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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 000-27723
______________
SonicWALL, Inc.
(Exact name of registrant as specified in its charter)
California 77-0270079
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1160 Bordeaux Drive
Sunnyvale, California 94089
(Address of registrant's principal executive offices) (Zip Code)
(408) 745-9600
(Registrant's telephone number, including area code)
_______________
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
TITLE OF EACH CLASS OUTSTANDING AT MARCH 31, 2000
Common Stock, no par value 25,770,227 Shares
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
PART I. FINANCIAL INFORMATION....................................... 3
ITEM 1. Financial Statements........................................ 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 14
PART II. OTHER INFORMATION........................................... 14
ITEM 1. Legal Proceedings........................................... 14
ITEM 2. Changes in Securities and Use of Proceeds................... 14
ITEM 3. Defaults Upon Senior Securities............................. 14
ITEM 4. Submission of Matters to a Vote of Security Holders......... 14
ITEM 5. Other Information........................................... 14
ITEM 6. Exhibits and Reports on Form 8-K............................ 14
SIGNATURES............................................................ 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999................................................ 4
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999........................... 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999........................... 6
Notes to Condensed Consolidated Financial Statements................... 7
</TABLE>
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SONICWALL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................. $193,285 $62,589
Short term investments..................................................... 40,456 -
Accounts receivable, net................................................... 4,552 3,687
Inventories................................................................ 1,912 558
Deferred income taxes...................................................... 4,756 1,556
Prepaid expenses and other current assets.................................. 1,886 1,015
-------- -------
Total current assets..................................................... 246,847 69,405
Property and equipment, net.................................................. 1,225 435
Intangibles and other assets................................................. 1,189 1,399
-------- -------
$249,261 $71,239
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................... $ 3,525 $ 2,692
Accrued payroll and related benefits....................................... 1,485 1,205
Other accrued liabilities.................................................. 2,811 1,839
Deferred revenue........................................................... 5,487 3,732
Income taxes payable....................................................... 845 1,021
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Total current liabilities................................................ 14,153 10,489
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Shareholders' Equity:
Common stock............................................................... 234,179 61,600
Retained earnings (accumulated deficit).................................... 929 (850)
-------- -------
Total shareholders' equity............................................... 235,108 60,750
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$249,261 $71,239
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SONICWALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
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<S> <C> <C>
Revenue
Internet security.......................................................... $13,407 $ 2,251
Ethernet................................................................... -- 813
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Total revenue........................................................... 13,407 3,064
Cost of revenue.............................................................. 3,660 943
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Gross margin ................................................................ 9,747 2,121
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Operating expenses
Research and development................................................... 1,985 658
Sales and marketing........................................................ 2,602 811
General and administrative................................................. 861 332
Deferred stock compensation................................................ 1,801 15
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Total operating expenses................................................ 7,249 1,816
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Income from operations....................................................... 2,498 305
Other income, net............................................................ 1,209 41
------- -------
Income before income taxes................................................... 3,707 346
Provision for income taxes................................................... 1,928 135
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Net income................................................................... $ 1,779 $ 211
======= =======
Net income per share
Basic...................................................................... $0.07 $0.01
======= =======
Diluted.................................................................... $0.07 $0.01
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Shares used in computing net income per share
Basic...................................................................... 23,949 16,304
======= =======
Diluted.................................................................... 26,957 18,635
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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SONICWALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
<S> <C> <C>
2000 1999
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Cash flows from operating activities:
Net income............................................................. $ 1,779 $ 211
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................................... 245 220
Provision for allowance for doubtful accounts......................... -- 69
Amortization of deferred stock compensation........................... 1,801 15
Changes in operating assets and liabilities:
Accounts receivable................................................. (865) (726)
Inventories......................................................... (1,353) (20)
Prepaid expenses and other current assets........................... (870) 135
Deferred income taxes............................................... (2) 224
Accounts payable.................................................... 833 124
Accrued payroll and related benefits................................ 280 89
Other accrued liabilities........................................... 973 (22)
Deferred revenue.................................................... 1,755 563
Income taxes payable................................................ 608 (95)
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Net cash provided by operating activities...................... 5,184 787
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Cash flows from investing activities:
Purchase of property and equipment..................................... (827) (11)
Purchase of short term investments..................................... (40,456) --
-------- ------
Net cash used in investing activities.......................... (41,283) (11)
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Cash flows from financing activities:
Proceeds from exercise of stock options................................ 301 --
Proceeds from issuance of redeemable Series A convertible
preferred stock....................................................... -- 4,971
Proceeds from issuance of common stock, net of issuance costs.......... 166,494 --
Payments of notes receivable from shareholders......................... -- 38
-------- ------
Net cash provided by financing activities...................... 166,795 5,009
-------- ------
Net increase in cash and cash equivalents................................ 130,696 5,785
Cash and cash equivalents at beginning of period......................... 62,589 1,051
-------- ------
Cash and cash equivalents at end of period............................... $193,285 $6,836
======== ======
Supplemental disclosure of cash flow information:
Cash paid for income taxes............................................. $ 1,320 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
SONICWALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by SonicWALL, Inc. (the "Company") and are unaudited and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position and the results of operations of the
Company for the interim periods. The statements have been prepared in
accordance with the regulations of the Securities and Exchange Commission
("SEC"). Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles. The results of operations
for the three months ended March 31, 2000 are not necessarily indicative of the
operating results to be expected for the full fiscal year or future operating
periods. The information included in this report should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
fiscal year ended December 31, 1999 and the risk factors as set forth in the
Company's Form 10-K, including without limitation, risks relating to limited
operating history, management of growth, maintaining profitability, dependence
on new products, customer concentration, dependence on OEM orders, product
pricing, risks associated with international sales and operations, dependence on
components, product liability, dependence on contract manufacturer, management
of acquisitions of products and technologies, protection of intellectual
property, dependence on key personnel, rapid technological change, competition,
government regulation affecting Internet security, concentration of stock
ownership, possible volatility of stock price and effect of certain charter
provisions. Any party interested in reviewing these publicly available
documents should write to the SEC or the Chief Financial Officer of the Company.
2. CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
3. NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share computations for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(In thousands, except per share amounts) 2000 1999
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<S> <C> <C>
Numerator:
Net income........................................................... $ 1,779 $ 211
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Denominator:
Weighted average common shares outstanding........................... 24,197 16,304
Weighted average unvested common shares subject to
repurchase......................................................... (248) --
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Denominator for basic calculation.................................... 23,949 16,304
Common stock equivalents............................................. 3,008 2,331
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Denominator for diluted calculation.................................. 26,957 18,635
</TABLE>
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<TABLE>
<S> <C> <C>
Basic net income per share............................................. $ 0.07 $ 0.01
======= =======
Diluted net income per share........................................... $ 0.07 $ 0.01
======= =======
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) March 31, December 31,
2000 1999
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<S> <C> <C>
Raw materials.......................................................... $ 746 $ 25
Finished goods......................................................... 1,166 533
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$1,912 $ 558
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</TABLE>
5. FOLLOW-ON OFFERING
In March 2000, the Company completed a follow-on offering of 3,500,000
shares of its common stock at a price of $100 per share, of which 1,750,000
shares were sold by the Company and 1,750,000 shares were sold by selling
shareholders. The Company received approximately $166 million in net proceeds
after deducting underwriting discounts and commissions and offering expenses.
The Company expects to use the proceeds from the offering to support growth,
working capital and potential acquisitions of complementary products and
technologies.
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement 133, "Accounting for Derivative Instruments and Hedging Activities."
The new statement established accounting and reporting standards for derivative
instruments and for hedging activities and is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of Statement 133 to have a material impact on the Company's results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company implemented SAB 101 in the quarter ended March 31,
2000 and it did not have a material impact on the financial statements.
In March 2000, the FASB issued FASB interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No.25". This interpretation has provisions that are effective on
staggered dates, some of which began after December 15, 1998 and others that
become effective after June 30, 2000. The adoption of this interpretation did
and will not have a material impact on the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements about future results,
which are subject to risks and uncertainties, including those discussed below.
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 significantly from the results
discussed in the forward-looking statements as a result of a variety of factors,
including, but not limited to, those set forth in our Form 10-K filed with the
Securities and Exchange Commission. Refernces to "we," "our," and "us" refer to
SonicWALL, Inc.
<PAGE>
OVERVIEW
From inception through 1996, we derived substantially all of our revenue
from the development and marketing of networking products for Apple Macintosh
computers. These products enable Apple Macintosh computers to connect to
computer networks using Ethernet communications standards. The Ethernet standard
was developed in the 1970s by Xerox Corporation and is the most widely used
technology to facilitate communication between computers on local area networks.
The Ethernet standard is defined by the Institute of Electrical and Electronics
Engineers and specifies the speed and other characteristics of a computer
network. 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 stopped shipments of our
Ethernet product line during 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 1999, our Internet security products represented approximately
92% of our total revenue and in 2000 they represented 100% of our total revenue.
In 1999, our Ethernet products represented 8% of our total revenue and in 2000,
Ethernet products are no longer being sold.
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. 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 1999, sales to
Ingram Micro and Tech Data accounted for 34% and 12% of our revenue,
respectively.
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 approximately 95% of total revenue for the year
ended December 31, 1999. 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. 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. For all other distributors, 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. For all of our distributors, 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. Price
reductions which may result in price protection require the approval of our
president, chief financial officer, and vice president of sales. Subscription
fees and extended warranty fees are deferred and amortized over the period of
the related contracts. Subscription and extended warranty fees to date have not
been material.
To date, a significant portion of our revenue has been dependent on large
purchase orders from a limited number of distributors. These purchase orders
typically have short lead times and are subject to delay or cancellation without
penalty. We anticipate that our operating results for a given period will
continue to depend on a small number of customers. If we experience a decline in
revenue from any of our significant distributors in a given quarter, our revenue
for that quarter, or following quarters, will be adversely affected. This could
adversely affect our business, prospects, results of operations and financial
condition. Furthermore, if any of our 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.
<PAGE>
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, Sreekanth Ravi and Sudhakar Ravi, two of our executive
officers and principal shareholders, were also the majority shareholders of
SonicWALL, Inc. 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
completed technology and will be amortized over a period of three years. The
intangible assets acquired by the Company were rights to the completed core
technology developed by AckFin that provides the foundation for our Internet
products. 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. AckFin did not have any revenue transactions with
unrelated third parties. All 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 recorded approximately $6.1 million in additional
deferred stock compensation for stock options granted in the year ended December
31, 1999, at prices subsequently deemed to be below fair market value on the
date of grant. We amortized approximately $2.9 million of deferred stock
compensation for the year ended December 31, 1999, including amortization for
granted options to certain consultants in exchange for services rendered. These
options are subject to variable plan accounting with fair value re-measurements
at the end of each quarterly reporting period.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data for the
periods indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
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<S> <C> <C>
Revenue
Internet Security................................................... 100.0% 73.5%
Ethernet............................................................ 0.0 26.5
----- -----
Total revenue..................................................... 100.0 100.0
Cost of revenue....................................................... 27.3 30.8
----- -----
Gross margin.......................................................... 72.7 69.2
Operating expenses
Research and development............................................ 14.8 21.5
Sales and marketing................................................. 19.4 26.4
General and administrative.......................................... 6.4 10.8
Deferred stock compensation......................................... 13.4 0.5
----- -----
Total operating expenses.......................................... 54.0 59.2
----- -----
</TABLE>
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<TABLE>
<S> <C> <C>
Income from operations................................................. 18.7 10.0
Other income, net...................................................... 9.0 1.3
----- -----
Income before income taxes............................................. 27.7 11.3
Provision for income taxes............................................. 14.4 4.4
----- -----
Net income............................................................. 13.3% 6.9%
===== =====
</TABLE>
Internet Security Revenue - Revenue from sales of our security appliance
products increased to $13.4 million in the three months ended March 31, 2000
from $2.3 million in the three months ended March 31, 1999. This increase was
attributable to a higher volume of products shipped, expansion of our
distribution channel and increasing demand in the security appliance market. The
increase in shipping volume resulted primarily from increased market acceptance
of the SonicWALL products over the corresponding period of the prior year and
the introduction of a new product during May 1999, the SonicWALL Pro. In
addition, during the three months ended March 31, 2000 we increased shipments
under an OEM relationship that was entered in July 1999.
Ethernet Revenue - Revenue from our Ethernet products declined by $0.8
million from $0.8 million in the three months ended March 31, 1999 to $0 in the
three months ended March 31, 2000. This decrease was directly related to our
decision to focus on development, sales and marketing efforts on our Internet
security appliance products. We stopped shipment of Ethernet products in
December 1999.
There can be no assurance that the Company's net sales will continue to
increase in absolute dollars or at the rate at which they have grown in recent
fiscal periods.
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 $3.7 million in the
three months ended March 31, 2000 from $0.9 million in the three months ended
March 31, 1999. Gross margin increased from 69.2% for the three months ended
March 31, 1999 to 72.7% for the three months ended March 31, 2000. This increase
in gross margin was primarily attributable to the increase in sales of higher
gross margin security appliance products, and the Company's decision to cease
shipping of the lower gross margin Ethernet products in December 1999. In
addition, we experienced increased manufacturing efficiencies and lower overhead
and component costs per unit, due to the economies of scale. Gross margin was
also favorably impacted by growth in content filter subscriptions and service
revenues due to a larger installed base. Factors contributing to the gross
margin growth were partially offset by the effect of increased sales of OEM
products, which generate lower gross margins.
The Company's gross margin has been and will continue to be affected by a
variety of factors, including competition; the mix and average selling prices of
products; new product introductions and enhancements and the cost of components
and manufacturing labor.
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 by 202% from $0.7 million for the three months ended March 31, 1999 to
$2.0 million for the three months ended March 31, 2000. Research and development
expenses represented 21.5% and 14.8%, respectively, of net sales for such
periods and increased in absolute dollars primarily as a result of increased
personnel costs, increased facility expenses related to the new leased facility,
prototyping expenses associated with the development of new products and ongoing
support of current and future product development and enhancement efforts. The
Company believes that significant investments in research and development will
be required to remain competitive and expects that such expenditures will
continue to increase in absolute dollars.
<PAGE>
Sales and Marketing - Sales and marketing expenses primarily consist of
personnel costs, including commissions and bonuses, 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 221% from $0.8 million for the three months
ended March 31, 1999 to $2.6 million for the three months ended March 31, 2000.
These expenses were 26.4% and 19.4% of net sales for such periods, respectively.
The increase in absolute dollars was primarily related to the expansion of the
Company's sales and marketing organization, including growth in the domestic and
international sales force, increased commission and bonus expenses related to
higher sales volumes and increased travel expenses. Facility expenses and
depreciation also increased over the corresponding period of the prior year due
to the move to a larger facility in October 1999 and to related leasehold
improvements. The Company expects to continue to increase its sales and
marketing expenses in an effort to expand domestic and international markets,
introduce new products and establish and expand new distribution channels and
OEM relationships.
General and Administrative - General and administrative expenses were $0.9
million for the three months ended March 31, 2000, compared to $0.3 million for
the three months ended March 31, 1999. These expenses represented 6.4% and
10.8%, respectively, of net sales for such periods and increased in absolute
dollars primarily as a result of increased personnel costs, increased facility
expenses related to the new leased facility and the growth of other expenses.
The Company believes that its general and administrative expenses will increase
in absolute dollars as the Company continues to build its infrastructure.
Deferred Stock Compensation - Amortization of deferred stock compensation
was $1.8 million for the three months ended March 31, 2000. This amortization
relates to deferred compensation of $6.1 million, related to stock options
granted in the year ended December 31, 1999. We are amortizing this amount over
the vesting periods of the applicable options. Amortization of deferred stock
compensation in the three months ended March 31, 1999 was $15,000.
Other Income, net - Other income, net, consists primarily of interest
income on the Company's cash, cash equivalents and short-term investments, and
increased to $1.2 million for the three months ended March 31, 2000 from $41,000
in the three months ended March 31, 1999. This increase was related primarily to
higher interest earnings on cash and cash equivalents that increased in amount
from $6.8 million at March 31, 1999, to $234 million at March 31, 2000 as a
result of the initial public offering in November 1999 and the follow-on
offering in March 2000.
Provision for Income Taxes - The Company's effective tax rate for the first
quarter of fiscal 2000 was 35% compared with 37.5% in the first quarter of
fiscal 1999. The lower tax rate in fiscal 2000 is a result of the
implementation of a foreign sales corporation in February 2000 and tax benefits
related to investments in tax exempt securities.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors including the
level competition; the size and timing of significant orders; product mix;
market acceptance of new products and product enhancements; new product
announcements or the introductions by the Company or its competitors; deferrals
of customer orders in anticipation of new products or product enhancement;
changes in pricing by the Company or its competitors; the ability of the Company
to develop, introduce and market new products and product enhancements on a
timely basis; hardware component costs; supply constraints; the Company's
success in expanding its sales and marketing programs; technological changes in
the Internet security market; the mix of sales among the Company's sales
channels; levels of expenditure on research and development; changes in Company
strategy; personnel changes; the Company's ability to successfully expand
domestic and international operations; general economic trends and other
factors.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2000, the Company's cash, cash
equivalents and short-term investments increased by $171 million to $234
million. This increase related primarily to the follow-on offering in March
2000 which generated $166.5 million in net proceeds. The Company's working
capital increased for the three months ended March 31, 2000 by $174 million to
$233 million. For the three months ended March 31, 2000, the Company generated
cash from operating activities totaling $5.2 million, principally related to net
income of $1.8 million and an increase in deferred revenue, partially offset by
increases in accounts receivable and inventories. Net cash provided by operating
activities in the three months ended March 31, 1999 principally related to net
income and an increase in deferred revenues, offset by an increase in accounts
receivable.
The Company purchased $40 million of short-term investments and used $0.8
million to purchase property and equipment during the three months ended March
31, 2000. The Company spent approximately $11,000 on investing activities in
the three months ended March 31, 1999.
Financing activities provided $167 million and $5 million for the three
months ended March 31, 2000 and March 31, 1999, respectively. In February 1999,
the Company completed a private placement and issued 1,438,377 shares of
redeemable Series A convertible preferred stock for net proceeds of $5 million.
In March 2000, the Company completed its follow-on offering of common stock
which generated approximately $166.5 million in net proceeds after deducting
underwriting discounts and commissions and estimated offering expenses.
YEAR 2000
We believe that we have successfully rendered our products, internal
management and other administrative systems and external information systems
year 2000 compliant. In addition, we have surveyed the vendors of the third-
party technologies we incorporate into our products and services and applied
updates or arrangements to correct potential year 2000 compliance problems.
Since January 1, 2000, we have experienced no disruptions in our business
operations as a result of year 2000 compliance problems or otherwise, and have
received no reports of any year 2000 compliance problems with our products and
services. To date, the total cost of our efforts to address year 2000
compliance has not been material.
Nonetheless, some problems related to the year 2000 risks may not appear
until several months after January 1, 2000. Year 2000 issues could include
problems with our own products and services or with third-party products or
technology that we use or with which our products exchange data. Any problems
that are not identified and corrected successfully and completely could
adversely affect our business.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement 133, "Accounting for Derivative Instruments and Hedging Activities."
The new statement established accounting and reporting standards for derivative
instruments and for hedging activities and is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of Statement 133 to have a material impact on the Company's results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for revenue recognition under certain
circumstances. The Company implemented SAB 101 in the quarter ended March 31,
2000 and it did not have a material impact on the financial statements.
In March 2000, the FASB issued FASB interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No.25". This interpretation has provisions that are effective on
staggered dates, some of which began after December 15, 1998 and others that
become effective after
<PAGE>
June 30, 2000. The adoption of this interpretation did and will not have a
material impact on the financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our cash, cash equivalents and short-term investments. 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. A
hypothetical 10 percent increase in market interest rates from levels at March
31, 2000, would cause the fair value of these short-term investments to decline
by an immaterial amount. Because we have the ability to hold these investments
until maturity we would not expect any significant decline in value of our
investments caused by market interest rate changes. Declines in interest rates
over time will, however, reduce our interest income.
We invoice all of our foreign customers from the United States in U.S.
dollars and all revenue is collected in U.S. dollars. As a result, we do not
have significant market risks associated with foreign currencies or related to
sales and collections.
The hypothetical changes and assumptions discussed above will be different
from what actually occurs in the future. Furthermore, such computations do not
anticipate actions that may be taken by management, should the hypothetical
market changes actually occur over time. As a result, the effect on actual
earnings in the future will differ from those described above.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.15++ Amendment Number Two to the OEM Purchase and Development
Agreement between Registrant and 3Com Europe, Ltd. effective
March 15, 2000
27.1 Financial Data Schedule for the period ended March 31, 2000
(b) REPORTS ON FORM 8-K
No reports on From 8-K were filed during the quarter ended March 31,
2000.
++ Confidential treatment has been requested for portions of this exhibit. The
omitted material has been separately filed with the Securities and Exchange
Commission.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State
of California.
SonicWALL, Inc.
/s/ MICHAEL J. SHERIDAN
----------------------------------
By: Michael J. Sheridan,
Vice President, Finance and Chief
Financial Officer and Secretary
(Principal Financial Officer,
Chief Accounting Officer and
Authorized Signer)
Dated: May 12, 2000
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
- ------------- ----------------------------------------------------------------
<S> <C>
10.15++ Amendment Number Two to the OEM Purchase and Development
Agreement between Registrant and 3Com Europe, Ltd. effective
March 15, 2000
27.1 Financial Data Schedule.
++ Confidential treatment has been requested for portions of this exhibit. The
omitted material has been separately filed with the Securities and Exchange
Commission.
</TABLE>
<PAGE>
EXHIBIT 10.15
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been requested.
Confidential portions omitted have been filed separately with the Commission.
Amendment Number Two
to the
OEM PURCHASE AND DEVELOPMENT AGREEMENT
Between
SonicWALL, INC. (FORMERLY SONIC SYSTEMS, Inc.)
and
3Com EUROPE, LTD.
This Second Amendment, effective upon the date of the last signature affixed
hereto, is by and between SonicWALL, Inc. (formerly Sonic Systems, Inc.)
("SonicWALL"), with a place of business at 1160 Bordeaux Drive, Sunnyvale, CA
94089 and 3Com Europe, Ltd. ("3Com"), with a place of business at Boundary Way,
Hemel Hempstead, Herts, HP2 7YU United Kingdom.
The parties have entered into an OEM Purchase and Development Agreement executed
on 27 July 1999 and effective as of 1 July 1999, as amended to date ("OEM
Agreement"), pursuant to which Seller will manufacture and sell certain products
to 3Com.
The parties desire to amend the OEM Agreement so as, among other things, to add
additional Products to the Products currently being manufactured and sold to
3Com under the OEM Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
1. All references to "Sonic" in the OEM Agreement shall read "SonicWALL".
2. The following definition is added to Section 1:
1.10 "SonicWALL PRO+" means the SonicWALL product equivalent to the 3Com
Superstack II Internet firewall, which consists of the SonicWALL PRO product
with an added VPN accelerator card.
3. Section 6.2 (iv) is deleted in its entirety and replaced by the following:
"(iv) a decrease in the U.S. list price of SonicWALL Plus DMZ and/or
SonicWALL PRO+ equal to or greater than fifteen percent (15%). Any or all of
the preceding will necessitate good faith negotiations between the Parties
regarding the pricing of the Products." Price Changes resulting from these
reviews will take effect for all deliveries
<PAGE>
after the start of 3Com's next fiscal quarter (1 June, 1 September, 1
December, 1 February of each year).
4. Exhibit A(1), under "Description of Products" is amended to add the
following:
"3C XXXXA Superstack II Internet Firewall
3C XXXXB Web Site Filter for Superstack II Internet Firewalls"
5. Exhibit A(1), under "Price, Specification, Lead-time, Royalty, Repair
Charges", is amended to add to the chart the following:
<TABLE>
<CAPTION>
Product Initial 3Com Spec No. Lead Time Royalty Repair Charge
- ------- ------------- ------------ --------- ------- -------------
Price (US$)
-------------
(see Exhibit B) (see Section (see Section (out of Warranty repairs
------------- ----------- ----------- -----------------------
5.1) 22.2.1) only)
--- ------ -----
<S> <C> <C> <C> <C> <C>
3C XXXXA [*] 1034-007 [*] [*] [*]
3C XXM [*] 1034-00x [*] [*] [*]
</TABLE>
*Prices are agreed for initial orders and are subject to review and amendment in
the future at the Quarterly price reviews set out in Section 6.3."
6. Exhibit A(1) is amended to add immediately after "In addition, an overhead
charge to cover SonicWALL's costs of acquiring this material," the
following:
"SonicWALL has a price-reduction program underway for the SonicWALL PRO+,
consisting of proprietary Application Specific Integrated Circuits (ASIC"),
with a targeted product release in 4Q2000. At 3Com's request, SonicWALL
will incorporate this design into a 3Com Superstack II Internet Firewall
Product to be released within 45 days of the SonicWALL product release.
When SonicWALL completes and releases the 3Com OEM version of this cost
reduced version, then the 3Com price will be reduced to [*] (if not already
at or below [*]), on first shipment of the new product. The parties will
negotiate in good faith any NRE charges related to the re-spinning of the
PCB for the cost-reduced 3Com product and to cover any prototypes."
7. Exhibit B, under "Product Specifications" is amended to add to the chart
the following:
3C XXXXA Superstack II Internet Firewall 3Com Document no. 1034-007
3C XXXXB Web Site Filter for Superstack II 3Com Document no. 1034-00x
Internet Firewall
8. Exhibit B is amended by adding in the space immediately after the chart and
before "In all cases, the latest issue level signed and approved by 3Com
and SonicWALL is applicable," the following:
2
<PAGE>
"For the Superstack II Internet Firewall, the following additional features will
be provided by SonicWALL:
. LDAP support (to be defined)
. Anti Virus
. PKI/IKE
. Global Management
. SNMP support (to be defined).
SonicWALL will provide to 3Com a schedule of planned availability for each of
these features when it has been finalized. Following discussions with 3Com, any
NRE charges (for customization, if appropriate) will be determined and 3Com's
price discount against SonicWALL's list price for these features will be
determined. It is expected that basic SNMP functionality will be provided [*]
to 3Com.
The above features will be provided to 3Com within 14 days of release of these
enhancements to SonicWALL customers unless any customization or private-labeling
work is required, in which case the product's release plan will be mutually
agreed upon."
9. Exhibit H, is deleted in its entirety and replaced with the following:
Exhibit H-1
(1) Development of the Office Connect Firewall Product
(a). Non-Recurring Engineering (NRE)
In return for a consideration of [*] Sonic will carry out the
following:
Re-design SonicWALL to fit OfficeConnect format as per product
specification 1007-015
. New PCB layout to cover both products by population options
. New Power Regulation Circuit for 3Com Power Adapter
. Noise suppression circuitry for FCC B
. Move flash reset switch to external access
. Relayout to fit 3Com enclosure
. Make modifications to Web Management GUI
. Make modifications to Back-end Server GUI
. Design and test to product spec 1007-015 **
. Supply base manual(s) for 3Com to re-work
. Provide five (5) sample units of each version
NRE charge is payable in the following installments
- ---------------------------------------------------
3
<PAGE>
[*] at program start
[*] on prototype acceptance
[*] on first production shipment
**3Com to bear the cost of any approval fees billed to Sonic by third parties.
Sonic to bill 3Com separately for these fees.
Sonic to source designed and completed case and packaging items from 3Com
designated suppliers including, but not limited to, chassis, top covers,
manuals, registration cards, boxes, CDs, seals, clips, etc.
(2) Development of the Superstack II Internet Firewall Product
(a.) Non-Recurring Engineering (NRE)
In return for a consideration of [*], SonicWALL will carry out the following:
Re-design SonicWALL Product to fit Superstack II format as per product
specification 1034-007
. Re-layout the PCB to fit 3Com enclosure
. Adapt board for 3Com Power Supply and RPS connector
. Adapt LEDS and switches to specification
. Modify the Web Management GUI to reflect 3Com name and logo
. Generate new algorithms as required for Back-end Server
. Perform Safety and EMC testing per product specification 1034-007**
. Supply base manuals for 3Com to re-work
. Source manuals, registration cards, labels, CDs, etc., per specification.
3Com to provide artwork and content.
. Provide five (5) prototype boards of each of two spins of the board (total
10).
. Provide ICT test fixture and programming.
**3Com to bear the cost of any approval fees billed to SonicWALL for EMC, Safety
and ICSA testing. SonicWALL to bill 3Com separately for these fees. EMC
testing for Korea and Safety testing NOM-019 SCFI not included in this
quotation. (Both require testing on location.)
(b.) SonicWALL will perform interoperability tests with existing 3Com VPN
products. 3Com to provide the products on loan to SonicWALL for testing. Fees
for testing will be negotiated in good faith by the parties and will depend on
number of products and extent of testing required.
(c). Exceptions/Exclusions:
4
<PAGE>
1. 3Com is responsible for Reliability and Environmental testing per
sections 9.1and 9.2 of specification.
2. TFTP Protocol (per section 9.5.2) is not included.
3. MIBs listed in 9.5.2 not included.
4. SNMP is not included in the initial version.
(d.) NRE charge is payable in the following installments:
[*] At signing of Amendment 2
[*] On prototype acceptance by 3Com
[*] On first production shipment to 3Com
Performance of the VPN accelerator is essential to prototype acceptance by 3Com.
A sample of the VPN accelerator card will be provided to 3Com at a date to be
agreed within 14 days of the signing of this agreement. If, following 3Com
testing of the VPN accelerator in a SonicWALL PRO+ product, 3Com notifies
SonicWALL that the VPN performance listed in the specification, 3Com Document
No. 1034-007, is not achieved, SonicWALL shall have 30 days to provide
conforming Product. If SonicWALL does not provide conforming product to 3Com,
3Com shall have the right to terminate the development of the Superstack II
Internet firewall after payment of the initial payment of [*] only.
(3) Additional Services
In consideration of [*] Sonic will provide the following service:
. Set-up of back-end server(s) for Content Filter List, Product Registration
and Product updates.
(4) Works Developed For 3Com
The following IP will be owned by 3Com at the completion of the development:
A. Web Management GUI: Specific combination of colors, fonts, GUI element
styles and GUI element locations for the Cerberus web-based management
interface.
B. Back-end Registration Server: Specific combination of colors, fonts,
GUI elements styles and GUI element locations for the web interface to the
back-end server user for registration, upgrade activation and other
functions."
9. Except as amended and set forth herein, the OEM Agreement shall continue in
full force and effect. The OEM Agreement and any attachments thereto,
together with this
5
<PAGE>
Amendment, constitute the entire agreement of the parties hereto with
respect to the subject matter hereof.
IN WITNESS WHEREOF, parties hereto have executed this Second Amendment on the
dates written below.
SonicWALL, Inc. 3Com Europe Ltd.
- --------------- ----------------
<TABLE>
<S> <C> <C> <C>
By: /s/ Sreekanth Ravi By: /s/T.M. Jalland
------------------- -------------------
Printed Name: Sreekanth Ravi Printed Name: T.M. Jalland
------------------- -------------------
Title: President/CEO Title: VP Marketing
------------------- -------------------
Date: 3/12/00 Date: 3/15/00
------------------- -------------------
</TABLE>
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 193,285
<SECURITIES> 40,456
<RECEIVABLES> 5,100
<ALLOWANCES> (548)
<INVENTORY> 1,912
<CURRENT-ASSETS> 246,847
<PP&E> 1,455
<DEPRECIATION> (230)
<TOTAL-ASSETS> 249,261
<CURRENT-LIABILITIES> 14,153
<BONDS> 0
0
0
<COMMON> 236,819
<OTHER-SE> (2,640)
<TOTAL-LIABILITY-AND-EQUITY> 249,261
<SALES> 13,407
<TOTAL-REVENUES> 13,407
<CGS> 3,660
<TOTAL-COSTS> 7,249
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,209
<INCOME-PRETAX> 3,707
<INCOME-TAX> 1,928
<INCOME-CONTINUING> 1,779
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,779
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
