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 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 December 31, 1999, we had sold more than 35,000 of our Internet security appliances worldwide. An investment in our shares involves a high degree of risk. The risks associated with investing in our stock include the following. We may not be able to maintain 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 55.3% of our outstanding stock and, if acting together, would be able to significantly influence all matters requiring shareholder approval. We depend on two distributors for approximately 46% 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.
From inception in 1991 through 1996, we derived substantially all of our revenue from the sale of networking products for Apple Computer Inc. 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 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 1999, they represented 92% of our total revenue. In 1998, our Ethernet products represented approximately 69% of our total revenue and in 1999, Ethernet products represented approximately 8% of our total revenue. In the years ended December 31, 1997 and 1998 we incurred losses of $467,000 and $1,461,000, respectively. In 1999, our net income was $158,000 and we had an accumulated deficit of $850,000.
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 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, 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
Common stock offered by:
SonicWALL................... 1,750,000 shares Selling shareholders........ 1,750,000 shares Common stock to be outstanding after this offering...................... 25,425,385 shares Use of proceeds............... General corporate purposes to support our growth, working capital, and potential acquisitions of complementary products and technologies. We will not receive any proceeds from shares sold by the selling shareholders. See "Use of Proceeds."
Nasdaq National Market SNWL symbol........................
The number of shares of common stock to be outstanding after this offering is based upon shares outstanding as of December 31, 1999, and this number excludes 849,261 shares of common stock reserved for issuance under our stock plans, 3,794,208 shares of common stock issuable upon exercise of outstanding stock options and 250,000 shares of common stock available for issuance under our employee stock purchase plan.
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 and (2) assumes no exercise by the underwriters of their over-allotment option.
Summary Financial Data (In thousands, except per share data) Year Ended December 31, 1997 1998 1999
Statement of Operations Data:
Revenue
Internet security................................. $ 250 $ 2,349 $19,403
Ethernet.......................................... 9,092 5,166 1,644
Total revenue................................... 9,342 7,515 21,047
Cost of revenue..................................... 4,842 3,308 5,961
Gross margin........................................ 4,500 4,207 15,086
Operating expenses
Research and development.......................... 1,983 2,051 3,634
Sales and marketing............................... 2,468 2,870 5,342
General and administrative........................ 644 753 1,761
Deferred stock compensation....................... -- 42 2,895
Total operating expenses........................ 5,095 5,716 13,632
Income (loss) from operations....................... (595) (1,509) 1,454
Other income (expense), net......................... 29 54 536
Income (loss) before income taxes................... (566) (1,455) 1,990
Benefit from (provision for) income taxes........... 99 (6) (1,832)
Net income (loss)................................... $ (467) $(1,461) $ 158
Basic net income (loss) per share................... $(0.06) $ (0.13) $ 0.01
Diluted net income (loss) per share................. $(0.06) $ (0.13) $ 0.01
Shares used in computing basic net income (loss) per
share.............................................. 8,461 11,251 17,334
Shares used in computing diluted net income (loss)
per share.......................................... 8,461 11,251 21,196
December 31, 1999 Actual As Adjusted
Consolidated Balance Sheet Data: Cash and cash equivalents.................................. $ 62,589 $206,789 Total assets............................................... 71,239 215,439 Total shareholders' equity................................. 60,750 204,950
The preceding table summarizes . actual balance sheet data; and . as adjusted balance sheet data to give effect to the sale by SonicWALL, Inc. of 1,750,000 shares of common stock in this offering at an assumed price of $86.75 per share, after deducting underwriting discounts and commissions and estimated offering expenses.
See Note 1 of Notes to Consolidated Financial Statements for information concerning the calculation of basic and diluted net income (loss) per share.