Attached files
file | filename |
---|---|
EX-10.1 - AL TECH AGREEMENT - SONICWALL INC | al.htm |
EX-10.2 - AL TECH AMEND - SONICWALL INC | al2.htm |
EX-31.2 - CFO CERTIFICATION - SONICWALL INC | ex312.htm |
EX-32.1 - CERTIFICATION - SONICWALL INC | ex321.htm |
EX-10.3 - XILINX AMEND - SONICWALL INC | lease.htm |
EX-31.1 - CEO CERTIFICATION - SONICWALL INC | ex311.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the Quarterly period
ended September 30, 2009
OR
£ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OR THE SECURITIES EXCHANGE ACT 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.)
|
2001
Logic Drive
San
Jose, California 95124
(408)
745-9600
Fax:
(408) 745-9300
(Address
of registrant’s principal executive offices)
1143
Borregas Avenue
Sunnyvale,
California 94089
(Former
name, former address and former fiscal year, if changed since last
report)
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
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨ Accelerated
filer x
Non-accelerated
filer ¨ (Do not check if a
smaller reporting
company)
Smaller reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
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 October 31,
2009
|
Common
Stock, no par value
|
54,242,559
Shares
|
Page
|
|
PART
I. FINANCIAL INFORMATION
|
3 |
ITEM
1. Financial Statements
|
|
Condensed
Consolidated Balance Sheets as of September 30,
2009 (unaudited) and December 31, 2008
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended September 30, 2009 and 2008 (unaudited)
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2009 and 2008 (unaudited)
|
|
Condensed
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
for the nine months ended September 30, 2009 and 2008
(unaudited)
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
|
ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
ITEM
4. Controls and Procedures
|
|
PART
II. OTHER INFORMATION
|
|
ITEM
1. Legal Proceedings
|
|
ITEM
1A. Risk Factors
|
|
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
ITEM
3. Defaults Upon Senior Securities
|
|
ITEM
4. Submission of Matters to a Vote of Security
Holders
|
|
ITEM
5. Other Information
|
|
ITEM
6. Exhibits
|
|
SIGNATURES
|
ITEM
1. FINANCIAL
STATEMENTS
SONICWALL,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
(1)
|
||||||
(Unaudited)
|
||||||||
(In
thousands)
|
||||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 99,080 | $ | 45,127 | ||||
Short-term
investments
|
88,579 | 60,327 | ||||||
Accounts
receivable, net
|
21,174 | 20,945 | ||||||
Inventories,
net
|
6,554 | 8,956 | ||||||
Deferred
tax assets
|
9,423 | 9,423 | ||||||
Prepaid
expenses and other current assets
|
8,530 | 11,861 | ||||||
Total
current assets
|
233,340 | 156,639 | ||||||
Property
and equipment, net
|
9,906 | 9,543 | ||||||
Goodwill
|
138,470 | 138,470 | ||||||
Long-term
investments
|
15,384 | 61,450 | ||||||
Deferred
tax assets, non-current
|
18,406 | 18,406 | ||||||
Purchased
intangibles and other assets, net
|
14,419 | 17,328 | ||||||
Total
assets
|
$ | 429,925 | $ | 401,836 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 7,277 | $ | 10,717 | ||||
Accrued
payroll and related benefits
|
13,333 | 11,554 | ||||||
Other
accrued liabilities
|
8,232 | 10,307 | ||||||
Deferred
revenue
|
93,213 | 88,415 | ||||||
Total
current liabilities
|
122,055 | 120,993 | ||||||
Deferred
revenue, non-current
|
23,501 | 15,072 | ||||||
Total
liabilities
|
145,556 | 136,065 | ||||||
Shareholders'
Equity:
|
||||||||
Common
stock, no par value
|
404,858 | 396,223 | ||||||
Accumulated
other comprehensive loss, net
|
(7,441 | ) | (9,209 | ) | ||||
Accumulated
deficit
|
(113,048 | ) | (121,243 | ) | ||||
Total shareholders'
equity
|
284,369 | 265,771 | ||||||
Total
liabilities and shareholders' equity
|
$ | 429,925 | $ | 401,836 |
(1)
|
Amounts as of December 31,
2008 have been derived from the audited financial statements as of the
same date.
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SONICWALL,
INC.
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||
Revenues:
|
||||||||||||||||
Product
|
$ | 19,248 | $ | 21,439 | $ | 51,219 | $ | 68,989 | ||||||||
License
and service
|
31,471 | 31,839 | 95,209 | 95,398 | ||||||||||||
Total
revenues
|
50,719 | 53,278 | 146,428 | 164,387 | ||||||||||||
Cost
of revenues:
|
||||||||||||||||
Product
|
9,916 | 10,627 | 27,121 | 32,478 | ||||||||||||
License
and service
|
3,733 | 5,150 | 11,778 | 15,414 | ||||||||||||
Amortization
of purchased technology
|
754 | 754 | 2,262 | 2,262 | ||||||||||||
Total
cost of revenues
|
14,403 | 16,531 | 41,161 | 50,154 | ||||||||||||
Gross
profit
|
36,316 | 36,747 | 105,267 | 114,233 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
9,416 | 11,411 | 28,153 | 34,368 | ||||||||||||
Sales
and marketing
|
17,357 | 19,472 | 51,998 | 63,954 | ||||||||||||
General
and administrative
|
4,406 | 3,957 | 12,588 | 14,135 | ||||||||||||
Amortization
of purchased intangible assets
|
274 | 274 | 822 | 840 | ||||||||||||
Restructuring
charges (reversals)
|
- | (87 | ) | - | 1,683 | |||||||||||
Total
operating expenses
|
31,453 | 35,027 | 93,561 | 114,980 | ||||||||||||
Income
(loss) from operations
|
4,863 | 1,720 | 11,706 | (747 | ) | |||||||||||
Interest
income and other expense, net
|
573 | 1,122 | 2,377 | 5,328 | ||||||||||||
Income
before income taxes
|
5,436 | 2,842 | 14,083 | 4,581 | ||||||||||||
Provision
for income taxes
|
(2,396 | ) | (2,273 | ) | (5,888 | ) | (3,153 | ) | ||||||||
Net
income
|
$ | 3,040 | $ | 569 | $ | 8,195 | $ | 1,428 | ||||||||
Net
income per share:
|
||||||||||||||||
Basic
|
$ | 0.06 | $ | 0.01 | $ | 0.15 | $ | 0.03 | ||||||||
Diluted
|
$ | 0.05 | $ | 0.01 | $ | 0.15 | $ | 0.02 | ||||||||
Shares
used in computing net income per share:
|
||||||||||||||||
Basic
|
53,946 | 53,412 | 53,806 | 56,906 | ||||||||||||
Diluted
|
56,012 | 54,928 | 55,180 | 59,050 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SONICWALL,
INC.
Nine
Months Ended
|
||||||||
September
30,
|
||||||||
2009
|
2008
|
|||||||
(In
thousands)
|
||||||||
(Unaudited)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 8,195 | $ | 1,428 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
6,809 | 6,609 | ||||||
Employee
share-based compensation expense
|
6,332 | 8,082 | ||||||
Excess
tax benefits from share-based compensation
|
- | (1,987 | ) | |||||
Change
in fair value of financial instruments
|
(172 | ) | - | |||||
Change
in allowance for doubtful accounts and others
|
19 | (75 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(295 | ) | 3,916 | |||||
Inventories
|
2,402 | (1,548 | ) | |||||
Prepaid
expenses and other current assets
|
(1,776 | ) | 181 | |||||
Other
assets
|
(173 | ) | (182 | ) | ||||
Accounts
payable
|
(3,440 | ) | 1,060 | |||||
Accrued
payroll and related benefits
|
1,779 | (8,429 | ) | |||||
Other
accrued liabilities
|
(2,075 | ) | (89 | ) | ||||
Deferred
revenue
|
13,227 | 4,905 | ||||||
Net
cash provided by operating activities
|
30,832 | 13,871 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchase
of property and equipment
|
(4,040 | ) | (3,827 | ) | ||||
Change
in restricted cash in escrow
|
5,104 | 1,376 | ||||||
Maturity
and sale of investments
|
70,671 | 159,216 | ||||||
Purchase
of investments
|
(50,917 | ) | (93,162 | ) | ||||
Net
cash provided by investing activities
|
20,818 | 63,603 | ||||||
Cash
flows from financing activities:
|
||||||||
Issuance
of common stock
|
2,303 | 5,306 | ||||||
Repurchase
of common stock
|
- | (79,408 | ) | |||||
Excess
tax benefits from share-based compensation
|
- | 1,987 | ||||||
Net
cash provided by (used in) financing activities
|
2,303 | (72,115 | ) | |||||
Net
increase in cash and cash equivalents
|
53,953 | 5,359 | ||||||
Cash
and cash equivalents at beginning of period
|
45,127 | 33,324 | ||||||
Cash
and cash equivalents at end of period
|
$ | 99,080 | $ | 38,683 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SONICWALL,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
(In
thousands, except for share data)
Accumulated
|
||||||||||||||||||||
Other
|
Total
|
|||||||||||||||||||
Common Stock
|
Comprehensive
|
Accumulated
|
Shareholders'
|
|||||||||||||||||
Nine Months Ended September 30,
2008
|
Shares
|
Amount
|
Loss
|
Deficit
|
Equity
|
|||||||||||||||
Balance
at December 31, 2007
|
62,477,590 | $ | 446,431 | $ | (2,284 | ) | $ | (116,443 | ) | $ | 327,704 | |||||||||
Issuance
of common stock upon exercise of stock options
|
446,681 | 2,878 | 2,878 | |||||||||||||||||
Issuance
of common stock in connection with the Employee Stock Purchase Plan
(ESPP)
|
376,728 | 2,428 | 2,428 | |||||||||||||||||
Share-based
compensation
|
8,082 | 8,082 | ||||||||||||||||||
Repurchase
of common stock
|
(9,725,870 | ) | (69,727 | ) | (9,681 | ) | (79,408 | ) | ||||||||||||
Excess
tax benefit from share-based compensation
|
1,987 | 1,987 | ||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||
Change
in unrealized loss on investment securities
|
(2,170 | ) | (2,170 | ) | ||||||||||||||||
Net
income
|
1,428 | 1,428 | ||||||||||||||||||
Total
comprehensive loss
|
(742 | ) | ||||||||||||||||||
Balance
at September 30, 2008
|
53,575,129 | $ | 392,079 | $ | (4,454 | ) | $ | (124,696 | ) | $ | 262,929 |
Accumulated
|
||||||||||||||||||||
Other
|
Total
|
|||||||||||||||||||
Common Stock
|
Comprehensive
|
Accumulated
|
Shareholders'
|
|||||||||||||||||
Nine Months Ended September 30,
2009
|
Shares
|
Amount
|
Loss
|
Deficit
|
Equity
|
|||||||||||||||
Balance
at December 31, 2008
|
53,575,371 | $ | 396,223 | $ | (9,209 | ) | $ | (121,243 | ) | $ | 265,771 | |||||||||
Issuance
of common stock upon exercise of stock options
|
179,654 | 896 | 896 | |||||||||||||||||
Issuance
of common stock in connection with ESPP
|
374,378 | 1,407 | 1,407 | |||||||||||||||||
Share-based
compensation
|
6,332 | 6,332 | ||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||
Change
in unrealized loss on investment securities
|
1,768 | 1,768 | ||||||||||||||||||
Net
income
|
8,195 | 8,195 | ||||||||||||||||||
Total
comprehensive income
|
9,963 | |||||||||||||||||||
Balance
at September 30, 2009
|
54,129,403 | $ | 404,858 | $ | (7,441 | ) | $ | (113,048 | ) | $ | 284,369 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SONICWALL,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1. CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements prepared by SonicWALL,
Inc. (the “Company”), are unaudited and reflect all adjustments which are
normal, recurring and, in the opinion of management, necessary for a fair
statement of the financial position and the results of operations of the Company
for the interim periods presented. The condensed consolidated
statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission (“SEC”). Accordingly, these statements do not
include all information and footnotes required by Generally Accepted Accounting
Principles in the United States of America (“U.S. GAAP”). The results
of operations for the nine month period ended September 30, 2009 is 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 consolidated financial
statements and notes thereto for the fiscal year ended December 31, 2008, as set
forth in the Company’s Annual Report on Form 10-K filed with the SEC on March 6,
2009.
2. CONSOLIDATION
The
condensed consolidated financial statements have been prepared in accordance
with U.S. GAAP and include the Company and its wholly owned
subsidiaries. All intercompany accounts and transactions have been
eliminated.
3. CRITICAL
ACCOUNTING POLICIES
There
have been no material changes to any of the Company’s critical accounting
policies and critical accounting estimates as disclosed in its annual report on
Form 10-K for the year ended December 31, 2008.
4. NEW
ACCOUNTING PRONOUNCEMENTS
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC” or “Codification”) 105, Generally Accepted Accounting
Principles (“ASC 105”). ASC 105 establishes the Codification as the
source of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the SEC, which are sources of authoritative GAAP for SEC
registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is nonauthoritative. As the Codification was not
intended to change or alter existing U.S. GAAP, it did not have any impact on
the Company’s consolidated financial statements.
In
October 2009, the FASB amended FASB ASC 605, Revenue Recognition (“ASC
605”) and FASB ASC 985, Software (“ASC 985”). The
amendments to ASC 605 requires entities to allocate revenue in an arrangement
using estimated selling prices of the delivered goods and services based on a
selling price hierarchy. The amendments eliminate the residual method of revenue
allocation and require revenue to be allocated using the relative selling price
method. The amendments to ASC 985 remove tangible products from the scope of
software revenue guidance and provide guidance on determining whether software
deliverables in an arrangement that includes a tangible product are covered by
the scope of the software revenue guidance. These amendments to ASC 605 and ASC
985 should be applied on a prospective basis for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010,
with early adoption permitted. The Company is in the process of evaluating these
amendments and has not yet determined the impact that the adoption of these
amendments will have on the Company’s consolidated financial
statements.
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
5. 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 (in
thousands, except per share amounts):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Numerator:
|
||||||||||||||||
Net
income
|
$ | 3,040 | $ | 569 | $ | 8,195 | $ | 1,428 | ||||||||
Denominator:
|
||||||||||||||||
Weighted
average shares used to compute basic EPS
|
53,946 | 53,412 | 53,806 | 56,906 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Dilutive
common stock equivalents
|
2,066 | 1,516 | 1,374 | 2,144 | ||||||||||||
Weighted
average shares used to compute diluted EPS
|
56,012 | 54,928 | 55,180 | 59,050 | ||||||||||||
Net
income per share:
|
||||||||||||||||
Basic
|
$ | 0.06 | $ | 0.01 | $ | 0.15 | $ | 0.03 | ||||||||
Diluted
|
$ | 0.05 | $ | 0.01 | $ | 0.15 | $ | 0.02 |
For the
nine month period ended September 30, 2009, potentially dilutive securities of
approximately 14.3 million shares consisting of options with a weighted average
exercise price of $8.43, have not been considered in the computation of net
income per share as the exercise prices of these options were greater than the
average market price of common shares for the period.
For the
nine month period ended September 30, 2008, potentially dilutive securities of
approximately 11.4 million shares consisting of options with a weighted average
exercise price of $8.85, have not been considered in the computation of net
income per share as the exercise prices of these options were greater than the
average market price of common shares for the period.
6. FINANCIAL
INSTRUMENTS
Financial
Instruments
The
following is a summary of our available-for-sale securities (in
thousands):
As
of September 30, 2009
|
Fair
Value
|
Gross
Unrealized Gains
|
Gross
Unrealized (Losses)
|
Amortized
Cost
|
||||||||||||
Corporate
debt securities
|
||||||||||||||||
Auction
rate securities
|
$ | 6,807 | $ | - | $ | (3,199 | ) | $ | 10,006 | |||||||
Asset
backed securities
|
18,489 | 117 | (4,347 | ) | 22,719 | |||||||||||
Corporate
bonds
|
23,094 | 6 | (47 | ) | 23,135 | |||||||||||
Total
corporate debt securities
|
48,390 | 123 | (7,593 | ) | 55,860 | |||||||||||
U.S.
government securities
|
19,619 | 30 | (1 | ) | 19,590 | |||||||||||
Total
available-for-sale securities
|
$ | 68,009 | $ | 153 | $ | (7,594 | ) | $ | 75,450 | |||||||
Included
in cash equivalent
|
$ | 5,998 | $ | 1 | $ | - | $ | 5,997 | ||||||||
Included
in short-term investments
|
46,627 | 152 | (75 | ) | 46,550 | |||||||||||
Included
in long-term investments
|
15,384 | - | (7,519 | ) | 22,903 | |||||||||||
Total
available-for-sale securities
|
$ | 68,009 | $ | 153 | $ | (7,594 | ) | $ | 75,450 |
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
As
of December 31, 2008
|
Fair
Value
|
Gross
Unrealized Gains
|
Gross
Unrealized (Losses)
|
Amortized
Cost
|
||||||||||||
Corporate
debt securities
|
||||||||||||||||
Auction
rate securities
|
$ | 6,565 | $ | - | $ | (3,444 | ) | $ | 10,009 | |||||||
Asset
backed securities
|
34,905 | 60 | (5,809 | ) | 40,654 | |||||||||||
Corporate
bonds
|
12,816 | 26 | (5 | ) | 12,795 | |||||||||||
Total
corporate debt securities
|
54,286 | 86 | (9,258 | ) | 63,458 | |||||||||||
U.S.
government securities
|
22,336 | 35 | (72 | ) | 22,373 | |||||||||||
Total
available-for-sale securities
|
$ | 76,622 | $ | 121 | $ | (9,330 | ) | $ | 85,831 | |||||||
Included
in short-term investments
|
$ | 60,288 | $ | 116 | $ | (248 | ) | $ | 60,420 | |||||||
Included
in long-term investments
|
16,334 | 5 | (9,082 | ) | 25,411 | |||||||||||
Total
available-for-sale securities
|
$ | 76,622 | $ | 121 | $ | (9,330 | ) | $ | 85,831 |
The
estimated fair value and amortized cost of available-for-sale securities by
contractual maturity as of September 30, 2009 and December 31, 2008 were as
follows (in thousands):
As
of September 30, 2009
|
As
of December 31, 2008
|
|||||||||||||||
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
|||||||||||||
Due
within one year
|
$ | 30,832 | $ | 30,802 | $ | 29,320 | $ | 29,265 | ||||||||
Due
between one and five years
|
12,743 | 12,764 | 6,450 | 6,502 | ||||||||||||
Due
between five and ten years
|
- | - | 1,697 | 1,687 | ||||||||||||
Due
after ten years
|
24,434 | 31,884 | 39,155 | 48,377 | ||||||||||||
Total
available-for-sale securities
|
$ | 68,009 | $ | 75,450 | $ | 76,622 | $ | 85,831 |
The
proceeds and realized gains and losses from sales of available-for-sale
securities, and the amount of the net unrealized gains and losses on
available-for-sale securities that has been included in other comprehensive
income for the three and nine month periods ended September 30, 2009 and 2008
were as follows (in thousands):
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Proceeds
from sales
|
$ | 22,405 | $ | 26,564 | $ | 70,655 | $ | 159,163 | ||||||||
Realized
gains
|
5 | - | 16 | 66 | ||||||||||||
Realized
losses
|
- | - | - | (13 | ) | |||||||||||
Net
unrealized gains (losses)
|
||||||||||||||||
included
in other comprehensive income
|
$ | 1,111 | $ | (1,812 | ) | $ | 1,768 | $ | (2,170 | ) |
The
unrealized gains on trading securities still held at September 30, 2009, that
have been included in net income for the nine month period ended September 30,
2009, were $172,000, net of losses on the related offer from UBS, one of its
investment brokers, as described below.
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
Fair
Value of Financial Instruments
The
following table presents the Company’s financial assets (cash equivalents and
investments) measured at fair value on a recurring basis as of September 30,
2009 (in thousands):
Fair
Value Measurements at September 30, 2009 Using
|
||||||||||||||||
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Money
market funds (1)
|
$ | 76,966 | $ | 76,966 | $ | - | $ | - | ||||||||
Asset
backed securities (2)
|
18,489 | 18,489 | - | - | ||||||||||||
Auction
rate securities (3)
|
43,834 | - | - | 43,834 | ||||||||||||
Auction
rate securities right (4)
|
4,925 | - | - | 4,925 | ||||||||||||
Other
available-for-sale securities (5)
|
42,713 | 42,713 | - | - | ||||||||||||
Total
|
$ | 186,927 | $ | 138,168 | $ | - | $ | 48,759 |
_____________
Note:
(1)
|
Classified
as cash and cash equivalents in the consolidated balance
sheet.
|
(2)
|
Consisting
of $9.9 million classified as short-term investments and $8.6 million as
long-term investments in the consolidated balance
sheet.
|
(3)
|
Consisting
of $37.0 million trading securities classified as short-term investments
and $6.8 million available-for-sale securities classified as long-term
investments in the consolidated balance
sheet.
|
(4)
|
Classified
as short-term investments in the consolidated balance
sheet.
|
(5)
|
Consisting
of $36.7 million classified as short-term investments and $6.0 million
classified as cash equivalent in the consolidated balance
sheet.
|
Historically,
the fair value of the auction rate securities (“ARS”) approximated par value due
to the frequent resets through the auction process. While the Company
continues to earn interest on its ARS investments at the contractual rate, these
investments are not currently trading and therefore do not have a readily
determinable market value. Accordingly, the estimated fair value of
the ARS no longer approximates par value. The Company used a
discounted cash flow approach to arrive at this valuation. The
assumptions used in preparing the discounted cash flow model included estimates,
based on data available as of September 30, 2009, of interest rates, timing and
amount of cash flows, credit and liquidity premiums, and expected holding
periods of the ARS.
In
November 2008, the Company accepted the right offered by UBS, which entitles the
Company to sell to UBS at par value ARS originally purchased from UBS, at a par
value of approximately $45.3 million, at anytime during the period June 30,
2010 through July 2, 2012 (the “Right”). In accepting the Right, the
Company also granted UBS the authority to sell or auction the ARS at par at any
time after accepting the Right until the expiration date thereof provided that
the Company receives par value for their ARS. As part of the Right, the
Company released UBS from any claims relating to the marketing and sale of
ARS. Although the Company expects to sell its ARS under the Right, if
the Right is not exercised before July 2, 2012, the Right will expire and
UBS will have no further right or obligation to buy the Company’s ARS.
UBS’s obligations under the Right are not secured by its assets and do not
require UBS to obtain any financing to support its performance obligations under
the Right. UBS has disclaimed any assurance that it will have sufficient
financial resources to satisfy its obligations under the Right. The
Company valued the Right as a put option asset using a discounted cash flow
approach including estimates, based on data available as of September 30, 2009,
of interest rates, timing and amount of cash flow, adjusted for any bearer risk
associated with UBS’s financial ability to repurchase the ARS beginning
June 30, 2010. On September 30, 2009, the Company classified the
ARS and the ARS Right from UBS as short-term investments due to the offer
described above.
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
The
assumptions used in valuing the ARS and the Right are volatile and subject to
change as the underlying sources of these assumptions and market conditions
change.
The
following table presents a reconciliation for all assets measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the
period ended September 30, 2009 (in thousands):
Asset
Backed Securities (2)
|
Auction
Rate Securities
|
Auction
Rate Securities Right
|
Total
(1)
|
|||||||||||||
Balance
at December 31, 2008
|
$ | 34,905 | $ | 44,079 | $ | 7,640 | $ | 86,624 | ||||||||
Transfers
in and/or out of Level 3
|
- | - | - | - | ||||||||||||
Purchases,
sales, issuances and settlements, net
|
(8,143 | ) | - | - | (8,143 | ) | ||||||||||
Total
realized or unrealized gains or (losses)
|
||||||||||||||||
Included
in other comprehensive income
|
1,280 | 133 | - | 1,413 | ||||||||||||
Included
in earnings
|
- | 1,950 | (1,873 | ) | 77 | |||||||||||
Balance
at March 31, 2009
|
28,042 | 46,162 | 5,767 | 79,971 | ||||||||||||
Transfers
in and/or out of Level 3
|
(20,515 | ) | - | - | (20,515 | ) | ||||||||||
Purchases,
sales, issuances and settlements, net
|
(6,514 | ) | - | - | (6,514 | ) | ||||||||||
Total
realized or unrealized gains or (losses)
|
||||||||||||||||
Included
in other comprehensive income
|
(947 | ) | 124 | - | (823 | ) | ||||||||||
Included
in earnings
|
(66 | ) | 84 | (55 | ) | (37 | ) | |||||||||
Balance
at June 30, 2009
|
- | 46,370 | 5,712 | 52,082 | ||||||||||||
Transfers
in and/or out of Level 3
|
- | - | - | - | ||||||||||||
Purchases,
sales, issuances and settlements, net
|
- | (3,351 | ) | - | (3,351 | ) | ||||||||||
Total
realized or unrealized gains or (losses)
|
||||||||||||||||
Included
in other comprehensive income
|
(12 | ) | (12 | ) | ||||||||||||
Included
in earnings
|
- | 827 | (787 | ) | 40 | |||||||||||
Balance
at September 30, 2009
|
$ | - | $ | 43,834 | $ | 4,925 | $ | 48,759 | ||||||||
The
amount of total gains or (losses) for the period
|
||||||||||||||||
included
in earnings attributable to the change
|
||||||||||||||||
in
unrealized gains or losses relating to assets
|
||||||||||||||||
still
held at September 30, 2009
|
$ | - | $ | 818 | $ | (787 | ) | $ | 31 |
_______________
Note:
(1)
|
Consisting
of $42.0 million classified as short-term investments and $6.8 million as
long-term investments in the consolidated balance
sheet.
|
(2)
|
At
March 31, 2009, the Company relied on Level 3 inputs to value the ABS
securities. A market approach methodology was used utilizing
information such as trade data, two-sided markets, institutional bids,
comparable trades, dealer quotes, and data from news media. However, in
subsequent quarters, the Company’s broker was able to obtain quoted market
prices, in an active and orderly market, on the Company’s
ABS. Accordingly, the securities are classified as Level
1.
|
7. INVENTORIES
Inventories
are stated at the lower of standard cost (which approximates cost determined on
a first-in, first-out basis) or market. The Company writes down the
value of inventories for estimated excess and obsolete inventories based upon
assumptions about future demand and market conditions. Inventories
consist primarily of finished goods. Inventory reserves, once
established, are only reversed upon sale or disposition of related
inventories.
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
8. INCOME
TAXES
As part
of the process of preparing the Company’s consolidated financial statements, the
Company is required to estimate its income taxes in each of the jurisdictions in
which it operates. This process involves determining the Company’s
income tax benefit (expense) together with calculating the deferred income tax
benefit (expense) related to temporary differences resulting from differing
treatment of items, such as deferred revenue or deductibility of certain
intangible assets, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within the
consolidated balance sheet. The Company must then assess the
likelihood that the deferred tax assets will be recovered through the generation
of future taxable income.
As of
September 30, 2009, the Company continued to have a partial valuation allowance
against its net deferred tax assets. The Company believes that its deferred tax
assets will more likely than not be realized with the exception of certain
acquired net operating losses. Valuation allowances have been recorded for this
portion of the deferred tax assets as a result of the uncertainties regarding
realization of the assets based upon the limitation on the use of the net
operation losses in the future. For the three and nine month period
ended September 30, 2009, the Company’s income before income taxes was earned in
domestic and foreign jurisdictions.
The
interim effective income tax rate is based on management’s best estimate of the
annual effective income tax rate. For the nine month period ended September 30,
2009, the effective income tax rate was 41.8%, compared to 68.8% for the nine
month period ended September 30, 2008. The effective income tax rate for
the nine month period ended September 30, 2009 was different from the statutory
United States federal income tax rate of 35% primarily due to non-deductible
share-based compensation expense, state income taxes, and subpart F income tax
which were offset by research and development tax credits, deferred compensation
expenses, foreign tax withholding, and foreign tax rates in excess of federal
income tax rate. The effective income tax rate for the nine month period ended
September 30, 2008 was different from the statutory United States federal income
tax rate of 35% primarily due to non-deductible share-based compensation expense
and state income taxes which were offset by state research and development tax
credits.
9. GOODWILL
AND PURCHASED INTANGIBLES
The
Company amortizes purchased intangible assets other than goodwill over their
useful lives. The Company also periodically evaluates if there are
any events or indicators that would require an impairment assessment of the
carrying value of the goodwill between each annual impairment
assessment. For the nine month period ended September 30, 2009, there
were no events or changes to the indicators of goodwill impairment that would
require an impairment assessment. The Company has elected to perform
its annual impairment analysis on December 31st of each year.
Intangible
assets as of September 30, 2009 and December 31, 2008 consist of the following
(in thousands):
September
30, 2009
|
December
31, 2008
|
||||||||||||||||||||||||
Weighted
Average Amortization Period
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||
Purchased
technology
|
70
months
|
$ | 43,211 | $ | (36,084 | ) | $ | 7,127 | $ | 43,211 | $ | (33,822 | ) | $ | 9,389 | ||||||||||
Customer
base
|
77
months
|
26,690 | (20,744 | ) | 5,946 | 26,690 | (19,922 | ) | 6,768 | ||||||||||||||||
Total
intangibles
|
69
months
|
$ | 69,901 | $ | (56,828 | ) | $ | 13,073 | $ | 69,901 | $ | (53,744 | ) | $ | 16,157 |
Estimated
future amortization expense to be included in cost of revenue and operating
expense is as follows (in thousands):
Fiscal Year
|
Amortization
Amount to Cost of Revenue
|
Amortization
Amount to Operating Expense
|
||||||
2009
(fourth quarter)
|
$ | 755 | $ | 273 | ||||
2010
|
2,374 | 1,095 | ||||||
2011
|
1,382 | 1,095 | ||||||
2012
|
1,382 | 1,008 | ||||||
2013
|
803 | 990 | ||||||
Thereafter
|
431 | 1,485 | ||||||
Total
|
$ | 7,127 | $ | 5,946 |
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
10. RESTRUCTURING
CHARGES
2008
Restructuring Plan
During
the first quarter of fiscal year 2008, the Company commenced the implementation
of a 2008 restructuring plan associated primarily with the relocation of support
activities, the closure of facilities in Pune, India, the partial closure of
facilities in Sunnyvale, California, and other employee reductions for the
purpose of better integration and alignment of Company functions. The
Company recorded $1.0 million, in restructuring expenses related to costs
associated with the termination of 21 employees across multiple geographic
regions and functions, primarily related to severance, benefits and related
costs. Furthermore, the Company
recorded additional restructuring costs of $762,000 in connection with
facilities, and property and equipment that was disposed of or removed from
service. As of September 30, 2009, the Company’s restructuring costs
had been paid in full.
The
following tables set forth an analysis of the components of the 2008
restructuring plan and the payments made as of September 30, 2009 (in
thousands):
Facilities
Costs
|
||||
Accrual
balance at December 31, 2008
|
$ | 72 | ||
Cash
paid
|
$ | (72 | ) | |
Accrual
balance at September 30, 2009
|
$ | - |
11. COMMITMENTS
AND CONTINGENCIES
Lease
Commitments
The
Company leases office space in several U.S. locations including California,
Washington, and Arizona. Additional sales and support offices as well as larger
research and development facilities in Bangalore, India and Shanghai, China are
leased worldwide under leases that expire at various times ranging from 2009 to
2015.
On June
19, 2009, the Company entered into a Lease Agreement (the “Lease Agreement”) to
lease approximately 72,000 square feet of rentable space, located at 2001 Logic
Drive, San Jose, California, as the new headquarters offices of the
Company. The Lease Agreement commenced on August 16, 2009 and will
continue for an initial term that expires on September 30, 2014. The Lease
Agreement specifies an initial rent free period. Rent applicable on the first
anniversary of the lease commencement date and on each anniversary date
thereafter during the initial term will be increased at a rate of 3% per
year. At the end of the initial term of the lease, the Company has
the right, at its discretion, to extend the lease for an additional twelve (12)
month term at a rent equal to 3% above the rent in effect during the fifth year
of the initial term. The Company has the right to assign the Lease
Agreement or sublet all or any portion of the premises subject to a detailed
process, including, among other requirements, the prior written consent of the
landlord which consent may not unreasonably be withheld or delayed.
Future
annual minimum lease payments under all non-cancelable operating leases with an
initial or remaining term in excess of one year as of September 30, 2009 are as
follows (in thousands):
Year Ending December 31,
|
||||
2009
(fourth quarter)
|
$ | 716 | ||
2010
|
3,618 | |||
2011
|
3,630 | |||
2012
|
2,810 | |||
2013
|
2,123 | |||
Thereafter
|
2,020 | |||
Total
|
$ | 14,917 |
Purchase
Commitments
The
Company outsources its manufacturing function to third party contract
manufacturers, and at September 30, 2009, it had purchase obligations totaling
$11.5 million. Of this amount, $10.8 million cannot be canceled and
is payable within one year. The Company has a contingent liability
for any inventory owned by a contract manufacturer that becomes excess and
obsolete. As of September 30, 2009, $14,000 had been accrued for
excess and obsolete inventory held by our contract manufacturers. In
addition to the obligation related to inventory, as of September 30, 2009, the
Company had, in the normal course of business, $540,000 in non-cancelable
purchase commitments.
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
Product
Warranties
The
Company’s standard warranty period for its products is one year and includes
repair or replacement obligations for units with product defects. The
Company estimates the accrual for future warranty costs based upon its
historical cost experience and its current and anticipated product failure
rates. If actual product failure rates or replacement costs differ
from its estimates, revisions to the estimated warranty obligations would be
required. However, the Company concluded that no adjustment to
pre-existing
warranty accruals were necessary in the nine month periods ended September 30,
2009 and 2008. A reconciliation of the changes to the Company’s
warranty accrual as of September 30, 2009 and 2008 is as follows (in
thousands):
2009
|
2008
|
|||||||
Balance
at December 31,
|
$ | 575 | $ | 741 | ||||
Accruals
for warranties issued
|
151 | 502 | ||||||
Settlements
made during the period
|
(289 | ) | (821 | ) | ||||
Balance
at September 30,
|
$ | 437 | $ | 422 |
Guarantees
and Indemnification Agreements
The
Company enters into standard indemnification agreements in its ordinary course
of business. As part of its standard distribution agreements, the
Company indemnifies, holds harmless, and agrees to reimburse the indemnified
parties for losses suffered or incurred by the indemnified party, in connection
with any U.S. patent or any copyright or other intellectual property
infringement claim by any third party with respect to the Company's products,
software, or services. The indemnification agreements commence upon
execution of the agreement and do not have specific terms. The
maximum potential amount of future payments the Company could be required to
make under these agreements is not limited. The Company has never
incurred costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the
estimated exposure from these agreements is minimal.
The
Company's articles of incorporation limit the liability of directors to the full
extent permitted by California law. In addition, the Company's bylaws
provide that the Company will indemnify its directors and officers to the
fullest extent permitted by California law, including circumstances in which
indemnification is otherwise discretionary under California law. The
Company has entered into indemnification agreements with its directors and
officers that may require the Company: to indemnify its 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. The Company
currently has directors and officers insurance in place. The Company
has not incurred any costs related to these indemnification agreements to
date.
The
Company has entered into agreements with certain executives where the Company
may be required to pay severance benefits up to 24 months of salary, bonuses and
accelerated vesting of stock options in the event of termination of employment
under certain circumstances, including a change of control. In October 2008, the
Compensation Committee of the Board of Directors authorized modifications to
these agreements designed to comply with Section 409A of the Internal Revenue
Code of 1986, as amended.
Legal
Proceedings
On
December 5, 2001, a securities class action complaint was filed in the U.S.
District Court for the Southern District of New York against the Company, three
of its officers and directors, and certain of the underwriters in the Company’s
initial public offering in November 1999 and its follow-on offering in March
2000. Similar complaints were filed in the same court against
numerous public companies that conducted initial public offerings (“IPOs”) of
their common stock since the mid-1990s. All of these lawsuits were
consolidated for pretrial purposes before Judge Shira Scheindlin. On
April 19, 2002, plaintiffs filed an amended complaint. The amended
complaint alleges claims under the Securities Act of 1933 and the Securities
Exchange Act of 1934, and seeks damages or rescission for misrepresentations or
omissions in the prospectuses relating to, among other things, the alleged
receipt of excessive and undisclosed commissions by the underwriters in
connection with the allocation of shares of common stock in the Company’s public
offerings. On July 15, 2002, the issuers filed an omnibus motion to
dismiss for failure to comply with applicable pleading standards. On
October 8, 2002, the Court entered an Order of Dismissal as to all of the
individual defendants in the SonicWALL IPO litigation, without
prejudice. On February 19, 2003, the Court denied the motion to
dismiss the Company’s claims. A tentative agreement was reached with
plaintiffs’ counsel and the insurers for the settlement and release of claims
against the issuer defendants, including SonicWALL, in exchange for a guaranteed
recovery to be paid by the issuer defendants’ insurance carriers and an
assignment of certain claims. Papers formalizing the settlement among
the plaintiffs,
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
issuer
defendants, including SonicWALL, and insurers were presented to the Court on
September 14, 2004. On February 15, 2005, the Court granted
preliminary approval of the settlement, subject to the parties fulfilling
certain conditions. On August 31, 2005, the Court entered an order
confirming its preliminary approval of the settlement. In December
2006, the Second Circuit Court of Appeals reversed the class certification
decision of the District Court in six (6) focus cases. The Second
Circuit Court of Appeals also denied rehearing. In June 2007, the
District Court signed a stipulation terminating the settlement approval
process. In December 2007, plaintiffs filed an opposition to motions
to dismiss of the focus case issuers and underwriters. The focus case
issuers and underwriters in turn submitted briefs in opposition to plaintiffs’
motion for class certification. In March 2008, plaintiffs filed a
reply in support of their motion for class certification in the focus cases.
During the remainder of calendar year 2008, the parties continued settlement
discussions and on April 2, 2009, formal settlement papers were filed with the
Court. On June 9, 2009, the Court, without altering any of the terms
of the proposed settlement, issued an order granting preliminary approval of the
settlement. On October 5, 2009 the Court issued an order of final approval of
the settlement. Under the terms of the settlement, the insurers will pay the
full amount of the settlement share allocated to the Company, and the Company
will not be required to make any payments. The Company, as well as the officer
and director defendants who were previously dismissed from the action without
prejudice pursuant to tolling agreements, receive complete dismissals from the
case. Subsequent to the court order, several groups of objectors have indicated
their intent to appeal once judgments have been entered. These developments
will, at a minimum, delay the effective date of the settlement. Under the terms
of the settlement, the settlement does not become effective until final judgment
in each case is either upheld on appeal or is no longer subject to appeal. If
the settlement is overturned on appeal and the litigation against the Company
continues, the Company believes it has a meritorious defense and intends to
defend the case vigorously. No estimate can be made of the possible loss or
possible range of loss, if any, associated with the resolution of this matter.
As a result, no loss has been accrued in the Company’s financial statements as
of September 30, 2009.
On
October 8, 2008, Northpeak Wireless, LLC filed a complaint captioned Northpeak
Wireless, LLC v. 3Com Corporation, et al, No. CV-08-J-1813-NE, in the United
States District Court for the Northern District of Alabama. The complaint names
thirty one (31) defendants, including the Company. The complaint alleges that
the Company makes, uses, sells, offers to sell, and/or imports products that
incorporate and/or utilize direct sequence spread spectrum wireless technology
that infringes U.S. Patent No. 4,977,577 (the “577 Patent”) and U.S. Patent No.
5,987,058 (the “058 Patent”) and seeks a judgment that the Company has
infringed, actively induced infringement and/or contributorily infringed the 577
Patent and the 058 Patent. The complaint seeks an award of unspecified damages,
pre-judgment and post-judgment interest together with costs, expenses and
attorneys’ fees. On January 21, 2009, the Court granted the motion made by the
defendants, including SonicWALL, to transfer the case to the Northern District
of California. On August 28, 2009, the Court granted a stay in this case pending
the results of a request for reexamination filed on behalf of certain of the
defendants, not including the Company. The Company intends to defend the case
vigorously. No estimate can be made at this time of the possible loss or
possible range of loss, if any, associated with the resolution of this matter.
As a result, no loss has been accrued in the Company’s financial statements as
of September 30, 2009.
On May
29, 2009, Enhanced Security Research, LLC filed a complaint captioned Enhanced
Security Research LLC v. Cisco Systems, Inc., et al, C.A. No. 09-390 in the
United States District Court for the District of Delaware. The complaint names
ten (10) defendants, including the Company. The complaint alleges that the
Company makes, uses, offers to sell within the United States past, present, and
future versions of products and/or methods that use intrusion detection and
prevention systems that infringe or contribute to the infringement
of U.S. Patent No. 6,119,236 (the “236 Patent”) and U.S. Patent No.
6,304,975 B1 (the “975 Patent”). The complaint seeks a declaration that the
Company has infringed the 236 Patent and the 975 Patent, a permanent injunction
against further infringement and contributory infringement, unspecified damages,
pre-judgment and post-judgment interest together with costs and attorneys’ fees.
The Company intends to defend the case vigorously. No estimate can be made at
this time of the possible loss or possible range of loss, if any, associated
with the resolution of this matter. As a result, no loss has been accrued in the
Company’s financial statements as of September 30, 2009.
On July
9, 2009, Southwest Technology Innovations LLC filed a complaint captioned
Southwest Technology Innovations LLC v. St. Bernard Software, Inc., et al,
09-CV-1487-JAH-JMA in the United States District Court for the Southern District
of California. The complaint names six (6) defendants, including the Company.
The complaint alleges that the Company makes, uses, imports, sells, offers to
sell, induces, aids and abets, encourages others or contributes to other use of
certain products of the Company that infringe or contribute to the infringement
of U.S. Patent No. 6,952,719 (the “719 Patent”) via its update functions that
update software and/or firmware. The complaint seeks a judgment that the Company
infringes the 719 Patent, unspecified damages, prejudgment interest not less
than a reasonable royalty, and such other further relief as the court or jury
may deem proper. The Company intends to defend the case vigorously. No estimate
can be made at this time of the possible loss or possible range of loss, if any,
associated with the resolution of this matter. As a result, no loss has been
accrued in the Company’s financial statements as of September 30,
2009.
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
On August
28, 2009, Meteora, LLC filed a complaint captioned Meteora, LLC v. Marshal8E6,
et al, CV09-6293-PSG (JEMx) in the United States District Court for the Central
District of California. The complaint names twenty three (23) defendants,
including the Company. The complaint alleges that the Company has been and now
is infringing, inducing and/or contributing to others’ infringement of U.S.
Patent No. 6,782,510 (the “510 Patent”) literally and/or under the doctrine of
equivalents, by making, using, importing, selling, offering to sell word
checking products, including, but not limited to, its email security products.
The complaint seeks a judgment that the Company infringes, contributed and/or
actively induced others’ infringement of the 510 Patent, a preliminary and
permanent injunction from further acts of infringement of the 510 Patent,
unspecified damages, prejudgment interest and post-judgment interest at the
maximum rate allowed by law, attorneys’ fees, enhanced damages pursuant to 35
U.S.C. Section 284, compulsory future royalties, court costs and such other and
further relief as the Court deems proper. The Company intends to defend the case
vigorously. No estimate can be made at this time of the possible loss or
possible range of loss, if any, associated with the resolution of this
matter. As a result, no loss has been accrued in the Company’s financial
statements as of September 30, 2009.
Additionally,
the Company is, from time to time, a party to routine litigation incidental to
its business. The Company believes that none of these legal
proceedings will have a material adverse effect on the Company’s consolidated
financial statements taken as a whole or its results of operations, financial
position, and cash flows.
12. EMPLOYEE
BENEFITS
1999
Employee Stock Purchase Plan
The 1999
Employee Stock Purchase Plan (“ESPP”) is designed to enable eligible employees
to purchase shares of the Company’s common stock at a discount. Each
offering period is for one year and consists of two six-month purchase
periods. The purchase price for shares of common stock under the ESPP
is 85% of the lesser of the fair market value of the Company’s common stock on
the first day of the applicable offering period or the last day of each purchase
period. At September 30, 2009, 937,126 shares were available for future issuance
under the ESPP.
Employee
Stock Incentive Plans
As of
September 30, 2009, the Company has two stock incentive plans (together the
“Equity Incentive Plans”): the shareholder approved 2008 Equity Incentive Plan
(the “2008 Plan”) and the Board approved 2008 Inducement Equity Incentive Plan
(the “2008 Inducement Plan”). The 2008 Plan was approved by the Company’s
shareholders on June 10, 2008. In connection with the acquisitions of
various companies, the Company assumed the share-based awards granted under
stock incentive plans of the acquired companies. Share-based awards are designed
to reward employees for their long-term contributions to the Company and provide
incentives for them to remain with the Company. The number and frequency of
share-based awards are based on competitive practices, operating results of the
Company, government regulations and the other factors disclosed by the Company
in its filings under the Securities Exchange Act of 1934, as amended. The
Company’s primary stock incentive plans are summarized as follows:
2008
Plan
The 2008
Plan permits the granting of stock options, restricted stock, restricted stock
units (“RSUs”), stock appreciation rights, and performance shares to employees,
consultants of the Company and its subsidiaries and affiliates, and non-employee
directors of the Company. As approved by the shareholders on June 10, 2008, the
maximum number of shares issuable over the term of the 2008 Plan is 800,000
shares. In addition, shares subject to stock options or similar awards granted
under the Company’s expired 1998 Stock Option Plan (the “1998 Plan”) that expire
or otherwise terminate without having been exercised in full and shares issued
pursuant to awards granted under the 1998 Plan that are forfeited to, or
repurchased by the Company, up to a maximum of 5,000,000 shares may be added to
the 2008 Plan. Stock options granted under the 2008 Plan have an exercise price
of at least 100% of the fair market value of the underlying stock on the grant
date and expire no later than seven years from the grant date. Stock options
granted under the 2008 Plan will generally become exercisable either (1) for 25%
of the option shares one year from the date of grant and then ratably over the
following 36 months or (2) as to 1/48th of
the option shares on the one month anniversary of the grant date and on each
one-month anniversary thereafter. Subject to the annual per-person limit, shares
granted under the 2008 Plan, including applicable vesting schedules, shall be
granted as determined by the Board of Directors, or any of its committees
administering the 2008 Plan, in its sole discretion.
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
2008 Inducement
Plan
The 2008
Inducement Plan permits the granting of nonstatutory stock options, restricted
stock, restricted stock units, performance shares, and stock appreciation rights
to new employees of the Company, its subsidiaries and affiliates, as material
inducements to accept an offer of employment. As adopted by the Board on June
10, 2008, the maximum number of shares issuable over the term of the 2008
Inducement Plan is 500,000 shares. Nonqualified stock options granted under the
2008 Inducement Plan have an exercise price of at least 100% of the fair market
value of the underlying stock on the grant date and expire no later than seven
years from the grant date. The stock options awarded under the 2008
Inducement Plan will generally become exercisable as to 25% of the option
shares, one year after the date of grant and then ratably over the following 36
months. The Board of Directors or other committees administering the plan, have
the discretion to use a different vesting schedule.
General
Share-Based Award Information
Stock Option
Awards
The
following table summarizes the Company’s stock option activities as of September
30, 2009 under the Equity Incentive Plans:
Number
Outstanding
|
Weighted
Average Exercise Price per Share
|
|||||||
Balance
at December 31, 2008
|
19,558,480 | $ | 7.30 | |||||
Granted
|
37,200 | $ | 3.89 | |||||
Exercised
|
(35,800 | ) | $ | 3.75 | ||||
Canceled
|
(282,703 | ) | $ | 7.65 | ||||
Balance
at March 31, 2009
|
19,277,177 | $ | 7.37 | |||||
Granted
|
27,100 | $ | 5.22 | |||||
Exercised
|
(22,223 | ) | $ | 5.08 | ||||
Canceled
|
(180,062 | ) | $ | 7.73 | ||||
Balance
at June 30, 2009
|
19,101,992 | $ | 7.36 | |||||
Granted
|
3,900 | $ | 6.26 | |||||
Exercised
|
(121,631 | ) | $ | 5.34 | ||||
Canceled
|
(55,673 | ) | $ | 7.40 | ||||
Balance
at September 30, 2009
|
18,928,588 | $ | 7.38 |
The
following table summarizes significant ranges of outstanding and exercisable
stock options as of September 30, 2009:
Stock
Options Outstanding
|
Stock
Options Exercisable
|
|||||||||||||||||||||||||||||
Range
of Exercise Prices
|
Number
of Shares Outstanding
|
Weighted
Average Remaining Contractual Life (in Years)
|
Weighted
Average Exercise Price per Share
|
Aggregate
Intrinsic Value
|
Number
of Shares Exercisable
|
Weighted
Average Exercise Price per Share
|
Aggregate
Intrinsic Value
|
|||||||||||||||||||||||
$ 0.30 – $ 0.45 | 38 | 5.8 | $ | 0.30 | $ | 308 | 38 | $ | 0.30 | $ | 308 | |||||||||||||||||||
$ 1.41 – $ 2.12 | 7,844 | 0.8 | 1.41 | 54,830 | 7,509 | 1.41 | 52,488 | |||||||||||||||||||||||
$ 2.87 – $ 4.31 | 2,923,770 | 3.5 | 3.44 | 14,504,302 | 2,875,370 | 3.43 | 14,285,108 | |||||||||||||||||||||||
$ 4.32 – $ 6.48 | 2,672,810 | 4.7 | 5.65 | 7,349,093 | 2,615,782 | 5.65 | 7,192,227 | |||||||||||||||||||||||
$ 6.49 – $ 9.74 | 12,586,764 | 7.2 | 8.10 | 5,333,228 | 7,451,679 | 8.08 | 3,442,957 | |||||||||||||||||||||||
$ 9.75 – $14.63 | 498,752 | 6.6 | 10.53 | - | 346,560 | 10.61 | - | |||||||||||||||||||||||
$14.64 – $21.96 | 118,610 | 1.7 | 17.67 | - | 118,610 | 17.67 | - | |||||||||||||||||||||||
$21.97 – $32.96 | 20,000 | 0.6 | 29.75 | - | 20,000 | 29.75 | - | |||||||||||||||||||||||
$32.97 – $49.46 | 100,000 | 0.8 | 45.56 | - | 100,000 | 45.56 | - | |||||||||||||||||||||||
Total
|
18,928,588 | 6.2 | $ | 7.38 | $ | 27,241,760 | 13,535,548 | $ | 7.08 | $ | 24,973,088 |
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on options with an exercise price less than the Company’s
closing stock price of $8.40 as of September 30, 2009, which would have been
received by the option holders had all option holders exercised their options as
of that date. The total number of in-the-money options exercisable as
of September 30, 2009 was approximately 10.0 million.
Restricted Stock Unit
Awards
The
Company grants RSUs under the 2008 Plan. Each RSU issued is counted as two
shares toward the limit of shares available under the 2008 Plan. The
Company issues new shares of common stock upon the vesting of RSUs.
The
following table summarizes the Company’s RSU activities as of September 30, 2009
under the Equity Incentive Plans:
Restricted
Stock Units
|
Weighted
Average Price per Share
|
|||||||
Balance
at January 1, 2009
|
- | $ | - | |||||
Granted
|
52,500 | $ | 5.82 | |||||
Balance
at September 30, 2009
|
52,500 | $ | 5.82 |
Share-Based Awards Available
for Grant
A summary
of share-based awards available for grant are as follows (in
millions):
Share-Based
Awards Available for Grant
|
||||
Balance
at December 31, 2008
|
1,874,478 | |||
Options
granted
|
(37,200 | ) | ||
Options
canceled/expired
|
273,729 | |||
Balance
at March 31, 2009
|
2,111,007 | |||
Options
granted
|
(27,100 | ) | ||
Restricted
stock units granted
|
(105,000 | ) | ||
Options
canceled/expired
|
157,772 | |||
Balance
at June 30, 2009
|
2,136,679 | |||
Options
granted
|
(3,900 | ) | ||
Options
canceled/expired
|
37,172 | |||
Balance
at September 30, 2009
|
2,169,951 |
Share-Based
Compensation Expenses and Valuation
The
Company measures and recognizes compensation expenses for all share-based awards
made to employees and directors including stock options, stock purchase rights,
and restricted stock units. The following table summarizes employee
share-based compensation expenses by function (in thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of sales
|
$ | 123 | $ | 145 | $ | 358 | $ | 396 | ||||||||
Research
and development
|
666 | 848 | 1,941 | 2,562 | ||||||||||||
Sales
and marketing
|
779 | 1,023 | 2,295 | 2,869 | ||||||||||||
General
and administrative
|
571 | 784 | 1,738 | 2,255 | ||||||||||||
Share-based
compensation expense
|
$ | 2,139 | $ | 2,800 | $ | 6,332 | $ | 8,082 |
SONICWALL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(UNAUDITED)
The
weighted average fair value per share of stock options granted, the intrinsic
value of stock options exercised and total fair value of the shares vested are
as follows (in thousands except for weighted average fair value per
share):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Weighted
average fair value per share of options granted
|
$ | 2.36 | $ | 2.12 | $ | 1.79 | $ | 2.69 | ||||||||
Total
intrinsic value of options exercised
|
$ | 271 | $ | 55 | $ | 303 | $ | 602 | ||||||||
Total
fair value of shares vested
|
$ | 1,694 | $ | 2,540 | $ | 5,612 | $ | 7,634 | ||||||||
Cash
received from employees upon exercise of stock options and
ESPP
|
$ | 1,338 | $ | 1,473 | $ | 2,303 | $ | 5,306 |
The
weighted average remaining contractual term for options exercisable at September
30, 2009 was 5.4 years. The Company issues new shares of common stock
upon exercise of stock options. The total compensation cost (gross)
related to non-vested awards not yet recognized at September 30, 2009 was $12.7
million, and the weighted-average period over which this amount is expected to
be recognized is 2.44 years.
The
Company has assumed certain option plans in connection with business
combinations. Generally, the options granted under these plans have
terms similar to the Company’s own options. The exercise prices of
such options have been adjusted to reflect the relative exchange
ratios.
The
assumptions used to estimate the fair value of stock options granted under the
Company’s Option Plans and stock purchase rights granted under the ESPP are as
follows:
Stock
Option Plans
|
ESPP
|
||||||||||||
|
Nine
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||
Expected
volatility
|
45% - 58% | 41% - 45% |
43%
to 74%
|
43% | |||||||||
Risk-free
interest rate
|
1.29%
to 1.75%
|
2% - 3% |
0.26%
to 1.95%
|
1.95% - 2.79% | |||||||||
Expected
term (in years)
|
3.68
years
|
3.48
years
|
0.49
- 0.99 year
|
0.49
- 0.58 year
|
|||||||||
Dividend
yield
|
0% | 0% |
0%
|
0% |
Pension
Plan
The
Company has a defined contribution retirement plan covering substantially all of
its eligible United States employees. The Company’s contribution to
this plan is discretionary. The plan provides for a discretionary
matching contribution in an amount equal to 50% of the employee contribution up
to a maximum of $2,000 annually for each participant. All employer
contributions vest immediately. Effective April 24, 2009, the
discretionary matching contribution made by the Company was
discontinued. The Company has expensed approximately $403,000 and
$632,000 for the cost of matching contributions during the nine month periods
ended September 30, 2009 and 2008, respectively.
Deferred
Compensation Plan
SonicWALL
has a deferred compensation plan (“DCP”) to provide specified benefits to, and
help retain, a select group of management and highly compensated employees and
directors (“Participants”) who contribute materially to the Company’s continued
growth, development, and future business success. Under the DCP,
Participants may defer up to 80% of their salary and up to 100% of their annual
bonus and commission. Each Participant’s deferral account is credited
with an amount equal to the net investment return of one or more equity or bond
funds selected by the Participant. Amounts in a Participant’s
deferral account represent an unsecured claim against the Company’s assets and
are paid, pursuant to the Participant’s election, in a lump-sum or in quarterly
installments at a specified date during the participant’s employment or upon the
Participant’s termination of employment with the Company. The Company
pays for the insurance coverage provided under this plan, but does not make any
contributions to this plan. At September 30, 2009, the trust assets
and the corresponding deferred compensation liability were $4.0 million and $3.7
million, respectively, and are included in other current assets and other
current liabilities, respectively. In August 2008, the Compensation Committee of
our Board approved an amended and restated DCP to comply with the requirements
of Section 409A of the Internal Revenue Code.
13. SUBSEQUENT
EVENTS
The
Company has evaluated all events or transactions that occurred after September
30, 2009 up through November 6, 2009, the date we issued these financial
statements. During this period, the Company did not have any material
recognizable and nonrecognizable subsequent events.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This
Form 10-Q contains forward-looking statements which 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,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “intend” or “continue,” or the negative of such terms and other
comparable terminology. In addition, forward-looking statements in
this document include, but are not limited to, those regarding the dedication of
resources to develop new products and services and marketing those products and
services to channel partners and customers; the introduction of more service
offerings on our platforms as a vehicle to generate additional revenue from our
installed base of products; our ability to deliver comprehensive and profitable
solutions to our channel partners; the growth opportunity associated with sales
through our indirect channel to larger distributed enterprises; weakening
economic conditions that could lead to decreases in IT spending that could
adversely impact operating results; the level of comfort of our
channel partners in offering our solutions to their customers; the growth of the
Network Security, Secure Content Management and Business Continuity markets; the
impact of a failure to achieve greater international sales;
our ability to maintain and enhance current product lines, develop
new products, maintain technological competitiveness and meet the expanding
range of customer requirements; the market opportunity for license
and service revenue growth; our ability to deliver comprehensive
solutions to channel partners, the positive characteristics of our software
license and service revenue model on future revenue growth and the
predictability of our revenue stream; the impact on revenue of the combination
of subscription services sold in conjunction with new product
offerings; expected competition in the Internet security market and
our ability to compete in markets in which we participate; impact of service
renewal rates on lowering selling and marketing expense; our ability to achieve
increased incremental revenue per transaction through success of our software
license and service revenue model; the impact of IT spending on demand for our
products and services; the current and likely future impact of
share-based compensation expense on reported operating results, anticipated
revenue contributions of new products including continuous data protection,
email security and SSL-VPN products and related services; the impact of growth
in international operations on our exposure to foreign currency fluctuations;
the possible impact of uncertainties in the auction rate and asset backed
securities markets on the Company’s financial performance; our ability to access
funds held as auction rate securities in our investment portfolio; the impact of
significant fluctuations in the exchange rate of some foreign currencies in
relation to the US Dollar; diverging economic conditions in foreign markets in
which we do business; pricing pressures on our solution based
offerings; anticipated higher gross margins associated with our license and
service offerings; the probability of realization of all deferred tax assets;
assessment of future effective tax rates and the continued need for a partial
tax valuation allowance; the potential for product gross margins to erode based
upon changes in product mix; downward pressure on product pricing or upward
pressure on production costs; the impact of product mix on product gross
profits; the impact of the completion of “in sourcing” certain technical support
functions on period over period comparisons of cost of license and service
revenue and gross margin; the implementation of a second phase of technical
support “in sourcing” activity; our ability to maintain investment in current
and future product development and enhancement efforts; the introduction of new
products and the broadening of existing product offerings; planned investments
and expenses in current and future product development; production costs and
sales volume comparisons between the NSA and SSL-VPN products and other hardware
appliances; the rate of change of general and administrative
expenses; the impact of geopolitical and macro-economic conditions on
demand for our offerings; the ability of our contract manufacturers to meet our
requirements; the belief that existing cash, cash equivalents and short-term
investments will be sufficient to meet our cash requirements at least through
the next twelve months; factors potentially impacting operating cash flows in
future periods; and expected fluctuations in days sales outstanding. These
statements are only predictions, and they are subject to risks and
uncertainties. 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 herein under the heading
“Risk Factors”. References to “we,” “our,” and “us” refer to
SonicWALL, Inc. and its subsidiaries.
Overview
SonicWALL
provides network security, secure remote access, content security, and business
continuity solutions for businesses of all sizes. Our solutions are
typically deployed at the edges of networks. These networks are often
aggregated into broader distributed deployments to support companies that do
business in multiple physical locations, interconnect their networks with
trading partners, or support a mobile or remote workforce. Our
solutions are sold in over 50 countries worldwide. Our descriptions of regions
of the world in which we do business specifically excludes Cuba, Iran, Syria,
Sudan and any other country identified by the United States Government as being
state sponsors of terrorism and subject to economic sanctions and export
controls.
The
Company groups revenue into the following primary product categories of similar
products:
(1)
|
Unified Threat Management
(“UTM”) including both NSA and TZ products; subscription services
such as Comprehensive Gateway Security Suite, Comprehensive Anti-Spam
Service, integrated Gateway Anti-Virus, and Intrusion Prevention; software
licenses such as our enhanced “SonicOS” operating system, node upgrades,
and other services such as extended warranty and service contracts,
training, consulting and engineering
services.
|
|
|
(2)
|
Secure Content Management
(“SCM”) including CSM and email security appliances, subscription
services such as internet filtering and email protection term and
perpetual licenses, and other services such as extended warranty and
service contracts, training, consulting and engineering
services.
|
(3)
|
SSL VPN Secure Remote Access
(“SSL”) including SSL-VPN appliances, add-on software licenses and
other services such as extended warranty and service contracts, training,
consulting and engineering
services.
|
(4)
|
Continuous Data Protection
(“CDP”) including the CDP appliances, off-site data backup
subscription services, site-to-site back-up licenses, and other services
such as extended warranty and service contracts, training, consulting and
engineering services.
|
We
generate revenue within these product categories primarily from the sale of: (1)
products, (2) software licenses, (3) subscriptions for services such as content
filtering, anti-virus protection and intrusion prevention, offsite data backup,
email protection, and (4) other services such as extended warranty and service
contracts, training, consulting and engineering services.
We
currently outsource our hardware manufacturing and assembly to third party
contract manufacturers and some of the key components in the Company’s products
come from single or limited number of suppliers. Outsourcing our
manufacturing and assembly enables us to reduce fixed overhead and personnel
costs and to provide flexibility in meeting market demand.
We design
and develop the key components for the majority of our products. In
addition, we generally determine the components that are incorporated in our
products and select the appropriate suppliers of these
components. Product testing and burn-in are performed by our contract
manufacturers using tests that we typically specify.
We sell
our solutions primarily through distributors and value-added resellers, who in
turn sell our products to end-users. Some of our resellers are
carriers or service providers who provide solutions to the end-user customers as
managed services. Channel sales accounted for 99% of the total revenue in the
three and nine month periods ended September 30, 2009 and 2008,
respectively. Alternative Technology, Tech Data, and Ingram Micro,
all of whom are technology product distributors, collectively accounted for
approximately 46% and 48% of our total revenue in the three and nine month
periods ended September 30, 2009, respectively, compared to approximately 50%
and 49%, respectively, in the same periods last year.
We seek
to provide our channel partners and customers with differentiated solutions that
are innovative, easy to use, reliable, and provide good value. To
support this commitment, we dedicate significant resources to developing new
products and marketing our products to our channel partners and
customers.
Key
Success Factors of our Business
We
believe that there are several key success factors of our business and that we
create value in our business by focusing on our execution in these
areas.
Channel
Our
distributors and authorized resellers provide a valuable service in assisting
end-users in the design, implementation, and service of our network security,
content security, and business continuity solutions. We support our
distribution and channel partners with sales, marketing, and technical support
to help them create and fulfill demand for our offerings. We also
focus on helping our channel partners succeed with our solutions by
concentrating on comprehensive reseller training and certification, and support
for our channel’s sales activities.
Product
and Service Platform
Our
products serve as a platform for revenue generation for both us and our channel
partners. Most product sales can result in additional revenue through
the simultaneous or subsequent acquisition of software licenses, such as our
Global Management System, or through the sale of additional value-added
subscription services, such as Content Filtering; client Anti-Virus and
integrated Gateway Anti-Virus; Anti-Spyware and Intrusion Prevention Services;
email protection and off-site data backup.
Distributed
Architecture
Our
security solutions are based on a distributed architecture, which we believe
allows our offerings to be deployed and managed at the most efficient location
in the network. We are providing our customers and their service
providers with mechanisms to enforce the networking and security policies they
have defined for their business. We also use the flexibility of a
distributed architecture to allow us to enable new functionality in
already-deployed platforms through the provisioning of an electronic key, which
may be distributed through the Internet.
Market
Acceptance
We began
offering integrated security appliances in 1997, and since that time we have
shipped about 1.5 million revenue units. Our experience in
serving a broad market and our installed base of customers provides us with
opportunities to sell our new network security, content security, and business
continuity solutions as they become available. The market acceptance
of our current solutions provides our current and prospective channel partners
with an increased level of comfort when deciding to offer our new solutions to
their customers.
Integrated
Design
Our
platforms utilize a highly integrated design in order to improve ease-of-use,
lower acquisition and operational costs for our customers, and enhance
performance. Various models also integrate functionality to support
different internet connection alternatives. Every appliance also
ships with pre-loaded firmware to provide for rapid set up and easy
installation. Each of these tasks can be managed through a simple
web-browser session.
Our
Opportunities, Challenges, and Risks
We serve
substantial markets for network security, content security, and business
continuity. Our goal is to deliver comprehensive and profitable
solutions to our channel partners which address their customers'
needs. We pursue the creation of these solutions through a blend of
organic and inorganic growth strategies including internal development efforts,
licensing and OEM opportunities, and acquisition of other
companies. To the extent that these efforts result in solutions which
fit well with our channel and end-users, we would expect to generate increasing
sales. To the extent that these efforts are not successful, we would
expect to see loss of sales and/or increased expenses without commensurate
return.
International
Growth
We expect
that international revenue will continue to represent a substantial portion of
our total revenue in the foreseeable future. Our percentage of sales
from international territories does not represent the same degree of penetration
of those markets as we have achieved domestically. We believe that a
significant opportunity exists to grow our revenue by increasing our
international penetration rate to match our penetration rate in the domestic
market.
If we
fail to structure our distribution relationships in a manner consistent with
marketplace requirements and on favorable terms, the percentage of sales from
international territories will decline and the revenue from our international
operations may decrease.
Growth
in Enterprises
We
believe that sales through our indirect channel to enterprise class customers
represent a growth opportunity for the Company. Our percentage of
revenues from such customers does not represent the same degree of penetration
of that segment as we have achieved with small to medium sized
businesses. We believe that a significant opportunity exists to grow
our revenue by increasing our penetration rate with this segment by leveraging
the company’s technological and channel strengths.
If we
fail to establish competitive products and services for this segment, or fail to
develop the correct channel partners and resources, the percentage of our
revenue derived from enterprise class customers will not increase, and may, in
fact, decrease.
License
and Services Revenue
We
believe that the software license and services component of our revenue has
several characteristics that are positive for our business as a whole: our
license and services revenue is associated with a higher gross profit than our
product revenue; the subscription services component of license and services
revenue is recognized ratably over the service periods, and thus provides, in
the aggregate, a more predictable revenue stream than product or license
revenue, which are generally recognized at the time of the sale; and to the
extent that we are able to achieve good renewal rates, we have the opportunity
to lower our selling and marketing expenses attributable to that segment. We
expect our revenue from software licenses and services to continue to represent
the majority of our total revenue subject to (1) continuing demand from our
installed base of customers for the renewal and upgrading of such service, (2)
the number of new hardware appliances sold, and (3) the demand for such services
as attached to new hardware appliances sold.
Macro-Economic
Factors Affecting IT Spending
We
believe that our products and services are subject to the macro-economic factors
that affect much of the information technology (“IT”) market. Growing
IT budgets and an increased funding for projects to provide security, mobility,
data protection, and productivity could drive product upgrade cycles and/or
create demand for new applications of our solutions. Contractions in
IT spending can affect our revenue by causing projects incorporating our
products and services to be delayed and/or canceled. We believe that
demand for our solutions correlate with increases or decreases in global IT
spending and we believe that current economic uncertainties, including
fluctuating energy prices, difficulties in the financial sector, the
availability of credit, softness in the housing market, underlying market
liquidity, and geopolitical uncertainties may continue to have an adverse impact
on IT spending in the markets in which we do business.
Critical
Accounting Policies and Critical Accounting Estimates
The
preparation of our financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires us
to make judgments, assumptions, and estimates that affect the amounts reported
in our consolidated financial statements and accompanying notes. We
believe that the judgments, assumptions and estimates upon which we rely are
reasonable based upon information available to us at the time that these
judgments, assumptions and estimates are made. However, any
differences between these judgments, assumptions and estimates and actual
results could have a material impact on our statement of operations and
financial condition. The current volatility in the financial markets
and associated general economic uncertainty increase the risk that such
differences may be realized. The accounting policies that reflect our
most significant judgments, assumptions and estimates and which we believe are
critical in understanding and evaluating our reported financial results include:
(1) revenue recognition; (2) sales returns and other allowances, allowance for
doubtful accounts and warranty reserve; (3) valuation of inventory; (4)
accounting for income taxes; (5) valuation of long-lived and intangible assets
and goodwill; (6) share-based compensation; and (7) fair value of
investments. There have been no material changes to any of our
critical accounting policies and critical accounting estimates as disclosed in
Part II, Item 7 of our annual report on Form 10-K for the year ended December
31, 2008.
RESULTS
OF OPERATIONS
The
following table sets forth certain consolidated financial data for the periods
indicated as percentage of total revenue:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues:
|
||||||||||||||||
Product
|
38.0% | 40.2% | 35.0% | 42.0% | ||||||||||||
License
and service
|
62.0% | 59.8% | 65.0% | 58.0% | ||||||||||||
Total
revenues
|
100.0% | 100.0% | 100.0% | 100.0% | ||||||||||||
Cost
of revenues:
|
||||||||||||||||
Product
|
19.5% | 19.9% | 18.5% | 19.8% | ||||||||||||
License
and service
|
7.4% | 9.7% | 8.1% | 9.4% | ||||||||||||
Amortization
of purchased technology
|
1.5% | 1.4% | 1.5% | 1.4% | ||||||||||||
Total
cost of revenues
|
28.4% | 31.0% | 28.1% | 30.6% | ||||||||||||
Gross
profit
|
71.6% | 69.0% | 71.9% | 69.4% | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
18.6% | 21.4% | 19.2% | 20.9% | ||||||||||||
Sales
and marketing
|
34.2% | 36.5% | 35.5% | 38.9% | ||||||||||||
General
and administrative
|
8.7% | 7.4% | 8.6% | 8.6% | ||||||||||||
Amortization
of purchased intangible assets
|
0.5% | 0.5% | 0.6% | 0.5% | ||||||||||||
Restructuring
charges (reversals)
|
0.0% | (0.2%) | 0.0% | 1.0% | ||||||||||||
Total
operating expenses
|
62.0% | 65.6% | 63.9% | 69.9% | ||||||||||||
Income
(loss) from operations
|
9.6% | 3.4% | 8.0% | (0.5%) | ||||||||||||
Interest
income and other expense, net
|
1.1% | 2.1% | 1.6% | 3.2% | ||||||||||||
Income
before income taxes
|
10.7% | 5.5% | 9.6% | 2.7% | ||||||||||||
Provision
for income taxes
|
(4.7%) | (4.3%) | (4.0%) | (1.9%) | ||||||||||||
Net
income
|
6.0% | 1.2% | 5.6% | 0.8% |
The
following table shows share-based compensation cost before taxes as a percent of
total revenue for the periods indicated:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Cost
of revenue
|
0.3% | 0.3% | 0.2% | 0.2% | ||||||||||||
Research
and development
|
1.3% | 1.6% | 1.3% | 1.6% | ||||||||||||
Sales
and marketing
|
1.5% | 1.9% | 1.6% | 1.7% | ||||||||||||
General
and administrative
|
1.1% | 1.5% | 1.2% | 1.4% | ||||||||||||
Share-based
compensation expense
|
4.2% | 5.3% | 4.3% | 4.9% |
Total
Revenue
Total
revenue by product category (in thousands, except for percentage
data)
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
UTM
|
$ | 39,450 | $ | 40,918 | (4%) | $ | 112,943 | $ | 123,391 | (8%) | ||||||||||||||
%
of total revenues
|
78% | 77% | 77% | 75% | ||||||||||||||||||||
SCM
|
4,670 | 5,535 | (16%) | 15,023 | 17,513 | (14%) | ||||||||||||||||||
%
of total revenues
|
9% | 10% | 10% | 11% | ||||||||||||||||||||
SSL
|
4,438 | 4,600 | (4%) | 12,312 | 15,539 | (21%) | ||||||||||||||||||
%
of total revenues
|
9% | 9% | 8% | 9% | ||||||||||||||||||||
CDP
|
2,161 | 2,225 | (3%) | 6,150 | 7,944 | (23%) | ||||||||||||||||||
%
of total revenues
|
4% | 4% | 5% | 5% | ||||||||||||||||||||
Total
revenues
|
$ | 50,719 | $ | 53,278 | (5%) | $ | 146,428 | $ | 164,387 | (11%) |
The 4%
decline in revenue in the UTM product category for the three month period ended
September 30, 2009 compared to the corresponding period of 2008 was due to the
combination of a 6% decrease in product revenue and a 3% decrease in revenue
from software license and subscription services contracts. The decline in
product revenue was due to the combination of a 9% decrease in average net
revenue per unit, offset by a 3% increase in units sold. The 3% decrease in
software license and subscription services revenue was primarily due to declines
in software license and anti-virus subscription services revenue, offset by an
11% increase in revenue from our CGSS subscription services. The 16% decline in
revenue in the SCM product category for the three month period ended September
30, 2009 compared to the corresponding period of 2008 was due to the combination
of a 52% decrease in product revenue and an 11% decrease in revenue from
software license and subscription services contracts. The decline in
product revenue was due to a 54% decrease in units sold, offset by a 3% increase
in average net revenue per unit. The 4% decline in revenue in the SSL product
category for the three month period ended September 30, 2009 compared to the
corresponding period of 2008 was due to the combination of a 33% decrease in
product revenue and an 8% decrease in subscription services contracts, offset by
a 200% increase in software license revenue. The decrease in product
revenue was due to the combination of a 32% decrease in units sold and a 2%
decrease in average net revenue per unit. The increase in software license
revenue was primarily due to a change that was effected in the fourth quarter of
2008 to the pricing structure of Aventail SSL-VPN solutions that offered end
user licenses separately from the base appliances. The 3% decline in revenue in
the CDP product category for the three month period ended September 30, 2009
compared to the corresponding period of 2008 was due to an 11% decrease in
product revenue, offset by a 7% increase in revenue from software license and
subscription services contracts. The decline in product revenue was
due to a 23% decrease in units sold, offset by a 15% increase in average net
revenue per unit.
The 8%
decline in revenue in the UTM product category for the nine month period ended
September 30, 2009 compared to the corresponding period of 2008 was due to the
combination of a 19% decrease in product revenue and a 32% decrease in software
license revenue, offset by a 3% increase in revenue from subscription services
contracts. The decline in product revenue was due to the combination of an 11%
decrease in units sold and a 9% decrease in average net revenue per unit. The
increase in subscription services contract revenue was primarily due to an 18%
increase in revenue from our CGSS subscription services. The 14% decline in
revenue in the SCM product category for the nine month period ended September
30, 2009 compared to the corresponding period of 2008 was due to the combination
of a 52% decrease in product revenue and a 9% decrease in revenue from software
license and subscription services contracts. The decline in product
revenue was due to the combination of a 48% decrease in units sold and an 8%
decrease in average net revenue per unit. The 21% decline in revenue in the SSL
product category for the nine month period ended September 30, 2009 compared to
the corresponding period of 2008 was due to the combination of a 54% decrease in
product revenue and a 3% decrease in subscription services contracts, offset by
a 95% increase in software license revenue. The decrease in product
revenue was due to the combination of a 29% decrease in units sold and a 36%
decrease in average net revenue per unit. The increase in software license
revenue was primarily due to a change that was effected in the fourth quarter of
2008 to the pricing structure of Aventail SSL-VPN solutions that offered end
user licenses separately from the base appliances. The 23% decline in revenue in
the CDP product category for the nine month period ended September 30, 2009
compared to the corresponding period of 2008 was due to a 39% decrease in
product revenue, offset by a 3% increase in revenue from software license and
subscription services contracts. The decline in product revenue was
primarily due to a 41% decrease in units sold.
Total
Revenue by Geographic Area (in thousands, except for percentage
data)
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Americas
|
$ | 35,701 | $ | 37,540 | (5%) | $ | 103,170 | $ | 113,001 | (9%) | ||||||||||||||
%
of total revenues
|
70% | 70% | 70% | 69% | ||||||||||||||||||||
EMEA
|
9,943 | 10,031 | (1%) | 28,735 | 33,787 | (15%) | ||||||||||||||||||
%
of total revenues
|
20% | 19% | 20% | 21% | ||||||||||||||||||||
APAC
|
5,075 | 5,707 | (11%) | 14,523 | 17,599 | (17%) | ||||||||||||||||||
%
of total revenues
|
10% | 11% | 10% | 11% | ||||||||||||||||||||
Total
revenues
|
$ | 50,719 | $ | 53,278 | (5%) | $ | 146,428 | $ | 164,387 | (11%) |
Revenue
in the Americas included sales from regions outside the United States and Canada
of $1.1 million and $1.6 million for the three month periods ended September 30,
2009 and 2008, respectively. The decline in revenue in the Americas
for the three month period ended September 30, 2009 compared to the
corresponding period of 2008 was primarily due to decreases in the units sold in
the SSL and CDP product categories, average net revenue per unit in the UTM
product category and sales of software license and subscription services
contracts, offset by an increase in units sold in the UTM product
category. The decline in revenue in EMEA for the three month period
ended September 30, 2009 compared to the corresponding period of 2008 was
primarily due to a decrease in the units sold in the UTM product category,
offset by the combination of increases in average net revenue per unit in the
UTM product category and sales of software license and subscription services
contracts. The decline in revenue in APAC for the three month period
ended September 30, 2009 compared to the corresponding period of 2008 was
primarily due to the combination of decreases in the units sold in the SSL
product category, average net revenue per unit in the UTM product category and
sales of software license and subscription services contracts, offset by an
increase in units sold in the UTM product category.
Revenue
in the Americas included sales from regions outside the United States and Canada
of $3.0 million and $4.6 million for the nine month periods ended September 30,
2009 and 2008, respectively. The decline in revenue in the Americas for the nine
month period ended September 30, 2009 compared to the corresponding period of
2008 was primarily due to decreases in the units sold in all product categories,
average net revenue per unit in the UTM and SSL product categories and sales of
software license and subscription services contracts. The decline in
revenue in EMEA for the nine month period ended September 30, 2009 compared to
the corresponding period of 2008 was primarily due to the combination of
decreases in the units sold in all product categories and average net revenue
per unit in the UTM, SSL and CDP product categories, offset by increased sales
of software licenses and subscription services contracts. The decline
in revenue in APAC for the nine month period ended September 30, 2009 compared
to the corresponding period of 2008 was primarily due to the combination of
decreases in the units sold in the UTM and SSL product categories and average
net revenue per unit in the UTM, SCM and SSL product categories, offset by the
combination of increases in the units sold in the SCM product category and sales
of software licenses and subscription services contracts.
Product
and License and Service revenue (in thousands, except for percentage
data)
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
September
30,
|
||||||||||||||||||||||
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Product
|
$ | 19,248 | $ | 21,439 | (10%) | $ | 51,219 | $ | 68,989 | (26%) | ||||||||||||||
%
of total revenues
|
38% | 40% | 35% | 42% | ||||||||||||||||||||
License
and service
|
31,471 | 31,839 | (1%) | 95,209 | 95,398 | (0%) | ||||||||||||||||||
%
of total revenues
|
62% | 60% | 65% | 58% | ||||||||||||||||||||
Total
revenues
|
$ | 50,719 | $ | 53,278 | (5%) | $ | 146,428 | $ | 164,387 | (11%) |
Product
Revenue
We
shipped approximately 45,000 revenue units in the three month periods ended
September 30, 2009 and 2008. The decrease in product revenue for the quarter
ended September 30, 2009 compared to the corresponding quarter in 2008 was
primarily due to the combination of decreases in units sold in the SCM, SSL and
CDP product categories and average net revenue per unit in the UTM product
category, offset by an increase in units sold in the UTM product
category.
We
shipped approximately 122,000 and 140,000 revenue units in the nine month
periods ended September 30, 2009 and 2008, respectively. The decrease in product
revenue for the nine months ended September 30, 2009 compared to the
corresponding period in 2008 was primarily due to the combination of decreases
in units sold in all product categories and average net revenue per unit in the
UTM and SSL product categories.
License
and Service Revenue
The
decline in license and service revenue for the quarter ended September 30, 2009
compared to the corresponding quarter in 2008 was primarily due to (1) a
decrease in sales of software licenses associated with our UTM solutions; and
(2) a decrease in sales of subscription services associated with our SCM
solutions. These decreases were offset by an increase in sales of
software licenses associated with our SSL solutions.
Licenses
and service revenue for the nine months ended September 30, 2009, compared to
the corresponding period in 2008 were neutral. Significant changes in
the individual product solutions consisted of decreases in (1) sales of software
licenses associated with our UTM solutions and (2) sales of our subscription
services contracts associated with our SCM solutions. These decreases
were offset by (1) an increase in sales of software licenses of our SSL
solutions and (2) an increase in sales of our UTM subscription services
contracts.
Cost
of Revenue and Gross Profit
The
following table shows the cost of revenue for product and license and services
(in thousands, except for percentage data):
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Product
|
$ | 9,916 | $ | 10,627 | (7%) | $ | 27,121 | $ | 32,478 | (16%) | ||||||||||||||
License
and service
|
3,733 | 5,150 | (28%) | 11,778 | 15,414 | (24%) | ||||||||||||||||||
Amortization
of purchased technology
|
754 | 754 | 0% | 2,262 | 2,262 | 0% | ||||||||||||||||||
Total
cost of revenues
|
$ | 14,403 | $ | 16,531 | (13%) | $ | 41,161 | $ | 50,154 | (18%) |
Note —
Effect of amortization of purchased technology has been excluded from product
and license and service gross profit discussions below.
The
following table shows the gross profit for product and the gross profit for
license and service (in thousands, except for percentage data):
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||||||||||
|
Gross
Profit Amount
|
Gross
Profit
|
Gross
Profit Amount
|
Gross
Profit
|
||||||||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||||||
Product
|
$ | 9,332 | $ | 10,812 | 48% | 50% | $ | 24,098 | $ | 36,511 | 47% | 53% | ||||||||||||||||||||
License
and service
|
27,738 | 26,689 | 88% | 84% | 83,431 | 79,984 | 88% | 84% | ||||||||||||||||||||||||
Amortization
of purchased technology
|
(754 | ) | (754 | ) | n/a | n/a | (2,262 | ) | (2,262 | ) | n/a | n/a | ||||||||||||||||||||
Total
gross profit
|
$ | 36,316 | $ | 36,747 | 72% | 69% | $ | 105,267 | $ | 114,233 | 72% | 69% |
Cost
of Product Revenue and Gross profit
Cost of
product revenue includes costs associated with the production of our products,
including cost of materials, manufacturing and assembly costs paid to contract
manufacturers, freight, related fulfillment costs, and overhead costs associated
with our manufacturing operations. Additionally, warranty costs and
inventory provisions or write-downs are included in cost of product
revenue.
In the
three month period ended September 30, 2009 compared to the corresponding period
of 2008, the cost of product revenue decreased in all four product
categories. The 7% decline was primarily due to the combination of a
54% decrease in units sold from the SCM product category, a 32% decrease in
units sold from the SSL product category and a 6% decrease in the average
production cost per unit in the UTM product category, offset by a 3% increase in
units sold from the UTM product category. In the three month period ended
September 30, 2009, cost of product revenue per unit decreased by approximately
7% and the number of units shipped was neutral, in comparison to the same period
last year.
In the
nine month period ended September 30, 2009 compared to the corresponding period
of 2008, the cost of product revenue decreased in all four product
categories. The 16% decline was primarily due to the combination of
an 11% decrease in units sold from the UTM product category, a 48% decrease in
units sold from the SCM product category, a 29% decrease in units sold from the
SSL product category and a 41% decrease in units sold from the CDP product
category. In the nine month period ended September 30, 2009, cost of product
revenue per unit decreased by approximately 4% and the number of units shipped
decreased by approximately 13%, in comparison to the same period last
year.
Gross
profit from product sales decreased in all four categories and gross profit
percentage from product sales decreased in the UTM, SSL and CDP product
categories in the three month period ended September 30, 2009 compared to the
same period in 2008. In the UTM product category, the 8% decline in
gross profit was due to an 8% decrease in average net revenue per unit, offset
by the combination of a 6% decrease in production costs per unit and a 3%
increase in units sold. In the SCM product category, the 49% decline
in gross profit was primarily due to a 54% decrease in units sold. In
the SSL product category, the 37% decline in gross profit was primarily due to a
32% decrease in units sold. In the CDP product category, the 14%
decline in gross profit was due to the combination of a 21% increase in
production costs per unit and a 23% decline in units sold, offset by a 15%
increase in average net revenue per unit.
Gross
profit and gross profit percentage from product sales in all four product
categories decreased in the nine month period ended September 30, 2009 compared
to the same period in 2008. In the UTM product category, the 25% decline in
gross profit was due to the combination of a 9% decrease in average net revenue
per unit and an 11% decrease in units sold, offset by a 1% decrease in
production costs per unit. In the SCM product category, the 63%
decline in gross profit was primarily due to an 8% decrease in average net
revenue per unit and a 48% decrease in units sold. In the SSL product
category, the 61% decline in gross profit was due to the combination of a 36%
decrease in average net revenue per unit and a 29% decrease in units sold,
offset by a 10% decrease in production costs per unit. In the CDP
product category, the 46% decline in gross profit was due to the combination of
a 20% increase in production costs per unit and a 41% decrease in units sold,
offset by a 4% increase in average net revenue per unit.
We expect
future product gross profit to erode to the extent that we experience downward
pressure on product pricing or upward pressure on production costs. A
change in the volume of products sold and the mix of products sold could also
change product gross profit and gross profit percentage.
Cost
of License and Service Revenue and Gross profit
Cost of
license and service revenue includes costs associated with the production and
delivery of our license and service offerings, including technical support costs
related to our service contracts, royalty costs related to certain subscription
offerings, personnel costs related to the delivery of training, consulting, and
professional services, costs of packaging materials and related costs paid to
contract manufacturers.
Gross
profit from license and service increased in the UTM, SSL and CDP product
categories and gross profit percentage from product sales increased in all
product categories in the three month period ended September 30, 2009 compared
to the same period in 2008. The increase was primarily due to
decreased costs. Cost of license and service revenue decreased by 28% in the
three month period ended September 30, 2009 as compared to the same period last
year. This decrease was primarily due to decreased technical support
costs. In 2007, the Company started a process to “in-source” a
portion of our technical support delivery to centers located in the United
States and India. That phase of the “in-sourcing” process was
completed in mid 2008 and has resulted in a decline in our technical support
costs for the three month period ended September 30, 2009 in comparison to the
same period last year. The Company plans to complete the implementation of a
second phase of technical support “in sourcing” activity in other regions in the
fourth quarter of 2009.
Gross
profit from license and service increased in the UTM, SSL and CDP product
categories and gross profit percentage from product sales increased in all
product categories in the nine month period ended September 30, 2009 compared to
the same period in 2008. The increase was primarily due to decreased
costs. Cost of license and service revenue decreased by 24% in the nine month
period ended September 30, 2009 as compared to the same period last
year. This decrease was primarily due to decreased technical support
costs. In 2007, the Company started a process to “in-source” a
portion of our technical support delivery to centers located in the United
States and India. That process was completed in mid 2008 and has
resulted in a decline in our technical support costs for the nine month period
ended September 30, 2009 in comparison to the same period last year. The Company
plans to complete the implementation of a second phase of technical support
“in-sourcing” activity in other regions in the fourth quarter of
2009.
Amortization
of Purchased Technology
Amortization
of purchased technology represents the amortization of existing technology
acquired in our business combinations accounted for using the purchase
method. Purchased technology is being amortized over the estimated
useful lives of four to six years.
Future
amortization to be included in cost of revenue based on current balance of
purchased technology, absent any additional investment, is as follows (in
thousands):
Fiscal
Year
|
Cost
of Revenue
|
|||
2009
(fourth quarter)
|
$ | 755 | ||
2010
|
2,374 | |||
2011
|
1,382 | |||
2012
|
1,382 | |||
2013
|
803 | |||
Thereafter
|
431 | |||
Total
|
$ | 7,127 |
Our gross
profit has been and will continue to be affected by a variety of factors,
including competition, the mix of products and services, new product
introductions and enhancements, fluctuations in manufacturing volumes, the cost
of components and manufacturing labor.
Operating
Expenses
Research
and Development
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
(In
thousands, except percentage data)
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Expense
|
$ | 9,416 | $ | 11,411 | (17%) | $ | 28,153 | $ | 34,368 | (18%) | ||||||||||||||
%
of total revenues
|
19% | 21% | 19% | 21% |
Research
and development expenses primarily consist of personnel costs, contract
consultants, outside testing services and equipment, and supplies associated
with enhancing existing products and developing new products.
For the
three month period ended September 30, 2009, the decrease in research and
development costs in comparison to the same period last year was primarily due
to (1) lower share-based compensation expenses related to employee stock options
and rights granted under the Employee Stock Purchase Program (“ESPP”) of
$182,000; (2) decreased salary, variable compensation and benefit expenses of
$540,000; (3) decreased contract labor costs of $290,000; (4) decreased travel
related expenses of $112,000; (5) decreased prototype expenses for product
development of $271,000; and (6) decreased facility related costs of
$656,000.
For the
nine month period ended September 30, 2009, the decrease in research and
development costs in comparison to the same period last year was primarily due
to (1) lower share-based compensation expenses related to employee stock options
and rights granted under the ESPP of $620,000; (2) decreased salary, variable
compensation and benefit expenses of $2.7 million; (3) decreased recruitment
expenses by $135,000; (4) decreased contract labor costs of $706,000; (5)
decreased travel related expenses of $408,000; (6) decreased contract service
and prototype expenses for product development by $769,000; and (7) decreased
facility related costs of $872,000.
We
believe that our future performance will depend in large part on our ability to
maintain and enhance our current product line, develop new products that achieve
market acceptance, maintain technological competitiveness, and meet an expanding
range of customer requirements. We plan to maintain our investments
in current and future product development and enhancement efforts, and incur
expenses associated with these initiatives, such as prototyping expense and
non-recurring engineering charges associated with the development of new
products and technologies.
Sales
and Marketing
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
(In
thousands, except percentage data)
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Expense
|
$ | 17,357 | $ | 19,472 | (11%) | $ | 51,998 | $ | 63,954 | (19%) | ||||||||||||||
%
of total revenues
|
34% | 37% | 36% | 39% |
Sales and
marketing expenses primarily consist of personnel costs, including commissions,
costs associated with the development of our business and corporate identity,
costs related to customer support, travel, tradeshows, promotional and
advertising costs, and related facilities costs.
For the
three month period ended September 30, 2009, the decrease in sales and marketing
expenses compared to the same period last year was primarily due to (1) lower
share-based compensation expenses related to employee stock options and rights
granted under the ESPP of $245,000; (2) decreased personnel costs of
approximately $420,000 associated with reduced salary and variable compensation
expenses; (3) decreased travel related costs of $438,000; (4) decreased
promotion, channel program and meeting expenses of approximately $674,000; and
(5) decreased facility related costs of $293,000.
For the
nine month period ended September 30, 2009, the decrease in sales and marketing
expenses compared to the same period last year was primarily due to (1) lower
share-based compensation expenses related to employee stock options and rights
granted under the ESPP of $575,000; (2) decreased personnel costs of
approximately $5.5 million associated with reduced salary and variable
compensation expenses; (3) decreased travel related costs of $1.5 million; (4)
decreased promotion, channel program and meeting expenses of approximately $3.5
million; (5) decreased office and product management expenses of approximately
$259,000; and (6) decreased facility related costs of $650,000.
General
and Administrative
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
(In
thousands, except percentage data)
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Expense
|
$ | 4,406 | $ | 3,957 | 11% | $ | 12,588 | $ | 14,135 | (11%) | ||||||||||||||
%
of total revenues
|
9% | 7% | 9% | 9% |
General
and administrative expenses consist primarily of personnel costs, business
insurance, corporate governance costs, professional fees, travel expenses, and
related facilities costs.
The
increase for the three month period ended September 30, 2009 compared to the
same period last year was primarily related to an increase in personnel costs of
approximately $633,000 primarily due to variable compensation program accruals,
offset by lower share-based compensation expenses related to employee stock
options and rights granted under the ESPP of $213,000.
The
decrease for the nine month period ended September 30, 2009 compared to the same
period last year was primarily related to (1) lower share-based compensation
expenses related to employee stock options and rights granted under the ESPP of
$517,000; (2) a decrease in personnel costs of approximately $219,000; (3) a
decrease of $546,000 in professional service fees; (4) and a decrease in bad
debt expenses of approximately $186,000.
Amortization
of Purchased Intangibles
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
(In
thousands, except percentage data)
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Expense
|
$ | 274 | $ | 274 | 0% | $ | 822 | $ | 840 | (2%) | ||||||||||||||
%
of total revenues
|
1% | 1% | 1% | 1% |
Amortization
of purchased intangibles included in operating expenses represents the
amortization of assets arising from contractual or other legal rights acquired
in business combinations and excludes amortization of acquired developed
technology which is included in cost of revenue. Purchased intangible
assets are being amortized over their estimated useful lives of three to eight
years.
The
decrease in amortization expense in the nine month period ended September 30,
2009 compared to the same period last year was primarily due to the completion
of the amortization of the finite-lived intangibles related to the acquisition
of MailFrontier of approximately $19,000.
Future
amortization to be included in operating expense based on the current balance of
purchased intangibles absent any additional investment is as follows (in
thousands):
Fiscal
Year
|
Operating
Expense
|
|||
2009
(fourth quarter)
|
$ | 273 | ||
2010
|
1,095 | |||
2011
|
1,095 | |||
2012
|
1,008 | |||
2013
|
990 | |||
Thereafter
|
1,485 | |||
Total
|
$ | 5,946 |
Restructuring
Charges
Three
Months Ended
|
|
Nine
Months Ended
|
|
|||||||||||||||||||||
|
September
30,
|
|
September
30,
|
|
||||||||||||||||||||
(In
thousands, except percentage data)
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||
Expense
|
$ | - | $ | (87 | ) | (100%) | $ | - | $ | 1,683 | (100%) | |||||||||||||
%
of total revenues
|
0% | 0% | 0% | 1% |
During
the first quarter of fiscal year 2008, the Company commenced the implementation
of a 2008 restructuring plan associated primarily with the relocation of support
activities, the closure of facilities in Pune, India and a portion of certain
facilities in Sunnyvale, California, and other employee reductions for the
purpose of better integration and alignment of Company functions. The
Company recorded approximately $1.0 million in restructuring expenses related to
costs associated with the termination of 21 employees across multiple geographic
regions and functions, primarily related to severance, benefits and related
costs. Furthermore, the Company recorded additional restructuring
costs of $0.8 million in connection with facilities and property and equipment
that was disposed of or removed from service. As of September 30,
2009, the Company’s restructuring costs had been paid in full.
Interest
Income and Other Expense, Net
Interest
income and other expense, net consists primarily of interest income on our cash,
cash equivalents, and investments. Fluctuations in the amount of invested cash
and short-term interest rates directly influence the interest income we
recognize. Interest income and other expense, net also includes foreign currency
gains and losses due to remeasurement and gains and losses from trading
securities.
For the
three month periods ended September 30, 2009 and 2008, interest income and other
expense, net was $0.6 million and $1.1 million, respectively. The decrease was
caused by a combination of a lower overall balance in our investment portfolio
and a reduction in available investment yields, offset by unrealized gains on
trading securities, deferred compensation expenses, and foreign currency
gains.
For the
nine month periods ended September 30, 2009 and 2008, interest income and other
expense, net was $2.4 million and $5.3 million, respectively. The decrease was
caused by a combination of a lower overall balance in our investment portfolio
and a reduction in available investment yields, offset by unrealized gains on
trading securities, deferred compensation expenses, and foreign currency
gains.
Provision
for Income Taxes
The
provision for income taxes in the three month periods ended September 30, 2009
and 2008 was $2.4 million and $2.3 million, respectively, and $5.9 million and
$3.2 million for the nine month periods ended September 30, 2009 and
2008. As of September 30, 2009, the Company continued to have a
partial valuation allowance against its net deferred tax assets. The Company
believes that its deferred tax assets will more likely than not be realized with
the exception of certain acquired net operating losses. Valuation allowances
have been recorded for this portion of the deferred tax assets as a result of
the uncertainties regarding realization of the assets based upon the limitation
on the use of the net operating losses in the future.
The
interim effective income tax rate is based on management’s best estimate of the
annual effective income tax rate. For the nine month period ended September 30,
2009, the effective income tax rate was 41.8%, compared to 68.8% for the nine
month period ended September 30, 2008. The effective income tax rate for
the nine month period ended September 30, 2009 was different from the statutory
United States federal income tax rate of 35% primarily due to non-deductible
share-based compensation expense, state income taxes, and subpart F income tax
which were offset by research and development tax credits, deferred compensation
expenses, foreign tax withholding, and foreign tax rates in excess of federal
income tax rate. The effective income tax rate for the nine month period ended
September 30, 2008 was different from the statutory United States federal income
tax rate of 35% primarily due to non-deductible share-based compensation expense
and state income taxes which were offset by state research and development tax
credits.
LIQUIDITY
AND CAPITAL RESOURCES
We ended
September 30, 2009 with $187.7 million in cash, cash equivalents, and short-term
investments, consisting principally of commercial paper, corporate bonds, U.S.
government securities and money market funds, an increase of $82.2 million as
compared to fiscal 2008 year end. $43.8 million of the increase
resulted from the reclassification of ARS from long-term investments to
short-term investments in the second quarter of 2009.
Prior to
the second quarter of 2009, the Company determined the fair value of our ABS
using Level 3 inputs, whereby a market approach methodology was used
utilizing information such as trade data, two-sided markets, institutional bids,
comparable trades, dealer quotes, and data from news media. Beginning in the
second quarter of 2009, the Company determined the fair value of its ABS using
Level 1 inputs. The Company’s broker was able to obtain quoted market
prices, in an active and orderly market, on the Company’s ABS. The
change in the methodology did not result in a material difference in fair
value.
Our
primary source of cash is receipts from product, license, and service
revenue. The primary uses of cash are payments for the production of
our products, payroll (salaries and related benefits), acquisition related
activities, general operating expenses (marketing, travel, office rent), and the
repurchase of shares of common stock under our share repurchase
program.
Operating
Activities
Cash
provided by operating activities for the nine months ended September 30, 2009
totaled $30.8 million. Cash provided by operating activities was the result of
the net income adjusted by non-cash items such as share-based compensation
expense of $6.3 million, depreciation and amortization expense of $6.8 million,
and changes in our operating assets and liabilities of $9.6
million. The main drivers of the changes in operating assets and
liabilities are as follows:
§
|
Accounts
receivable increased due to the timing of collections. Our DSO
in accounts receivable was 38 days at September 30, 2009 compared to 34
days at December 31, 2008. The increase in DSO was primarily
due to an increase net account receivables and the timing of shipments and
billings. Collection of accounts receivable and related DSO
will continue to fluctuate in future periods due to the timing and amount
of our future shipments and billings, the payment terms that we extend to
our customers, and the effectiveness of our collection
efforts.
|
§
|
The
decrease in inventories was primarily related to a reduction in inventory
in transit related to a change in terms on purchased inventory from FOB
shipping point to FOB destination in
2009.
|
§
|
The
increase in prepaid expenses and other current assets was primarily due to
(1) an increase in the amount of deferred cost of goods sold associated
with products shipped on deferred revenue arrangements; (2) an increase in
payments made for royalty contracts; (3) an increase in prepaid insurance,
maintenance and service agreements; and (4) an increase in deferred
compensation assets due to participant
contributions.
|
§
|
The
decrease in accounts payable was primarily due to (1) a decrease in
inventory in transit; (2) a reduction of operating expenses; and (3) the
timing of payments to our vendors.
|
§
|
The
increase in accrued payroll and related benefits was primarily attributed
to an increase in the number of days accrued for payroll, bonus and
commission accruals, and related payroll taxes. This increase was
partially offset by (1) a decrease of 401K contribution withheld; (2) a
decrease in ESPP withholdings due to the scheduled ESPP purchase on August
31, 2009; and (3) a decrease in accrued PTO due to changes in PTO policies
in 2009.
|
§
|
The
decrease in other accrued liabilities is primarily due to (1) the final
payment of the remaining escrow amount related to the acquisition of
Aventail; (2) a decrease in accrued travel due to lower travel expenses in
2009; (3) a decrease in accrued royalties due to the timing of invoicing
from vendors and payments. These increases were partially offset by an
increase in federal income taxes
payable.
|
§
|
Deferred
revenue increased due to increased sales of subscription services as well
as an increase related to shipments to distributors whereby revenue is
recognized on a sell-through basis.
|
Cash
provided by operating activities for the nine months ended September 30, 2008
totaled $13.9 million. Cash provided by operating activities was the result of
the net income adjusted by non-cash items such as share-based compensation
expense and excess tax benefits of $6.1 million, depreciation and amortization
expense of $6.6 million, and changes in our operating assets and liabilities of
($0.2) million. The main drivers of the changes in operating assets
and liabilities are as follows:
§
|
Accounts
receivable decreased due to the timing of collections. Our DSO
in accounts receivable was 38 days at September 30, 2008 compared to 42
days at December 31, 2007. The decrease in DSO was primarily
due to the timing of shipments and billings, combined with customers
taking advantage of early payment discounts. Collection of
accounts receivable and related DSO will continue to fluctuate in future
periods due to the timing and amount of our future shipments and billings,
the payment terms that we extend to our customers, and the effectiveness
of our collection efforts.
|
§
|
The
increase in inventories was primarily related to the expansion of our
product line with the release of E-Class NSA and NSA UTM
products.
|
§
|
The
increase in accounts payable was primarily due to an increase in the level
of cost of goods sold and operating expenses and the timing of payments to
our vendors.
|
§
|
The
decrease in accrued payroll and related benefits was primarily attributed
to (1) the payment of bonuses under our 2007 Incentive Compensation Plan
and bonuses payments made to former Aventail employees under plans assumed
as part of the Aventail acquisition; (2) a decrease in the accrued
commission; and (3) a decrease in the ESPP withholding due to the regular
ESPP purchase event on August 29, 2008. These reductions were partially
offset by an increase in the vacation
accrual.
|
§
|
The
slight decrease in other accrued liabilities is primarily due to (1) the
final payment of the remaining escrow amount related to the acquisition of
Mail Frontier; (2) payments made in connection with our annual partner and
employee recognition events; and (3) a decrease in professional fees
caused by the timing and size of audit and tax projects. These reductions
were offset by an increase in taxes payable and an accrual related to the
partial closure of our facilities in Seattle,
WA.
|
§
|
Deferred
revenue increased due to increased sales of subscription services as well
as an increase related to shipments to distributors whereby revenue is
recognized on a sell-through basis.
|
In
addition, our operating cash flows may be impacted in the future by a number of
factors, including fluctuations in our operating results, accounts receivable
collections, inventory management, expensing of stock options, and the timing
and amount of tax and the timing of payments to our vendors.
Investing
Activities
Net cash
provided by investing activities for the nine month period ended September 30,
2009 was $20.8 million, principally as a result of (1) the net sale and maturity
of $19.8 million of investments and (2) change in restricted cash in escrow of
$5.1 million, offset by the purchase of $4.0 million in property and
equipment.
Net cash
provided by investing activities for the nine month period ended September 30,
2008 was $63.6 million, principally as a result of (1) the net sale and maturity
of $66.1 million of investments and (2) change in restricted cash in escrow of
$1.4 million, offset by the purchase of $3.8 million in property and
equipment.
Financing
Activities
Net cash
provided by financing activities for the nine month period ended September 30,
2009 was $2.3 million provided by common stock issuances through option
exercises and purchase of shares under the ESPP.
Net cash
used in financing activities for the nine month period ended September 30, 2008
was $72.1 million, of which $79.4 million was used to buyback common stock under
the Company’s stock repurchase program, partially offset by (1) $5.3 million
provided by common stock issuances through option exercises and purchase of
shares under the ESPP, and (2) $2.0 million of excess tax benefits from
share-based compensation.
Page 33
of 39
Liquidity
and Capital Resource Requirements
We
believe our existing cash, cash equivalents, and short-term investments will be
sufficient to meet our cash requirements at least through the next twelve
months. However, we 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, marketing, and
support operations, the timing of introductions of new products and enhancements
to existing products, market acceptance of our products, and pursuit of
corporate opportunities. We cannot assure you that additional equity
or debt financing will be available on acceptable terms or at
all. Our sources of liquidity beyond
twelve months, in management’s opinion, will be our then current cash balances,
funds from operations and whatever long-term credit facilities we can
arrange. We have no other agreements or arrangements with third
parties to provide us with sources of liquidity and capital resources beyond
twelve months. We believe that future liquidity and capital resources
will not be materially affected in the event we are not able to prevail in
litigation for which we have been named a defendant as described in Note 11 to
the financial statements.
OFF-BALANCE
SHEET ARRANGEMENTS
None.
CONTRACTUAL
OBLIGATIONS
We do not
have any debt, long-term obligations or long-term capital commitments. The
following summarizes our principal contractual commitments as of September 30,
2009 (in thousands):
|
Payments
Due by Period
|
|||||||||||||||||||
|
|
Less
Than
|
1
to 3
|
3
to 5
|
||||||||||||||||
Contractual Obligations
|
Total
|
One Year
|
Years
|
Years
|
Thereafter
|
|||||||||||||||
Operating
lease obligations
|
$ | 14,917 | $ | 3,414 | $ | 6,680 | $ | 4,268 | $ | 555 | ||||||||||
Non-cancelable
purchase obligations
|
$ | 11,367 | $ | 11,367 | $ | - | $ | - | $ | - |
We
outsource our manufacturing operations to third party contract manufacturers,
and at September 30, 2009, we had purchase obligations totaling $11.5 million.
Of this amount, $10.8 million cannot be cancelled and is payable within one
year. We have a contingent liability for any inventory owned by a contract
manufacturer that becomes excess and obsolete. At September 30, 2009,
$14,000 had been accrued for excess and obsolete inventory held by our contract
manufacturers. In addition to the obligations related to inventory,
at September 30, 2009, we had, in the normal course of business, $540,000 in
non-cancelable purchase commitments.
Recent
Accounting Pronouncements
The
information contained in Note 4 of the Notes to Condensed Consolidated Financial
Statements (unaudited) in Part I, Item 1 of this Quarterly Report on Form 10-Q
is hereby incorporated by reference into this Part I, Item 2.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Interest
Rate Risk
Our
exposure to market risk for changes in interest rates relates primarily to our
cash, cash equivalents, and investment portfolio. We classified our
investments as available-for-sale except the ARS held by one of our investment
firms. Refer to Note 6 to the Consolidated Financial Statements of
SonicWALL’s Annual Report on Form 10-K for the year ended December 31, 2008 as
filed with the SEC on March 6, 2009 for further detailed
discussion. The available-for-sale investments are recorded on the
balance sheet at fair value with unrealized gains and losses reported as a
separate component of accumulated other comprehensive income (loss), net of
tax. As of September 30, 2009, our cash, cash equivalents and
investment portfolio included money-markets securities, corporate bonds,
municipal bonds, auction rate securities, asset backed securities, and
commercial papers which are generally subject to no interest rate risk when held
to maturity, but may increase or decrease in value if interest rates change
prior to maturity. A hypothetical 100 basis point change in the floating
interest rates applicable to the September 30, 2009 balance would result in a
change in annual interest income of approximately $2.0 million.
Fixed-rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating-rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our
future investment income may fall short of expectations due to changes in
interest rates or we may suffer losses in principal if we are forced to sell
securities which have declined in market value due to changes in interest
rates.
Our
investment policy states that we are adverse to principal loss and further the
goal of preservation of our invested funds by limiting default and market
risk. We mitigate default risk by investing in only investment-grade
instruments. As of September 30, 2009, we do not have any derivative
financial instruments in our investment portfolio.
At September 30, 2009, included within our investment portfolio are $52.0 million of investments in ARS and $22.7 million of ABS. Refer to Note 6, “Financial Instruments” in Part 1 Item 1 and information under the heading “Financial Market Risk” in Part 1 Item 3, respectively, of this report for additional information.
Foreign
Currency Risk
We
consider our exposure to foreign currency exchange rate fluctuations in general
to be moderate. We invoice substantially all of our foreign customers
from the United States in U.S. dollars and substantially all revenue is
collected in U.S. dollars. For the nine month period ended September
30, 2009, we earned approximately 32% of our revenue from international
markets. We may, in the future, denominate these transactions in
various local currencies. Because our sales are currently denominated
in U.S. 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. A weakened dollar could increase the cost of local
operating expenses and procurement of raw materials to the extent we must
purchase components in foreign currencies. As our base of
international operations expands, a greater percentage of our employee base will
be paid in local currency and our cash balances denominated in local currency
will increase in those countries. This expansion increases our exposure to
market currencies, which can have extreme currency volatility. As a
result, our operating results may become subject to significant fluctuations
based upon changes in the exchange rates of some currencies in relation to the
U.S. dollar and diverging economic conditions in foreign markets in which we do
business. We do not enter into forward exchange contracts to hedge
exposures denominated in foreign currencies and do not use derivative financial
instruments for trading or speculative purposes.
Financial
Market Risk
Included
within our investment portfolio at September 30, 2009 were ARS that we purchased
for $52.0 million whose underlying assets are primarily student loans which are
substantially backed by the federal government and ABS that were purchased for
$22.7 million whose underlying assets are all prime mortgages of which
approximately 43% are backed by the federal government. Beginning in
February 2008, auctions for certain of the ARS failed due to insufficient bids
from buyers. In 2008, we accepted an offer from one of our investment
banks under which the bank would purchase 100% of the ARS, which represents over
80% of the ARS in our investment portfolio, at par anytime during a two-year
period beginning June 30, 2010. In the event the liquidity of our
investment bank is adversely impacted by the current uncertainties in the
financial market, they may be unable to pay us when their payment option comes
due. We may not be able to generate liquidity from these funds until
our investment bank is able to pay us the offered amount, future auctions for
the ARS in our portfolio are successful or until we sell the securities in a
secondary market which currently is very volatile and has experienced discount
rates of up to 25% for similar investments. On September 30, 2009,
the Company classified $42.0 million ARS from one investment firm as current
investment due to the offer described above. The remaining $10 million ARS from
another investment firm and non-government backed ABS investments currently lack
short term liquidity and therefore remain classified as non-current on our
September 30, 2009 balance sheet. We will continue to evaluate any
changes in the market for ARS and ABS. Depending upon future market
conditions, we may be required to record an other-than-temporary decline in
market value. In such an event, the Company’s financial condition and
reported earnings could be negatively affected.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer (CEO), Chief
Financial Officer (CFO), and Chief Accounting Officer (CAO), has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on the
evaluation, our CEO, CFO and CAO have concluded that the Company’s disclosure
controls and procedures are effective to ensure that the information required to
be disclosed in the reports we file or submit under the Exchange Act to be
recorded, processed, summarized and reported within the time period specified in
the SEC’s rules and forms and such information is accumulated and communicated
to management, including our CEO, CFO and CAO, as appropriate to allow timely
decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
During
the three month period ended September 30, 2009, there have not been any
changes in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d – 15(f) under the Exchange Act) that have materially
affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM
1. LEGAL
PROCEEDINGS
The
information set forth in the section entitled “Legal proceedings” in Note 11 of
Part I, Item 1 of this Form 10-Q is hereby incorporated by
reference.
ITEM
1A. RISK
FACTORS
Information
regarding risk factors appears in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Information Related to
Forward-Looking Statements,” in Part I – Item 2 of this Form 10-Q and in Part I
– Item 1A of SonicWALL’s Annual Report on Form 10-K for the year ended December
31, 2008 as filed with the SEC on March 6, 2009. There have been no
material changes from the risk factors previously disclosed in SonicWALL’s
Annual Report on Form 10-K.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
|
None.
|
(b)
|
None.
|
(c)
|
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
Number
|
Description
|
10.1
|
Distribution
Agreement dated April 18, 2002 between Registrant and Alternative
Technology, Inc.
|
10.2
|
Amendment
to Distribution Agreement dated October 6, 2006 between Registrant and
Alternative Technology, Inc.
|
10.3 | Second Amendment to Lease dated June 19, 2009 between Registrant, as Tenant, and Xilinx, Inc. |
31.1
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act Rules
13a-14(c) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-14(c) and 15d-14(a)-, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Jose, State of
California.
SONICWALL, INC.
By: /s/ Robert D.
Selvi
Robert D. Selvi
Chief Financial Officer
Dated:
November 6, 2009
Number
|
Description
|
10.1
|
Distribution
Agreement dated April 18, 2002 between Registrant and Alternative
Technology, Inc.
|
10.2
|
Amendment
to Distribution Agreement dated October 6, 2006 between Registrant and
Alternative Technology, Inc.
|
10.3 | Second Amendment to Lease dated June 19, 2009 between Registrant, as Tenant, and Xilinx, Inc. |
31.1
|
Certification
of Chief Executive Officer pursuant to Securities Exchange Act Rules
13a-14(c) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Securities Exchange Act Rules
13a-14(c) and 15d-14(a)-, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Page 39 of 39