prospectus which,
in the opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares or Additional
Shares.
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters, the Company and
each Selling Shareholder contained in this Agreement, including the agreements
contained in Section 5, the indemnity agreements contained in Section 7 and the
contribution agreements contained in Section 8, shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any Underwriter or any controlling person thereof or by or on behalf of the
Company, any of its officers and directors, or any controlling person of the
Company or any Selling Shareholder, and shall survive delivery of and payment
for the Shares to and by the Underwriters. The representations contained in
Section 1 and the agreements contained in Sections 5, 7, 8, 11(d) and 12 hereof
shall survive the termination of this Agreement, including termination pursuant
to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective upon the execution and
delivery of a counterpart hereof by each of the parties hereto.
(b) The Underwriters shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the
Underwriters to purchase the Additional Shares at any time prior to the
Additional Closing Date, as the case may be, if on or prior to such date, (i)
the Company shall have failed, refused or been unable to perform in any material
respect any agreement on its part to be performed hereunder, (ii) any other
condition to the obligations of the Underwriters hereunder as provided in
Section 6 is not fulfilled when and as required in any material respect, (iii)
in the reasonable judgment of the Underwriters any Material Adverse Change shall
have occurred since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus, (iv) any downgrading
shall have occurred in the rating accorded the Company's debt securities by any
"nationally recognized statistical rating
22
<PAGE>
organization", as that term is defined by the Commission for purposes of Rule
436(g)(2) under the Securities Act, or any such organization shall have publicly
announced that it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities, or (v)(A) any
domestic or international event or act or occurrence has materially disrupted,
or in the opinion of the Underwriters will in the immediate future materially
disrupt, the market for the Company's securities or for securities in general;
or (B) trading in securities generally on the New York Stock Exchange ("NYSE")
----
or quotations on the Nasdaq shall have been suspended or materially limited, or
minimum or maximum prices for trading shall have been established, or maximum
ranges for prices for securities shall have been required, on such exchange, or
by such exchange or other regulatory body or governmental authority having
jurisdiction; or (C) a banking moratorium shall have been declared by federal or
state authorities, or a moratorium in foreign exchange trading by major
international banks or persons shall have been declared; or (D) there is an
outbreak or escalation of armed hostilities involving the United States on or
after the date hereof, or if there has been a declaration by the United States
of a national emergency or war, the effect of which shall be, in the
Underwriters' judgment, to make it inadvisable or impracticable to proceed with
the offering, sale and delivery of the Firm Shares or the Additional Shares, as
the case may be, on the terms and in the manner contemplated by the Prospectus;
or (E) there shall have been such a material adverse change in general economic,
political or financial conditions or if the effect of international conditions
on the financial markets in the United States shall be such as, in the
Underwriters' judgment, makes it inadvisable or impracticable to proceed with
the offering, sale and delivery of the Firm Shares or the Additional Shares, as
the case may be, on the terms and in the manner contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall
be by telephone, telex, telegraph or telephonic facsimile, confirmed in writing
by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (other than pursuant to Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by the Underwriters, reimburse the Underwriters
for all out-of-pocket expenses (including the fees and expenses of their
counsel), incurred by the Underwriters in connection herewith.
12. Underwriters' Information. The Company, the Selling Shareholders
-------------------------
and the Underwriters severally acknowledge that the statements set forth in (i)
the last paragraph of the outside front cover of the Prospectus concerning the
delivery of the shares of Common Stock to the Underwriters and the offering of
such shares by the Underwriters; (ii) the third paragraph under the caption
"Underwriting" in the Prospectus concerning the proposed public offering price,
discount and concession; and (iii) the tenth paragraph under the caption
"Underwriting" in the Prospectus concerning transactions that stabilize,
maintain, or otherwise affect the price of the Common Stock, constitute the only
information furnished in writing by or on behalf of any Underwriter expressly
for use in the Registration Statement, as originally filed or in any amendment
thereof, any related preliminary prospectus or preliminary prospectus supplement
or the Prospectus or in any amendment thereof or supplement thereto, as the case
may be.
13. Notices. All communications hereunder, except as may be
-------
otherwise specifically provided herein, shall be in writing and, if sent to the
Underwriters shall be mailed,
23
<PAGE>
delivered, or telexed, telegraphed or telecopied and confirmed in writing to
Bear, Stearns & Co. Inc., Hambrecht & Quist and Thomas Weisel Partners LLC, c/o
Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention:
Corporate Finance Department, telecopy number: (212) 272-3092, with a copy,
which shall not constitute notice, to Latham & Watkins, Attn: Gregory K. Miller,
505 Montgomery Street, Suite 1900, San Francisco, California 94111; telecopy
number: (415) 395-8095; and if sent to the Company, shall be mailed, delivered
or telexed, telegraphed or telecopied and confirmed in writing to SonicWALL,
Inc., 5400 Betsy Ross Drive, Santa Clara, California 95054, Attention: Chief
Executive Officer, telecopy number: (408) 844-9900, with a copy, which shall not
constitute notice, to Manatt, Phelps & Phillips, LLP Attn: William T.
Quicksilver, telecopy number: (310) 312-4224.
14. Parties. This Agreement shall inure solely to the benefit of,
-------
and shall be binding upon, the Underwriters, the Selling Shareholders, the
Company and the controlling persons, directors, officers, employees and agents
referred to in Section 7 and 8, and their respective successors and assigns, and
no other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not include
a purchaser, in its capacity as such, of Shares from any of the Underwriters.
15. GOVERNING LAW; Construction. This Agreement shall be construed
---------------------------
in accordance with the internal laws of the State of New York applicable to
agreements made and to be performed within such State, without giving any effect
to any provisions thereof relating to conflicts of law. TIME IS OF THE ESSENCE
IN THIS AGREEMENT.
16. Captions. The captions included in this Agreement are included
--------
solely for convenience of reference and are not to be considered a part of this
Agreement.
17. Counterparts. This Agreement may be executed in various
------------
counterparts which together shall constitute one and the same instrument.
24
<PAGE>
If the foregoing correctly sets forth the understanding among the
Underwriters, each Selling Shareholder and the Company, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among us.
Very truly yours,
SonicWALL, Inc.
By_______________________________
Name_____________________________
Title____________________________
[Selling Shareholder #1]
_________________________________
[Selling Shareholder #2]
_________________________________
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST LLC
THOMAS WEISEL PARTNERS LLC
BEAR, STEARNS & CO. INC.
By ________________________________
Name_____________________________
Title____________________________
<PAGE>
SCHEDULE I
Number of Firm
Name of Underwriter Shares to be Purchased
- -------------------------------------------------------------------------------
Bear, Stearns & Co. Inc.-----------------------------------------------[__]
Hambrecht & Quist LLC----------------------------------------------------[__]
Thomas Weisel Partners LLC----------------------------------------------[__]
Total...................................................................[__]
<PAGE>
SCHEDULE II
[to follow]
<PAGE>
Exhibit B
Form of opinion of counsel to Selling Shareholders
Upon (i) payment for the shares in accordance with the terms of the
Underwriting Agreement, (ii) physical delivery of the Securities to the Transfer
Agent and registration of the Securities in the name of DTC upon registration of
transfer by the issuer thereof, (iii) physical delivery of the Securities to
DTC, and registration of the Securities in the name of DTC upon registration of
transfer by the issuer thereof, (iv) registration by book-entry of the credit to
the Lead Underwriters' securities accounts with DTC of the purchase of
Securities in the records of DTC, and (v) registration by book-entry of the
credit to the Other Underwriters' securities accounts of their purchase of
Securities in the records of any other "securities intermediary" (as defined in
Section 8-102(a)(14) of the California UCC) which acts as a "clearing
corporation" (as defined in Section 8-102(a)(5) of the California UCC) or
maintains "securities accounts" (as defined in Section 8-501(a) of the
California UCC) with respect to the transfer of the Securities to the
Underwriters, then the Underwriters will become the "entitlement holders" (as
defined in Section 8-102(a)(7) of the UCC) of the Securities, to our knowledge,
free of any "adverse claims" (as defined in Section 8-102(a)(1) of the
California UCC).
<PAGE>
Exhibit C
SonicWALL, Inc.
1160 Bordeaux Drive
Sunnyvale, California 94089
Lock-Up Agreement
_________________, 1999
Bear, Stearns & Co. Inc.
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Ladies and Gentlemen:
The undersigned understands that Bear, Stearns & Co. Inc. (the
"Representative") of the several underwriters (the "Underwriters"), proposes to
enter into an Underwriting Agreement with SonicWALL, Inc. (the "Company")
providing for the initial public offering (the "Initial Public Offering") by the
Underwriters, including the Representative, of the Company's Common Stock, no
par value per share (the "Common Stock").
In consideration of the Underwriters' agreement to purchase and
undertake the Initial Public Offering and for other good and valuable
consideration, receipt of which is hereby acknowledged, the undersigned,
pursuant to this letter agreement (this "Agreement"), agrees that, without the
prior written consent of the Representative, the undersigned will not, directly
or indirectly, offer, sell, contract to sell, grant any option to purchase,
pledge or otherwise dispose of any shares of Common Stock of the Company
(including, without limitation, shares of Common Stock of the Company that may
be deemed to be beneficially owned by the undersigned in accordance with the
rules and regulations of the Securities and Exchange Commission and shares of
Common Stock that may be issued upon exercise of a stock option or warrant) or
any securities convertible into or exercisable or exchangeable for such Common
Stock (such Common Stock and securities are referred to herein as, collectively,
"Securities"), or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of Securities, for a period (the
"Lock-Up Period") of 180 days after the date of the Prospectus used by the
Company in connection with the Initial Public Offering (any of the foregoing, a
"Disposition"); provided, however, that the undersigned may make a Disposition:
(i) as a bona fide gift or gifts, provided that the donee or donees thereof
agree in writing to be bound by the terms of this Agreement; (ii) as a
distribution to limited partners or shareholders of the undersigned, provided
that the distributees thereof agree in writing to be bound by the terms of this
Agreement; (iii) if the undersigned is an individual, either during his or her
lifetime or on death by will or intestacy to his or her immediate family or to a
trust the beneficiaries of which are exclusively the undersigned and/or a member
or members of his or her immediate family, provided that prior to any such
transfer each transferee agrees in writing to be bound by the terms of this
Agreement; or (iv) with the prior written consent of the Representative. For
the purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor.
In addition, the undersigned agrees that the Company may, and that the
undersigned will, (i) with respect to any shares for which the undersigned is
the record holder, cause the transfer agent for the Company to note stop
transfer instructions with respect to such shares on the transfer books and
records of the
<PAGE>
or proceedings referred to therein, fairly present the information required
with respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein in all material respects.
13. Such counsel has participated in conferences with officers and
other representatives of the Company, representatives of the independent
certified public accountants of the Company and the Underwriters and its
representatives at which the contents of the Registration Statement,
Preliminary Prospectus and the Prospectus and related matters were
discussed and, although such counsel is not passing upon and assumes no
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement, Preliminary Prospectus
or the Prospectus (except as indicated above), on the basis of the
foregoing, no facts have come to such counsel's attention which led such
counsel to believe that the Registration Statement (except for the
financial statements and schedules and other financial data contained
therein), at the time it became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that
the Prospectus (except for the financial statements and schedules and other
financial data contained therein), as of its date or the Closing Date,
contained or contains an untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters
involving the application of laws other than the laws of the United States,
California and any other jurisdictions in which they are admitted, to the extent
such counsel deems proper and to the extent specified in such opinion, if at
all, upon an opinion or opinions (in form and substance reasonably satisfactory
to Underwriters' Counsel) of other counsel familiar with the applicable laws and
reasonably acceptable to Underwriters' Counsel; provided, that such opinion
shall expressly state that the Underwriters may rely on such opinion as if it
were addressed to them. In rendering such opinion, such counsel may rely as to
matters of fact, to the extent they deem proper, on certificates of responsible
officers of the Company and its subsidiaries and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the existence or good standing of the Company and its
subsidiaries, provided that such opinion shall state that such counsel and the
Underwriters are justified in so relying upon any such certificate. The opinion
of such counsel for the Company shall state that the opinion of any such other
counsel is in form satisfactory to such counsel and, in their opinion, the
Underwriters and they are justified in relying thereon.
iii
<PAGE>
Exhibit B
[Opinion of counsel to Selling Shareholders]
iv
<PAGE>
Exhibit C
SonicWALL, Inc.
1160 Bordeaux Drive
Sunnyvale, California 94089
Lock-Up Agreement
_________________, 1999
Bear, Stearns & Co. Inc.
Hambrecht & Quist LLC
Thomas Weisel Partners LLC
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Ladies and Gentlemen:
The undersigned understands that Bear, Stearns & Co. Inc. (the
"Representative") of the several underwriters (the "Underwriters"), proposes to
enter into an Underwriting Agreement with SonicWALL, Inc. (the "Company")
providing for the initial public offering (the "Initial Public Offering") by the
Underwriters, including the Representative, of the Company's Common Stock, no
par value per share (the "Common Stock").
In consideration of the Underwriters' agreement to purchase and
undertake the Initial Public Offering and for other good and valuable
consideration, receipt of which is hereby acknowledged, the undersigned,
pursuant to this letter agreement (this "Agreement"), agrees that, without the
prior written consent of the Representative, the undersigned will not, directly
or indirectly, offer, sell, contract to sell, grant any option to purchase,
pledge or otherwise dispose of any shares of Common Stock of the Company
(including, without limitation, shares of Common Stock of the Company that may
be deemed to be beneficially owned by the undersigned in accordance with the
rules and regulations of the Securities and Exchange Commission and shares of
Common Stock that may be issued upon exercise of a stock option or warrant) or
any securities convertible into or exercisable or exchangeable for such Common
Stock (such Common Stock and securities are referred to herein as, collectively,
"Securities"), or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of Securities, for a period (the
"Lock-Up Period") of 180 days after the date of the Prospectus used by the
Company in connection with the Initial Public Offering (any of the foregoing, a
"Disposition"); provided, however, that the undersigned may make a Disposition:
(i) as a bona fide gift or gifts, provided that the donee or donees thereof
agree in writing to be bound by the terms of this Agreement; (ii) as a
distribution to limited partners or shareholders of the undersigned, provided
that the distributees thereof agree in writing to be bound by the terms of this
Agreement; (iii) if the undersigned is an individual, either during his or her
lifetime or on death by will or intestacy to his or her immediate family or to a
trust the beneficiaries of which are exclusively the undersigned and/or a member
or members of his or her immediate family, provided that prior to any such
transfer each transferee agrees in writing to be bound by the terms of this
Agreement; or (iv) with the prior written consent of the Representative. For
the purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor.
<PAGE>
In addition, the undersigned agrees that the Company may, and that the
undersigned will, (i) with respect to any shares for which the undersigned is
the record holder, cause the transfer agent for the Company to note stop
transfer instructions with respect to such shares on the transfer books and
records of the Company and (ii) with respect to any shares for which the
undersigned is the beneficial holder but not the record holder, cause the record
holder of such shares to cause the transfer agent for the Company to note stop
transfer instructions with respect to such shares on the transfer books and
records of the Company.
The foregoing restrictions are expressly agreed to preclude the holder
of any Securities from engaging in any hedging or other transaction that is
designed to or is reasonably expected to lead to or result in a Disposition of
Securities during the Lock-Up Period even if such Securities would be disposed
of by someone other than the undersigned. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any of the Securities or any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from any of the
Securities.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to enter into this Agreement, and that, upon
request, the undersigned will execute any additional documents necessary or
desirable in connection with the enforcement hereof. All authority herein
conferred or agreed to the conferred shall survive the death or incapacity of
the undersigned and any obligations of the undersigned shall be binding upon the
heirs, personal representatives, successors, and assigns of the undersigned.
[signature page follows]
1
<PAGE>
The undersigned hereby executes this Agreement and agrees to its terms
as of the date first written above.
Very truly yours,
___________________________________
(Signature)
Please type:___________________________________
(Name)
___________________________________
(Address)
___________________________________
(Social Security or
Taxpayer Identification No.)
Number of shares owned or Certificate numbers:
subject to warrants, options
or convertible securities: ___________________________________
_________________________________ ___________________________________
2
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
[SONICWALL LOGO APPEARS HERE]
SHARES SHARES
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN BOSTON, MA OR IN NEW YORK, NY CUSIP 835470 10 5
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK NO PAR VALUE, OF
SonicWALL, Inc.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned and registered
by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Michael Sheridan /s/ Sreekanth Ravi
[SEAL]
SECRETARY CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/ [ILLEGIBLE]
AUTHORIZED SIGNATURE
<PAGE>
SonicWALL, Inc.
Statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established, from time to time, by the Articles of
incorporation of the Corporation and by any certificate of determination, and
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and without
charge from the Secretary of the Corporation at its corporate headquarters.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______Custodian_____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as tenants Act________________
in common (State)
UNIF TRF MIN ACT - _______ Custodian (until age ___)
(Cust)
__________ under Uniform Transfers
(Minor)
to Minors Act ____________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated________________________
X ________________________________________________
X ________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By_____________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCK-
BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM. PURSUANT
TO S.E.C. RULE 17AD-15).
<PAGE>
[LETTERHEAD OF MANATT PHELPS PHILLIPS APPEARS HERE]
October 19, 1999
EXHIBIT 5.1
SonicWALL, Inc.
5400 Betsy Ross Drive
Santa Clara, California 95054
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to SonicWALL, Inc., a California corporation
(the "Company") and certain shareholders of the Company (the "Selling
Shareholders") in connection with the underwritten public offering (the
"Offering") of the Company of 4,000,000 shares (the "Firm Shares") of the
Company's common stock, no par value, (the "Common Stock") and an additional
600,000 shares (the "Additional Shares") of Common Stock, which may be purchased
by the underwriters under an option to be granted to them by the Selling
Shareholders to cover over-allotments, if any, pursuant to proposed terms of an
Underwriting Agreement (the "Underwriting Agreement") to be entered into by and
among the Company, the Selling Shareholders and Bear, Stearns & Co. Inc.,
Hambrecht & Quist LLC and Thomas Weisel Partners LLC (collectively, the
"Underwriters"). The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares."
In rendering the opinions contained herein, we have examined the
originals or copies of such documents as we deemed necessary for purposes of
this opinion, including but not limited to the following:
1. Amended and Restated Articles of Incorporation of the Company, as
amended to date;
2. Bylaws of the Company as amended to date;
3. Registration Statement on Form S-1 (File No. 333-85997) of the Company
and Amendments No. 1 and 2 thereto, including exhibits thereto, (collectively,
the "Registration Statement"); and
4. Records of proceedings of the Board of Directors and the shareholders
of the Company pertaining to the issuance of the Shares.
<PAGE>
SonicWALL, Inc.
October 19, 1999
Page 2
In rendering the opinions expressed below, we have relied as to
certain factual matters upon certificates and communications executed by
officers of the Company and also of governmental authorities. We did not
independently verify such matters.
With respect to the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity to the originals of all documents submitted to
us as copies.
Based upon and subject to the foregoing, we are of the opinion that the
issuance and sale of the Shares have been duly authorized and, when issued and
delivered against payment therefor as provided in the Underwriting Agreement,
the Firm Shares will be validly issued by the Company, fully paid and
nonassessable.
This opinion is limited to the current laws of the state of California
and the federal law of the United States of America, to present judicial
interpretations thereof and to facts as they presently exist. We have no
obligation to revise or supplement this opinion if the current laws of the State
of California or the federal law of the United States of America are changed by
legislative action, judicial decision or otherwise.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference of this firm under the heading
"Legal Matters" in the Prospectus constituting a part of the Registration
Statement.
Respectfully submitted,
/s/ Manatt, Phelps + Phillips, LLP
MANATT, PHELPS & PHILLIPS, LLP
<PAGE>
EXHIBIT 10.14
LEASE
DATED
SEPTEMBER 27, 1999
BY AND BETWEEN
AMB PROPERTY, L. P.
as Landlord
and
SONICWALL, INC.
as Tenant
AFFECTING PREMISES COMMONLY KNOWN AS
1160 BORDEAUX DRIVE
SUNNYVALE, CA
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Basic Provisions 1
1.1 Parties 1
1.2 Premises 1
1.3 Term 1
1.4 Base Rent 1
1.5 Tenant's Share of Operating Expenses 1
1.6 Tenant's Estimated Monthly Rent Payment 1
1.7 Security Deposit 1
1.8 Permitted Use 1
1.9 Guarantor 1
1.10 Addenda and Exhibits 1
1.11 Address for Rent Payments 1
2. Premises, Parking and Common Areas 2
2.1 Letting 2
2.2 Common Areas - Definition 2
2.3 Common Areas - Tenant's Rights 2
2.4 Common Areas - Rules and Regulations 2
2.5 Common Area Changes 2
3. Term 2
3.1 Term 2
3.2 Delay in Possession 2
3.3 Commencement Date Certificate 2
4. Rent 2
4.1 Base Rent 2
4.2 Operating Expenses 3
5. Security Deposit 3
6. Use 4
6.1 Permitted Use 4
6.2 Hazardous Substances 4
6.3 Tenant's Compliance with Requirements 4
6.4 Inspection: Compliance with Law 5
7. Maintenance, Repairs, Trade Fixtures and Alterations 5
7.1 Tenant's Obligations 5
7.2 Landlord's Obligations 5
7.3 Alterations 5
7.4 Surrender/Restoration 6
8. Insurance; Indemnity 6
8.1 Payment of Premiums 6
8.2 Tenant's Insurance 6
8.3 Landlord's Insurance 6
8.4 Waiver of Subrogation 6
8.5 Indemnity 6
8.6 Exemption of Landlord from Liability 7
9. Damage or Destruction 7
9.1 Termination Right 7
9.2 Damage Caused by Tenant 7
10. Real Property Taxes 7
10.1 Payment of Real Property Taxes 7
10.2 Real Property Tax Definition 7
10.3 Additional Improvements 8
10.4 Joint Assessment 8
10.5 Tenant's Property Taxes 8
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
11. Utilities 8
12. Assignment and Subletting 8
12.1 Landlord's Consent Required 8
12.2 Rent Adjustment 8
13. Default; Remedies 8
13.1 Default 8
13.2 Remedies 9
13.3 Late Charges 9
14. Condemnation 9
15. Estoppel Certificate and Financial Statements 9
15.1 Estoppel Certificate 9
15.2 Financial Statement 9
16. Additional Covenants and Provisions 9
16.1 Severability 9
16.2 Interest on Past-Due Obligations 9
16.3 Time of Essence 9
16.4 Landlord Liability 9
16.5 No Prior or Other Agreements 9
16.6 Notice Requirements 10
16.7 Date of Notice 10
16.8 Waivers 10
16.9 Holdover 10
16.10 Cumulative Remedies 10
16.11 Binding Effect; Choice of Law 10
16.12 Landlord 10
16.13 Attorneys' Fees and Other Costs 10
16.14 Landlord's Access: Showing Premises; Repairs 10
16.15 Signs 11
16.16 Termination: Merger 11
16.17 Quiet Possession 11
16.18 Subordination: Attornment; Non-Disturbance 11
16.19 Rules and Regulations 11
16.20 Security Measures 11
16.21 Reservations 11
16.22 Conflict 12
16.23 Offer 12
16.24 Amendments 12
16.25 Multiple Parties 12
16.26 Authority 12
Signatures 12
</TABLE>
EXHIBIT A
EXHIBIT B
EXHIBIT C Not Applicable
EXHIBIT D
EXHIBIT E
EXHIBIT F
EXHIBIT G
EXHIBIT H
EXHIBIT I
ii
<PAGE>
AMB PROPERTY CORPORATION
INDUSTRIAL MULTI-TENANT LEASE
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease") dated September 27, 1999, is made by
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and between AMB Property, L.P., a Delaware limited partnership, ("Landlord") and
SonicWALL, Inc., a California corporation ("Tenant") (collectively the
"Parties," or individually a "Party").
1.2 Premises: The area consisting of 32,256 square feet of leasable area
--------
as outlined on Exhibit A attached hereto ("Premises"), of the building
("Building") located at 1160 Bordeaux Drive in the City of Sunnyvale, State of
California. The Building is located in the industrial center commonly known as
Moffett Park I & II (the "Industrial Center"). Tenant shall have non-exclusive
rights to the Common Areas (as defined in Paragraph 2.3 below), but shall not
have any rights to the roof, exterior walls or utility raceways of the Building
or to any other buildings in the Industrial Center. The Premises, the Building,
the Common Areas, the land upon which they are located and all other buildings
and improvements thereon are herein collectively referred to as the "Industrial
Center."
1.3 Term: Five (5) years and Zero (0) months ("Term") commencing October
----
1, 1999 ("Commencement Date") and ending September 30, 2004 ("Expiration Date").
1.4 Base Rent: $43,545.60 per month ("Base Rent"). $43,545.60 payable on
---------
execution of this Lease for period, October 1, 1999 to October 31, 1999.
1.5 Tenant's Share of Operating Expenses ("Tenant's Share"):
------------------------------------
(a) Industrial Center 9.87%
(b) Building 100%
1.6 Tenant's Estimated Monthly Rent Payment: Following is the estimated
---------------------------------------
monthly Rent payment to Landlord pursuant to the provisions of this Lease. This
estimate is made at the inception of the Lease and is subject to adjustment
pursuant to the provisions of this Lease:
(a) Base Rent (Paragraph 4.1) $ 43,545.60
(b) Operating Expenses (Paragraph 4.2;
excluding Real Property Taxes,
Landlord Insurance) $ 4,015.00
(d) Landlord Insurance (Paragraph 8.3) $ 263.00
(e) Real Property Taxes (Paragraph 10) $ 4,384.00
Estimated Monthly Payment $52,207.60
1.7 Security Deposit: $49,996.80 ("Security Deposit").
----------------
1.8 Permitted Use: ("Permitted Use") General office, sales, designing,
-------------
manufacturing of equipment and other related uses.
1.9 Guarantor: N/A
---------
1.10 Addenda and Exhibits: Attached hereto are the following Addenda and
--------------------
Exhibits, all of which constitute a part of this Lease:
(a) Addenda: First Addendum to Lease
(b) Exhibits: Exhibit A: Diagram of Premises.
Exhibit B: Commencement Date Certificate.
Exhibit C: Not Applicable
Exhibit D: Approved Specifications.
Exhibit E: Description of Private Restrictions.
Exhibit F: Sign Criteria.
Exhibit G: Hazardous Materials Questionnaire.
Exhibit H: Legal Description.
Exhibit I: Rules and Regulations.
1
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1.11 Address for Rent Payments: All amounts payable by Tenant to Landlord
--------------------------
shall until further notice from Landlord be paid to AMB Property L. P., c/o
Orchard Properties at the following address:
File No.: 3750789034
P.O. Box 840349
Dallas, TX 75284-0349
2
<PAGE>
2. Premises, Parking and Common Areas.
2.1 Letting. Landlord hereby leases to Tenant and Tenant hereby leases
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from Landlord the Premises upon all of the terms, covenants and conditions set
forth in this Lease. Any statement of square footage set forth in this Lease or
that may have been used in calculating Base Rent and/or Operating Expenses is an
approximation which Landlord and Tenant agree is reasonable and the Base Rent
and Tenant's Share based thereon is not subject to revision whether or not the
actual square footage is more or less.
2.2 Common Areas - Definition. "Common Areas" are all areas and
-------------------------
facilities outside the Premises and within the exterior boundary line of the
Industrial Center and interior utility raceways within the Premises that are
provided and designated by the Landlord from time to time for the general non-
exclusive use of Landlord, Tenant and other tenants of the Industrial Center and
their respective employees, suppliers, shippers, tenants, contractors and
invitees.
2.3 Common Areas - Tenant's Rights. Landlord hereby grants to Tenant, for
------------------------------
the benefit of Tenant and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Landlord under the terms hereof or under the terms of any rules and
regulations or covenants, conditions and restrictions governing the use of the
Industrial Center.
2.4 Common Areas - Rules and Regulations. Landlord shall have the
------------------------------------
exclusive control and management of the Common Areas and shall have the right,
from time to time, to establish, modify, amend and enforce reasonable Rules and
Regulations with respect thereto in accordance with Paragraph 16.19.
2.5 Common Area Changes. Landlord shall have the right, in Landlord's
-------------------
sole discretion, from time to time provided Tenant's proximity to parking,
access to Premises and visibility of signage from the street are not materially
diminished other than on a temporary basis for repairs and maintenance:
(a) To make changes to the Common Areas, including, without
limitation, changes in the locations, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Landlord may, in
the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Term of this Lease
----
are as specified in Paragraph 1.3.
3.2 Delay in Possession. If for any reason Landlord cannot deliver
-------------------
possession of the Premises to Tenant by the Commencement Date, Landlord shall
not be subject to any liability therefor, nor shall such failure affect the
validity of this Lease or the obligations of Tenant hereunder. In such case,
Tenant shall not, except as otherwise provided herein, be obligated to pay Rent
or perform any other obligation of Tenant under the terms of this Lease until
Landlord delivers possession of the Premises to Tenant. The term of the Lease
shall commence on the earlier of (i) the date Tenant takes possession of the
Premises for the conduct of business or (ii) one (1) day following notice to
Tenant that Landlord has substantially completed (as defined in the First
Addendum) the Tenant Improvements. If possession of the Premises is not
delivered to Tenant within 60 days after the Commencement Date and such delay is
not due to Tenant's acts, failure to act or omissions
3
<PAGE>
Tenant may by notice in writing to Landlord within 10 days after the end of said
60 day period cancel this Lease and the parties shall be discharged from all
obligations hereunder. If such written notice of Tenant is not received by
Landlord within said 10 day period, Tenant's right to cancel this Lease shall
terminate.
3.3 Commencement Date Certificate. At the request of Landlord, Tenant
-----------------------------
shall execute and deliver to Landlord a completed certificate ("Commencement
Date Certificate") in the form attached hereto as Exhibit B.
4. Rent.
4.1 Base Rent. Tenant shall pay to Landlord Base Rent and other monetary
---------
obligations of Tenant to Landlord under the terms of this Lease (such other
monetary obligations are herein referred to as "Additional Rent") in lawful
money of the United States, without offset or deduction, in advance on or before
the first day of each month. Base Rent and Additional Rent for any period during
the term hereof which is for less than one full month shall be prorated based
upon the actual number of days of the month involved. Payment of Base Rent and
Additional Rent shall be made to Landlord at its address stated herein or to
such other persons or at such other addresses as Landlord may from time to time
designate in writing to Tenant. Base Rent and Additional Rent are collectively
referred to as "Rent". All monetary obligations of Tenant to Landlord under the
terms of this Lease are deemed to be rent.
4.2 Operating Expenses. Tenant shall pay to Landlord on the first day of
------------------
each month during the term hereof, in addition to the Base Rent, Tenant's Share
of all Operating Expenses in accordance with the following provisions:
(a) "Operating Expenses" are all costs incurred by Landlord relating
to the ownership, management and operation of the Industrial Center, Building
and Premises including, but not limited to, the following:
(i) The management, operation, repair, maintenance and
replacement in neat, clean, good order and condition of the Common Areas,
including parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, drainage systems, lighting facilities, fences and gates,
exterior signs and tenant directories.
(ii) Water, gas, electricity, telephone and other utilities
servicing the Common Areas.
(iii) Trash disposal, janitorial services, snow removal, property
management and security services.
(iv) Reserves set aside for maintenance, repair and replacement
of the Common Areas and Building.
(v) Real Property Taxes.
(vi) Premiums for the insurance policies maintained by Landlord
under Paragraph 8 hereof.
(vii) Environmental monitoring and insurance programs, but not
costs of clean up of Hazardous Substances.
(viii) Monthly amortization of capital improvements to the Common
Areas and the Building. The monthly amortization of any given capital
improvement shall be the sum of the (i) quotient obtained by dividing the cost
of the capital improvement by Landlord's reasonable estimate of the number of
months of useful life of such improvement plus (ii) an amount equal to the cost
of the capital improvement times 1/12 of the lesser of 12% or the maximum annual
interest rate permitted by law.
(ix) Maintenance of the Building including, but not limited to,
painting, caulking and repair and replacement of Building components, including,
but not limited to, roof, elevators and fire detection and sprinkler systems.
(x) If Tenant fails to maintain the Premises, any expense
incurred by Landlord for such maintenance provided Tenant has been notified of
the need for the maintenance and has failed to perform the maintenance within
thirty (30) days after receipt of such notice, or has failed to commence the
maintenance within fifteen (15) days, and prosecute same to completion if the
maintenance cannot reasonably be accomplished within thirty (30) days.
4
<PAGE>
(b) Tenant's Share of Operating Expenses that are not specifically
attributed to the Premises or Building ("Common Area Operating Expenses") shall
be that percentage shown in Paragraph 1.5(a). Tenant's Share of Operating
Expenses that are attributable to the Building ("Building Operating Expenses")
shall be that percentage shown in Paragraph 1.5(b). Landlord in its reasonable
discretion shall determine which Operating Expenses are Common Area Operating
Expenses, Building Operating Expenses or expenses to be entirely borne by
Tenant.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose any obligation upon
Landlord to either have said improvements or facilities or to provide those
services.
(d) Tenant shall pay monthly in advance on the same day as the Base
Rent is due Tenant's Share of estimated Operating Expenses in the amount set
forth in Paragraph 1.6. Landlord shall deliver to Tenant within 90 days after
the expiration of each calendar year a reasonably detailed statement showing
Tenant's Share of the actual Operating Expenses incurred during the preceding
year. If Tenant's estimated payments under this Paragraph 4(d) during the
preceding year exceed Tenant's Share as indicated on said statement, Tenant
shall be credited the amount of such overpayment against Tenant's Share of
Operating Expenses next becoming due. If Tenant's estimated payments under this
Paragraph 4.2(d) during said preceding year were less than Tenant's Share as
indicated on said statement, Tenant shall pay to Landlord the amount of the
deficiency within 10 days after delivery by Landlord to Tenant of said
statement. At any time Landlord may adjust the amount of the estimated Tenant's
Share of Operating Expenses to reflect Landlord's estimate of such expenses for
the year.
5. Security Deposit. Tenant shall deposit with Landlord upon Tenant's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security for
Tenant's faithful performance of Tenant's obligations under this Lease. If
Tenant fails to pay Base Rent or Additional Rent or otherwise defaults under
this Lease (as defined in Paragraph 13.1), Landlord may use the Security Deposit
for the payment of any amount due Landlord or to reimburse or compensate
Landlord for any liability, cost, expense, loss or damage (including attorney's
fees) which Landlord may suffer or incur by reason thereof. Tenant shall on
demand pay Landlord the amount so used or applied so as to restore the Security
Deposit to the amount set forth in Paragraph 1.7. Landlord shall not be required
to keep all or any part of the Security Deposit separate from its general
accounts. Landlord shall, at the expiration or earlier termination of the term
hereof and after Tenant has vacated the Premises, return to Tenant that portion
of the Security Deposit not used or applied by Landlord. No part of the Security
Deposit shall be considered to be held in trust, to bear interest, or to be
prepayment for any monies to be paid by Tenant under this Lease.
6. Use.
6.1 Permitted Use. Tenant shall use and occupy the Premises only for the
-------------
Permitted Use set forth in Paragraph 1.8. Tenant shall not commit any nuisance,
permit the emission of any objectionable noise or odor, suffer any waste, make
any use of the Premises which is contrary to any law or ordinance or which will
invalidate or increase the premiums for any of Landlord's insurance. Tenant
shall not service, maintain or repair vehicles on the Premises, Building or
Common Areas. Tenant shall not store foods, pallets, drums or any other
materials outside the Premises.
6.2 Hazardous Substances.
--------------------
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
-------------------------------
as used in this Lease shall mean any product, substance, chemical, material or
waste including asbestos whose presence, nature, quantity and/or intensity of
------------------
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Landlord to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Tenant shall not engage in any activity in
5
<PAGE>
or about the Premises which constitutes a Reportable Use (as hereinafter
defined) of Hazardous Substances without the express prior written consent of
Landlord and compliance in a timely manner (at Tenant's sole cost and expense)
with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use"
shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or disposal
of a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with, any
governmental authority, and (iii) the presence in, on or about the Premises of a
Hazardous Substance with respect to which any Applicable Requirements require
that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Tenant may, without
Landlord's prior consent, but upon notice to Landlord and in compliance with all
Applicable Requirements, use any ordinary and customary materials reasonably
required to be used by Tenant in the normal course of the Permitted Use, so long
as such use is not a Reportable Use and does not expose the Premises, or
neighboring properties to any meaningful risk of contamination or damage or
expose Landlord to any liability therefor. In addition, Landlord may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Tenant upon Tenant's giving Landlord such additional
assurances as Landlord, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Landlord's option, removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit.
(b) Duty to Inform Landlord. If Tenant knows, or has reasonable cause
-----------------------
to believe, that a Hazardous Substance is located in, under or about the
Premises or the Building, Tenant shall immediately give Landlord written notice
thereof, together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous
Substance. Tenant shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including, without
limitation, through the plumbing or sanitary sewer system).
(c) Indemnification. Tenant shall indemnify, protect, defend and hold
---------------
Landlord, Landlord's affiliates, Lenders, and the officers, directors,
shareholders, partners, employees, managers, independent contractors, attorneys
and agents of the foregoing ("Landlord Entities") and the Premises, harmless
from and against any and all damages, liabilities, judgments, costs, claims,
liens, expenses, penalties, loss of permits and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Tenant or by any of Tenant's employees, agents, contractors or invitees.
Tenant's obligations under this Paragraph 6.2(c) shall include, but not be
limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Tenant, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof to the extent required by law, or of any
contamination therein involved. Tenant's obligations under this Paragraph 6.2(c)
shall survive the expiration or earlier termination of this Lease.
6.3 Tenant's Compliance with Requirements. Tenant shall, at Tenant's sole
-------------------------------------
cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release of
any Hazardous Substance), now in effect or which may hereafter come into effect.
Tenant shall, within 5 days after receipt of Landlord's written request, provide
Landlord with copies of all documents and
6
<PAGE>
information evidencing Tenant's compliance with any Applicable Requirements and
shall immediately upon receipt, notify Landlord in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Tenant or the
Premises to comply with any Applicable Requirements.
6.4 Inspection; Compliance with Law. In addition to Landlord's
-------------------------------
environmental monitoring and insurance program, the cost of which is included in
Operating Expenses, Landlord and the holders of any mortgages, deeds of trust or
ground leases on the Premises ("Lenders") shall have the right to enter the
Premises at any time in the case of an emergency, and otherwise at reasonable
times upon twenty-four (24) hours prior notice, for the purpose of inspecting
the condition of the Premises and for verifying compliance by Tenant with this
Lease and all Applicable Requirements. Landlord shall be entitled to employ
experts and/or consultants in connection therewith to advise Landlord with
respect to Tenant's installation, operation, use, monitoring, maintenance, or
removal of any Hazardous Substance on or from the Premises. The cost and
expenses of any such inspections shall be paid by the party requesting same
unless a violation of Applicable Requirements exists or is imminent or the
inspection is requested or ordered by a governmental authority. In such case,
Tenant shall upon request reimburse Landlord or Landlord's Lender, as the case
may be, for the costs and expenses of such inspections.
7. Maintenance, Repairs, Trade Fixtures and Alterations.
7.1 Tenant's Obligations. Subject to the provisions of Paragraph 7.2
--------------------
(Landlord's Obligations), Paragraph 9 (Damage or Destruction) and Paragraph 14
(Condemnation), Tenant shall, at Tenant's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair (whether or not such portion of the Premises requiring repair, or the
means of repairing the same, are reasonable or readily accessible to Tenant and
whether or not the need for such repairs occurs as a result of Tenant's use, any
prior use, the elements or the age of such portion of the Premises) including,
without limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire hose connectors if within the Premises, fixtures, interior walls,
interior surfaces of exterior walls, ceilings, floors, windows, doors, plate
glass, and skylights, but excluding any items which are the responsibility of
Landlord pursuant to Paragraph 7.2 below. Tenant's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair.
7.2 Landlord's Obligations. Subject to the provisions of Paragraph 6
----------------------
(Use), Paragraph 7.1 (Tenant's Obligations), Paragraph 9 (Damage or Destruction)
and Paragraph 14 (Condemnation), Landlord at its expense and not subject to
reimbursement pursuant to Paragraph 4.2, shall keep in good order, good and
watertight condition and good repair the foundations, windows except for
breakage and exterior walls of the Building and utility systems outside the
Building. Landlord, subject to reimbursement pursuant to Paragraph 4.2, shall
keep in good order, condition and repair the Building roof and Common Areas.
7.3 Alterations. Construction by Tenant of Alterations shall be governed
-----------
by the following:
A. Except as set forth below and except for the installation of a card
access security system, which Landlord hereby approves, Tenant shall not
construct any Tenant Alterations or otherwise alter, improve, modify, or perform
any work of improvement to the Premises without Landlord's prior written
approval. However, Tenant shall be entitled, without Landlord's prior approval,
to make Tenant Alterations (i) which do not affect the structural or exterior
parts or water tight character of the Building, and (ii) the reasonably
estimated cost of which, plus the original cost of any part of the Premises
removed or materially altered in connection with such Tenant Alterations,
together do not exceed the Permitted Tenant Alterations Limit per work of
improvement. In the event Landlord's approval for any Tenant Alterations is
required, Tenant shall not construct the Tenant Alterations until Landlord has
approved in writing the plans and specifications therefor. Such Tenant
Alterations shall be constructed substantially in compliance with such approved
7
<PAGE>
plans and specifications by a licensed contractor first approved by Landlord.
All Tenant Alterations (whether Landlord's consent is required or not) shall be
constructed by a licensed contractor in accordance with all Laws (including the
ADA) using new materials of good quality.
B. Tenant shall not commence construction of any Tenant Alterations until
(i) all required governmental approvals and permits have been obtained, (ii) all
requirements regarding insurance imposed by this Lease have been satisfied,
(iii) Tenant has given Landlord at least five days' prior written notice of its
intention to commence such construction, and (iv) if requested by Landlord,
Tenant has obtained contingent liability and broad form builders' risk insurance
in an amount reasonably satisfactory to Landlord if there are any perils
relating to the proposed construction not covered by insurance carried pursuant
to the Lease.
C. All Tenant Alterations shall remain the property of Tenant during the
Lease Term but shall not be altered or removed from the Premises except with
Landlord's advance written permission. At the expiration or sooner termination
of the Lease Term, all Tenant Alterations shall be surrendered to Landlord as
part of the realty and shall then become Landlord's property, and Landlord shall
have no obligation to reimburse Tenant for all or any portion of the value or
cost thereof; provided, however, that if Landlord requires Tenant to remove any
Tenant Alterations, Tenant shall so remove such Tenant Alterations prior to the
expiration or sooner termination of the Lease Term. Notwithstanding the
foregoing, Tenant shall not be obligated to remove any Tenant Alterations with
respect to which the following is true: (i) Tenant was required, or elected, to
obtain the approval of Landlord to the installation of the Leasehold Improvement
in question; (ii) at the time Tenant requested Landlord's approval, Tenant
requested of Landlord in writing that Landlord inform Tenant of whether or not
Landlord would require Tenant to remove such Leasehold Improvement at the
expiration of the Lease Term; and (iii) at the time Landlord granted its
approval, it did not inform Tenant that it would require Tenant to remove such
Leasehold Improvement at the expiration of the Lease Term.
D. Landlord's consent to the construction of Tenant Alterations may be
withheld in Landlord's reasonable discretion. Landlord shall give Tenant its
consent or disapproval with ten (10) days after Tenant has submitted complete
plans and specifications to Landlord requesting approval. Landlord's consent to
construction of Tenant Alterations and Landlord's approval of plans and
specifications for Tenant Alterations shall not create any responsibility or
liability on Landlord's part in regard to the completeness, competency, design
sufficiency, or compliance with Law of such Tenant Alterations or the plans and
specifications therefor.
7.4 Surrender/Restoration. Tenant shall surrender the Premises by the end
---------------------
of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair
ordinary wear and tear excepted. Without limiting the generality of the above,
Tenant shall remove all personal property, trade fixtures and floor bolts, patch
all floors and cause all lights to be in good operating condition.
8. Insurance; Indemnity.
8.1 Payment of Premiums. The cost of the premiums for the insurance
-------------------
policies maintained by Landlord under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date of Expiration
Date.
8.2 Tenant's Insurance.
------------------
(i) At its sole cost and expense, Tenant shall maintain in full force
and effect during the Term of the lease the following insurance coverages
insuring against claims which may arise from or in connection with the Tenant's
operation and use of the leased premises.
(a) Commercial General Liability with minimum limits of
$1,000,000 per occurrence; $3,000,000 general aggregate for bodily injury,
personal injury and property damage. If required by Landlord, liquor liability
coverage will be included.
(b) Workers' Compensation insurance with statutory limits and
Employers Liability with a $1,000,000 per accident limit for bodily injury or
disease.
8
<PAGE>
(c) Automobile Liability covering all owned, non-owned and
hired vehicles with a $1,000,000 per accident limit for bodily injury and
property damage.
(d) Property insurance against all risks of loss to any tenant
improvements or betterments and business personal property on a full replacement
cost basis with no coinsurance penalty provision; and Business Interruption
Insurance with a limit of liability representing loss of at least approximately
six months of income.
(ii) Tenant shall deliver to AMB certificates of all insurance
reflecting evidence of required coverages prior to initial occupancy; and
annually thereafter.
(iii) If, in the opinion of Landlord's insurance advisor, the amount
of scope of such coverage is deemed inadequate at any time during the Term,
Tenant shall increase such coverage to such reasonable amounts or scope as
Landlord's advisor deems adequate.
(iv) All insurance required under Paragraph 8.2 (i) shall be primary
and non-contributory (ii) shall provide for severability of interests, (iii)
shall be issued by insurers, licensed to do business in the state in which the
Premises are located and which are rated A:VII or better by Best's Key Rating
Guide, (iv) shall be endorsed to include Landlord and such other persons or
entities as Landlord may from time to time designate, as additional insureds
(Commercial General Liability only), and (v) shall be endorsed to provide at
least 30-days prior notification of cancellation or material change in coverage
to said additional insureds.
8.3 Landlord's Insurance. Landlord shall maintain all risk, not including
--------------------
earthquake and flood, insurance covering the buildings, Commercial General
Liability with minimum limits of $1,000,000 per occurance and $3,000,000 general
aggregate for bodily injury, personal injury and property damage and such other
insurance in such amounts and covering such other liability or hazards as deemed
appropriate by Landlord. The amount and scope of coverage of Landlord's
insurance shall be determined by Landlord from time to time in its sole
discretion and shall be subject to such deductible amounts as Landlord may
elect. Premiums for any such insurance shall be a Common Area Operating Expense.
8.4 Waiver of Subrogation. To the extent permitted by law and without
---------------------
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
on account of any and all claims Landlord or Tenant may have against the other
with respect to property insurance actually carried, or required to be carried
hereunder, to the extent of the proceeds realized from such insurance coverage.
8.5 Indemnity. Except for indemnity of Landlord entities for Hazardous
---------
Substances which is provided in Section 6.2 c of this Lease. Tenant shall
protect, indemnify and hold the Landlord Entities harmless from and against any
and all loss, claims, liability or costs (including court costs and attorney's
fees) incurred by reason of:
(i) any damage to any property (including but not limited to
property of any Landlord Entity) or death or injury to any person occurring in
or about the Premises, the Building or the Industrial Center to the extent that
such injury or damage shall be caused by or arise from any actual or alleged
act, neglect, fault or omission by or of Tenant, its agents, servants,
employees, or invitees;
(ii) the conduct or management of any work or anything whatsoever
done by the Tenant on or about the Premises or from transactions of the Tenant
concerning the Premises;
(iii) Tenant's failure to comply with any and all governmental laws,
ordinances and regulations applicable to the condition or use of the Premises or
its occupancy; or
(iv) any breach or default of the part of Tenant in the performance
of any covenant or agreement on the part of the Tenant to be performed pursuant
to this Lease.
The provisions of this Paragraph 8.5 shall survive the termination of this Lease
with respect to any claims or liability accruing prior to such termination.
8.6 Exemption of Landlord from Liability. Except to the extent caused by
------------------------------------
the active negligence or willful misconduct of Landlord, Landlord Entities shall
not be liable for and Tenant waives any claims against Landlord Entities for
injury or damage to the person or
9
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the property of Tenant, Tenant's employees, contractors, invitees, customers or
any other person in or about the Premises, Building or Industrial Center from
any cause whatsoever, including, but not limited to, damage or injury which is
caused by or results from (i) fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures
or (ii) from the condition of the Premises, other portions of the Building or
Industrial Center. Landlord shall not be liable for any damages arising from any
act or neglect of any other tenant of Landlord nor from the failure by Landlord
to enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Landlord's negligence or breach of this Lease, Landlord shall
under no circumstances be liable for injury to Tenant's business, for any loss
of income or profit therefrom or any indirect, consequential or punitive
damages.
9. Damage or Destruction.
9.1 Termination Right. Tenant shall give Landlord immediate written
-----------------
notice of any damage to the Premises. Subject to the provisions of Paragraph
9.2, if the Premises or the Building shall be damaged to such an extent that
there is substantial interference for a period exceeding 90 consecutive days
with the conduct by Tenant of its business at the Premises, Tenant, at any time
prior to commencement of repair of the Premises and following 10 days written
notice to Landlord, may terminate this Lease effective 30 days after delivery of
such notice to Landlord. Such termination shall not excuse the performance by
Tenant of those covenants that under the terms hereof survive termination. Rent
shall be abated in proportion to the degree of interference during the period
that there is such substantial interference with the conduct of Tenant's
business at the Premises. Abatement of rent and Tenant's right of termination
pursuant to this provision shall be Tenant's sole remedy for failure of Landlord
to keep in good order, condition and repair the foundations and exterior walls
of the Building, Building roof, utility systems outside the Building and the
Common Areas.
9.2 Damage Caused by Tenant. Tenant's termination rights under Paragraph
-----------------------
9.1 shall not apply if the damage to the Premises or Building is the result of
any negligent or intentional act or omission of Tenant or of any of Tenant's
agents, employees, customers, invitees or contractors ("Tenant Acts"). Any
damage resulting from a Tenant Act shall be promptly repaired by Tenant except
to the extent it is not covered by Tenant's insurance of any kind and it is
covered by Landlord's All Risk Insurance covering the building in which case
Landlord shall repair the damage and Tenant shall be responsible for the
deductible. Landlord at its option may at Tenant's expense repair any damage
caused by Tenant Acts. Tenant shall continue to pay all rent and other sums due
hereunder and shall be liable to Landlord for all damages that Landlord may
sustain resulting from a Tenant Act.
10. Real Property Taxes.
10.1 Payment of Real Property Taxes. Landlord shall pay the Real Property
------------------------------
Taxes due and payable during the term of this Lease and, except as otherwise
provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Operating Expenses in accordance with the provisions of Paragraph
4.2.
10.2 Real Property Tax Definition. As used herein, the term
----------------------------
"Real Property Taxes" is any form of tax or assessment, general, special,
ordinary or extraordinary, imposed or levied upon (a) the Industrial Center, (b)
any interest of Landlord in the Industrial Center, (c) Landlord's right to rent
or other income from the Industrial Center, and/or (d) Landlord's business of
leasing the Premises. Real Property Taxes include (i) any license fee,
commercial rental tax, excise tax, improvement bond or bonds, levy or tax; (ii)
any tax or charge which replaces or is in addition to any of such above-
described "Real Property Taxes" and (iii) any fees, expenses or costs (including
attorney's fees, expert fees and the like) incurred by Landlord in protesting or
contesting any assessments levied or any tax rate. The term "Real Property
Taxes" shall also include any increase resulting from a change in the ownership
of the Industrial Center or Building, the execution of this Lease or any
modification, amendment or transfer thereof. Real Property Taxes for tax years
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date and Expiration
Date.
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10.3 Additional Improvements. Operating Expenses shall not include Real
-----------------------
Property Taxes attributable to improvements placed upon the Industrial Center by
other tenants or by Landlord for the exclusive enjoyment of such other tenants.
Notwithstanding Paragraph 10.1 hereof, Tenant shall, however, pay to Landlord at
the time Operating Expenses are payable under Paragraph 4.2, the entirety of any
increase in Real Property Taxes if assessed by reason of improvements placed
upon the Premises by Tenant or at Tenant's request.
10.4 Joint Assessment. If the Building is not separately assessed, Real
----------------
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed.
10.5 Tenant's Property Taxes. Tenant shall pay prior to delinquency all
-----------------------
taxes assessed against and levied upon Tenant's improvements, fixtures,
furnishings, equipment and all personal property of Tenant contained in the
Premises or stored within the Industrial Center.
11. Utilities. Tenant shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon.
12. Assignment and Subletting.
12.1 Landlord's Consent Required.
---------------------------
(a) Tenant shall not assign, transfer, mortgage or otherwise transfer
or encumber (collectively, "assign") or sublet all or any part of Tenant's
interest in this Lease or in the Premises without Landlord's prior written
consent which consent shall not be unreasonably withheld. Landlord shall give
Tenant its approval or disapproval within thirty (30) days after Tenant's
request in writing with required documentation for the sublease. Relevant
criteria in determining reasonability of consent include, but are not limited
to, credit history of a proposed assignee or sublessee, references from prior
landlords, any change or intensification of use of the Premises or the Common
Areas and any limitations imposed by the Internal Revenue Code and the
Regulations promulgated thereunder relating to Real Estate Investment Trusts.
Assignment or sublet shall not release Tenant from its obligations hereunder.
Tenant shall not (i) sublet or assign or enter into other arrangements such that
the amounts to be paid by the sublessee or assignee thereunder would be based,
in whole or in part, on the income or profits derived by the business activities
of the sublessee or assignee; (ii) sublet the Premises or assign this Lease to
any person in which Landlord owns an interest, directly or indirectly (by
applying constructive ownership rules set forth in Section 856(d)(5) of the
Internal Revenue Code (the "Code"); or (iii) sublet the Premises or assign this
Lease in any other manner which could cause any portion of the amounts received
by Landlord pursuant to this Lease or any sublease to fail to qualify as
"rents from real property" within the meaning of Section 856(d) of the Code, or
which could cause any other income received by Landlord to fail to qualify as
income described in Section 856(c)(2) of the Code. The requirements of this
Section 12.1 shall apply to any further subleasing by any subtenant.
(b) A change in the control of Tenant shall constitute an assignment
requiring Landlord's consent. The transfer, on a cumulative basis, of 50% or
more of the voting or management control of Tenant shall constitute a change in
control for this purpose. Notwithstanding the foregoing, this Subsection 12.2(b)
(regarding a change in control as constituting an assignment requiring
Landlord's consent) shall not apply to or after the initial public offering of
the Tenant's securities.
12.2 Rent Adjustment. If, as of the effective date of any permitted
----------------
assignment or subletting the then remaining term of this Lease is less than one
(1) year and if the proposed assignment or subletting is for the remainder of
the term of the lease, Landlord may, as a condition to its consent: (i) require
that the amount and adjustment schedule of the rent payable under this Lease be
adjusted to what is then the market value and/or adjustment schedule for
property similar to the Premises as then constituted, as determined by Landlord;
or (ii) terminate the Lease as of the date of assignment or subletting subject
to the performance by Tenant of those covenants which under the terms hereof
survive termination.
13. Default; Remedies.
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13.1 Default. The occurrence of any one of the following events shall
-------
constitute an event of default on the part of Tenant ("Default"):
(a) The abandonment of the Premises by Tenant;
(b) Failure to pay any installment of Base Rent, Additional Rent or
any other monies due and payable hereunder, said failure continuing for a period
of 3 days after Landlord has given Tenant notice that the same is due (a three
(3) day notice to pay rent or quit would satisfy this provision);
(c) A general assignment by Tenant or any guarantor for the benefit of
creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant or any
guarantor, the filing of a voluntary petition for an arrangement, the filing of
a petition, voluntary or involuntary, for reorganization, or the filing of an
involuntary petition by Tenant's creditors or guarantors;
(e) Receivership, attachment, of other judicial seizure of the
Premises or all or substantially all of Tenant's assets on the Premises;
(f) Failure of Tenant to maintain insurance as required by Paragraph
8.2;
(g) Any breach by Tenant of its covenants under Paragraph 6.2;
(h) Failure in the performance of any of Tenant's covenants,
agreements or obligations hereunder (except those failures specified as events
of Default in other Paragraphs of this Paragraph 13.1 which shall be governed by
such other Paragraphs), which failure continues for 30 days after written notice
thereof from Landlord to Tenant provided that, if Tenant has exercised
reasonable diligence to cure such failure and such failure cannot be cured
within such 30 day period despite reasonable diligence, Tenant shall not be in
default under this subparagraph unless Tenant fails to begin to cure within
fifteen (15) days after notices and/or thereafter diligently and continuously to
prosecute the cure to completion;
(i) Any transfer of a substantial portion of the assets of Tenant, or
any incurrence of a material obligation by Tenant, unless such transfer or
obligation is undertaken or incurred in the ordinary course of Tenants business
or in good faith for equivalent consideration, or with Landlord's consent; and
13.2 Remedies. In the event of any Default by Tenant, Landlord shall have
--------
the remedies set forth in the Addendum attached hereto entitled "Landlord's
Remedies in Event of Tenant Default".
13.3 Late Charges. Tenant hereby acknowledges that late payment by Tenant
------------
to Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges. Accordingly, if any installment of rent or
other sum due from Tenant shall not be received by Landlord or Landlord's
designee within 10 days after such amount shall be due, then, without any
requirement for notice to Tenant, Tenant shall pay to Landlord a late charge
equal to 5% of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's Default with respect
to such overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of exercise of said power (all
of which are herein called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than 10% of the floor area of the Premises, or
more than 25% of the portion of the Common Areas designated for Tenant's
parking, is taken by condemnation, Tenant may, at Tenant's option, to be
exercised in writing within 10 days after Landlord shall have given Tenant
written notice of such taking (or in the absence of such notice, within 10 days
after the condemning authority shall have taken possession) terminate this Lease
as of the date the condemning authority takes such possession. If Tenant does
not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises
12
<PAGE>
remaining, except that the Base Rent shall be reduced in the same proportion as
the rentable floor area of the Premises taken bears to the total rentable floor
area of the Premises. No reduction of Base Rent shall occur if the condemnation
does not apply to any portion of the Premises. Any award for the taking of all
or any part of the Premises under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of
Landlord, provided, however, that Tenant shall be entitled to any compensation,
separately awarded to Tenant for Tenant's relocation expenses and/or loss of
Tenants trade fixtures. In the event that this Lease is not terminated by reason
of such condemnation, Landlord shall to the extent of its net severance damages
in the condemnation matter, repair any damage to the Premises caused by such
condemnation authority. Tenant shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such repair.
15. Estoppel Certificate and Financial Statements.
15.1 Estoppel Certificate. Each party (herein referred to as "Responding
--------------------
Party") shall within 10 business days after written notice from the other Party
(the "Requesting Party") execute, acknowledge and deliver to the Requesting
Party, to the extent it can truthfully do so, an estoppel certificate, plus such
additional information, confirmation and/or statements as be reasonably
requested by the Requesting Party.
15.2 Financial Statement. If Landlord desires to finance, refinance, or
-------------------
sell the Building, Industrial Center or any part thereof, Tenant and all
Guarantors shall deliver to any potential lender or purchaser designated by
Landlord such financial statements of Tenant and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Tenant's financial statements for the past 3 years. All such financial
statements shall be received by Landlord and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
16. Additional Covenants and Provisions.
16.1 Severability. The invalidity of any provision of this Lease, as
------------
determined by a court of competent jurisdiction, shall not affect the validity
of any other provision hereof.
16.2 Interest on Past-Due Obligations. Any monetary payment due Landlord
--------------------------------
hereunder not received by Landlord within 10 days following the date on which it
was due shall bear interest from the date due at 12% per annum, but not
exceeding the maximum rate allowed by law in addition to the late charge
provided for in Paragraph 13.3.
16.3 Time of Essence. Time is of the essence with respect to the
---------------
performance of all obligations to be performed or observed by the Parties under
this Lease.
16.4 Landlord Liability. Tenant, its successors and assigns, shall not
------------------
assert nor seek to enforce any claim for breach of this Lease against any of
Landlord's assets other than Landlord's interest in the Industrial Center.
Tenant agrees to look solely to such interest for the satisfaction of any
liability or claim against Landlord under this Lease. In no event whatsoever
shall Landlord (which term shall include, without limitation, any general or
limited partner, trustees, beneficiaries, officers, directors, or stockholders
of Landlord) ever be personally liable for any such liability.
16.5 No Prior or Other Agreements. This Lease contains all agreements
----------------------------
between the Parties with respect to any matter mentioned herein, and supersedes
all oral, written prior or contemporaneous agreements or understandings.
16.6 Notice Requirements. All notices required or permitted by this Lease
-------------------
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in the Paragraph 16.6. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Tenant's
taking possessing of the Premises, the Premises shall constitute Tenant's
address for the purpose of mailing or delivering notices to Tenant. A copy of
all notices required or permitted to be given to Landlord hereunder shall be
concurrently transmitted to such party or parties at such addresses as Landlord
may from time to time hereafter designate by written notice to Tenant.
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<PAGE>
16.7 Date of Notice. Any notice sent by registered or certified mail,
--------------
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given 48 hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given 24 hours after delivery of the same to the United
States Postal Service or courier. If any notice is transmitted by facsimile
transmission or similar means, the same shall be deemed served or delivered upon
telephone or facsimile confirmation of receipt of the transmission thereof,
provided a copy is also delivered via hand or overnight delivery or certified
mail. If notice is received on a Saturday or a Sunday or a legal holiday, it
shall be deemed received on the next business day.
16.8 Waivers. No waiver by Landlord of a Default by Tenant shall be deemed
-------
a waiver of any other term, covenant or condition hereof, or of any subsequent
Default by Tenant of the same or any other term, covenant or condition hereof.
16.9 Holdover. Tenant has no right to retain possession of the Premises or
--------
any part thereof beyond the expiration or earlier termination of this Lease. If
Tenant holds over with the consent of Landlord: (i) the Base Rent payable shall
be increased to 150% of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination; (ii) Tenant's right to
possession shall terminate on 30 days notice from Landlord and (iii) all other
terms and conditions of this Lease shall continue to apply. Nothing contained
herein shall be construed as a consent by Landlord to any holding over by
Tenant. Tenant shall indemnify, defend and hold Landlord harmless from and
against any and all claims, demands, actions, losses, damages, obligations,
costs and expenses, including, without limitation, attorneys' fees incurred or
suffered by Landlord by reason of Tenant's failure to surrender the Premises on
the expiration or earlier termination of this Lease in accordance with the
provisions of this Lease.
16.10 Cumulative Remedies. No remedy or election hereunder shall be
-------------------
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies in law or in equity.
16.11 Binding Effect: Choice of Law. This Lease shall be binding upon the
-----------------------------
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
16.12 Landlord. The covenants and obligations contained in this Lease on
--------
the part of Landlord are binding on Landlord, its successors and assigns, only
during and in respect of their respective period of ownership of such interest
in the Industrial Center. In the event of any transfer or transfers of such
title to the Industrial Center, Landlord (and in case of any subsequent
transfers or conveyances, the then grantor) shall be concurrently freed and
relieved from and after the date of such transfer or conveyance, without any
further instrument or agreement, of all liability with respect to the
performance of any covenants or obligations on the part of Landlord contained in
this Lease thereafter to be performed.
16.13 Attorneys' Fees and Other Costs. If any Party brings an action or
-------------------------------
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding shall be entitled
to reasonable attorneys' fees. The term "Prevailing Party" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought. Landlord shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting breach. Tenant shall reimburse
Landlord on demand for all reasonable legal, engineering and other professional
services expenses incurred by Landlord in connection with all requests by Tenant
for consent or approval hereunder.
16.14 Landlord's Access; Showing Premises; Repairs. Landlord and
--------------------------------------------
Landlord's agents shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times upon twenty-four (24)
notice for the purpose of showing the same to prospective purchasers, lenders,
or tenants, and making such alterations, repairs, improvements or additions to
the Premises or to the Building, as Landlord may reasonably
14
<PAGE>
deem necessary. Landlord may at any time place on or about the Premises or
Building any ordinary "For Sale" signs and Landlord may at any time during the
last 180 days of the term hereof place on or about the Premises any ordinary
"For Lease" signs. All such activities of Landlord shall be without abatement of
rent or liability to Tenant.
16.15 Signs. Tenant shall not place any signs at or upon the exterior of
-----
the Premises or the Building, except that Tenant may, with Landlord's prior
written consent, install (but not on the roof) such signs as are reasonably
required to advertise Tenant's own business so long as such signs are in a
location designated by Landlord and comply with sign ordinances and the signage
criteria established for the Industrial Center by Landlord. Tenant shall have
right to install, at Tenant's cost, signs bearing Tenant's name on two (2)
monument signs for the Building and on the exterior of the Building of the
maximum size permitted by local zoning ordinances and any rules of the
industrial center.
16.16 Termination: Merger. Unless specifically stated otherwise in
-------------------
writing by Landlord, the voluntary or other surrender of this Lease by Tenant,
the mutual termination or cancellation hereof, or a termination hereof by
Landlord for Default by Tenant, shall automatically terminate any sublease or
lesser estate in the Premises; provided, however, Landlord shall, in the event
of any such surrender, termination or cancellation, have the option to continue
any one or all of any existing subtenancies. Landlord's failure within 10 days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Landlord's
election to have such event constitute the termination of such interest.
16.17 Quiet Possession. Upon payment by Tenant of the Base Rent and
----------------
Additional Rent for the Premises and the performance of all of the covenants,
conditions and provisions on Tenant's part to be observed and performed under
this Lease, Tenant shall have quiet possession of the Premises for the entire
term hereof subject to all of the provisions of this Lease.
16.18 Subordination; Attornment; Non-Disturbance.
------------------------------------------
(a) Subordination. This Lease shall be subject and subordinate
to any ground lease, mortgage, deed of trust, or other hypothecation or mortgage
(collectively, "Mortgage") now or hereafter placed by Landlord upon the real
property of which the Premises are a part, to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Tenant agrees that any person holding any
Mortgage shall have no duty, liability or obligation to perform any of the
obligations of Landlord under this Lease. In the event of Landlord's default
with respect to any such obligation, Tenant will give any Lender, whose name and
address have previously in writing been furnished Tenant, notice of a default by
Landlord. Tenant may not exercise any remedies for default by Landlord unless
and until Landlord and the Lender shall have received written notice of such
default and a reasonable time (not less than 90 days) shall thereafter have
elapsed without the default having been cured. If any Lender shall elect to have
this Lease superior to the lien of its Mortgage and shall give written notice
thereof to Tenant, this Lease shall be deemed prior to such Mortgage. The
provisions of a Mortgage relating to the disposition of condemnation and
insurance proceeds shall prevail over any contrary provisions contained in this
Lease.
(b) Attornment. Subject to the non-disturbance provisions of
subparagraph C of this Paragraph 16.18, Tenant agrees to attorn to a Lender or
any other party who acquires ownership of the Premises by reason of a
foreclosure of a Mortgage. In the event of such foreclosure, such new owner
shall not: (i) be liable for any act or omission of any prior landlord or with
respect to events occurring prior to acquisition of ownership, (ii) be subject
to any offsets or defenses which Tenant might have against any prior Landlord.
(c) Non-Disturbance. With respect to Mortgage entered into by
Landlord after the execution of this Lease, Tenant's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Mortgage holder that Tenant's possession and this Lease will not be disturbed so
long as Tenant is not in default and attorns to the record owner of the
Premises. Landlord shall use reasonable efforts to obtain a non-disturbance
agreement from any existing mortgage holder within thirty (30) days after the
full execution of this Lease.
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(d) Self-Executing. The agreements contained in this Paragraph
16.18 shall be effective without the execution of any further documents;
provided, however, that upon written request from Landlord or a Lender in
connection with a sale, financing or refinancing of Premises, Tenant and
Landlord shall execute such further writings as may be reasonably required to
separately document any such subordination or non-subordination, attornment
and/or non-disturbance agreement as is provided for herein. Landlord is hereby
irrevocably vested with full power to subordinate this Lease to a Mortgage.
16.19 Rules and Regulations. Tenant agrees that it will abide by, and to
---------------------
cause its employees, suppliers, shippers, customers, tenants, contractors and
invitees to abide by all reasonable rules and regulations ("Rules and
Regulations") which Landlord may make from time to time for the management,
safety, care, and cleanliness of the Common Areas, the parking and unloading of
vehicles and the preservation of good order, as well as for the convenience of
other occupants or tenants of the Building and the Industrial Center and their
invitees. Landlord shall not be responsible to Tenant for the non-compliance
with said Rules and Regulations by other tenants of the Industrial Center.
16.20 Security Measures. Tenant acknowledges that the rental payable to
-----------------
Landlord hereunder does not include the cost of guard service or other security
measures. Landlord has no obligations to provide same. Tenant assumes all
responsibility for the protection of the Premises, Tenant, its agents and
invitees and their property from the acts of third parties.
16.21 Reservations. Landlord reserves the right to grant such easements
------------
that Landlord deems necessary and to cause the recordation of parcel maps, so
long as such easements and maps do not reasonably interfere with the use of the
Premises by Tenant. Tenant agrees to sign any documents reasonable requested by
Landlord to effectuate any such easements or maps.
16.22 Conflict. Any conflict between the printed provisions of this Lease
--------
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
16.23 Offer. Preparation of this Lease by either Landlord or Tenant or
-----
Landlord's agent or Tenant's agent and submission of same to Tenant or Landlord
shall not be deemed an offer to lease. This Lease is not intended to be binding
until executed and delivered by all Parties hereto.
16.24 Amendments. This Lease may be modified only in writing, signed by
----------
the parties in interest at the time of the modification.
16.25 Multiple Parties. Except as otherwise expressly provided herein, if
----------------
more than one person or entity is named herein as Tenant, the obligations of
such persons shall be the joint and several responsibility of all persons or
entities named herein as such Tenant.
16.26 Authority. Each person signing on behalf of Landlord or Tenant
---------
warrants and represents that he or she is authorized to execute and deliver this
Lease and to make it a binding obligation of Landlord or Tenant.
The parties hereto have executed this Lease at the place and on the
dates specified above their respective signatures.
Landlord: Tenant:
AMB Property, L.P. SonicWALL, Inc.
a Delaware limited partnership a California corporation
By: AMB Property Corporation,
a Maryland corporation
By: /s/ John L. Rossi By: /s/ Michael J. Sheridan
--------------------- -------------------------------
John L. Rossi
Its: Regional Manager Its: CFO
------------------------------
Telephone: (415)394-9000 Telephone: (408) 327 - 7855
----------------- ------------------------
Facsimile: (415)394-0903 Facsimile: (408) 844 - 9100
----------------- ------------------------
16
<PAGE>
Executed at: 505 Montgomery Street Executed at: Santa Clara
----------------------
6/th/ Floor
San Francisco, CA 94111
Date: 9/31/99 Date: Date: 9/29/99
--------------------- -------------------------
17
<PAGE>
FIRST ADDENDUM TO LEASE
THIS FIRST ADDENDUM is dated for reference purposes as September 27, 1999,
and is made a part of that Lease Agreement (the "Lease") dated September 27,
1999, by and between AMB PROPERTY L.P., a Delaware limited partnership
("Landlord") and SONICWALL, INC., a California corporation ("Tenant") affecting
certain real property commonly known as 1160 Bordeaux Drive, Sunnyvale,
California, with reference to the following facts. In the event of a conflict
between this First Addendum to Lease and the Lease, the Addendum prevails and is
controlling.
1. Base Monthly Rent:
-----------------
Months 1 - 12: $43,545.60
Months 13 - 24: $45,158.40
Months 25 - 36: $46,771.20
Months 37 - 48: $48,384.00
Months 49 - 60 and any partial month: $49,996.80
2. Option to Extend Lease Term: Landlord does not grant Tenant an
---------------------------
option to extend the Lease.
3. Early Occupancy:
---------------
A. As consideration for Tenant's performance of all obligations
to be performed by Tenant under the Lease, and upon receipt of (i) the first
month's Base Monthly Rent and Security Deposit totaling $93,542.40, and (ii) a
certificate of insurance as provided by Article 9.1C of the Lease, Landlord
shall permit Tenant to enter and use the Premises" until October 1, 1999 (the
"Early Occupancy Period") for the purposes of installing Tenant's furniture,
communications cabling and electrical wiring to support Tenant's cubicles and
equipment. Such occupancy during the Early Occupancy Period shall be subject to
all of the terms, covenants and conditions of the Lease provided, however, that
the rent payable during the Early Occupancy Period shall be waived.
B. In the event either party shall bring any action or legal
proceeding for damages for alleged breach of any provision of this agreement, to
recover rent, to terminate tenancy of the Premises, or to enforce, protect or
establish any term or covenant of this agreement or the Lease or right of remedy
of either party, the prevailing party shall be entitled to recover as a part of
such action or proceeding, reasonable attorney's fees and court costs as may be
fixed by the court or jury.
C. In consideration of executing this Early Occupancy
Agreement, Tenant agrees to indemnify and save Landlord harmless of and from any
and all liability, damage, expense, cause of action, suits or claims or
judgments resulting from injury to person or property arising from the use of
the Premises by Tenant during the Early Occupancy Period, including loss or
damage to Tenant, its equipment, materials or supplies.
D. Tenant agrees to cooperate with construction personnel
completing the Interior Improvements in the Premises and not cause any delay in
the completion of these improvements. It is the intent of Landlord and Tenant
that Tenant's obligation to pay the Base Monthly Rent and all Additional Rent
not be delayed by any
1
<PAGE>
cause or other act of Tenant and, if it is so delayed, and provided that
Landlord promptly notifies Tenant in writing of each separate delay and the
estimated period of delay, then Tenant's obligation to pay the Base Monthly Rent
and all Additional Rent shall commence as of the date it would have commenced
absent said delay caused by Tenant.
E. During the Early Occupancy Period, Tenant shall arrange to
have all utility services, including but not limited to gas, electric, water and
trash, billed directly to Tenant for payment.
4. Interior Improvements:
----------------------
The Premises will be delivered to Tenant with all electrical, HVAC and
plumbing in good working condition. Tenant agrees that the Premises are to be
leased and accepted by Tenant in their condition existing as of the Commencement
Date.
Landlord, at Landlord's sole cost, shall improve the Premises with all the
following "Tenant Improvements" prior to Commencement Date:
1. Install slate floor throughout the lobby and finish the
ceiling.
2. Install carpet throughout the space except the tile area by
the rollup doors, but not in the large lab area, lunchroom
or restrooms.
Landlord and Tenant acknowledge that the following additional "Tenant
Improvements" are not practical to complete by the "Commencement Date".
Landlord, at Landlord's sole cost, shall diligently pursue substantial
completion of the following "Additional Tenant Improvements" within ninety (90)
days of "Commencement Date". Tenant shall be responsible for removing furniture
and other items to allow work to be performed. All Additional Tenant
Improvements shall be performed during weekends or after 5:00 P.M. in the
evening or weekdays (i.e. during non-business hours).
1. Install two (2) conference rooms as shown on Exhibit D
attached. The larger conference room shall have a glass
front and shall have a door from the lobby.
2. Install men and women's showers.
3. Remove the rollup door and install glass, then finish the
ceiling to match existing.
4. Install one (1) 14' x 14' private office as shown on Exhibit
D attached.
5. Install double doors with glass windows into the large lab
area.
6. Install carpet instead of tile in the area directly in front
of the rollup door.
For purposes of this Lease "Substantial completion" shall mean installed in
accordance with the drawing and specifications and all Building codes and permit
2
<PAGE>
requirements, subject to minor punch list items that do not materially affect
the use or aesthetic appearance of the Premises. Landlord shall complete any
punch list items within thirty (30) days of Tenant's delivery of the punch list.
Any construction warranties (to the extent they exist on these improvements)
shall be assigned to the tenant.
5. Tenant Alterations: Tenant shall be entitled, without Landlord's
------------------
prior approval, to make Tenant's Alterations (i) which do not affect the
structural or exterior parts or water tight character of the Building, and (ii)
the reasonably estimated cost of which, plus the original cost of any part of
the Premises removed or materially altered in connection with such Tenant's
Alterations, together do not exceed Five Thousand and 00/100 Dollars
($5,000.00). Tenant has the right to install six (6) private offices at Tenant's
expense, which may at option of the Landlord be required to be removed upon
lease termination.
6. Tenant Maintenance: Tenant shall (i) maintain, repair and replace
------------------
when necessary all HVAC equipment which services only the Premises, and shall
keep the same in good condition through regular inspection and servicing, and
(ii) maintain continuously throughout the Lease Term a service contract for the
maintenance of all such HVAC equipment with a licensed HVAC repair and
maintenance contractor approved by Landlord, which contract provides for the
periodic inspection and servicing of the HVAC equipment at least once every
sixty (60) days during the Lease Term. Tenant shall furnish Landlord with a copy
of such service contract, which shall provide that it may not be cancelled or
changed without at least thirty (30) day's prior written notice to Landlord.
Notwithstanding the foregoing, Landlord may elect at any time to assume
responsibility for the maintenance, repair and replacement of such HVAC
equipment that serves only the Premises. Tenant shall maintain continuously
through the Lease Term a service contract for the washing of all windows (both
interior and exterior surfaces) in the Premises.
A. Tenant shall maintain continuously throughout the Lease Term
a service contract for the maintenance of all such HVAC equipment with a
licensed HVAC repair and maintenance contractor approved by Landlord, which
contract provides for the periodic inspection and servicing of the HVAC
equipment at least once every sixty (60) days during the Lease Term. Tenant
shall furnish Landlord with a copy of such service contract, which shall provide
that it may not be cancelled or changed without at least thirty (30) day's prior
written notice to Landlord. Notwithstanding the foregoing, Landlord may elect at
any time to assume responsibility for the maintenance, repair and replacement of
such HVAC equipment that serves only the Premises, with the cost thereof to be
allocated as provided in Section 7b below. Tenant shall maintain continuously
through the Lease Term a service contact for the washing of all windows (both
interior and exterior surfaces in the Premises).
B. There are four (4) 20 ton VAC HVAC units (each consisting of
condensing unit, an air handler and a heating ware supply) on the roof of the
Premises (the "VAC HVAC" Units). Tenant will be responsible for repair or
replacement cost of up to Fifteen Thousand Dollars ($15,000.00) in the aggregate
over the term of the Lease for each such VAC HVAC Unit. Landlord shall be
responsible for all repairs and or replacements in excess of the first
$15,000.00 incurred by tenant over the term of the Lease for each VAC HVAC Unit
as provided in the following sentence. In the event repairs or replacements for
an individual VAC HVAC Unit are necessary which would bring the amount of repair
or replacement costs to be paid by Tenant for such particular VAC HVAC Unit to
exceed $15,000 in the aggregate over the term of the Lease, Landlord shall (i)
be responsible to pay for repair and maintenance of such VAC HVAC costing in
excess of $15,000 and thereafter for the remainder of the term of the Lease; or
(ii) replace such VAC HVAC Unit and amortize the cost of such new VAC HVAC Unit
3
<PAGE>
over 20 a year life, with Tenant reimbursing Landlord as an Operating Expense
for the amortized amount falling within the remainder of the Lease Term.
7. Landlord's Representation Regarding Hazardous Materials:
-------------------------------------------------------
Landlord, to the best of Landlord's knowledge, hereby makes the following
representations to Tenant as of the Effective Date without having made any
investigation to verify the accuracy thereof and is subject to and qualified by
all information and disclosures made to Tenant by Landlord.
A. The soil and groundwater on or under the Project does not
contain hazardous Materials in amounts which violate any Hazardous Materials
Laws to the extent that any governmental entity could require wither Landlord or
Tenant to make any remedial action with respect to such Hazardous Materials.
B. During the time that Landlord has owned the Project,
Landlord has received no written notice of: (i) any violation, or alleged
violation, of any Hazardous Materials Law with respect to the Project that has
not been remediated to the extent that no other remediation is then legally
required by applicable law; (ii) any pending claims relating to the presence of
Hazardous Materials on the Project; or, (iii) any pending investigation by any
governmental agency concerning the Project relating to Hazardous Materials.
8. Landlord's Remedies in Event of Tenant Default: (AMB)
----------------------------------------------
A. Termination. In the event of any Default by Tenant, then in
-----------
addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the immediate option to terminate this
Lease and all rights of Tenant hereunder by giving written notice of such
intention to terminate. In the event that Landlord shall elect to so terminate
this Lease then Landlord may recover from Tenant:
1. the worth at the time of award of any unpaid Rent and
any other sums due and payable which have been earned at the time of such
termination; plus
2. the worth at the time of award of the amount by which
the unpaid Rent and any other sums due and payable which would have been earned
after termination until the time of award exceeds the amount of such rental loss
Tenant proves could have been reasonably avoided; plus
3. the worth at the time of award of the amount by which
the unpaid Rent and any other sums due and payable for the balance of the term
of this Lease after the time of award exceeds the amount of such rental loss
that Tenant proves could be reasonably avoided; plus
4. any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course would be likely to
result therefrom, including, without limitation, any costs or expenses incurred
by Landlord (i) in retaking possession of the Premises; (ii) in maintaining,
repairing, preserving, restoring, replacing, cleaning, altering or
rehabilitating the Premises or any portion thereof, including such acts for
reletting to a new lessee or lessees; (iii) for leasing commissions; or (iv) for
any other costs necessary or appropriate to relet the Premises; plus
5. such reasonable attorneys' fees incurred by Landlord as
a result of a Default, and costs in the event suit is filed by Landlord to
enforce such remedy; and plus
4
<PAGE>
6. at Landlord's election, such other amounts in addition
to or in lieu of the foregoing as may be permitted from time to time by
applicable law.
As used in subparagraphs (1) and (2) above, the "worth at the time of award" is
computed by allowing interest at an annual rate equal to twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less. As used in
subparagraph (3) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%). Tenant waives redemption
or relief from forfeiture under California Code of Civil Procedure Sections 1174
and 1179, or under any other present or future law, in the event Tenant is
evicted or Landlord takes possession of the Premises by reason of any Default of
Tenant hereunder.
B. Continuation of Lease. In the event of any Default by
---------------------
Tenant, then in addition to any other remedies available to Landlord at law or
in equity and under this Lease, Landlord shall have the remedy described in
California Civil Code Section 1951.4 (Landlord may continue this Lease in effect
after Tenant's Default and abandonment and recover Rent as it becomes due,
provided tenant has the right to sublet or assign, subject only to reasonable
limitations).
C. Re-entry. In the event of any Default by Tenant, Landlord
--------
shall also have the right, with or without terminating this Lease, in compliance
with applicable law, to re-enter the Premises and remove all persons and
property from the Premises; such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Tenant.
D. Reletting. In the event of the abandonment of the Premises
---------
by Tenant or in the event that Landlord shall elect to re-enter or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, then if Landlord does not elect to terminate this Lease
as provided in Paragraph a, Landlord may from time to time, without terminating
this Lease, relet the Premises or any part thereof for such term or terms and at
such rental or rentals and upon such other terms and conditions as Landlord in
its sole discretion may deem advisable with the right to make alterations and
repairs to the Premises. In the event that Landlord shall elect to so relet,
then rentals received by Landlord from such reletting shall be applied in the
following order: (1) to reasonable attorneys' fees incurred by Landlord as a
result of a Default and costs in the event suit is filed by Landlord to enforce
such remedies; (2) to the payment of any indebtedness other than Rent due
hereunder from Tenant to Landlord; (3) to the payment of any costs of such
reletting; (4) to the payment of the costs of any alterations and repairs to the
Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the
residue, if any, shall be held by Landlord and applied in payment of future Rent
and other sums payable by Tenant hereunder as the same may become due and
payable hereunder. Should that portion of such rentals received from such
reletting during any month, which is applied to the payment of Rent hereunder,
be less than the Rent payable during the month by Tenant hereunder, then Tenant
shall pay such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any
costs and expenses incurred by Landlord in such reletting or in making such
alterations and repairs not covered by the rentals received from such reletting.
E. Termination. No re-entry or taking of possession of the
-----------
Premises by Landlord pursuant to this Addendum shall be construed as an election
to terminate this Lease unless a written notice of such intention is given to
Tenant or unless the termination thereof is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any Default by Tenant, Landlord may at any time after such reletting
elect to terminate this Lease for any such Default.
5
<PAGE>
F. Cumulative Remedies. The remedies herein provided are not
-------------------
exclusive and Landlord shall have any and all other remedies provided herein or
by law or in equity.
G. No Surrender. No act or conduct of Landlord, whether
------------
consisting of the acceptance of the keys to the Premises, or otherwise, shall be
deemed to be or constitute an acceptance of the surrender of the Premises by
Tenant prior to the expiration of the Term, and such acceptance by Landlord of
surrender by Tenant shall only flow from and must be evidenced by a written
acknowledgment of acceptance of surrender signed by Landlord. The surrender of
this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless
Landlord elects in writing that such merger take place, but shall operate as an
assignment to Landlord of any and all existing subleases, or Landlord may, at
its option, elect in writing to treat such surrender as a merger terminating
Tenant's estate under this Lease, and thereupon Landlord may terminate any or
all such subleases by notifying the sublessee of its election so to do within
five (5) days after such surrender.
H. Notice Provisions. Tenant agrees that any notice given by
-----------------
Landlord pursuant to Paragraph 13.1 of the Lease shall satisfy the requirements
for notice under California Code of Civil Procedure Section 1161, and Landlord
shall not be required to give any additional notice in order to be entitled to
commence an unlawful detainer proceeding.
9. Year 2000 Disclaimer: Landlord hereby disclaims any liability for
--------------------
any and all damages, injuries or other losses, whether ordinary, special,
consequential, punitive or otherwise, arising out of, relating to, or in
connection with, (a) the failure of any automated, computerized and/or software
system or other technology used in, on, or about the Property or relating to the
management or operation of the Property to accurately receive, provide or
process date/time data (including, but not limited to, calculating, comparing
and sequencing) both before and after September 9, 1999, and before, after,
during and between the years 1999 A. D. and 2000 A. D., and leap year
calculations and, or (b) the malfunction, ceasing to function or providing of
invalid or incorrect results by any such technology as a result of date/time
data. The foregoing disclaimer shall apply to any such technology used in, on,
or about the Property or that affects the Property, whether or not such
technology is within the control of Owner or any of Owner's agents or
representatives. THE FOREGOING DISCLAIMER INCLUDES A DISCLAIMER OF ALL
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE MATTERS
DESCRIBED HEREIN, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
6
<PAGE>
LANDLORD: TENANT:
AMB Property, L.P. SonicWALL, Inc.
a Delaware limited partnership a California corporation
By: AMB Property Corporation,
a Maryland corporation
By: /s/ John L. Rossi By: /s/ Michael J. Sheridan
------------------------ -------------------------------
John L. Rossi
Its: Regional Manager Its: CFO
------------------------------
Telephone: (415) 394-9000 Telephone: (408) 327 - 7855
------------------ ------------------------
Facsimile: (415) 394-0903 Facsimile: (408) 844 - 9100
------------------ ------------------------
Executed at: 505 Montgomery Street Executed at: Santa Clara
----------------------
6/th/ Floor
San Francisco, CA 94111
Date: 9/30/99 Date: 9/29/99
--------------------- -----------------------
7
<PAGE>
EXHIBIT A
[MAP OF PROPERTY]
<PAGE>
EXHIBIT B
COMMENCEMENT DATE CERTIFICATE
THIS COMMENCEMENT DATE CERTIFICATE is made as of September 27, 1999, by and
between the parties hereto with regard to that Lease dated September 27, 1999,
by and between AMB PROPERTY, L.P., a Delaware limited partnership, as Landlord
("Landlord"), and SONICWALL, INC., a California corporation as Tenant
("Tenant"), affecting those Premises commonly known as 1160 Bordeaux Drive,
Sunnyvale, California. The parties hereto agree as follows:
1. Possession of the Premises has been delivered to Tenant and Tenant has
accepted and taken possession of the Premises.
2. The Commencement Date of the Lease Term is October 1, 1999 and the Lease
Term shall expire on September 30, 2004 unless sooner terminated according to
the terms of the Lease or by mutual agreement.
3. The Base Monthly Rent initially due pursuant to the Lease is Forty-Three
Thousand Five Hundred Forty-Five and 60/100 Dollars ($43,545.60) per month,
subject to any subsequent adjustments required by the Lease.
4. Landlord has received a Security Deposit in the amount of Forty-Nine
Thousand Nine Hundred Ninety-Six and 80/Dollars ($49,996.80). In addition,
Tenant has prepaid rent in the amount of Forty-Three Thousand Five Hundred
Forty-Five and 60/Dollars ($43,545.60), which shall be applied to the first
installment of Base Monthly Rent.
5. The Lease is in full force and effect, neither party is in default of its
obligations under the Lease, and Tenant has no setoffs, claims, or defenses to
the enforcement of the Lease.
LANDLORD: TENANT:
AMB Property, L.P. SonicWALL, Inc.
a Delaware limited partnership a California corporation
By: AMB Property Corporation,
a Maryland corporation
By: /s/ John L. Rossi By: Michael J. Sheridan
--------------------------- ------------------------
John L. Rossi
Its: Regional Manager Its: CFO
------------------------
Telephone: (415) 394-9000 Telephone: (408) 327 - 7855
------------------------- -------------------
Facsimile: (415) 394-0903 Facsimile: (408) 344 - 9100
------------------------- -------------------
Executed at: 505 Montgomery Street Executed at: Santa Clara
-----------------
6th Floor
San Francisco, CA 94111
Date: 9/30/99 Date: 9/29/99
------------------------------ ------------------------
<PAGE>
EXHIBIT C
INTERIOR IMPROVEMENT AGREEMENT
(NOT APPLICABLE)
<PAGE>
EXHIBIT D
[FLOOR PLAN OF PROPERTY]
<PAGE>
EXHIBIT E
DECLARATION OF PROTECTIVE COVENANTS FOR
MOFFETT INDUSTRIAL PARK NO. 3
That certain Declaration of Protective Covenants recorded at page 544 of Book O
549 of the Official Records of Santa Clara County, State of California on
September 5, 1972.
THIS DECLARATION, made this 31st day of August, 1973, by THE
PRUDENTIAL INSURANCE COMPANY OF AMERICA (hereafter called Prudential), a New
Jersey Corporation.
WITNESSETH:
-----------
Whereas Prudential is the owner of that certain real property located
in the City of Sunnyvale, County of Santa Clara, State of California. described
in Exhibit "A" (hereafter called Moffett Industrial Park No. 3) and,
Whereas Prudential proposes to subdivide Moffett Industrial Park No. 3
and to subject it to the following restrictions:
NOW, THEREFORE, Prudential hereby declares that Moffett Industrial
Park No. 3 is and shall be held, conveyed, encumbered, leased and used subject
to the following uniform restrictions, covenants and equitable servitudes in
furtherance of a plan for the subdivision. improvement and sale thereof and the
enhance the value, desirability and attractiveness of Moffett Industrial Park
No. 3, the restrictions set forth herein shall run with the real property
included within Moffett Industrial Park No. 3 shall be binding on all persons
having or acquiring any interest in such real property or any part thereof,
shall inure to the benefit if every portion of Moffett Industrial Park No. 3 and
any interest therein shall inure to the benefit of and be binding upon each
successor in interest of Prudential and may be enforced by Prudential or its
successors in interest or by any Owner (as defined in Article I below) or his
successors in interest or by any Owner (as defined in Article 1 below) or his
successors in interest.
GENERAL PROVISIONS.
A. Definitions
1. "Architectural Control Committee" means Prudential. or any committee which
Prudential may appoint by an appropriate instrument recorded with the Santa
Clara County Recorder.
2. "Lot" means such lot as shown on the parcel or subdivision map, or maps for
Moffett Industrial Park No. 3.
3. "Site" means a parcel consisting either of a Lot, a portion of a Lot,
contiguous Lots, or portions of contiguous Lots.
4. "Improvements" means all improvements to a Site, including, but without
limitation, buildings, loading areas, trackage, parking areas. pavement, poles,
fences, landscaping, signs and structures of any type.
5. "Building" means the main portion of any building or similar structure and
all projections or extensions thereof, including garages, outside platforms and
docks.
<PAGE>
6. "Owner" means the person or persons, partnership or corporation in whom
title to a Site is vested, as shown by the official records of the Office of the
County Recorder of Santa Clara County, "Owner" does not mean mortgagees, trustee
and beneficiaries of deeds of trust or holders of any indebtedness secured by a
mortgage deed or trust.
B. Purposes of Restrictions.
The purpose of these covenants, conditions and restrictions is to insure
proper development and use of Moffett Industrial Park No. 3. to protect the
Owner of each Site against such improper development and use of other Sites as
will depreciate the value of his Site, to prevent erection of structures of
unsuitable or inharmonious design or construction, to secure and maintain
sufficient setbacks from streets and between structures, to maintain Common
Landscaping (as defined in Article V) and in general to provide for a high
quality of improvement of Moffett Park Industrial Park No. 3 in accordance with
a general plan.
II. REGULATION OF IMPROVEMENTS.
A. Minimum Setback Lines.
----------------------
No Improvement shall be constructed on any Site within fifty (50) feet of
the right-of-way line of any public street. No Improvement other than
landscaping, paving and fenced shall be constructed on any Site within twenty
(20) feet of any other Site. The Architectural Control Committee may approve
lesser setback lines if in its opinion a variation would be compatible with the
general development of Moffett Industrial Park No. 3.
B. Ground Coverage.
----------------
No more than forty-five per cent (45%) of the surface of any Site shall be
covered with a Building or Buildings.
C. Construction Operations.
------------------------
Construction of all Improvements shall be expedited so that none shall
remain in a partially finished condition any longer than reasonably necessary
for the completion thereof.
D. Excavation.
-----------
No excavation shall be made on, and no sand, gravel or soil shall be
removed from, any Site, except in connection with the construction of
Improvements, and upon completion thereof, exposed openings shall be backfilled,
and disturbed ground shall be graded, leveled and paved or landscaped.
E. Landscaping.
------------
Within ninety (90) days of occupancy or completion of any building on a
Site, whichever occurs first, such Site shall be landscaped in accordance with
plans approved by the Architectural Control Committee. The Owner of the Site
shall maintain such landscaping in good order and condition.
F. Signs.
------
<PAGE>
No billboard or advertising signs shall be permitted on any Site other than
those approved by the Architectural Control Committee which identify the name,
business and products of the person or firm occupying the Site or the offer the
Site for sale or lease.
G. Parking Areas.
--------------
Each Site shall have facilities for parking sufficient to serve the
business conducted thereon without using adjacent streets thereof, and no use
shall be made of any Site which would require parking in excess of the parking
spaces on the Site. In any event, the number and size of the parking spaces on
each Site shall conform with all ordinances of the City of Sunnyvale applicable
with respect thereto. Parking areas shall be laid out and constructed according
to plans approved by the Architectural Control Committee and shall be maintained
thereafter in good condition. Except with the approval of the Architectural
Control Committee no parking shall be permitted within fifty (50) feet of the
right-of-way line of any street or between any Building and any street.
H. Loading Area.
-------------
All vehicle loading and unloading in connection with an Owner's business
shall be conducted upon his Site, and sufficient space shall be provided
therefor. Loading Areas shall be screened from view from streets and adjoining
properties by a visual barrier of not less than six (6) feet in height. Except
with the prior written approval of the Architectural Control Committee, loading
areas shall not be located between any Building and any street closer than
seventy-five (75) feet to the right-of-way line of any street.
I. Storage Areas.
--------------
No materials, supplies, equipment or trash containers shall be stored on a
Site except inside a Building or behind a visual barrier not less than six (6)
feet in height or rising two (2) feet above the stored materials, supplies or
equipment. whichever is higher, screening such storage areas from view from
streets and adjoining Sites. Except with the prior written approval of the
Architectural Control Committee, storage areas shall not be located between any
Building and any street.
J. Building-Regulations.
---------------------
All Buildings shall be constructed and maintained in accordance with the
following standards unless an exception is approved in writing by the
Architectural Control Committee:
1. Exterior walls shall be of masonry, concrete or approved equal
material.
2. Exterior walls shall be painted or otherwise finished in a manner
acceptable to the Architectural Control Committee. Exterior walls shall
not be repainted or refinished unless and until the Architectural Control
Committee shall have approved the color or refinishing materials to be
used.
3. All Buildings shall be maintained in good order and repair and
condition. All exterior painted surfaces shall be maintained in first-
class condition and shall be repainted at least once every five (5) years.
4. All electrical, telephone and other utility lines shall be underground
and shall not be exposed on the exterior of any Building.
<PAGE>
5. All electrical and mechanical apparatus, equipment, fixtures (other
than lighting fixtures) conduit, ducts, vents, flues and pipes located on
the exterior of any Building shall be concealed form view and shall be
architecturally treated in a manner acceptable to the Architectural Control
Committee.
III. APPROVAL OF PLANS.
No Improvement shall be erected. placed, altered, maintained or permitted
to remain on any Site until plans and specifications showing plot layout and all
exterior elevations, with materials and colors therefor and structural design,
signs and landscaping shall have been submitted to and approved in writing by
the Architectural Control Committee. Such plans and specifications shall be
submitted in writing over the signature of the Owner of the Site or his
authorized agent. Approval shall be based, among other things, on adequacy of
Site dimensions, adequacy of structural design; effect of location and use of
improvements on neighboring Sites; improvements, operations, and uses; relation
of topography, grade, and finished ground elevation of the Site being improved
to that of neighboring Sites: proper facing of main elevation with respect to
nearby streets; and conformity of the plans and specifications to the purpose
and general plan and intent of this Declaration. The Architectural Control
Committee shall not arbitrarily or unreasonably withhold its approval of such
plans and specifications. If the Architectural Control Committee fails to
either approve or disapprove such plans and specifications within thirty (30)
days after the same have been submitted to it, it shall be conclusively presumed
that the Architectural Control Committee has approved said plans and
specifications, subject, however, to the restrictions contained in Articles II
and IV hereof.
Neither the Architectural Control Committee nor its successors or assigns shall
be liable in damages to anyone submitting plans to them for approval, or to any
Owner by reason of mistake in judgement, negligence, or nonfeasance arising out
of or in connection with the approval or disapproval or failure to approve any
such plans. Every person who submits plans to the Architectural Control
Committee for approval agrees, by submission of such plans, and every Owner
agrees, by acquiring title to a Site, that he will not bring any action or suit
against the Architectural Control Committee to recover such damages.
Notwithstanding anything to the contrary contained herein. after the expiration
of one (1) year from the date of issuance of a building permit by municipal or
other governmental authority for any Improvement, said Improvement shall, in
favor of purchasers and encumbrances in good faith and for value, be deemed to
be in compliance with all provisions of Article III, unless actual notice of
such noncompliance or noncompletion, executed by the Architectural Control
Committee, shall appear of record in the Office of the County Recorder of Santa
Clara County, California, or unless legal proceedings shall have been instituted
to enforce compliance or completion.
IV. REGULAT1ON OF OPERATIONS AND USES.
A. Permitted Operations and Uses.
------------------------------
Except as provided in paragraphs B and C below, any industrial use will be
permitted on a Site including, but without limitation, manufacturing,
processing, storage, wholesale, office, laboratory, professional and research
and development. Such retail uses as may be required for the convenience of
Owners and their employees shall be permitted and such retail uses may include,
but without limitation, restaurants, drug stores, barber and beauty shops, shoe
repair shops, cleaners, motels, post offices, banks and automobile service
stations. Such municipal, governmental and public utility uses as may be
necessary or appropriate shall be permitted.
B. Prohibited Operations and Uses.
-------------------------------
<PAGE>
No site shall be used as a junk yard, stock yard, or slaughter yard or for
commercial excavation of building or construction materials, fat rendering or
distillation of bones, dumping, disposal, incineration or reduction of garbage,
sewage, offal, dead animals or refuse, or the smelting of iron, tin, zinc or
other ores or the prospecting or drilling for natural gas, oil or like
substances, except with prior written permission of the Architectural Control
Committee, and then only in such manner as will not materially inconvenience
other Owners or materially depreciate the value of adjacent property.
C. Nuisance.
---------
No noxious or offensive activity shall be carried on nor shall anything be
done on any Site which may be or become an annoyance or nuisance to the Owners
or occupants of other Sites or which will be offensive by reason of odor, fumes,
dust, dirt, fly-ash, smoke, noise, glare or which will be hazardous by reason of
danger of fire or explosion.
V. COMMON LANDSCAPING.
The Owner of each Site shall maintain landscaping existing thereon at the
time of purchase ("Common Landscaping") in a condition that meets the approval
of the Architectural Control Committee. In the event that the Owner of any Site
does not maintain Common Landscaping in such condition or the landscaping
described in Article II E as therein provided, Prudential or its agents shall
have the right to maintain such landscaping in such condition, Prudential or its
agents shall have the right at any reasonable time to enter into any Site for
the purpose of such maintenance and for such other purposes as are reasonably
related thereto. Prudential shall use due diligence and reasonable care in
repairing, maintaining and installing Common Landscaping to see that such
repair, maintenance and installation does not interfere with the Owner's use of
its Site. In the event that Prudential or its agents should undertake any such
maintenance on any such Site, the Owner thereof shall reimburse Prudential for
all of Prudential's costs incurred for such maintenance. In any legal
proceeding brought by Prudential to recover such costs, the Owner shall be
obligated to pay for the costs and expenses for such proceeding, including
reasonable attorneys' fees.
VI. ENFORCEMENT.
A. Interpretation.
---------------
In case of uncertainty as to the meaning of any article, section,
subsection, paragraph, sentence, clause, phrase, or word of this Declaration the
interpretation of Prudential shall be final, conclusive and binding upon all
interested parties.
B. Abatement and Suit.
-------------------
Violation of any restriction herein contained shall give to Prudential and
every Owner the right to enter the property upon or as to which said violation
or breach exists and to summarily abate and remove at the expense of the Owner
thereof, any structure, thing or condition that may be or exist thereon contrary
to the intent and meaning of the provisions hereof, or to prosecute a proceeding
law or in equity against the person or persons who have violated or are
attempting to violate any of these restrictions to enjoin or prevent them from
doing so, to cause said violation to be remedied or to recover damages from said
violation.
In any legal or equitable proceeding for the enforcement of this
Declaration the losing party or parties shall pay the attorneys' fees of the
prevailing party or parties, in such amount as may be fixed by the court in such
proceedings. All remedies provided herein or at law or in equity shall be
cumulative and not exclusive.
<PAGE>
C. Inspection.
-----------
Prudential may from time to time at any reasonable hour or hours, enter and
inspect any property subject to these restrictions to ascertain compliance
therewith.
D. Failure to Enforce Not a Waiver of Rights.
------------------------------------------
Except as provided in the last paragraph of Article III hereof, the failure
of Prudential or any Owner to enforce any restriction contained herein shall in
no event be deemed a waiver of the right to do so thereafter nor of the right to
enforce any other restrictions contained herein.
VII. EXTINGUISHMENT, CONTINUATION AND MODIFICATION.
This Declaration, every provision hereof and every covenant, condition and
restriction contained herein shall continue in full force and effect for a
period of forty (40) years from the date hereof, provided, however, that this
Declaration, or any provisions hereof, or any covenant, condition or restriction
contained herein, may be terminated, extended, modified, or amended with the
written consent of the Owners of sixty-five per cent (65%) of the land in
Moffett Park Industrial Park No. 3 (exclusive of portions thereof now or
hereafter dedicated to public use); provided, further, that so long as
Prudential owns at least twenty per cent (20%) of Moffett Industrial Park No. 3,
no such termination, extension, modification or amendment shall be effective
without written consent of Prudential. No such termination, extension,
modification or amendment shall, be effective until a proper instrument in
writing has been executed and acknowledged and recorded in the Office of the
Recorder of Santa Clara County, California.
VIII. MOFFETT MUSIVLIAL PARK NO. 3 OWNERS ASSOCIATION.
A. Membership.
-----------
Each Owner shall be a member of the Moffett Industrial Park No. 3 Owners
Association, an unincorporated association (hereinafter called the
"Association").
B. Transfer of Rights and Duties.
------------------------------
The rights and duties of Prudential under this Declaration shall be
transferred to and automatically assumed by the Association upon the earliest of
the following to occur:
1. The sale of ninety per cent (90%) of Moffett Industrial Park No. 3 by
Prudential to Owners as evidenced by the official records of the Santa Clara
County Recorder; or
2. The recordation by Prudential of an appropriate instrument with the
Santa Clara County Recorder transferring the rights and duties of Prudential
under this Declaration to the Association.
C. Organization.
-------------
The members of the Association may at any time meet and adopt by-laws or
rules of procedure to govern the operation of the Association. Until such by-
laws or rules of procedure are adopted, meetings of the Association may be
called by any member thereof upon seven (7) days' written notice to each member
setting forth the time and place thereof, provided that notice may be waived in
writing at any time by any member or members not so notified; twenty-five per
cent (25%) of the members of the Association shall constitute a quorum; and the
Association may act by a vote of a majority of its members present at a meeting,
duly called, at which a quorum is present or without a meeting by unanimous
written consent of its members.
<PAGE>
IX. ASSIGNMENT OF PRUDENTIAL'S RIGHTS AND DUTIES.
Any and all of the rights, powers and reservations of Prudential herein
contained may be assigned to any person, corporation or entity which assumes in
writing the duties of Prudential pertaining to the particular rights, powers and
reservations assigned, and thereafter to the extent of such assignment, such
person, corporation or entity shall have the same rights and powers and be
subject to the same obligations and duties as are herein given to and assumed by
Prudential.
X. CONSTRUCTIVE NOTICE AND ACCEPTANCE.
Every Owner is and shall be conclusively deemed to have. consented and agreed
to every covenant, condition and restriction contained herein, whether or not
any reference to this Declaration is contained in the instrument by which such
Owner acquired an interest in any portion of Moffett Industrial Park No. 3.
IN WITNESS WHEREOF. Prudential, the declared herein, has caused its name to be
hereunto subscribed as of the day and yea first above written.
EXHIBIT "A"
DESCRIPTION
The Land referred to in this report is situated in the State of California,
County of Santa Clara, City of Sunnyvale, and is described as follows:
All that certain real property in the City of Sunnyvale, County of Santa Clara,
State of California, described as follows:
All of parcel "A" as shown upon that certain map entitled, "Parcel Map for Guy
F. Atkinson Company, being a portion of Rancho Pastoria de los Borregas,
Crossman Sub. No. 2 T. J. Murphy Sub. No. 3, which map was filed for record in
the office of the Recorder of the County of Santa Clara, State of California, on
January 6, 1970 in book 263 of Maps, at page 20.
<PAGE>
EXHIBIT F
SIGN CRITERIA
[GRAPHICS OF SIGN]
<PAGE>
EXHIBIT G
2290 North First Street, Suite 300
San Jose. California 95131
(408) 922-0400
FAX (408) 922-0157
ORCHARD
PROPERTIES
TO: PROSPECTIVE TENANT
FROM: ORCHARD PROPERTIES
SUBJECT: HAZARDOUS MATERIALS QUESTIONNAIRE AS IT RELATES
CALIFORNIA HEALTH AND SAFETY CODE
SECTIONS 25503.5 AND 25503.6
California Health and Safety Code Section 25503.5 requires any business which
handles Hazardous Materials in excess of certain limits to establish a business
plans for emergency response to a release or threatened release of Hazardous
Materials. Health and. Safety Code Section 25503.6 specifies that any business
which is required under Section 25503.5 to establish and implement a business
plan and is located on leased property is required to notify the owner in
writing that the business is subject to Section 25503.5 and to provide a copy of
the business plan to the owner within five working days after receiving a
request from the owner or owner's agent for a copy.
The purpose of this letter is to request that you either verify that you are not
subject to Health and Safety Code Sections 25503.5 and 25503.6 or that you
provide the information required to be provided by those Sections by:
1. Completing the attached acknowledgment;
2. Completing the attached questionnaire;
3. If you are a reporting company, attaching a copy of your
Hazardous materials management plan.
If you have questions as to your own specific requirements, please contact the
local fire department to assess your use.
Very truly yours,
ORCHARD PROPERTIES, AMO(R)
Joe Lewis
President
<PAGE>
2290 North First Street, Suite 300
San Jose. California 95131
(408) 922-0400
FAX (408) 922-0157
ORCHARD
PROPERTIES
ACKNOWLEDGMENT
--------------
THE UNDERSIGNED HEREBY ACKNOWLEDGES THAT IT (Mark One):
_____ Does not use any hazardous materials other than minor amounts of
reproduction and janitorial chemicals consistent with routine office
uses.
(No need to fill out the attached Hazardous Materials Questionnaire.)
_____ Does not use hazardous materials in a manner or in a quantity
requiring the preparation of a hazardous material management plan or
any other documents under California Health and Safety Code Section
25503.5.
(Please fill out the attached Hazardous Materials Questionnaire.)
_____ Uses only those chemicals identified in -the attached questionnaire in
accordance with the provisions of the attached hazardous materials
management plan, which has been approved by the Fire Department of the
City of ______________ and is in full force and effect.
(Please fill out the attached Hazardous Materials Questionnaire and
attach copy of your Hazardous Materials Management Plan.)
THE UNDERSIGNED FURTHER ACKNOWLEDGES THAT IT HAS COMPLIED IN ALL
RESPECTS TO THE PROVISIONS OF LOCAL, STATE AND FEDERAL LAW AND THE HAZARDOUS
MATERIALS MANAGEMENT PLAN ATTACHED HERETO IN CONNECTION WITH ITS STORAGE, USE
AND DISPOSAL OF HAZARDOUS MATERIALS AND THAT IT HAS DISPOSED OF HAZARDOUS
MATERIALS ONLY BY (1) DISCHARGE TO APPROPRIATELY TREATED WASTE TO A PUBLICLY
OWNED TREATMENT WORK IN ACCORDANCE WITH A VALID AND ENFORCEABLE WASTE DISCHARGE
PERMIT AND (2) DELIVERY OF HAZARDOUS WASTES TO A PROPERLY LICENSED WASTE
DISPOSAL AGENT.
IN WITNESS WHEREOF, the undersigned, an authorized officer of the
aforementioned company has executed this acknowledgement as of the date written
below.
________________________
(Company Name)
a_______________________
By:_____________________
________________________
(Print Name and Title)
<PAGE>
EXHIBIT H
Legal Description
All that certain Real Property in the City of Sunnyvale, County of Santa Clara,
State of California, description as follows:
All of Parcel 2, as shown upon that certain Map entitled, "Parcel map being a
Resubdivision of a portion Parcel 2-B, as shown upon that certain Parcel Map
recorded in Book 339 of Maps, at Page 55 and Parcel 5 as shown on Parcel Map
recorded in Book 373 of Maps, at Page 33, Santa Clara County Records", which Map
was filed for record in the Office of the Recorder of the County of Santa Clara,
State of California on August 22, 1976 in Book 380 of Maps, at Page 9.
All of Parcel A-1, as shown upon that certain Map entitled, "Parcel Map, being a
subdivision of Parcel "A" as shown upon that certain Parcel Map, which Map was
filed for record in the Office of the Recorder of the County of Santa Clara,
State of California on November 23, 1971 in Book 293 of Maps, at Page 13", which
Map was filed for record in the County of Santa Clara, State of California on
August 28, 1974 in Book 345 of Maps, at Page 18.
<PAGE>
EXHIBIT I
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be installed
or displayed on any part of the outside or inside of the Building without the
prior written consent of the Landlord. Landlord shall have the right to remove,
at Tenant's expense and without notice, any sign installed or displayed in
violation of this rule. All approved signs or lettering on doors and walls
shall be printed, painted, affixed or inscribed at the expense of Tenant by a
person or vendor chosen by Landlord. In addition, Landlord reserves the right
to change from time to time the format of the signs or lettering and to require
previously approved signs or lettering to be appropriately altered.
2. If Landlord objects in writing to any curtains, blinds, shades or screens
attached to or hung in or used in connection with any window or door of the
Premises, Tenant shall immediately discontinue such use. No awning shall be
permitted on any part of the Premises. Tenant shall not place anything or allow
anything to be placed against or near any glass partitions or doors or windows
which may appear unsightly, in the opinion of Landlord, from outside the
Premises.
3. Tenant shall not obstruct any sidewalks, halts, passages, exits, entrances,
elevators, escalators or stairways of the Building. The halls, passages, exits,
entrances, elevators and stairways are not for the general public, and Landlord
shall in all cases retain the right to control and prevent access thereto of all
persons whose presence in the judgment of Landlord would be prejudicial to the
safety, character, reputation and interests of the Building and its tenants
provided that nothing herein contained shall be construed to prevent such access
to persons with whom any tenant normally deals in the ordinary course of its
business, unless such persons are engaged in illegal activities. No tenant and
no employee or invitee or any tenant shall go upon the roof of the Building.
4. The directory of the Building will be provided exclusively for the display
of the name and location of tenants only and Landlord reserves the right to
exclude any other names therefrom.
5. Tenant shall not alter any lock or install a new or additional lock or bolt
on any door of its Premises. Tenant, upon the termination of its tenancy, shall
deliver to Landlord the keys of all doors which have been furnished to Tenant,
and in the event of loss of any keys so furnished, shall pay Landlord therefor.
6. Tenant shall have the right to use in common with other tenants or
occupants of the Building the parking facilities of the Building, as shown on
Exhibit A, if any, as designated from time to time by Landlord. Tenant shall not
at any time park or permit the parking of Tenant's vehicle, or the vehicles of
others, adjacent to loading areas or so as to interfere in any way with the use
of such areas. Tenant shall not park or permit to be parked any inoperative
vehicles or equipment on any portion of the parking or loading areas. The
parking ratio is 3.5: 1.
7. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with Landlord's instructions in
their installation.
8. Tenant shall not place a load upon any floor which exceeds the load per
square foot which such floor was designed to carry and which is allowed by law.
Landlord shall have the right to prescribe the weight, size and position of all
equipment, materials, furniture or other property brought into the Building.
Heavy objects shall, stand on such platforms as determined by Landlord to be
necessary to properly distribute the weight. Business machines and
<PAGE>
mechanical equipment belonging to Tenant which cause noise or vibration that may
be transmitted to the structure of the Building or to any space therein to such
a degree as to be objectionable to Landlord or to any tenants shall be placed
and maintained by Tenant at Tenants expense, on vibration eliminators or other
devices sufficient to eliminate noise or vibration. The persons employed to move
such equipment in or out of the Building must be acceptable to Landlord.
Landlord will not be responsible for loss of, or damage to, any such equipment
or other property from any cause, and all damage done to the Building by
maintaining or moving such equipment or other property shall be repaired at the
expense of Tenant.
10. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed, no
foreign substance of any kind whatsoever shall be thrown therein, and the
expense of any breakage, stoppage or damage resulting from the violation of this
rule shall be borne by the Tenant who, or whose employees or invitees, shall
have caused it.
11. Tenant shall not install any radio or television antenna, loudspeaker or
other device on the roof or exterior walls of the Building without Landlord's
written approval. Tenant shall not interfere with radio or television
broadcasting or reception from or in the Building or elsewhere.
12. Except as approved by Landlord, Tenant shall not mark, drive nails, screw
or drill into the partitions, woodwork or plaster or in any way deface the
Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix
any floor covering to the floor of the Premises in any manner except as approved
by Landlord. Tenant shall repair any damage resulting from noncompliance with
this rule.
13. Tenant shall store all its trash and garbage within its Premises. Tenant
shall not place into any trash box or receptacle any material which cannot be
disposed of in the ordinary and customary manner of trash and garbage disposal.
All garbage and refuse disposal shall be made in accordance with directions
issued from time to time by Landlord.
14. No cooking shall be done or permitted by any Tenant on the Premises, except
that use by the Tenant of Underwriters, Laboratory approved equipment for
brewing coffee, tea, hot chocolate and similar beverages shall be permitted,
provided that such equipment and use is in accordance with all federal, state
and city laws, codes, ordinances, rules and regulations. Tenant shall have the
right to install and operate microwave oven(s) and toaster(s) for the use of its
employees.
15. Tenant shall not use any hand trucks except those equipped with the rubber
tires and side guards or such other material-handling equipment as Landlord may
approve. Term shall not bring any other vehicles of any kind into the Building.
16. Tenant shall not use the name of the Building in connection with or in
promoting or advertising the business of Tenant except as Tenant's address.
17. The requirements of Tenant will be attended to only upon appropriate
application to the office of the Building by an authorized individual.
Employees of Landlord shall not perform any work or do anything outside of their
regular duties unless under special instructions from Landlord, and no employee
of Landlord will admit any person (Tenant or otherwise) to any space without
specific instructions from Landlord.
18. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by. Landlord
shall be construed as a waiver of such Rules and Regulations in favor or any
other tenant or tenants, nor prevent Landlord from
<PAGE>
thereafter enforcing any such Rules and Regulations against any or all of the
tenants of the Building.
19. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify or amend in whole or in part the terms, covenants,
agreements and conditions of any lease of premises in the Building.
20. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgement may from time to time be needed for safety and
security, for care and cleanliness of the Building and for the preservation of
good order therein. Tenant agrees to abide by all such rules and regulations
hereinabove stated and any additional rules and regulations which are adopted.
21. Tenant shall be responsible for the observance of all of the foregoing
rules by Tenant's employees, agents, clients, customers, invites and guests.
<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, except as to the items described in Note 10
which is as of October 8, 1999, relating to the combined consolidated financial
statements and financial statement schedule 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 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 1,051 8,766
<SECURITIES> 0 0
<RECEIVABLES> 870 2,441
<ALLOWANCES> 193 398
<INVENTORY> 331 506
<CURRENT-ASSETS> 2,456 13,252
<PP&E> 313 493
<DEPRECIATION> 206 (246)
<TOTAL-ASSETS> 4,751 15,107
<CURRENT-LIABILITIES> 3,263 6,968
<BONDS> 0 0
0 4,971
0 0
<COMMON> 2,732 7,494
<OTHER-SE> (1,244) (4,326)
<TOTAL-LIABILITY-AND-EQUITY> 4,751 15,107
<SALES> 7,515 12,151
<TOTAL-REVENUES> 7,515 12,151
<CGS> 3,308 3,462
<TOTAL-COSTS> 9,024 11,558
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 122 216
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,455) 798
<INCOME-TAX> 6 787
<INCOME-CONTINUING> (1,461) 11
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,461) 11
<EPS-BASIC> (0.13) 0
<EPS-DILUTED> (0.13) 0
</TABLE>
