<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 2000
REGISTRATION NO. 333-47668
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SUN MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3571 94-2805249
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NUMBER
</TABLE>
901 SAN ANTONIO ROAD
PALO ALTO, CALIFORNIA 94303
(650) 960-1300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SCOTT G. MCNEALY
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
SUN MICROSYSTEMS, INC.
901 SAN ANTONIO ROAD
PALO ALTO, CALIFORNIA 94303
(650) 960-1300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
LARRY W. SONSINI, ESQ. STEPHEN W. DEWITT
KATHARINE A. MARTIN, ESQ. PRESIDENT AND CHIEF EXECUTIVE OFFICER
MICHAEL S. DORF, ESQ. COBALT NETWORKS, INC.
MICHAEL S. RINGLER, ESQ. 555 ELLIS STREET
SHELLY B. GOLDSTONE, ESQ. MOUNTAIN VIEW, CA 94043
WILSON SONSINI GOODRICH & ROSATI (650) 623-2500
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD ROD J. HOWARD, ESQ.
PALO ALTO, CALIFORNIA 94304 JOHN MONTGOMERY, ESQ.
(650) 493-9300 ANDREW R. HULL, ESQ.
BROBECK, PHLEGER & HARRISON LLP
TWO EMBARCADERO PLACE
2200 GENG ROAD
PALO ALTO, CALIFORNIA 94303
(650) 424-0160
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon
consummation of the merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
November 1, 2000
Dear Cobalt Networks, Inc. Stockholders:
I am writing to you today about our proposed merger with a subsidiary of
Sun Microsystems, Inc. This merger will create a combined company that your
board of directors believes will be better able to accelerate the growth of
Cobalt's business.
In the merger, each share of Cobalt common stock will be exchanged for 0.50
shares of Sun common stock (subject to adjustment to reflect the effect of any
stock split, stock dividend, recapitalization, reclassification or the like on
Sun or Cobalt common stock). Sun expects to issue approximately 15,157,078
million shares of its common stock in the merger (subject to adjustment to
reflect the effect of any stock split, stock dividend, recapitalization,
reclassification or the like on Sun or Cobalt common stock). Sun common stock is
traded on The Nasdaq Stock Market under the trading symbol "SUNW," and closed at
$110.88 per share on October 31, 2000. The merger is described more fully in the
accompanying document.
You will be asked to vote upon the merger agreement and the merger at a
special meeting of Cobalt stockholders to be held on December 6, 2000 at 9:00
a.m., local time, at Cobalt's offices located at 515 Ellis Street, Mountain
View, California 94043. To complete the merger, the holders of a majority of the
outstanding shares of Cobalt common stock must adopt and approve the merger
agreement and approve the merger. Only stockholders who hold shares of Cobalt
common stock at the close of business on October 26, 2000 will be entitled to
vote at the special meeting.
We are very excited by the opportunities we envision for the combined
company. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AGREEMENT IS ADVISABLE, AND THAT THE TERMS OF THE MERGER AGREEMENT AND THE
MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF COBALT AND ITS STOCKHOLDERS, AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO ADOPT AND APPROVE THE MERGER AGREEMENT
AND APPROVE THE MERGER.
The accompanying document provides detailed information about Sun, Cobalt
and the merger. Please give all of this information your careful attention. IN
PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE SECTION ENTITLED
"RISK FACTORS" BEGINNING ON PAGE 15 OF THE ACCOMPANYING DOCUMENT.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. To
vote your shares, you may use the enclosed proxy card or attend the special
meeting of stockholders described in the accompanying document. To adopt and
approve the merger agreement and approve the merger, you MUST vote "FOR" the
proposal by following the instructions stated on the enclosed proxy card. If you
do not vote at all, it will, in effect, count as a vote against the merger
agreement and the merger. We urge you to vote FOR this proposal, a necessary
step in the merger between Cobalt and Sun.
Sincerely,
/s/ STEPHEN W. DEWITT
Stephen W. DeWitt
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER OR THE SECURITIES OF SUN TO
BE ISSUED IN THE MERGER, OR DETERMINED IF THE ACCOMPANYING DOCUMENT IS ACCURATE
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The accompanying document is dated November 1, 2000, and was first mailed
to Cobalt stockholders on or about November 3, 2000.
[COBALT NETWORKS LOGO]
<PAGE> 3
[COBALT NETWORKS LOGO]
COBALT NETWORKS, INC.
555 ELLIS STREET
MOUNTAIN VIEW, CA 94043
(650) 623-2500
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 6, 2000
We will hold a special meeting of stockholders of Cobalt Networks, Inc. at
9:00 a.m., local time, on December 6, 2000 at Cobalt's offices located at 515
Ellis Street, Mountain View, California 94043:
1. To consider and vote upon a proposal to adopt and approve the
merger agreement by and among Sun Microsystems, Inc., Azure Acquisition
Corporation, a wholly owned subsidiary of Sun, and Cobalt Networks, Inc.,
pursuant to which Cobalt will become a wholly-owned subsidiary of Sun, and
each outstanding share of Cobalt common stock will be converted into the
right to receive 0.50 shares of Sun common stock (subject to adjustment to
reflect the effect of any stock split, stock dividend, recapitalization,
reclassification or the like on Sun or Cobalt common stock), and to approve
the merger of Cobalt with a subsidiary of Sun; and
2. To transact such other business that may properly come before the
special meeting and any adjournment or postponement of the special meeting.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER
AGREEMENT IS ADVISABLE, AND THAT THE TERMS OF THE MERGER AGREEMENT AND THE
MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF COBALT AND ITS STOCKHOLDERS, AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO ADOPT AND APPROVE THE MERGER AGREEMENT
AND APPROVE THE MERGER.
We describe the merger agreement and the merger more fully in the
accompanying document, which we urge you to read.
Only Cobalt stockholders of record at the close of business on October 26,
2000 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement of the special meeting.
YOUR VOTE IS IMPORTANT. TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE
SPECIAL MEETING, YOU ARE URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY
CARD AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY IN
THE MANNER DESCRIBED IN THE ACCOMPANYING DOCUMENT AT ANY TIME BEFORE IT HAS BEEN
VOTED AT THE SPECIAL MEETING. YOU MAY VOTE IN PERSON AT THE SPECIAL MEETING EVEN
IF YOU HAVE RETURNED A PROXY CARD.
By Order of the Board of Directors
/s/ KENTON CHOW
Kenton Chow
Secretary
Mountain View, California
November 1, 2000
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers About the Merger...................... 1
Summary..................................................... 4
The Companies............................................. 4
Structure of the Merger................................... 5
Effect on Exchange Ratio of Proposed Sun Stock Split...... 5
Voting Requirements....................................... 5
Recommendation of Cobalt's Board of Directors............. 6
Opinion of Cobalt's Financial Advisor..................... 6
Completion and Effectiveness of the Merger................ 6
Conditions to Completion of the Merger.................... 6
Termination of the Merger Agreement....................... 6
Payment of Termination Fee................................ 7
Cobalt Prohibited from Soliciting Other Offers............ 7
Stock Option Agreement.................................... 7
Interests of Certain Cobalt Directors and Officers in the
Merger................................................. 8
Share Ownership of Management............................. 8
Material U.S. Federal Income Tax Consequences............. 8
Accounting Treatment of the Merger........................ 8
Antitrust Approval Required to Complete the Merger........ 8
Restrictions on the Ability to Sell Sun Stock............. 9
Listing of Sun Common Stock............................... 9
Dissenters' and Appraisal Rights.......................... 9
Cautionary Statement Regarding Forward-Looking Statements
in this Document....................................... 9
Sun Summary Selected Consolidated Financial Data............ 10
Cobalt Summary Selected Consolidated Financial Data......... 11
Comparative Historical and Pro Forma Per Share Data......... 12
Comparative Per Share Market Price Data..................... 13
Cobalt Dividend Policy...................................... 14
Risk Factors................................................ 15
Risks Related to the Merger............................... 15
Risks Related to Sun and Cobalt as a Combined Company..... 18
The Special Meeting of Cobalt Stockholders.................. 24
General................................................... 24
Date, Time and Place...................................... 24
Purpose of the Special Meeting............................ 24
Record Date for the Special Meeting....................... 24
Voting of Proxies at the Special Meeting and Revocation of
Proxies................................................ 24
Votes Required for Approval and Adoption of the Merger
Agreement and Approval of the Merger................... 25
Quorum, Abstentions and Broker Non-Votes.................. 26
Solicitation of Proxies and Expenses...................... 26
Board Recommendation...................................... 27
The Merger and Related Transactions......................... 28
Background of the Merger.................................. 28
Consideration of the Merger by Cobalt's Board of
Directors.............................................. 32
Cobalt's Reasons for the Merger and Recommendation of
the Cobalt Board of Directors......................... 32
Opinion of Cobalt's Financial Advisor.................. 34
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interests of Directors and Officers of Cobalt in the
Merger................................................ 42
Effects of Golden Parachute Tax Rules.................. 44
Consideration of the Merger by Sun's Board of Directors... 45
Sun's Reasons for the Merger........................... 45
The Merger Agreement...................................... 46
Structure of the Merger................................ 46
Completion and Effectiveness of the Merger............. 46
Conversion of Cobalt Common Stock in the Merger........ 46
Exchange of Cobalt Stock Certificates for Sun Stock
Certificates.......................................... 47
Fractional Shares...................................... 47
Distributions with Respect to Unexchanged Shares....... 47
Transfers of Ownership and Lost Stock Certificates..... 47
Cobalt's Representations and Warranties................ 48
Sun's Representations and Warranties................... 49
Cobalt's Conduct of Business Before Completion of the
Merger................................................ 50
Sun's Conduct of Business Before Completion of the
Merger................................................ 51
No Solicitation by Cobalt.............................. 51
Treatment of Cobalt Stock Options...................... 53
Treatment of Rights under Cobalt Employee Stock
Purchase Plan......................................... 53
Conditions to Completion of the Merger................. 53
Termination of the Merger Agreement.................... 55
Payment of Termination Fee............................. 56
Extension, Waiver and Amendment of the Merger
Agreement............................................. 57
Definition of Material Adverse Effect.................. 57
Material Federal Income Tax Consequences.................. 58
Accounting Treatment of the Merger........................ 60
Regulatory Filings and Approvals Required to Complete the
Merger................................................. 60
Restrictions on Sales of Shares by Affiliates of Cobalt
and Sun................................................ 60
Listing on the Nasdaq Stock Market of Sun Common Stock to
be Issued in the Merger................................ 61
Delisting and Deregistration of Cobalt Common Stock After
the Merger............................................. 61
Dissenters' and Appraisal Rights.......................... 61
Other Material Agreements Relating to the Merger.......... 61
The Stock Option Agreement............................. 61
Voting Agreements...................................... 62
Cobalt Affiliate Agreements............................ 63
Non-Competition Agreements............................. 63
Severance and Acceleration Waivers..................... 63
Operations After the Merger............................... 64
Information About Cobalt.................................... 65
Business.................................................. 65
Overview............................................... 65
Corporate Background................................... 65
Industry Background.................................... 66
The Cobalt Solution.................................... 67
The Cobalt Strategy.................................... 69
Products............................................... 71
Technology............................................. 73
Customers.............................................. 75
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Sales and Marketing.................................... 75
Manufacturing.......................................... 77
Research and Development............................... 78
Competition............................................ 78
Intellectual Property.................................. 79
Employees.............................................. 80
Facilities................................................ 80
Legal Proceedings......................................... 80
Cobalt Management's Discussion and Analysis of Financial
Condition and Results of Operations of Cobalt............. 81
Overview.................................................. 81
Results of Operations..................................... 83
Six Months Ended June 30, 2000 and July 2, 1999........ 83
Years Ended December 31, 1999 and 1998................. 86
Years Ended December 31, 1998 and 1997................. 88
Acquisition of Progressive Systems, Inc. ................. 89
Liquidity and Capital Resources........................... 89
Quarterly Results of Operations........................... 91
Recent Accounting Pronouncements.......................... 93
Qualitative and Quantitative Disclosure About Market
Risk................................................... 93
Security Ownership of Certain Beneficial Owners and
Management of Cobalt...................................... 94
Comparison of Rights of Holders of Cobalt Common Stock and
Sun Common Stock.......................................... 97
Common Stock.............................................. 97
Preferred Stock........................................... 97
Board of Directors........................................ 97
Removal of Directors...................................... 97
Filling Vacancies on the Board of Directors............... 98
Stockholder Action by Written Consent..................... 98
Ability to Call Special Meetings.......................... 98
Advance Notice Provisions for Stockholder Nominations and
Proposals.............................................. 99
Amendment of Certificate of Incorporation................. 100
Amendment of Bylaws....................................... 101
State Anti-Takeover Statutes.............................. 101
Limitation of Liability of Directors...................... 101
Indemnification of Directors and Officers................. 101
Stockholder Rights Plan................................... 102
Legal Matters............................................... 104
Experts..................................................... 104
Stockholder Proposals....................................... 104
Where You Can Find More Information......................... 104
Statement Regarding Forward-Looking Information............. 106
Financial Statements of Cobalt Networks, Inc................ F-1
Annexes:
A -- Agreement and Plan of Merger and Reorganization...... A-1
B -- Stock Option Agreement............................... B-1
C -- Form of Voting Agreement............................. C-1
D -- Opinion of Goldman, Sachs & Co. ..................... D-1
</TABLE>
iii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE WE PROPOSING TO MERGE? (SEE PAGES 32 AND 45)
A: Sun is accelerating its move into the server appliance industry and Cobalt
is a leader in the server appliance marketplace with leading edge products
and a world-class management team. We believe that the combination of the
two companies is a synergistic move that will enable us to provide an
end-to-end solution of servers from the low-end appliance to mainframe-
class servers. We believe that we can achieve greater stockholder value
through a combined company with additional resources to help us compete and
grow in the rapidly evolving server appliance industry with its increasing
number of large, well-capitalized, and well-known competitors. We also
believe that, given Sun's historical revenue growth, Cobalt stockholders may
achieve greater possible returns through participation in the potential
future growth in value of the combined company. Finally, we believe that the
premium provided by the exchange ratio over the existing market price of
Cobalt common stock at the time the merger agreement was approved by the
Cobalt board of directors will permit greater returns to stockholders.
Q: WHAT WILL I RECEIVE IN THE MERGER? (SEE PAGE 46)
A: If the merger is completed, you will receive 0.50 shares of Sun common stock
for each share of Cobalt common stock you own at the time of completion of
the merger (subject to adjustment to reflect the effect of any stock split,
stock dividend, recapitalization, reclassification or the like on Sun or
Cobalt common stock). Sun will not issue fractional shares in connection
with the merger. Instead of any fractional share of Sun common stock, you
will receive cash based on the market price of Sun common stock.
At the annual meeting of Sun stockholders to be held on November 8, 2000,
Sun stockholders will vote on a proposal to increase the authorized number
of shares of Sun common stock. At a meeting held on August 16, 2000, the Sun
board of directors approved a two-for-one forward stock split, to be paid in
the form of a stock dividend on Sun common stock, contingent upon approval
of the proposed increase in the authorized number of shares of Sun common
stock by Sun stockholders. If the share increase proposal is approved by Sun
stockholders and the Sun stock split is implemented prior to the exchange of
Cobalt common stock for Sun common stock, the merger exchange ratio will be
adjusted such that Cobalt stockholders will receive one share of Sun common
stock for each share of Cobalt common stock held by them. See the section
entitled "The Merger and Related Transactions -- The Merger Agreement --
Conversion of Cobalt Common Stock in the Merger" beginning on page 46 of
this document.
Q: HOW WILL THE MERGER AFFECT OPTIONS TO ACQUIRE COBALT COMMON STOCK? (SEE PAGE
53)
A: Options to purchase shares of Cobalt common stock will be assumed by Sun and
become exercisable for shares of Sun common stock after completion of the
merger. The number of shares covered by these options, and their applicable
exercise prices, will be adjusted using the merger exchange ratio of 0.50
shares of Sun common stock for each share of Cobalt common stock that was
subject to the applicable option prior to the merger (subject to adjustment
to reflect the effect of any stock split, stock dividend, recapitalization,
reclassification or the like on Sun or Cobalt common stock).
1
<PAGE> 8
Q: WILL COBALT STOCKHOLDERS BE ABLE TO TRADE THE SUN COMMON STOCK THAT THEY
RECEIVE IN THE MERGER? (SEE PAGE 60)
A: Yes. The Sun common stock will be listed on The Nasdaq Stock Market under
the symbol "SUNW." Certain persons who are deemed affiliates of Cobalt will
be required to comply with Rule 145 under the Securities Act if they sell
their shares of Sun common stock received in the merger.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER? (SEE PAGE 46)
A: We currently plan to complete the merger prior to December 31, 2000. Because
the merger is subject to governmental and regulatory approvals and other
conditions, however, we cannot predict the exact timing.
Q: HOW DO I VOTE ON THE MERGER? (SEE PAGE 24)
A: Following your review of this document, complete and sign the enclosed proxy
card, and then mail it in the enclosed return envelope as soon as possible
so that your shares can be voted at the special meeting of Cobalt
stockholders at which the merger agreement and the merger will be presented
and voted upon. You may also attend the special meeting in person and vote
at the special meeting instead of submitting a proxy.
Q: WHAT HAPPENS IF I DON'T INDICATE HOW TO VOTE MY PROXY? (SEE PAGE 24)
A: If you do not include instructions on how to vote your properly signed proxy
card, your shares will be voted FOR adoption and approval of the merger
agreement and approval of the merger.
Q: WHAT HAPPENS IF I DON'T RETURN A PROXY CARD? (SEE PAGE 25)
A: Not returning your proxy card will have the same effect as voting against
adoption and approval of the merger agreement and against approval of the
merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD? (SEE PAGE 25)
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting at which the merger will be presented and voted upon. You
can do this in one of three ways. First, you can send a written notice to
the Secretary of Cobalt stating that you would like to revoke your proxy.
Second, you can complete and submit a later-dated proxy card. Third, you can
attend the special meeting and vote in person. Your attendance alone will
not revoke your proxy.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME," WILL MY BROKER VOTE MY SHARES
FOR ME? (SEE PAGE 24)
A: No. Your broker will not be able to vote your shares without instructions
from you. If you do not provide your broker with voting instructions, your
shares will be considered present at the special meeting for purposes of
determining a quorum but will not be considered to have been voted in favor
of adoption and approval of the merger agreement or approval of the merger.
If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change those instructions.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? (SEE PAGE 47)
A: No. If the merger is completed, we will send you written instructions for
exchanging your Cobalt stock certificates for Sun stock certificates.
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS? (SEE PAGE 61)
A: No. Under applicable law, you are not entitled to dissenters' or appraisal
rights in connection with the merger.
2
<PAGE> 9
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
MERGER?
A: Yes. We have set out in the section entitled "Risk Factors" beginning on
page 15 of this document a number of risk factors that you should consider
in connection with the merger.
Q: WHO CAN HELP ANSWER MY QUESTIONS ABOUT THE MERGER?
A: Cobalt stockholders may call Christopher Bunn of Cobalt, at (650) 623-2508,
with any questions such stockholders may have about the merger.
3
<PAGE> 10
SUMMARY
The following is a summary of the information contained in this document.
This summary may not contain all of the information that is important to you.
You should carefully read this entire document and the other documents we refer
to for a more complete understanding of the merger and related transactions. In
particular, you should read the annexes attached to this document, including the
merger agreement, the stock option agreement and the form of voting agreement,
which are attached to this document as Annexes A, B and C, respectively. In
addition, Sun incorporates by reference into this document important business
and financial information about Sun. You may obtain the information incorporated
by reference into this document without charge by following the instructions in
the section entitled "Where You Can Find More Information" beginning on page 104
of this document.
THE COMPANIES
SUN MICROSYSTEMS, INC.
901 San Antonio Road
Palo Alto, California 94303
(650) 960-1300
http://www.sun.com
Sun is a leading worldwide provider of products, services and support
solutions for building and maintaining network computing environments. Sun sells
scalable computer and storage systems, high-speed microprocessors and a complete
line of high performance software for operating network computing equipment. Sun
also provides a full range of services, including support, education and
professional services. Sun's products and services command a significant share
of the rapidly growing network computing market, which includes the Internet and
corporate intranets. Sun's products are used for many demanding commercial and
technical applications in various industries, including telecommunications,
manufacturing, financial services, education, retail, government, energy and
healthcare. Sun owes much of its success to its adherence to open industry
standards, the Solaris(TM) Operating Environment, the UNIX(R) platform, and the
UltraSPARC(TM) (Ultra Scalable Processor Architecture) microprocessor
architecture. In addition, Sun is committed to investment in and ownership of
intellectual property and leveraging its partnerships with industry leaders.
For the latest fiscal year ended June 30, 2000, Sun had annual revenues of
more than $15.7 billion and over 36,700 employees. Sun conducts business in over
170 countries. Sun was incorporated in California in February 1982 and
reincorporated in Delaware in July 1987.
COBALT NETWORKS, INC.
555 Ellis Street
Mountain View, California 94043
(650) 623-2500
http://www.cobalt.com
Cobalt provides server appliances, which are a new category of network
infrastructure devices that combine hardware and software to deliver one or a
few network-based applications well. Server appliances differ from general
purpose servers, which are designed to support a broad range of applications and
are not designed specifically to perform any particular function. Cobalt's
server appliances enable organizations that could not previously establish an
online presence to do so easily, cost-effectively and reliably. As the number of
internet users and businesses online increases, Cobalt believes the demand for
server appliances will continue to grow.
Cobalt's principal product lines, the Cobalt Qube(TM) and Cobalt RaQ(TM),
enable Cobalt's customers to perform critical internet-related applications
including file serving, web hosting and providing software applications over the
Internet, such as electronic mail and electronic commerce. Cobalt also offers
network-attached storage products, which provide overflow file storage for
network users, and network caching products, which enable more efficient
bandwidth usage and improve speed of Internet content
4
<PAGE> 11
delivery. Cobalt's products are designed to
enable Linux, an open source operating system for which the source code is
available at little or no cost, to work well with software applications and
hardware components delivered pre-configured in Cobalt's products. These
software applications include applications for web-based communications
developed by Cobalt and by the open source software developer community, as well
as proprietary third party applications. Cobalt's use of the Linux operating
system enables it to leverage the rapid application development cycles of the
open source software community to reduce the time to market for its new and
innovative products.
As of June 30, 2000, Cobalt had sold over 40,000 server appliances to more
than 3,700 end user customers in more than 75 countries. Cobalt markets and
sells its products globally through its direct sales force and its channel
partners. Cobalt's target customers are small- to medium-sized organizations,
including businesses, educational and government entities and branch offices of
large organizations. Cobalt also targets web hosting and application service
providers that offer outsourced Internet services to these end users.
Cobalt filed its articles of incorporation in California in October 1996
under the name Viavision Systems, Inc. Cobalt changed its name to Cobalt
Microserver, Inc. in March 1997 and to Cobalt Networks, Inc. in June 1998.
Cobalt reincorporated in Delaware in October 1999.
STRUCTURE OF THE MERGER (SEE PAGE 46)
Under the terms of the merger agreement between Sun and Cobalt, a
wholly-owned subsidiary of Sun will merge with and into Cobalt, Cobalt will
survive as a wholly-owned subsidiary of Sun, and each outstanding share of
Cobalt common stock will be converted into the right to receive 0.50 shares of
Sun common stock (subject to adjustment to reflect the effect of any stock
split, stock dividend, recapitalization, reclassification or the like on Sun or
Cobalt common stock). Following the merger, you will have an equity stake in
Cobalt's parent company as a stockholder of Sun.
EFFECT ON EXCHANGE RATIO OF PROPOSED SUN STOCK SPLIT (SEE PAGE 46)
At the annual meeting of Sun stockholders to be held on November 8, 2000,
Sun stockholders will vote on a proposal to increase the authorized number of
shares of Sun common stock. At a meeting held on August 16, 2000, the Sun board
of directors approved a two-for-one forward stock split, to be paid in the form
of a stock dividend on Sun common stock, contingent upon approval of the
proposed increase in the authorized number of shares of Sun common stock by Sun
stockholders. If the share increase proposal is approved by Sun stockholders and
the Sun stock split is implemented prior to the exchange of Cobalt common stock
for Sun common stock, the merger exchange ratio will be adjusted such that
Cobalt stockholders will receive one share of Sun common stock for each share of
Cobalt common stock held by them.
VOTING REQUIREMENTS (SEE PAGE 25)
In order to complete the merger, the holders of a majority of the
outstanding shares of Cobalt common stock must adopt and approve the merger
agreement and approve the merger. Sun stockholders are not required to adopt or
approve the merger agreement or approve the merger as a condition to completing
the merger.
At the close of business on the record date for the special meeting of
Cobalt stockholders at which the merger agreement and the merger will be
presented and voted upon, the directors and executive officers of Cobalt (and
their respective affiliates) collectively held approximately 13.4% of the
outstanding shares of Cobalt common stock entitled to vote on the merger
agreement and the merger, excluding options to purchase Cobalt common stock
which were unexercised as of the record date.
5
<PAGE> 12
Cobalt stockholders are entitled to cast one vote per share of Cobalt
common stock such stockholders owned as of October 26, 2000, the record date for
the special meeting at which the merger agreement and the merger will be
presented and voted upon.
RECOMMENDATION OF COBALT'S BOARD OF DIRECTORS (SEE PAGE 27)
After careful consideration, Cobalt's board of directors unanimously
determined that the merger agreement is advisable, and that the terms of the
merger agreement and the merger are fair to and in the best interests of Cobalt
and its stockholders. Cobalt's board of directors approved the merger agreement
and unanimously recommends that you vote FOR adoption and approval of the merger
agreement and approval of the merger.
OPINION OF COBALT'S FINANCIAL ADVISOR (SEE PAGE 34)
On September 18, 2000, Goldman, Sachs & Co. delivered its oral opinion,
subsequently confirmed in writing, to the board of directors of Cobalt that, as
of the date of such opinion, the exchange ratio of 0.50 shares of Sun common
stock to be received for each share of Cobalt common stock pursuant to the
merger agreement was fair from a financial point of view to the holders of
Cobalt common stock. The opinion of Goldman Sachs does not constitute a
recommendation as to how any holder of Cobalt common stock should vote with
respect to the merger.
COMPLETION AND EFFECTIVENESS OF THE MERGER (SEE PAGE 46)
We will complete the merger when all of the conditions to completion of the
merger contained in the merger agreement are satisfied or waived. The merger
will become effective when we file a certificate of merger with the State of
Delaware.
We are working toward completing the merger as quickly as possible. We
currently plan to complete the merger prior to December 31, 2000. Because the
merger is subject to governmental and regulatory approvals and other conditions,
however, we cannot predict the exact timing.
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 53)
Completion of the merger is subject to the satisfaction of a number of
conditions, including:
- adoption and approval of the merger agreement and approval of the merger
by the holders of a majority of the outstanding shares of Cobalt common
stock;
- expiration or termination of applicable waiting periods under applicable
antitrust laws;
- the absence of any injunction or order preventing the completion of the
merger;
- the continuing accuracy of the representations and warranties of Sun and
Cobalt contained in the merger agreement (except to the extent that any
inaccuracies would not constitute a material adverse effect on the
applicable company), and the absence of any material adverse effect on
the respective businesses of Sun and Cobalt; and
- receipt of opinions of tax counsel that the merger will qualify as a
tax-free reorganization.
Some of the conditions to completion of the merger may be waived by the
company entitled to assert the condition.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 55)
Cobalt and Sun may mutually agree to terminate the merger agreement without
completing the merger.
6
<PAGE> 13
In addition, either Cobalt or Sun may terminate the merger agreement under
any of the following circumstances:
- if the conditions to completion of the merger would not be satisfied
because of a material breach by the other company of any of its covenants
or other agreements contained in the merger agreement;
- if the conditions to completion of the merger would not be satisfied
because a representation or warranty of the other company contained in
the merger agreement becomes untrue in a way that constitutes a material
adverse effect on that company;
- if the merger is not completed by March 16, 2001;
- if a final court or other governmental order prohibiting the merger is
issued and is not appealable;
- if the Cobalt stockholders do not adopt and approve the merger agreement
and approve the merger; or
- if there is a material adverse effect with respect to the other company
that is not curable by that company by the use of commercially reasonable
efforts.
Sun may also terminate the merger agreement if:
- Cobalt's board of directors withdraws or changes in a manner adverse to
Sun its unanimous recommendation in favor of the adoption and approval of
the merger agreement and approval of the merger;
- Cobalt's board of directors does not reaffirm its unanimous
recommendation in favor of the adoption and approval of the merger
agreement and approval of the merger within 10 business days after Sun
requests reaffirmation following the announcement of any offer or
proposal from a party other than Sun relating to an extraordinary
transaction involving Cobalt, such as a merger or a sale of significant
assets;
- Cobalt's board of directors approves or recommends any offer or proposal
from a party other than Sun relating to an extraordinary transaction,
such as a merger or a sale of significant assets;
- Cobalt enters into any letter of intent or other agreement accepting any
offer or proposal from a party other than Sun relating to an
extraordinary transaction, such as a merger or a sale of significant
assets;
- Cobalt breaches the provisions of the merger agreement that prohibit
Cobalt from soliciting offers from any party other than Sun regarding an
extraordinary transaction, such as a merger or a sale of significant
assets; or
- a party unaffiliated with Sun undertakes a tender or exchange offer
relating to the securities of Cobalt, and Cobalt does not recommend that
its stockholders reject the offer within 10 business days after the offer
is first made.
PAYMENT OF TERMINATION FEE (SEE PAGE 56)
Under some circumstances, if the merger agreement is terminated Cobalt must
pay Sun a termination fee of $59 million.
COBALT PROHIBITED FROM SOLICITING OTHER OFFERS (SEE PAGE 51)
Cobalt has agreed not to initiate or, subject to some limited exceptions,
engage in discussions with any party other than Sun about a business combination
or other extraordinary transaction, such as a merger or a sale of significant
assets, while the merger is pending.
STOCK OPTION AGREEMENT (SEE PAGE 61)
As an inducement to Sun to enter into the merger agreement, Cobalt granted
Sun an option to purchase a number of shares of newly-issued Cobalt common stock
equal to
7
<PAGE> 14
19.9% of the issued and outstanding shares of
Cobalt capital stock at the time the option is exercised. The option's exercise
price is $57.63 per share of Cobalt common stock.
The option is intended to increase the likelihood that the merger will be
completed, and may discourage third parties who otherwise might be interested in
acquiring a significant equity stake in Cobalt from acquiring such a stake.
Sun may only exercise the option if Sun terminates the merger agreement
under circumstances in which the termination fee is payable under the merger
agreement.
INTERESTS OF CERTAIN COBALT DIRECTORS AND OFFICERS IN THE MERGER (SEE PAGE 42)
In considering the recommendations of the Cobalt board of directors, you
should be aware that Cobalt directors and officers will receive continuing
indemnification against liabilities from Sun, that one Cobalt officer has a
severance arrangement that provides for the acceleration of some of his options
following the merger and certain severance benefits if he is terminated
following the merger, and that certain of Cobalt's directors and officers have
Cobalt stock and stock options, participate in an employee stock purchase plan
and have received employment offers from Sun following the merger that give them
interests in the merger that may be different from yours and may make them more
likely to adopt and approve the merger agreement and approve the merger than
Cobalt stockholders generally.
SHARE OWNERSHIP OF MANAGEMENT (SEE PAGE 94)
As of the close of business on the record date for the special meeting of
Cobalt stockholders at which the merger agreement and the merger will be
considered and voted upon, directors and executive officers of Cobalt (and their
respective affiliates) beneficially owned approximately 13.4% of the outstanding
shares of Cobalt common stock, excluding options to purchase Cobalt common stock
which were unexercised as of the record date. All of Cobalt's directors and some
of Cobalt's executive officers, together beneficially owning approximately 10.7%
of the outstanding shares of Cobalt common stock as of the record date,
excluding options to purchase Cobalt common stock which were unexercised as of
the record date, have entered into voting agreements with Sun and have agreed to
vote their Cobalt shares in favor of adoption and approval of the merger
agreement and approval of the merger.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 58)
In general, Cobalt stockholders will not recognize gain or loss for United
States federal income tax purposes in the merger, except for taxes payable
because of cash received instead of fractional shares. It is a condition to the
merger that we receive legal opinions to this effect. You should carefully read
the discussion under "Material U.S. Federal Income Tax Consequences" beginning
on page 58 of this document. HOWEVER, YOU ARE ENCOURAGED TO CONSULT YOUR OWN TAX
ADVISOR BECAUSE TAX MATTERS CAN BE COMPLICATED, AND THE TAX CONSEQUENCES OF THE
MERGER TO YOU WILL DEPEND UPON YOUR OWN SITUATION.
ACCOUNTING TREATMENT OF THE MERGER (SEE PAGE 60)
Sun intends to account for the merger as a purchase.
ANTITRUST APPROVAL REQUIRED TO COMPLETE THE MERGER (SEE PAGE 60)
The merger is subject to antitrust laws. We have made required filings
under applicable antitrust laws with the Department of Justice and the Federal
Trade Commission, and we are not permitted to complete the merger until the
applicable waiting periods associated with those filings have expired or been
terminated. In addition, the merger may be subject to various foreign antitrust
laws, some of which may require us to make filings with foreign antitrust
authorities. The Department of Justice or the Federal Trade Commission, as well
as a foreign
8
<PAGE> 15
regulatory agency or government, state or private person, may challenge the
merger at any time before its completion.
RESTRICTIONS ON THE ABILITY TO SELL SUN STOCK (SEE PAGE 60)
All shares of Sun common stock received by Cobalt stockholders in
connection with the merger will be freely transferable unless any such
stockholder is considered an "affiliate" of either Sun or Cobalt under the
Securities Act. Shares of Sun common stock held by Cobalt's affiliates may only
be sold pursuant to a registration statement or exemption under the Securities
Act.
LISTING OF SUN COMMON STOCK (SEE PAGE 61)
The shares of Sun common stock issued in connection with the merger will be
listed on The Nasdaq Stock Market.
DISSENTERS' AND APPRAISAL RIGHTS (SEE PAGE 61)
Under applicable law, Cobalt stockholders are not entitled to dissenters'
or appraisal rights in connection with the merger.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT (SEE
PAGE 106)
This document and the documents incorporated by reference into this
document contain forward-looking statements within the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995 with respect to Sun's
and Cobalt's financial condition, results of operations and business and on the
expected impact of the merger on Sun's financial performance. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions identify forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking statements. In
evaluating the merger, you should carefully consider the discussion of risks and
uncertainties discussed in the section entitled "Risk Factors" beginning on page
15 of this document.
9
<PAGE> 16
SUN SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The table below presents summary selected historical consolidated financial
data of Sun. Sun has prepared this information using its consolidated financial
statements for each of its most recent five fiscal years ended June 30, 2000.
The consolidated financial statements for the five fiscal years ended June 30,
2000 have been audited by Ernst & Young LLP, independent auditors.
When you read this summary historical data, it is important that you read
along with it the historical consolidated financial statements and related notes
in Sun's Annual Report to Stockholders and Annual Report on Form 10-K for the
fiscal year ended June 30, 2000 filed with the Securities and Exchange
Commission and incorporated by reference into this document, as well as the
section of Sun's annual report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY CONSOLIDATED STATEMENTS OF INCOME:
Net revenues.................................... $7,125 $8,661 $9,862 $11,806 $15,721
Costs and expenses:
Cost of sales................................. 3,927 4,332 4,713 5,670 7,549
Research and development...................... 661 837 1,029 1,280 1,630
Selling, general and administrative........... 1,806 2,436 2,830 3,215 4,137
In-process research and development........... 58 23 176 121 12
------ ------ ------ ------- -------
Total costs and expenses................... 6,452 7,628 8,748 10,286 13,328
------ ------ ------ ------- -------
Operating income................................ 673 1,033 1,114 1,520 2,393
Interest income, net............................ 34 34 48 85 170
Gain on sale of investments, net................ -- 62 -- -- 208
------ ------ ------ ------- -------
Income before taxes............................. 707 1,129 1,162 1,605 2,771
Provision for income taxes...................... 233 352 407 575 917
------ ------ ------ ------- -------
Net income...................................... $ 474 $ 777 $ 755 $ 1,030 $ 1,854
====== ====== ====== ======= =======
Net income per common share -- diluted.......... $ 0.30 $ 0.50 $ 0.47 $ 0.63 $ 1.10
====== ====== ====== ======= =======
Shares used in the calculation of net income per
common share -- diluted....................... 1,587 1,569 1,590 1,641 1,689
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
SUMMARY CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $1,031 $1,161 $1,333 $ 2,692 $ 2,475
Working capital................................. 1,584 1,935 2,074 2,940 2,118
Total assets.................................... 3,858 4,783 5,794 8,499 14,152
Long-term debt and other obligations............ -- -- -- 192 1,720
Stockholders' equity............................ 2,292 2,801 3,569 4,867 7,309
</TABLE>
10
<PAGE> 17
COBALT SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The table below presents summary selected historical consolidated financial
data of Cobalt. Cobalt has prepared this information using its consolidated
financial statements for (1) the period from October 18, 1996 (Cobalt's
inception) to December 31, 1996, (2) each of the three years in the period ended
December 31, 1999, and (3) the six-month periods ended July 2, 1999 and June 30,
2000. The consolidated statements for the period from October 18, 1996 to
December 31, 1996, and for each of the three years in the period ended December
31, 1999, have been audited by PricewaterhouseCoopers LLP, independent
accountants. The consolidated financial statements for the six-month periods
ended July 2, 1999 and June 30, 2000 have not been audited.
When you read this summary historical financial data, it is important that
you read along with it the historical consolidated financial statements and
related notes included in this document beginning on page F-1, as well as the
section entitled "Cobalt Management's Discussion and Analysis of Financial
Condition and Results of Operations of Cobalt" beginning on page 81 of this
document.
Operating results for the six months ended July 2, 1999 and June 30, 2000
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 2000.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 18,
1996
(INCEPTION) SIX MONTHS ENDED
TO YEAR ENDED DECEMBER 31, -------------------
DECEMBER 31, ------------------------------ JULY 2, JUNE 30,
1996 1997 1998 1999 1999 2000
------------ -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues.......................... $ -- $ -- $ 3,537 $ 22,814 $ 7,663 $ 28,275
Cost of revenues...................... -- -- 3,123 14,461 5,156 15,293
----- -------- -------- -------- -------- --------
Gross profit........................ -- -- 414 8,353 2,507 12,982
Operating Expenses
Research and development.............. 22 1,067 3,483 6,013 2,771 4,013
Sales and marketing................... -- 245 5,581 14,772 6,273 11,595
General and administrative............ 60 445 1,895 4,070 1,454 3,609
Amortization of stock compensation.... -- -- -- 2,970 253 2,433
Amortization of goodwill and other
intangible assets................... -- -- -- -- -- 2,764
In-process research and development... -- -- -- -- -- 830
Litigation settlement................. -- -- -- 4,200 -- --
----- -------- -------- -------- -------- --------
Total operating expenses............ 82 1,757 10,959 32,025 10,751 25,244
Loss from operations.................... (82) (1,757) (10,545) (23,672) (8,244) (12,262)
Interest and other income (expense),
net................................... -- (12) 67 1,366 -- 3,658
----- -------- -------- -------- -------- --------
Net loss................................ (82) (1,769) (10,478) (22,306) (8,244) (8,604)
Accretion of mandatorily redeemable
convertible preferred stock........... -- -- (828) (1,377) (1,191) --
----- -------- -------- -------- -------- --------
Net loss attributable to holders of
common stock.......................... $ (82) $ (1,769) $(11,306) $(23,683) $ (9,435) $ (8,604)
===== ======== ======== ======== ======== ========
Basic and diluted net loss per share
attributable to holders of common
stock................................. $ (4.09) $ (5.48) $ (3.43) $ (2.83) $ (0.31)
======== ======== ======== ======== ========
Basic and diluted weighted average
shares outstanding.................... 432 2,065 6,901 3,338 27,787
======== ======== ======== ======== ========
SUMMARY CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investment.......................... $ 15 $ 1,738 $ 2,090 $141,777 $ 27,426 $131,888
Working capital....................... (105) 1,542 (1,912) 129,111 24,539 118,542
Total assets.......................... 42 1,998 6,145 151,857 34,902 225,304
Long-term debt and other
obligations......................... 70 -- 84 40 64 17
Mandatorily redeemable convertible
preferred stock..................... -- 3,551 12,339 -- 45,646 --
Stockholder's equity (deficit)........ (82) (1,847) (13,073) 130,756 (19,850) 200,290
</TABLE>
11
<PAGE> 18
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following tables set forth certain historical per share data of Sun and
Cobalt and combined per share data on an unaudited pro forma basis after giving
effect to the merger using the purchase method of accounting assuming 0.50
shares of Sun common stock are issued in exchange for each share of Cobalt
common stock. The following data should be read in conjunction with the separate
historical consolidated financial statements of Sun incorporated by reference
into this document and the historical consolidated financial statements of
Cobalt included in this document. The unaudited pro forma combined per share
data do not necessarily indicate the operating results that would have been
achieved had the merger been completed as of the beginning of the earliest
period presented and should not be taken as representative of future operations.
All per share information has been restated, as applicable, for stock splits, as
discussed in each entity's respective consolidated financial statements and
notes thereto. In addition, Sun's per share information represents diluted
earnings per share computed in accordance with SFAS No. 128 for all periods
presented. No cash dividends have ever been declared or paid on Sun or Cobalt
common stock.
<TABLE>
<CAPTION>
SUN
------
<S> <C>
NET INCOME PER SHARE (DILUTED):
Year ended June 30, 2000......... $ 1.10
BOOK VALUE PER SHARE(1):
June 30, 2000.................... $ 4.58
</TABLE>
<TABLE>
<CAPTION>
COBALT
------
<S> <C>
NET LOSS PER SHARE:
Six months ended June 30,
2000......................... $(0.31)
Year ended December 31, 1999.... $(3.43)
BOOK VALUE PER SHARE(1):
June 30, 2000................... $ 6.78
December 31, 1999............... $ 4.62
</TABLE>
<TABLE>
<CAPTION>
SUN COBALT EQUIVALENT
PRO FORMA COMBINED PRO FORMA COMBINED(2)
------------------ ---------------------
<S> <C> <C>
NET INCOME PER SHARE (DILUTED):
Year ended June 30, 2000..................... $0.81 $0.41
BOOK VALUE PER SHARE(1):
June 30, 2000................................ $5.77 $2.89
</TABLE>
---------------
(1) Historical book value per share is computed by dividing stockholders' equity
by the number of shares of Sun or Cobalt common stock outstanding at the end
of each period. Pro forma book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of Sun common
stock outstanding at the end of each period.
(2) The Cobalt equivalent pro forma combined per share amounts are calculated by
multiplying Sun combined pro forma share amounts by the exchange ratio for
the merger (i.e., 0.50). In the event that Sun effects its proposed
two-for-one stock split prior to the completion of the merger, the Cobalt
equivalent pro forma combined net income per share (diluted) for the year
ended June 30, 2000, and book value per share as of June 30, 2000, would be
$0.81 and $5.77, respectively, based upon the one-for-one adjusted exchange
ratio.
12
<PAGE> 19
COMPARATIVE PER SHARE MARKET PRICE DATA
Cobalt common stock has traded on the Nasdaq National Market under the
symbol "COBT" since November 5, 1999. Sun common stock is traded on The Nasdaq
Stock Market under the symbol "SUNW."
The following table shows, for the calendar quarters indicated, the high
and low sale prices per share of Cobalt common stock and Sun common stock both
as reported on The Nasdaq Stock Market.
<TABLE>
<CAPTION>
COBALT SUN
COMMON STOCK COMMON STOCK
----------------- ----------------
CALENDAR QUARTERS HIGH LOW HIGH LOW
-------------------------------------- ------- ------- ------- ------
<S> <C> <C> <C> <C>
1998:
First Quarter....................... -- -- $ 25.00 $18.81
Second Quarter...................... -- -- 22.78 19.09
Third Quarter....................... -- -- 13.20 9.59
Fourth Quarter...................... -- -- 22.09 9.75
1999:
First Quarter....................... -- -- 30.31 21.78
Second Quarter...................... -- -- 35.88 24.91
Third Quarter....................... -- -- 47.28 33.59
Fourth Quarter...................... $168.81 $104.75 81.88 44.69
2000:
First Quarter....................... 126.00 47.00 105.00 68.00
Second Quarter...................... 64.19 26.50 98.81 71.88
Third Quarter....................... 60.50 37.88 128.63 86.50
Fourth Quarter (through October 31,
2000)............................ 60.25 46.75 122.00 94.88
</TABLE>
The following table shows the closing prices per share of Cobalt common
stock and Sun common stock each as reported on The Nasdaq Stock Market on (1)
September 18, 2000, the business day preceding public announcement that Sun and
Cobalt had entered into the merger agreement and (2) October 30, 2000, the last
full trading day for which closing prices were available at the time of the
printing of this document.
The table also includes the equivalent price per share of Cobalt common
stock on those dates. This equivalent per share price reflects the value of the
Sun common stock you would receive for each share of your Cobalt common stock if
the merger was completed on any of these dates applying the exchange ratio of
0.50 shares of Sun common stock for each share of Cobalt common stock on those
dates.
As of the record date, there were approximately 23,983 holders of record of
Cobalt common stock.
<TABLE>
<CAPTION>
COBALT SUN EQUIVALENT PRICE
COMMON STOCK COMMON STOCK PER SHARE
------------ ------------ ----------------
<S> <C> <C> <C>
September 18, 2000............ $41.13 $115.25 $57.63
October 31, 2000.............. $55.13 $110.88 $55.44
</TABLE>
In the event that Sun effects its proposed two-for-one stock split prior to
completion of the merger, the Equivalent Price per Share figures provided above
for September 18, 2000 and October 31, 2000 would be $115.25 and $110.88,
respectively, based upon the one-to-one adjusted exchange ratio.
BECAUSE THE MARKET PRICE OF SUN COMMON STOCK MAY INCREASE OR DECREASE
BEFORE THE COMPLETION OF THE MERGER, YOU ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS.
13
<PAGE> 20
COBALT DIVIDEND POLICY
Cobalt has not declared or paid any cash dividends on its common stock
since its inception and does not anticipate paying cash dividends in the
foreseeable future. Cobalt expects that it will retain all future earnings, if
any, for use in its operations and the expansion of its business.
14
<PAGE> 21
RISK FACTORS
By voting in favor of the merger agreement and the merger, you will be
choosing to invest in Sun common stock. An investment in Sun common stock
involves a high degree of risk. In addition to the other information contained
in or incorporated by reference into this document, you should carefully
consider the following risk factors in deciding whether to vote in favor of
adoption and approval of the merger agreement and approval of the merger.
RISKS RELATED TO THE MERGER
ALTHOUGH WE EXPECT THAT THE MERGER WILL RESULT IN BENEFITS TO THE COMBINED
COMPANY, WE MAY NOT REALIZE THOSE BENEFITS.
Achieving the benefits of the merger will depend in part on the integration
of technology, operations and personnel of Sun and Cobalt. The integration
process will be a complex, time-consuming and expensive process and may disrupt
Sun's business if not completed in a timely and efficient manner. The challenges
involved in this integration include the following:
- demonstrating to our customers that the merger will not result in adverse
changes in client service standards or business focus;
- persuading our employees that our business cultures are compatible; and
- timely release of products to market.
There can be no assurance that we will successfully integrate the
businesses, operations or product lines of Sun and Cobalt, or that we will
realize any of the anticipated benefits of the merger.
YOU WILL RECEIVE 0.50 SHARES OF SUN COMMON STOCK FOR EACH OF YOUR SHARES OF
COBALT COMMON STOCK, REGARDLESS OF ANY CHANGES IN MARKET VALUE OF COBALT COMMON
STOCK OR SUN COMMON STOCK.
Upon completion of the merger, each share of Cobalt common stock will be
converted into the right to receive 0.50 shares of Sun common stock (subject to
adjustment to reflect the effect of any stock split, stock dividend,
recapitalization, reclassification or the like on Sun or Cobalt common stock).
There will be no adjustment to this exchange ratio based upon changes in the
market price of either Sun common stock or Cobalt common stock, and Cobalt is
not permitted to withdraw from the merger or resolicit the vote of its
stockholders solely because of changes in the market price of Sun common stock
or Cobalt common stock. Accordingly, the dollar value of Sun common stock you
will receive upon completion of the merger will depend on the market value of
Sun common stock at the time of completion of the merger, which may be different
than the market value of Sun common stock at September 18, 2000 or October 31,
2000. Because the market price of Sun common stock may increase or decrease
before the completion of the merger, you are urged to obtain current market
quotations. The merger may not be completed immediately following the Cobalt
stockholder meeting, if all regulatory approvals have not yet been obtained or
if other closing conditions have not been satisfied or waived. We cannot assure
you that the value of the Sun common stock you will receive in the merger will
not decline prior to or after the merger.
COBALT EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS THAT MAY INFLUENCE
THEM TO SUPPORT AND APPROVE THE MERGER.
Some of the directors and executive officers of Cobalt will receive
continuing indemnification against liabilities and have Cobalt stock, stock
options and employment offers that provide them with
15
<PAGE> 22
interests in the merger that are different from, or are in addition to, your
interests in the merger. In addition, as a result of the completion of the
merger, unvested options held by an officer of Cobalt will immediately vest, and
this officer, if terminated, will also be entitled to severance payments. As a
result, these directors and officers may be more likely to vote to adopt and
approve the merger agreement and approve the merger than if they did not have
these interests. As of the close of business on the record date for the special
meeting of Cobalt stockholders at which the merger agreement and the merger will
be presented and voted upon, Cobalt's officers and directors (and their
respective affiliates) together beneficially owned approximately 4,050,014
shares of Cobalt common stock, excluding options to purchase Cobalt common stock
which were unexercised as of the record date, which represented approximately
13.4% of all outstanding shares of Cobalt common stock entitled to vote at the
special meeting, and these persons have agreed to vote in favor of adoption and
approval of the merger agreement and approval of the merger. See the section
entitled "The Merger and Related Transactions -- Interests of Directors and
Officers of Cobalt in the Merger" beginning on page 42 of this document.
CUSTOMER AND EMPLOYEE UNCERTAINTY RELATED TO THE MERGER COULD HARM THE
COMBINED COMPANY.
Our customers may, in response to the announcement or consummation of the
merger, delay or defer purchasing decisions. Any delay or deferral in purchasing
decisions by our customers could adversely affect the business of the combined
company. Similarly, our employees may experience uncertainty about their future
role with the combined company until or after strategies with regard to Cobalt
are announced or executed. This may adversely affect our ability to attract and
retain key management, marketing and technical personnel.
SUN'S OPERATING RESULTS COULD BE ADVERSELY AFFECTED AS A RESULT OF PURCHASE
ACCOUNTING TREATMENT, THE IMPACT OF AMORTIZATION OF GOODWILL AND OTHER
INTANGIBLES RELATING TO THE MERGER.
Under U.S. generally accepted accounting principles that apply to Sun, Sun
will account for the merger using the purchase method of accounting. Under
purchase accounting, Sun will record the market value of its common stock issued
in connection with the merger, the fair market value of the options to purchase
Cobalt common stock that will be converted into options to purchase Sun common
stock, and the amount of direct transaction costs, as the cost of acquiring the
business of Cobalt. Sun will allocate that cost to the individual assets
acquired and liabilities assumed, including various identifiable intangible
assets such as acquired technology, acquired trademarks and trade names and
acquired workforce, and to in-process research and development, based on their
respective fair values. In-process research and development, which is currently
estimated at $70 million, will be expensed in the quarter when the merger
closes. Intangible assets, including goodwill, generally will be amortized over
a five-year period. The amount of purchase cost allocated to goodwill and other
intangibles is estimated to be approximately $2 billion. If goodwill and other
intangible assets were amortized in equal quarterly amounts over a five-year
period following completion of the merger, the accounting charge attributable to
these items would be approximately $100 million per quarter and $400 million per
fiscal year. As a result, purchase accounting treatment of the merger will
decrease the net income of Sun in the foreseeable future, which could have a
material and adverse effect on the market value of Sun common stock following
completion of the merger. These amounts are only estimates, however, and actual
amounts may differ from these estimates.
WE EXPECT TO INCUR SIGNIFICANT COSTS ASSOCIATED WITH THE MERGER.
Sun estimates that it will incur direct transaction costs of approximately
$4 million associated with the merger, which will be included as a part of the
total purchase cost for accounting purposes.
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In addition, Cobalt estimates that it will incur direct transaction costs of
approximately $16 million in connection with the merger, which will be expensed
in the quarter that the merger is completed. We believe the combined entity may
incur charges to operations, which are not currently reasonably estimable, in
the quarter in which the merger is completed or the following quarters, to
reflect costs associated with integrating the two companies. There can be no
assurance that the combined company will not incur additional material charges
in subsequent quarters to reflect additional costs associated with the merger.
THE PRICE OF SUN COMMON STOCK MAY BE AFFECTED BY FACTORS DIFFERENT FROM
THOSE AFFECTING THE PRICE OF COBALT COMMON STOCK.
When the merger is completed, holders of Cobalt common stock will become
holders of Sun common stock. Sun's business differs from that of Cobalt, and
Sun's results of operations, as well as the price of Sun common stock, may be
affected by factors different from those affecting Cobalt's results of
operations and the price of Cobalt common stock.
WE MAY BE UNABLE TO OBTAIN THE REQUIRED REGULATORY APPROVALS FOR COMPLETING
THE MERGER.
As a condition to the obligations of Sun and Cobalt to complete the merger,
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 must have expired or been terminated. We have made required filings under
the Hart-Scott-Rodino Act with the Department of Justice and the Federal Trade
Commission. There can be no assurance that the waiting period under the
Hart-Scott-Rodino Act will be permitted to expire or be terminated at all or
without materially adverse restrictions or conditions that would have an adverse
effect on the combined company. In addition, the merger may be subject to
various foreign antitrust laws, some of which may require us to make filings
with foreign antitrust authorities. The combined company may be required to
agree to various operating restrictions, before or after receipt of stockholder
approval, in order to obtain the necessary authorizations and approvals of the
merger or to assure that governmental authorities do not seek to block the
merger. No additional stockholder approval is expected to be required or sought
for any decision by Sun or Cobalt, after the special meeting of Cobalt's
stockholders, to agree to any terms and conditions necessary to resolve any
regulatory objections to the merger, and stockholder approval will not be sought
unless such stockholder approval is required to approve such terms and
conditions under applicable law. Notwithstanding any agreements regarding
operating restrictions that may be required under applicable law or by
governmental authorities, under the terms of the merger agreement, Sun is not
required to accept any material restrictions on its business in order to
complete the merger and may refuse to complete the merger if any material
restrictions are required by governmental authorities as a condition to
approving the merger. Even if regulatory approvals are obtained, any federal,
state or foreign governmental entity or any private person may challenge the
merger at any time before or after its completion.
IF THE MERGER IS NOT COMPLETED, OUR STOCK PRICES AND FUTURE BUSINESS AND
OPERATIONS COULD BE ADVERSELY AFFECTED.
If the merger is not completed, we may be subject to the following material
risks, among others:
- Cobalt may be required to pay Sun a termination fee of $59 million;
- the option granted to Sun by Cobalt may become exercisable and, if
exercised, will result in a substantial decrease in the percentage of
outstanding Cobalt common stock currently held by Cobalt stockholders,
may depress Cobalt's stock price and may make another business
combination involving Cobalt more difficult;
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- Sun could require Cobalt to purchase the option or shares of Cobalt
common stock it acquired under the option, resulting in significant
additional costs to Cobalt;
- the price of Sun and Cobalt common stock may decline to the extent that
the current market prices of Sun common stock and Cobalt common stock
reflect a market assumption that the merger will be completed; and
- Sun's and Cobalt's costs related to the merger, such as legal, accounting
and some of the fees of Cobalt's financial advisor, must be paid even if
the merger is not completed.
Further, if the merger agreement is terminated and the Cobalt board of
directors determines to seek another merger or business combination, Cobalt may
not be able to find a partner willing to pay an equivalent or more attractive
price than that which would be paid in the merger.
In addition, while the merger agreement is in effect and subject to limited
exceptions described on page 51 of this document, Cobalt is generally prohibited
from soliciting, initiating or knowingly encouraging or entering into
extraordinary transactions, such as a merger, sale of assets or other business
combination with any party other than Sun.
RISKS RELATED TO SUN AND COBALT AS A COMBINED COMPANY
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS,
OUR RESULTING LOSS OF COMPETITIVE POSITION COULD RESULT IN PRICE REDUCTIONS,
FEWER CUSTOMER ORDERS, REDUCED REVENUES, REDUCED MARGINS, REDUCED LEVELS OF
PROFITABILITY AND LOSS OF MARKET SHARE.
We compete in the hardware and software products and services markets.
These markets are intensely competitive. If we fail to compete successfully in
these markets, the demand for our products would decrease. Any reduction in
demand could lead to a decrease in the prices of our products, fewer customer
orders, reduced revenues, reduced margins, reduced levels of profitability and
loss of market share. These competitive pressures could adversely affect our
business and operating results.
Our competitors are some of the largest, most successful companies in the
world. They include Hewlett-Packard Company (HP), International Business
Machines Corporation (IBM), Compaq Computer Corporation (Compaq) and EMC
Corporation (EMC). Our future competitive performance depends on a number of
factors, including our ability to:
- continually develop and introduce new products and services with better
prices and performance than offered by our competitors;
- offer a wide range of products and solutions from small single-processor
systems to large complex enterprise-level systems;
- offer solutions to customers that operate effectively within a computing
environment that includes hardware and software from multiple vendors;
- offer products that are reliable and that ensure the security of data and
information;
- create products for which third party software vendors will develop a
wide range of applications; and
- offer high quality products and services.
We also compete with systems manufacturers and resellers of systems based
on microprocessors from Intel Corporation (Intel) and Windows operating system
software from Microsoft Corporation
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(Microsoft). These competitors include Dell Computer Corporation (Dell), HP and
Compaq, in addition to Intel and Microsoft. This competition creates increased
pressure, including pricing pressure, on our workstation and lower-end server
product lines. We expect this competitive pressure to intensify considerably
during fiscal year 2001 with the anticipated releases of new software products
from Microsoft and new microprocessors from Intel.
The computer systems that we sell are made up of many products and
components, including workstations, servers, storage products, microprocessors,
the Solaris(TM) operating system and other software products. We also sell some
of these components separately and as add-ons to installed systems. If we are
unable to offer products and services that compete successfully with the
products and services offered by our competitors or that meet the complex needs
of our customers, our business and operating results could be adversely
affected. In addition, if in responding to competitive pressures, we are forced
to lower the prices of our products and services and we are unable to reduce our
component costs or improve operating efficiencies, our business and operating
results would be adversely affected.
Over the last three years, we have invested significantly in our storage
products business with a view to increasing the sales of these products both on
a stand-alone basis to customers using the systems of our competitors and as
part of the systems that we sell. The intelligent storage products business is
intensely competitive. EMC is currently the leader in this market. To the extent
we are unable to penetrate this market and compete effectively, our business and
operating results could be adversely affected. In addition, we will be making
significant investments over the next few years to develop, market and sell
software products under our alliance with America Online, Inc. (AOL) and have
agreed to significant minimum revenue commitments. These alliance products are
targeted at the e-commerce market and are strategic to our ability to
successfully compete in this market. If we are unable to successfully compete in
this market, our business and operating results could be adversely affected.
THE PRODUCTS WE MAKE ARE VERY COMPLEX AND IF WE ARE UNABLE TO RAPIDLY AND
SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS, WE WILL NOT BE ABLE TO SATISFY
CUSTOMER DEMAND.
We operate in a highly competitive, quickly changing environment, and our
future success depends on our ability to develop and introduce new products that
our customers choose to buy. If we are unable to develop new products, our
business and operating results would be adversely affected. We must quickly
develop, introduce and deliver in quantity new, complex systems, software and
hardware products and components including products we plan to introduce during
fiscal 2001 which incorporate our new Ultra SPARC(TM) III architecture, the
Solaris Operating Environment, our Sun StorEdge(TM) storage products and other
software products, such as those products under development or to be developed
under our alliance with AOL or those that extend the Cobalt product line. The
development process for these complicated products is very uncertain. It
requires high levels of innovation from both our product designers and our
suppliers of the components used in our products. The development process is
also lengthy and costly. If we fail to accurately anticipate our customers'
needs and technological trends or are otherwise unable to complete the
development of a product on a timely basis, we will be unable to introduce new
products into the market on a timely basis, if at all, and our business and
operating results would be adversely affected. In addition, the successful
development of software products under our alliance with AOL depends on many
factors, including our ability to work effectively within the alliance on
complex product development and any encumbrances that may arise from time to
time that prevent us from developing, marketing or selling these alliance
software products. If we are unable to successfully develop or market or sell
the alliance software products or other software products, our business and
operating results could be adversely affected.
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Software and hardware products such as ours may contain known as well as
undetected errors and these defects may be found following introduction and
shipment of new products or enhancements to existing products. Although we
attempt to fix errors that we believe would be considered critical by our
customers prior to shipment, we may not be able to detect or fix all errors, and
this could result in lost revenues and delays in customer acceptance and could
be detrimental to our business and reputation.
The manufacture and introduction of our new hardware and software products
is also a complicated process. Once we have developed a new product we face the
following challenges in the manufacturing process:
- We must be able to manufacture new products in high enough volumes so
that we can have an adequate supply of new products to meet customer
demand;
- We must be able to manufacture the new products at acceptable costs. This
requires us to be able to accurately forecast customer demand so that we
can procure the appropriate components at optimal costs. Forecasting
demand requires us to predict order volumes, the correct mixes of our
software and hardware products and the correct configurations of these
products;
- We must manage new product introductions, like the introduction of our
new UltraSPARC III architecture during fiscal 2001, so that we can
minimize the impact of customers delaying purchases of existing products
in anticipation of the new product release. We must also try to reduce
the levels of older product and component inventories to minimize
inventory write-offs; and
- We may also decide to adjust prices of our existing products during this
process in order to try to increase customer demand for these products.
If we are introducing new products at the same time or shortly after the
price adjustment, this will complicate our ability to anticipate customer
demand for our new products.
If we were unable to timely develop, manufacture and introduce new products
in sufficient quantity to meet customer demand at acceptable costs or if we were
unable to correctly anticipate customer demand for our new and existing
products, our business and operating results could be materially adversely
affected.
OUR RELIANCE ON SINGLE SOURCE SUPPLIERS COULD DELAY PRODUCT SHIPMENTS AND
INCREASE OUR COSTS.
We depend on many suppliers for the necessary parts and components to
manufacture our products. There are a number of vendors producing the parts and
components that we need. However, there are some components that can only be
purchased from a single vendor due to price, quality or technology reasons. For
example, we depend on Sony for various monitors and on Texas Instruments for our
SPARC microprocessors. If we were unable to purchase the necessary parts and
components from a particular vendor and we had to find a new supplier for such
parts and components, our new and existing product shipments could be delayed,
severely affecting our business and operating results.
OUR FUTURE OPERATING RESULTS DEPEND ON OUR ABILITY TO PURCHASE A SUFFICIENT
AMOUNT OF COMPONENTS TO MEET THE DEMANDS OF OUR CUSTOMERS.
We depend heavily on our suppliers to timely design, manufacture and
deliver the necessary components for our products. While many of the components
we purchase are standard, we do purchase some components, specifically color
monitors and custom memory integrated circuits such
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as static random access memories (SRAMS) and video random access memories
(VRAMS), that require long lead times to manufacture and deliver. Long lead
times make it difficult for us to plan component inventory levels in order to
meet the customer demand for our products. In addition, in the past, we have
experienced shortages in certain of our components (specifically dynamic random
access memories (DRAMS) and SRAMS). If a component delivery from a supplier is
delayed, if we experience a shortage in one or more components or if we are
unable to provide for adequate levels of component inventory, our new and
existing product shipments could be delayed and our business and operating
results could suffer.
SINCE WE ORDER OUR COMPONENTS (AND IN SOME CASES COMMIT TO PURCHASE) FROM
SUPPLIERS IN ADVANCE OF RECEIPT OF CUSTOMER ORDERS FOR OUR PRODUCTS THAT INCLUDE
THESE COMPONENTS, WE FACE A SUBSTANTIAL INVENTORY RISK.
As part of our component inventory planning, we frequently pay certain
suppliers well in advance of receipt of customer orders. For example, we often
enter into noncancelable purchase commitments with vendors early in the
manufacturing process of our microprocessors to make sure we have enough of
these components for our new products to meet customer demand. Because the
design and manufacturing process for these components is very complicated it is
possible that we could experience a design or manufacturing flaw that could
delay or even prevent the production of the components for which we have
previously committed to pay. We also face the risk of ordering too many
components, or conversely, not enough components, since the orders are based on
the forecasts of customer orders rather than actual orders. If we cannot change
or be released from the noncancelable purchase commitments, we could incur
significant costs from the purchase of unusable components, due to a delay in
the production of the components or as a result of inaccurately predicting
component orders in advance of customer orders. Our business and operating
results could be adversely affected as a result of these increased costs.
DELAYS IN PRODUCT DEVELOPMENT OR CUSTOMER ACCEPTANCE AND IMPLEMENTATION OF
NEW PRODUCTS AND TECHNOLOGIES COULD SERIOUSLY HARM OUR BUSINESS.
Generally, the computer systems we sell to customers incorporate hardware
and software products that we sell, such as UltraSPARC microprocessors, the
Solaris Operating Environment and Sun StorEdge(TM) storage products. Delays in
the development of the software and hardware included in our systems could delay
our shipment of these systems. Delays in the development and introduction of our
products may occur for various reasons including the following:
- Delays in software development could delay shipments of related new
hardware products.
- If customers decide to delay the adoption and implementation of new
releases of our Solaris Operating Environment, this could also delay
customer acceptance of new hardware products tied to that release.
Adopting a new release of an operating environment requires a great deal
of time and money for a customer to convert its systems to the new
release. The customer must also work with software vendors who port their
software applications to the new operating system and make sure these
applications will run on the new operating system. As a result, customers
may decide to delay their adoption of a new release of an operating
system because of the cost of a new system and the effort involved to
implement it.
Such delays in product development and customer acceptance and
implementation of new products could adversely affect our business.
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IF WE ARE UNABLE TO CONTINUE GENERATING SUBSTANTIAL REVENUES FROM
INTERNATIONAL SALES OUR BUSINESS COULD BE SUBSTANTIALLY HARMED.
Currently, approximately half of our revenues come from international
sales. Our ability to sell our products internationally is subject to the
following risks:
- general economic and political conditions in each country could adversely
affect demand for our products and services in these markets
- currency exchange rate fluctuations could result in lower demand for our
products as well as currency translation losses
- changes to and compliance with a variety of foreign laws and regulations
may increase our cost of doing business in these jurisdictions
- trade protection measures and import and export licensing requirements
subject us to additional regulation, may prevent us from shipping
products to a particular market and may increase our operating costs.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A
NUMBER OF REASONS.
Future operating results will continue to be subject to quarterly
fluctuations based on a wide variety of factors including:
- Seasonality. Our sequential quarterly operating results usually fluctuate
downward in the first quarter of each fiscal year when compared to the
immediately preceding fourth quarter.
- Increases in Operating Expenses. Our operating expenses will continue to
increase as we continue to expand our operations. Our operating results
could suffer if our revenues do not increase at least as fast as our
expenses.
- Acquisitions/Alliances. If, in the future, we acquire technologies,
products or businesses, or we form alliances with companies requiring
technology investments or revenue commitments (such as our alliance with
AOL), we will face a number of risks to our business. The risks we may
encounter include those associated with integrating or co-managing
operations, personnel and technologies acquired or licensed, and the
potential for unknown liabilities of the acquired or combined business.
Also, we will include amortization expense of acquired intangible assets
in our financial statements for several years following these
acquisitions. Our business and operating results on a quarterly basis
could be adversely affected if our acquisition or alliance activities are
not successful.
- Significant Customers. Sales to a single customer of Sun accounted for
approximately 19%, 15% and 14% of Sun's fiscal 2000, 1999 and 1998 net
revenues, respectively. Sun's major customer revenues in fiscal 2000,
1999 and 1998 were primarily generated by two subsidiaries of an
international organization: (1) a reseller (16%, 14% and 14% of net
revenues in fiscal 2000, 1999 and 1998, respectively), acquired by the
international organization in fiscal 1999; and (2) a finance/leasing
company (3%, 1% and none of net revenues in fiscal 2000, 1999 and 1998,
respectively). Revenue is generated with the finance/leasing company
whenever a Sun customer elects to lease equipment; in such cases, Sun
sells the equipment to the leasing company. Our business could suffer if
this customer or any other significant customer terminated its business
relationship with us or significantly reduced the amount of business it
did with us.
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OUR ACQUISITION AND ALLIANCE ACTIVITIES COULD DISRUPT OUR ONGOING BUSINESS.
We intend to continue to make investments in companies, products and
technologies, either through acquisitions or investment alliances. For example,
we have purchased several companies in the past and have also formed alliances,
including our alliance with AOL. Acquisitions and alliance activities often
involve risks, including:
- difficulty in assimilating the acquired operations and employees;
- difficulty in managing product co-development activities with our
alliance partners;
- retaining the key employees of the acquired operation;
- disruption of our ongoing business;
- inability to successfully integrate the acquired technology and
operations into our business and maintain uniform standards, controls,
policies and procedures; and
- lacking the experience to enter into new markets, products or
technologies.
Some of these factors are beyond our control. Failure to manage these
alliance activities effectively and to integrate entities or assets that we
acquire could affect our operating results or financial condition.
THE LOCATION OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES.
A substantial portion of our facilities, including our corporate
headquarters and other critical business operations are located near major
earthquake faults. We are uninsured and do not fund for earthquake-related
losses. In addition, we face risks to the extent that our suppliers of products,
services and systems and others with whom we do business on a worldwide basis
are impacted by an earthquake. As a result, our business, financial condition or
operating results could be materially adversely affected in the event of a major
earthquake.
WE DEPEND ON KEY EMPLOYEES AND FACE COMPETITION IN HIRING AND RETAINING
QUALIFIED EMPLOYEES.
Our employees are vital to our success, and our key management, engineering
and other employees are difficult to replace. We generally do not have
employment contracts with our key employees. Further, we do not maintain key
person life insurance on any of our employees. The expansion of high technology
companies in Silicon Valley and Colorado, as well as many other areas, has
increased demand and competition for qualified personnel. We may not be able to
attract, assimilate or retain additional highly qualified employees in the
future. These factors could adversely affect our business.
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THE SPECIAL MEETING OF COBALT STOCKHOLDERS
GENERAL
Cobalt is furnishing this document to holders of Cobalt common stock in
connection with the solicitation of proxies by the Cobalt board of directors for
use at the special meeting of Cobalt stockholders to be held on December 6,
2000, and at any adjournment or postponement thereof. This document also is
being furnished to Cobalt stockholders by Sun as a prospectus of Sun in
connection with the issuance by Sun of shares of Sun common stock as
contemplated by the merger agreement.
This document was first mailed to stockholders of Cobalt on or about
November 3, 2000.
DATE, TIME AND PLACE
The special meeting will be held on December 6, 2000 at 9:00 a.m., local
time, at Cobalt's offices located at 515 Ellis Street, Mountain View, California
94043. Cobalt's executive offices are located at 555 Ellis Street, Mountain
View, California 94043 and its telephone number is (650) 623-2500.
PURPOSE OF THE SPECIAL MEETING
At the special meeting, and any adjournment or postponement thereof, Cobalt
stockholders will be asked:
1. To consider and vote upon a proposal to adopt and approve the
merger agreement by and among Sun, Azure Acquisition Corporation, a
wholly-owned subsidiary of Sun, and Cobalt, pursuant to which Cobalt will
become a wholly-owned subsidiary of Sun, and each outstanding share of
Cobalt common stock will be converted into the right to receive 0.50 shares
of Sun common stock (subject to adjustment to reflect the effect of any
stock split, stock dividend, recapitalization, reclassification or the like
on Sun or Cobalt common stock) and to approve the merger of Cobalt with a
subsidiary of Sun; and
2. To transact other business that may properly come before the
special meeting and any adjournment or postponement of the special meeting.
A copy of the merger agreement is attached to this document as Annex A.
Cobalt stockholders are encouraged to read the merger agreement in its entirety.
RECORD DATE FOR THE SPECIAL MEETING
The Cobalt board of directors has fixed the close of business on October
26, 2000 as the record date for determination of Cobalt stockholders entitled to
notice of and to vote at the special meeting.
VOTING OF PROXIES AT THE SPECIAL MEETING AND REVOCATION OF PROXIES
Cobalt requests that all holders of Cobalt common stock on the record date
complete, date and sign the accompanying proxy and promptly return it in the
accompanying envelope or otherwise mail it to Cobalt. Brokers holding shares in
"street name" may vote the shares only if the stockholder provides instructions
on how to vote. Brokers will provide directions to stockholders on how to
instruct the broker to vote the shares. All properly executed proxies that
Cobalt receives prior to the vote at the special meeting, and that are not
revoked, will be voted in accordance with the instructions indicated on the
proxies. If no direction is indicated on such proxies, such proxies will be
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voted in favor of approval and adoption of the merger agreement and approval of
the merger. The Cobalt board of directors does not currently intend to bring any
other business before the special meeting and, to the knowledge of the Cobalt
board of directors, no other matters are to be brought before the special
meeting. If other business properly comes before the special meeting, the
proxies will vote in accordance with their own judgment.
A Cobalt stockholder may revoke a proxy at any time prior to its use:
- by delivering to the Secretary of Cobalt a signed notice of revocation;
- by delivering to the Secretary of Cobalt a later-dated, signed proxy; or
- by attending the special meeting and voting in person.
Attendance at the special meeting does not in itself constitute the
revocation of a proxy.
VOTES REQUIRED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF
THE MERGER
In order for the merger to be effective, the holders of a majority of the
shares of Cobalt common stock outstanding as of the record date must vote to
adopt and approve the merger agreement and approve the merger. As of the close
of business on the record date for the special meeting, approximately 30,314,157
shares of Cobalt common stock were issued and outstanding, and there were
approximately 23,983 stockholders of record. Cobalt is authorized to issue
10,000,000 shares of preferred stock and no such shares were issued or
outstanding as of the record date. Each share of Cobalt common stock outstanding
on the record date is entitled to one vote at the special meeting on each matter
to be voted on.
As of the close of business on the record date for the special meeting,
Cobalt's directors and executive officers (and their respective affiliates) held
approximately 4,050,014 shares of Cobalt common stock, or approximately 13.4% of
the shares of Cobalt common stock entitled to vote at the special meeting,
excluding options to purchase Cobalt common stock which were unexercised as of
the record date. In addition, directors, executive officers and stockholders of
Cobalt beneficially owning an aggregate of approximately 3,246,432 shares of
Cobalt common stock (excluding any shares issuable upon the exercise of options)
as of the close of business on the record date for the special meeting, or
approximately 10.7% of the shares of Cobalt common stock entitled to vote at the
special meeting, have entered into voting agreements and irrevocable proxies,
pursuant to which they have agreed to vote their Cobalt shares in favor of
adoption and approval of the merger agreement and approval of the merger, in
favor of any matter that could reasonably be expected to facilitate the merger,
against any proposal made in opposition to, or in competition with, the merger,
and against any other action that is intended to, or that could reasonably be
expected to impede, interfere with, delay, postpone, discourage or adversely
affect the merger. As of the close of business on the record date for the
special meeting, no director or executive officer of Sun owned any shares of
Cobalt common stock, other than William N. Joy, the Cofounder and Chief
Scientist of Sun, who owned 2,435 shares of Cobalt common stock. As of the close
of business on the record date for the special meeting, no director or executive
officer of Cobalt owned any shares of Sun common stock, other than Patrick J.
Conte, Cobalt's Vice President, Sales, Americas and Asia-Pacific, who owned 400
shares of Sun common stock, and Ruth Henniger, Cobalt's Vice President, Product
Development, who owned 1,200 shares of Sun common stock. See the section
entitled "The Merger and Related Transactions -- Interests of Directors and
Officers of Cobalt in the Merger" beginning on page 42 of this document.
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QUORUM, ABSTENTIONS AND BROKER NON-VOTES
A majority of all shares of Cobalt common stock outstanding as of the
record date, represented in person or by proxy, constitutes a quorum for the
transaction of business at the special meeting. Cobalt has appointed Cobalt's
Chief Financial Officer, Vice President, Finance and Secretary, to function as
the inspector of elections of the special meeting. The inspector of elections,
with the assistance of Cobalt's transfer agent, will ascertain whether a quorum
is present, tabulate votes and determine the voting results on all matters
presented to Cobalt stockholders at the special meeting. If a quorum is not
obtained, or fewer shares of Cobalt common stock are voted for the adoption and
approval of the merger agreement and the approval of the merger than a majority
of the shares eligible to vote at the special meeting in person or by proxy, the
special meeting may be postponed or adjourned for the purpose of allowing
additional time for obtaining additional proxies or votes, and at any subsequent
reconvening of the special meeting, all proxies will be voted in the same manner
as the proxies would have been voted at the original convening of the special
meeting, except for any proxies that have been effectively revoked or withdrawn
prior to the subsequent special meeting.
If you submit a proxy that indicates an abstention from voting in all
matters, your shares will be counted as present for the purpose of determining
the existence of a quorum at the special meeting, but they will not be voted on
any matter at the applicable special meeting. Consequently, your abstention will
have the same effect as a vote against the proposal to adopt and approve the
merger agreement and to approve the merger.
Under the rules that govern brokers who have record ownership of shares
that are held in "street name" for their clients, the beneficial owners of the
shares, brokers have discretion to vote these shares on routine matters but not
on non-routine matters. The adoption and approval of the merger agreement and
the approval of the merger at the special meeting are not considered routine
matters. Accordingly, brokers will not have discretionary voting authority to
vote your shares at the special meeting. A "broker non-vote" occurs when brokers
do not have discretionary voting authority and have not received instructions
from the beneficial owners of the shares. At the special meeting, broker
non-votes will be counted for the purpose of determining the presence of a
quorum but will not be counted for the purpose of determining the number of
votes cast on a matter. Accordingly, at the special meeting, broker non-votes
will have the same effect as a vote against the proposal to adopt and approve
the merger agreement and to approve the merger. Consequently, Cobalt
stockholders are urged to return the enclosed proxy card marked to indicate
their vote.
SOLICITATION OF PROXIES AND EXPENSES
Cobalt will bear its own expenses in connection with the solicitation of
proxies for its special meeting of stockholders, except that Cobalt and Sun will
share equally all printing and filing costs and expenses, other than attorneys'
and accountants' fees and expenses, incurred in connection with the preparation
of this document and the preparation and filing of the registration statement of
which this document forms a part.
In addition to solicitation by mail, directors, officers and employees of
Cobalt may solicit proxies from stockholders by telephone, facsimile, e-mail or
in person. No additional compensation will be paid to these individuals for any
such services. Some of these individuals may have interests in the merger that
are different from, or in addition to, the interests of Cobalt stockholders
generally. See the section entitled "The Merger and Related
Transactions -- Interests of Directors and Officers of Cobalt in the Merger"
beginning on page 42 of this document. Brokerage houses, nominees, fiduciaries
and other custodians will be requested to forward soliciting materials to
beneficial owners and will be reimbursed for their reasonable expenses incurred
in sending proxy materials to beneficial owners.
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<PAGE> 33
BOARD RECOMMENDATION
The Cobalt board of directors has unanimously determined that the merger
agreement is advisable, and that the terms of the merger agreement and the
merger are fair to and in the best interests of Cobalt and its stockholders.
Accordingly, the Cobalt board of directors has unanimously approved the merger
agreement and unanimously recommends that stockholders vote "FOR" adoption and
approval of the merger agreement and approval of the merger. In considering such
recommendation, Cobalt stockholders should be aware that some Cobalt directors
and officers have interests in the merger that are different from, or in
addition to, those of Cobalt stockholders, and that Sun has agreed to provide
indemnification arrangements to directors and officers of Cobalt. See the
section entitled "The Merger and Related Transactions -- Interests of Directors
and Officers of Cobalt in the Merger" beginning on page 42 of this document.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF COBALT. ACCORDINGLY, COBALT STOCKHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT, AND TO
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
COBALT'S STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF COBALT
COMMON STOCK CERTIFICATES WILL BE MAILED TO COBALT STOCKHOLDERS PROMPTLY
FOLLOWING COMPLETION OF THE MERGER. FOR MORE INFORMATION REGARDING THE
PROCEDURES FOR EXCHANGING COBALT STOCK CERTIFICATES FOR SUN STOCK CERTIFICATES,
SEE THE SECTION ENTITLED "THE MERGER AND RELATED TRANSACTIONS -- THE MERGER
AGREEMENT -- EXCHANGE OF COBALT STOCK CERTIFICATES FOR SUN STOCK CERTIFICATES"
ON PAGE 47 OF THIS DOCUMENT.
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<PAGE> 34
THE MERGER AND RELATED TRANSACTIONS
The following is a description of the material aspects of the proposed
merger and related transactions, including the merger agreement and certain
other agreements entered into in connection therewith. While we believe that the
following description covers the material terms of the merger and the related
transactions, the description may not contain all of the information that is
important to you. You should read this entire document and the other documents
we refer to carefully for a more complete understanding of the merger and the
related transactions.
BACKGROUND OF THE MERGER
Cobalt was founded in late 1996 to develop a new class of server
infrastructure called server appliances. The server and server appliance
industry is rapidly developing and extremely competitive, with dozens of
established and emerging public and privately held companies vying for position.
Throughout the development of the company, Cobalt senior management held regular
corporate and business development discussions with numerous leading and
established server vendors including Compaq Computer Corporation, Dell Computer
Corporation, Gateway, Inc., Hewlett Packard Corporation, IBM, Intel Corporation,
Network Appliance, Inc. and Sun. Such discussions generally centered around
various business opportunities including joint product development, OEM
relationships, technology license agreements, strategic investments, and sales
and marketing partnerships.
In January 2000, Stephen DeWitt, Cobalt's President and Chief Executive
Officer, hosted an executive briefing at Cobalt's facilities in Mountain View,
California for a number of executives from Sun, including Ed Zander, Sun's
President and Chief Operating Officer. The purpose of the meeting was to
establish executive level contacts, provide a business and market update, and
initiate general business dialog between the companies.
During May 2000, several informal meetings took place between Sun and
Cobalt executive officers. The purpose of these meetings was to continue general
corporate communications between the companies and to discuss the relative
businesses of Sun and Cobalt.
On July 17, 2000, Mr. DeWitt and Vivek Mehra, Cobalt's Chief Technology
Officer and Vice President, Products, were invited to give a presentation
regarding Cobalt's business model and strategy to a number of Sun executives at
Sun's facilities in Cupertino, California, including Mr. Zander, John S.
McFarlane, Executive Vice President, Network Service Providers, Greg M.
Papadopoulos, Senior Vice President and Chief Technology Officer, and Jonathan
I. Schwartz, Senior Vice President, Corporate Strategy and Planning.
In August 2000, Messrs. Schwartz and DeWitt had several phone calls
regarding potential opportunities the two organizations could pursue. On August
23, 2000, Messrs. Schwartz and DeWitt, and Daniel Mitz, Sun's Vice President,
Business Affairs, discussed by telephone the possibility of a potential business
combination transaction between Sun and Cobalt.
On August 24, 2000, Mr. McFarlane met with Mr. DeWitt to discuss each
company's interest in a potential business combination transaction between Sun
and Cobalt.
On August 25, 2000, Messrs. Schwartz, DeWitt and Mitz again discussed by
telephone the possibility of a business combination transaction between Sun and
Cobalt.
On August 29, 2000, a conference call was held between Jonathan Schwartz
and Daniel Mitz on Sun's behalf, and Mr. DeWitt, Mr. Mehra, Kenton D. Chow,
Cobalt's Chief Financial Officer, Vice President, Finance and Secretary, and
Gary Martell, Cobalt's Chief Operating Officer, on Cobalt's behalf, during which
the parties discussed the possibility of a business combination between the two
28
<PAGE> 35
companies and the possible structure of such a transaction. Also on August 29,
2000, Cobalt and Sun entered into a mutual non-disclosure agreement with respect
to any written proposal exchanged between Sun and Cobalt.
On August 31, 2000, Sun provided Cobalt with a written preliminary proposal
for a subsidiary of Sun to merge with Cobalt, and Cobalt and Sun began focused
discussions on the possibility and structure of a merger. Also on August 31,
2000, Cobalt retained Brobeck, Phleger & Harrison LLP to act as its outside
legal counsel in connection with the possible transaction.
On September 1, 2000, Cobalt entered into an engagement letter with
Goldman, Sachs & Co. pursuant to which Goldman Sachs was engaged to act as
Cobalt's financial advisor in connection with the possible transaction.
During the first week of September 2000, representatives of Cobalt and Sun
and their respective legal counsel at Brobeck, Phleger & Harrison LLP and Wilson
Sonsini Goodrich & Rosati engaged in telephonic discussions regarding possible
terms of a potential merger between the companies. Representatives of Goldman
Sachs assisted Cobalt in these negotiations.
On September 5 and September 6, 2000, informal conference calls were held
among Cobalt's management team and members of the Cobalt board of directors to
update the board members on the status of negotiations between Sun and Cobalt.
On September 8, 2000, Wilson Sonsini Goodrich & Rosati, Professional
Corporation, outside legal counsel to Sun, delivered a draft merger agreement to
Brobeck, Phleger & Harrison LLP.
On September 10, 2000, Wilson Sonsini Goodrich & Rosati delivered drafts of
the other transaction documents (including the stock option agreement and the
voting agreement) to various parties and Brobeck, Phleger & Harrison LLP
provided its initial comments on the draft merger agreement previously delivered
by Wilson Sonsini Goodrich & Rosati.
On the evening of September 10, 2000, Cobalt and Sun executives held a
dinner meeting. The representatives of Sun and Cobalt in attendance discussed
various aspects of each company's business and the possible structure and
operation of the combined company if a business combination was completed.
On September 11, 2000, Cobalt and Sun signed a second mutual non-disclosure
agreement and representatives from Sun and Wilson Sonsini Goodrich & Rosati
began their due diligence review of Cobalt's documents.
Between September 11, 2000 through the evening of September 18, 2000,
representatives of Brobeck, Phleger & Harrison LLP and Wilson Sonsini Goodrich &
Rosati participated in a series of negotiations on the terms of the merger
agreement and the other related agreements by teleconference. These negotiations
covered all aspects of the transaction, including, among other things, the
representations and warranties made by the parties, the restrictions on the
conduct of their business, the conditions to completion of the proposed merger,
the provisions regarding termination, the details of the "no shop" clause, the
amount, triggers and payment of the termination fees and the consequences of
termination, the potential inclusion of a stock option agreement and, later, the
terms and conditions of the stock option agreement, and the delivery and terms
of the voting agreements. During this period, executive officers of Cobalt who
were asked to enter into the non-competition agreements, voting agreements and
irrevocable proxies and agreements waiving certain stock option acceleration and
severance benefits, and who were to receive employment offer letters from Sun,
engaged their own legal counsel to review and advise them regarding the delivery
and terms of those documents.
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<PAGE> 36
On September 12, 2000, the Cobalt board of directors held a regularly
scheduled meeting at Cobalt's executive offices in Mountain View, California
during which the Cobalt board of directors discussed the proposed business
combination with Sun. Mr. DeWitt reviewed the chronology of various discussions
during calendar year 2000 regarding possible transactions with Sun, including
OEM, joint venture and business combination transactions as well as the current
status of negotiations with Sun regarding the terms of the proposed transaction.
Representatives of Goldman Sachs reviewed the financial implications of the
terms of the transaction as proposed at that time. In addition, representatives
of Brobeck, Phleger & Harrison LLP outlined the board's fiduciary duties and
other applicable legal principles in the context of business combination
transactions and reviewed the merger agreement, voting agreements, stock option
agreement and related agreements and matters. The board discussed the strategic,
business and financial merits and the timing of a possible transaction with Sun
and the terms of Sun's proposal, and directed management to continue
negotiations with Sun.
On September 13, 2000, Messrs. DeWitt and Mehra met with Mr. Schwartz,
Roderick Steedman, Sun's Vice President, Acquisition Integration, Corporate
Strategy and Planning, and Pat Deagman, Sun's Vice President, Network Service
Providers, at Cobalt's executive offices in Mountain View, California to
continue discussions of the operation of each company's organization.
On September 16, 2000, a representative of Goldman Sachs met with Mr.
DeWitt, Mr. Schwartz and Mr. Mitz at Cobalt's executive offices in Mountain
View, California to discuss open issues in the negotiations, including valuation
and potential exchange ratios.
On September 17, 2000, the Cobalt board of directors held a special
telephonic meeting at which Mr. DeWitt, together with representatives of
Brobeck, Phleger & Harrison LLP and Goldman Sachs, reviewed the status of
negotiations and discussions with Sun since the board's September 12, 2000
meeting. In addition, a representative of Brobeck, Phleger & Harrison LLP
reviewed with the Cobalt board of directors the main legal principles applicable
to the proposed merger (including the board's fiduciary duties and authority in
considering the merger). Brobeck, Phleger & Harrison LLP representatives also
reviewed in detail the principal terms of the proposed merger agreement and
related agreements and summarized the remaining open issues and deal points. The
Cobalt board of directors reviewed and discussed the principal issues in the
proposed transaction, including the proposed exchange ratio and merger
consideration, closing conditions, termination rights, termination fees, the
stock option agreement, the voting agreements and Cobalt's ability to consider
alternative proposals.
From September 17, 2000 through the evening of September 18, 2000,
representatives of Brobeck, Phleger & Harrison LLP and Wilson Sonsini Goodrich &
Rosati, with consultation from Cobalt and Sun, respectively, continued to
negotiate the remaining terms of the transaction documents.
On September 18, 2000, the Cobalt board of directors held a special
telephonic meeting to review revised drafts of the merger agreement and related
agreements. Representatives of Goldman Sachs and Brobeck, Phleger & Harrison
LLP, also participated. Representatives of Brobeck, Phleger & Harrison LLP
reviewed the outcome of further negotiations and responded to questions by the
Cobalt board of directors. Goldman Sachs reviewed the financial terms of the
proposed transaction and delivered its oral opinion, subsequently confirmed in
writing, to the Cobalt board of directors that, based upon and subject to
various considerations, as of September 18, 2000, the exchange ratio of 0.50
shares of Sun common stock to be received for each share of Cobalt common stock
pursuant to the merger agreement was fair from a financial point of view to the
holders of Cobalt common stock. For a more detailed discussion of Goldman Sachs'
analysis and opinion, you should review the section entitled "-- Consideration
of the Merger by Cobalt's Board of Directors --
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<PAGE> 37
Opinion of Cobalt's Financial Advisor" beginning on page 34 of this document,
and the text of Goldman Sachs' opinion attached to this document as Annex D.
After further deliberation, the Cobalt board of directors, by a unanimous
vote:
- determined that the merger agreement and merger are advisable, and fair
to and in the best interests of Cobalt and its stockholders;
- approved the merger, the merger agreement, the stock option agreement and
the voting agreements and the transactions contemplated thereby, together
with such changes as were discussed at the meeting;
- resolved to call a special meeting of Cobalt's stockholders to adopt and
approve the merger agreement and to approve the merger;
- resolved to recommend that stockholders of Cobalt vote in favor of the
adoption and approval of the merger agreement and approval of the merger;
and
- authorized each of Messrs. DeWitt, Chow and Martell to execute, on behalf
of Cobalt, the merger agreement and the stock option agreement and such
other documents that any of such officers find necessary or advisable in
such officer's sole discretion, together with any changes, deletions,
additions and alterations such officers approve consistent with the
resolutions of the Cobalt board of directors.
During the evening of September 18, 2000, Sun and Cobalt entered into the
merger agreement and the stock option agreement.
Also on September 18, 2000, the directors and certain officers and
stockholders of Cobalt entered into voting agreements with Sun, pursuant to
which they agreed to vote their Cobalt shares in favor of the adoption and
approval of the merger agreement and approval of the merger. In addition, the
directors and certain officers and stockholders of Cobalt entered into affiliate
agreements with Sun, acknowledging the restrictions imposed by the federal
securities laws in some instances on their ability to sell Sun shares following
the completion of the merger. In addition, certain officers of Cobalt received
employment offer letters from Sun, effective upon the completion of the merger,
that include compensation and proposed options to purchase shares of Sun common
stock if the offers are accepted. Certain officers of Cobalt also signed
severance and acceleration waiver letter agreements pursuant to which they
agreed to waive, upon completion of the merger, certain of their severance
benefits and acceleration of their Cobalt stock option vesting to which they may
have otherwise been entitled as a result of the merger. Messrs. DeWitt and Mehra
each entered into non-competition agreements with Sun under which they agreed,
upon completion of the merger, not to engage in certain activities or make
certain investments, and not to solicit Sun employees, for a period of two years
following the completion of the merger. See the section entitled
"-- Consideration of the Merger by Cobalt's Board of Directors -- Interests of
Directors and Officers of Cobalt in the Merger" beginning on page 42 of this
document, and "Other Material Agreements Relating to the Merger" beginning on
page 61 of this document, for a further description of some of these agreements.
On September 19, 2000, a joint press release was issued announcing the
signing of the merger agreement.
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<PAGE> 38
CONSIDERATION OF THE MERGER BY COBALT'S BOARD OF DIRECTORS
COBALT'S REASONS FOR THE MERGER AND RECOMMENDATION OF THE COBALT BOARD OF
DIRECTORS
After careful consideration, the Cobalt board of directors has unanimously
concluded that the merger agreement is advisable, and that the terms of the
merger agreement and the merger are fair to and in the best interests of Cobalt
and its stockholders, and unanimously recommends that Cobalt stockholders adopt
and approve the merger agreement and approve the merger. This decision was based
upon a number of potential benefits of the merger that the Cobalt board of
directors believes will contribute to the success of the combined company
compared to Cobalt continuing to operate as an independent business, including
the following:
- the Cobalt board's judgment that the two companies have significant
complementary strengths and complementary products, services and
solutions;
- the Cobalt board's judgment that important advantages will accrue to the
leader of the server appliance industry and that in order to achieve and
retain this position a company must offer a complete line of server and
server appliance products;
- the potential that Sun's larger market capitalization, broad suite of
products and services, and historical revenue growth will provide Cobalt
with additional resources to grow and gain market share more rapidly than
Cobalt can grow as an independent company in the rapidly evolving server
appliance market characterized by the entrance of an increasing number of
large, well capitalized and well known competitors;
- that based on the price of Sun common stock at the time the merger
agreement was approved by the Cobalt board of directors, the exchange
ratio was at a significant premium over the price of Cobalt common stock
then prevailing in the market, and the further opportunity for Cobalt's
stockholders to participate in the future growth in value of the combined
company as stockholders of Sun following the merger;
- the combined company's potential to be a market leader as a single-source
provider in the rapidly developing and highly competitive server industry
by offering a full line of servers and server appliance products,
services and solutions to large, medium and small enterprises;
- the combined company's potential to leverage global presence in sales,
support and alliances through Sun's extensive salesforce, strong service
organization and the combined company's developed customer bases;
- the Cobalt board's judgment that the common stock of the combined company
may be a more valuable currency to finance future acquisitions at a
faster pace and at less dilutive prices than Cobalt could accomplish with
its stock alone; and
- the greater liquidity afforded Cobalt stockholders upon exchange of their
shares of Cobalt common stock for shares of Sun common stock, whose
shares trade in significantly higher dollar and share volumes.
In identifying these benefits and evaluating the merger, the Cobalt board
of directors reviewed a number of factors and sources of information, including
the following:
- historical information concerning Cobalt and Sun and their respective
businesses, financial performance, condition, operations, technology,
management and position in the industry, and information and evaluations
regarding the two companies' strengths, weaknesses and prospects, both
before and after giving effect to the merger;
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- the reports and presentations of Cobalt's legal counsel, Brobeck, Phleger
& Harrison LLP, regarding the terms of the transaction, the oral and
written presentations of Cobalt's financial advisor, Goldman Sachs, and
Goldman Sachs' opinion (which is attached to this document as Annex D) to
the effect that, based upon and subject to various considerations, as of
September 18, 2000, the exchange ratio of 0.50 shares of Sun common stock
to be received for each share of Cobalt common stock pursuant to the
merger agreement was fair from a financial point of view to holders of
Cobalt common stock;
- current financial market conditions and historical market prices,
volatility and trading information for Cobalt common stock and Sun common
stock, and various factors that might affect the market value of Sun
common stock in the future;
- the premium represented by the exchange ratio and the premiums paid in
other recent transactions that could be viewed as comparable, and the
negotiations between Cobalt and Sun relating to the exchange ratio;
- the alternatives available to Cobalt and the history of contacts with
other parties concerning their possible interest in a business
combination with Cobalt; and
- the terms of the merger agreement and related agreements, by themselves
and in comparison to the terms of other transactions, and the intensive
negotiations between Sun and Cobalt, including their negotiations
relating to the details of the conditions to the parties' obligations to
complete the merger, the details of the "no shop" restrictions on Cobalt
and the scope of Cobalt's fiduciary out from these restrictions, the
parties' termination rights, the termination fee that Cobalt may be
required to pay Sun in certain circumstances, the voting agreements, and
the stock option agreement.
The Cobalt board of directors also identified and considered a number of
risks and uncertainties in its deliberations concerning the merger, including
the following:
- the fact that the exchange ratio is fixed and will not change with
increases or decreases in the market price of either company's stock
before the closing of the merger, and the possibility that the dollar
value of a share of Sun stock at the closing of the merger may be more or
less than the dollar value of a share of Sun stock at the signing of the
merger agreement;
- the risk that the potential benefits sought in the merger may not be
fully realized, if at all;
- the possibility that the merger may not be consummated and the effect of
the public announcement of the merger on Cobalt's sales, customer
relations and operating results and Cobalt's ability to attract and
retain key management, marketing and technical personnel;
- the risk that despite the efforts of the combined company, key technical,
marketing and management personnel might not choose to remain employed by
the combined company;
- the risk of market confusion and hesitation and potential delay or
reduction in orders;
- the fact that pursuant to the merger agreement, Cobalt is required to
obtain Sun's consent before it can take a variety of actions between the
signing and the closing of the merger; and
- various other risks associated with the businesses of Cobalt, Sun and the
combined company and the merger described under the section entitled
"Risk Factors" beginning on page 15 of this document.
The Cobalt board of directors concluded, however, that many of these risks
could be managed or mitigated by Cobalt or by the combined company or were
unlikely to have a material impact on the
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merger or the combined company, and that, overall, the risks, uncertainties,
restrictions and potentially negative factors associated with the merger were
outweighed by the potential benefits of the merger.
The foregoing discussion of information and factors considered and given
weight by the Cobalt board of directors is not intended to be exhaustive. In
view of the variety of factors considered in connection with its evaluation of
the merger, the Cobalt board of directors did not find it practicable to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its determinations and recommendations.
FOR THE REASONS DISCUSSED ABOVE, THE COBALT BOARD OF DIRECTORS HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE MERGER AND HAS DETERMINED THAT
THE MERGER AGREEMENT IS ADVISABLE, AND THAT THE TERMS OF THE MERGER AGREEMENT
AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF COBALT AND ITS
STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT COBALT'S STOCKHOLDERS VOTE TO
ADOPT AND APPROVE THE MERGER AGREEMENT AND APPROVE THE MERGER.
OPINION OF COBALT'S FINANCIAL ADVISOR
Goldman Sachs has acted as financial advisor to Cobalt in connection with
the merger. On September 18, 2000, Goldman Sachs delivered its oral opinion,
subsequently confirmed in writing, to the Cobalt board of directors that, as of
the date of such opinion, the exchange ratio of 0.50 shares of Sun common stock
to be received for each share of Cobalt common stock pursuant to the merger
agreement was fair from a financial point of view to the holders of Cobalt
common stock.
THE FULL TEXT OF THE GOLDMAN SACHS OPINION IS ATTACHED TO THIS DOCUMENT AS
ANNEX D AND IS INCORPORATED INTO THIS DOCUMENT BY REFERENCE. STOCKHOLDERS OF
COBALT ARE URGED TO, AND SHOULD, READ THE OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed:
- the merger agreement;
- the registration statement on Form S-1, including the prospectus
contained therein dated November 4, 1999, relating to Cobalt's initial
public offering of 5,750,000 shares of Cobalt common stock;
- the annual report to stockholders and the Annual Report on Form 10-K of
Cobalt for the year ended December 31, 1999;
- the annual reports to stockholders and the Annual Reports on Form 10-K of
Sun for the five fiscal years ended June 30, 1999;
- certain interim reports to stockholders and Quarterly Reports on Form
10-Q of Cobalt and Sun;
- certain other communications from Cobalt and Sun to their respective
stockholders; and
- certain internal financial analyses and forecasts for Cobalt prepared by
Cobalt's management.
Goldman Sachs also held discussions with members of the senior management
of Cobalt and Sun regarding their assessment of the strategic rationale for, and
the potential benefits of, the merger and the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, Goldman Sachs reviewed the reported price and trading
activity for Cobalt common stock and Sun common stock, which like many
Internet-related stocks have been and are likely to continue to be subject to
significant short-term price and trading volatility, compared
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certain financial and stock market information for Cobalt and Sun with similar
information for certain other companies the securities of which are publicly
traded, reviewed the financial terms of certain recent business combinations in
the Internet infrastructure and computer hardware industries specifically and in
other industries generally, and performed such other studies and analyses as it
considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information discussed with or reviewed by it and assumed
such accuracy and completeness for purposes of rendering its opinion. Sun did
not make available its forecast of future financial performance. Accordingly,
Goldman Sachs' view of such matters, with the consent of the Cobalt board of
directors, was limited to discussions with the senior management of Sun of
certain publicly available research analysts' estimates for Sun. In addition,
Goldman Sachs has not made an independent evaluation or appraisal of the assets
and liabilities of Cobalt or Sun or any of their subsidiaries and Goldman Sachs
has not been furnished with any such evaluation or appraisal. Goldman Sachs'
advisory services and Goldman Sachs' opinion were provided for the information
and assistance of the Cobalt board of directors in connection with its
consideration of the transaction contemplated by the merger agreement and the
opinion does not constitute a recommendation as to how any holder of Cobalt
common stock should vote with respect to the merger.
The following is a summary of the material financial analyses presented by
Goldman Sachs to the Cobalt board of directors on September 18, 2000. SOME OF
THE SUMMARIES OF THE FINANCIAL ANALYSES INCLUDE INFORMATION PRESENTED IN TABULAR
FORMAT. THE TABLES MUST BE READ TOGETHER WITH THE TEXT ACCOMPANYING EACH
SUMMARY.
Transaction Premium Analysis
Goldman Sachs compared the historical stock prices of Cobalt common stock
and Sun common stock on the basis of the respective closing prices per share on
September 15, 2000, and the respective closing prices and period averages for
the prior five days, 10 days, 20 days, 30 days, 60 days and 90 days. The
following table presents:
- the implied exchange ratio on September 15, 2000 between the closing
prices of Cobalt common stock and Sun common stock and the average
implied exchange ratio between the closing stock prices of Cobalt common
stock and Sun common stock for various periods;
- the premiums over those implied exchange ratios implied by the actual
exchange ratio in the merger;
- the closing stock price or average closing stock prices of Cobalt common
stock at the specified point in time or over the specified period; and
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<PAGE> 42
- the premium represented by the price of Cobalt common stock as implied by
an exchange ratio of 0.50 on September 15, 2000 over the closing stock
price or average closing stock prices of Cobalt common stock at the
specified point in time or over the specified period.
<TABLE>
<CAPTION>
PREMIUM
OVER PREMIUM
IMPLIED IMPLIED PRICE OR OVER PRICE
EXCHANGE EXCHANGE AVERAGE OR AVERAGE
DATE OR PERIOD RATIO RATIO PRICE PRICE
-------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
September 15, 2000............................ 0.3858 29.6% $43.63 29.6%
5 day average................................. 0.4110 21.7 47.54 18.9
10 day average................................ 0.4172 19.8 49.84 13.4
20 day average................................ 0.4026 24.2 49.25 14.8
30 day average................................ 0.3974 25.8 47.44 19.2
60 day average................................ 0.4669 7.1 49.26 14.8
90 day average................................ 0.4411 13.4 43.92 28.7
</TABLE>
Selected Companies Analysis
Goldman Sachs compared specified publicly-available financial information
of Cobalt with specified publicly-available financial information for the
following appliance server companies, open source related companies and Internet
infrastructure companies:
<TABLE>
<CAPTION>
APPLIANCE SERVER COMPANIES OPEN SOURCE RELATED COMPANIES INTERNET INFRASTRUCTURE COMPANIES
-------------------------- ----------------------------- ---------------------------------
<S> <C> <C>
Cacheflow Inc. Caldera Systems, Inc. Alteon Websystems, Inc.
Network Engines, Inc. Red Hat, Inc. Brocade Communications
SonicWALL, Inc. VA Linux Systems, Inc. Systems, Inc.
Watchguard Technologies, Extreme Networks, Inc.
Inc. Foundry Networks, Inc.
Juniper Networks, Inc.
Network Appliance, Inc.
</TABLE>
The following table presents for Cobalt and the groups of appliance server
companies, open source related companies and Internet infrastructure companies:
- levered market capitalization as a multiple of projected year 2000 and
2001 revenue, or revenue multiple;
- levered market capitalization as a multiple of projected year 2000 and
2001 gross profit, or gross profit multiple;
- five-year forecasted compound annual growth rate; and
- the revenue multiple over the five-year forecasted compound annual growth
rate.
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The analysis was performed using stock prices on September 15, 2000. Levered
market capitalization is a company's equity market capitalization plus
outstanding indebtedness and less cash. Forecasted revenue and gross profit were
based on publicly available research analysts' estimates. Compound annual growth
rates are from estimates provided by the Institutional Brokers Estimate System,
or IBES.
<TABLE>
<CAPTION>
REVENUE
MULTIPLE/
IBES 5 YEAR
COMPOUND
REVENUE GROSS PROFIT IBES 5 YEAR ANNUAL
MULTIPLE MULTIPLE COMPOUND GROWTH RATE
------------ ------------ ANNUAL --------------
2000 2001 2000 2001 GROWTH RATE 2000 2001
---- ---- ---- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Cobalt............................................. 19.5x 9.5x 41.5x 19.8x 50% 0.4x 0.2x
Appliance server companies mean.................... 34.5 15.2 59.1 23.9 45 0.8 0.4
Appliance server companies median.................. 22.4 12.8 44.4 21.2 45 0.5 0.3
Open source companies mean......................... 27.7 13.9 72.7 70.0 48 0.6 0.3
Open source companies median....................... 25.2 12.8 72.7 36.2 50 0.5 0.3
Internet infrastructure companies mean............. 53.5 28.8 86.8 46.7 50 1.1 0.6
Internet infrastructure companies median........... 38.1 22.9 62.1 38.6 50 0.7 0.4
</TABLE>
Goldman Sachs compared specified publicly-available financial information
of Sun with specified publicly-available financial information for the following
computer system companies:
<TABLE>
<CAPTION>
COMPUTER SYSTEM COMPANIES
-------------------------
<S> <C> <C>
Apple Computer, Inc.
Compaq Computer Corporation
Dell Computer Corporation
Gateway, Inc.
Hewlett-Packard Company
International Business Machines Corporation
Sun
</TABLE>
The following table presents for Sun and the group of computer system
companies:
- levered market capitalization as multiple of projected year 2000 and 2001
revenue;
- projected year 2000, 2001 and 2002 price to earnings per share ratios, or
PE ratio;
- five-year forecasted compound annual growth rate; and
- the PE ratio over the five-year forecasted compound annual growth rate.
The analysis was performed using stock prices on September 15, 2000. Forecasted
revenue, gross profit and earnings per share were based on publicly available
research analysts' estimates. Compound annual growth rates are from estimates
provided by IBES.
<TABLE>
<CAPTION>
PE RATIO/
IBES 5 YEAR
COMPOUND
REVENUE IBES 5 YEAR ANNUAL
MULTIPLE PE RATIO COMPOUND GROWTH RATE
------------ --------------------- ANNUAL -----------
2000 2001 2000 2001 2002 GROWTH RATE 2000 2001
----- ---- ----- ----- ----- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sun................................ 10.5x 8.4x 96.6x 76.1x 61.9x 21.5% 4.5x 3.5x
Computer system companies mean..... 3.1 2.6 40.1 32.3 29.2 20.4 2.0 1.6
Computer system companies median... 2.1 1.8 29.0 25.0 21.0 20.0 1.6 1.4
</TABLE>
37
<PAGE> 44
Contribution Analysis
Goldman Sachs analyzed and compared the respective contributions of each of
Sun and Cobalt to the combined company's actual revenue and gross profit for
fiscal year 2000 and projected revenue and gross profit for each fiscal year
2001 and 2002 and the combined company's projected operating income before non
cash expenses and net income before non cash expenses for each fiscal year 2001
and 2002, based on publicly available research analysts' estimates for Sun and a
base case estimate prepared by Cobalt's management representing its forecast of
Cobalt's expected financial performance, to the percentage ownerships of the
combined company by the stockholders of each of Sun and Cobalt. The analysis was
performed based on Sun's fiscal year, which ends on June 30. Operating income
before non cash expenses is operating income plus amortization of goodwill and
deferred compensation. Net income before non cash expenses is net income plus
amortization of goodwill and deferred compensation. The following table presents
the results of that analysis:
<TABLE>
<CAPTION>
CONTRIBUTIONS TO TOTAL
(BASE CASE)
-----------------------
SUN COBALT
------- ----------
<S> <C> <C>
REVENUE
FY 2000A............................................ 99.72% 0.28%
FY 2001E............................................ 99.69 0.31
FY 2002E............................................ 99.26 0.74
GROSS PROFIT
FY 2000A............................................ 99.77% 0.23%
FY 2001E............................................ 99.71 0.29
FY 2002E............................................ 99.29 0.71
OPERATING INCOME BEFORE NON CASH EXPENSES
FY 2001E............................................ NM NM
FY 2002E............................................ 99.78% 0.22%
NET INCOME BEFORE NON CASH EXPENSES
FY 2001E............................................ 99.90% 0.10%
FY 2002E............................................ 99.44 0.56
</TABLE>
Goldman Sachs also analyzed and compared the respective contributions of
each of Sun and Cobalt to the combined company's projected revenue and gross
profit for each fiscal year 2001 and 2002 and the combined company's projected
operating income before non cash expenses and net income before non cash
expenses for each fiscal year 2001 and 2002, based on publicly available
research analysts' estimates for Sun and a target case estimate prepared by
Cobalt's management representing its plan for Cobalt's financial performance
assuming certain specific objectives of Cobalt's management for the growth of
Cobalt's business are achieved, to the percentage ownerships
38
<PAGE> 45
of the combined company by the stockholders of each of Sun and Cobalt. The
following table presents the results of that analysis:
<TABLE>
<CAPTION>
CONTRIBUTIONS TO TOTAL
(TARGET CASE)
-----------------------
SUN COBALT
------- ----------
<S> <C> <C>
REVENUE
FY 2001E............................................ 99.65% 0.35%
FY 2002E............................................ 99.05 0.95
GROSS PROFIT
FY 2001E............................................ 99.66% 0.34%
FY 2002E............................................ 99.06 0.94
OPERATING INCOME BEFORE NON CASH EXPENSES
FY 2001E............................................ 99.94% 0.06%
FY 2002E............................................ 99.23 0.77
NET INCOME BEFORE NON CASH EXPENSES
FY 2001E............................................ 99.78% 0.22%
FY 2002E............................................ 99.10 0.90
</TABLE>
In comparison, based on the exchange ratio in the merger and Sun's and Cobalt's
closing stock prices on September 15, 2000, stockholders of Sun would own
approximately 98.98% of the combined company's equity interests considered on a
diluted basis and the stockholders of Cobalt would own approximately 1.02% of
the combined company's equity interests on a diluted basis. Goldman Sachs
observed that the contribution analyses of the base case gave rise to implied
exchange ratios ranging from 0.053 to 0.370 and the contribution analyses of the
target case gave rise to implied exchange ratios ranging from 0.055 to 0.484.
Pro Forma Merger Analysis
Goldman Sachs prepared pro forma analyses of the financial impact of the
merger using earnings estimates for (a) Cobalt that were based on the base case
and target case that were prepared by Cobalt's management and (b) Sun that were
based on publicly available research analysts' estimates. For each of the fiscal
years 2001 and 2002, Goldman Sachs compared the estimated earnings per share of
Sun common stock on a stand-alone basis to the estimated earnings per share of
the common stock of Sun on a pro forma basis. In addition, for each of the
fiscal years 2001 and 2002, Goldman Sachs compared the estimated earnings per
share before non cash expenses of Sun common stock on a standalone basis to the
estimated earnings per share before non cash expenses of the common stock of Sun
on a pro forma basis. Earnings per share before non cash expenses is earnings
per share plus amortization of goodwill and deferred compensation on a per share
basis. Based on such analyses and before taking into account any of the possible
benefits that may be realized following the merger, Goldman Sachs estimated that
the proposed transaction would give rise to dilution to Sun's stockholders (a)
of less than 1% on an earnings per share basis before non cash expenses in each
of fiscal years 2001 and 2002 and (b) ranging from 13% to 16% on an earnings per
share basis in each of fiscal years 2001 and 2002.
39
<PAGE> 46
Comparable Transaction Premium Analysis
Goldman Sachs analyzed certain information relating to the following 15
selected Internet infrastructure transactions and six selected hardware company
transactions:
<TABLE>
<CAPTION>
INTERNET INFRASTRUCTURE TRANSACTIONS (TARGET/ ACQUIRER) HARDWARE TRANSACTIONS (TARGET/ ACQUIRER)
------------------------------------------------------- ----------------------------------------
<S> <C>
Alteon Websystems, Inc./Nortel Networks Corporation Conner Peripherals Inc./Seagate
Active Software, Inc./webMethods, Inc. Technology Inc.
OnDisplay, Inc./Vignette Corporation VeriFone, Inc./Hewlett-Packard
ArrowPoint Communications, Inc./Cisco Systems, Inc. Company
Verio Inc./NTT Communications Corp. Tandem Computers Incorporated/ Compaq
Net2Phone, Inc./AT&T Corp. Computer Corporation
Network Solutions, Inc./VeriSign, Inc. Amdahl Corporation/Fujitsu Limited
Newbridge Networks Corporation/Alcatel Digital Equipment Corporation/Compaq
PairGain Technologies, Inc./ADC Computer Corporation
Telecommunications, Inc. Data General Corporation/EMC
InterVU Inc./Akamai Technologies, Inc. Corporation
Ortel Corporation/Lucent Technologies Inc.
Silknet Software Inc./Kana Communications, Inc.
Andover.net, Inc./VA Linux Systems, Inc.
Concentric Network Corporation/Nextlink
Communications, Inc.
Forte Software, Inc./Sun
</TABLE>
The Internet infrastructure transactions were chosen because they involved
Internet infrastructure companies in year 2000 or involved Sun. The hardware
company transactions were chosen because they involved hardware companies since
September 1995. The following table presents the ranges, means and medians of
the price premiums paid in the transactions and in relation to the closing price
of the target the day before the transaction was announced and the average price
of the target in the 5 days, 10 days, 20 days, 30 days, 60 days and 90 days
prior to the announcement. The premium was calculated based on the equity
consideration paid for the target by the acquirer in the transactions.
<TABLE>
<CAPTION>
SELECTED INTERNET SELECTED HARDWARE
INFRASTRUCTURE TRANSACTIONS TRANSACTIONS
---------------------------- --------------------------
MEAN MEDIAN RANGE MEAN MEDIAN RANGE
---- ------ ---------- ---- ------ --------
<S> <C> <C> <C> <C> <C> <C>
PRICE PREMIUM TO
Day prior closing price.............................. 31% 31% 0% - 63% 38% 40% 5% - 67%
Average of prior 5-day closing prices................ 39 41 (4) - 87 41 43 18 - 62
Average of prior 10-day closing prices............... 44 43 5 - 96 43 44 20 - 54
Average of prior 20-day closing prices............... 47 41 18 - 91 43 49 23 - 55
Average of prior 30-day closing prices............... 49 46 17 - 87 44 48 26 - 56
Average of prior 60-day closing prices............... 52 58 (36) - 112 45 42 30 - 67
Average of prior 90-day closing prices............... 65 73 (39) - 150 48 47 33 - 70
</TABLE>
40
<PAGE> 47
The following table presents the ranges, means and medians of the exchange
ratio paid in the transactions as a premium to the average implied exchange
ratios between the closing stock prices of the target and the acquirer in the
five days, 10 days, 20 days, 30 days, 60 days and 90 days prior to the
announcement. The premium was calculated based on the equity consideration paid
for the target by the acquirer in the transactions.
<TABLE>
<CAPTION>
SELECTED INTERNET
INFRASTRUCTURE TRANSACTIONS SELECTED HARDWARE TRANSACTIONS
---------------------------- ------------------------------
MEAN MEDIAN RANGE MEAN MEDIAN RANGE
---- ------ ---------- ----- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
EXCHANGE RATIO PAID IN THE TRANSACTIONS AS A
PREMIUM TO THE AVERAGE IMPLIED EXCHANGE RATIOS
FOR THE PRIOR
5-days............................................. 37% 45% (1)% - 68% 41% 42% 19% - 65%
10-days............................................ 40 41 7 - 79 42 42 22 - 65
20-days............................................ 40 40 12 - 82 44 42 22 - 73
30-days............................................ 43 38 15 - 86 44 42 24 - 80
60-days............................................ 47 37 8 - 105 42 37 19 - 93
90-days............................................ 51 35 (6) - 164 44 37 12 - 106
</TABLE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No transaction used
in the above analyses was directly comparable to the merger, no company used in
the above analyses was directly comparable to Cobalt and no company, other than
Sun, used in the above analyses was directly comparable to Sun. The analyses
were prepared solely for purposes of Goldman Sachs' providing its opinion to the
Cobalt board of directors as to the fairness from a financial point of view of
the exchange ratio pursuant to the merger agreement to the holders of Cobalt
common stock. The analyses do not purport to be appraisals or necessarily
reflect the prices at which the business or securities actually may be sold.
Analyses based upon forecasts of future results, which are inherently subject to
uncertainty, are not necessarily indicative of actual future results, which may
be significantly more or less favorable than suggested by such analyses. As
described above, Goldman Sachs' opinion to the Cobalt board of directors was one
of many factors taken into consideration by the Cobalt board of directors in
making its determination to approve the merger agreement. The foregoing summary
describes material financial analyses used by Goldman Sachs in connection with
providing its opinion to the Cobalt board of directors on September 18, 2000,
but does not purport to be a complete description of the analysis performed by
Goldman Sachs in connection with such opinion and is qualified by reference to
the written opinion of Goldman Sachs included in this document as Annex D.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with Cobalt, having provided certain investment banking services to
Cobalt from time to time, including having acted as managing underwriter of its
initial public offering of 5,750,000 shares of Cobalt common stock in November
1999 and having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to, the merger agreement.
Goldman Sachs has also provided certain investment banking services to Sun from
time to time, including having acted as managing underwriter of a public
offering of $1.5 billion in principal amount of senior notes of Sun in July
1999, and may provide investment banking services to Sun in the future. Goldman
Sachs provides a full range of financial advisory and securities services and,
in the course of its normal trading activities, may from time to time effect
transactions and hold securities, including derivative securities, of Cobalt or
Sun for its own account and for the accounts of customers.
41
<PAGE> 48
Pursuant to a letter agreement dated September 1, 2000, Cobalt engaged
Goldman Sachs to act as its financial advisor in connection with the possible
sale of all or a portion of Cobalt. Cobalt has agreed to pay Goldman Sachs a
transaction fee of 0.75% of the aggregate consideration paid in the merger.
Twenty five percent of the fee was payable upon the announcement of the merger
and the balance of the fee will be payable upon consummation of the merger.
Cobalt has agreed to reimburse Goldman Sachs for its reasonable out-of-pocket
expenses, including attorneys' fees, and to indemnify Goldman Sachs against
certain liabilities, including certain liabilities under the federal securities
laws.
THE FULL TEXT OF THE OPINION DELIVERED BY GOLDMAN SACHS TO THE COBALT BOARD
OF DIRECTORS, DATED SEPTEMBER 18, 2000, WHICH SETS FORTH THE ASSUMPTIONS MADE,
GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF
REVIEW UNDERTAKEN BY GOLDMAN SACHS IN RENDERING ITS OPINION, IS ATTACHED TO THIS
DOCUMENT AS ANNEX D AND IS INCORPORATED HEREIN BY REFERENCE. GOLDMAN SACHS'
OPINION IS DIRECTED TO THE COBALT BOARD OF DIRECTORS AND ADDRESSES ONLY THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE RECEIVED BY
THE HOLDERS OF COMMON STOCK OF COBALT. GOLDMAN SACHS' OPINION DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY COBALT STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE WITH RESPECT TO THE PROPOSED TRANSACTION. IN FURNISHING ITS OPINION,
GOLDMAN SACHS DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF THE TERM
"EXPERT" AS USED IN THE SECURITIES ACT, NOR DID IT ADMIT THAT ITS OPINION
CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF THE SECURITIES ACT. THE
SUMMARY OF GOLDMAN SACHS' OPINION DESCRIBED ABOVE IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF ITS OPINION. COBALT STOCKHOLDERS ARE URGED TO
READ THE OPINION CAREFULLY IN ITS ENTIRETY.
INTERESTS OF DIRECTORS AND OFFICERS OF COBALT IN THE MERGER
In considering the recommendation of the Cobalt board of directors with
respect to the adoption and approval of the merger agreement and approval of the
merger, Cobalt stockholders should be aware that certain members of the
management of Cobalt and the Cobalt board of directors may have interests in the
merger that are different from, or in addition to, the interests of Cobalt
stockholders generally. The Cobalt board of directors was aware of these
interests and considered the following matters, among others, in approving the
merger agreement and the merger.
As of the record date for the special meeting of Cobalt stockholders at
which the merger agreement and the merger will be presented and voted upon,
directors and executive officers of Cobalt (and their respective affiliates)
collectively beneficially owned an aggregate of approximately 4,050,014 shares
of Cobalt common stock, excluding unexercised options to purchase Cobalt common
stock. Upon completion of the merger, it is anticipated that the former
directors and executive officers of Cobalt (and their respective affiliates)
collectively will beneficially own an aggregate of approximately 3,519,541
shares of Sun common stock, or less than one percent of the then outstanding
shares of Sun common stock, calculated on the basis set forth in the section
entitled "Security Ownership of Certain Beneficial Owners and Management of
Cobalt" beginning on page 94 of this document.
As of the record date for the special meeting at which the merger agreement
and the merger will be presented and voted upon, directors and executive
officers of Cobalt held outstanding stock options to purchase an aggregate of
approximately 2,985,250 shares of Cobalt common stock. Upon the completion of
the merger, these options will be assumed by Sun in accordance with the merger
agreement. An aggregate of approximately 330,000 of such outstanding stock
options are held by Cobalt's non-employee directors under Cobalt's 1999 director
stock option plan. Under this 1999 plan, if a current Cobalt non-employee
director is terminated as a director following the completion of the merger, all
remaining unvested option shares held by such non-employee director fully vest
and become exercisable immediately upon such termination. Sun currently
anticipates that it will replace
42
<PAGE> 49
the entire Cobalt board of directors upon completion of the merger. See the
section entitled "-- The Merger Agreement" beginning on page 46 of this
document, for a further description of the assumption of Cobalt options by Sun
and for a description of the outstanding Cobalt options that will become options
to purchase Sun common stock upon completion of the merger.
Cobalt officers and employee directors who hold less than five percent of
Cobalt's outstanding common stock are eligible to participate in Cobalt's
employee stock purchase plan. The employee stock purchase plan permits eligible
Cobalt employees to purchase common stock through payroll deductions, which may
not exceed the lesser of 15% of an employee's compensation or $25,000 per annum.
The current offering period under Cobalt's employee stock purchase plan began on
May 1, 2000 and ends on October 31, 2000 and the next offering period under the
plan begins on November 1, 2000. Through September 30, 2000, Cobalt's officers,
including Mr. DeWitt, who is also a director, currently participating in this
program have committed an aggregate of approximately $83,363 in payroll
deductions during the current offering period. The purchase price of Cobalt's
common stock under its employee stock purchase plan is 85 percent of the lesser
of the fair market value per share on the start date of the offering period or
at the end of the purchase period. Under the merger agreement, outstanding
purchase rights under the plan will be exercised immediately prior to the
completion of the merger and each share purchased under such exercise will be
converted into the right to receive 0.50 shares of Sun common stock (subject to
adjustment to reflect the effect of any stock split, stock dividend,
recapitalization, reclassification or the like on Sun or Cobalt common stock).
Officers of Cobalt, including Stephen DeWitt, Vivek Mehra, Kenton Chow,
Gary Martell, Patrick Conte, Kelly Herrell, George Korchinsky, Sharon McCorkle,
Mark Orr, Ruth Henniger, Y. Samuel Cho and Chris Hogan, along with several other
Cobalt employees, have received employment offers from Sun, effective only upon
the completion of the merger, that include compensation and proposed options to
purchase shares of Sun common stock if the offers are accepted. Under previously
existing employment agreements with Cobalt, these executive officers might have
been entitled in some instances to severance benefits or payments and
acceleration of stock option vesting following the merger. These executive
officers have entered into letter agreements with Sun and Cobalt under which
they agreed to waive, upon completion of the merger, the severance and
acceleration benefits described therein. See the section entitled "-- Other
Material Agreements Relating to the Merger," beginning on page 61 of this
document, for a further description of the severance and waiver agreements.
In addition, George Korchinsky, Cobalt's Vice President, EMEA Operations,
has a stock option agreement with Cobalt under which the lesser of 50% of the
original option shares granted or all remaining unvested option shares will vest
and become exercisable upon the completion of the merger. At the time of the
merger, 55,000 option shares will vest and become exercisable under the terms of
this agreement. In addition, Mr. Korchinsky has a letter employment agreement
with Cobalt under which he has a 90-day period following the completion of the
merger to accept an employment position with Sun or to decide that the merger
constitutes constructive termination of his employment. If Mr. Korchinsky
determines that the merger does constitute constructive termination, all of his
options will vest up to the date of constructive termination regardless of the
12-month initial anniversary vesting, plus an additional six months of options
will be deemed vested. Upon a constructive termination, a total of 33,750 option
shares under all three option grants would vest and become exercisable. The
letter employment agreement also provides that if Mr. Korchinsky is terminated
without cause, he is entitled to receive 12 months of his annual base salary and
benefits in exchange for a general release of any claims. At the time of the
merger, Mr. Korchinsky would be entitled to receive $160,000 in base salary plus
any employer sponsored benefits if terminated without cause.
43
<PAGE> 50
Messrs. DeWitt and Mehra have entered into non-competition agreements with
Sun under which they have agreed, upon completion of the merger, not to engage
in some activities or make specified investments, and not to solicit Sun
employees, for a period of two years following the completion of the merger. See
the section entitled "-- Other Material Agreements Relating to the Merger,"
beginning on page 61 of this document, for a further description of these
agreements.
Sun has agreed to fulfill and honor in all respects the indemnification
agreements Cobalt and its subsidiaries have previously entered into with their
respective officers and directors and to fulfill and honor any indemnification
provisions of Cobalt's and its subsidiaries' applicable charter documents. The
merger agreement provides that all rights to indemnification for present and
former officers and directors of Cobalt will survive the merger and continue in
full force and effect for a period of not less than six years from the date of
the completion of the merger. Sun also has agreed to maintain insurance for
Cobalt's directors and officers that is no less favorable than Cobalt's current
directors' and officers' liability insurance for actions or omissions occurring
on or prior to the date of the completion of the merger for a period of not less
than four years after the completion of the merger, subject to limitations.
As a result of these interests, these directors and officers of Cobalt
could be more likely to vote to adopt and approve the merger agreement and
approve the merger than if they did not hold these interests. Cobalt
stockholders should consider whether these interests may have influenced these
directors and officers to support or recommend the merger.
EFFECTS OF GOLDEN PARACHUTE TAX RULES
George Korchinsky, Cobalt's Vice President, EMEA Operations, currently
holds the following stock options: an option to purchase 120,000 shares of
Cobalt common stock that was granted to him on July 15, 1998 with an exercise
price of $0.50 per share; an option granted on July 27, 1999 to purchase an
additional 60,000 shares of Cobalt common stock at an exercise price of $2.50
per share; and an option granted on April 28, 2000 to purchase another 30,000
shares of Cobalt common stock at an exercise price of $31.625 per share. Each
option vests as to 25% of the option shares upon completion of one year of
employment with Cobalt measured from the grant date (for the 120,000-share
grant, the one-year period will be measured from the July 8, 1998 commencement
date of his employment) and will vest as to the balance of the shares in a
series of 36 successive equal monthly installments upon his completion of each
additional month of employment over the next 36 months of employment thereafter.
However, the 120,000-share option will immediately vest as to the lesser of
60,000 option shares or all of the remaining unvested option shares, in the
event Cobalt is acquired in a transaction such as the merger with Sun. In
addition, Mr. Korchinsky will, pursuant to his existing employment agreement
with Cobalt, have a 90-day period following the completion of the merger in
which to accept a position of employment with Sun or to treat the merger as a
constructive termination of his employment. If Mr. Korchinsky elects to treat
the merger as a constructive termination, he will be immediately credited with
an additional 6 months of vesting credit under each of his options, and as to
the April 28, 2000 grant he will also vest in an additional 7,500 option shares.
His employment agreement also provides that if he is terminated without cause,
he will be entitled to 12 months of base salary and company-paid benefits in
exchange for a general release of any claims he may have against Cobalt.
The accelerated vesting of Mr. Korchinsky's options, both at the time of
the merger and upon any election by him to treat that merger as a constructive
termination, and payment of the severance benefits to which he may become
entitled should he be terminated without cause within one year after the merger,
could be at a sufficiently high level to cause those benefits to be considered
parachute payments under the Federal tax laws. These benefits will be deemed to
be parachute
44
<PAGE> 51
payments if the combined value of those accelerated vesting benefits and
severance payments exceed 2.99 times Mr. Korchinsky's average W-2 wages for the
1998 and 1999 fiscal years, with any wages for a partial year to be annualized
for purposes of determining the average. The value of each of those benefits
will be specially calculated for parachute payment purposes under the proposed
Federal income tax regulations. If the resulting value exceeds the 2.99 limit,
then an excess parachute payment will result under the Internal Revenue Code to
the extent that the resulting value exceeds a base amount equal to ONE times his
average W-2 wages for those years.
In such event, a portion of the base amount will be allocated to each of
Mr. Korchinsky's parachute payments in the same proportion as the value of each
particular payment (whether the parachute value attributed to the accelerated
vesting of his stock options or the parachute value of his severance payments)
bears to the total parachute value of all those parachute payments. To the
extent the parachute value attributed to the accelerated vesting of his options
or the parachute value of his severance payments exceeds the portion of the base
amount allocated to that particular parachute payment, an excess parachute
payment will arise, and the deduction otherwise allowable to Cobalt for federal
income tax purposes when those options are exercised or when those severance
payments are made will be reduced by the excess parachute payment triggered by
those benefits. In other words, the deduction to which Cobalt might otherwise be
entitled upon the exercise of Mr. Korchinsky's options (the excess of the fair
market value of the purchased shares over the option exercise price paid for
those shares) will be reduced by the excess parachute payment attributed to the
accelerated vesting of his stock options, and the deduction otherwise allowable
for the base salary and employee benefit severance payments made to him will
also reduced by the excess parachute payment attributed to those severance
benefits. In addition, Mr. Korchinsky would be subject to a 20% excise tax on
his excess parachute payments if he is subject to US income taxes at the time
those payments or benefits are paid or provided.
CONSIDERATION OF THE MERGER BY SUN'S BOARD OF DIRECTORS
SUN'S REASONS FOR THE MERGER
The Sun board of directors approved the merger agreement and the merger
because it determined that the combined company would have the potential to
realize a stronger competitive position and improved long-term operating and
financial results. In particular, the Sun board of directors believes that the
merger will allow Sun and Cobalt the opportunity to:
- provide enterprises with a more complete range of servers from low cost,
easy to use, server appliances priced below $1,000 to high end fault
tolerant enterprise servers costing more than $1,000,000;
- capitalize on Sun's manufacturing resources and support services to
support Cobalt's server appliances;
- benefit from combining established customer relationships of both
companies;
- combine resources in each companies' strategy of supporting open
programming standards;
- sell Cobalt's products into Sun's installed customer base through its
larger sales forces;
- take advantage of the financial resources of the combined company, which
are much greater than Cobalt's financial resources; and
- improve time to market for products of the combined company.
45
<PAGE> 52
The Sun board of directors also believes that the merger will contribute to
the success of the combined companies because:
- the merger offers the opportunity to reduce Sun's time to market in
developing and deploying low cost, easy to use, server appliances;
- the merger will grow Sun's talent pool and management depth focused on
server and related appliances; and
- the merger will broaden the range of products that Sun will be able to
offer to enterprise customers.
After taking into account these and other factors, the Sun board of
directors unanimously determined that the merger agreement and the merger were
in the best interests of Sun and its stockholders and that Sun should enter into
the merger agreement and complete the merger.
THE MERGER AGREEMENT
STRUCTURE OF THE MERGER
The merger agreement provides for the merger of Azure Acquisition
Corporation, a newly-formed, wholly-owned subsidiary of Sun, with and into
Cobalt. Cobalt will survive the merger as a wholly-owned subsidiary of Sun.
COMPLETION AND EFFECTIVENESS OF THE MERGER
We will complete the merger when all of the conditions to completion of the
merger contained in the merger agreement are satisfied or waived, including
approval of the merger agreement by the stockholders of Cobalt. The merger will
become effective upon the filing of a certificate of merger with the State of
Delaware.
We are working towards completing the merger as quickly as possible. We
currently plan to complete the merger prior to December 31, 2000. Because the
merger is subject to governmental and regulatory approvals and other conditions,
however, we cannot predict the exact timing.
CONVERSION OF COBALT COMMON STOCK IN THE MERGER
At the effective time of the merger, by virtue of the merger and without
any action on the part of Sun, Azure, Cobalt or any of their securityholders,
each share of Cobalt common stock issued and outstanding immediately prior to
the effective time will be cancelled and extinguished and automatically
converted into the right to receive 0.50 shares of Sun common stock (including,
with respect to each such share of Sun common stock issued, the associated
rights as described in the section entitled "Comparison of Rights of Holders of
Cobalt Common Stock and Sun Common Stock -- Stockholder Rights Plan" beginning
on page 102 of this document) upon surrender of the certificate representing
such share of Cobalt common stock in the manner provided in the merger
agreement, or in the case of a lost, stolen or destroyed certificate, upon
delivery of an affidavit, and bond, if required.
This exchange ratio (i.e., 0.50 shares of Sun common stock for each share
of Cobalt common stock) in the merger will also be adjusted to reflect the
effect of any forward stock split, reverse stock split, stock dividend
(including any dividend or distribution of securities convertible into Sun
common stock or Cobalt common stock), extraordinary cash dividends,
reorganization, recapitalization, reclassification, combination, exchange of
shares or other like change with respect to Sun common
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stock or Cobalt common stock occurring prior to the effective time of the
merger, including the two-for-one forward stock split, to be paid in the form of
a stock dividend, approved by the Sun board of directors on August 16, 2000,
which will be effected (if at all) only upon approval of a proposed increase in
the authorized number of shares of Sun common stock by the stockholders of Sun
at the currently scheduled annual meeting of Sun stockholders to be held on
November 8, 2000.
Each share of Cobalt common stock held by Cobalt or owned by Sun or Azure
or any direct or indirect wholly-owned subsidiary of Sun immediately prior to
the effective time of the merger will be canceled and extinguished.
EXCHANGE OF COBALT STOCK CERTIFICATES FOR SUN STOCK CERTIFICATES
Promptly following the effective time of the merger, an exchange agent for
the merger will mail to you a letter of transmittal and instructions for
surrendering your Cobalt stock certificates in exchange for Sun stock
certificates and for cash in lieu of a fractional share and any dividends or
other distributions, if any. When you deliver your Cobalt stock certificates to
the exchange agent along with any required documents, your Cobalt stock
certificates will be canceled and you will receive Sun stock certificates
representing the number of full shares of Sun common stock to which you are
entitled under the merger agreement. You will also receive payment in cash,
without interest, in lieu of any fractional shares of Sun common stock which
would have been otherwise issuable to you as a result of the merger.
YOU SHOULD NOT SUBMIT YOUR COBALT STOCK CERTIFICATES FOR EXCHANGE UNTIL YOU
RECEIVE INSTRUCTIONS FROM THE EXCHANGE AGENT.
FRACTIONAL SHARES
No fractional shares of Sun common stock will be issued in connection with
the merger. Instead you will receive cash, without interest, in lieu of a
fraction of a share of Sun common stock equal to the product obtained by
multiplying such fraction by the average closing price on the Nasdaq National
Market, as reported in The Wall Street Journal, Western Edition, of one share of
Sun common stock for the five consecutive trading days ending on the trading day
immediately prior to the effective date of the merger.
DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES
You are not entitled to receive any dividends or other distributions on Sun
common stock until the merger is completed and you have surrendered your Cobalt
stock certificates in exchange for Sun stock certificates. Promptly after your
Sun stock certificates are issued, you will receive payment for any dividend or
other distribution on Sun common stock with a record date after the merger and a
payment date prior to the date you surrender your Cobalt stock certificates. You
will receive payment for any dividend or other distribution on Sun common stock
with a record date after the merger and a payment date after the date you
surrender your Cobalt stock certificates promptly after the payment date.
TRANSFERS OF OWNERSHIP AND LOST STOCK CERTIFICATES
Sun will only issue a Sun stock certificate or a check in lieu of a
fractional share in a name other than the name in which a surrendered Cobalt
stock certificate is registered if you present the exchange agent with all
documents required to show and effect the unrecorded transfer of ownership and
show that you paid any applicable stock transfer taxes. If your Cobalt stock
certificate has been
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lost, stolen or destroyed, you may need to deliver an affidavit or bond prior to
receiving your Sun stock certificate.
COBALT'S REPRESENTATIONS AND WARRANTIES
Cobalt made a number of representations and warranties to Sun in the merger
agreement regarding aspects of its business, financial condition, structure and
other facts pertinent to the merger. These representations and warranties
include representations as to:
- corporate organization and qualification to do business of Cobalt and its
subsidiaries;
- Cobalt's certificate of incorporation and bylaws;
- Cobalt's capitalization;
- authorization of the merger agreement and the stock option agreement by
Cobalt;
- regulatory approvals required to complete the merger;
- the effect of the merger on obligations of Cobalt and under applicable
laws;
- permits required to conduct Cobalt's business and compliance with those
permits;
- Cobalt's compliance with applicable laws;
- Cobalt's filings and reports with the Securities and Exchange Commission;
- Cobalt's financial statements;
- Cobalt's liabilities;
- changes in Cobalt's business since June 30, 2000 and actions taken by
Cobalt since December 31, 1999;
- litigation involving Cobalt;
- Cobalt's employee benefit plans;
- Cobalt's labor relations;
- information supplied by Cobalt in this document and the related
registration statement filed by Sun;
- restrictions on the conduct of Cobalt's business;
- Cobalt's title to the properties it owns and leases;
- Cobalt's taxes;
- environmental matters pertaining to Cobalt;
- payments, if any, required to be made by Cobalt to brokers and agents on
account of the merger;
- intellectual property matters;
- Cobalt's material contracts;
- Cobalt's insurance coverage;
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- the fairness opinion received by Cobalt from Goldman Sachs;
- approvals by the Cobalt board;
- the vote of Cobalt stockholders required to approve the merger; and
- the inapplicability of state takeover statutes.
The representations and warranties of Cobalt contained in the merger
agreement expire at the completion of the merger.
SUN'S REPRESENTATIONS AND WARRANTIES
Sun and Azure have made a number of representations and warranties to
Cobalt in the merger agreement regarding aspects of Sun's business, financial
condition, structure and other facts pertinent to the merger. These
representations and warranties include representations as to:
- corporate organization and qualification to do business of Sun and its
subsidiaries;
- Sun's certificate of incorporation and bylaws;
- Sun's capitalization;
- authorization of the merger agreement and stock option agreement by Sun
and Azure;
- regulatory approvals required to complete the merger;
- the effect of the merger on obligations of Sun under applicable laws;
- Sun's filings and reports with the Securities and Exchange Commission;
- Sun's financial statements;
- changes in Sun's business since June 30, 2000; and
- information supplied by Sun in this document and the related registration
statement filed by Sun.
The representations and warranties of Sun and Azure contained in the merger
agreement expire at the completion of the merger.
The representations and warranties contained in the merger agreement are
complicated and not easily summarized. You are urged to carefully read the
articles of the merger agreement entitled "Representations and Warranties of the
Company" and "Representations and Warranties of Parent and Merger Sub."
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COBALT'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
Under the terms of the merger agreement, Cobalt agreed that, until the
earlier of the completion of the merger or termination of the merger agreement,
or unless Sun consents in writing, Cobalt will use its commercially reasonable
efforts consistent with past practices and policies to:
- preserve intact its present business organization;
- keep available the services of its present officers and employees; and
- preserve its relationships with customers, suppliers, distributors,
licensors, licensees, and others with which it has business dealings.
Under the terms of the merger agreement, Cobalt also agreed that, until the
earlier of the completion of the merger or termination of the merger agreement,
or unless Sun consents in writing, Cobalt will conduct its business in
compliance with some specific restrictions relating to the following:
- restricted stock and stock options;
- employees and employee benefits, including severance and termination
payments;
- Cobalt's intellectual property;
- the issuance of dividends or other distributions;
- the issuance and redemption of securities;
- modification of Cobalt's certificate of incorporation and bylaws;
- the acquisition of assets or other entities;
- the sale, lease, license and disposition of assets;
- the incurrence of indebtedness;
- the adoption or amendment of employee benefit plans;
- payment or settlements of liabilities;
- capital expenditures;
- entrance into or modification of contracts;
- accounting policies and procedures;
- incurrence of obligations to make certain expenditures;
- treatment of the merger as a "reorganization" under the Internal Revenue
Code;
- delaying or hindering the consummation of the merger;
- hiring of employees;
- making of tax elections; and
- payments to professional service advisors.
The agreements related to the conduct of Cobalt's business in the merger
agreement are complicated and not easily summarized. You are urged to carefully
read the sections of the merger agreement entitled "Conduct Prior to the
Effective Time -- Conduct of Business by the Company."
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SUN'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER
Under the terms of the merger agreement, Sun agreed that, until the earlier
of the completion of the merger or termination of the merger agreement, or
unless Cobalt consents in writing, Sun will not engage in any action that could
reasonably be expected to cause the merger to fail to qualify as a
"reorganization" under the Internal Revenue Code.
NO SOLICITATION BY COBALT
Under the terms of the merger agreement, Cobalt further agreed to cease, as
of the date of the merger agreement, any and all existing activities,
discussions or negotiations with any parties conducted prior to that date with
respect to any Acquisition Proposal.
Under the terms of the merger agreement, an ACQUISITION PROPOSAL is any
offer or proposal providing for any Acquisition Transaction, other than an offer
or proposal from Sun.
Under the terms of the merger agreement, an ACQUISITION TRANSACTION is any
transaction or series of related transactions, other than the merger, involving
any of the following:
- the acquisition or purchase from Cobalt by any person or group of more
than a 15% interest in the total outstanding voting securities of Cobalt
or any of its subsidiaries;
- any tender offer or exchange offer that if consummated would result in
any person or group beneficially owning 15% or more of the total
outstanding voting securities of Cobalt or any of its subsidiaries;
- any merger, consolidation, business combination or similar transaction
involving Cobalt pursuant to which the stockholders of Cobalt immediately
preceding such transaction hold less than 85% of the equity interests in
the surviving or resulting entity;
- any sale, lease outside the ordinary course of business, exchange,
transfer, license outside the ordinary course of business, acquisition or
disposition of more than 15% of the assets of Cobalt; or
- any liquidation or dissolution of Cobalt.
Until the merger is completed or the merger agreement is terminated, under
the terms of the merger agreement Cobalt agreed that neither it nor any of its
subsidiaries will:
- solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal;
- participate in any discussions or negotiations regarding any Acquisition
Proposal;
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
Acquisition Proposal;
- engage in discussions with any person with respect to any Acquisition
Proposal, except as to the existence of the Acquisition Proposal
provisions in the merger agreement;
- subject to certain limited exceptions in the event of a Superior Offer,
as discussed below, approve, endorse or recommend any Acquisition
Proposal; or
- enter into any letter of intent or similar document or any contract,
agreement or commitment contemplating or otherwise relating to any
Acquisition Transaction.
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For purposes of the foregoing, any violation of any of the restrictions in
the immediately preceding paragraph by any officer or director of Cobalt or any
of its subsidiaries, or any investment banker, attorney or other advisor or
representative of Cobalt or any of its subsidiaries is deemed to be a breach of
the relevant restriction by Cobalt.
Under the terms of the merger agreement, a SUPERIOR OFFER is a bona fide,
unsolicited, written Acquisition Proposal for all of the outstanding shares of
Cobalt common stock on terms that the board of directors of Cobalt determines,
in good faith and after considering the advice of a financial advisor and taking
into account all the terms and conditions of the Acquisition Proposal, to be
more favorable to Cobalt stockholders than the terms of the merger.
However, an offer will not be considered a Superior Offer under the terms
of the merger agreement if any financing required to consummate the transaction
contemplated by such offer is neither committed nor likely in the judgment of
the Cobalt board of directors to be obtained by such third party on a timely
basis.
Between the date this document was mailed to Cobalt stockholders and the
date, if any, that the merger agreement is approved by the Cobalt stockholders,
the terms of the merger agreement allow Cobalt to furnish information regarding
Cobalt and its subsidiaries to, and to enter into a confidentiality agreement
with or to enter into discussions with, any person or group in response to a
Superior Offer submitted by the person or group, and not withdrawn, if all of
the following conditions are met:
- neither Cobalt nor any of its representatives or subsidiaries has
breached the non-solicitation provisions contained in the merger
agreement;
- the board of directors of Cobalt concludes in good faith, after
consultation with its outside legal counsel, that such action is required
in order for the Cobalt board of directors to comply with its fiduciary
obligations to Cobalt's stockholders under applicable law;
- prior to furnishing any such information to, or entering into discussions
or negotiations with, the person or group, Cobalt gives Sun written
notice of the identity of such person or group and of Cobalt's intention
to furnish information to, or enter into discussion or negotiations with,
such person or group and Cobalt receives from such person or group an
executed confidentiality agreement at least as restrictive as the
Confidential Disclosure Agreement between Cobalt and Sun; and
- contemporaneously with furnishing any information to the person or group,
Cobalt furnishes the same information to Sun, to the extent the
information has not been previously furnished by Cobalt to Sun.
Under the terms of the merger agreement, Cobalt has agreed to inform Sun,
within 24 hours, of any request for information that Cobalt reasonably believes
is likely to lead to an Acquisition Proposal, or of any Acquisition Proposal, or
any inquiry with respect to or which Cobalt reasonably believes could lead to
any Acquisition Proposal, the material terms and conditions of such request,
Acquisition Proposal or inquiry, and the identity of the person or group making
any such request, Acquisition Proposal or inquiry. Cobalt further agreed to keep
Sun informed in all material respects of the status and details, including
material amendments or proposed amendments of any such request, Acquisition
Proposal or inquiry.
Under the terms of the merger agreement, the Cobalt directors are allowed
to withhold, withdraw, amend or modify their unanimous recommendation in favor
of the merger if a Superior Offer is made and not withdrawn, neither Cobalt nor
any of its representatives has breached the non-solicitation provisions of the
merger agreement, and the board of directors of Cobalt concludes in
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good faith, after consultation with its outside counsel that, in light of the
Superior Offer, the withholding, withdrawal, amendment or modification of its
recommendation is required in order for the Cobalt directors to comply with
their fiduciary obligations to Cobalt stockholders under applicable law.
Regardless of whether there has been a Superior Offer, Cobalt is obligated,
under the terms of the merger agreement, to hold and convene the Cobalt special
meeting of stockholders.
TREATMENT OF COBALT STOCK OPTIONS
Upon completion of the merger, each outstanding option to purchase Cobalt
common stock will be converted into an option to purchase that number of shares
of Sun common stock equal to the number of shares of Cobalt common stock
purchasable pursuant to such Cobalt option, multiplied by 0.50 (rounded down to
the nearest whole number of shares) (subject to adjustment to reflect the effect
of any stock split, stock dividend, recapitalization, reclassification or the
like on Sun or Cobalt common stock). The exercise price per share will be equal
to the exercise price per share of Cobalt common stock divided by the exchange
ratio, rounded up to the nearest whole cent. All other terms of each outstanding
option will be unchanged by the merger. As of September 14, 2000, options for
approximately 5,756,915 shares of Cobalt common stock were outstanding in the
aggregate under the various Cobalt stock option plans.
Sun will file a registration statement on Form S-8 for the shares of Sun
common stock issuable with respect to options assumed by Sun in connection with
the merger.
TREATMENT OF RIGHTS UNDER COBALT EMPLOYEE STOCK PURCHASE PLAN
The employee stock purchase plan permits eligible Cobalt employees to
purchase common stock through payroll deductions, which may not exceed the
lesser of 15% of an employee's compensation or $25,000 per annum. The current
offering period under Cobalt's employee stock purchase plan began on May 1, 2000
and ends on October 31, 2000 and the next offering period under the plan begins
on November 1, 2000. Through September 30, 2000, Cobalt's officers, including
Mr. DeWitt, who is also a director, currently participating in this program have
committed an aggregate of approximately $83,363 in payroll deductions during the
current offering period. The purchase price of Cobalt's common stock under its
employee stock purchase plan is 85 percent of the lesser of the fair market
value per share on the start date of the offering period or at the end of the
purchase period. Under the merger agreement, outstanding purchase rights under
the plan will be exercised immediately prior to the completion of the merger and
each share purchased under such exercise will be converted into the right to
receive 0.50 shares of Sun common stock (subject to adjustment to reflect the
effect of any stock split, stock dividend, recapitalization, reclassification or
the like on Sun or Cobalt common stock).
CONDITIONS TO COMPLETION OF THE MERGER
The obligations of Sun and Cobalt to complete the merger and the other
transactions contemplated by the merger agreement are subject to the
satisfaction or waiver of each of the following conditions before completion of
the merger:
- the merger agreement must be adopted and approved and the merger must be
approved by the requisite holders of Cobalt common stock;
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- Sun's registration statement must be effective, no stop order suspending
its effectiveness will be in effect and no proceedings for suspension of
its effectiveness will be pending before or threatened by the Securities
and Exchange Commission;
- no law, regulation or order must be enacted or issued which has the
effect of making the merger illegal or otherwise prohibiting completion
of the merger;
- all applicable waiting periods under applicable antitrust laws must have
expired or been terminated;
- Sun and Cobalt must each receive from their respective tax counsel, an
opinion to the effect that the merger will constitute a tax-free
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code. However, if counsel to either Sun or Cobalt does not render
this opinion, this condition will be satisfied if counsel to the other
party renders the opinion to such party; and
- the shares of Sun common stock to be issued in the merger must be
authorized for listing on Nasdaq, subject to notice of issuance.
Cobalt's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- Sun's representations and warranties must be true and correct as of
September 18, 2000 and on and as of the date the merger is to be
completed as if made at and as of such time, except:
-- to the extent Sun's representations and warranties address matters
only as of a particular date, they must be true and correct as of
that date;
-- if any of these representations and warranties are not true and
correct but the effect in each case, or in the aggregate, of the
inaccuracies of these representations and breaches of these
warranties, is not and does not have a material adverse effect on
Sun, then this condition will be deemed satisfied;
-- for changes contemplated by the merger agreement; and
- Sun must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by Sun on or before completion of the merger.
Sun's obligations to complete the merger and the other transactions
contemplated by the merger agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the merger:
- Cobalt's representations and warranties must be true and correct as of
September 18, 2000 and on and as of the date the merger is to be
completed as if made at and as of such time except:
-- to the extent Cobalt's representations and warranties address matters
only as of a particular date, they must be true and correct as of
that date;
-- if any of these representations and warranties are not true and
correct but the effect in each case, or in the aggregate, of the
inaccuracies of these representations and breaches of these
warranties (other than those concerning certain aspects of Cobalt's
capital structure, its corporate authority to enter into and
consummate the merger agreement, payment of broker fees, intellectual
property, receipt of the fairness opinion, board
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approval, the vote required by the stockholders to approve the merger
and the inapplicability of state takeover statutes to the merger
(which must be true and correct in all respects)), is not and does
not have a material adverse effect on Cobalt, then this condition
will be deemed satisfied;
-- for changes contemplated by the merger agreement;
- Cobalt must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by Cobalt on or before completion of the merger;
- each Cobalt employee who has signed a non-competition agreement shall
continue to be employed by Cobalt as of the date of the merger, shall not
have notified Cobalt or Sun, whether formally or informally, that he or
she is planning to terminate his or her employment, and shall not have
rescinded his or her non-competition agreement;
- Cobalt shall have obtained all consents, waivers and approvals required
by identified contracts; and
- each of the severance and acceleration waivers shall be in full force and
effect.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated in accordance with its terms at any
time prior to completion of the merger, whether before or after the approval and
adoption of the merger agreement and approval of the merger by Cobalt
stockholders:
- by mutual consent of Sun and Cobalt;
- by Sun or Cobalt, if the merger is not completed before March 16, 2001,
except that this right to terminate the merger agreement is not available
to any party whose action or failure to act has been a principal cause of
or resulted in the failure of the merger to occur on or before March 16,
2001, and such action or failure to act constitutes a breach of the
merger agreement;
- by Sun or Cobalt, if there is any order of a court or governmental
authority having the effect of permanently restraining, enjoining or
prohibiting the completion of the merger which is final and
nonappealable;
- by Sun or Cobalt, if the merger agreement fails to receive the requisite
vote for adoption and approval and the merger fails to receive the
requisite vote for approval by the stockholders of Cobalt at the Cobalt
special meeting or at any adjournment or postponement of that meeting,
except that this right to terminate the merger agreement is not available
to a party where the failure to obtain Cobalt stockholder approval was
caused by the party's action or failure to act and such action or failure
to act constitutes a breach by the party of the merger agreement;
- by Cobalt, upon a breach of any representation, warranty, covenant or
agreement on the part of Sun in the merger agreement, or if any of Sun's
representations or warranties are or become untrue so that the
corresponding condition to completion of the merger would not be met.
However, if the breach or inaccuracy is curable by Sun through the
exercise of its commercially reasonable efforts, and Sun continues to
exercise such commercially reasonable efforts, Cobalt may not terminate
the merger agreement for 30 days after delivery of written notice from
Cobalt to Sun of the breach. If the breach is cured during those 30 days,
or if
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Cobalt shall otherwise be in material breach of the merger agreement,
Cobalt may not exercise this termination right;
- by Sun, upon a breach of any representation, warranty, covenant or
agreement on the part of Cobalt set forth in the merger agreement, or if
any of Cobalt's representations or warranties are or become untrue so
that the corresponding condition to completion of the merger would not be
met. However, if the breach or inaccuracy is curable by Cobalt through
the exercise of its commercially reasonable efforts, and Cobalt continues
to exercise such commercially reasonable efforts, Sun may not terminate
the merger agreement for 30 days after delivery of written notice from
Sun to Cobalt of the breach. If the breach is cured during those 30 days,
or if Sun shall otherwise be in material breach of the merger agreement,
Sun may not exercise this termination right;
- by Sun, if a Triggering Event shall have occurred;
- by Cobalt, if there is a material adverse effect on Sun that cannot be
cured by Sun; or
- by Sun, if there is a material adverse effect on Cobalt that cannot be
cured by Cobalt.
Under the terms of the merger agreement, a TRIGGERING EVENT is deemed to
have occurred if:
- Cobalt's board of directors withdraws or amends or modifies in a manner
adverse to Sun its unanimous recommendation in favor of the adoption and
approval of the merger agreement or the approval of the merger;
- Cobalt fails to include in this document the unanimous recommendation of
Cobalt's board of directors in favor of the adoption and approval of the
merger agreement and the approval of the merger;
- Cobalt's board of directors fails to reaffirm its unanimous
recommendation in favor of the adoption and approval of the merger
agreement and approval of the merger within ten business days after Sun
requests in writing that such recommendation be reaffirmed at any time
following the announcement of an Acquisition Proposal;
- Cobalt's board of directors approves or recommends any Acquisition
Proposal;
- Cobalt enters into any letter of intent or similar document or any
agreement, contract or commitment accepting any Acquisition Proposal;
- Cobalt breaches the non-solicitation provisions of the merger agreement;
or
- a tender or exchange offer relating to not less than 15% of the
securities of Cobalt is commenced by a person unaffiliated with Sun, and
Cobalt does not send to its securityholders within 10 business days after
such tender or exchange offer is first commenced, a statement disclosing
that Cobalt recommends rejection of such tender or exchange offer.
PAYMENT OF TERMINATION FEE
If the merger agreement is terminated by Sun because of the occurrence of a
Triggering Event, under the terms of the merger agreement, Cobalt must pay Sun a
termination fee of $59 million within one business day after demand by Sun.
Further, under the terms of the merger agreement, Cobalt must pay to Sun,
within one business day after demand by Sun, a termination fee of $59 million if
the merger agreement is terminated by
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Sun or Cobalt because the merger is not consummated by March 16, 2001 or because
Cobalt's stockholders do not approve the merger agreement and the merger, and
any of the following occur:
- after September 18, 2000 and prior to the termination of the merger
agreement, a third party has announced an Acquisition Proposal and within
12 months following the termination of the merger agreement a Company
Acquisition is consummated;
- after September 18, 2000 and prior to the termination of the merger
agreement, a third party has announced an Acquisition Proposal and within
12 months following the termination of the merger agreement Cobalt enters
into an agreement or letter of intent providing for a Company
Acquisition; or
- after September 18, 2000 and prior to the termination of the merger
agreement, a third party has announced an Acquisition Proposal and within
12 months following the termination of the merger agreement a third party
commences a tender or exchange offer for a Company Acquisition and
thereafter such Company Acquisition is consummated.
Under the terms of the merger agreement, a COMPANY ACQUISITION is any of
the following:
- a merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving Cobalt pursuant
to which the stockholders of Cobalt immediately preceding such
transaction hold less than 50% of the aggregate equity interests in the
surviving or resulting entity of such transaction;
- a sale or other disposition by Cobalt of assets representing in excess of
50% of the aggregate fair market value of Cobalt's business immediately
prior to such sale; or
- the acquisition by any person or group, including by way of a tender
offer or an exchange offer or issuance by Cobalt, directly or indirectly,
of beneficial ownership or a right to acquire beneficial ownership of
shares representing in excess of 50% of the voting power of the then
outstanding shares of capital stock of Cobalt.
EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
Sun and Cobalt may amend the merger agreement before completion of the
merger by mutual written consent.
Either Sun or Cobalt may extend the other's time for the performance of any
of the obligations or other acts under the merger agreement, waive any
inaccuracies in the other's representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the merger
agreement.
DEFINITION OF MATERIAL ADVERSE EFFECT
Under the terms of the merger agreement, a MATERIAL ADVERSE EFFECT on
either Sun or Cobalt is defined to mean any change, event, violation,
inaccuracy, circumstance or effect that is materially adverse to the business,
assets (including intangible assets), capitalization, financial condition or
results of operations of such entity and its subsidiaries taken as a whole.
However, under the terms of the merger agreement, none of the following, alone
or in combination, will be deemed to constitute,
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nor will any of the following be taken into account in determining whether there
has been or will be a material adverse effect on any entity:
- any change in such entity's stock price or trading volume in and of
itself;
- any change, event, violation, inaccuracy, circumstance or effect that
such entity successfully bears the burden of proving results from changes
affecting any of the industries in which such entity operates generally
or the United States economy generally (which changes in each case do not
disproportionately affect such entity); or
- any change, event, violation, inaccuracy, circumstance or effect
resulting from the disruption or loss of existing or prospective
customer, distributor or supplier relationships that such entity
successfully bears the burden of proving results from the public
announcement or pendency of the transactions contemplated by the merger
agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income tax
consequences of the merger to Cobalt stockholders. This discussion is based on
existing provisions of the Internal Revenue Code, existing treasury regulations
and current administrative rulings and court decisions, all of which are subject
to change. Any such change, which may or may not be retroactive, could alter the
tax consequences to Sun, Cobalt or Cobalt stockholders as described herein.
We do not discuss all U.S. federal income tax considerations that may be
relevant to you in light of your particular circumstances. Factors that could
alter the tax consequences of the merger to you include:
- whether you are a dealer in securities;
- whether you are subject to the alternative minimum tax provisions of the
Internal Revenue Code;
- whether you are a non-U.S. person or entity;
- whether you are a financial institution or insurance company;
- whether you do not hold your Cobalt shares as capital assets;
- whether you acquired your shares in connection with stock option or stock
purchase plans or in other compensatory transactions;
- whether you hold Cobalt common stock as part of an integrated investment,
including a "straddle," comprised of shares of Cobalt common stock and
one or more other positions; or
- whether you hold Cobalt common stock subject to the constructive sale
provisions of Section 1259 of the Internal Revenue Code.
In addition, we do not discuss the tax consequences of the merger under
foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to, or concurrently with, the merger, whether or
not any such transactions are undertaken in connection with the merger,
including without limitation any transaction in which Cobalt shares are acquired
or shares of Sun common stock are disposed of, or the tax consequences to
holders of options, warrants or similar rights to acquire Cobalt common stock.
ACCORDINGLY, WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER.
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Completion of the merger is conditioned upon receipt by Sun and Cobalt of
opinions from their respective counsel, Wilson Sonsini Goodrich & Rosati,
Professional Corporation, and Brobeck, Phleger & Harrison LLP, that the merger
will constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. In the event that this opinion requirement is waived as a
result of a material change in the tax consequences of the merger from those
expressed in this tax consequences section, a revised tax consequences section
will be prepared and distributed to Cobalt stockholders as part of a revised
proxy statement-prospectus in connection with resoliciting stockholder approval
for the merger.
The tax opinions will be rendered on the basis of facts, representations
and assumptions set forth or referred to in such opinions. In rendering these
tax opinions, counsel will require and will rely upon factual representations
contained in certificates of officers of Sun and Cobalt. These tax opinions will
also be based upon the Internal Revenue Code, existing treasury regulations, and
current administrative rulings and court decisions, all of which are subject to
change, possibly with retroactive effect.
With respect to Cobalt stockholders who hold their Cobalt common stock as a
capital asset, qualification of the merger as a reorganization within the
meaning of Section 368 of the Internal Revenue Code will result in the following
federal income tax consequences:
- you will not recognize any gain or loss upon your receipt of Sun common
stock in the merger, except on cash received for a fractional share of
Sun common stock;
- the aggregate tax basis of the Sun common stock received by you in the
merger, including any fractional share of Sun common stock not actually
received, will be the same as the aggregate tax basis of the Cobalt
common stock surrendered in exchange therefor;
- the holding period of the Sun common stock received by you in the merger
will include the period for which the Cobalt common stock surrendered in
exchange therefor was considered to be held;
- cash payments received by you for a fractional share of Sun common stock
will be treated as if such fractional share had been issued in the merger
and then redeemed by Sun. You will recognize gain or loss with respect to
such cash payment, measured by the difference, if any, between the amount
of cash received and the basis in such fractional share; and
- Sun, Azure and Cobalt will not recognize gain or loss solely as a result
of the merger.
Even if the merger qualifies as a reorganization, you could recognize gain
to the extent that shares of Sun common stock are considered to be received in
exchange for services or property, other than solely for Cobalt common stock.
All or a portion of such gain may be taxable as ordinary income. Gain may also
have to be recognized to the extent that you are treated as receiving, directly
or indirectly, consideration other than Sun common stock in exchange for your
Cobalt common stock.
Neither Sun nor Cobalt will request a ruling from the Internal Revenue
Service in connection with the merger. The tax opinions do not bind the Internal
Revenue Service and do not prevent the Internal Revenue Service from
successfully asserting a contrary opinion.
If the Internal Revenue Service successfully challenges the status of the
merger as a reorganization, you would recognize taxable gain or loss with
respect to each share of Cobalt common stock surrendered equal to the difference
between your basis in such share and the fair market value, as of the completion
of the merger, of the Sun common stock received in exchange therefor. In such
event, your aggregate basis in the Sun common stock so received would equal its
fair market value as
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of the effective time of the merger, and your holding period for such stock
would begin the day after the merger.
ACCOUNTING TREATMENT OF THE MERGER
Sun intends to account for the merger using the "purchase" method.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MERGER
The merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, under which a transaction cannot
be completed until required information and materials are furnished to the
Antitrust Division of the Department of Justice and the Federal Trade Commission
and the waiting periods expire or are terminated. We have made the required
filings with the Department of Justice and Federal Trade Commission, and will
not be permitted to complete the merger until the applicable waiting periods
have expired or been terminated. In addition, the merger may be subject to
various foreign antitrust laws, some of which may require us to make filings
with foreign antitrust authorities.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds either before or after
expiration of the waiting period. Accordingly, at any time before or after the
completion of the merger, either the Antitrust Division of the Department of
Justice or the Federal Trade Commission could take action under the antitrust
laws as it deems necessary or desirable in the public interest. Other persons
could also take action under the antitrust laws, including seeking to enjoin the
merger. Additionally, at any time before or after the completion of the merger,
whether or not the applicable waiting period has expired or been terminated, any
state could take action under the antitrust laws as it deems necessary or
desirable in the public interest. There can be no assurance that a challenge to
the merger will not be made or that, if a challenge is made, we will prevail.
Neither Sun nor Cobalt is aware of any other material governmental or
regulatory approval required for completion of the merger, other than compliance
with applicable corporate law of Delaware.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF COBALT AND SUN
The shares of Sun common stock to be issued in connection with the merger
will be registered under the Securities Act and will be freely transferable
under the Securities Act, except for shares of Sun common stock issued to any
person who is deemed to be an "affiliate" of either Sun or Cobalt. Persons who
may be deemed to be affiliates include individuals or entities that control, are
controlled by, or are under common control of either of us and may include some
of our officers and directors, as well as our principal stockholders. Affiliates
may not sell their shares of Sun common stock acquired in connection with the
merger except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares;
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
Sun's registration statement on Form S-4, of which this document forms a
part, does not cover the resale of shares of Sun common stock to be received by
our affiliates in the merger.
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LISTING ON THE NASDAQ STOCK MARKET OF SUN COMMON STOCK TO BE ISSUED IN THE
MERGER
Sun has agreed to use its commercially reasonable best efforts to cause the
shares of Sun common stock to be issued in the merger to be approved for listing
on The Nasdaq Stock Market before the completion of the merger, subject to
official notice of issuance.
DELISTING AND DEREGISTRATION OF COBALT COMMON STOCK AFTER THE MERGER
When the merger is completed, Cobalt common stock will be delisted from the
Nasdaq National Market and will be deregistered under the Exchange Act.
DISSENTERS' AND APPRAISAL RIGHTS
You are not entitled to exercise dissenters' or appraisal rights in
connection with the merger or to demand payment for your shares under Section
262 of the Delaware General Corporation Law.
OTHER MATERIAL AGREEMENTS RELATING TO THE MERGER
THE STOCK OPTION AGREEMENT
A description of certain terms of the stock option agreement between Sun
and Cobalt follows. The full text is attached to this document as Annex B. We
encourage you to read the entire stock option agreement.
The stock option agreement grants Sun the option to acquire up to a number
of shares of Cobalt common stock that represent 19.9% of the issued and
outstanding Cobalt common stock, as of the first date, if any, upon which the
option is exercisable. The exercise price of the option is $57.63 per share of
Cobalt common stock, payable in cash. The number of shares issuable upon
exercise of the option and the exercise price of the option are subject to
adjustment to prevent dilution. Based on the number of shares of Cobalt common
stock outstanding on September 18, 2000, the date that Sun and Cobalt entered
into the stock option agreement, the option would be exercisable for
approximately 6,036,386 shares of Cobalt common stock. Sun required Cobalt to
enter into the stock option agreement as a condition to entering into the merger
agreement.
The option is intended to increase the likelihood that the merger will be
completed. While the stock option agreement is in effect, it may discourage
persons who might be interested in acquiring all or a significant interest in
Cobalt or its assets before completion of the merger.
Exercise Event. Sun may exercise the option, in whole or part, at any time
or from time to time, upon the occurrence of any of the following events:
- the termination of the merger agreement by Sun because of the occurrence
of a Triggering Event;
- if either Sun or Cobalt terminates the merger agreement because (1) the
merger is not consummated by March 16, 2001 or (2) the stockholders of
Cobalt fail to approve and adopt the merger agreement and approve the
merger and:
-- the consummation of a Company Acquisition that occurs within 12
months after the termination of the merger agreement if a third party
announced an Acquisition Proposal after September 18, 2000 and prior
to the termination of the merger agreement;
-- Cobalt's entering into an agreement or letter of intent providing for
a Company Acquisition within 12 months after the termination of the
merger agreement if a third
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party announced an Acquisition Proposal after September 18, 2000 and
prior to the termination of the merger agreement; or
-- the consummation of a Company Acquisition that occurs within 12
months after the termination of the merger agreement if a third party
commenced a tender or exchange offer for a Company Acquisition after
September 18, 2000 and prior to the termination of the merger
agreement.
Termination. The option will terminate and not become exercisable upon the
earliest of any of the following:
- completion of the merger;
- 12 months after termination of the merger agreement based on a failure of
the merger to be consummated by March 16, 2001 or the failure to obtain
the required approval of Cobalt stockholders if no event causing the
termination fee to become payable has occurred;
- 12 months after termination of the merger agreement based on the
occurrence of a Triggering Event;
- if the merger agreement is terminated based on a failure of the merger to
be completed by March 16, 2001 or the failure to obtain the required
approval of Cobalt stockholders and an event causing the termination fee
to become payable has occurred, 12 months after payment of the
termination fee; or
- the date on which the merger agreement is terminated if neither a
Triggering Event nor the announcement of an Acquisition Proposal by a
third party has occurred on or prior to the date of such termination.
Repurchase at the Option of Sun. During the period when the option is
exercisable, Sun may require Cobalt to repurchase from Sun the unexercised
portion of the option and all the shares of Cobalt stock purchased by Sun
pursuant to the option that Sun then owns.
Economic Benefit to Sun is Limited. The stock option agreement limits the
cash payment, including the amount, if any, paid to Sun as a termination fee
under the merger agreement, which may be received by Sun pursuant to the
exercise of its put right, to $79 million plus the amount paid by Sun to
exercise the option minus any amount paid by Cobalt to Sun as a termination fee.
Registration Rights. The stock option agreement grants certain registration
rights to Sun with respect to the shares of Cobalt stock represented by the
option. These include the right to make up to three demands that Cobalt register
with the Securities and Exchange Commission all or part of such shares of Cobalt
stock. In addition, the stock option agreement grants Sun the right to register
all or part of such shares if Cobalt otherwise effects a registration for its
own account.
VOTING AGREEMENTS
As a condition to Sun's entering into the merger agreement, all of the
directors, some of the executive officers and certain Cobalt stockholders
entered into voting agreements with Sun. By entering into the voting agreements,
these Cobalt stockholders have irrevocably appointed Sun as their lawful
attorney and proxy. These proxies give Sun the limited right to vote the shares
of Cobalt common stock beneficially owned by these Cobalt stockholders,
including shares of Cobalt common stock acquired after the date of the voting
agreements, in favor of the adoption and approval of the merger agreement, in
favor of approval of the merger and in favor of each other action contemplated
by the merger agreement and proxy and any action required in furtherance of the
merger agreement
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and proxy. These proxies also give Sun the limited right to vote the shares of
Cobalt common stock beneficially owned by these Cobalt stockholders against any
proposal made in opposition to, or in competition with, completion of the
merger. These Cobalt stockholders may vote their shares of Cobalt common stock
on all other matters.
As of the record date for the special meeting at which the merger agreement
and the merger will be presented and voted upon, these directors, executive
officers and stockholders collectively beneficially owned an aggregate of
approximately 3,246,432 shares of Cobalt common stock which represented
approximately 10.7% of the outstanding Cobalt common stock, excluding
unexercised options to purchase Cobalt common stock. None of the Cobalt
stockholders who are parties to the voting agreements were paid additional
consideration in connection with the agreements.
Pursuant to these voting agreements, and except as otherwise waived by Sun,
the directors, executive officers and stockholders who entered into voting
agreements with Sun also agreed not to sell the Cobalt common stock and options
owned, controlled or acquired, either directly or indirectly, by that person
until the earlier of the termination of the merger agreement or the completion
of the merger, unless each person to which any shares or any interest in any
shares is transferred agrees to be bound by the terms and provisions of the
voting agreement and delivers a proxy to Sun.
These voting agreements will terminate upon the earlier to occur of the
termination of the merger agreement and the completion of the merger. The form
of voting agreement is attached to this document as Annex C, and you are urged
to read it in its entirety.
COBALT AFFILIATE AGREEMENTS
As a condition to Sun's entering into the merger agreement, each member of
the Cobalt board of directors and some officers of Cobalt entered into affiliate
agreements with Sun. Under the terms of the affiliate agreements, Sun will be
entitled to place appropriate legends on the certificates evidencing any Sun
common stock to be received by these persons and to issue stop transfer
instructions to the transfer agent for the Sun common stock. Additionally, these
persons have acknowledged the resale restrictions imposed by Rule 145 under the
Securities Act on shares of Sun common stock to be received by them in the
merger.
NON-COMPETITION AGREEMENTS
As a condition to Sun's entering into the merger agreement, two employees
of Cobalt, Stephen DeWitt, Cobalt's Chief Executive Officer, President and a
director, and Vivek Mehra, Cobalt's Chief Technology Officer and Vice President,
Products, entered into non-competition agreements with Sun. Under the terms of
the non-competition agreements, these employees agreed not to directly or
indirectly engage in a business that competes with Sun or Cobalt in certain
geographic areas or encourage any other employee to terminate his or her
employment with Sun or Cobalt. The employees are also prohibited from having
greater than a 1% ownership interest in any entity that competes with Sun. The
provisions of the non-competition agreement are effective for twenty-four months
after the completion of the merger.
SEVERANCE AND ACCELERATION WAIVERS
As a condition to Sun's entering into the merger agreement, certain
employees of Cobalt have executed severance and acceleration waivers. Under the
terms of these severance and acceleration waivers, these employees agreed to
waive certain provisions of their employment agreements that relate to severance
payments, including acceleration of the vesting of their options, resulting from
the constructive or voluntary termination or termination for cause of their
employment with Cobalt.
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Additionally, the employees agreed to waive provisions of their employment
agreements entitling them to acceleration of the vesting of their options, or
other equity or cash-based payments, upon a change in control of Cobalt.
OPERATIONS AFTER THE MERGER
Following the merger, Cobalt will continue its operations as a wholly-owned
subsidiary of Sun for some period of time. The membership of Sun's board of
directors will remain unchanged as a result of the merger. The stockholders of
Cobalt will become stockholders of Sun, and their rights as stockholders will be
governed by the Sun Restated Certificate of Incorporation, as currently in
effect, the Sun Bylaws and the laws of the State of Delaware. See the section
entitled "Comparison of Rights of Holders of Cobalt Common Stock and Sun Common
Stock" beginning on page 97 of this document.
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INFORMATION ABOUT COBALT
BUSINESS
OVERVIEW
Cobalt provides server appliances, which are a new category of network
infrastructure devices that combine hardware and software to deliver one or more
network-based applications. Server appliances differ from general purpose
servers, which are designed to support a broad range of applications and are not
designed specifically to perform any particular function. Cobalt's server
appliances enable organizations that could not previously establish an online
presence to do so easily, cost-effectively and reliably. As the number of
Internet users and businesses online increases, Cobalt believes the demand for
server appliances will continue to grow.
Cobalt's principal product lines, the Cobalt Qube and Cobalt RaQ, enable
Cobalt's customers to perform critical Internet-related applications including
file serving, web hosting and providing software applications over the Internet,
such as electronic mail and electronic commerce. Cobalt also offers
network-attached storage products, which provide overflow file storage for
network users, and network caching products, which enable more efficient
bandwidth usage and improve speed of Internet content delivery. Cobalt's
products are designed to enable Linux, an open source operating system for which
the source code is available at little or no cost, to work well with software
applications and hardware components delivered pre-configured in Cobalt's
products. These software applications include applications for web-based
communications developed by Cobalt and by the open source software developer
community, as well as proprietary third party applications. Cobalt's use of the
Linux operating system enables it to leverage the rapid application development
cycles of the open source software community to reduce the time to market for
its new and innovative products.
As of June 30, 2000, Cobalt had sold over 40,000 server appliances to more
than 3,700 end user customers in more than 75 countries. Cobalt markets and
sells its products globally through its direct sales force and its channel
partners. Cobalt's target customers are small- to medium-sized organizations,
including businesses, educational and government entities and branch offices of
large organizations. Cobalt also targets web hosting and application service
providers that offer outsourced Internet services to these end users.
Cobalt's objective is to become the leading global provider in the emerging
market for server appliances. Cobalt intends to increase market acceptance of
server appliances through a focus on providing solutions with a compelling value
proposition to targeted market segments. Cobalt intends to continue to encourage
open source and third party software application developers to create and market
software applications for its products through a comprehensive partnership
program. Cobalt expects to continue to base its products on industry standard
hardware components and the Linux operating system. By doing so, Cobalt intends
to encourage its distributors, original equipment manufacturers and web hosting
and application service providers to sell its products by enabling them to add
value through modification of its solutions for specific customer needs.
Furthermore, Cobalt intends to establish itself as the premier server appliance
brand for its target customers and third party application developers.
CORPORATE BACKGROUND
Cobalt filed its articles of incorporation in California in October 1996
under the name Viavision Systems, Inc. Cobalt changed its name to Cobalt
Microserver, Inc. in March 1997 and to Cobalt Networks, Inc. in June 1998.
Cobalt reincorporated in Delaware in October 1999. Cobalt's principal
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executive offices are located at 555 Ellis Street, Mountain View, California
94043. Cobalt's telephone number is (650) 623-2500.
INDUSTRY BACKGROUND
The emergence of the internet as the backbone of electronic commerce and
content delivery has created the opportunity for small- to medium-sized
organizations to significantly expand their market reach. The Internet enables
these organizations to benefit from powerful information technology previously
beyond their economic and technical resources. In order to create an online
presence, these organizations can purchase and deploy their own network
infrastructure or rely upon outsourced infrastructure deployed by web hosting
and application service providers that offer services such as electronic mail
and electronic commerce.
Traditionally, creating an online presence required the deployment of
general purpose servers and complex network technologies. General purpose
servers are designed to perform a large variety of functions including providing
database, electronic mail, network management, file management and application
services. However, the high cost of ownership and the complexity of general
purpose servers often discourage their adoption by small- and medium-sized
organizations, due to limited budgets and scarce and costly technology skills.
The high cost and complexity also create challenges for web hosting and
application service providers that seek to profitably differentiate themselves
in an intensely competitive and price sensitive market by offering high value
added services to small- to medium-sized organizations.
Server appliances have been developed to address the challenges faced by
small- to medium-sized organizations and web hosting and application service
providers in deploying their internet infrastructures. Because server appliances
are explicitly designed and customized to provide one or a few dedicated
applications, they can:
- be easy to install, use and administer;
- be easy to integrate with other infrastructure components;
- have a low acquisition price and low total cost of ownership; and
- deliver robust and scalable performance on an ongoing basis.
These benefits enable small- to medium-sized organizations to rapidly and
cost-effectively establish an online presence through the use of server
appliances. These benefits also enable larger organizations to easily complement
their existing general purpose servers by deploying application specific server
appliances and thereby reduce conflicting capacity demands on their general
purpose servers. In addition, these benefits allow web hosting and application
service providers to increase profitability by offering value added services. In
situations that may require the dedication of a single server to a single
customer to provide customized services, server appliances enable these
providers to avoid the high cost and complexity of a general purpose server.
Server appliances can be developed either with proprietary or open source
operating systems, such as Linux. Proprietary operating systems are owned and
protected by a single vendor. A single vendor's limited engineering staff may be
the only developers with access to the source code needed to create other
software applications. As a result, the owner of the proprietary operating
system is the primary developer of new applications. Other developers may be
required to satisfy lengthy qualification procedures and pay license fees for
access to the elements of source code needed to create compatible applications.
These access limitations and fees result in slower development cycles and higher
end user costs of proprietary operating systems than can be achieved using open
source
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software. Open source software uses publicly available source code that can be
copied, modified and distributed by any software developer with very few
restrictions. Unlike proprietary, or closed, software products, open source
software is developed by a community of independent developers who permit others
to access their improvements and modifications freely. Open source software,
such as Apache web server, Perl and Sendmail, is gaining increasing acceptance,
particularly among web hosting and application service providers. Open source
software may provide the following benefits to server appliances:
- Better application integration and higher reliability: because the source
code is open, server appliance vendors may have a better understanding of
the interaction of all system components, which allows them to more
thoroughly coordinate their applications with the operating system and
improve system stability.
- Lower cost base: open source operating systems and software are available
at no cost and therefore can be incorporated in a system without the need
for royalty payments or significant internal research and development
costs.
- Shorter development cycles: the collaborative nature of the worldwide
developer base for open source software enables server appliance vendors
to improve their products more quickly than they can improve products
based on proprietary operating systems.
Dataquest, an industry research firm, expects the server appliance market
to grow from $2.2 billion in 1999 to approximately $15.8 billion in 2003,
representing a 64% compound annual growth rate. Dataquest also expects that
approximately $2.0 billion of this $15.8 billion market opportunity will be
revenue that server appliances will cannibalize from the market opportunity for
traditional servers. Dataquest believes that server appliances based on open
source operating systems, including Linux, will be a significant market segment.
Dataquest expects the Linux-based server appliance market to grow at
approximately 72% a year between 1999 and 2003 and represent approximately 24%
of the total server appliance market, or $3.8 billion, in 2003. The web hosting
and application service provider market represents an important part of the
overall server appliance market opportunity. Forrester Research estimates that
internet hosting revenues will increase from approximately $2.0 billion in 1999
to approximately $14.6 billion by 2003.
In response to the growth and opportunities in the server appliance market,
several server appliance vendors have emerged. However, many of the server
appliances available today do not deliver fully on the promise of the benefits
of server appliances. Some of these server appliances use closed, proprietary
architectures that restrict users' abilities to integrate them with other
applications and services. In order to achieve ease of use and low cost, others
offer systems that are not easily scalable or offer insufficient power to
adequately perform the functions for which they were designed. In addition,
server appliances offered by more established server vendors are typically
scaled down versions of their general purpose servers that fail to achieve an
optimal mix of low cost, ease of use, scalability, openness and performance.
Finally, some general purpose server vendors have long-standing relationships
with third party operating system and application vendors that may limit their
ability to aggressively pursue the opportunity for open source server
appliances.
THE COBALT SOLUTION
Cobalt provides server appliances that deliver network-based applications
in a flexible and reliable manner that is simpler and more cost-effective than
other current solutions. Cobalt's server appliances include a tailored version
of the Red Hat Linux operating system that Cobalt has customized to more
effectively perform the particular applications for which its products are
designed. Cobalt's server appliances also include web-based communications
applications that have been
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developed by it and the open source software developer community, and
industry-standard hardware components. Cobalt believes that it is well
positioned to become the leading provider of server appliance solutions for
small- to medium-sized organizations and web hosting and application service
providers by offering the following advantages:
Complete, integrated solutions
Cobalt's products provide its customers with complete solutions that do not
require additional hardware or software to cost-effectively deliver the specific
applications for which the product is designed. Cobalt's use of open source
software and industry standard hardware enables it to fully understand the
interaction of all components of the system and design an efficient and reliable
solution. In addition, Cobalt's products provide significant advantages over
other servers based on open source operating systems that are not customized to
fully integrate the applications and operating system to perform a specific
function. The integrated design of Cobalt's software applications, operating
system and hardware results in a more reliable and stable product that is less
likely to cause disruptions in network services. This integration also enhances
the security of Cobalt's solutions and enables it to design the hardware in a
cost-effective manner.
Ease of installation and use
Cobalt's products are pre-configured and include a simple set up procedure
designed to require less than 15 minutes for deployment by a non-technical
person. In addition, Cobalt's products are easy to use, can be administered from
any internet-accessible location and require minimal space and power. Cobalt's
web-based user interface shields the user from technical complexities and
minimizes the need for trained information technology staff.
Low cost of ownership
Cobalt designs its server appliances to deliver robust performance at an
installed cost that is less than the published list prices of general purpose
servers equipped to perform the same functions. Cobalt can sell its products at
lower prices because its operating systems are based on royalty-free open source
software, and Cobalt avoids the use of unnecessary hardware components by
designing its products to perform a specific function. Cobalt's products require
limited skills and time to deploy and do not require a network shutdown to
install or add additional appliances. In addition, the software tools included
in Cobalt's products minimize ongoing system management and support efforts that
would otherwise be provided by trained information technology staff, thus
greatly reducing the appliances' lifetime cost of ownership.
Building blocks for future growth
As the amount of data traffic handled by a Cobalt server appliance
increases, additional units can be added to increase capacity at little
incremental expense beyond the cost of the units themselves. The ability to
easily add additional server appliances provides an evolution path that enables
customers to develop their network services and related architecture according
to their needs without a high up-front investment. Cobalt's low cost server
appliances are designed to be building blocks for scalable solutions.
To assist customers in managing vast installations of Cobalt's server
appliances, Cobalt has developed a software tool to enable its Cobalt RaQ
products to interoperate in a fully scalable fashion. This software tool, the
Cobalt Management Console, is specifically designed to allow system
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administrators to monitor and perform management tasks on large installations of
Cobalt RaQ server appliances from a single management console.
Stable, open source development environment
Cobalt's products use a version of the Red Hat Linux operating system, an
open source operating system that undergoes a continuous cycle of enhancement by
a global community of open source developers. Cobalt customizes Red Hat Linux
for its server appliances by eliminating large portions of general purpose
source code that is unnecessary for a dedicated server appliance and tailoring
the remaining source code to work effectively with its dedicated hardware.
Cobalt's open source operating system is designed to work with its hardware
components to provide a reliable and stable environment upon which Cobalt and
third party developers can develop applications with a rapid time to market. In
addition, because Cobalt's source code is royalty free and open, Cobalt believes
its products will attract a large community of third party application
developers. Cobalt enjoys the benefits of its customized operating system
exclusively for a short period of time, then publishes its customizations for
further enhancement by the open source development community.
Cross platform compatibility
Cobalt's products employ an internet standards-based architecture that
enables them to function with other networked computers that operate on a
variety of operating systems, including Windows NT and UNIX. By being cross
platform compatible, Cobalt's products enable its customers to realize the
benefits of its products as part of their existing network infrastructure.
THE COBALT STRATEGY
Cobalt's objective is to become the leading global provider in the emerging
market for flexible, low cost server appliance products. To accomplish Cobalt's
objective, the key elements of Cobalt's strategy include:
Increase market acceptance of server appliances
Cobalt intends to increase market acceptance of server appliances through a
focus on providing solutions with a compelling value proposition to targeted
markets. Cobalt intends to continue to offer products that complement general
purpose servers by removing one or more specific, resource intensive functions
from a network's general purpose server to improve network performance and
stability. Cobalt's approach to increase market acceptance of server appliances
is to:
- Add new applications. Cobalt intends to continue to deliver high value
results with application specific products. Cobalt's current proprietary
applications include solutions for web hosting, electronic mail, web
publishing, electronic commerce, file management, network services,
cache, security, clustering, and active server pages. Cobalt intends to
leverage this experience to expand the scope of its software applications
to address other specific needs of its target customers. In addition
Cobalt will continue to integrate third-party applications into its
products.
- Simplify management. Cobalt intends to further enhance the ease of use
and reliability of its products. For example, Cobalt has developed a
management tool that enables outsourced hosting and application service
providers to manage, troubleshoot and monitor a number of server
appliances from a single console.
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- Add new hardware designs. Cobalt intends to continue to develop hardware
designs that address its customers' specific needs. Cobalt expects to
continue to rapidly introduce innovative, new products with enhanced
functionality that incorporates customer feedback and demands.
- Continue to offer low prices. Cobalt expects to continue to offer its
server applications at low cost by using readily available standard
hardware components and leveraging a royalty-free Linux-based operating
system. Cobalt believes its use of an open source operating system will
provide its products with an advantage relative to server appliances
based on proprietary operating systems, where substantial license fees
are a cost passed through to the consumer.
- Enable partners to add value. Cobalt intends to continue to design its
products with its open source operating system and application interfaces
to allow channel partners to add value through software applications that
they sell with its products. This design strategy will also enable web
hosting and application service providers to provide value added
services.
Attract and support application developers
Ensuring the existence of a complete set of software applications is a
vital requirement for offering integrated solutions and driving the success of
Cobalt's server appliances. Cobalt intends to actively promote third-party
development of software applications for its products through a comprehensive
partnership program with independent, open source software developers. Cobalt
believes that its use of the Linux operating system is a fundamental element of
this program, since an open source operating system better enables developers to
create optimized and reliable high value added applications. On the basis of its
business development and engineering contacts with third party developers,
Cobalt believes there are currently over 1,900 registered developers developing
software for its product platforms. Cobalt intends to leverage its position in
the Linux community in order to expand upon the base of third party developers
for its products significantly by providing a high volume channel for their
internet and electronic commerce applications. In order to encourage the
continued growth of the Linux community, Cobalt will continue to give back to
the community those elements of source code that Cobalt writes that are relevant
to the Linux kernel, while still developing a proprietary base of intellectual
property.
Develop and leverage partnerships to enhance Cobalt's market reach
Cobalt bases its products on industry standard hardware components and its
open source operating system to encourage channel partners, original equipment
manufacturers and web hosting and application service providers to add value by
modifying its solutions to address specific needs of Cobalt's customers.
Cobalt's leveraged distribution strategy includes:
- Multi-tier sales channel. Cobalt believes that a highly leveraged sales
channel is critical for effectively penetrating its target markets.
Cobalt makes it attractive for its distribution, reseller and system
integrator partners to resell its solutions by maximizing the opportunity
for them to add value to its products. In order to effectively reach
small- to medium-sized businesses, Cobalt intends to continue to enter
into agreements with many of the world's leading distributors, resellers
and system integrators. Cobalt also intends to continue to expand its
sales channel globally, while strengthening its direct sales efforts in
key geographies where use of the internet is growing most rapidly.
- Web hosting and application service providers. Cobalt intends to promote
the sale of its products by leveraging its relationships with outsourced,
dedicated web hosting and application service providers. Cobalt believes
its highly-focused approach to serving this market provides it
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with an advantage over competitors. Through its direct sales model Cobalt
has developed relationships with many of the prominent web hosting and
application service providers that are competing effectively by offering
higher revenue, value added application and hosting services. Cobalt
expects to leverage its leadership in this market by assisting its
customers to market to their customers.
Establish a strong brand identity
Cobalt intends to establish itself as the premier server appliance brand
for its target customers and third party application developers. Cobalt intends
to continue to create brand awareness with innovative, award winning products,
progressive product styling and creative marketing. Cobalt believes that this
distinctive brand identity is an important component of its efforts to increase
market acceptance of server appliances, expand participation in its software
development program and develop its reputation within a broad community of
potential partners and customers. Cobalt intends to actively seek new
opportunities to refine and extend its brand recognition.
Provide focused server appliances for specific needs
Cobalt intends to continue to develop and release products that meet
specific customer needs while continuing to perform specified tasks reliably at
a low price in comparison to both general purpose servers and other server
appliances. For example, Cobalt's Cobalt Qube and Cobalt RaQ products are
available with user interfaces in Japanese, French, German and Chinese, and
Cobalt is developing several other language specific user interfaces. Cobalt's
Cobalt RaQ products are designed specifically to minimize space usage, because
more effective use of rack space in a service provider's facility can increase
the number of customers that the service provider can host from a single
facility. Cobalt's target customers are small- to medium-sized organizations,
including small- to medium-sized businesses, educational and governmental
entities and branch offices of large organizations. Cobalt also targets the web
hosting and application service providers that offer outsourced internet
services to these end users.
PRODUCTS
All of Cobalt's products are built on a common core software and hardware
architecture that enables it to develop and market new products rapidly.
Cobalt's products are based on the Linux operating system, an operating system
known for its high reliability, performance, scalability, customizability and
low memory requirements. Cobalt has customized the Red Hat Linux operating
system to improve the performance and reliability of its products. Cobalt has
invested in the development of proprietary technology for its products that
includes core applications, software toolkits, management tools, system
maintenance daemons and clustering technologies. Cobalt's products include
bandwidth management technology embedded in the operating system for which
Cobalt has filed for a patent.
Cobalt also has an application developer program through which Cobalt
encourages third-party software developers to create additional software
applications for its products. Examples of those applications are electronic
commerce engines, a medical imaging file server program and a cellular telephone
voicemail server program. Cobalt believes that end users will benefit from its
open source model by having many additional applications available to them.
Cobalt provides the relevant portions of its source code to third party software
developers to assist them in creating applications that are closely integrated
with its products' operating systems, applications and hardware. Cobalt provides
other assistance to application developers including telephone support,
electronic mail bulletin boards
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and a web site. Cobalt believes that other third party applications for its
products are currently in development.
The following table reflects Cobalt's product lines:
<TABLE>
<CAPTION>
DATE OF FIRST STARTING
PRODUCT LINE COMMERCIAL SALE LIST PRICE FUNCTION
------------ --------------- ---------- --------
<S> <C> <C> <C>
Cobalt Qube................. March 1998 $ 999 Small- to medium-sized organizations
(1st generation) can use these products for dedicated
January 1999 functions such as electronic mail,
(2nd generation) file servers and print servers or to
October 2000 provide internet access and web
(3rd generation) serving. Cobalt introduced a Japanese
language user interface in May 1998,
French and German language user
interfaces in September 1999 and a
Chinese language user interface in
March 2000.
Cobalt RaQ.................. September 1998 $ 799 Web hosting and application service
(1st generation) providers can use Cobalt's Cobalt RaQ
March 1999 products for dedicated hosting
(2nd generation) services. The compact design of the
October 1999 product is intended to facilitate its
(3rd generation) use in standard size networking
facility racks.
July 2000 Cobalt introduced a Japanese language
(4th generation) user interface for this product in
December 1998.
Cobalt Cache................ July 1998 $1,899 Customers can use Cobalt's Cobalt
(1st generation) CacheQube and CacheRaQ products to
April 1999 provide faster web response time and
(2nd generation) eliminate redundant traffic travelling
over wide area network links. These
products are targeted at markets where
bandwidth is at a premium and public
communications networks are less
developed.
Cobalt NAS.................. April 1999 $1,799 Customers can use the Cobalt NASRaQ to
add storage to an existing network.
For users of the network, the Cobalt
NASRaQ appears to be another hard
drive.
Cobalt Management Console... October 1999 $1,999 In multiple Cobalt RaQ installations,
several or as many as one hundred
systems can be configured, monitored,
and managed as a block or in subsets
from a single operator station with
the aid of the Cobalt Management
Console.
StaQware.................... May 2000 $ 999 High availability cluster software.
</TABLE>
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<TABLE>
<CAPTION>
DATE OF FIRST STARTING
PRODUCT LINE COMMERCIAL SALE LIST PRICE FUNCTION
------------ --------------- ---------- --------
<S> <C> <C> <C>
Chili!Soft Active Server
Pages (ASP)............... October 1997 $1,995 Software that enables dynamic content
on a web site or web page to be
updated constantly, utilizing multiple
server platforms.
</TABLE>
TECHNOLOGY
Cobalt has invested in developing proprietary technology for its products
that includes its operating system, web-based communications applications,
software toolkits, management tools, system maintenance daemons and clustering
technologies.
Operating System
Cobalt's products are based on the Linux operating system, an operating
system known for its high reliability, performance, scalability, customizability
and low memory requirements. Cobalt recognizes the many benefits that an open
source operating system, such as Linux, provides for the development of server
appliances. Linux is open source software that is constantly being improved by a
broad base of developers without requirements for royalty obligations to the
developers. Cobalt can customize existing Linux operating system applications or
adopt different versions of Linux without lengthy product transitions. Cobalt
has free access to the entire Linux source code and has modified Red Hat's
version of the Linux operating system to optimize it for use in its products.
Web-based Communications Applications
Cobalt's server appliances offer web-based communications applications such
as web serving, domain name serving, file transfer protocol, electronic mail,
discussion groups and web authoring. Cobalt provides integrated and optimized
royalty-free industry standard software such as Apache, a web serving software,
Perl, a scripting language for web site development, and Sendmail, an electronic
mail program. Cobalt also provides its internally developed software for
discussion groups and web page authoring as integrated features of its Cobalt
Qube and Cobalt RaQ products. Cobalt is investing significant resources in
deploying, testing and effectively integrating these diverse applications with
consistent, user friendly interfaces.
Software Toolkit
Cobalt has developed and is continuing to enhance a proprietary software
toolkit that provides a consistent interface between the applications and the
operating system. Cobalt's software toolkit enables it to provide uniform
browser-based user interfaces across all server functions and applications.
Cobalt's custom software toolkit overcomes the complexity generally associated
with setting up, managing, monitoring and using various complex network daemons
and applications. Cobalt intends to continue to develop and improve interfaces
to its software to assist third parties such as web hosting and application
service providers and value added resellers to add software applications to its
platform.
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System Maintenance Daemons
To improve reliability and reduce cost of ownership of its server
appliances, Cobalt has developed a set of software daemons, which are software
programs that continuously monitor the state of the various software and
hardware functions on the server to permit troubleshooting. Cobalt's system
maintenance daemons automatically inform the user of excessive server resource
utilization and recommend corrective action. Cobalt's system maintenance daemons
also attempt to fix any problems automatically that the software detects and
proactively inform the user if an attempted solution was unsuccessful. The
proactive problem resolution enhances the overall reliability of the server
appliance while reducing management overhead. Cobalt's products also support
industry standards including Simple Network Management Protocol.
Clustering Technologies
Cobalt's products incorporate its proprietary clustering technologies that
distribute network usage across a number of server appliances for improved
network performance. These technologies allow Cobalt's server appliances to be
clustered without using expensive load balancing equipment. For example, these
technologies enable a user to deploy additional Cobalt CacheRaQ units as needed
to support increased network usage.
Management Tools
Cobalt has several management tools, such as its maintenance and restore
toolkit, that assist the user to perform maintenance and administrative tasks on
its server appliances. In addition, Cobalt has developed a web-based remote
management tool for monitoring the status and configurations of a large number
of its server appliances on a single network. In addition, this management
software allows system administrators to provide software upgrades to multiple
server appliances and configure multiple machines from a single management
console in an easy-to-use and cost-effective manner.
Active Server Page Technology
This technology allows for the display of dynamic content on a web site or
on a web page, such as stock quotes and other constantly changing information.
In May 2000, Cobalt acquired Chili!Soft, Inc., provider of software solutions
for platform-independent Active Server Pages (ASP), the standard for the rapid
development and deployment of interactive Web applications.
Security
In August 2000, Cobalt acquired Progressive Systems, Inc., a privately held
company that develops network firewall solutions and appliances. Cobalt intends
to use Progressive Systems' firewall technology in its product lines.
Embedded Processor Hardware Platform
Cobalt enables its products to deliver high performance cost-effectively
through its proprietary hardware and motherboards that leverage standard
components including hard disk drives, memory and processors. Cobalt has
eliminated unnecessary components, thus reducing cost and power consumption and
increasing reliability. With the compact size of Cobalt's Cobalt RaQ products,
Cobalt's service provider customers are able to achieve three to four times the
server density of general purpose servers, a key advantage in the web hosting
and application service provider market where rack space is at a premium.
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CUSTOMERS
As of June 30, 2000, Cobalt had sold over 40,000 of its server appliance
products to more than 3,700 customers in over 75 countries. Cobalt's direct
customers include regional and national web hosting and application service
providers in the United States, in addition to Cobalt's channel partners.
Cobalt's indirect customers are primarily composed of small- to medium- sized
organizations and web hosting and application service providers. With respect to
both Cobalt's direct and indirect sales, customers often buy for a single
location, department or division, and then, based upon the initial success of
the products, later expand their use of Cobalt's products into other parts of
the organization. In 1999 and 1998, no single end user customer accounted for
more than 10% of Cobalt's revenues. For the six months ended June 30, 2000, no
single end user customer represented more than 10% of Cobalt's revenues.
Indirect sales were 79% and 54% of Cobalt's net revenues in 1999 and 1998,
respectively. For the six months ended June 30, 2000, indirect sales were 63% of
Cobalt's net revenues. In 1999, sales to two of Cobalt's distributors, Nissho
Electronics and Tech Data, accounted for 14% and 11% of Cobalt's net revenues,
respectively. For the six months ended June 30, 2000, sales to distributors
Nissho Electronics and Tech Data accounted for 12% and 10% of Cobalt's net
revenues, respectively.
SALES AND MARKETING
Cobalt sells its products through its direct sales force and channel
partners including distributors, resellers and system integrators. Historically
Cobalt's direct sales efforts have focused on regional and national web hosting
and application service providers in the United States. Cobalt intends to
continue and expand its sales efforts to web hosting and application service
providers. Cobalt also intends to pursue sales to the growing number of web
hosting and application service providers outside of the United States. Cobalt
has relied on original equipment manufacturers for only a limited number of
sales, but Cobalt intends to explore opportunities to work with additional
original equipment manufacturers in the future.
Direct Sales
The primary function of Cobalt's direct sales force is to generate demand
for Cobalt's products that is fulfilled either directly or through channel
partners. Cobalt encourages its direct sales staff to work with potential web
hosting and application service provider customers regardless of whether the
customer ultimately purchases Cobalt's product from it or one of its channel
partners. Cobalt believes this model enables it to encourage proliferation of
its products in this key customer group. Cobalt's direct sales force uses a team
approach, which Cobalt believes enables it to achieve better control of the
sales process and respond more rapidly to customer needs. Cobalt's direct sales
force for North America is distributed throughout the United States. In 1999 and
1998, respectively, 21% and 46% of Cobalt's net revenues were from direct sales,
substantially all of which were from the United States. For the six months ended
June 30, 2000, 37% of Cobalt's net revenues were from direct sales.
Cobalt opened sales offices in Japan, the United Kingdom and Germany in
1998 and in the Netherlands and France in 1999. In 1999 and 1998 respectively,
52% and 44% of Cobalt's net revenues were from outside the United States. For
the six months ended June 30, 2000, 47% of Cobalt's net revenues were from
outside the United States.
Channel Partners
As the server appliance market has matured, Cobalt has developed a
multi-tier sales channel that is comprised of distributors, resellers and system
integrators. Cobalt believes that as the market
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for server appliances matures, sales through channel partners will represent an
increasing percentage of Cobalt's sales.
Sales to Cobalt's channel partners represented 79% and 54% of its net
revenues in 1999 and 1998, respectively. For the six months ended June 30, 2000,
channel partners represented 63% of net revenues.
In addition to delivering Cobalt's server appliances to small web hosting
and application service providers and small- to medium-sized organizations,
distributors enable it to more effectively pursue a number of vertical markets.
Vertical markets and applications such as branch offices of large organizations,
government, education and web-based direct resellers are targets of Cobalt's
channel partners.
Original Equipment Manufacturer Relationships
Cobalt recently began to sell its products through original equipment
manufacturer relationships. As part of these relationships, Cobalt designs and
manufactures products that are customized to meet the end users' needs and which
are branded and sold under that company's label. Cobalt has initiated several
original equipment manufacturer relationships for its Cobalt Qube products.
Cobalt plans to expand its selling efforts through original equipment
manufacturer relationships and is currently evaluating opportunities,
particularly with respect to sales of its Cobalt Qube products.
In 1999, Cobalt established OEM relationships with several partners,
including NTT DoCoMo and France Telecom.
NTT DoCoMo sells a customized version of the Cobalt Qube as the server
appliance technology branded by NTT DoCoMo for its wireless electronic mail
system. This technology enables subscribers to access e-mail from network
computer systems via handheld wireless telephone and personal digital assistant
devices. Using the wireless technology, customers can establish low cost e-mail
connections.
France Telecom sells the Cobalt Qube to the French public schools to
provide students with network services and internet access. The France Telecom
branded version of the Cobalt Qube includes a specially developed collection of
education-oriented software. Cobalt developed the education package for France
Telecom in conjunction with third party software developers. France Telecom
plans to install one or more Cobalt Qubes in public schools over the next
several years. Cobalt believes the software technology Cobalt developed with
France Telecom and third party developers could lead to additional business in
the education market.
Marketing Programs
To support its growing sales organization and channel, Cobalt has devoted
significant resources in the past year to building and launching a series of
marketing campaigns. Cobalt's marketing efforts have included a number of
programs, such as seminars, industry trade shows, mailings to resellers, analyst
and press tours, print and online advertising, and public relations. Cobalt
believes these marketing programs have resulted in better awareness of its
Cobalt brand.
Customer Advocacy and Support
Cobalt believes that high quality customer service and support is critical
to the successful marketing and sale of its products. Cobalt is developing a
comprehensive service and support organization to manage customer accounts and
expects to provide an increasing level of support as its products are deployed
across a range of customers. Cobalt provides support for its products and
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services primarily from its Mountain View, California location and from an
outsourced call center. Cobalt plans to establish additional service and support
sites internationally commensurate with customer needs.
Cobalt's products are designed to be deployed quickly and effectively by
its customers and to require minimal support from Cobalt. Cobalt offers various
levels of service and support programs to meet pre- and post-sale technical
requirements. Cobalt's CobaltCare program offers extended warranties, advanced
product replacement, telephone and electronic mail trouble shooting assistance
and other support and services. Cobalt prices its CobaltCare variably depending
on the level of support selected by the customer. Cobalt also offers a variety
of services specifically tailored for web hosting and application service
providers and resellers that provide immediate access to the latest support
information, white papers and answers to frequently asked questions.
MANUFACTURING
Cobalt uses contract vendors to manufacture its products, and they perform
tasks that include material procurement, assembly, test, packaging, warehousing
and shipment. Utilizing a contract manufacturer enables Cobalt to reduce
investment in manufacturing capital and inventory warehousing costs. Cobalt's
internal manufacturing expertise is primarily focused on product testability,
manufacturability and the transfer of products from development to
manufacturing. However, Cobalt also manages the evaluation and selection of key
components.
Since August 1999, Surface Mount Technology Centre (SMTC) has been Cobalt's
primary contract manufacturer. Cobalt's agreement with SMTC requires Cobalt to
submit a six month rolling forecast the first month of which is binding. In any
given month Cobalt has the ability to double its forecast and require SMTC to
fill those orders. However, if Cobalt inaccurately forecasts demand for its
products, SMTC may be unable to provide Cobalt with adequate manufacturing
capacity. Purchase prices will fluctuate based on changes in component prices
throughout the one-year contract period. SMTC provides warranties on workmanship
and pass-through warranties on component parts.
SMTC purchases most of the key components used to manufacture Cobalt's
products. Some of these key components, such as sheet metal parts and chassis,
are obtained directly from sole sources. Other industry standard components,
such as Cobalt's processors and power supplies, are obtained from sole or
limited sources. SMTC may not be able to obtain adequate supplies of components
to meet Cobalt's customers' delivery requirements. Alternatively, SMTC may
accumulate excess inventories for Cobalt's account.
Prior to August 1999, Cobalt's primary contract manufacturer was an
electronics component supply chain company that procured materials and
subcontracted the assembly, test, packaging and shipment of Cobalt's products to
a subcontract manufacturer. This contract manufacturer experienced difficulty in
obtaining selected components and coordinating with the subcontract manufacturer
for the manufacture of Cobalt's products in the quarter ended July 2, 1999.
Cobalt resolved this difficulty in the quarter ended July 2, 1999 by internally
managing procurement of some of its key components and qualifying and commencing
production of its products with a second manufacturing partner, Flash
Electronics, in May 1999. Cobalt subsequently switched to SMTC Manufacturing as
its primary contract manufacturer in August 1999.
As Cobalt's needs and the needs of its customers continue to evolve, Cobalt
plans to reassess its manufacturing requirements periodically and effect changes
as necessary.
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RESEARCH AND DEVELOPMENT
For the six months ended June 30, 2000, Cobalt's research and development
expenses were $4.0 million. Cobalt's research and development expenses were $6.0
million in 1999, up from $3.5 million in 1998 and $1.1 million in 1997. Cobalt
believes that its research and development efforts are essential to its ability
to deliver innovative products that address the needs of the market and help
evolve the capabilities of server appliances. As of September 30, 2000, Cobalt's
83 person research and development staff included personnel with expertise in
several key areas, including software-related development, hardware-related
activities, and other research and development activities.
Cobalt recognizes the need to integrate new and enhanced technologies into
its products and to continue to extend the open architecture of its products'
Linux operating system. In addition to the development of proprietary core
technologies, Cobalt plans to continue partnerships with other leading providers
of Linux technologies, products and services to jointly develop architectures
and industry standards.
COMPETITION
Cobalt competes in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Cobalt faces competition primarily from server
vendors that provide solutions for distributed computing systems.
Companies offering competitive products vary in scope and breadth of
products and services offered and include:
- general purpose server manufacturers such as Compaq Computer, Dell
Computer, Gateway Computer, Hewlett-Packard, IBM, Sun and VA Linux, some
of which have begun manufacturing versions of their general purpose
server products for sale as server appliances;
- server appliance vendors such as Encanto Networks, Freegate (acquired by
Tut Systems), Intel, Network Engines, NetMachines, and Whistle
Communications (acquired by IBM);
- network caching companies such as CacheFlow and Novell; and
- network attached storage vendors such as Meridian (acquired by Quantum)
and Maxtor.
Cobalt believes it competes favorably on the principal factors that will
draw end users to a server appliance product, which include:
- depth of product functionality;
- ability to work with network components utilizing other operating systems
such as Windows NT;
- scalability;
- product quality and performance;
- open systems architecture;
- strength of channel;
- brand name recognition;
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- competitive pricing; and
- customer support.
Cobalt expects competition in the server appliance market to increase
significantly as new companies enter the market and current competitors expand
their product lines and services. Many of these potential competitors are likely
to enjoy substantial competitive advantages including:
- greater resources that can be devoted to the development, promotion and
sale of their products;
- more established sales channels;
- greater software development experience; and
- greater name recognition.
INTELLECTUAL PROPERTY
Cobalt has invested significantly in the development of proprietary
technology for its products. Key areas of intellectual property development
relate to the tight integration of embedded software with industry standard
platforms and components, intuitive user interfaces that provide easy to use
appliance functionality and clustering technology. Cobalt's success depends
significantly upon its proprietary technology. Additionally, Cobalt has
integrated third party intellectual property into its products. Cobalt may
occasionally reach agreements with third parties to provide additional
functionality for its products and may offer third parties its technology for
integration into products on an original equipment manufacturer or other basis.
Cobalt has also trademarked the Cobalt name as well as its individual product
names in the United States.
Cobalt currently relies on a combination of patent, copyright, trademark
laws, and trade secret laws, confidentiality procedures and contractual
provisions to protect its proprietary rights. Cobalt protects its software,
documentation and other written materials under copyright and trade secret laws,
which afford only limited protection. Cobalt has applied for two patents neither
of which have been issued. Cobalt cannot be certain that any patents it seeks
will be issued or that, if issued, those patents will not be challenged. Cobalt
has registered and applied for registration of some of the service marks and
trademarks Cobalt uses with the United States Patent and Trademark Office.
Cobalt will continue to analyze whether it should register additional service
marks and trademarks.
Cobalt generally enters into confidentiality agreements with its employees,
consultants, business partners and major customers. Despite Cobalt's efforts to
protect its proprietary rights and other intellectual property, unauthorized
parties may attempt to copy aspects of Cobalt's products, obtain and use
information that Cobalt regards as proprietary or misappropriate Cobalt's
copyrights, trademarks, trade dress and similar proprietary rights. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. Cobalt's means of protecting its
proprietary rights may not be adequate. In addition, Cobalt's competitors might
independently develop similar technology or duplicate its products or circumvent
any patents or Cobalt's other intellectual property rights.
Cobalt, Cobalt Networks, the Cobalt logo, Cube, Qube, Cobalt Qube, Cobalt
RaQ, Cobalt NASRaQ, Cobalt CacheRaQ, RaQ, StaQware, Chili!Soft Active Server
Pages and Chili!Soft are trademarks of Cobalt or its subsidiaries. This document
also contains brand names, trademarks or service marks of companies other than
Cobalt, and these brand names, trademarks and service marks are the property of
their respective holders.
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EMPLOYEES
As of September 30, 2000, Cobalt had 265 full time employees, of whom 83
were engaged in research and development, 99 in sales and marketing and 83 in
finance, administration and operations. None of Cobalt's employees is
represented by a labor union. Cobalt has not experienced any work stoppages and
considers its relations with its employees to be good.
FACILITIES
Cobalt's principal offices are located in a 29,500 square foot facility in
Mountain View, California. Cobalt's lease on the Mountain View facility expires
in December 2003. In September 1999, Cobalt entered into a lease for an
approximately 30,000 square foot building on property contiguous to its current
headquarters to expand its Mountain View operations. This lease extends through
March 2004. Cobalt has sublet approximately one-third of this building to a
third party through February 2001. In addition, Cobalt leases a 16,500 square
foot building in Bellevue, Washington and an 8,500 square foot building in
Columbus, Ohio, which leases expire in January 2004 and October 2004,
respectively. Both the Bellevue and the Columbus buildings are used for product
development. Cobalt also has sales and marketing offices in Germany, Japan, the
Netherlands and the United Kingdom.
LEGAL PROCEEDINGS
In June 2000, Cobalt filed suit against NetMachines, Inc., in the U.S.
District Court for the Northern District of California, claiming that the use of
the name RedRak for NetMachines' server products constitutes trademark
infringement of Cobalt's registered RaQ trademark for computer hardware
products, which includes servers. Cobalt intends to pursue this matter
vigorously but is unable to provide an evaluation of the probability of a
favorable or unfavorable outcome. Cobalt believes, based on currently available
information, the resolution of this matter will not have a material effect on
its financial position, results of operations or cash flows.
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COBALT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF COBALT
The following discussion and analysis of Cobalt's financial condition and
results of operations should be read in conjunction with "Cobalt Summary
Selected Consolidated Financial Data" and Cobalt's consolidated financial
statements and notes thereto appearing elsewhere in this document. This
discussion and analysis contains forward looking statements that involve risks
and uncertainties. These statements relate to future events or Cobalt's future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause Cobalt or Cobalt's industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by the forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including, but not limited to, those set forth under
the section entitled "Risk Factors" and elsewhere in this document. These
factors may cause Cobalt's actual results to differ materially from any
forward-looking statement.
OVERVIEW
Since its inception in 1996, Cobalt has incurred substantial costs to
develop its technology and products, to recruit and train personnel for its
engineering, sales and marketing and technical support departments, and to
establish an administrative organization. As a result, Cobalt had an accumulated
deficit of $45.4 million as of June 30, 2000. Cobalt anticipates that its
operating expenses will increase substantially in the future as it increases its
sales and marketing operations, develops new channels, funds greater levels of
research and development, broadens its technical support and improves its
operational and financial systems. Accordingly, Cobalt will need to generate
significant revenues to achieve profitability. In addition, Cobalt's limited
operating history makes it difficult to predict future operating results and,
accordingly, there can be no assurance that Cobalt will sustain revenue growth
or achieve profitability in future quarters.
Cobalt currently derives substantially all of its net revenues from sales
of a limited number of products. In the six months ended June 30, 2000 and July
2, 1999, respectively, 91% and 84% of Cobalt's net revenues were derived from
sales of its Cobalt Qube and Cobalt RaQ products. Although Cobalt began selling
its Cobalt Cache products in 1998 and Cobalt NAS products in 1999, Cobalt
expects that a substantial majority of its revenues in 2000 will continue to be
generated from sales of its Cobalt Qube and Cobalt RaQ products.
Cobalt sells its products directly through its sales force and indirectly
through channel partners that include distributors, resellers and system
integrators. Indirect sales are a majority of Cobalt's total sales and account
for substantially all of Cobalt's sales outside of the United States. In the six
months ended June 30, 2000 and July 2, 1999, respectively, 37% and 14% of
Cobalt's net revenues were from direct sales. The increase in direct sales as a
percentage of net revenues is due to focused efforts by Cobalt's direct sales
force. Direct sales in absolute dollars rose to $10.5 million in the six months
ended June 30, 2000 from $1.1 million in the six months ended July 2, 1999.
Indirect sales were 63% and 86% of Cobalt's net revenues in the six months
ended June 30, 2000 and July 2, 1999, respectively. In the six months ended June
30, 2000, sales to two of Cobalt's distributors, Nissho Electronics and Tech
Data, accounted for approximately 12% and 10% of Cobalt's net revenues,
respectively. In the six months ended July 2, 1999, Nissho Electronics and Tech
Data accounted for approximately 13% and 18% of Cobalt's net revenues,
respectively. While
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Cobalt is seeking to diversify its customer base and expand the portion of its
net revenues which is derived from sales through various channels, Cobalt
anticipates that its operating results will continue to depend on volume sales
to a relatively small number of channel partners.
For direct sales and sales to resellers and system integrators, Cobalt
records revenues upon shipment. Cobalt recognizes revenues on sales to
distributors at the time products are sold through to end-users. As a result,
Cobalt defers recognition of gross profit, captioned on Cobalt's balance sheet
as "deferred margin on distributor inventory" until it records the revenues and
cost of revenues on a sell-through basis. Revenues from service obligations are
deferred and recognized on a straight- line basis over the contractual period.
Cobalt's customers and distributors are generally able to cancel their
orders at any time prior to shipment without penalty. In addition, Cobalt is
typically able to fulfill a majority of orders in less than seven days.
Consequently, backlog measured on any given day is not a meaningful predictor of
Cobalt's prospects in the ensuing weeks and months.
Cobalt provides allowances for estimated sales returns and warranty costs
at the time of revenue recognition based on Cobalt's historical results. To
date, Cobalt's actual sales returns and warranty expenditures have each been
less than 5% of net revenues in any quarter. However, Cobalt's past product
return and warranty experience may not be indicative of future product return
rates and warranty costs.
Although Cobalt enters into general sales contracts with its channel
partners, none of Cobalt's channel partners is obligated to purchase any amount
of Cobalt's products pursuant to these contracts. Cobalt relies on its channel
partners to submit purchase orders for specific quantities of its products.
Cobalt's gross profit is affected by:
- fluctuations in demand for its products;
- the mix of products sold;
- the mix of sales channels through which its products are sold;
- the mix of sales within and outside North America;
- the timing and size of customer orders;
- new product introductions by Cobalt and its competitors;
- changes in its pricing policies;
- changes in component costs; and
- the volume manufacturing prices Cobalt is able to obtain from its
contract manufacturers.
Cobalt recorded unearned stock compensation on its balance sheet of $8.9
million in connection with stock options granted to Cobalt's employees between
July 1, 1998 and October 1, 1999. Cobalt is amortizing this stock compensation
over the vesting period of the related options. During the six
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months ended June 30, 2000, Cobalt amortized $2.4 million of stock compensation.
During the remainder of 2000, Cobalt expects to amortize stock compensation of:
<TABLE>
<CAPTION>
EXPECTED
AMORTIZATION
OF STOCK
QUARTER ENDED COMPENSATION
------------------------------------------------------------ --------------
(IN THOUSANDS)
<S> <C>
September 29, 2000.......................................... $861
December 29, 2000........................................... $623
</TABLE>
Cobalt then expects aggregate per quarter stock compensation amortization
of between $533,000 and $318,000 during 2001, between $262,000 and $116,000
during 2002 and between $78,000 and $10,000 during 2003. The amount of stock
compensation expense to be recorded in future periods could decrease in the
event of the forfeiture of options for which accrued but unvested compensation
has been recorded.
Prior to April 26, 1999, Cobalt's net loss attributable to holders of
common stock includes accretion charges to increase over time the carrying
amount of Cobalt's mandatorily redeemable convertible preferred stock to the
amount Cobalt would be required to pay if the preferred stock were to be
redeemed. As of April 26, 1999, Cobalt ceased recording these charges because
Cobalt changed the terms of the preferred stock to limit the redemption amount
to its original issue price plus accrued dividends.
Cobalt had 226 employees as of June 30, 2000, a substantial increase from
101 employees as of July 2, 1999. This rapid growth has placed significant
demands on Cobalt's management and operational resources. In order to manage its
growth effectively, Cobalt must implement and improve its operational systems,
procedures and controls on a timely basis. Cobalt could experience a decline in
its revenues and operating results if:
- its total revenues do not increase relative to its operating expenses;
- its management systems do not expand to meet increasing demands;
- it fails to attract, assimilate and retain qualified personnel; or
- its management otherwise fails to manage Cobalt's expansion effectively.
Until January 1, 1999, Cobalt operated on calendar fiscal quarters and a
fiscal year ended December 31. Beginning in 1999, Cobalt began to operate on
thirteen week fiscal quarters ending on the Friday closest to the end of the
calendar month. Therefore, in 2000 Cobalt's fiscal quarters end on March 31,
June 30, September 29 and December 29.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND JULY 2, 1999
Net Revenues
Net revenues for the six months ended June 30, 2000 were $28.3 million, an
increase of 269% over the $7.7 million in the comparable period of 1999. The
increase was primarily the result of an increase in sales to new and existing
customers of Cobalt's Cobalt Qube and Cobalt RaQ product lines. Cobalt expects
that the majority of its revenues in the future may continue to be generated
from sales of its Cobalt Qube and Cobalt RaQ products.
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Net revenues from sales to international customers for the six months ended
June 30, 2000 increased to $13.3 million, or 47% of net revenues, compared to
$4.3 million, or 57% of net revenues for the six months ended July 2, 1999. The
increase in absolute dollars of international revenues was due to the expansion
of Cobalt's operations in Japan, Europe and other countries. One factor relating
to the increase in net revenues from sales outside the United States was
Cobalt's introduction of various local language user interfaces including
Japanese, German, French and Chinese. Cobalt's net revenues from sales outside
the United States were primarily valued in U.S. dollars. The effect of foreign
exchange fluctuations did not have a significant impact on Cobalt's results.
Cost of Revenues and Gross Profit
Cost of revenues includes technology license fees, manufacturing costs,
manufacturing personnel expenses, packaging and shipping costs and warranty
expenses. Cobalt has outsourced its manufacturing and repair operations.
Accordingly, in the six months ended June 30, 2000 approximately 72% and in the
six months ended July 2, 1999 approximately 72% of Cobalt's cost of revenues
consisted of payments to Cobalt's contract manufacturers. The cost of revenues
as a percentage of net revenues for the six months ended June 30, 2000 and July
2, 1999 were 54% and 67%, respectively. The decrease in cost as a percentage of
net revenues is attributable to the continued focus on Cobalt's manufacturing
operations and economies of scale.
Gross profit for the six months ended June 30, 2000 was $13.0 million, an
increase of $10.5 million or 320%, as compared to $2.5 million in the same
period of 1999. Gross profit as a percentage of net revenues for the six months
ended June 30, 2000 and 1999 was 46% and 33%, respectively. The increase in
gross profit was primarily due to increased sales volume and the introduction of
new products. Cobalt believes that the rate of growth of the increase in gross
profit will not be sustainable in future quarters.
Research and Development
Research and development expenses consist primarily of salaries and related
expenses for personnel engaged in research and development including the
development of application and server management software, material costs for
prototype and test units and other expenses related to the design, development,
testing and enhancements of Cobalt's products. Due to the rapid pace of new
product introduction, Cobalt expenses all research and development costs as they
are incurred. Research and development expenses in the six months ended June 30,
2000 increased to $4.0 million, an increase of 45% over the $2.8 million in the
comparable period of 1999. The increase resulted from hiring additional research
and development personnel. Cobalt believes that a significant level of
investment in product research and development is required to remain
competitive. Accordingly, Cobalt expects to continue to devote substantial
resources to product research and development such that research and development
expenses will increase in absolute dollars but may continue to fluctuate as a
percentage of net revenues.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer support
functions, as well as costs associated with trade shows, promotional activities,
advertising and public relations. Sales and marketing expenses increased to
$11.6 million in the six months ended June 30, 2000, an increase of 85%, from
$6.3 million in the comparable period of 1999. The increase in sales and
marketing expenses was due to the expansion of Cobalt's sales and marketing
efforts, Cobalt's branding campaign, advertising and tradeshows, and hiring
additional sales and marketing personnel. Cobalt intends to expand its sales
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and marketing operations and efforts substantially, both domestically and
internationally, in order to increase market awareness and to generate sales of
its products. Accordingly, Cobalt expects its sales and marketing expenses to
increase in absolute dollars but to continue to fluctuate as a percentage of net
revenues.
General and Administrative
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding Cobalt's information systems. General and
administrative expenses increased to $3.6 million in the six months ended June
30, 2000, an increase of 148% over the $1.5 million in the comparable period of
1999. The increase was due to hiring additional administrative personnel and
increased costs associated with the expansion of Cobalt's facilities and
information infrastructure. Cobalt expects these expenses to increase in
absolute dollars but they may continue to fluctuate as a percentage of net
revenues as Cobalt adds personnel and incurs additional costs related to the
growth of its business and the expansion of its information infrastructure.
Amortization of Stock Compensation
In connection with the grant of stock options to employees for the period
from July 1, 1998 to October 1, 1999, Cobalt recorded unearned stock
compensation within stockholders' equity of approximately $8.9 million,
representing the difference between the estimated fair value of the common stock
for accounting purposes and the option exercise price of these options at the
date of grant. For the six months ended June 30, 2000, Cobalt recorded $2.4
million of stock compensation amortization and $253,000 in the comparable period
of 1999. The amount of stock compensation expense to be recorded in future
periods could decrease if options for which accrued but unvested compensation
has been recorded are forfeited. During the six months ended June 30, 2000, no
unearned stock compensation costs were reversed upon the cancellation of
options.
Amortization of Goodwill and Other Intangible Assets
In the six months ended June 30, 2000, Cobalt recorded $2.8 million for the
amortization of goodwill and intangibles related to the acquisition of
Chili!Soft. The details for the basis and expected amortization period are
specified in Note 13 to the consolidated financial statements included in this
document beginning on page F-1.
In-Process Research and Development
In the six months ended June 30, 2000, Cobalt charged a total of $830,000
for in-process research and development. This research and development was
acquired as part of the acquisition of Chili!Soft. The amount allocated to
in-process research and development was determined through established valuation
techniques as detailed in Note 13 to the consolidated financial statements
included in this document beginning on page F-1.
The development of this technology may fail because of prohibitive cost,
inability to perform the required efforts to complete the technology or other
factors outside Cobalt's control such as changes in the market for the resulting
developed products. In addition, at such time that the project is completed, the
completed products may not receive market acceptance or Cobalt may be unable to
produce and market the products cost effectively.
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Interest Income (Expense), Net
Interest income (expense), net includes income from Cobalt's cash
investments net of expenses related to Cobalt's debt and lease financing
obligations. For the six months ended June 30, 2000, Cobalt recorded net
interest income of $3.7 million. For the six months ended July 2, 1999 Cobalt
recorded no net interest income. The growth in net interest income was primarily
due to an increase in interest income earned on proceeds from Cobalt's initial
public offering of common stock in November 1999.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Revenues
Net revenues increased to $22.8 million in 1999 from $3.5 million in 1998.
The 551% increase in net revenues was primarily the result of an increase in
sales to new and existing customers of Cobalt's Cobalt Qube and Cobalt RaQ
product lines, which together represented 87% and 83% of net revenue in 1999 and
1998, respectively. The remaining increase was due to the introduction of Cobalt
Cache products and Cobalt NAS products in July 1998 and April 1999,
respectively, and an expansion of Cobalt's sales through its direct sales force
and channel partners. Cobalt expects that the majority of its revenues in the
future may continue to be generated from sales of its Cobalt Cube and Cobalt RaQ
products.
Net revenues from sales to international customers increased to $11.9
million, or 52% of net revenue, in 1999 from $1.6 million, or 44% of net revenue
in 1998. The increase in absolute dollars was due to expansion of Cobalt's
operations in Japan, Europe and other countries. One factor relating to the
increase in net revenues from sales outside the United States was Cobalt's
introduction of various local language user interfaces including Japanese,
German, and French. Cobalt's net revenues from sales outside the United States
were primarily denominated in U.S. dollars. The effect of foreign exchange
fluctuations did not have a significant impact on Cobalt's results.
Cost of Revenues and Gross Profit
Cost of revenues includes technology license fees, manufacturing costs,
manufacturing personnel expenses, packaging and shipping costs and warranty
expenses. Cobalt has outsourced its manufacturing and repair operations.
Accordingly, in 1999 approximately 76% and in 1998 approximately 65% of Cobalt's
cost of revenues consists of payments to Cobalt's contract manufacturers. Cost
of revenues increased to $14.5 million in 1999 from $3.1 million in 1998. The
increase in cost of revenues was primarily due to increased sales volume and the
introduction of new products. Cobalt believes that its cost of revenues will
increase in absolute dollars in future periods but may continue to fluctuate as
a percentage of net revenues due to factors including changes in product mix,
and material and labor costs.
Gross profit increased to $8.4 million in 1999 from $414,000 in 1998. Gross
profit as a percentage of net revenues increased to 36.6% in 1999 from 11.7% in
1998. The increase in gross profit was primarily due to increased sales volume
and the introduction of new products. Cobalt believes that the rate of growth of
the increase in gross profit will not be sustainable in future quarters.
Research and Development
Research and development expenses consist primarily of salaries and related
expenses for personnel engaged in research and development including the
development of application and server
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management software, material costs for prototype and test units and other
expenses related to the design, development, testing and enhancements of
Cobalt's products. Cobalt expenses all of its research and development costs as
they are incurred. Research and development expenses increased to $6.0 million
in 1999 from $3.5 million in 1998. The increase resulted from the hiring of
additional research and development personnel and the cost of consulting
services and materials. As net revenues increased, research and development
expenses declined as a percentage of net revenues to 26% in 1999 from 98% in
1998. Cobalt believes that a significant level of investment in product research
and development is required to remain competitive. Accordingly, Cobalt expects
to continue to devote substantial resources to product research and development
such that research and development expenses will increase in absolute dollars
but may continue to fluctuate as a percentage of net revenues.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer support
functions, as well as costs associated with trade shows, promotional activities,
advertising and public relations. Sales and marketing expenses increased to
$14.8 million in 1999 from $5.6 million in 1998. The increase in sales and
marketing expenses was due to the expansion of Cobalt's international sales and
marketing efforts, Cobalt's branding campaign, advertising and tradeshows and
the hiring of additional sales and marketing personnel in the United States. As
net revenues increased, sales and marketing expenses declined as a percentage of
net revenues to 65% in 1999 from 158% in 1998. Cobalt intends to expand its
sales and marketing operations and efforts substantially, both domestically and
internationally, in order to increase market awareness and to generate sales of
its products. Accordingly, Cobalt expects its sales and marketing expenses to
increase in absolute dollars but to continue to fluctuate as a percentage of net
revenues.
General and Administrative
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding Cobalt's information systems. General and
administrative expenses increased to $4.1 million in 1999 from $1.9 million in
1998. The increase was due to hiring of additional administrative personnel and
increased rent. As net revenues increased, general and administrative expenses
declined as a percentage of net revenues to 18% in 1999 from 54% in 1998. Cobalt
expects these expenses to increase in absolute dollars but may continue to
fluctuate as a percentage of net revenues as Cobalt adds personnel and incurs
additional costs related to the growth of its business, expansion of its
information infrastructure and its operation as a public company.
Amortization of Stock Compensation
In connection with the grant of stock options to employees for the period
from July 1, 1998 to October 1, 1999, Cobalt recorded unearned stock
compensation within stockholders' equity of approximately $8.9 million,
representing the difference between the estimated fair value of the common stock
for accounting purposes and the option exercise price of these options at the
date of grant. Cobalt recorded $2.4 million of stock compensation amortization
during 1999 and no stock compensation amortization in 1998. The amount of stock
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
During 1999, unearned stock compensation costs of $64,000 were reversed upon
cancellation of options.
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Litigation Settlement
In December 1998, CUBE Computer Corporation filed a lawsuit against Cobalt
in the United States District Court for the Southern District of New York for
trademark infringement. CUBE, an original equipment manufacturer of personal
computers, argued that this alleged infringement resulted from Cobalt's use of
"Qube" in connection with its products. In December 1999, Cobalt entered into a
settlement agreement with CUBE Computer resulting in a one-time payment of $4.1
million, excluding related legal fees.
Interest Income (Expense), Net
Interest income (expense), net includes income from Cobalt's cash
investments net of expenses related to Cobalt's debt and lease financing
obligations. Cobalt had net interest income of $1.5 million in 1999 and $67,000
in 1998. The growth in net interest income from 1998 was primarily due to an
increase in interest income earned on proceeds from issuance of Cobalt's stock.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net Revenues
Cobalt had net revenues of $3.5 million in 1998, principally related to
sales of the Cobalt Qube and Cobalt RaQ. Cobalt had no net revenues in 1997. Net
revenues from sales outside of the United States were approximately 44% of net
revenues in 1998, primarily in Japan and Europe.
Cost of Revenues and Gross Profit
Cost of revenues was $3.1 million in 1998 and gross profit totaled
$414,000. There were neither cost of revenues nor gross profit in 1997.
Research and Development
Research and development expenses increased to $3.5 million in 1998 from
$1.1 million in 1997. The increase in research and development expenses was due
to expanded technology development efforts related to Cobalt's new products,
user interfaces, Linux operating system customization and application software.
Sales and Marketing
Sales and marketing expenses increased to $5.6 million in 1998 from
$245,000 in 1997. The increase in sales and marketing expenses during 1998 was
due to the addition of new sales, marketing, and customer support personnel and
product launches, sales channel growth, and Cobalt's expansion of its global
selling efforts, which emphasizes the support of sales and service through
distributors and resellers.
General and Administrative
General and administrative expenses increased to $1.9 million in 1998 from
$445,000 in 1997. The increase in general and administrative expenses in each
period was due to the hiring of additional personnel and to expansion of
Cobalt's facilities to support the growth of its business.
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Interest Income (Expense), Net
Cobalt had net interest income of $67,000 in 1998 and net interest expense
of $12,000 in 1997. The net change from 1997 to 1998 was due to interest income
on the increased average cash and cash equivalents balances as a result of
Cobalt's issuances of capital stock.
ACQUISITION OF PROGRESSIVE SYSTEMS, INC.
On August 28, 2000 Cobalt acquired all outstanding stock and rights to
acquire capital stock of Progressive Systems, Inc. in exchange for a combination
of Cobalt common stock and cash totaling $11.0 million. An aggregate of
approximately 162,000 shares of Cobalt common stock were issued and $3.3 million
in cash was paid pursuant to this acquisition. In addition, Cobalt assumed
certain liabilities and incurred certain direct costs of the acquisition, which
resulted in an aggregate purchase price of $12.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Cobalt has financed its operations primarily through
private sales of mandatorily redeemable convertible preferred stock, proceeds
from its initial public offering of common stock, the issuance of convertible
notes, equipment financings and net revenues generated from product sales. As of
June 30, 2000, Cobalt had cash and cash equivalents of $80.9 million, short-term
investments of $50.9 million, an accumulated deficit of $45.4 million and
working capital of $118.5 million.
Cobalt's operating activities used cash of $3.4 million in the six months
ended June 30, 2000 and $7.5 million in the six months ended July 2, 1999. Cash
used in operating activities during the six months ended June 30, 2000 was
attributable to a net loss of $8.6 million, and increases in accounts receivable
of $2.9 million and a decrease in accounts payable of $2.8 million, but was
offset in part by increases in accrued liabilities of $3.6 million, deferred
margin on distributor inventory of $646,000, depreciation, amortization of stock
compensation, acquired intangibles and other non-cash expenses aggregating $6.4
million. Cash used in operating activities for the six months ended July 2, 1999
was primarily attributable to net losses of $8.2 million. In the six months
ended July 2, 1999, cash used in operating activities was also attributable to
increases in accounts receivable and inventories of $2.6 million and $505,000,
respectively, offset in part by increases in accounts payable and accrued
expenses of $1.3 million and $1.6 million, respectively.
Cobalt's investing activities used cash of $57.6 million in the six months
ended June 30, 2000 and $428,000 in the six months ended July 2, 1999. Cash used
in investing activities for the six months ended June 30, 2000 was primarily
attributable to purchases of short-term investments, long term investments and
costs related to the acquisition of Chili!Soft, Inc. The decreases in the six
months ended July 2, 1999 reflect purchases of computer equipment and other
fixed assets.
Cobalt's financing activities provided cash of $159,000 in the six months
ended June 30, 2000 and $33.2 million in the six months ended July 2, 1999. The
increases in the six months ended June 30, 2000 resulted primarily from the net
proceeds from the issuances of common stock to Cobalt's employees upon the
exercise of stock options. The increases in the six months ended July 2, 1999
resulted from the net proceeds from the issuance of mandatorily redeemable
convertible preferred stock and convertible promissory notes, borrowings under
bank lines of credit and advances from a related party.
From inception, Cobalt has made capital expenditures of $4.1 million to
support its research and development, sales and marketing and administrative
activities. Cobalt expects to have capital expenditures of approximately $2.0
million for the next twelve months. Cobalt also anticipates that its
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capital expenditures will increase over the next several years as it expands its
facilities and acquires equipment to support expansion of its sales and
marketing and research and development activities.
In September 1998, Cobalt entered into an equipment lease financing
agreement with available borrowings of up to $1.0 million at an interest rate of
10.95% per annum secured by Cobalt's equipment, machinery and fixtures. Cobalt
is required to repay advances under the line in equal installments. Under this
lease line, as of June 30, 2000 and July 2, 1999, Cobalt had outstanding
borrowings of $63,000 and $105,000.
Cobalt intends to continue to invest heavily in the development of new
products and enhancements to its existing products. Cobalt's future liquidity
and capital requirements will depend upon numerous factors, including:
- the costs and timing of expansion of sales and marketing activities;
- the costs and timing of expansion of product development efforts and the
success of these development efforts;
- the extent to which Cobalt's existing and new products gain market
acceptance;
- the costs involved in maintaining and enforcing intellectual property
rights;
- market developments;
- available borrowings under line of credit arrangements; and
- other factors.
Cobalt believes that its current cash and investment balances and any cash
generated from operations and future debt financing will be sufficient to meet
its operating and capital requirements for at least the next 12 months. However,
it is possible that Cobalt may require additional financing within this period.
Cobalt has no current plans, and is not currently negotiating, to obtain
additional financing. The factors described above will affect Cobalt's future
capital requirements and the adequacy of Cobalt's available funds. In addition,
even if Cobalt raises sufficient funds to meet its anticipated cash needs during
the next 12 months, it may need to raise additional funds beyond this time.
Cobalt may be required to raise those funds through public or private
financings, strategic relationships or other arrangements. Cobalt cannot assure
that such funding, if needed, will be available at attractive terms, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants. If Cobalt
fails to raise capital when needed, Cobalt's failure could have a negative
impact on Cobalt's ability to pursue its business strategy and achieve and
maintain profitability.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents Cobalt's consolidated operating results for
each of the ten quarters in the period from January 1, 1998 through June 30,
2000. The information for each of these quarters is unaudited and has been
prepared on the same basis as Cobalt's audited consolidated financial statements
appearing elsewhere in this document. In the opinion of Cobalt's management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited quarterly results when read in
conjunction with our audited consolidated financial statements and related notes
appearing elsewhere in this document.
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, APR. 2, JULY 2, OCT. 1,
1998 1998 1998 1998 1999 1999 1999
--------- -------- --------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ 70 $ 379 $ 1,064 $ 2,024 $ 2,634 $ 5,029 $ 6,186
Cost of revenues............................ 155 427 808 1,733 2,002 3,154 3,873
--------- ------- ------- ------- ------- ------- -------
Gross profit (loss)...................... (85) (48) 256 291 632 1,875 2,313
--------- ------- ------- ------- ------- ------- -------
OPERATING EXPENSES:
Research and development................... 528 855 990 1,110 1,397 1,374 1,566
Sales and marketing........................ 590 1,050 1,709 2,232 2,753 3,520 3,973
General and administrative................. 242 351 487 815 621 833 1,170
Amortization of stock compensation......... -- -- -- -- 140 113 1,256
Amortization of goodwill and other
intangible assets........................ -- -- -- -- -- -- --
In-process research and development........ -- -- -- -- -- -- --
Litigation settlement...................... -- -- -- -- -- -- --
--------- ------- ------- ------- ------- ------- -------
Total operating expenses............... 1,360 2,256 3,186 4,157 4,911 5,840 7,965
--------- ------- ------- ------- ------- ------- -------
Loss from operations........................ (1,445) (2,304) (2,930) (3,866) (4,279) (3,965) (5,652)
Interest income (expense), net.............. 7 (10) 48 22 (128) 128 174
--------- ------- ------- ------- ------- ------- -------
Net loss.................................... $ (1,438) $(2,314) $(2,882) $(3,844) $(4,407) $(3,837) $(5,478)
========= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUES:
Net revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 221.4 112.7 75.9 85.6 76.0 62.7 62.6
--------- ------- ------- ------- ------- ------- -------
Gross profit (loss)...................... (121.4) (12.7) 24.1 14.4 24.0 37.3 37.4
--------- ------- ------- ------- ------- ------- -------
OPERATING EXPENSES:
Research and development................... 754.3 225.6 93.0 54.8 53.0 27.3 25.3
Sales and marketing........................ 842.9 277.0 160.6 110.3 104.5 70.0 64.2
General and administrative................. 345.7 92.6 45.8 40.3 23.6 16.6 18.9
Amortization of stock compensation......... -- -- -- -- 5.3 2.2 20.3
Amortization of goodwill and intangibles... -- -- -- -- -- -- --
In process research and development........ -- -- -- -- -- -- --
Litigation settlement...................... -- -- -- -- -- -- --
--------- ------- ------- ------- ------- ------- -------
Total operating expenses.................... 1,942.9 595.2 299.4 205.4 186.4 116.1 128.7
--------- ------- ------- ------- ------- ------- -------
Loss from operations........................ (2,064.3) (607.9) (275.3) (191.0) (162.4) (78.8) (91.3)
Interest income (expense), net.............. 10.0 (2.6) 4.5 1.1 (4.9) 2.5 2.8
--------- ------- ------- ------- ------- ------- -------
Net loss................................... (2,054.3)% (610.5)% (270.8)% (189.9)% (167.3)% (76.3)% (88.5)%
========= ======= ======= ======= ======= ======= =======
<CAPTION>
DEC. 31 MAR. 31 JUN. 30
1999 2000 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ 8,965 $12,033 $16,242
Cost of revenues............................ 5,432 6,716 8,577
------- ------- -------
Gross profit (loss)...................... 3,533 5,317 7,665
------- ------- -------
OPERATING EXPENSES:
Research and development................... 1,676 1,630 2,383
Sales and marketing........................ 4,526 5,222 6,373
General and administrative................. 1,447 1,578 2,031
Amortization of stock compensation......... 1,460 1,235 1,198
Amortization of goodwill and other
intangible assets........................ -- -- 2,764
In-process research and development........ -- -- 830
Litigation settlement...................... 4,200 -- --
------- ------- -------
Total operating expenses............... 13,309 9,665 15,579
------- ------- -------
Loss from operations........................ (9,776) (4,348) (7,914)
Interest income (expense), net.............. 1,192 1,765 1,893
------- ------- -------
Net loss.................................... $(8,584) $(2,583) $(6,021)
======= ======= =======
AS A PERCENTAGE OF NET REVENUES:
Net revenues................................ 100.0% 100.0% 100.0%
Cost of revenues............................ 60.6 55.8 52.8
------- ------- -------
Gross profit (loss)...................... 39.4 44.2 47.2
------- ------- -------
OPERATING EXPENSES:
Research and development................... 18.7 13.5 14.7
Sales and marketing........................ 50.5 43.4 39.2
General and administrative................. 16.1 13.1 12.5
Amortization of stock compensation......... 16.3 10.3 7.4
Amortization of goodwill and intangibles... 0.0 0.0 17.0
In process research and development........ 0.0 0.0 5.1
Litigation settlement...................... 46.8 0.0 0.0
------- ------- -------
Total operating expenses.................... 148.4 80.3 95.9
------- ------- -------
Loss from operations........................ (109.0) (36.1) (48.7)
Interest income (expense), net.............. 13.3 14.7 11.7
------- ------- -------
Net loss................................... (95.7)% (21.4)% (37.0)%
======= ======= =======
</TABLE>
91
<PAGE> 98
Net revenues increased in each of the ten quarters from January 1, 1998
through June 30, 2000. These quarterly increases were primarily due to the
introduction of Cobalt's Cobalt RaQ and to a lesser extent, its Cobalt Cache and
Cobalt NAS products, increased sales of its Cobalt Qube products, and the
addition of new channel partners and web hosting and application service
provider customers.
Cost of revenues increased in each of the ten quarters from January 1, 1998
through June 30, 2000 as a result of increased unit sales. Gross profit
increased in each of the ten quarters from January 1, 1998 through June 30, 2000
due to increases in the volume of sales and the realization of associated
economies of scale as well as the introduction of the higher margin Cobalt RaQ
products.
Research and development expenses increased in each of the ten quarters
from January 1, 1998 to June 30, 2000, with the exception of the quarters ended
July 2, 1999 and March 31, 2000, primarily due to the addition of personnel and
costs incurred for the development of new products. For the quarters ended July
2, 1999 and March 31, 2000, research and development expenses decreased relative
to the prior quarter as a result of relatively high contract research and
development expenses in the prior quarter. Sales and marketing expenses
increased in each of the ten quarters from January 1, 1998 to June 30, 2000 due
to the hiring of additional sales personnel, higher commission expense resulting
from increased unit sales, marketing programs, tradeshows and customer support.
General and administrative expenses generally increased for each of the ten
quarters from January 1, 1998 to June 30, 2000, except for the quarter ended
April 2, 1999. For the quarter ended April 2, 1999, general and administrative
expenses decreased relative to the prior quarter as a result of moving costs
Cobalt incurred in connection with its move to a new corporate headquarters
facility in Mountain View, California during the prior quarter.
As a result of Cobalt's limited operating history, Cobalt cannot forecast
operating expenses based on historical results. Accordingly, Cobalt bases its
expenses in part on future revenue projections. Most of Cobalt's expenses are
fixed in nature, and Cobalt may not be able to quickly reduce spending if
revenues are lower than it has projected. Cobalt's ability to forecast its
quarterly sales accurately is limited, which makes it difficult to predict the
quarterly revenues that Cobalt will recognize. Cobalt expects that its business,
operating results and financial condition would be harmed if revenues did not
meet projections.
Cobalt expects that its revenues and operating results may vary
significantly from quarter to quarter, and anticipates that its expenses will
increase substantially for at least the next two fiscal years as Cobalt:
- increases its sales and marketing activities, including expanding its
North American and international direct sales forces;
- expands its indirect channels;
- develops its technology, expand its product lines and creates and markets
new products; and
- pursues strategic relationships and acquisitions.
Accordingly, Cobalt believes that quarter to quarter comparisons of its
operating results are not necessarily meaningful. Investors should not rely on
the results of one quarter as an indication of future performance.
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<PAGE> 99
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
Securities and Exchange Commission. The effective date of this pronouncement is
the fourth quarter of the fiscal year beginning after December 15, 1999. Cobalt
believes that adopting SAB 101 will not have a material impact on its financial
position and results of operations.
In March 2000 the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") -- Accounting for Certain Transactions
involving Stock Compensation -- an interpretation of APB Opinion No. 25. FIN 44
clarifies the application of Opinion 25 for (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain provisions cover specific
events that occur after either December 15, 1999 or January 12, 2000. The
adoption of certain other provisions of FIN 44 did not have a material effect on
the financial position or results of Cobalt. Cobalt does not expect that the
adoption of the remaining provisions will have a material effect on its
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In July 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 deferred the effect of SFAS No. 133 until fiscal years beginning after
June 15, 2000. Cobalt will adopt SFAS No. 133 in 2001. To date, Cobalt has not
engaged in derivative or hedging activities. Cobalt is unable to predict the
impact of adopting SFAS No 133 if Cobalt were to engage in derivative and
hedging activities in the future.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Cobalt does not engage in any foreign currency hedging transactions and
therefore, does not believe it is subject to exchange rate risk. Cobalt's
exposure to market risk for changes in interest rates relates primarily to its
cash and cash equivalents. Cobalt is subject to fluctuating interest rates that
may impact, adversely or otherwise, its results of operations or cash flows for
its cash and cash equivalents.
The table below presents the principal amounts and related average interest
rates by year of maturity for Cobalt's cash and cash equivalents.
As of June 30, 2000:
<TABLE>
<CAPTION>
EXPECTED MATURITY
2000
---------------------
(IN THOUSANDS, EXCEPT
INTEREST RATES)
<S> <C>
Assets
Cash and cash equivalents................................... $80,945
Average interest rates...................................... 5.8%
</TABLE>
The estimated fair value of Cobalt's cash and cash equivalents approximates
the principal amounts reflected above based on the short maturities of these
financial instruments.
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<PAGE> 100
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF COBALT
The following table sets forth information regarding beneficial ownership
of Cobalt's common stock as of October 26, 2000, the record date for
determination of Cobalt stockholders entitled to notice of and to vote at the
special meeting. The table also sets forth pro forma information regarding
beneficial ownership of Sun common stock by the principal stockholders of Cobalt
following the merger using the exchange ratio of 0.50 shares of Sun common stock
for each share of Cobalt common stock, excluding options to acquire shares of
Cobalt common stock (other than non-employee director options under Cobalt's
1999 director option plan) that will become exercisable solely as a result of
the merger, if any. The table includes:
- each person known to beneficially own more than 5% of the outstanding
shares of Cobalt common stock on an as-converted basis;
- each of Cobalt's directors, the chief executive officer and four other
most highly compensated executive during 1999; and
- all of Cobalt's directors and executive officers as a group.
In addition, because of Sun's option to purchase a number of shares of
Cobalt common stock equal to 19.9% of Cobalt's outstanding common stock at the
time of exercise, Sun may be deemed to beneficially own approximately 6,032,517
shares of Cobalt common stock assuming the option was exercised on October 26,
2000.
Unless otherwise indicated, the address of each person owning more than 5%
of the outstanding shares of common stock is c/o Cobalt Networks, Inc., 555
Ellis Street, Mountain View, California 94043. Except as indicated by footnote,
to Cobalt's knowledge, all persons named in the table below have sole voting and
investment power with respect to their shares of common stock, except to the
extent authority is shared by spouses under applicable law.
Shares of Cobalt common stock that are subject to options are currently
exercisable or exercisable within 60 days of October 26, 2000, are deemed
outstanding for computing the percentages of the person holding such options but
are not deemed outstanding for computing the percentages of any other person.
Percentage ownership before the merger is based on 30,314,157 shares of common
stock outstanding as of October 26, 2000. Percentage ownership after the merger
is based on an estimated 1,609,171,019 shares of Sun common stock outstanding as
of October 26, 2000.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COBALT NETWORKS OF SUN MICROSYSTEMS
BEFORE THE MERGER AFTER THE MERGER
----------------------- -----------------------
NAME BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
--------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Gordon A. Campbell(1)........................ 1,666,894 5.49 833,447 *
Stephen W. DeWitt(2)......................... 1,629,723 5.23 814,861 *
Vivek Mehra(3)............................... 939,949 3.08 469,974 *
George Korchinsky(4)......................... 219,729 * 109,864 *
Kenton D. Chow(5)............................ 205,759 * 102,879 *
Patrick J. Conte(6).......................... 160,351 * 80,575 *
Jordan A. Levy(7)............................ 111,091 * 55,854 *
Stephen J. Luczo(8).......................... 56,218 * 28,109 *
Gary F. Bengier(9)........................... 55,000 * 27,500 *
Mark F. Spagnolo(10)......................... 50,500 * 25,250 *
Carl F. Pascarella(11)....................... 50,000 * 25,000 *
All directors and executive officers as a
group (17 persons)(12)..................... 7,035,264 21.13 3,519,541 *
</TABLE>
94
<PAGE> 101
-------------------------
* Less than one percent.
(1)Includes 60,000 shares of common stock that may be acquired upon exercise of
stock options exercisable within 60 days after October 26, 2000, 527,149
shares of common stock held by TechFund Capital, LP, 2,364 shares of common
stock held by TechFund Capital II, LP, 216,392 shares of common stock held
by TechFund Capital Management, LLC, 10,405 shares of common stock held by
TechFund Capital Management II, LLC, 150,970 shares of common stock held in
trust by Gordon A. Campbell and Maria Ligeti, his spouse, for the benefit of
family members, and 699,614 shares of common stock held by Gordon A.
Campbell. TechFund Capital Management, LLC is the Managing Member of
TechFund Capital, LP and may be deemed to have shared voting and dispositive
power over TechFund Capital, LP's shares. TechFund Capital Management II,
LLC is the Managing Member of TechFund Capital II, LP and may be deemed to
have shared voting and dispositive power over TechFund Capital II, LP's
shares. Mr. Campbell also is a Managing Member of TechFund Capital
Management, LLC and TechFund Capital Management II, LLC.
(2)Includes 850,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000, 160,000
shares of common stock held in trust for the benefit of certain members of
Mr. DeWitt's family, and 619,723 shares of common stock held by Mr. DeWitt.
(3) Includes 230,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000, 25,000
shares of common stock held in trust by Mr. Mehra for the benefit of
certain members of Mr. Mehra's family, 25,000 shares of common stock held
in trust by Sonia Bhanot, Mr. Mehra's spouse, for the benefit of certain
members of Ms. Bhanot's family, and 659,949 shares of common stock held by
Mr. Mehra.
(4)Includes 210,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000 and 9,729
shares of common stock held by Mr. Korchinsky.
(5) Includes 156,250 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000, 4,000
shares of common stock held in trust by Teri L. Chow, Mr. Chow's spouse,
for the benefit of herself and her children, 8,000 shares of common stock
held in trust by Mr. Chow for the benefit of himself and his children, and
37,509 shares of common stock held by Mr. Chow.
(6) Includes 160,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000 and 351
shares of common stock held by Mr. Conte. Mr. Conte's beneficial ownership
of Sun common stock includes 400 shares owned prior to the completion of
the merger.
(7)Includes 71,500 shares of common stock that may be acquired upon exercise of
stock options exercisable within 60 days after October 26, 2000, and 39,591
shares of common stock held by Mr. Levy. Mr. Levy's beneficial ownership of
Sun common stock includes 309 shares owned prior to completion of the
merger.
(8) Includes 55,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000 and
1,218 shares of common stock held by Mr. Luczo.
(9) Includes 55,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000.
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<PAGE> 102
(10) Includes 50,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000 and 500
shares of common stock held by Mr. Spagnolo.
(11) Includes 50,000 shares of common stock that may be acquired upon exercise
of stock options exercisable within 60 days after October 26, 2000.
(12) Includes 2,985,250 shares of common stock that may be acquired upon
exercise of stock options exercisable within 60 days after October 26,
2000.
96
<PAGE> 103
COMPARISON OF RIGHTS OF HOLDERS OF COBALT COMMON STOCK AND SUN COMMON STOCK
The following is a description of the material differences between the
rights of holders of Cobalt common stock and Sun common stock. While we believe
that the description covers the material differences between the two, this
summary may not contain all of the information that is important to you. You
should carefully read this entire document and the other documents we refer to
for a more complete understanding of the differences between being a stockholder
of Cobalt and being a stockholder of Sun.
Cobalt's certificate of incorporation and bylaws, each as currently in
effect, govern your rights as a stockholder of Cobalt. After completion of the
merger, you will become a stockholder of Sun. Sun's certificate of incorporation
and bylaws will govern your rights as a stockholder of Sun. We are each
incorporated under the laws of the State of Delaware. Accordingly, the Delaware
General Corporation Law will continue to govern your rights as a stockholder
after completion of the merger.
COMMON STOCK
Each of Sun and Cobalt have one class of common stock issued and
outstanding. Holders of Sun common stock and holders of Cobalt common stock are
each entitled to one vote for each share held.
PREFERRED STOCK
Both of the certificates of incorporation of Sun and Cobalt provide that
our boards of directors are authorized to provide for the issuance of shares of
undesignated preferred stock in one or more series, and to fix the designations,
powers, preferences and rights of the shares of each series and any
qualifications, limitations or restrictions thereof.
BOARD OF DIRECTORS
Sun's certificate of incorporation indicates that the number of directors
which will constitute the whole board of directors of Sun shall be as specified
in Sun's bylaws. Sun's bylaws currently indicate that the number of directors of
the corporation shall be no less than five and no more than nine, and sets the
number of directors at eight, until changed by amendment. An amendment to Sun's
bylaws requires the vote or written consent of holders of a majority of the
outstanding shares of Sun.
The board of directors of Sun has proposed an amendment to the Sun bylaws
that would change the range of the number of directors to a minimum of six and a
maximum of eleven. The exact number of directors will continue to be eight if
the proposal is approved. Sun's stockholders are expected to vote on this
proposal at the 2000 annual meeting of stockholders to be held on November 8,
2000.
Sun's directors are elected for a term of one year and until their
successors are elected and qualified.
Cobalt's board of directors currently consists of seven directors. The
number of directors on Cobalt's board may be changed by the board. Cobalt's
directors are divided into three classes and are elected for a term of three
years.
REMOVAL OF DIRECTORS
Sun's directors, or the entire Sun board, may be removed with or without
cause by the affirmative vote of the holders of at least a majority of the
outstanding shares of Sun entitled to vote
97
<PAGE> 104
in the election of directors. For so long as stockholders are entitled to
cumulative voting, unless the entire Sun board is so removed, an individual Sun
director may not be removed without cause if the number of votes cast against
such director's removal is at least equal to the number of votes that would be
required to elect such director in an election of directors. "Cause" is not
defined in Sun's certificate of incorporation or bylaws.
Any director of Cobalt or the entire board of directors can be removed with
or without cause by the vote of a majority of the then-outstanding shares of
voting stock entitled to vote in the election of directors, voting as a single
class. Any director of Cobalt or the entire board of directors can be removed
without cause by the vote of at least sixty-six and two-thirds percent of the
then-outstanding shares of the voting stock entitled to vote in the election of
directors. "Cause" is not defined in Cobalt's certificate of incorporation or
bylaws.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Any newly created directorships in Sun's board of directors, resulting from
any increase in the number of authorized directors or any vacancies, may be
filled by a majority of the remaining members of the such board of directors,
even though less than a quorum, or by a sole remaining director. If the
remaining members of the board who fill such vacancy are less than a majority of
the board (as constituted immediately prior to such increase), any Sun
stockholder holding at least ten percent of the outstanding shares of Sun
entitled to vote may request that the Delaware Court of Chancery order an
election to fill any such newly created directorships or to replace the
directors chosen by the remaining board members to fill such newly created
directorships.
Any vacancies in Cobalt's board are filled by either the vote of a majority
of the then-outstanding shares of voting stock entitled to vote in the election
of directors, voting as a single class, or by the vote of a majority of the
remaining directors, even though less than a quorum or by a sole remaining
director; however, a vacancy created by the removal of a director by stockholder
vote or by court order may be filled only by the affirmative vote of a majority
of the shares represented and voting at a duly held meeting at which a quorum is
present. Newly created directorships resulting from an increase in the number of
directors are filled only by vote of the directors then in office, even though
less than a quorum.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Sun's stockholders may take action at annual or special meetings of
stockholders, or by written consent.
Cobalt's stockholders may take action only at annual or special meetings of
stockholders. They may not take action by written consent.
ABILITY TO CALL SPECIAL MEETINGS
Sun's board of directors, chairman of the board, any executive officer or
one or more stockholders holding a total of 10% or more of Sun's outstanding
shares of common stock entitled to vote may call special meetings of Sun
stockholders.
A majority of Cobalt's board of directors, or the chairman of the board,
may call special meetings of Cobalt stockholders.
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<PAGE> 105
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
The Sun bylaws allow stockholders to nominate candidates for election to
Sun's board of directors at any annual or any special stockholder meeting at
which the board of directors has determined that directors will be elected. In
addition, the Sun bylaws allow stockholders to propose business to be brought
before any stockholder meeting. However, nominations and proposals may only be
made by a stockholder who has given timely written notice to the Secretary of
Sun before the annual or special stockholder meeting.
Under Sun's bylaws, to be timely, notice of stockholder nominations or
proposals to be made at a stockholder meeting must be received by the Secretary
of Sun no less than 60 days nor more than 90 days before the date that Sun
mailed its proxy statement to stockholders for the previous year's annual
meeting. If Sun did not have an annual meeting the previous year or if the
annual meeting date for the current year has been changed by more than 30 days
from the date of the previous year's annual meeting, notice will also be timely
if received by Sun no later than 10 days after the day Sun publicly announces
the date of the annual meeting for the current year.
A stockholder's notice to Sun must set forth all of the following:
- all information required to be disclosed in solicitations of proxies for
election of directors, or information otherwise required by applicable
law, relating to any person that the stockholder proposes to nominate for
election or reelection as a director, including that person's written
consent to being named in the proxy statement as a nominee and to serving
as a director if elected;
- name, age, business address, and residence address, if known, of each
nominee proposed in the notice who is not an incumbent; the principal
occupation or employment of the nominee; the number of shares of Sun
stock owned by the nominee and any other information required by law;
- a brief description of the business the stockholder proposes to bring
before the meeting, the reasons for conducting that business at that
meeting and any material interest of the stockholder in the business
proposed and the beneficial owner, if any, on whose behalf the proposal
is made; and
- the stockholder's and the beneficial owner's, if any, name and address as
they appear on Sun's books and the class and number of shares of Sun
which are beneficially owned by the stockholder.
Stockholder nominations and proposals will not be brought before any Sun
stockholder meeting unless the nomination or proposal was brought before the
meeting in accordance with Sun's stockholder advance notice procedure.
The Cobalt bylaws allow stockholders to propose business to be brought
before an annual stockholder meeting. In addition, the Cobalt bylaws allow
stockholders who are entitled to vote in the election of directors to nominate
candidates for election to Cobalt's board of directors at a meeting of
stockholders. However, proposals and nominations may only be made by a
stockholder who has given proper, timely notice in writing to the Secretary of
Cobalt before the stockholder meeting.
Under Cobalt's bylaws, to be timely, notice of stockholder proposals or
nominations to be made at a stockholder meeting must be received by the
Secretary of Cobalt no less than 120 days before the date specified in Cobalt's
proxy statement sent to stockholders in connection with the previous year's
annual meeting. If Cobalt did not have an annual meeting the previous year or if
the annual meeting date for the current year has been changed by more than 30
days from the date specified at
99
<PAGE> 106
the time of the previous year's proxy statement, notice will also be timely if
received by Cobalt within a reasonable time before proxies are solicited.
A stockholder's notice to Cobalt regarding the proposal of business must
set forth all of the following:
- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting;
- the stockholder's name and address, as they appear on Cobalt's books;
- the class and number of shares of Cobalt stock owned by the stockholder;
- any material interest that the stockholder has in the proposed business;
and
- any other information that is required to be provided by the stockholder
pursuant to Regulation 14A under the Securities Exchange Act of 1934.
A stockholder's notice to Cobalt regarding nomination of a director must
set forth all of the following regarding the person nominated:
- the name, age, business address and residence address of the nominee;
- the principal occupation or employment of the nominee;
- the class and number of shares of Cobalt stock beneficially owned by the
nominee;
- a description of all arrangements or understandings between the
stockholder and the nominee and any other person pursuant to which the
nominations are to be made by the stockholder; and
- any other information relating to the nominee that is required to be
disclosed in solicitations of proxies for elections of directors or is
otherwise required pursuant to Regulation 14A under the Securities
Exchange Act of 1934.
Stockholder proposals and nominations will not be brought before any Cobalt
stockholder meeting unless the proposal or nomination was brought before the
meeting in accordance with Cobalt's stockholder notice procedure.
AMENDMENT OF CERTIFICATE OF INCORPORATION
Under Delaware law, a certificate of incorporation of a Delaware
corporation may be amended by approval of the board of directors of the
corporation and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote for the amendment, unless a higher vote is
required by the corporation's certificate of incorporation.
Sun's certificate of incorporation does not contain any provisions
requiring a vote greater than that required by Delaware law to amend its
certificate of incorporation.
Cobalt's certificate of incorporation requires the affirmative vote of
sixty-six and two-thirds percent of the voting power of outstanding shares,
voting as a single class, to alter, amend or repeal provisions of the
certificate of incorporation regarding Cobalt's board of directors and its
powers, the percentage vote required for the adoption, amendment or repeal of
certain sections of Cobalt's bylaws, the requirements for valid stockholder
actions, the percentage vote required to remove directors from office, and the
requirement for the affirmative vote of sixty-six and two-thirds percent of the
voting power of outstanding shares to alter, amend or repeal the above
provisions.
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<PAGE> 107
AMENDMENT OF BYLAWS
Under Delaware law, stockholders entitled to vote have the power to adopt,
amend or repeal bylaws. In addition, a corporation may, in its certificate of
incorporation, confer such power upon the board of directors. The stockholders
always have the power to adopt, amend or repeal bylaws, even though the board
may also be delegated such power.
Sun's board of directors is expressly authorized to adopt, amend and repeal
Sun's bylaws by an affirmative vote of a majority of the total number of
authorized directors at that time, regardless of any vacancies. Sun's
stockholders may also adopt, amend or repeal Sun's bylaws in accordance with
Delaware law.
Cobalt's board of directors is expressly authorized to make, alter, amend
or repeal Cobalt's bylaws. Cobalt's stockholders may also amend or repeal
Cobalt's bylaws in accordance with Delaware law and Cobalt's certificate of
incorporation.
STATE ANTI-TAKEOVER STATUTES
Sun and Cobalt are both subject to Section 203 of the Delaware General
Corporation Law, which under certain circumstances may make it more difficult
for a person who would be an "Interested Stockholder," as defined in Section
203, in our respective companies, to effect various business combinations with
either of us for a three-year period. Under Delaware law, a corporation's
certificate of incorporation or bylaws may exclude a corporation from the
restrictions imposed by Section 203. Our respective certificates of
incorporation and bylaws do not exclude us from the restrictions imposed under
Section 203.
LIMITATION OF LIABILITY OF DIRECTORS
The Delaware General Corporation Law permits a corporation to include a
provision in its certificate of incorporation eliminating or limiting the
personal liability of a director or officer to the corporation or its
stockholders for damages for a breach of the director's fiduciary duty, subject
to certain limitations. Our respective certificates of incorporation include
such a provision to the maximum extent permitted by law. In addition, under the
terms of the merger agreement, Sun has agreed to fulfill and honor in all
respects the indemnification provisions in Cobalt's certificate of incorporation
and bylaws with respect to the directors, officers, employees and agents of
Cobalt prior to the merger for a period of six years following the completion of
the merger.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate that
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his duty of care.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law permits a corporation to indemnify
officers and directors for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful.
Both Sun's and Cobalt's bylaws provide that any person who was or is a
party or is threatened to be a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative, because
that person is or was a director or officer, or is or was serving at the request
of
101
<PAGE> 108
Sun or Cobalt, as the case may be, as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, will be indemnified against expenses, including attorney's fees,
judgments, fines and amounts paid in settlement and held harmless by Sun or
Cobalt, as the case may be, to the fullest extent permitted by the Delaware
General Corporation Law. The indemnification rights conferred by Sun and Cobalt
are not exclusive of any other right to which persons seeking indemnification
may be entitled under any statute, Sun's or Cobalt's certificate of
incorporation or bylaws, any agreement, vote of stockholders or disinterested
directors or otherwise. In addition, Sun and Cobalt are authorized to purchase
and maintain insurance on behalf of their directors and officers.
Additionally, Sun may pay expenses incurred by its directors or officers in
defending a civil or criminal action, suit or proceeding because that person is
a director or officer, in advance of the final disposition of that action, suit
or proceeding. However, such payment will be made only if Sun receives an
undertaking by or on behalf of that director or officer to repay all amounts
advanced if it is ultimately determined that he or she is not entitled to be
indemnified by Sun, as authorized by Sun's bylaws.
Cobalt's certificate of incorporation provides that any person who is made
or threatened to be made a party to an action or proceeding, whether criminal,
civil, administrative or investigative, by reason of the fact that he is or was
a director, officer or employee of Cobalt, or served as a director, officer or
employee of another enterprise at Cobalt's request, will be indemnified by
Cobalt against expenses, including attorneys' fees, judgments, fines and
settlements to the fullest extent permitted by the Delaware General Corporation
Law.
STOCKHOLDER RIGHTS PLAN
Under Delaware law, every corporation may create and issue rights entitling
the holders of such rights to purchase from the corporation shares of its
capital stock of any class or classes, subject to any provisions in its
certificate of incorporation. The price and terms of such shares must be stated
in the certificate of incorporation or in a resolution adopted by the board of
directors for the creation or issuance of such rights.
Sun has entered into a stockholder rights agreement. As with most
stockholder rights agreements, the terms of Sun's rights agreement are complex
and not easily summarized, particularly as they relate to the acquisition of
Sun's common stocks and to exercisability. This summary may not contain all of
the information that is important to you. Accordingly, you should carefully read
Sun's rights agreement, which is incorporated by reference into this document,
in its entirety.
Sun's rights agreement provides that each share of Sun's common stock
outstanding will have the right to purchase one one-thousandth of a preferred
share of Sun attached to it. The purchase price per one one-thousandth of a
preferred share of Sun under the agreement is $500, subject to adjustment. Each
share of Sun common stock issued in the merger will have one right attached.
Initially, the rights under Sun's rights agreement are attached to
outstanding certificates representing Sun common stock and no separate
certificates representing the rights will be distributed. The rights will
separate from Sun common stock and be represented by separate certificates
approximately 10 days after someone acquires or commences a tender offer for 10%
(20% if such person files a Schedule 13-G) of the outstanding Sun common stock.
After the rights separate from Sun's common stock, certificates
representing the rights will be mailed to record holders of the common stock.
Once distributed, the rights certificates alone will represent the rights.
102
<PAGE> 109
All shares of Sun common stock issued prior to the date the rights separate
from the common stock will be issued with the rights attached. The rights are
not exercisable until the date the rights separate from the common stock. The
rights will expire on February 11, 2008, unless earlier redeemed or exchanged by
Sun.
If an acquiror obtains or has the right to obtain 10% (20% if such acquiror
files a Schedule 13-G) or more of Sun common stock, then each right will entitle
the holder to purchase a number of shares of Sun common stock having a then
current market value equal to two times the exercise price.
Each right will entitle the holder to purchase a number of shares of common
stock of the acquiror having a then current market value of twice the purchase
price if an acquiror obtains 10% (20% if such acquiror files a Schedule 13-G) or
more of Sun common stock and any of the following occurs:
- Sun merges into another entity;
- an acquiring entity merges into Sun; or
- Sun sells more than 50% of its assets or earning power.
Under Sun's rights agreement, any rights that are or were owned by an
acquiror of more than 10% (20% if such acquiror files a Schedule 13-G) of Sun's
respective outstanding common stock will be null and void.
Sun's rights agreement contains exchange provisions which provide that
after an acquiror obtains 10% or more of Sun capital stock, but less than 50% of
Sun's outstanding common stock, Sun's boards of directors may, at its option,
exchange all or part of the then outstanding and exercisable rights for common
shares. In such an event, the exchange ratio is one common share per right,
adjusted to reflect any stock split, stock dividend or similar transaction.
The Sun board of directors may, at its option, redeem all of the
outstanding rights under the Sun rights agreement prior to the earlier of (1) 10
days after the time that an acquiror obtains 10% or more of Sun's outstanding
common stock, or (2) the final expiration date of the rights agreement. The
redemption price under Sun's rights agreement is $.0025 per right. The right to
exercise the rights will terminate upon the action of Sun's board ordering the
redemption of the rights and the only right of the holders of the rights will be
to receive the redemption price.
Holders of rights will have no rights as stockholders of Sun, including the
right to vote or receive dividends, simply by virtue of holding the rights.
Sun's rights agreement provides that the provisions of the rights agreement
may be amended by the board of directors prior to the date 10 days after any
person acquires 10% of Sun's common stock without the approval of the holders of
the rights. However, after the date any person acquires 10% of Sun's common
stock, the rights agreement may not be amended in any manner which would
adversely affect the interests of the holders of the rights, excluding the
interests of any acquiror.
Sun's rights agreement contains rights that have anti-takeover effects. The
rights may cause substantial dilution to a person or group that attempts to
acquire Sun without conditioning the offer on a substantial number of rights
being acquired. Accordingly, the existence of the rights may deter acquirors
from making takeover proposals or tender offers. However, the rights are not
intended to prevent a takeover, but rather are designed to enhance the ability
of Sun's board to negotiate with an acquiror on behalf of all the stockholders.
In addition, the rights should not interfere with a proxy contest.
103
<PAGE> 110
Cobalt does not have a stockholder rights agreement.
LEGAL MATTERS
The validity of the shares of Sun common stock offered by this document
will be passed upon for Sun by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Cobalt is represented in connection with the
merger by Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of the date
of this document, attorneys at Brobeck, Phleger & Harrison LLP beneficially own
an aggregate of 2,444 shares of Cobalt common stock. It is a condition to the
completion of the merger that Cobalt receive an opinion of Brobeck, Phleger &
Harrison LLP and that Sun receive an opinion from Wilson Sonsini Goodrich &
Rosati, Professional Corporation, in each case to the effect that, among other
things, the merger will qualify as a reorganization under the Internal Revenue
Code. See the section entitled "The Merger and Related Transactions -- Material
Federal Income Tax Consequences" beginning on page 58 of this document.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Sun's consolidated
financial statements and schedule included in Sun's Annual Report on Form 10-K
for the year ended June 30, 2000, as set forth in their report, which is
incorporated by reference in this document and elsewhere in the registration
statement of which this document forms a part. Sun's financial statements and
schedule are incorporated by reference in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
The consolidated financial statements of Cobalt Networks, Inc. as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 included in this document have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
STOCKHOLDER PROPOSALS
If the merger is not completed before the 2001 annual meeting of Cobalt
stockholders, Cobalt stockholders may present proper proposals for inclusion in
the proxy statement mailed by Cobalt for such meeting and for consideration at
the next annual meeting of its stockholders by submitting their proposals to
Cobalt in a timely manner complying with all the requirements of the proxy rules
established by the Securities and Exchange Commission and Cobalt's bylaws.
Proposals of stockholders of the Cobalt that are intended to be presented by
such stockholders at Cobalt's 2001 annual meeting must be received by Cobalt no
later than December 20, 2000 in order that they may be considered for inclusion
in the proxy statement and form of proxy relating to that meeting.
If a stockholder intends to submit a proposal at Cobalt's 2001 annual
meeting which is not eligible for inclusion in the proxy statement relating to
that meeting, the stockholder must provide Cobalt notice in accordance with the
requirements set forth in the Securities Exchange Act of 1934, as amended, no
later than December 20, 2000.
WHERE YOU CAN FIND MORE INFORMATION
THIS DOCUMENT INCORPORATES OTHER REPORTS BY REFERENCE WHICH ARE NOT
PRESENTED IN OR DELIVERED WITH THIS DOCUMENT.
104
<PAGE> 111
All reports, proxy and information statements and other information filed
by Sun pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended, after the date of this document and before the date of
the special meeting described herein are incorporated by reference into this
document from the date of filing of those reports, proxy and information
statements and other information.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH SUN HAS REFERRED YOU HEREIN. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT.
The following documents, which have been filed by Sun with the Securities
and Exchange Commission, are incorporated by reference into this document:
- 2000 Annual Report to Stockholders; and
- Annual Report on Form 10-K for the fiscal year ended June 30, 2000.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference into this document will be deemed to be modified or
superseded for purposes of this document to the extent that a statement
contained in this document or any other subsequently filed document that is
deemed to be incorporated by reference into this document modifies or supersedes
the statement. Any statement so modified or superseded will not be deemed,
except as so modified or superseded, to constitute a part of this document.
The reports incorporated by reference into this document are available from
Sun upon request. Sun will provide a copy of any and all of the information that
is incorporated by reference in this document (not including exhibits to the
information unless those exhibits are specifically incorporated by reference
into this document) to any person, without charge, upon written or oral request
to the following address and telephone number. ANY REQUEST FOR DOCUMENTS SHOULD
BE MADE BY NOVEMBER 29, 2000 TO ENSURE TIMELY DELIVERY.
Sun Microsystems, Inc.
Investor Relations
901 San Antonio Road
Palo Alto, CA 94303
(650) 960-1300
Sun and Cobalt file reports, proxy and information statements and other
information with the Securities and Exchange Commission. Copies of our reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 or by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
maintains a Website that contains reports, proxy statements and other
information regarding each of us. The address of the Securities and Exchange
Commission Website is http://www.sec.gov.
105
<PAGE> 112
Reports, proxy and information statements and other information concerning
Cobalt and Sun may be inspected at:
The National Association of Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
Sun has filed a registration statement on Form S-4 under the Securities Act
with the Securities and Exchange Commission with respect to Sun's common stock
to be issued to Cobalt stockholders in the merger. This document constitutes the
prospectus of Sun filed as part of the registration statement. This document
does not contain all of the information set forth in the registration statement
because certain parts of the registration statement are omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. The
registration statement and its exhibits are available for inspection and copying
as set forth above.
Cobalt stockholders should call Christopher Bunn at Cobalt at (650)
623-2508 with any questions about the merger.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS DOCUMENT, OR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY DISTRIBUTION OF
SECURITIES PURSUANT TO THIS DOCUMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH OR
INCORPORATED INTO THIS DOCUMENT BY REFERENCE OR IN OUR AFFAIRS SINCE THE DATE OF
THIS DOCUMENT. THE INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT TO COBALT
AND ITS SUBSIDIARIES WAS PROVIDED BY COBALT AND THE INFORMATION CONTAINED IN
THIS DOCUMENT WITH RESPECT TO SUN WAS PROVIDED BY SUN.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This document and the documents incorporated by reference into this
document contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, particularly statements regarding
market expectations and opportunities, market share growth, new products and
service expectations and capabilities and Sun's and Cobalt's expectations
regarding the growth of the Internet. These forward-looking statements are just
predictions and involve risks and uncertainties such that actual results may
differ materially.
In evaluating the merger, you should carefully consider the discussion of
risks and uncertainties in the section entitled "Risk Factors" beginning on page
15 of this document.
106
<PAGE> 113
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cobalt Networks, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Cobalt Networks, Inc. and its subsidiaries at December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the three years in
the period end December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 14, 2000, except as to Note 12
which is as of March 22, 2000.
F-1
<PAGE> 114
COBALT NETWORKS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
2000 1999 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 80,945 $141,777 $ 2,090
Short-term investments.................................... 50,943 -- --
Accounts receivable, net of allowance for doubtful
accounts of $919 (unaudited), $572 and $335............ 9,015 6,187 2,040
Inventories............................................... 318 714 514
Other current assets...................................... 2,318 1,494 239
-------- -------- --------
Total current assets................................... 143,539 150,172 4,883
Property and equipment, net................................. 2,732 1,685 1,262
Long-term investments....................................... 3,200 -- --
Goodwill and intangible assets.............................. 75,833 -- --
-------- -------- --------
$225,304 $151,857 $ 6,145
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable, current.................................... $ 46 $ 44 $ 39
Borrowings under line of credit........................... -- -- 600
Advance from related party................................ -- -- 500
Accounts payable.......................................... 13,439 15,101 4,179
Accrued liabilities....................................... 9,561 4,611 1,183
Deferred margin on distributor inventory.................. 1,951 1,305 294
-------- -------- --------
Total current liabilities......................... 24,997 21,061 6,795
Notes payable............................................... 17 40 84
-------- -------- --------
25,014 21,101 6,879
-------- -------- --------
Mandatorily Redeemable Convertible Preferred Stock (Note
5)........................................................ -- -- 12,339
-------- -------- --------
Commitments and contingencies (Notes 10 and 11).............
Stockholders' equity (deficit)..............................
Preferred Stock: $0.001 par value; 10,000,000 shares
authorized, none issued and outstanding................ -- -- --
Common Stock: $0.001 par value; 120,000,000 shares
authorized; 29,581,000 (unaudited), 28,317,000 and
4,750,000 shares issued and outstanding at June 30,
2000, December 31, 1999 and 1998....................... 30 28 5
Additional paid-in capital................................ 250,127 174,462 79
Unearned stock compensation............................... (4,011) (6,444) --
Notes receivable from stockholders........................ (412) (450) --
Accumulated deficit....................................... (45,444) (36,840) (13,157)
-------- -------- --------
Total stockholders' equity (deficit).............. 200,290 130,756 (13,073)
-------- -------- --------
$225,304 $151,857 $ 6,145
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 115
COBALT NETWORKS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------- YEAR ENDED DECEMBER 31,
JUNE 30, JULY 2, -------------------------------
2000 1999 1999 1998 1997
-------- --------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $ 28,275 $ 7,663 $ 22,814 $ 3,537 $ --
Cost of revenues.......................... 15,293 5,156 14,461 3,123 --
-------- --------- -------- -------- -------
Gross profit......................... 12,982 2,507 8,353 414 --
-------- --------- -------- -------- -------
Operating expenses:
Research and development................ 4,013 2,771 6,013 3,483 1,067
Sales and marketing..................... 11,595 6,273 14,772 5,581 245
General and administrative.............. 3,609 1,454 4,070 1,895 445
Amortization of stock compensation...... 2,433 253 2,970 -- --
Amortization of goodwill and other
intangible assets.................... 2,764 -- -- -- --
In-process research and
development.......................... 830 -- -- -- --
Litigation settlement................... -- -- 4,200 -- --
-------- --------- -------- -------- -------
Total operating expenses............. 25,244 10,751 32,025 10,959 1,757
-------- --------- -------- -------- -------
Loss from operations...................... (12,262) (8,244) (23,672) (10,545) (1,757)
Interest and other income, net............ 3,879 217 1,587 82 17
Interest expense.......................... (221) (217) (221) (15) (29)
-------- --------- -------- -------- -------
Net loss.................................. (8,604) (8,244) (22,306) (10,478) (1,769)
Accretion of Mandatorily Redeemable
Convertible Preferred Stock............. -- (1,191) (1,377) (828) --
-------- --------- -------- -------- -------
Net loss attributable to holders of Common
Stock................................... $ (8,604) $ (9,435) $(23,683) $(11,306) $(1,769)
======== ========= ======== ======== =======
Basic and diluted net loss per share
attributable to holders of Common
Stock................................... $ (.31) $ (2.83) $ (3.43) $ (5.48) $ (4.09)
======== ========= ======== ======== =======
Basic and diluted weighted average shares
outstanding............................. 27,787 3,338 6,901 2,065 432
======== ========= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 116
COBALT NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL UNEARNED RECEIVABLE
------------------- PAID-IN STOCK FROM ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDER DEFICIT TOTAL
---------- ------ ---------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... -- $ -- $ -- $ -- $ -- $ (82) $ (82)
Issuance of Common Stock........... 4,763,000 5 -- -- -- -- 5
Repurchase of Common Stock......... (570,000) (1) -- -- -- -- (1)
Net loss........................... -- -- -- -- -- (1,769) (1,769)
---------- ---- -------- ------- ----- -------- --------
Balance at December 31, 1997....... 4,193,000 4 -- -- -- (1,851) (1,847)
Issuance of Common Stock........... 812,000 1 79 -- -- -- 80
Repurchase of Common Stock......... (255,000) -- -- -- -- -- --
Accretion of Mandatorily Redeemable
Convertible Preferred Stock...... -- -- -- -- -- (828) (828)
Net loss........................... -- -- -- -- -- (10,478) (10,478)
---------- ---- -------- ------- ----- -------- --------
Balance at December 31, 1998....... 4,750,000 5 79 -- -- (13,157) (13,073)
Issuance of Common Stock........... 6,199,000 6 116,216 -- (50) -- 116,172
Issuance of warrants............... -- -- 532 -- -- -- 532
Stock compensation................. -- -- 568 -- -- -- 568
Unearned stock compensation (Note
7)............................... -- -- 8,910 (8,910) -- -- --
Amortization of stock
compensation..................... -- -- -- 2,402 -- -- 2,402
Reversal of unearned stock
compensation on termination of
employment....................... -- -- (64) 64 -- -- --
Accretion of Mandatorily Redeemable
Convertible Preferred Stock...... -- -- -- -- -- (1,377) (1,377)
Issuance of notes receivable to
stockholder...................... -- -- -- -- (400) -- (400)
Conversion of Mandatorily
Redeemable Preferred Stock to
Common Stock..................... 17,368,000 17 46,356 -- -- -- 46,373
Adjustments to redemption value of
Mandatorily Redeemable Preferred
Stock............................ -- -- 1,865 -- -- -- 1,865
Net loss........................... -- -- -- -- -- (22,306) (22,306)
---------- ---- -------- ------- ----- -------- --------
Balance at December 31, 1999....... 28,317,000 $ 28 $174,462 $(6,444) $(450) $(36,840) $130,756
Issuance of Common Stock
(unaudited)...................... 1,247,000 2 75,665 -- -- -- 75,667
Repurchase of Common Stock
(unaudited)...................... (3,000) -- -- -- -- -- --
Amortization of stock compensation
(unaudited)...................... -- -- -- 2,433 -- -- 2,433
Repayment of note receivable from
stockholder (unaudited).......... -- -- -- -- 38 -- 38
Net loss (unaudited)............... -- -- -- -- -- (8,604) (8,604)
---------- ---- -------- ------- ----- -------- --------
Balance at June 30, 2000
(unaudited)...................... 29,561,000 $ 30 $250,127 $(4,011) $(412) $(45,444) $200,290
========== ==== ======== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 117
COBALT NETWORKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------- YEAR ENDED DECEMBER 31,
JUNE 30, JULY 2, -------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,604) $ (8,244) $(22,306) $(10,478) $(1,769)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 419 369 897 323 18
Purchase of in-process research and
development 830 -- -- -- --
Amortization of goodwill and other intangible
assets 2,764 -- -- -- --
Amortization of stock compensation 2,433 253 2,970 -- --
Non-cash interest expense (12) 130 130 2 20
Other non-cash expense -- -- 100 -- --
Changes in assets and liabilities:
Accounts receivable (2,864) (2,630) (4,147) (2,040) --
Inventories 396 (505) (200) (494) (20)
Other current assets (223) (227) (1,255) (161) (74)
Accounts payable (2,781) 1,324 10,922 3,970 164
Accrued liabilities 3,569 1,648 3,478 1,096 76
Deferred margin on distributor inventory 646 423 1,011 294 --
-------- -------- -------- -------- -------
Net cash used in operating activities (3,427) (7,459) (8,400) (7,488) (1,585)
-------- -------- -------- -------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment (1,158) (428) (1,320) (1,423) (157)
Acquisition of Chili!Soft, Inc. (net of cash
acquired) (2,263) -- -- -- --
Purchases of long-term investments (3,200) -- -- -- --
Purchases of short-term investments (50,943) -- -- -- --
Loans to shareholder -- -- (500) -- --
-------- -------- -------- -------- -------
Net cash used in investing activities (57,564) (428) (1,820) (1,423) (157)
-------- -------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Mandatorily
Redeemable
Convertible Preferred Stock, net -- 29,583 30,124 7,210 2,992
Proceeds from issuance of Common Stock 130 8 116,172 80 4
Proceeds from advance from related party -- -- -- 500 --
Proceeds from borrowings under line of credit -- -- -- 600 --
Principal payments on line of credit -- (600) (600) -- --
Proceeds from borrowings under notes payable -- 431 --
Principal payments on notes payable (21) (18) (39) (308) (130)
Proceeds from loan to stockholder 50 -- -- -- --
Proceeds from borrowings under convertible
promissory notes -- 4,250 4,250 750 599
-------- -------- -------- -------- -------
Net cash provided by investing activities 159 33,223 149,907 9,263 3,465
-------- -------- -------- -------- -------
Net increase in cash and cash equivalents (60,832) 25,336 139,687 352 1,723
Cash and cash equivalents at beginning of
period 141,777 2,090 2,090 1,738 15
-------- -------- -------- -------- -------
Cash and cash equivalents at end of period $ 80,945 $ 27,426 $141,777 $ 2,090 $ 1,738
======== ======== ======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 14 $ 88 $ 91 $ 13 $ 9
======== ======== ======== ======== =======
Conversion of notes payable and accrued
interest into Mandatorily Redeemable
Convertible Preferred Stock $ -- $ 4,800 $ 4,800 $ 750 $ 559
======== ======== ======== ======== =======
Issuance of warrants $ -- $ 402 $ 532 $ -- $ --
======== ======== ======== ======== =======
Issuance of Common Stock for promissory note $ -- $ 50 $ 50 $ -- $ --
======== ======== ======== ======== =======
Conversion of Mandatorily Redeemable
Convertible
Preferred Stock to Common Stock $ -- $ -- $ 46,373 $ -- $ --
======== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 118
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Cobalt Networks, Inc., (formerly ViavisionSystems Inc. and Cobalt
Microserver, Inc.) (the "Company"), was incorporated in California in October
1996. Effective October 19, 1999, Cobalt reincorporated in the State of
Delaware. The par value and shares of Common Stock and Preferred Stock
authorized, issued and outstanding at each balance sheet date presented, and for
each period presented in the consolidated statement of stockholders' deficit
have been retroactively adjusted to reflect the reincorporation.
The Company is a leading provider of server appliances. Server appliances
are a new category of network infrastructure devices that are optimized to
deliver one or a few network-based applications well. The Company markets and
sells its products globally through its direct sales force and its channel
partners. The Company operates in one business segment.
Fiscal Year
Through December 31, 1998 the Company operated on a calendar quarter-end
and year-end basis. Beginning in 1999 the Company changed its accounting periods
to thirteen-week fiscal quarters ending on the Friday closest to the end of the
month.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales to other than distributors is generally
recognized at the time the product is shipped. Provisions for estimated future
product returns and exchanges are recognized upon product shipment. The Company
grants distributors limited rights of return on unsold inventory held by such
distributors. The Company has limited control over the extent to which products
sold to distributors are sold through to end users. Accordingly, the Company
recognizes revenues on sales to distributors at the time its products are sold
through to end users. The recognition of the gross profit on the products held
by distributors is deferred until the sale to the end user occurs. The deferred
gross profit is captioned as "deferred margin on distributor inventory" on the
Company's balance sheet. Upon shipment, the Company also provides for the
estimated cost that may be incurred for product warranties.
F-6
<PAGE> 119
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The majority of the
Company's cash equivalents consist of money market funds.
Investments
The Company's investments comprise federal obligations and money market
investments. Investments with maturities of less than one year are considered
short term and are carried at fair value. Nearly all investments are held in the
Company's name by two major financial institutions. The specific identification
method is used to determine the cost of securities disposed of, with realized
gains and losses reflected in other income and expense. Unrealized gains and
losses on these investments are included as a separate component of
shareholders' equity, net of any related tax effect. Such unrealized gains and
losses have not been significant to date. The Company also has certain
investments in privately-held companies. These investments are included in
"Long-term investments" in the Company's balance sheet and are generally carried
at cost. The Company monitors these investments for impairment and makes
appropriate reductions in carrying values when necessary.
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
accounts receivable, accounts payable, notes payable and capital lease
obligations are carried at cost, which approximates their fair value because of
the short-term maturity of these instruments.
Concentration of credit risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash equivalents and
accounts receivable. The Company places its cash and cash equivalents primarily
in market rate accounts with high credit financial institutions. The Company's
accounts receivable are derived from revenue earned from customers located in
the United States, Europe and Asia. Sales to foreign customers in 1999, 1998 and
for the six months ended June 30, 2000, which are denominated in U.S. dollars,
accounted for 52%, 44% and 47% (unaudited), respectively, of total revenue.
Sales in the United States, Japan, Europe and other foreign countries were 48%,
21%, 21% and 10%, respectively, of total revenues in 1999, were 44%, 25%, 22%
and 9%, respectively, of total revenues in 1998, and for the six months ended
June 30, 2000 were 53% (unaudited), 20% (unaudited), 19% (unaudited), and 8%
(unaudited), respectively, of total revenues. The Company performs ongoing
credit evaluations of its customers' financial condition and generally requires
no collateral from its customers. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of accounts
receivable.
For the year ended December 31, 1999, two customers accounted for
approximately 14% and 11%, respectively, of net revenues. As of December 31,
1999, these two customers accounted for 13% and 11%, respectively, of total
accounts receivable. For the year ended December 31, 1998, one customer
accounted for approximately 12% of net revenues. As of December 31, 1998, this
customer accounted for 15% of total accounts receivable. For the six months
ended June 30, 2000, two customers accounted for approximately 12% (unaudited)
and 10% (unaudited), respectively, of net
F-7
<PAGE> 120
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenues. As of June 30, 2000, these two customers accounted for 11% (unaudited)
and 6% (unaudited), respectively, of total accounts receivable.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard cost which approximates the first-in, first-out method.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally twelve months to five years. Leasehold improvements are amortized
using the straight-line method over their estimated lives or the remaining term
of the lease, whichever is shorter.
Long-lived assets
The Company periodically evaluates the recoverability of its long-lived
assets based upon expected undiscounted cash flows and recognizes impairment
from the carrying value of long-lived assets, if any, based on the fair value of
such assets.
Research and development
Research and development costs are charged to operations as incurred.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development and are expensed as
incurred. After technological feasibility is established, material software
development costs are capitalized. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To date, the
period between achieving technological feasibility, which the Company has
defined as the establishment of a working model which typically occurs when the
beta testing commences, and the general availability of such software has been
short and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
Income taxes
Income taxes are computed using the asset and liability method. Deferred
income tax assets or liabilities are established for the expected future
consequences resulting from the temporary differences between the financial
reporting and income tax bases of assets and liabilities and from net operating
loss and tax credit carryforwards. The Company records a valuation allowance
against deferred tax assets when it is more likely than not that such assets
will not be realized.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock
F-8
<PAGE> 121
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Issued to Employees," and complies with the disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
Compensation."
The Company accounts for stock issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
Foreign currency translation
The Company uses the U.S. dollar as its functional currency for all of its
worldwide operations. All sales worldwide are billed in U.S. dollars. Foreign
currency assets and liabilities are remeasured into U.S. dollars at the
end-of-period exchange rates. Expenses are translated at average exchange rates
in effect during each period, except for those expenses related to balance sheet
amounts which are translated at historical exchange rates. Gains or losses from
foreign currency remeasurements and transactions are included in net loss and
were not material for all periods presented.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income (loss) as
compared to its reported net loss.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98. Under the
provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed by
dividing the net loss available to holders of Common Stock for the period by the
weighted average number of shares of Common Stock outstanding during the period.
Weighted average shares exclude shares of Common Stock subject to repurchase
("restricted shares"). Diluted net loss per share is computed by dividing the
net loss available to holders of Common Stock for the period by the weighted
average number of shares of Common Stock and Potential Common Stock outstanding
during the period, if dilutive.
Because the inclusion of Potential Common Stock would be anti-dilutive,
diluted net loss per share is the same as basic net loss per share. Potential
Common Stock includes unvested restricted shares of Common Stock and incremental
shares of Common Stock issuable upon the exercise of stock options and warrants
and upon conversion of Series A, B, and C Mandatorily Redeemable Convertible
Preferred Stock.
F-9
<PAGE> 122
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except share and per
share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------ YEAR ENDED DECEMBER 31,
JUNE 30, JULY 2 ---------------------------------------
2000 1999 1999 1998 1997
-------- ------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss attributable to holders
of Common Stock.............. $(8,604) $(9,435) $ (23,683) $ (11,306) $ (1,769)
======= ======= =========== =========== ===========
Denominator:
Weighted average shares
outstanding.................. 28,589 4,834 8,226,000 4,700,000 2,519,000
Weighted average shares of
Common Stock subject to
repurchase................... (802) (1,496) (1,325,000) (2,635,000) (2,087,000)
------- ------- ----------- ----------- -----------
Denominator for basic and
diluted calculation.......... 27,787 3,338 6,901,000 2,065,000 432,000
======= ======= =========== =========== ===========
Basic and diluted net loss per
share attributable to holders
of Common Stock.............. $ (.31) $ (2.83) $ (3.43) $ (5.48) $ (4.09)
======= ======= =========== =========== ===========
</TABLE>
The effects of options to purchase 5,627,000 (unaudited), 4,041,000,
1,622,000 and 238,000 shares of Common Stock at an average exercise price of
$13.95 (unaudited), $6.77, $0.26 and $0.03 per share as of June 30, 2000,
December 31, 1999, 1998 and 1997, respectively, and warrants to purchase 204,000
and 164,000 shares of Preferred Stock at an average exercise price of $1.24 and
$1.00 per share; and 7,271,000 and 3,572,000 shares of Mandatorily Redeemable
Convertible Preferred Stock for the years ended December 31, 1998 and 1997,
respectively, and warrants to purchase 243,000 shares of Common Stock at $3.70
per share as of June 30, 2000 and December 31, 1999, have not been included in
the computation of diluted net loss per share as their effect would have been
anti-dilutive.
Segment information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. During each period presented, the Company operated in a
single business segment, primarily in the United States, Japan and Europe.
New accounting pronouncements
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements," which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with
Securities and Exchange Commission. The effective date of this pronouncement is
the fourth quarter
F-10
<PAGE> 123
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of the fiscal year beginning after December 15, 1999. The Company believes that
adopting SAB 101 will not have a material impact on its financial position and
results of operations.
In March 2000 the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") -- Accounting for Certain Transactions
involving Stock Compensation -- an interpretation of APB Opinion No. 25. FIN 44
clarifies the application of Opinion 25 for (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain provisions cover specific
events that occur after either December 15, 1999 or January 12, 2000. The
adoption of certain other provisions of FIN 44 did not have a material effect on
the financial position or results of the Company. The Company does not expect
that the adoption of the remaining provisions will have a material effect on its
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. In July 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 deferred the effect of SFAS No. 133 until fiscal years beginning after
June 15, 2000. The Company will adopt SFAS No. 133 in 2001. To date, the Company
has not engaged in derivative or hedging activities. The Company is unable to
predict the impact of adopting SFAS No 133 if the Company were to engage in
derivative and hedging activities in the future.
Unaudited interim results
The accompanying consolidated balance sheet as of June 30, 2000, the
consolidated statements of operations and cash flows for the six months ended
June 30, 2000 and July 2, 1999 and the consolidated statement of stockholders'
deficit for the six months ended June 30, 2000 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position and its results of operations and cash flows for the interim periods.
The data included in notes to the consolidated financial statements for these
periods is unaudited. Certain information or footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
F-11
<PAGE> 124
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------
2000 1999 1998
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Finished goods.......................... $ 230 $ 498 $ 517
Raw materials........................... 88 16 197
------- ------ ------
Total................................ $ 318 $ 514 $ 714
======= ====== ======
Property and equipment:
Computer equipment...................... $ 2,173 $ 456 $1,337
Office equipment and fixtures........... 1,048 280 619
Production equipment and tooling........ -- 417 --
Leasehold improvements.................. 971 450 485
------- ------ ------
4,192 1,603 2,441
Less: Accumulated depreciation.......... (1,460) (341) (756)
------- ------ ------
$ 2,732 $1,262 $1,685
======= ====== ======
Accrued liabilities:
Employee benefits....................... $ 3,633 $ 543 $1,539
Reserve for sales returns............... 2,453 386 1,817
Warranty................................ 1,314 181 885
Other................................... 2,161 73 370
------- ------ ------
$ 9,561 $1,183 $4,611
======= ====== ======
</TABLE>
NOTE 3 -- NOTES PAYABLE:
Notes payable
In September 1998, the Company entered into an equipment lease financing
agreement with a leasing company. The agreement provides for borrowings of up to
$1.0 million which are secured by the Company's equipment, machinery and
fixtures. As of December 31, 1999 and December 31, 1998, the Company had
outstanding borrowings under this agreement of $84,000 and $123,000,
respectively. The note balance is payable in 34 equal monthly installments and
bears interest at 10.95% per annum.
In June 1998, the Company borrowed $300,000 from a stockholder which bore
interest at 5.5% per annum. In connection with the loan, the Company issued
warrants to purchase 7,000 shares of Series B Mandatorily Redeemable Convertible
Preferred Stock at $2.163 per share. The estimated fair value of the warrants at
the grant date was not material to the financial statements. In July 1998, the
Company repaid the loan in full.
Convertible promissory notes payable
In April 1998, the Company borrowed $750,000 from various individuals under
convertible promissory notes bearing interest at 5.5% per annum. In connection
with these borrowings, the
F-12
<PAGE> 125
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company issued warrants to purchase 35,000 shares of Series B Mandatorily
Redeemable Convertible Preferred Stock at $2.163 per share. The estimated fair
value of the warrants at the grant date was not material to the financial
statements. These notes were converted into Series B Mandatorily Redeemable
Convertible Preferred Stock at $2.163 per share in July 1998.
In December 1998, the Company borrowed $500,000 from an affiliate of a
member of its Board of Directors and $50,000 from an individual investor under
convertible promissory notes bearing interest at 6% per annum. These notes were
converted to Series C Mandatorily Redeemable Preferred Stock in May 1999 (See
Note 5).
In February and March 1999, the Company borrowed $4.3 million from various
investors under convertible promissory notes bearing interest at 6.0% per annum,
including $2.9 million from affiliates of the Company. These notes were
converted into Series C Mandatorily Redeemable Preferred Stock in May 1999. In
connection with the notes, the Company issued warrants to purchase 79,000 shares
of Series C Mandatorily Redeemable Convertible Preferred Stock at $3.70 per
share, including 61,000 of such shares to affiliates of the Company. The
estimated fair value of the warrants at the grant date was $130,000 and was
recorded as interest expense.
NOTE 4 -- RELATED PARTY TRANSACTION:
In August 1999, the Company advanced $500,000 to its Chief Executive
Officer. In September 1999, the advance was converted into a full recourse
non-interest bearing promissory note payable in four years and is secured by
50,000 shares of the Company's Common Stock.
NOTE 5 -- MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
During 1997, the Company issued 3,571,000 shares of Series A Preferred
Stock at $1.00 per share for net proceeds of approximately $3.0 million and the
conversion of $559,000 of notes payable described in Note 3. In July 1998, the
Company issued 1,000 shares of Series A Preferred Stock at $1.00 per share for
net proceeds of $1,000 upon the exercise of a warrant. In September 1999, the
Company issued 77,000 shares of Series A Preferred Stock at $1.00 per share for
net proceeds of $77,000 upon the exercise of warrants.
In July 1998, the Company issued 3,699,000 shares of Series B Preferred
Stock at $2.163 per share for net proceeds of approximately $7.2 million and the
conversion of $750,000 of notes payable described in Note 3. In September 1999,
the Company issued 11,000 shares of Series B Preferred Stock at $2.163 per share
for net proceeds at approximately $25,000 upon the exercise of warrants.
In May 1999, the Company issued 9,814,000 shares of Series C Mandatorily
Redeemable Preferred Stock at $3.70 per share for net proceeds of approximately
$29.6 million and the conversion of $4.80 million of notes payable described in
Note 3 and above. In connection with the transaction, the Company issued a
warrant to purchase 243,000 shares of Common Stock at $3.70 per share. The
estimated fair value of the warrants at the date of grant was $402,000, which
was recorded as additional paid in capital. In September 1999, the Company
issued 6,000 shares of Series C Preferred stock at $3.70 per share for net
proceeds of approximately $25,000 upon the exercise of warrants.
Upon completion of the Company's initial public offering, the holders of
warrants to purchase Preferred Stock had 90 days to exercise these warrants. In
November and December 1999, the
F-13
<PAGE> 126
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company issued 189,000 shares of Common Stock for net proceeds of approximately
$419,000 upon the exercise of these warrants.
As of December 31, 1999, a warrant to purchase 243,000 shares of the
Company's Common Stock was outstanding.
Upon the completion of the Company's initial public offering, 17,368,000
shares of Mandatorily Redeemable Preferred Stock, including the 189,000 shares
issued pursuant to the exercise of warrants, as described above, with a value of
$46,373,000 were converted into 17,368,000 shares of Common Stock.
NOTE 6 -- COMMON STOCK:
Certain shares of Common Stock outstanding were sold under Restricted Stock
Purchase Agreements (the "Agreements"). According to the terms of the
Agreements, in the event that the purchaser ceases their relationship with the
Company, the Company has the right to repurchase shares issued at the original
purchase price ("purchase option"), subject to a declining percentage over time.
During 1998 and 1997, the Company exercised its purchase option for 255,000
shares and 570,000 shares, respectively, of Common Stock at $0.001 per share. As
of December 31, 1999, a total of 948,000 shares were subject to repurchase by
the Company.
NOTE 7 -- STOCK OPTION PLANS:
In April 1997, the Company adopted the Employee Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options and Common Stock to
employees and consultants of the Company. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive stock
options ("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. As of December 31, 1999, the
Company has reserved 6,100,000 shares of Common Stock for issuance under the
Plan. This reserve will be automatically increased on the first day of the
fiscal year beginning January 1, 2001, by an amount equal to the lesser of
2,500,000 shares per year, 5% of the number of shares of Common Stock which are
issued and outstanding on the last day of the proceeding fiscal year or a number
of shares determined by the Company's board of directors.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are generally exercisable immediately, subject to
repurchase options held by the Company. The repurchase options lapse over a
maximum period of five years at such times and under such conditions as
determined by the Board of Directors. Options vest over 4 years, 25% after the
first year and ratably each month over the remaining 36 months.
F-14
<PAGE> 127
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1996................ -- -- $ --
Authorized................................ 1,145,000 -- --
Granted................................... (826,000) 826,000 0.008
Exercised................................. -- (110,000) 0.001
Canceled.................................. 478,000 (478,000) 0.001
---------- ---------
Balance at December 31, 1997................ 797,000 238,000
Authorized................................ 1,405,000 -- --
Granted................................... (1,437,000) 1,437,000 0.500
Exercised................................. -- (12,000) 0.001
Canceled.................................. 41,000 (41,000) 0.190
---------- ---------
Balance at December 31, 1998................ 806,000 1,622,000
Authorized................................ 3,550,000 -- --
Granted................................... (2,715,000) 2,715,000 7.49
Exercised................................. -- (350,000) 1.44
Canceled.................................. 271,000 (271,000) 0.75
---------- ---------
Balance at December 31, 1999................ 1,912,000 3,716,000
========== =========
</TABLE>
Director Option Plan
In September 1999, the Board adopted the 1999 Director Option Plan (the
"Director Option Plan") and reserved 400,000 shares of Common Stock for issuance
thereunder. This reserve will be automatically increased on the first day of the
fiscal year beginning January 1, 2001, by an amount equal to the lesser of
100,000 shares per year, 0.25% of the number of shares of Common Stock which are
issued and outstanding on the last day of the preceding fiscal year or a number
of shares determined by the Company's board of directors. The option grants
under the Director Option Plan are automatic and non-discretionary, and the
exercise price of the options is 100% of the fair market value of the Common
Stock on the grant date. The term of the options granted under the Director
Option Plan is ten years. Options vest over 4 years, 25% after the first year
and ratably each month over the remaining 36 months.
F-15
<PAGE> 128
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity under the Option Plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
--------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1998.................. -- -- $ --
Authorized.................................. 400,000 -- --
Granted..................................... (325,000) 325,000 25.22
-------- -------
Balance at December 31, 1999.................. 75,000 325,000
======== =======
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1999.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING AT EXERCISABLE AT
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
----------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.001 11,000 7.37 $ 0.001 11,000 $ 0.001
0.100 657,000 8.18 0.10 657,000 0.10
0.500 552,000 8.56 0.50 552,000 0.50
1.00 - 1.40 154,000 9.21 1.21 154,000 1.21
1.85 - 2.50 1,703,000 9.44 2.06 1,703,000 2.06
10.00 - 10.25 122,000 9.71 10.16 122,000 10.16
14.00 173,000 9.82 14.00 173,000 14.00
22.00 614,000 9.84 22.00 614,000 22.00
108.38 - 126.75 55,000 10.00 111.69 55,000 111.69
--------- ---------
4,041,000 4,041,000
========= =========
</TABLE>
Fair value disclosures
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss for the years ended
December 31, 1999, 1998, and 1997 would have
F-16
<PAGE> 129
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been increased to the pro forma amounts indicated in the following table (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net loss attributable to holders of Common
Stock:
As reported................................... $(23,683) $(11,306) $(1,769)
======== ======== =======
Pro forma..................................... $(23,825) $(11,412) $(1,774)
======== ======== =======
Basic and diluted net loss per share
attributable to holders of Common Stock:
As reported................................... $ (3.43) $ (5.48) $ (4.09)
======== ======== =======
Pro forma..................................... $ (3.45) $ (5.53) $ (4.11)
======== ======== =======
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1999 1998
---- ----
<S> <C> <C>
Expected life (years)..................................... 5 5
Risk Free interest rate................................... 5.30% 6.66%
Expected volatility....................................... 60 --
Dividend yield............................................ -- --
</TABLE>
The estimated weighted average fair value of options granted to purchase
shares of common stock under the Plan in 1999 and 1998 was $6.03 and $0.07,
respectively.
Stock Compensation
During 1998, the Company issued NSOs to an outside consultant to purchase
25,000 shares of Common Stock at $0.50 per share, the estimated grant date fair
market value. The estimated fair value of the options was not material to the
financial statements.
In connection with two employee separation agreements in July and September
1999, the Company accelerated the vesting of options to purchase 41,000 Shares
of Common Stock. The intrinsic value of these shares amounted to $346,000 and
has been recognized as stock compensation.
During 1999, the Company issued NSOs to two outside consultants to purchase
35,000 shares of Common Stock at $22.00 per share, the estimated fair market
value. The estimated fair value at the date of grant was $222,000, which was
recorded as stock compensation.
In connection with certain stock option grants during the period from July
1, 1998, to October 1, 1999, the Company recorded unearned stock compensation
cost totaling $8.9 million which is being recognized over the vesting period of
the related options of four years. During 1999, unearned stock compensation of
$64,000 was reversed upon the cancellation of options. Amortization expense
associated with unearned stock compensation totaled $2.4 million for the year
ended December 31, 1999.
F-17
<PAGE> 130
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company expects to record amortization expense associated with unearned
stock compensation of $1.3 million, $1.3 million, $940,000 and $690,000 in the
first, second, third and fourth quarters of fiscal 2000, respectively.
NOTE 8 -- EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company sponsors a 401(k) defined contribution plan (the "Plan")
covering all eligible employees. Contributions made by the Company are
determined annually by the Board of Directors. No contributions have been made
to the Plan by the Company.
Employee Stock Purchase Plan
In September 1999, the Board adopted the 1999 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved 2,250,000 shares of Common Stock for issuance
thereunder. This reserve will be automatically increased on the first day of the
fiscal year beginning January 1, 2001, by an amount equal to the lesser of
1,500,000 shares per year, 3% of the number of shares of Common Stock which are
issued and outstanding on the last day of the preceding fiscal year or a number
of shares determined by the Company's board of directors. Employees generally
will be eligible to participate in the Purchase Plan if they are customarily
employed by the Company for more than 20 hours per week and more than five
months in a fiscal year end. The first offering period began on November 5,
1999, and therefore, the first Offering Period will be less than 24 months long.
Offering Periods and Purchase Periods thereafter will begin on the first day of
May and November of each year. The price at which the Common Stock is purchased
under the Purchase plan 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 the purchase period.
NOTE 9 -- INCOME TAXES:
No provision or benefit for income taxes has been recognized for any of the
periods presented as the Company has incurred net operating losses since
inception.
As of December 31, 1999, the Company has approximately $26 million and $18
million of net operating loss carryforwards available to offset future taxable
income for Federal and California purposes, respectively, which expire beginning
in 2014 and 2004, respectively. Under the Tax Reform Act of 1986, the amount of
net operating losses that can be utilized may be limited in certain
circumstances including, but not limited to, a cumulative stock ownership change
of more than 50% over a three-year period.
F-18
<PAGE> 131
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred taxes comprise the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Depreciation............................................. $ 49 $ 21
Other accruals and liabilities........................... 1,993 84
Capitalized startup costs................................ 172 148
Research and development credits......................... 166 163
Net operating loss and credit carryforwards.............. 9,870 3,985
-------- -------
Total deferred tax assets............................. 12,250 4,401
Less: Valuation allowance.................................. (12,250) (4,401)
-------- -------
Net deferred tax assets.................................... $ -- $ --
======== =======
</TABLE>
For financial reporting purposes, the Company has incurred a loss in each
period since its inception. Based on the available objective evidence, including
the Company's history of losses, management believes it is more likely than not
that the net deferred tax assets will not be fully realizable. Accordingly, the
Company provided for a full valuation allowance against its net deferred tax
assets for all periods presented.
A reconciliation between the amount of income tax benefit determined by
applying the applicable U.S. statutory income tax rate to pre-tax loss is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate..................................... (34)% (34)% (34)%
State tax, net of federal impact........................... (3)% -- (6)%
Cheap stock amortization................................... 6% -- --
Provision for valuation allowance on deferred tax assets... 32% 35% 44%
Other...................................................... (1)% (1)% (4)%
--- --- ---
--% --% --%
=== === ===
</TABLE>
NOTE 10 -- COMMITMENTS:
The Company leases its principal office space under a noncancelable
operating lease which expires on December 31, 2003. The Company leased a 30,000
square foot building on property contiguous to its current headquarters to
expand its Mountain View operations. This lease extends through March 2004. The
Company expects to occupy approximately two-thirds of this new facility in March
2000, and has subleased the remainder to a tenant through February of 2001. Rent
expense was $877,000 in 1999, $316,000 in 1998, and $73,000 in 1997.
F-19
<PAGE> 132
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000.................................................... $1,374
2001.................................................... 1,662
2002.................................................... 1,731
2003.................................................... 1,784
2004.................................................... 237
------
$6,788
======
</TABLE>
In March 2000, the Company entered into a sublease agreement for 10,000
square feet of the new facility. The tenant will occupy the premises through
February of 2001. The expected rental income from this agreement is $335,000 in
2000 and $66,000 in 2001.
NOTE 11 -- CONTINGENCIES:
Pursuant to the Company's turnkey service and purchase agreement with its
subcontract manufacturer, in the event that the agreement is terminated, the
Company would be required to purchase remaining surplus or obsolete inventory
which is specific to the Company's products.
In December 1998, CUBE Computer Corporation filed a lawsuit against the
Company in the United States District Court for the Southern District of New
York for trademark infringement. CUBE, an original equipment manufacturer of
personal computers, argued that this alleged infringement resulted from the
Company's use of "Qube" in connection with its products. In December 1999, the
Company entered into a settlement agreement with Cube Computer. We acquired
certain trademark rights for a one-time payment of $4.1 million, not including
related legal costs.
NOTE 12 -- SUBSEQUENT EVENTS:
Chili!Soft Acquisition
On March 22, 2000, the Company entered into a definitive agreement to
acquire Chili!Soft, Inc. ("Chili!Soft"), a provider of web page development
technology. The Company will acquire all outstanding stock and assume all stock
options of Chili!Soft in exchange for 1,150,000 shares of the Company's common
stock. The transaction is expected to be accounted for as a purchase business
combination.
NOTE 13 -- SUBSEQUENT EVENTS (UNAUDITED):
Chili!Soft Acquisition
Effective May 23, 2000, the Company completed its acquisition of
Chili!Soft, a provider of software solutions for web page development (the
"Acquisition"). An aggregate of approximately 1,150,000 shares of the Company's
Common Stock were issuable pursuant to the Acquisition, including options to
purchase approximately 226,000 shares of the Company's Common Stock
F-20
<PAGE> 133
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
issuable in connection with the exercise of options to purchase Chili!Soft
Common Stock that the Company assumed in connection with the Acquisition.
The Company accounted for the Acquisition as a purchase business
combination. The consolidated financial statements include the results of
operations of Chili!Soft commencing on May 24, 2000. The total purchase price
has been calculated as follows (in thousands):
<TABLE>
<S> <C>
Market value of 924,000 shares of common stock issued....... $60,112
Fair value of options assumed............................... 14,647
Cash advances to acquisition prior to May 23, 2000.......... 2,350
Direct acquisition costs.................................... 1,232
-------
Total purchase price...................................... $78,341
=======
</TABLE>
The total purchase price has been allocated to tangible and intangible
assets acquired and liabilities assumed on the basis of their respective fair
values on the acquisition date. The fair value of intangible assets was
determined using a combination of methods, including estimates based on risk-
based or risk-adjusted income approach for acquired in-process research and
development, completed technology and non-compete agreement, and on a cost
replacement approach for acquired work force. This valuation was determined by
an independent appraiser.
The allocation of the purchase price to assets acquired and liabilities
assumed is presented in the table that follows (in thousands):
<TABLE>
<S> <C>
Developed technology........................................ $ 1,790
In-process research and development......................... 830
Non-compete agreement....................................... 2,250
Workforce................................................... 2,210
Goodwill.................................................... 72,347
Net liabilities assumed..................................... (1,086)
Total purchase price........................................ $78,341
=======
</TABLE>
Amounts allocated to the non-compete agreements and workforce are being
amortized over their estimated useful lives of 3 and 2 years, respectively.
Amounts allocated to existing technology and goodwill are being amortized over
their estimated useful lives of 3 years.
In addition, the Company recorded a $830,000 charge for in-process research
and development related to in-process technology for projects that, as of the
date of the acquisition, had not yet reached technological feasibility and had
no alternative future use. The value of these projects was determined by
estimating the resulting net cash flows from the sale of the products resulting
from the completion of the projects, reduced by the portion of the revenue
attributable to core technology and the percentage completion of the project.
The resulting cash flows were then discounted back to their present value at
appropriate discount rates. Cash flows related to the in-process research and
development were discounted at 30%.
The in-process research and development relates to the development of
Chili!Soft's Active Server Pages which were under development as of the
acquisition date. Research and development costs to bring the products from the
acquired company to technological feasibility are estimated to total
F-21
<PAGE> 134
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
approximately $1.0 million. The Company anticipates the development will be
completed between nine and fifteen months.
Developed technology is technology that is being used in existing products
of the business and is distinguished from in-process technology because it has
achieved technological feasibility. Core technology represents fundamental
technology and advances that are the basis for the Company's developed and
in-process products. New and in-process products may leverage core technology to
different degrees depending on the extent of incorporation of new, previously
undeveloped technologies.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification features and technical performance requirements. The resulting net
cash flows from such products are based on estimates of revenue, cost of
revenue, research and development costs, sales and marketing costs, and income
taxes from such projects.
It is reasonably possible that the development of this technology could
fail because of either prohibitive cost, inability to perform the required
efforts to complete the technology or other factors outside of the Company's
control such as a change in the market for the resulting developed products. In
addition, at such time that the project is completed it is reasonably possible
that the completed product does not receive market acceptance or that we are
unable to produce and market the product cost effectively.
The following unaudited pro forma net revenues, net loss and net loss per
share data for the six months ended June 30, 2000 and July 2, 1999 are based on
the respective historical financial statements of the Company and Chili!Soft.
The pro forma data reflects the consolidated results of operations as if the
Acquisition with Chili!Soft occurred at the beginning of each of the periods
indicated and includes the amortization of the resulting goodwill and other
intangible assets. The pro forma financial data presented are not necessarily
indicative of the Company's results of operations that might have occurred had
the transaction been completed at the beginning of the periods specified, and do
not purport to represent what the Company's consolidated results of operations
might be for any future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JULY 2,
2000 1999
-------- --------
<S> <C> <C>
Pro forma net revenue..................................... $ 28,818 $ 8,236
Pro forma loss from operations............................ $(24,006) $(23,739)
Pro forma net loss attributable to holders of common
stock................................................... $(20,379) $(24,922)
Pro forma basic and diluted net loss per share
attributable to holders of common stock................. $ (.72) $ (5.85)
Pro forma shares used in basic and diluted net loss per
share calculation....................................... 28,335 4,262
</TABLE>
Progressive Systems Acquisition
On August 28, 2000 the Company acquired all outstanding stock and rights to
acquire capital stock of Progressive Systems, Inc. in exchange for a combination
of the Company's common stock
F-22
<PAGE> 135
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and cash totaling $11.0 million. An aggregate of approximately 162,000 shares of
the Company's common stock were issued and $3.3 million in cash was paid
pursuant to this acquisition. In addition, the Company assumed certain
liabilities and incurred certain direct costs of the acquisition which resulted
in an aggregate purchase price of $12.8 million. The transaction has been
accounted for as a purchase business combination.
Litigation Update
In June 2000, the Company filed suit against NetMachines, Inc., in the U.S.
District Court for the Northern District of California, claiming that the use of
the name RedRak for NetMachines' server products constitutes trademark
infringement of the Company's registered RaQ trademark for computer hardware
products, which includes servers. The Company intends to pursue this matter
vigorously but is unable to provide an evaluation of the probability of a
favorable or unfavorable outcome. The Company believes, based on currently
available information, the resolution of this matter will not have a material
effect on its financial position, results of operations or cash flows.
Merger with Sun Microsystems, Inc.
On September 18, 2000, the Company entered into a definitive agreement to
merge with Sun Microsystems, Inc. ("Sun"), a leading provider of products,
services and support solutions for building and maintaining networking computing
environments. Under the terms of the definitive agreement, each outstanding
share of the Company's common stock and each outstanding stock option will be
converted into the right to receive 0.50 shares of Sun common stock. The
transaction is expected to be accounted for as a purchase business combination
and is expected to close by December 31, 2000.
F-23
<PAGE> 136
ANNEX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
SUN MICROSYSTEMS, INC.,
AZURE ACQUISITION CORPORATION
AND
COBALT NETWORKS, INC.
DATED AS OF SEPTEMBER 18, 2000
A-1
<PAGE> 137
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION is made and entered
into as of September 18, 2000, by and among Sun Microsystems, Inc., a Delaware
corporation ("PARENT"), Azure Acquisition Corporation, a Delaware corporation
and a wholly-owned subsidiary of Parent ("MERGER SUB"), and Cobalt Networks,
Inc., a Delaware corporation (the "COMPANY").
RECITALS:
A. Upon the terms and subject to the conditions set forth this Agreement
(as defined in Section 1.2 hereof) and in accordance with the General
Corporation Law of the State of Delaware ("DELAWARE LAW"), Parent and the
Company intend to enter into a business combination transaction.
B. The Board of Directors of the Company (i) has determined that the Merger
(as defined in Section 1.1 hereof) is consistent with and in furtherance of the
long-term business strategy of the Company, and fair to and in the best
interests of, the Company and its stockholders, (ii) has unanimously approved
this Agreement, the Merger and the other transactions contemplated by this
Agreement, and (iii) has unanimously determined to recommend that the
stockholders of the Company adopt and approve this Agreement and approve the
Merger.
C. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
affiliates of the Company are entering into Voting Agreements, in the form
attached hereto as Exhibit A (each, a "VOTING AGREEMENT" and, collectively, the
"VOTING AGREEMENTS"), with Parent.
D. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
affiliates of the Company are entering into Affiliate Agreements, in the form
attached hereto as Exhibit B (each, a "AFFILIATE AGREEMENT" and, collectively,
the "AFFILIATE AGREEMENTS"), with Parent.
E. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
stockholders of the Company are entering into Non-Competition Agreements, in the
form attached hereto as Exhibit C (each, a "NON-COMPETITION AGREEMENT" and,
collectively, the "NON-COMPETITION AGREEMENTS"), with Parent.
F. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, the Company
is entering into a Stock Option Agreement in favor of Parent, in the form
attached hereto as Exhibit D (the "STOCK OPTION AGREEMENT"). The Board of
Directors of the Company has unanimously approved the Stock Option Agreement.
G. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
officers, directors and other employees of the Company have agreed to waive
certain severance and other rights that may be triggered as a direct or indirect
result of the transactions contemplated hereby (each, an "SEVERANCE AND
ACCELERATION WAIVER") and, collectively, the "SEVERANCE AND ACCELERATION
WAIVERS").
H. The parties hereto intend, by executing this Agreement, to adopt a plan
of reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "CODE").
I. The parties hereto intend for the Merger to be accounted for as a
purchase.
A-2
<PAGE> 138
AGREEMENT
NOW, THEREFORE, in consideration of foregoing premises, the mutual
covenants, promises and representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and accepted, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2 hereof)
and subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and into
the Company (the "MERGER"), the separate corporate existence of Merger Sub shall
cease and the Company shall continue as the surviving corporation. The Company,
as the surviving corporation after the Merger, is hereinafter sometimes referred
to as the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "CERTIFICATE OF
MERGER") (the time of such filing (or such later time as may be agreed in
writing by the Company and Parent and specified in the Certificate of Merger)
being referred to herein as the "EFFECTIVE TIME") as soon as practicable on or
after the Closing Date (as defined below). Unless the context otherwise
requires, the term "AGREEMENT" as used herein refers collectively to this
Agreement and Plan of Merger and Reorganization and the Certificate of Merger.
The closing of the Merger and the other transactions contemplated hereby (the
"CLOSING") shall take place at the offices of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304, at a
time and date to be specified by the parties hereto, which time and date shall
be no later than the second (2nd) business day after the satisfaction or waiver
of the conditions set forth in Article VI hereof, or at such other location,
time and date as the parties hereto shall mutually agree in writing (the date
upon which the Closing actually occurs being referred to herein as the "CLOSING
DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Delaware
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) Certificate of Incorporation. At the Effective Time, the Certificate
of Incorporation of the Company shall be amended and restated in its entirety to
be the same in substance as the Certificate of Incorporation of Merger Sub, as
in effect immediately prior to the Effective Time (except that the name of the
Company shall remain Cobalt Networks, Inc.), and such Certificate of
Incorporation of the Company, as so amended and restated, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended in accordance with Delaware Law and such Certificate of Incorporation.
A-3
<PAGE> 139
(b) Bylaws. The Bylaws of Merger Sub, as in effect immediately prior to
the Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended in accordance with Delaware Law, the
Certificate of Incorporation of the Surviving Corporation and such Bylaws.
1.5 Directors and Officers.
(a) Directors. The initial directors of the Surviving Corporation shall
be the directors of Merger Sub immediately prior to the Effective Time, until
their respective successors are duly elected or appointed and qualified.
(b) Officers. The initial officers of the Surviving Corporation shall be
the officers of Merger Sub immediately prior to the Effective Time, until their
respective successors are duly appointed.
1.6 Effect on Capital Stock. Subject to the terms and conditions set forth
in this Agreement, at the Effective Time, by virtue of the Merger and without
any action on the part of Merger Sub, the Company or the holders of any of the
following securities, the following shall occur:
(a) Conversion of Company Common Stock. Each share of Common Stock, par
value $0.001 per share, of the Company ("COMPANY COMMON STOCK") issued and
outstanding immediately prior to the Effective Time, other than any shares of
Company Common Stock to be canceled pursuant to Section 1.6(b) hereof, shall be
canceled and extinguished and automatically converted (subject to Section 1.6(e)
and Section 1.6(f) hereof) into the right to receive 0.50 (the "EXCHANGE RATIO")
shares of Common Stock, par value $0.00067 per share, of Parent (including, with
respect to each such share of Common Stock of Parent, the associated Rights (as
defined in that certain Second Amended and Restated Shares Rights Agreement,
dated as of February 11, 1998, as amended April 14, 1999 and April 26, 2000)
(the "PARENT RIGHTS AGREEMENT") between the Company and BankBoston, N.A., as
Rights Agent (the "PARENT COMMON STOCK") upon surrender of the certificate
representing such share of Company Common Stock in the manner set forth in
Section 1.7 hereof (or in the case of a lost, stolen or destroyed certificate,
upon delivery of an affidavit (and bond, if required) in the manner set forth in
Section 1.9 hereof). If any shares of Company Common Stock outstanding
immediately prior to the Effective Time are unvested or are subject to a
repurchase option, risk of forfeiture or other condition under any applicable
restricted stock purchase agreement or other agreement with the Company, then
the shares of Parent Common Stock issued in exchange for such shares of Company
Common Stock shall also be unvested and subject to the same repurchase option,
risk of forfeiture or other condition, and the certificates representing such
shares of Parent Common Stock may accordingly be marked with appropriate
legends. The Company shall take all action that may be necessary to ensure that,
from and after the Effective Time, Parent is entitled to exercise any such
repurchase option or other right set forth in any such restricted stock purchase
agreement or other agreement.
(b) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock held by Parent, the Company or any direct or indirect wholly-owned
subsidiary of Parent or the Company, immediately prior to the Effective Time
shall be canceled and extinguished without any conversion thereof or
consideration paid therefor.
(c) Stock Options; Employee Stock Purchase Plans.
(i) At the Effective Time, all options to purchase Company Common
Stock then outstanding under (A) the Company's Amended and Restated 1997
Employee Stock Plan (the "EMPLOYEE STOCK PLAN"), (B) the Company's 1999 Director
Option Plan (the "DIRECTOR OPTION PLAN"), (C) the Chili!Soft, Inc., Inc. 1997
Stock Option Plan (the "1997 CHILI!SOFT, INC. PLAN"),
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(D) the Chili!Soft, Inc. 1998 Stock Option Plan (the "1998 CHILI!SOFT, INC.
PLAN"), (E) the Chili!Soft, Inc. 1999 Stock Option Plan (the "1999 CHILI!SOFT,
INC. PLAN" and, together with the Employee Stock Plan, the Director Option Plan,
the 1997 Chili!Soft, Inc. Plan and the 1998 Chili!Soft, Inc. Plan, the "COMPANY
STOCK PLANS"), shall be assumed by Parent in accordance with the terms of
Section 5.9(a) hereof.
(ii) At the Effective Time, all purchase rights outstanding under the
Company's 1999 Employee Stock Purchase Plan (the "EMPLOYEE STOCK PURCHASE PLAN")
shall be treated as set forth in Section 5.9(b) hereof.
(d) Capital Stock of Merger Sub. Each share of Common Stock, par value
$0.001 per share, of Merger Sub (the "MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Time shall be converted into one
validly issued, fully paid and nonassessable share of Common Stock, par value
$0.001 per share, of the Surviving Corporation. Each certificate evidencing
ownership of shares of Merger Sub Common Stock immediately prior to the
Effective Time shall, as of the Effective Time, evidence ownership of an
equivalent number of shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any forward or reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Company Common Stock), extraordinary cash dividends,
reorganization, recapitalization, reclassification, combination, exchange of
shares or other like change with respect to Parent Common Stock (including,
without limitation, the two-for-one forward stock split, to be paid in the form
of a stock dividend, approved by the Board of Directors of Parent on August 16,
2000 (the "PARENT STOCK SPLIT"), which will be effected (if at all) only upon
the approval of a proposed increase in the authorized number of shares of Parent
Common Stock by the stockholders of Parent at the currently scheduled Annual
Meeting of Stockholders of Parent to be held on November 8, 2000) (the "PARENT
SHARE INCREASE") or Company Common Stock occurring on or after the date hereof
and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Parent Common Stock
shall be issued by virtue of the Merger, but in lieu thereof, each holder of
shares of Company Common Stock who would otherwise be entitled to a fraction of
a share of Parent Common Stock (after aggregating all fractional shares of
Parent Common Stock that otherwise would be received by such holder) shall, upon
surrender of such holder's Certificates(s) (as defined in Section 1.7(c)
hereof), receive from Parent an amount of cash (rounded to the nearest whole
cent), without interest, equal to the product obtained by multiplying (x) such
fraction, by (y) the average closing price on the Nasdaq National Market System
("NASDAQ"), as reported in The Wall Street Journal, Western Edition (or, in the
event of a good faith dispute as to the accuracy of the price reported therein,
another authoritative source reasonably agreed on by the parties hereto), of one
(1) share of Parent Common Stock for the five (5) consecutive trading days
ending on the trading day immediately prior to the day on which the Effective
Time shall occur.
1.7 Surrender of Certificates.
(a) Exchange Agent. EquiServe Limited Partnership, or another bank or
trust company selected by Parent (which shall be reasonably acceptable to the
Company), shall act as the exchange agent (the "EXCHANGE AGENT") in the Merger.
(b) Parent to Provide Common Stock. Promptly following the Effective
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I, the shares of Parent Common Stock issuable
pursuant to Section 1.6 hereof in exchange for outstanding shares of Company
Common Stock, and cash in an amount estimated to be sufficient for payment in
lieu of
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fractional shares pursuant to Section 1.6(f) hereof, and any dividends or
distributions to which holders of shares of Company Common Stock may be entitled
pursuant to Section 1.7(d) hereof.
(c) Exchange Procedures. Promptly following the Effective Time, Parent
shall cause the Exchange Agent to mail to each holder of record (as of the
Effective Time) of a certificate or certificates (each, a "CERTIFICATE" and,
collectively, the "CERTIFICATES"), which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock whose shares were
converted into the right to receive shares of Parent Common Stock pursuant to
Section 1.6 hereof, cash in lieu of any fractional shares pursuant to Section
1.6(f) hereof, and any dividends or other distributions pursuant to Section
1.7(d) hereof, (i) a letter of transmittal in customary form (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall contain such other provisions as Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock, cash in
lieu of any fractional shares pursuant to Section 1.6(f) hereof, and any
dividends or other distributions pursuant to Section 1.7(d) hereof. Upon
surrender of Certificates for cancellation to the Exchange Agent or to such
other agent or agents as may be reasonably appointed by Parent, together with
such letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, the holders of such Certificates shall be
entitled to receive in exchange therefor certificates representing the number of
whole shares of Parent Common Stock into which their shares of Company Common
Stock were converted at the Effective Time pursuant to Section 1.6 hereof,
payment in lieu of fractional shares which such holders have the right to
receive pursuant to Section 1.6(f) hereof, and any dividends or other
distributions payable pursuant to Section 1.7(d), and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, outstanding
Certificates shall be deemed from and after the Effective Time, for all
corporate purposes, subject to Section 1.7(d) hereof as to dividends and other
distributions, to evidence only the ownership of the number of full shares of
Parent Common Stock into which such shares of Company Common Stock shall have
been so converted pursuant to Section 1.6 hereof, and the right to receive an
amount in cash in lieu of the issuance of any fractional shares pursuant to
Section 1.6(f) hereof and any dividends or other distributions payable pursuant
to Section 1.7(d) hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holders of any unsurrendered Certificates with respect to the
shares of Parent Common Stock represented thereby until the holders of record of
such Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall deliver
to the record holders thereof, without interest, certificates representing whole
shares of Parent Common Stock issued in exchange therefor along with payment in
lieu of fractional shares pursuant to Section 1.6(f)hereof and the amount of any
such dividends or other distributions with a record date after the Effective
Time payable with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates representing shares of
Parent Common Stock are to be issued in a name other than that in which the
Certificates surrendered in exchange therefor are registered, it will be a
condition of the issuance thereof that the Certificates so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of certificates
representing shares of Parent Common Stock in any name other than that of the
registered holder of the Certificates surrendered, or established to the
satisfaction of Parent or any agent designated by it that such tax has been paid
or is not payable.
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(f) Required Withholding. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to any
holder or former holder of Company Common Stock such amounts as may be required
to be deducted or withheld therefrom under the Code, or under any provision of
state, local or foreign tax law or under any other applicable legal requirement.
To the extent such amounts are so deducted or withheld, such amounts shall be
treated for all purposes under this Agreement as having been paid to the person
to whom such amounts would otherwise have been paid.
(g) No Liability. Notwithstanding anything to the contrary in this
Section 1.7, neither the Exchange Agent, Parent, the Surviving Corporation nor
any other party hereto shall be liable to a holder of shares of Parent Common
Stock or Company Common Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued in accordance with the terms hereof (including any
cash paid in respect thereof pursuant to Section 1.6(f) or Section 1.7(d)hereof)
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Common Stock, and there shall be no further
registration of transfers on the records of the Surviving Corporation of shares
of Company Common Stock which were outstanding immediately prior to the
Effective Time. If, at any time following the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, certificates
representing the shares of Parent Common Stock into which the shares of Company
Common Stock represented by such Certificates were converted pursuant to Section
1.6 hereof, cash for fractional shares, if any, as may be required pursuant to
Section 1.6(f) hereof and any dividends or distributions payable pursuant to
Section 1.7(d) hereof; provided, however, that Parent and the Exchange Agent
may, in their discretion and as a condition precedent to the issuance of such
certificates representing shares of Parent Common Stock, cash and other
distributions, require the owner of such lost, stolen or destroyed Certificates
to deliver a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made against Parent, the Surviving Corporation or the
Exchange Agent with respect to the Certificates alleged to have been lost,
stolen or destroyed.
1.10 Tax and Accounting Consequences.
(a) Tax. It is intended by the parties hereto that the Merger shall
constitute a reorganization within the meaning of Section 368 of the Code. The
parties hereto adopt this Agreement as a "plan of reorganization" within the
meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax
Regulations.
(b) Accounting. It is intended by the parties hereto that the Merger
shall be accounted for as a purchase.
1.11 Taking of Necessary Action; Further Action. If, at any time following
the Effective Time, any further action is necessary or desirable to carry out
the purposes and intent of this Agreement and to vest the Surviving Corporation
with full right, title and possession to all assets, property, rights,
privileges, powers and franchises of the Company and Merger Sub, the officers
and directors of the Company and Merger Sub shall take all such lawful and
necessary action.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub, as of
the date hereof and as of the Closing Date as though made at the Closing Date,
subject to such exceptions as are specifically disclosed in writing (with
reference to a specific section of this Agreement to which each such exception
applies) in a disclosure letter supplied by the Company to Parent, dated as of
the date hereof and certified by a duly authorized officer of Company (the
"COMPANY DISCLOSURE LETTER"), which disclosure shall provide an exception to or
otherwise qualify or respond to the representations or warranties of the Company
specifically referred to in such disclosure and any other representation or
warranty of the Company to the extent that it is reasonably apparent from such
disclosure that such disclosure is applicable to such other representation or
warranty, as follows:
2.1 Organization and Qualification; Subsidiaries.
(a) Each of the Company and its subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry
on its business as it is now being conducted. Each of the Company and its
subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates, approvals and orders
("APPROVALS") necessary to own, lease and operate the properties it
purports to own, operate or lease and to carry on its business as it is now
being conducted, except where the failure to have such Approvals would not,
individually or in the aggregate, be material to the Company. Each of the
Company and its subsidiaries is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction
where the character of the properties owned, leased or operated by it or
the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed and
in good standing that would not, either individually or in the aggregate,
be material to the Company.
(b) Company has no subsidiaries except for the corporations identified
in Section 2.1(b) of the Company Disclosure Letter. Neither the Company nor any
of its subsidiaries has agreed, is obligated to make, or is bound by, any
written, oral or other agreement, contract, sub-contract, lease, binding
understanding, instrument, note, option, warranty, purchase order, license,
sub-license, insurance policy, benefit plan, commitment, or undertaking of any
nature, as of the date hereof or as may hereafter be in effect under which it
may become obligated to make, any future investment in or capital contribution
to any other entity. Neither the Company nor any of its subsidiaries directly or
indirectly owns any equity or similar interest in or any interest convertible,
exchangeable or exercisable for, any equity or similar interest in, any
corporation, partnership, joint venture or other business, association or
entity.
2.2 Certificate of Incorporation and Bylaws. The Company has previously
furnished to Parent a complete and correct copy of its Certificate of
Incorporation and Bylaws as amended to date. Such Certificate of Incorporation,
Bylaws and equivalent organizational documents of each of its subsidiaries are
in full force and effect. Neither the Company nor any of its subsidiaries is in
violation of any of the provisions of its Certificate of Incorporation or Bylaws
or equivalent organizational documents.
2.3 Capitalization.
(a) The authorized capital stock of the Company consists of one hundred
and twenty million (120,000,000) shares of Company Common Stock and ten million
(10,000,000) shares of
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Preferred Stock ("COMPANY PREFERRED STOCK"), each having a par value of $0.001
per share. As of the close of business on September 14, 2000, (i) 30,333,599
shares of Company Common Stock were issued and outstanding, all of which are
validly issued, fully paid and nonassessable, (ii) no shares of Company Common
Stock were held in treasury by the Company or by any subsidiaries of the
Company, (iii) 2,208,440 shares of Company Common Stock were available for
future issuance pursuant to the Employee Stock Purchase Plan, (iv) 4,957,461
shares of Company Common Stock were reserved for issuance upon the exercise of
outstanding options to purchase Company Common Stock under the Employee Stock
Purchase Plan, (v) 328,328 shares of Company Common Stock were reserved for
issuance upon the exercise of outstanding options to purchase Company Common
Stock under the Director Option Plan, (vi) 9,177 shares of Company Common Stock
were reserved for issuance upon the exercise of outstanding options to purchase
Company Common Stock under the 1997 Chili!Soft Stock Plan, (vii) 18,085 shares
of Company Common Stock were reserved for issuance upon the exercise of
outstanding options to purchase Company Common Stock under the 1998 Chili!Soft
Stock Plan, and (viii) 381,259 shares of Company Common Stock were reserved for
issuance upon the exercise of outstanding options to purchase Company Common
Stock under the 1999 Chili!Soft Stock Plan. Between the close of business on
September 14, 2000 and the date hereof, no shares of Company Common Stock have
been issued other than upon exercise of vested Company Stock Options (as defined
in Section 5.9 hereof) listed on Section 2.3(b) of the Company Disclosure
Letter. As of the date hereof, no shares of Company Preferred Stock are issued
or outstanding. Except as set forth in Section 2.3(a) of the Company Disclosure
Letter, there are no commitments or agreements of any character to which the
Company is bound obligating the Company to accelerate the vesting of any Company
Stock Option as a result of the Merger or any other transactions contemplated by
this Agreement, or as a result of the termination of employment of any holder of
any such option.
(b) Section 2.3(b) of the Company Disclosure Letter sets forth the
following information with respect to each Company Stock Option outstanding as
to the date of the Agreement: (i) the name of the optionee; (ii) the particular
plan pursuant to which such Company Stock Option was granted; (iii) the number
of shares of Company Common Stock subject to such Company Stock Option; (iv) the
exercise price of such Company Stock Option; (v) the date on which such Company
Stock Option was granted; (vi) the extent to which each such option is vested
and unvested as of a recent practicable date; (vii) the date on which such
Company Stock Option expires and (viii) whether the exercisability of such
option will be accelerated in any way by the transactions contemplated by this
Agreement, and indicates the extent of any such acceleration. Section 2.3(b) of
the Company Disclosure Letter also shall set forth the vesting schedule
generally applicable to Company Stock Options, and shall specifically identify
each Company Stock Option with a vesting schedule that is different than such
generally applicable vesting schedule (including a description of each such
different vesting schedule). The Company has made available to Parent accurate
and complete copies of all stock option plans pursuant to which the Company has
granted such Company Stock Options that are currently outstanding and the form
of all stock option agreements evidencing such Company Stock Options. All shares
of Company Common Stock subject to the issuance aforesaid, upon issuance on the
terms and conditions specified in the instrument pursuant to which they are
issuable, would be duly authorized, validly issued, fully paid and non
assessable. All outstanding shares of Company Common Stock, all outstanding
Company Stock Options, and all outstanding shares of capital stock of each
subsidiary of the Company have been issued and granted in compliance with (i)
all applicable securities laws and other applicable federal, state, local,
municipal, foreign or other law, statute, constitution, principle of common law,
resolution, ordinance, code, edict, decree, rule, regulation, ruling or
requirement issues, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any Governmental Entity (as defined
below) and (ii) all requirements set forth in applicable contracts, agreements,
and instruments.
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(c) Except for (i) securities Company owns, directly or indirectly
through one or more subsidiaries, free and clear of all liens, pledges,
hypothecations, charges, mortgages, security interests, encumbrances, claims,
infringements, interferences, options, right of first refusals, preemptive
rights, community property interests or restriction of any nature (including any
restriction on the voting of any security, any restriction on the transfer of
any security or other asset, any restriction on the possession, exercise or
transfer of any other attribute of ownership of any asset, but excluding any
restrictions on transfer imposed by federal or state securities laws), and (ii)
shares of capital stock or other similar ownership interests of subsidiaries of
the Company that are owned by certain nominee equity holders as required by the
applicable law of the jurisdiction of organization of such subsidiaries (which
shares or other interests do not materially affect the Company's control of such
subsidiaries), as of the date of this Agreement, there are no equity securities,
partnership interests or similar ownership interests of any class of equity
security of any subsidiary of the Company, or any security exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except as set forth in Section 2.3(c) of the Company Disclosure
Letter or as set forth in Section 2.3(b) hereof, and except for the Stock Option
Agreement, there are no subscriptions, options, warrants, equity securities,
partnership interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which Company
or any of its subsidiaries is a party or by which it is bound obligating Company
or any of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, or repurchase, redeem or otherwise acquire, or cause the
repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of the Company or any of
its subsidiaries or obligating the Company or any of its subsidiaries to grant,
extend, accelerate the vesting of or enter into any such subscription, option,
warrant, equity security, call, right, commitment or agreement. As of the date
of this Agreement, except as contemplated by this Agreement, there are no
registration rights and there is, except for the Voting Agreements, no voting
trust, proxy, rights plan, antitakeover plan or other agreement or understanding
to which the Company or any of its subsidiaries is a party or by which they are
bound with respect to any equity security of any class of the Company or with
respect to any equity security, partnership interest or similar ownership
interest of any class of any of its subsidiaries. Stockholders of the Company
will not be entitled to dissenters' rights under applicable state law in
connection with the Merger.
2.4 Authority Relative to this Agreement. The Company has all necessary
corporate power and authority to execute and deliver this Agreement and the
Stock Option Agreement and to perform its obligations hereunder and thereunder
and, subject to obtaining the approval of the stockholders of the Company of the
Merger, to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Stock Option Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby have been duly and validly authorized by all necessary
corporate action on the part of the Company and no other corporate proceedings
on the part of the Company are necessary to authorize this Agreement, the Stock
Option Agreement or to consummate the transactions so contemplated (other than,
with respect to the Merger, the approval and adoption of this Agreement and the
approval of the Merger by holders of a majority of the outstanding shares of
Company Common Stock in accordance with Delaware Law and the Company's
Certificate of Incorporation and Bylaws). This Agreement and the Stock Option
Agreement have been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by Parent and Merger Sub,
constitute legal and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, except as enforceability may
be subject to and limited by laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and rules of law governing specific
performance, injunctive relief or other equitable remedies.
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2.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement and the Stock Option
Agreement by Company do not, and the performance of this Agreement and the Stock
Option Agreement by Company will not, (i) conflict with or violate the
Certificate of Incorporation or Bylaws or equivalent organizational documents of
the Company or any of its subsidiaries, (ii) subject to obtaining the approval
of the Company's stockholders in favor of approval and adoption of this
Agreement and approval of the Merger, and obtaining the consents, approvals,
authorizations and permits and making registrations, filings and notifications
set forth in Section 2.5(b) hereof (or Section 2.5(b) of the Company Disclosure
Letter), conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its subsidiaries or by which its or
any of their respective properties is bound or affected, or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or impair the Company's or any of its
subsidiaries' rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of the Company or any of its subsidiaries pursuant to,
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or its or any of their respective properties are bound or
affected.
(b) The execution and delivery of this Agreement and the Stock Option
Agreement by the Company do not, and the performance of this Agreement by the
Company will not, require any consent, approval, authorization or permit of, or
registration, filing with or notification to, any court, administrative agency,
commission, governmental or regulatory authority, domestic or foreign (each, a
"GOVERNMENTAL ENTITY" and, collectively, "GOVERNMENTAL ENTITIES"), except for
(i) applicable requirements, if any, of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), and state securities laws ("BLUE SKY LAWS"), the pre-merger
notification requirements (the "HSR APPROVAL") of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and foreign
Governmental Entities and the rules and regulations promulgated thereunder, (ii)
the rules and regulations of The Nasdaq Stock Market, Inc., (iii) the filing and
recordation of the Merger Certificate as required by the Delaware Law, and (iv)
where the failure to obtain such consents, approvals, authorizations or permits,
or to make such filings or notifications, would not be material to the Company
or Parent or have a Material Adverse Effect (as defined in Section 8.3(c)
hereof) on the parties hereto, prevent or materially delay consummation of the
Merger or otherwise prevent the parties hereto from performing their obligations
under this Agreement.
2.6 Compliance; Permits.
(a) Neither the Company nor any of its subsidiaries is in conflict with,
or in default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its subsidiaries or by which its or
any of their respective properties is bound or affected, or (ii) any material
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
its or any of their respective properties is bound or affected, except for any
conflicts, defaults or violations that (individually or in the aggregate) would
not cause the Company to lose any material benefit or incur any material
liability. No investigation or review by any governmental or regulatory body or
authority is, to the knowledge of the Company, pending or threatened against the
Company or its subsidiaries, nor has any governmental or regulatory body or
authority indicated an intention to conduct the same, other than, in each such
case, those the outcome of which could not, individually or in the aggregate,
reasonably
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be expected to have the effect of prohibiting or materially impairing any
business practice of the Company or any of its subsidiaries, any acquisition of
material property by the Company or any of its subsidiaries or the conduct of
business by the Company or any of its subsidiaries.
(b) The Company and its subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals from Governmental Entities which are
material to operation of the business of the Company and its subsidiaries taken
as a whole (collectively, the "COMPANY PERMITS"). The Company and its
subsidiaries are in compliance in all material respects with the terms of the
Company Permits.
2.7 SEC Filings; Financial Statements.
(a) The Company has made available to Parent a correct and complete copy
of each report, schedule, registration statement and definitive proxy statement
filed by the Company with the Securities and Exchange Commission ("SEC") since
November 5, 1999 (the "COMPANY SEC REPORTS"), which are all the forms, reports
and documents required to be filed by Company with the SEC since such date. The
Company SEC Reports (i) were prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) did not at the
time they were filed and if amended or superseded by a filing prior to the date
of this Agreement then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the Company's
subsidiaries is required to file any reports or other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each
case, any related notes thereto) contained in the Company SEC Reports was
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited statements, do not
contain footnotes as permitted by Form 10-Q of the Exchange Act) and each fairly
presents the consolidated financial position of the Company and its subsidiaries
as at the respective dates thereof and the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal adjustments which
were not or are not expected to be material in amount.
(c) The Company has previously furnished to Parent a complete and
correct copy of any amendments or modifications, which have not yet been filed
with the SEC but which are required to be filed, to agreements, documents or
other instruments which previously had been filed by the Company with the SEC
pursuant to the Securities Act or the Exchange Act.
2.8 No Undisclosed Liabilities. Neither the Company nor any of its
subsidiaries has any liabilities (absolute, accrued, contingent or otherwise) of
a nature required to be disclosed on a balance sheet or in the related notes to
the consolidated financial statements prepared in accordance with GAAP which
are, individually or in the aggregate, material to the business, results of
operations or financial condition of the Company and its subsidiaries taken as a
whole, except (i) liabilities provided for in the Company's balance sheet as of
June 30, 2000 or (ii) liabilities incurred since June 30, 2000 in the ordinary
course of business, none of which is material to the business, results of
operations or financial condition of the Company and its subsidiaries, taken as
a whole.
2.9 Absence of Certain Changes or Events. Since June 30, 2000, there has
not been any Material Adverse Effect on the Company. Since December 31, 1999,
there has not been: (i) any declaration, setting aside or payment of any
dividend on, or other distribution (whether in cash, stock or property) in
respect of, any of the Company's or any of its subsidiaries' capital stock, or
any purchase, redemption or other acquisition by the Company of any of the
Company's capital stock or
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any other securities of the Company or its subsidiaries or any options,
warrants, calls or rights to acquire any such shares or other securities except
for repurchases from employees following their termination pursuant to the terms
of their pre-existing stock option or purchase agreements, (ii) any split,
combination or reclassification of any of the Company's or any of its
subsidiaries' capital stock, (iii) any granting by the Company or any of its
subsidiaries of any increase in compensation or fringe benefits, except for
normal increases of cash compensation in the ordinary course of business
consistent with past practice, or any payment by the Company or any of its
subsidiaries of any bonus, except for bonuses made in the ordinary course of
business consistent with past practice, or any granting by the Company or any of
its subsidiaries of any increase in severance or termination pay or any entry by
the Company or any of its subsidiaries into any currently effective employment,
severance, termination or indemnification agreement or any agreement the
benefits of which are contingent or the terms of which are materially altered
upon the occurrence of a transaction involving the Company of the nature
contemplated hereby, (iv) entry by the Company or any of its subsidiaries into
any licensing or other agreement with regard to the acquisition or disposition
of any Intellectual Property (as defined in Section 2.19 hereof) other than
licenses in the ordinary course of business consistent with past practice or any
amendment or consent with respect to any licensing agreement filed or required
to be filed by the Company with the SEC, and other than licenses disclosed on
Section 2.19(j) of the Company Disclosure Letter, (v) any material change by the
Company in its accounting methods, principles or practices, except as required
by concurrent changes in GAAP, (vi) any revaluation by the Company of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable, or (vii) any sale of
assets of the Company other than in the ordinary course of business.
2.10 Absence of Litigation. There are no claims, actions, suits or
proceedings pending or, to the knowledge of the Company, threatened (or, to the
knowledge of the Company, any governmental or regulatory investigation pending
or threatened) against the Company or any of its subsidiaries or any properties
or rights of the Company or any of its subsidiaries, before any Governmental
Entity.
2.11 Employee Benefit Plans.
(a) All employee compensation, incentive, fringe or benefit plans,
programs, policies, commitments or other arrangements (whether or not set forth
in a written document and including, without limitation, all "employee benefit
plans" (within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) (the "PLANS") covering (i) any
active, former employee, director or consultant of the Company, (ii) any
subsidiary of Company, or (iii) any trade or business (whether or not
incorporated) which is a member of a controlled group or which is under common
control with the Company within the meaning of Section 414 of the Code (an
"AFFILIATE"), or with respect to which the Company has or may in the future have
liability, are listed in Section 2.11(a) of the Company Disclosure Letter. The
Company has provided to Parent: (i) correct and complete copies of all documents
embodying each Plan including (without limitation) all amendments thereto, all
related trust documents, and all material written agreements and contracts
relating to each such Plan; (ii) the three (3) most recent annual reports (Form
Series 5500 and all schedules and financial statements attached thereto), if
any, required under ERISA or the Code in connection with each Plan; (iii) the
most recent summary plan description together with the summary(ies) of material
modifications thereto, if any, required under ERISA with respect to each Plan;
(iv) all IRS determination, opinion, notification and advisory letters; (v) all
material correspondence to or from any governmental agency relating to any Plan;
(vi) all COBRA forms and related notices; (vii) all discrimination tests for
each Plan for the most recent three (3) plan years; (viii) the most recent
annual actuarial valuations, if any, prepared for each Plan; (xi) if the Plan is
funded, the most recent annual and periodic accounting of Plan assets; (x) all
material written agreements and contracts relating to each Plan, including, but
not
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limited to, administrative service agreements, group annuity contracts and group
insurance contracts; (xi) all material communications to employees or former
employees regarding in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any material liability
under any Plan or proposed Plan; (xii) all policies pertaining to fiduciary
liability insurance covering the fiduciaries for each Plan; and (xiii) all
registration statements, annual reports (Form 11-K and all attachments thereto)
and prospectuses prepared in connection with any Plan.
(b) Each Plan has been maintained and administered in all material
respects in compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations (foreign or domestic),
including but not limited to ERISA, and the Code, which are applicable to such
Plans. No suit, action or other litigation (excluding claims for benefits
incurred in the ordinary course of Plan activities) has been brought, or to the
knowledge of the Company is threatened, against or with respect to any such
Plan. There are no audits, inquiries or proceedings pending or, to the knowledge
of the Company, threatened by the Internal Revenue Service or Department of
Labor with respect to any Plans. All contributions, reserves or premium payments
required to be made or accrued as of the date hereof to the Plans have been
timely made or accrued. Section 2.11(b) of the Company Disclosure Letter
includes a listing of the accrued vacation liability of Company as of August 25,
2000. Any Plan intended to be qualified under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code (i) has either
obtained a favorable determination, notification, advisory and/or opinion
letter, as applicable, as to its qualified status from the Internal Revenue
Service or still has a remaining period of time under applicable Treasury
Regulations or Internal Revenue Service pronouncements in which to apply for
such letter and to make any amendments necessary to obtain a favorable
determination, and (ii) incorporates or has been amended to incorporate all
provisions required to comply with the Tax Reform Act of 1986 and subsequent
legislation or still has a remaining period of time under applicable Treasury
Regulations or Internal Revenue Service pronouncements in which to amend the
Plan. The Company does not have any plan or commitment to establish any new
Plan, to modify any Plan (except to the extent required by law or to conform any
such Plan to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any new Plan. Each Plan can be amended, terminated or otherwise
discontinued after the Effective Time in accordance with its terms, without
liability to Parent, the Company or any of its Affiliates (other than ordinary
administration expenses).
(c) Neither the Company, nor any of its subsidiaries, nor any of their
Affiliates has at any time ever maintained, established, sponsored, participated
in, or contributed to any plan subject to Title IV of ERISA or Section 412 of
the Code and at no time has the Company or any of its subsidiaries contributed
to or been requested to contribute to any "multiemployer plan," as such term is
defined in ERISA or to any plan described in Section 413(c) of the Code. To the
knowledge of the Company, neither the Company, any of its subsidiaries, nor any
officer or director of the Company or any of its subsidiaries is subject to any
liability or penalty under Section 4975 through 4980B of the Code or Title I of
ERISA. There are no audits, inquiries or proceedings pending or, to the
knowledge of the Company, threatened by the IRS or DOL with respect to any
Company Employee Plan. No "prohibited transaction," within the meaning of
Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise
exempt under Section 408 of ERISA, has occurred with respect to any Company
Employee Plan.
(d) Neither the Company, any of its subsidiaries, nor any of their
Affiliates has, prior to the Effective Time and in any material respect,
violated any of the health continuation requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA"), the requirements of
Family Medical Leave Act of 1993, as amended, the requirements of the Women's
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Health and Cancer Rights Act, as amended, the requirements of the Newborns' and
Mothers' Health Protection Act of 1996, as amended, or any similar provisions of
state law applicable to employees of the Company or any of its subsidiaries.
None of the Plans promises or provides retiree medical or other retiree welfare
benefits to any person except as required by applicable law and neither the
Company nor any of its subsidiaries has represented, promised or contracted
(whether in oral or written form) to provide such retiree benefits to any
employee, former employee, director, consultant or other person, except to the
extent required by statute.
(e) Neither the Company nor any of its subsidiaries is bound by or
subject to (and none of its respective assets or properties is bound by or
subject to) any arrangement with any labor union. No employee of the Company or
any of its subsidiaries is represented by any labor union or covered by any
collective bargaining agreement and, to the knowledge of the Company, no
campaign to establish such representation is in progress. There is no pending
or, to the knowledge of the Company, threatened labor dispute involving the
Company or any of its subsidiaries and any group of its employees nor has the
Company or any of its subsidiaries experienced any labor interruptions over the
past three (3) years, and the Company and its subsidiaries consider their
relationships with their employees to be good. The Company and its subsidiaries
are in compliance in all material respects with all applicable foreign, federal,
state and local laws, rules and regulations regarding employment, employment
practices, terms and conditions of employment and wages and hours.
(f) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute, bonus
or otherwise) becoming due to any stockholder, director or employee of the
Company or any of its subsidiaries under any Plan or otherwise, (ii) materially
increase any benefits otherwise payable under any Plan, or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
(g) No payment or benefit which will or may be made by the Company or
its Affiliates with respect to any Employee will be characterized as a
"parachute payment" within the meaning of Section 280G of the Code.
(h) Each International Employee Plan (as defined below) has been
established, maintained and administered in compliance with its terms and
conditions and with the requirements prescribed by any and all statutory or
regulatory laws that are applicable to such International Employee Plan.
Furthermore, no International Employee Plan has unfunded liabilities, that as of
the Effective Time, will not be offset by insurance or fully accrued. Except as
required by law, no condition exists that would prevent the Company or Parent
from terminating or amending any International Employee Plan at any time for any
reason. For purposes of this Section "INTERNATIONAL EMPLOYEE PLAN" shall mean
each Plan that has been adopted or maintained by the Company or any of its
subsidiaries, whether informally or formally, for the benefit of current or
former employees of the Company or any of its subsidiaries outside the United
States.
(i) Except as set forth in Section 2.11(i) of the Company Disclosure
Letter, no Company Employee Plan provides, reflects or represents any liability
to provide retiree benefits health to any person for any reason, except as may
be required by COBRA or other applicable statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) or any other person
that such Employee(s) or other person would be provided with retiree health
benefits, except to the extent required by statute.
2.12 Labor Matters. (i) There are no material claims pending or, to the
knowledge of each of the Company and its respective subsidiaries, threatened,
between the Company or any of its
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subsidiaries and any of their respective employees; (ii) as of the date of this
Agreement, neither the Company nor any of its subsidiaries is a party to any
collective bargaining agreement or other labor union contract applicable to
persons employed by Company or its subsidiaries nor does the Company or its
subsidiaries know of any activities or proceedings of any labor union to
organize any such employees; and (iii) as of the date of this Agreement, neither
the Company nor any of its subsidiaries has any knowledge of any strikes,
slowdowns, work stoppages or lockouts, or threats thereof, by or with respect to
any employees of the Company or any of its subsidiaries.
2.13 Registration Statement; Proxy Statement/Prospectus. None of the
information supplied or to be supplied by the Company for inclusion or
incorporation by reference in (i) the Registration Statement (as defined in
Section 5.1(a) hereof) will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading, and (ii) the Proxy
Statement/Prospectus (as defined in Section 5.1(a) hereof) to be filed with the
SEC by Company pursuant to Section 5.1(a) hereof will, on the dates mailed to
the stockholders of the Company, at the time of the Company Stockholders'
Meeting (as defined in Section 5.2(a) hereof) and as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement/Prospectus will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder. Notwithstanding the foregoing,
the Company makes no representation or warranty with respect to any information
supplied by Parent or Merger Sub which is contained in any of the foregoing
documents.
2.14 Restrictions on Business Activities. There is no agreement,
commitment, judgment, injunction, order or decree binding upon the Company or
any of its subsidiaries or to which the Company or any of its subsidiaries is a
party which has or could reasonably be expected to have the effect of
prohibiting or impairing any business practice of the Company or any of its
subsidiaries, any acquisition of property by the Company or any of its
subsidiaries or the conduct of business by the Company or any of its
subsidiaries as currently conducted.
2.15 Title to Property. Neither the Company nor any of its subsidiaries
owns any material real property. The Company and each of its subsidiaries have
good and defensible title to all of their material properties and assets, free
and clear of all liens, charges and encumbrances except liens for taxes not yet
due and payable and such liens or other imperfections of title, if any, as do
not materially detract from the value of or interfere with the present use of
the property affected thereby; and all leases pursuant to which Company or any
of its subsidiaries lease from others material amounts of real or personal
property are in good standing, valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
material default or event of default (or any event which with notice or lapse of
time, or both, would constitute a material default and in respect of which
Company or subsidiary has not taken adequate steps to prevent such default from
occurring). All the plants, structures and equipment of Company and its
subsidiaries, except such as may be under construction, are in good operating
condition and repair, in all material respects.
2.16 Taxes.
(a) Definition of Taxes. For all purposes of and under this Agreement,
"TAX" or "TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities
relating to taxes, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer,
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franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts and any obligations under any agreements or arrangements with
any other person with respect to such amounts and including any liability for
taxes of a predecessor or transferor entity.
(b) Tax Returns and Audits.
(i) The Company and each of its subsidiaries have timely filed all
federal, state, local and foreign returns, estimates, information statement and
reports ("RETURNS") relating to Taxes required to be filed by the Company and
each of its subsidiaries with any Tax authority, except such Returns which are
not, individually or in the aggregate, material to the Company. The Company and
each of its subsidiaries have paid all Taxes shown to be due on such Returns.
(ii) The Company and each of its subsidiaries as of the Effective
Time will have withheld with respect to its employees all federal and state
income taxes, Taxes pursuant to the Federal Insurance Contribution Act ("FICA"),
Taxes pursuant to the Federal Unemployment Tax Act ("FUTA") and other Taxes
required to be withheld, except such Taxes which are not, individually or in the
aggregate, material to the Company.
(iii) Neither the Company nor any of its subsidiaries has been
delinquent in the payment of any material Tax nor is there any material Tax
deficiency outstanding, proposed or assessed against the Company or any of its
subsidiaries, nor has the Company or any of its subsidiaries executed any
unexpired waiver of any statute of limitations on or extending the period for
the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the Company or
any of its subsidiaries by any Tax authority is presently in progress, nor has
the Company or any of its subsidiaries been notified of any request for such an
audit or other examination.
(v) No adjustment relating to any Returns filed by the Company or any
of its subsidiaries has been proposed in writing formally or informally by any
Tax authority to the Company or any of its subsidiaries or any representative
thereof.
(vi) Neither the Company nor any of its subsidiaries has any
liability for any unpaid Taxes which has not been accrued for or reserved on the
Company's balance sheet as of June 30, 2000 in accordance with GAAP, whether
asserted or unasserted, contingent or otherwise, which is material to the
Company, other than any liability for unpaid Taxes that may have accrued since
the date of the Company Balance Sheet in connection with the operation of the
business of the Company and its subsidiaries in the ordinary course.
(vii) There is no contract, agreement, plan or arrangement to which
the Company or any of its subsidiaries is a party as of the date of this
Agreement, including but not limited to the provisions of this Agreement,
covering any employee or former employee of the Company or any of its
subsidiaries or any other person that, individually or collectively, could
reasonably be expected to give rise to the payment of any amount that would not
be deductible pursuant to Sections 280G, 404 or 162(m) of the Code. There is no
contract, agreement, plan or arrangement to which the Company is a party or by
which it is bound to compensate any individual for excise taxes paid pursuant to
Section 4999 of the Code.
(viii) Neither the Company nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by the Company or any of its
subsidiaries.
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(ix) Neither the Company nor any of its subsidiaries is party to or
has any obligation under any tax-sharing, tax indemnity or tax allocation
agreement or arrangement. Neither the Company nor any of its subsidiaries has
ever been a member of a group filing a consolidated, unitary, combined or
similar Return (other than Returns which include only the Company and any of its
subsidiaries) under any federal, state, local or foreign law. Neither the
Company nor any of its subsidiaries is party to any joint venture, partnership
or other arrangement that could be treated as a partnership for federal and
applicable state, local or foreign Tax purposes.
(x) None of the Company's or its subsidiaries' assets are tax exempt
use property within the meaning of Section 168(h) of the Code.
(xi) Neither the Company nor any subsidiary of the Company has
participated as either a "distributing corporation" or a "controlled
corporation" in a distribution of stock qualifying for tax-free treatment under
Section 355 of the Code.
2.17 Environmental Matters.
(a) Definitions. For all purposes of and under this Agreement, the
following terms shall have the following respective meanings:
(i) "Hazardous Material" means any material or substance that is
prohibited or regulated by any Environmental Law or that has been designated by
any Governmental Entity to be radioactive, toxic, hazardous or otherwise a
danger to health, reproduction or the environment.
(ii) "Business Facility" means any property including the land, the
improvements thereon, the groundwater thereunder and the surface water thereon,
that is or at any time has been owned, operated, occupied, controlled or leased
by the Company or any of its subsidiaries in connection with the operation of
its business.
(iii) "Disposal Site" means a landfill, disposal site, disposal
agent, waste hauler or recycler of Hazardous Materials, or any real site other
than a Business Facility receiving Hazardous Materials used or generated by a
Business Facility.
(iv) "Environmental Laws" means all applicable laws, rules,
regulations, orders, treaties, statutes, and codes promulgated by any
Governmental Entity which prohibit, regulate or control any Hazardous Material
or any Hazardous Material Activity, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
the Resource Recovery and Conservation Act of 1976, the Federal Water Pollution
Control Act, the Clean Air Act, the Hazardous Materials Transportation Act, the
Clean Water Act, comparable laws, rules, regulations, ordinances, orders,
treaties, statutes, and codes of other Governmental Entities the regulations
promulgated pursuant to any of the foregoing, and all amendments and
modifications of any of the foregoing, all as amended to date.
(v) "Hazardous Materials Activity" means the transportation,
transfer, recycling, storage, use, treatment, manufacture, removal, remediation,
release, exposure of others to, sale, or distribution of any Hazardous Material
or any product or waste containing a Hazardous Material, or product manufactured
with Ozone depleting substances.
(vi) "Environmental Permit" means any approval, permit, registration,
certification, license, clearance or consent required to be obtained from any
private person or any Governmental Entity with respect to a Hazardous Materials
Activity which is or was conducted by the Company.
(b) Condition of Property. Parent and Company expressly acknowledge
that the Company's corporate offices are located in the Middlefield-Ellis-Wisman
("MEW") federal
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Superfund Site in Mountain View, California, which has been listed by the United
States Environmental Protection Agency ("EPA") on the federal National Priority
List under the federal Comprehensive Environmental Response, Compensation and
Liability Act, 42 USC sec. 9601 et seq. Parent and Company further expressly
acknowledge that Hazardous Materials, including chemicals designated by the
State of California and EPA as carcinogens and reproductive toxicants, have been
released and are present in soil and groundwater throughout the MEW Superfund
Site. Neither the Company nor its subsidiaries have incurred any liability to
date with respect to the MEW Superfund Site, and neither the Company nor its
subsidiaries reasonably expect to incur any material liability with respect to
the MEW Superfund Site in the future. Excluding the MEW Superfund Site and
except in a manner that could not reasonably be expected to subject the Company
or its subsidiaries to material liability, to the knowledge of the Company, no
Hazardous Materials are present on any Business Facility, or were present on any
other Business Facility at the time it ceased to be owned, operated, occupied,
controlled or leased by the Company on any of its subsidiaries. To the knowledge
of the Company, there are no underground storage tanks, asbestos which is
friable or likely to become friable or PCBs present on any Business Facility
currently owned, operated, occupied, controlled or leased by the Company or any
subsidiaries or as a consequence of the acts of the Company or its subsidiaries
or agents.
(c) Hazardous Materials Activities. The Company and its subsidiaries
have conducted all Hazardous Material Activities relating to their business in
compliance in all material respects with all applicable Environmental Laws. The
Hazardous Material Activities of the Company and it subsidiaries prior to the
Closing have not resulted in the exposure of any person to a Hazardous Material
in a manner which has caused or could reasonably be expected to the Company or
its subsidiaries to incur liability.
(d) Permits. To the knowledge of the Company, the Company holds all
Environmental Permits necessary for the conduct of the business of the Company
and its subsidiaries, and all such Environmental Permits are valid and in full
force and effect. The Company and its subsidiaries have complied in all material
respects with all covenants and conditions of any such Environmental Permit. To
the knowledge of the Company, no circumstances exist which could cause any such
Environmental Permit to be revoked, modified, or rendered non-renewable upon
payment of the permit fee.
(e) Environmental Litigation. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
best of the Company's knowledge, threatened, concerning or relating to any
Environmental Permit or any Hazardous Materials Activity of the Company or any
of its subsidiaries relating to their business, or any Business Facility.
(f) Offsite Hazardous Material Disposal. No action, proceeding,
liability or claim has been filed against the Company or, to the actual
knowledge of the Company, is threatened against any Disposal Site or against the
Company or any of its subsidiaries with respect to any transfer or release of
Hazardous Materials relating to the Business to a Disposal Site.
(g) Reports and Records. The Company has delivered to Parent or made
available for inspection by Parent and its agents, representatives and employees
all records in the Company's possession concerning the Hazardous Materials
Activities of the Company and its subsidiaries relating to their business and
all environmental audits and environmental assessments of any Business Facility
conducted at the request of, or otherwise in the possession of the Company. The
Company has complied with all environmental disclosure obligations imposed by
applicable law with respect to this transaction.
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2.18 Brokers. Except for the fees payable to Goldman, Sachs & Co. pursuant
to an engagement letter dated September 1, 2000, a copy of which has been
provided to Parent, the Company has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders fees or agent's commissions
or any similar charges in connection with this Agreement or any transaction
contemplated hereby.
2.19 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
(i) "Intellectual Property" shall mean any or all of the following
and all rights in, arising out of, or associated therewith: (i) all United
States, international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or not),
invention disclosures, improvements, trade secrets, proprietary information,
know how, technology, technical data and customer lists, and all documentation
relating to any of the foregoing; (iii) all copyrights, copyrights registrations
and applications therefor, and all other rights corresponding thereto throughout
the world; (iv) all mask works, mask work registrations and applications
therefor, and any equivalent or similar rights in semiconductor masks, layouts,
architectures or topology; (v) domain names, uniform resource locators ("URLS")
and other names and locators associated with the Internet (collectively, "DOMAIN
NAMES"), (vi) all computer software, including all source code, object code,
firmware, development tools, files, records and data, and all media on which any
of the foregoing is recorded; (vii) all industrial designs and any registrations
and applications therefor throughout the world; (viii) all trade names, logos,
common law trademarks and service marks, trademark and service mark
registrations and applications therefor throughout the world; (ix) all databases
and data collections and all rights therein throughout the world; (x) all moral
and economic rights of authors and inventors, however denominated, throughout
the world, and (xi) any similar or equivalent rights to any of the foregoing
anywhere in the world.
(ii) "Company Intellectual Property" shall mean any Intellectual
Property that is owned by, or exclusively licensed to, the Company or any of its
subsidiaries.
(iii) "Registered Intellectual Property" means all United States,
international and foreign: (i) patents and patent applications (including
provisional applications); (ii) registered trademarks, applications to register
trademarks, intent-to-use applications, or other registrations or applications
related to trademarks; (iii) registered copyrights and applications for
copyright registration; and (iv) any other Intellectual Property that is the
subject of an application, certificate, filing, registration or other document
issued, filed with, or recorded by any state, government or other public legal
authority.
(iv) "Company Registered Intellectual Property" means all of the
Registered Intellectual Property owned by, or filed in the name of, the Company
or any of its subsidiaries.
(b) Section 2.19(b) of the Company Disclosure Letter contains a complete
and accurate list of (i) all Company Registered Intellectual Property and
specifies, where applicable, the jurisdictions in which each such item of
Company Registered Intellectual Property has been issued or registered, and (ii)
all proceedings or actions before any court or tribunal (including the United
States Patent and Trademark Office (the "PTO") or equivalent authority anywhere
else in the world) related to any of the Company Registered Intellectual
Property.
(c) Section 2.19(c) of the Company Disclosure Letter contains a complete
and accurate list (by name and version number) of all products, software or
service offerings of the Company or any of its subsidiaries (collectively,
"COMPANY PRODUCTS") that have been sold, distributed or otherwise
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disposed of in the ten (10)-year period preceding the date hereof or which the
Company or any of its subsidiaries currently intends to sell, distribute or
otherwise dispose of in the future, including any products or service offerings
under development.
(d) No Company Intellectual Property or Company Product is subject to
any proceeding or outstanding decree, order, judgment, contract, license,
agreement, or stipulation restricting in any manner the use, transfer, or
licensing thereof by Company or any of its subsidiaries, or which may affect the
validity, use or enforceability of such Company Intellectual Property or Company
Product.
(e) Each item of Company Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees currently
due in connection with such Company Registered Intellectual Property have been
made and all necessary documents, recordations and certificates in connection
with such Company Registered Intellectual Property have been filed with the
relevant patent, copyright, trademark or other authorities in the United States
or foreign jurisdictions, as the case may be, for the purposes of prosecuting,
maintaining or perfecting such Company Registered Intellectual Property.
(f) Section 2.19(f) of the Company Disclosure Letter contains a complete
and accurate list of all actions that are required to be taken by the Company
within ninety (90) days of the date hereof with respect to any of the Company
Registered Intellectual Property.
(g) The Company owns and has good and exclusive title to each item of
Company Intellectual Property owned by it, free and clear of any lien or
encumbrance (excluding non-exclusive licenses and related restrictions granted
in the ordinary course). Without limiting the generality of the foregoing, (i)
the Company is the exclusive owner of all trademarks and trade names used in
connection with the operation or conduct of the business of the Company and its
subsidiaries, including the sale, distribution or provision of any Company
Products by the Company or any of its subsidiaries, (ii) the Company owns
exclusively, and has good title to, all copyrighted works that are included or
incorporated into Company Products or which the Company or any of its
subsidiaries otherwise purports to own, and (iii) to the extent that any patents
would be infringed by any Company Products, the Company is the exclusive owner
of such patents.
(h) To the extent that any technology, software or Intellectual Property
has been developed or created independently or jointly by a third party for the
Company or any of its subsidiaries, or is incorporated into any of the Company
Products, the Company and its subsidiaries have a written agreement with such
third party with respect thereto and the Company and its subsidiaries thereby
either (i) have obtained ownership of, and is the exclusive owner of, or (ii)
have obtained perpetual, non-terminable licenses (sufficient for the conduct of
its business as currently conducted and as proposed to be conducted) to all such
third party's Intellectual Property in such work, material or invention by
operation of law or by valid assignment, to the fullest extent it is legally
possible to do so.
(i) Neither the Company nor any of its subsidiaries has transferred
ownership of, or granted any exclusive license with respect to, any Intellectual
Property that is Company Intellectual Property, to any third party, or knowingly
permitted the Company's rights in such Company Intellectual Property to lapse or
enter the public domain.
(j) Other than "shrink wrap" and similar widely available commercial
end-user licenses, Section 2.19(j) of the Company Disclosure Letter contains a
complete and accurate list of all contracts, licenses and agreements to which
the Company or any of its subsidiaries is a party (i) with respect to Company
Intellectual Property licensed or transferred to any third party, or (ii)
pursuant to which a third party has licensed or transferred any Intellectual
Property to the Company or any of its subsidiaries.
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(k) All contracts, licenses and agreements relating to either (i)
Company Intellectual Property, or (ii) Intellectual Property of a third party
licensed to the Company or any of its subsidiaries, are in full force and
effect. The consummation of the transactions contemplated by this Agreement will
neither violate nor result in the breach, modification, cancellation,
termination, suspension of, or acceleration of any payments with respect to,
such contracts, licenses and agreements. Each of the Company and its
subsidiaries is in material compliance with, and has not materially breached any
term of any such contracts, licenses and agreements and, to the knowledge of the
Company, all other parties to such contracts, licenses and agreements are in
compliance with, and have not materially breached any term of, such contracts,
licenses and agreements. Following the Closing Date, the Surviving Corporation
will be permitted to exercise all of the Company's and its subsidiaries' rights
under such contracts, licenses and agreements to the same extent the Company and
its subsidiaries would have been able to had the transactions contemplated by
this Agreement not occurred and without the payment of any additional amounts or
consideration other than ongoing fees, royalties or payments which the Company
or any of its subsidiaries would otherwise be required to pay. Neither this
Agreement nor the transactions contemplated by this Agreement, including the
assignment to Parent or Merger Sub by operation of law or otherwise of any
contracts or agreements to which the Company is or any of its subsidiaries are a
party, will result in (i) either Parent's or the Merger Sub's granting to any
third party any right to or with respect to any material Intellectual Property
right owned by, or licensed to, either of them, (ii) either the Parent's or the
Merger Sub's being bound by, or subject to, any non-compete or other material
restriction on the operation or scope or their respective businesses, or (iii)
either the Parent's or the Merger Sub's being obligated to pay any royalties or
other material amounts to any third party in excess of those payable by Parent
or Merger Sub, respectively, prior to the Closing.
(l) The operation of the business of the Company and its subsidiaries as
such business currently is conducted and reasonably contemplated to be
conducted, including (i) the Company's and its subsidiaries' design,
development, manufacture, distribution, reproduction, marketing or sale of the
products, software or services of the Company and its subsidiaries (including
Company Products), and (ii) the Company's use of any product, device or process,
has not, does not and will not infringe or misappropriate the Intellectual
Property of any third party or, to its knowledge, constitute unfair competition
or trade practices under the laws of any jurisdiction.
(m) The Company Intellectual Property constitutes all the material
Intellectual Property used in and/or necessary to the conduct of the business of
the Company and its subsidiaries as it currently is conducted, and as it is
currently planned to be conducted by the Company and its subsidiaries,
including, without limitation, the design, development, manufacture, use, import
and sale of products, technology and performance of services (including the
Company Products).
(n) Neither the Company nor any of its subsidiaries has received notice
from any third party that the operation of the business of the Company or any of
its subsidiaries or any act, product or service of the Company or any of its
subsidiaries, infringes or misappropriates the Intellectual Property of any
third party or constitutes unfair competition or trade practices under the laws
of any jurisdiction.
(o) To the knowledge of the Company, no person has or is infringing or
misappropriating any Company Intellectual Property.
(p) The Company and each of its subsidiaries has taken reasonable steps
to protect Company's and its subsidiaries' rights in Company's confidential
information and trade secrets that it wishes to protect or any trade secrets or
confidential information of third parties provided to Company or any of its
subsidiaries, and, without limiting the foregoing, each of Company and its
subsidiaries has and enforces a policy requiring each employee and contractor to
execute a proprietary
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information/confidentiality agreement substantially in the form provided to
Parent and all current and former employees and contractors of Company and any
of its subsidiaries have executed such an agreement, except where the failure to
do so is not reasonably expected to be material to Company.
(q) To the knowledge of the Company, all of the Company's and its
subsidiaries' products (including Company Products) (i) will record, store,
process, calculate and present calendar dates falling on and after (and if
applicable, spans of time including) January 1, 2000, and will calculate any
information dependent on or relating to such dates in the same manner, and with
the same functionality, data integrity and performance, as the products record,
store, process, calculate and present calendar dates on or before December 31,
1999, or calculate any information dependent on or relating to such dates
(collectively, "YEAR 2000 COMPLIANT"), (ii) will lose no functionality with
respect to the introduction of records containing dates falling on or after
January 1, 2000, and (iii) will be interoperable with other products used and
distributed by Parent that may reasonably deliver records to the Company's or
any of its subsidiaries' products or receive records from the Company's or any
of its subsidiaries' products, or interact with the Company's or any of its
subsidiaries' products. All of the Company's or its subsidiaries' Information
Technology (as defined below) is Year 2000 Compliant, and will not cause an
interruption in the ongoing operations of the Company's or any of its
subsidiaries' business on or after January 1, 2000. For purposes of the
foregoing, the term "INFORMATION TECHNOLOGY" shall mean and include all
software, hardware, firmware, telecommunications systems, network systems,
embedded systems and other systems, components and/or services (other than
general utility services including gas, electric, telephone and postal) that are
owned or used by the Company or any of its subsidiaries in the conduct of their
business, or purchased by the Company or any of its subsidiaries from
third-party suppliers.
2.20 Agreements, Contracts and Commitments.
(a) Neither the Company nor any of its subsidiaries is a party to or is
bound by:
(i) any employment or consulting agreement, contract or commitment
with any officer or director or higher level employee or member of the Company's
Board of Directors, other than those that are terminable by the Company or any
of its subsidiaries on no more than thirty (30) days notice without liability or
financial obligation to the Company;
(ii) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(iii) any agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with the sale or license
of hardware or software products in the ordinary course of business;
(iv) any agreement, contract or commitment containing any covenant
limiting in any respect the right of the Company or any of its subsidiaries to
engage in any line of business or to compete with any person or granting any
exclusive distribution rights;
(v) any agreement, contract or commitment currently in force relating
to the disposition or acquisition by the Company or any of its subsidiaries
after the date of this Agreement of a material amount of assets not in the
ordinary course of business or pursuant to which the Company or any of its
subsidiaries has any material ownership interest in any corporation,
partnership, joint venture or other business enterprise other than the Company's
subsidiaries;
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(vi) any dealer, distributor, joint marketing or development
agreement currently in force under which the Company or any of its subsidiaries
have continuing material obligations to jointly market any product, technology
or service and which may not be canceled without penalty upon notice of ninety
(90) days or less, or any material agreement pursuant to which Company or any of
its subsidiaries have continuing material obligations to jointly develop any
intellectual property that will not be owned, in whole or in part, by Company or
any of its subsidiaries and which may not be canceled without penalty upon
notice of ninety (90) days or less;
(vii) any agreement, contract or commitment currently in force to
provide source code to any third party for any product or technology that is
material to Company and its subsidiaries taken as a whole;
(viii) any agreement, contract or commitment currently in force to
license any third party to manufacture or reproduce any Company Product, service
or technology or any agreement, contract or commitment currently in force to
sell or distribute any Company Products, services or technology, except
agreements with distributors or sales representative in the normal course of
business cancelable without penalty upon notice of ninety (90) days or less and
substantially in the form previously provided to Parent;
(ix) any mortgages, indentures, guarantees, loans or credit
agreements, security agreements or other agreements or instruments relating to
the borrowing of money or extension of credit, other than accounts receivables
and payables in the ordinary course of business;
(x) any material settlement agreement entered into within five (5)
years prior to the date of this Agreement; or
(xi) any other agreement, contract or commitment that has a value of
$300,000 or more in any individual case.
(b) Neither the Company nor any of its subsidiaries, nor to the
Company's knowledge any other party to a Company Contract (as defined below), is
in breach, violation or default under, and neither the Company nor any of its
subsidiaries has received written notice that it has breached, violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which the Company or any of its
subsidiaries is a party or by which it is bound that are required to be set
forth in the Company Disclosure Letter (any such agreement, contract or
commitment, a "COMPANY CONTRACT") in such a manner as would permit any other
party to cancel or terminate any such Company Contract, or would permit any
other party to seek material damages or other remedies (for any or all of such
breaches, violations or defaults, in the aggregate).
2.21 Insurance. The Company maintains insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company and its subsidiaries
(collectively, the "INSURANCE POLICIES") which the Company reasonably believes
are of the type and in amounts customarily carried by persons conducting
businesses similar to those of the Company and its subsidiaries. There is no
material claim by the Company or any of its subsidiaries pending under any of
the material Insurance Policies as to which coverage has been questioned, denied
or disputed by the underwriters of such policies or bonds. The Company is not
aware of, and has not received notice under any Insurance Policies of, (i) an
insurer's intention or threat to cancel or terminate any of the Insurance
Policies, (ii) an insurer's intention or threat to increase the premiums due
under any of the Insurance Policies.
2.22 Opinion of Financial Advisor. The Company has received the opinion
of its financial advisor, Goldman, Sachs & Co., to the effect that, as of the
date hereof, the Exchange Ratio pursuant to this Agreement is fair from a
financial point of view to the stockholders of the Company,
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and will provide a copy of such opinion to Parent within three (3) business days
of the date of this Agreement.
2.23 Board Approval. The Board of Directors of Company has, as of the
date of this Agreement, unanimously (i) approved this Agreement and the
transactions contemplated hereby, subject to stockholder approval, (ii) approved
the Stock Option Agreement and the transactions contemplated thereby, (iii)
determined that the Merger is in the best interests of the stockholders of
Company and is on terms that are fair to such stockholders, and (iv) recommended
that the stockholders of Company approve and adopt this Agreement and approve
the Merger.
2.24 Vote Required. The affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock is the only vote of the holders
of any class or series of the Company's capital stock necessary to approve and
adopt this Agreement and approve the Merger.
2.25 State Takeover Statutes. The Board of Directors of the Company has
approved the Merger, this Agreement, the Stock Option Agreement and the Voting
Agreements, and such approval is sufficient to render inapplicable to the
Merger, this Agreement, the Stock Option Agreement and the Voting Agreements and
the transactions contemplated by this Agreement, the Stock Option Agreement and
the Voting Agreements, the provisions of Section 203 of the Delaware Law to the
extent, if any, such Section is applicable to the Merger, this Agreement, the
Stock Option Agreement and the Voting Agreements and the transactions
contemplated by this Agreement, the Stock Option Agreement and the Voting
Agreements. No other state takeover statute or similar statute or regulation
applies to or purports to apply to the Merger, this Agreement, the Stock Option
Agreement and the Voting Agreements or the transactions contemplated by this
Agreement, the Stock Option Agreement and the Voting Agreements.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant to the
Company, as of the date hereof and as of the Closing Date as though made at the
Closing Date, as follows:
3.1 Organization and Qualification; Subsidiaries. Each of Parent and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and authority to own, lease and operate its assets and
properties and to carry on its business as it is now being conducted, except, in
the case of Parent's subsidiaries, for such failures to be so duly organized,
validly existing and in good standing that would not, either individually or in
the aggregate, have a Material Adverse Effect on Parent. Each of Parent and its
subsidiaries is in possession of all Approvals necessary to own, lease and
operate the properties it purports to own, operate or lease and to carry on its
business as it is now being conducted, except where the failure to have such
Approvals would not, individually or in the aggregate, have a Material Adverse
Effect on Parent. Each of Parent and its subsidiaries is duly qualified or
licensed as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its activities makes such qualification or
licensing necessary, except for such failures to be so duly qualified or
licensed and in good standing that would not, either individually or in the
aggregate, have a Material Adverse Effect on Parent.
3.2 Certificate of Incorporation and Bylaws. Parent has previously
furnished to Company a complete and correct copy of its Certificate of
Incorporation and Bylaws as amended to date. Such Certificate of Incorporation,
Bylaws and equivalent organizational documents of each of its
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subsidiaries are in full force and effect. Neither Parent nor any of its
subsidiaries is in violation of any of the provisions of its Certificate of
Incorporation or Bylaws or equivalent organizational documents.
3.3 Capitalization. Before giving effect to the Parent Stock Split and
the Parent Share Increase, the authorized capital stock of Parent consists of
(i) three billion and six hundred million (3,600,000,000) shares of Parent
Common Stock and of (ii) ten million (10,000,000) shares of Preferred Stock, par
value $0.00067 per share ("PARENT PREFERRED STOCK"). At the close of business on
September 12, 2000 (i) 1,609,171,019 shares of Parent Common Stock were issued
and outstanding, all of which are validly issued, fully paid and nonassessable,
(ii) 137,210,572 shares of Parent Common Stock were held in treasury by Parent
or by subsidiaries of Parent, (iii) 63,305,420 shares of Parent Common Stock
were reserved for future issuance pursuant to Parent's employee stock purchase
plan, (iv) 218,104,814 shares of Parent Common Stock were reserved for issuance
upon the exercise of outstanding options ("PARENT OPTIONS") to purchase Parent
Common Stock. As of the date hereof, no shares of Parent Preferred Stock were
issued or outstanding, other than shares of Parent Preferred Stock reserved for
future issuance pursuant to the Rights (as defined in the Parent Rights
Agreement). The authorized capital stock of Merger Sub consists of 1,000 shares
of common stock, par value $0.001 per share, all of which, as of the date
hereof, are issued and outstanding. All of the outstanding shares of Parent's
and Merger Sub's respective capital stock have been duly authorized and validly
issued and are fully paid and nonassessable. All shares of Parent Common Stock
subject to issuance as aforesaid, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, shall, and the
shares of Parent Common Stock to be issued pursuant to the Merger will be, duly
authorized, validly issued, fully paid and nonassessable. All of the outstanding
shares of capital stock (other than directors' qualifying shares) of each of
Parent's subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and all such shares (other than directors' qualifying shares) are
owned by Parent or another subsidiary free and clear of all security interests,
liens, claims, pledges, agreements, limitations in Parent's voting rights,
charges or other encumbrances of any nature whatsoever, except as would not,
either individually or in the aggregate, have a Material Adverse Effect on
Parent.
3.4 Authority Relative to this Agreement. Each of Parent and Merger Sub
has all necessary corporate power and authority to execute and deliver this
Agreement and the Stock Option Agreement, and to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The execution and delivery of this Agreement and the Stock Option
Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub
of the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of Parent and Merger
Sub and no other corporate proceedings on the part of Parent or Merger Sub are
necessary to authorize this Agreement and the Stock Option Agreement, or to
consummate the transactions so contemplated. The Board of Directors of Parent
has, as of the date this Agreement, approved this Agreement and the Stock Option
Agreement and the transactions contemplated hereby and thereby, and no further
corporate action is required on the part of Parent to authorize this Agreement
or the Stock Option Agreement or the transactions contemplated hereby or
thereby. This Agreement and the Stock Option Agreement have been duly and
validly executed and delivered by Parent and Merger Sub and, assuming the due
authorization, execution and delivery by Company, constitute legal and binding
obligations of Parent and Merger Sub, enforceable against Parent and Merger Sub
in accordance with their respective terms, except as enforceability may be
subject to and limited by laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and rules of law governing specific
performance injunctive relief or other equitable remedies.
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3.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent and Merger
Sub and the Stock Option Agreement by Parent do not, and the performance of this
Agreement by Parent and Merger Sub and the Stock Option Agreement by Parent
shall not, (i) conflict with or violate the Certificate of Incorporation, Bylaws
or equivalent organizational documents of Parent or any of its subsidiaries,
(ii) subject to obtaining the consents, approvals, authorizations and permits
and making the registrations, filings and notifications, set forth in Section
3.5(b) hereof, conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Parent or any of its subsidiaries or by which
it or their respective properties are bound or affected, or (iii) result in any
breach of or constitute a default (or an event that with notice or lapse of time
or both would become a default) under, or impair Parent's or any such
subsidiary's rights or alter the rights or obligations of any third party under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Parent or any of its subsidiaries pursuant to, any
material note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which Parent or any of
its subsidiaries is a party or by which Parent or any of its subsidiaries or its
or any of their respective properties are bound or affected, except to the
extent such conflict, violation, breach, default, impairment or other effect
could not in the case of clauses (ii) or (iii) individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on Parent.
(b) The execution and delivery of this Agreement by Parent and Merger
Sub and the Stock Option Agreement by Parent do not, and the performance of this
Agreement by Parent and Merger Sub shall not, require any consent, approval,
authorization or permit of, or registration, filing with or notification to, any
Governmental Entity, except for (i) applicable requirements, if any, of the
Securities Act, the Exchange Act, Blue Sky Laws, the pre-merger notification
requirements of the HSR Act and of foreign governmental entities and the rules
and regulations promulgated thereunder, (ii) the rules and regulations of The
Nasdaq Stock Market, Inc., (iii) the filing and recordation of the Certificate
of Merger as required by the Delaware Law and (iv) where the failure to obtain
such consents, approvals, authorizations or permits, or to make such filings or
notifications, (A) would not prevent consummation of the Merger or otherwise
prevent Parent or Sub from performing their respective obligations under this
Agreement or (B) could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on Parent.
3.6 SEC Filings.
(a) Parent has made available to the Company a correct and complete copy
of each report, schedule, registration statement and definitive proxy statement
filed by Parent with the SEC on or after July 1, 1999 and prior to the date of
this Agreement (the "PARENT SEC REPORTS"), which are all the forms, reports and
documents required to be filed by Parent with the SEC since such date. The
Parent SEC Reports (i) were prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the date
of this Agreement then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of Parent's
subsidiaries is required to file any reports or other documents with the SEC.
(b) Each set of consolidated financial statements (including, in each
case, any related notes thereto) contained in the Parent SEC Reports was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited statements, do not contain footnotes as permitted by Form 10-Q
of the
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Exchange Act) and each fairly presents in all material respects the consolidated
financial position of Parent and its subsidiaries at the respective dates
thereof and the consolidated results of its operations and cash flows for the
periods indicated, except that the unaudited interim financial statements were
or are subject to normal adjustments which were not or are not expected to be
material in amount.
3.7 Absence of Changes. Since June 30, 2000, there has not been any
Material Adverse Effect on Parent.
3.8 Registration Statement; Proxy Statement/Prospectus. None of the
information supplied or to be supplied by Parent for inclusion or incorporation
by reference in (i) the Registration Statement will, at the time the
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading; and (ii)
the Proxy Statement/Prospectus will, at the dates mailed to the stockholders of
Company, at the time of the Company Stockholders' Meeting and as of the
Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. The Registration Statement will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations promulgated by the SEC thereunder. Notwithstanding the foregoing,
Parent makes no representation or warranty with respect to any information
supplied by the Company which is contained in any of the foregoing documents.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by the Company.
(a) During the period commencing with the execution and delivery of this
Agreement and continuing until the earlier to occur of the termination of this
Agreement pursuant to its terms or the Effective Time, the Company and each of
its subsidiaries shall, except to the extent that Parent shall otherwise consent
in writing, carry on its business, in the usual, regular and ordinary course, in
substantially the same manner as heretofore conducted and in compliance with all
applicable laws and regulations, pay its debts and taxes when due subject to
good faith disputes over such debts or taxes, pay or perform other material
obligations when due, and use its commercially reasonable efforts consistent
with past practices and policies to (i) preserve intact its present business
organization, (ii) keep available the services of its present officers and
employees and (iii) preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, Company will promptly notify Parent of any material event
involving its business or operations.
(b) Except as permitted or required by the terms of this Agreement, or as
set forth in Section 4.1 of the Company Disclosure Letter, during the period
commencing with the execution and delivery of this Agreement and continuing
until the earlier of the termination of this Agreement pursuant to its terms or
the Effective Time, the Company shall not do any of the following, and shall not
permit any of its subsidiaries to do any of the following, except to the extent
that Parent shall otherwise consent in writing:
(i) waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee,
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consultant, director or other stock plans or authorize cash payments in
exchange for any options granted under any of such plans;
(ii) grant any severance or termination pay to any officer or
employee except pursuant to written agreements outstanding, or policies
existing, on the date hereof and as previously disclosed in writing or made
available to Parent, or adopt any new severance plan, or amend or modify or
alter in any respect any severance plan, agreement or arrangement existing on
the date hereof, or grant any equity-based compensation (except as permitted by
Section 4.1(b)(iv) hereof), whether payable in cash or stock;
(iii) transfer or license to any person or entity, or otherwise
extend, amend or modify any rights to the Company Intellectual Property, or
enter into any agreements or make other commitments or arrangements to grant,
transfer or license to any person future patent rights other than non-exclusive
licenses granted to end-users in the ordinary course of business and consistent
with past practice;
(iv) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of, any capital stock of the Company or any of its subsidiaries, or split,
combine or reclassify any such capital stock, or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for any
such capital stock;
(v) purchase, redeem or otherwise acquire, directly or indirectly,
any shares of capital stock of the Company or any of its subsidiaries, except
repurchases of unvested shares at cost in connection with the termination of the
employment relationship with any employee pursuant to stock option or purchase
agreements in effect on the date hereof;
(vi) issue, deliver, sell, authorize, pledge or otherwise encumber
(or propose any of the foregoing with respect to) any shares of capital stock of
the Company or of any subsidiaries of the Company or any securities convertible
into, or exercisable or exchangeable for, shares of such capital stock, or any
subscriptions, rights, warrants or options to acquire any shares of such capital
stock, or enter into other agreements or commitments of any kind or character
obligating the Company or any of its subsidiaries to issue any shares of such
capital stock or securities convertible, or exercisable or exchangeable for,
shares of such capital stock, other than (A) the issuance, delivery and/or sale
of (x) shares of Company Common Stock pursuant to the exercise of stock options
therefor outstanding on the date of this Agreement, and (y) shares of Company
Common Stock issuable to participants in the Employee Stock Purchase Plan
consistent with the terms thereof, and (B) the granting of stock options, in the
ordinary course of business and consistent with past practices, to newly hired
employees who are not executive officers of the Company in an aggregate amount
not to exceed the amount set forth in Section 4.1 of the Company Disclosure
Letter;
(vii) cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents (or similar governing
instruments of any of its subsidiaries);
(viii) acquire or agree to acquire by merging or consolidating with,
or by purchasing any equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, limited liability company,
general or limited partnership, business trust, unincorporated association or
other business organization, entity or division thereof, or otherwise acquire or
agree to acquire all or substantially all of the assets of any of the foregoing,
or purchase any equity interest in any of the foregoing or enter into any joint
ventures, strategic partnerships or similar alliances;
(ix) sell, lease, license, encumber or otherwise dispose of any
properties or assets, except sales of inventory in the ordinary course of
business consistent with past practice, and except
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for the sale, lease or disposition (other than through licensing) of property or
assets which are not material, individually or in the aggregate, to the business
of Company and its subsidiaries;
(x) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of the Company,
enter into any "keep well" or other agreement to maintain any financial
statement condition or enter into any arrangement having the economic effect of
any of the foregoing, other than in connection with the financing of ordinary
course trade payables consistent with past practice;
(xi) adopt or amend any employee benefit plan, policy or arrangement,
or employee stock purchase or stock option plan, or enter into any employment
contract or collective bargaining agreement (other than offer letters and letter
agreements entered into, in the ordinary course of business and consistent with
past practice, with newly hired employees who are terminable "at will" and who
are not officers of the Company), pay any special bonus or special remuneration
to any director or employee, or increase the salaries or wage rates or fringe
benefits (including rights to severance or indemnification) of its directors,
officers, employees or consultants;
(xii) (A) pay, discharge, settle or satisfy any claims, liabilities
or obligations (whether absolute or contingent, asserted or unasserted, accrued
or unaccrued, or otherwise) or litigation (whether or not commenced prior to the
date of this Agreement), other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business consistent with past practice
or in accordance with their terms as in existence as of the date hereof, or (B)
waive the benefits of, agree to modify in any manner, terminate, release any
person from or knowingly fail to enforce any confidentiality or similar
agreement to which the Company or any of its subsidiaries is a party or of which
the Company or any of its subsidiaries is a beneficiary;
(xiii) make any payments outside of the ordinary course of business
in excess of $300,000 in the case of any individual or series of related
payments, or $1,000,000 in the aggregate, excluding payments permitted by this
Section 4.1.
(xiv) modify, amend or terminate any material contract or agreement
to which the Company or any of its subsidiaries is a party, or waive, delay the
exercise of, release or assign any material rights or claims thereunder;
(xv) enter into, renew or modify any contracts, agreements or
obligations relating to the distribution, sale, license or marketing by third
parties of the products of the Company or any of its subsidiaries, or products
licensed by the Company or any of its subsidiaries, other than non-exclusive
contracts, agreements or obligations which may be cancelled by the Company
without penalty and with prior notice of sixty (60) days or less;
(xvi) except as required by GAAP, revalue any assets of the Company
or any of its subsidiaries, or make any change in accounting methods, principles
or practices;
(xvii) incur or enter into any agreement, contract or other
commitment or arrangement requiring the Company or any of its subsidiaries to
make payments in excess of $300,000 in any individual case, or $1,000,000 in the
aggregate;
(xviii) engage in any action that could reasonably be expected to
cause the Merger to fail to qualify as a "reorganization" under Section 368(a)
of the Code, whether or not otherwise permitted by the provisions of this
Article IV;
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(xix) engage in any action with the intent to, directly or
indirectly, adversely impact or materially delay the consummation of the Merger
or any of the other transactions contemplated by this Agreement; or
(xx) hire any employee with an annual compensation level in excess of
$100,000, except for employees who are not executive officers and are hired on
an "at-will" basis in the ordinary course of business consistent with past
practices;
(xxi) make any Tax election that is reasonably likely to adversely
affect in any material respect the Tax liabilities or Tax attributes of the
Company or any of its subsidiaries, or settle or compromise any material income
Tax liability, or consent to any extension or waiver of any limitations period
with respect to Taxes;
(xxii) other than fees payable to pursuant to the engagement letter
referred to in Section 2.18 hereof, make any individual or series of related
payments outside of the ordinary course of business (including payments to
legal, accounting or other professional service advisors) in excess of
$1,000,000 in the aggregate;
(xxiii) agree in writing or otherwise to take any of the actions
described in Section 4.1(b)(i) through Section 4.1(b)(xxii), inclusive.
4.2 Conduct of Business by Parent. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, except as permitted by
the terms of this Agreement and the Stock Option Agreement, without the prior
written consent of the Company, Parent shall not engage in any action that would
reasonably be expected to cause the Merger to fail to qualify as a
"reorganization" under Section 368(a) of the Code.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings;
Board Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
the Company and Parent shall prepare and file with the SEC a proxy
statement/prospectus to be delivered to the stockholders of the Company in
connection with the Merger (the "PROXY STATEMENT/PROSPECTUS"), and Parent shall
prepare and file with the SEC a registration statement on Form S-4, in which the
Proxy Statement/Prospectus will be included as a prospectus, in connection with
the issuance of the Parent Common Stock in or as a result of the Merger (the
"REGISTRATION STATEMENT"). Each of the Company and Parent shall promptly provide
to the other all such information concerning its business and financial
statements and affairs as reasonably may be required or appropriate for
inclusion in the Proxy Statement/Prospectus or the Registration Statement, or in
any amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other party's counsel and auditors in the preparation of the
Proxy Statement/Prospectus and the Registration Statement. Each of the Company
and Parent shall respond to any comments of the SEC, and shall use its
respective commercially reasonable efforts to have the Registration Statement
declared or ordered effective under the Securities Act as promptly as
practicable after such filing, the Company shall cause the Proxy
Statement/Prospectus to be mailed to its stockholders at the earliest
practicable time after the Registration Statement is declared or ordered
effective by the Securities and Exchange Commission. As promptly as practicable
after the date of this Agreement, each of the Company and Parent shall
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prepare and file any other filings required to be filed by it under the Exchange
Act, the Securities Act or any other Federal, foreign, state "blue sky" or
related laws relating to the Merger and the transactions contemplated by this
Agreement (the "OTHER FILINGS"). Each of the Company and Parent shall notify the
other promptly upon the receipt of any comments from the SEC or its staff or any
other government officials and of any request by the SEC or its staff or any
other government officials for amendments or supplements to the Registration
Statement, the Proxy Statement/ Prospectus or any Other Filing, or for
additional information and shall supply the other with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC or its staff or any other government officials, on the other
hand, with respect to the Registration Statement, the Proxy
Statement/Prospectus, the Merger or any Other Filing. Each of the Company and
Parent shall cause all documents that it is responsible for filing with the SEC
or other regulatory authorities under this Section 5.1(a)to comply in all
material respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is required
to be set forth in an amendment or supplement to the Proxy Statement/
Prospectus, the Registration Statement or any Other Filing, the Company or
Parent, as the case may be, shall promptly inform the other of such occurrence
and cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to the stockholders of the Company, such amendment or
supplement.
(b) The Proxy Statement/Prospectus shall include (i) the unanimous
recommendation of the Board of Directors of the Company in favor of adoption and
approval of this Agreement and approval of the Merger, subject to the right of
the Board of Directors of the Company to withhold, withdraw, amend, modify or
change its recommendation and recommend a Superior Offer in accordance with
Section 5.2(c) hereof, and (ii) the opinion of Goldman, Sachs & Co. referred to
in Section 2.22 hereof.
5.2 Meeting of Company Stockholders.
(a) Promptly after the date hereof, the Company shall take all action
necessary in accordance with Delaware Law and its Certificate of Incorporation
and Bylaws to convene a meeting of the stockholders of the Company (the "COMPANY
STOCKHOLDERS' MEETING") to be held as promptly as practicable, and in any event
(to the extent permissible under Delaware Law and the Certificate of
Incorporation and Bylaws of the Company) within forty five (45) calendar days,
following the declaration of effectiveness of the Registration Statement, for
the purpose of voting upon this Agreement and the Merger. Subject to the terms
of Section 5.2(c) hereof, the Company shall use commercially reasonable efforts
to solicit from its stockholders proxies in favor of the adoption and approval
of this Agreement and the approval of the Merger, and shall take all other
commercially reasonable action necessary or advisable to secure the vote or
consent of its stockholders required by the rules of The Nasdaq Stock Market,
Inc. or Delaware Law to obtain such approvals. The Company may adjourn or
postpone the Company Stockholders' Meeting (i) if and to the extent necessary to
ensure that any necessary supplement or amendment to the Proxy
Statement/Prospectus is provided to the Company's stockholders in advance of a
vote on this Agreement and the Merger, or (ii) if, as of the time for which the
Company Stockholders' Meeting is originally scheduled (as set forth in the Proxy
Statement/Prospectus), there are insufficient shares of Company Common Stock
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of the Company Stockholders' Meeting. The Company shall
ensure that the Company Stockholders' Meeting is called, noticed, convened, held
and conducted, and that all proxies solicited by the Company in connection with
the Company Stockholders' Meeting are solicited, in compliance with Delaware
Law, and the Certificate of Incorporation and Bylaws of the Company, the rules
of The Nasdaq Stock Market, Inc. and all other applicable legal requirements.
Notwithstanding anything to the contrary contained in this Agreement, the
Company's obligation to call, give notice of, convene
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and hold the Company Stockholders' Meeting in accordance with this Section
5.2(a) shall not be limited to or otherwise affected by the commencement,
disclosure, announcement or submission to the Company of any Acquisition
Proposal (as defined below), or by any withholding, withdrawal, amendment,
modification or change of the recommendation of the Board of Directors of the
Company with respect to this Agreement and/or the Merger.
(b) Unless the Board of Directors of the Company shall have withheld,
withdrawn, amended, modified or changed its recommendation of this Agreement and
the Merger in compliance with Section 5.2(c) hereof: (i) the Board of Directors
of the Company shall unanimously recommend that the Company's stockholders vote
in favor of and adopt and approve this Agreement and approve the Merger at the
Company Stockholders' Meeting; (ii) the Proxy Statement/Prospectus shall include
a statement to the effect that the Board of Directors of the Company has
unanimously recommended that the Company's stockholders vote in favor of and
adopt and approve this Agreement and approve the Merger at the Company
Stockholders' Meeting; and (iii) neither the Board of Directors of the Company
nor any committee thereof shall withhold, withdraw, amend, modify, change or
propose or resolve to withhold, withdraw, amend, modify or change, in each case
in a manner adverse to Parent, the unanimous recommendation of the Board of
Directors of the Company that the Company's stockholders vote in favor of and
adopt and approve this Agreement and approve the Merger. For all purposes of and
under this Agreement, the foregoing recommendation of the Board of Directors of
the Company shall be deemed to have been modified in a manner adverse to Parent
if such recommendation by the Board of Directors of the Company or any committee
thereof shall no longer be unanimous.
(c) Nothing in this Agreement shall prevent the Board of Directors of
the Company from withholding, withdrawing, amending, modifying or changing its
unanimous recommendation in favor of the adoption and approval of this Agreement
and approval of the Merger if (i) a Superior Offer (as defined below) is made to
the Company and is not withdrawn, (ii) neither the Company nor any of its
representatives shall have violated the terms of Section 5.5 hereof and the
Company is not then in material breach of this Agreement, and (iii) the Board of
Directors of the Company reasonably concludes in good faith, after consultation
with its outside counsel, that, in light of such Superior Offer, the
withholding, withdrawal, amendment, modification or changing of such
recommendation is required in order for the Board of Directors of the Company to
comply with its fiduciary obligations to the Company's stockholders under
Delaware Law with respect to such Superior Offer; provided, however, that prior
to publicly withholding, withdrawing, amending, modifying or changing its
recommendation in favor of the adoption and approval of this Agreement and
approval of the Merger, the Company shall have given Parent at least three (3)
business days prior written notice (or such lesser prior notice as provided to
the members of Company's Board of Directors) thereof and the opportunity to meet
with the Company and its counsel. Nothing contained in this Section 5.2 shall
limit the Company's obligation to hold and convene the Company Stockholders'
Meeting (regardless of whether the unanimous recommendation of the Board of
Directors of the Company shall have been withheld, withdrawn, amended, modified
or changed pursuant hereto). As used in this Agreement, the term "SUPERIOR
OFFER" shall mean any bona fide, unsolicited written Acquisition Proposal (as
defined in SECTION 5.5(B) hereof) for all of the outstanding shares of Company
Common Stock on terms that the Board of Directors of the Company determines in
good faith, after considering the advice of a financial advisor of nationally
recognized reputation and taking into account all the terms and conditions of
the Acquisition Proposal, are more favorable to the Company's stockholders than
the terms of the Merger; provided, however, that any such offer shall not be
deemed to be a "Superior Offer" pursuant hereto if any financing required to
consummate the transaction contemplated by such offer is both not committed and
not likely, in the judgment of the Board of Directors of the Company, to be
obtained by such third party on a timely basis.
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5.3 Confidentiality. The parties hereto acknowledge that the Company and
Parent have previously executed a Confidential Disclosure Agreement, dated as of
September 8, 2000 (the "CONFIDENTIALITY AGREEMENT"), which Confidentiality
Agreement will continue in full force and effect in accordance with its terms.
5.4 Access to Information. During the period commencing with the
execution and delivery of this Agreement until the earlier to occur of the
termination of this Agreement pursuant to its terms and the Effective Time, the
Company shall afford Parent and its accountants, counsel and other
representatives reasonable access during normal business hours to the
properties, books, records and personnel of the Company to obtain all
information concerning the business of the Company, including, without
limitation, the status of the Company's product development efforts, properties,
results of operations and personnel, as Parent may reasonably request. No
information or knowledge obtained by Parent during the course of any
investigation conducted pursuant to this Section 5.4 shall affect, or be deemed
to modify in any respect any representation or warranty contained herein or the
conditions to the obligations of the parties to consummate the Merger contained
herein.
5.5 No Solicitation.
(a) During the period commencing with the execution and delivery of this
Agreement until the earlier to occur of the termination of this Agreement
pursuant to its terms and the Effective Time, the Company and its subsidiaries
shall not, nor will they authorize or permit any of their respective officers or
directors, or any investment banker, attorney or other advisor or representative
retained by any of them to, nor will they authorize any of their respective
affiliates or employees to, or indirectly, (i) solicit, initiate, knowingly
encourage or induce the making, submission or announcement of any Acquisition
Proposal (as defined in Section 5.5(b) hereof), (ii) participate in any
discussions or negotiations regarding, or furnish to any person any information
with respect to, or take any other action to knowingly facilitate any inquiries
or the making of any proposal that constitutes or may reasonably be expected to
lead to, any Acquisition Proposal, (iii) engage in discussions or negotiations
with any person with respect to any Acquisition Proposal (it being understood
and agreed that informing any person as to the existence of these provisions, or
requesting additional information regarding the terms and conditions of any
Acquisition Proposal from the person making such Acquisition Proposal, without
in each case providing additional information, shall not constitute a discussion
or negotiation in violation of this Section 5.5(a)), (iv) subject to the terms
of Section 5.2(c) hereof, approve, endorse or recommend any Acquisition
Proposal, or (v) enter into any letter of intent or similar document or any
contract, agreement or commitment contemplating or otherwise relating to any
Acquisition Transaction; provided, however, that prior to the adoption and
approval of this Agreement and the approval of the Merger by the requisite vote
of the stockholders of the Company, nothing in this Agreement (including the
first sentence of this Section 5.5(a)) shall prohibit the Company from
furnishing information regarding the Company or any of its subsidiaries to, or
entering into a confidentiality agreement with, or entering into or conducting
discussions or negotiations with, any person or group in response to a Superior
Offer submitted by such person or group (and not withdrawn) if (1) neither the
Company nor any representative of the Company and its subsidiaries shall have
violated any of the restrictions set forth above in this Section 5.5, (2) the
Board of Directors of the Company concludes in good faith, after consultation
with its outside legal counsel, that such action is required in order for the
Board of Directors of the Company to comply with its fiduciary obligations to
the Company's stockholders under Delaware Law (3) business days prior to
furnishing any such information to, or entering into discussions or negotiations
with, such person or group, the Company gives Parent written notice of the
identity of such person or group and of the Company's intention to furnish
information to, or enter into discussions or negotiations with, such person or
group, and (y) the Company receives from such person or group an executed
confidentiality agreement at least as restrictive as the
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Confidentiality Agreement, and (4) contemporaneously with furnishing any such
information to such person or group, the Company furnishes such information to
Parent (to the extent such information has not been previously furnished by the
Company to Parent). In addition, nothing in this Agreement shall prohibit the
Company from complying with Rule 14e-2 promulgated under the Exchange Act with
regard to an Acquisition Proposal. The Company and its subsidiaries shall
immediately cease any and all existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any Acquisition Proposal.
Without limiting the generality of the foregoing, the parties hereto understand
and agree that any violation of the restrictions set forth in this Section
5.5(a) by any officer or director of the Company or any of its subsidiaries or
any investment banker, attorney or other advisor or representative of the
Company or any of its subsidiaries shall be deemed to be a breach of this
Section 5.5(a) by the Company. In addition to the foregoing, the Company shall
(i) provide Parent with at least forty eight (48) hours prior notice (or such
lesser prior notice as provided to the members of the Board of Directors of the
Company, but in no event less than twelve (12) hours unless the Company shall
have previously notified Parent of a prior meeting of the Board of Directors of
the Company to consider such Superior Offer) of any meeting of the Board of
Directors of the Company at which the Board of Directors of the Company is
reasonably expected to consider a Superior Offer, and (ii) provide Parent with
at least three (3) business days prior written notice (or such lesser prior
notice as provided to the members of the Board of Directors of the Company) of a
meeting of the Board of Directors of the Company at which the Board of Directors
of the Company is reasonably expected to recommend a Superior Offer to the
stockholders of the Company and together with such notice a copy of the proposed
form of agreement, letter of intent or other definitive document containing the
terms and conditions of such Superior Offer.
(b) For all purposes of and under this Agreement, the term "ACQUISITION
PROPOSAL" shall mean any offer or proposal (other than an offer or proposal by
Parent) providing for any Acquisition Transaction. For all purposes of and under
this Agreement, the term "ACQUISITION TRANSACTION" shall mean any transaction or
series of related transactions, other than the transactions contemplated by this
Agreement, involving: (i) any acquisition or purchase from the Company by any
person or "group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder) of more than a fifteen percent
(15%) interest in the total outstanding voting securities of the Company or any
of its subsidiaries, or any tender offer or exchange offer that if consummated
would result in any person or "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) beneficially owning
fifteen percent (15%) or more of the total outstanding voting securities of the
Company or any of its subsidiaries, or any merger, consolidation, business
combination or similar transaction involving the Company pursuant to which the
stockholders of the Company immediately preceding such transaction would hold
less than eighty-five percent (85%) of the equity interests in the surviving or
resulting entity of such transaction; (ii) any sale, lease (other than in the
ordinary course of business), exchange, transfer, license (other than in the
ordinary course of business), acquisition or disposition of more than fifteen
percent (15%) of the assets of the Company; or (iii) any liquidation or
dissolution of the Company.
(c) In addition to the obligations of the Company set forth in Section
5.5(a) hereof, the Company shall advise Parent, as promptly as practicable, and
in any event within twenty four (24) hours, orally and in writing, of (i) any
request for information which the Company reasonably believes is likely to lead
to an Acquisition Proposal or, (ii) any Acquisition Proposal, or (iii) any
inquiry with respect to or which the Company reasonably believes could lead to
any Acquisition Proposal, the (iv) material terms and conditions of any such
request, Acquisition Proposal or inquiry, and (v) the identity of the person or
group making any such request, Acquisition Proposal or inquiry. The Company
shall keep Parent informed in all material respects of the status and details
(including material amendments or proposed amendments) of any such request,
Acquisition Proposal or inquiry.
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5.6 Public Disclosure. Parent and the Company shall consult with each
other, and to the extent practicable, agree, before issuing any press release or
otherwise making any public statement with respect to this Agreement, the Merger
or an Acquisition Proposal, and shall not issue any such press release or make
any such public statement prior to such consultation, except as may be required
by applicable law or any listing agreement with a national securities exchange
or The Nasdaq Stock Market, Inc. The parties hereto have agreed to the text of
the joint press release announcing the signing of this Agreement.
5.7 Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions and limitations set
forth in this Agreement (including, without limitation, the Company's rights
under Section 5.2 and Section 5.5 hereof), each of the parties hereto shall use
its commercially reasonable best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties hereto in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable, the
Merger and the other transactions contemplated by this Agreement, including,
without limitation, using reasonable efforts to accomplish the following: (i)
the taking of all reasonable actions necessary to cause the conditions precedent
set forth in Article VI hereof to be satisfied, (ii) the obtaining of all
necessary actions or nonactions, waivers, consents, approvals, orders and
authorizations from Governmental Entities, and the making of all necessary
registrations, declarations and filings (including registrations, declarations
and filings with Governmental Entities, if any), and the taking of all
reasonable steps as may be necessary to avoid any suit, claim, action,
investigation or proceeding by any Governmental Entity, (iii) the obtaining of
all necessary consents, approvals or waivers from third parties which may be
required or desirable as a result of, or in connection with, the transactions
contemplated by this Agreement, (iv) the defending of any suits, claims,
actions, investigations or proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the transactions contemplated
hereby, including, without limitation, seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity vacated or
reversed, and (v) the execution or delivery of any additional certificates,
instruments and other documents necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement. In
connection with and without limiting the foregoing, but subject to the
conditions and limitations set forth in this Agreement (including, without
limitation, the Company's rights under Section 5.2 and Section 5.5 hereof) the
Company and its Board of Directors shall, if any state takeover statute or
similar statute or regulation is or becomes applicable to the Merger, this
Agreement or any of the transactions contemplated by this Agreement, use
commercially reasonable efforts to ensure that the Merger and the other
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger, this Agreement
and the transactions contemplated hereby. Notwithstanding anything to the
contrary in this Agreement, nothing in this Agreement shall be deemed to require
Parent or the Company or any subsidiary or affiliate thereof to agree to any
divestiture by itself or any of its affiliates of shares of capital stock or of
any business, assets or property, or the imposition of any material limitation
on the ability of any of them to conduct their businesses or to own or exercise
control of such assets, properties and stock.
(b) The Company shall give prompt notice to Parent upon becoming aware
that any representation or warranty made by the Company in this Agreement has
become untrue or inaccurate, or that the Company has failed to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement, in each case, such that
the conditions set forth in Section 6.3(a) or Section 6.3(b) hereof would not be
satisfied, provided, however, that no such notification shall affect the
representations, warranties,
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covenants or agreements of the Company, or the conditions to the obligations of
the parties under this Agreement.
(c) Parent shall give prompt notice to the Company upon becoming aware
that any representation or warranty made by Parent or Merger Sub in this
Agreement has become untrue or inaccurate, or that Parent or Merger Sub has
failed to comply with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement, in
each case, such that the conditions set forth in Section 6.2(a) or Section
6.2(b) hereof would not be satisfied, provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of Parent or Merger Sub, or the conditions to the obligations of the
parties under this Agreement.
5.8 Third Party Consents. As soon as practicable following the date
hereof, Parent and the Company shall each use its respective commercially
reasonable efforts to obtain any consents, waivers and approvals under any of
its or its subsidiaries' respective agreements, contracts, licenses or leases
required to be obtained in connection with the consummation of the transactions
contemplated hereby and by the Stock Option Agreement.
5.9 Company Stock Options; Employee Stock Purchase Plan.
(a) Company Stock Options. At the Effective Time, each outstanding
option to purchase shares of Company Common Stock (each, a "COMPANY STOCK
OPTION") under any Company Stock Plan, whether or not vested, shall be assumed
by Parent by virtue of the Merger and without any action on the part of Parent,
the Company or any holders of Company Stock Options, and, to the extent required
under any Company Stock Plan, Parent shall issue assumption agreements to all
holders of Company Stock Options within thirty (30) calendar days following the
Effective Time. Each Company Stock Option so assumed by Parent under this
Agreement shall continue to have, and be subject to, the same terms and
conditions of such options immediately prior to the Effective Time (including,
without limitation, any repurchase rights or vesting provisions, but after
giving effect to the amendments entered into pursuant to Section 6.3(b) hereof),
except that (i) each Company Stock Option shall be exercisable (or will become
exercisable in accordance with its terms) for that number of whole shares of
Parent Common Stock equal to the product obtained by multiplying (x) the number
of shares of Company Common Stock that were issuable upon the exercise in full
of such Company Stock Option immediately prior to the Effective Time, by (y) the
Exchange Ratio, rounded down to the nearest whole number of shares of Parent
Common Stock, and (ii) the per share exercise price for the shares of Parent
Common Stock issuable upon the exercise of each such assumed Company Stock
Option shall be equal to the quotient obtained by dividing (x) the exercise
price per share of Company Common Stock at which such Company Stock Option was
exercisable immediately prior to the Effective Time, by (y) the Exchange Ratio,
rounded up to the nearest whole cent.
(b) Employee Stock Purchase Plan. Prior to the Effective Time,
outstanding purchase rights under the Employee Stock Purchase Plan shall be
exercised in accordance with Section 19 of the Employee Stock Purchase Plan, and
each share of Company Common Stock purchased pursuant to such exercise shall by
virtue of the Merger, and without any action on the part of the holder thereof,
be converted into the right to receive a number of shares of Parent Common Stock
equal to the Exchange Ratio, without issuance of certificates representing
issued and outstanding shares of Company Common Stock to participants under the
Employee Stock Purchase Plan. The Company shall terminate the Employee Stock
Purchase Plan, effective at or prior the Closing.
5.10 Form S-8. As soon as is reasonably practicable following the
Effective Time, to the extent available for use by Parent, Parent shall file a
registration statement on Form S-8 (or any
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successor form thereto) to register under the Securities Act the issuance of the
shares of Parent Common Stock issuable upon the exercise of all Company Stock
Options assumed by parent pursuant to Section 5.9 hereof, to the extent that the
issuance of such shares may be registered on Form S-8 (or any successor form
thereto).
5.11 Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time, Parent shall, and shall cause the
Surviving Corporation to, fulfill and honor in all respects the obligations of
the Company and its subsidiaries under any indemnification agreements between
(i) the Company or any of its subsidiaries and (ii) any of their respective
directors and officers, as in effect on the date hereof (the "INDEMNIFIED
PARTIES"), and any indemnification provisions in the Company's Certificate of
Incorporation or Bylaws, as in effect on the date hereof, or in any equivalent
organizational documents of any subsidiary of the Company, as the case may be.
The Certificate of Incorporation and Bylaws of the Surviving Corporation shall
contain provisions with respect to exculpation and indemnification that are at
least as favorable to the Indemnified Parties as those contained in the
Certificate of Incorporation and Bylaws of the Company, as in effect on the date
hereof, and the exculpation and indemnification provisions of the equivalent
organizational documents of each subsidiary of the Company as in effect on the
date hereof shall remain in full force and effect, and no such provisions shall
be amended, repealed or otherwise modified for a period of six (6) years
following the Effective Time in any manner that would adversely affect the
rights thereunder of individuals who, immediately prior to the Effective Time,
were directors, officers, employees or agents of the Company or any subsidiary
of the Company, unless such modification is required by applicable law.
(b) For a period of four (4) years following the Effective Time, Parent
shall maintain in effect a policy of directors' and officers' insurance covering
those persons who are currently covered, or will be covered on or prior to the
Effective Time, by the Company's directors' and officers' insurance policy in
effect as of the date hereof (a copy of which has been heretofore delivered to
Parent) for actions or omissions occurring on or prior to the Effective Time,
which insurance policy shall contain terms and conditions (including, without
limitation, coverage amounts and scope) that are at least as favorable in the
aggregate as the terms and conditions of the Company's directors' and officers'
insurance policy in effect as of the date hereof; provided, however, that
notwithstanding the foregoing, Parent shall not be required to pay an annual
premium on such insurance policy that is greater than one hundred and fifty
percent (150%) of the annual premium payable under the Company's directors' and
officers' insurance policy in effect as of the date hereof as set forth in
Section 5.11 of the Company Disclosure Letter (the "CURRENT PREMIUM"), and if
the annual premium for such coverage would at any time exceed one hundred and
fifty percent (150%) of the Current Premium, the Surviving Corporation shall
maintain insurance policies which provide the maximum and best coverage then
available at an annual premium equal to one hundred and fifty percent (150%) of
the Current Premium; and provided further, however, that notwithstanding the
foregoing, Parent may satisfy its obligations under this Section 5.11(b) by
purchasing a "tail" policy under the Company's existing directors' and officers'
insurance policy which (i) has an effective term of four (4) years from the
Effective Time, (ii) covers those persons who are currently covered, or will be
covered on or prior to the Effective Time, by the Company's directors' and
officers' insurance policy in effect as of the date hereof for actions and
omissions occurring on or prior to the Effective Time, and (iii) contains terms
and conditions (including, without limitation, coverage amounts) that are at
least as favorable in the aggregate as the terms and conditions of the Company's
directors' and officers' insurance policy in effect as of the date hereof.
(c) Parent and the Surviving Corporation jointly and severally agree
to pay all expenses, including reasonable attorneys' fees, that may be
incurred by any Indemnified Party in enforcing
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the indemnity and other obligations provided for in this Section 5.11 to
the extent that such Indemnified Party is determined to be entitled to
indemnification under this Section 5.11.
(d) The provisions of this Section 5.11 shall operate for the benefit
of, and shall be enforceable by, each of the Indemnified Parties, and their
heirs, representatives, successors and assigns.
5.12 Nasdaq Listing. Parent shall use its commercially reasonable best
efforts to cause the shares of Parent Common Stock issuable, and those required
to be reserved for issuance, in connection with the Merger, to be authorized for
listing on Nasdaq, at or prior to the Closing Date, upon official notice of
issuance.
5.13 Company Affiliates. Section 5.13 of the Company Disclosure Letter
contains a complete and accurate list of those persons who may be deemed to be,
in the Company's reasonable judgment, affiliates of the Company within the
meaning of Rule 145 promulgated under the Securities Act (each a "COMPANY
AFFILIATE"). The Company shall provide Parent with such information and
documents as Parent reasonably requests for purposes of reviewing and verifying
such list. The Company shall use its commercially reasonable efforts to deliver
or cause to be delivered to Parent, as promptly as practicable on or following
the date hereof, from each Company Affiliate who has not delivered an Affiliate
Agreement on or prior to the date hereof, an executed Affiliate Agreement. The
Affiliate Agreements will be in full force and effect as of the Effective Time.
Parent will be entitled to place appropriate legends on the certificates
evidencing any Parent Common Stock to be received by a Company Affiliate
pursuant to the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for Parent Common Stock, consistent with the
terms of each Affiliate Agreement.
5.14 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, the Company and Parent each shall file with the United States
Federal Trade Commission (the "FTC") and the Antitrust Division of the United
States Department of Justice ("DOJ") Notification and Report Forms relating to
the transactions contemplated hereby as required by the HSR Act, as well as
comparable pre-merger notification forms required by the merger notification or
control laws and regulations of any applicable jurisdiction, as agreed to by the
parties hereto. The Company and Parent each shall promptly (i) supply the other
with any information which may be required in order to effectuate such filings,
and (ii) supply any additional information which reasonably may be required by
the FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties hereto may reasonably deem appropriate;
provided, however, that Parent shall not be required to agree to any divestiture
by Parent or the Company or any of Parent's subsidiaries or affiliates of shares
of capital stock or of any business, assets or property of Parent, the Company
or any Parent's subsidiaries or affiliates, or the imposition of any material
limitations on the ability of any of the foregoing to conduct their respective
businesses or to own or exercise control of such assets, properties and capital
stock.
5.15 Company 401(k) Plan. The Company shall terminate, or cause to be
terminated, its 401(k) plan and any other 401(k) plan (including, without
limitation, the Chili!Soft 401(k) plan) sponsored by the Company or any
Affiliate, effective no later than the day immediately preceding the Closing
Date.
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ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction or fulfillment, at or prior to the Closing
Date, of the following conditions:
(a) Company Stockholder Approval. This Agreement shall have been duly
approved and adopted, and the Merger shall have been duly approved, by the
requisite vote under Delaware Law, by the stockholders of the Company.
(b) Registration Statement Effective; Proxy Statement/Prospectus. The
SEC shall have declared or ordered the Registration Statement to be effective,
no stop order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued, and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement/Prospectus, shall have been
initiated or threatened in writing (and not abandoned or withdrawn) by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger. All
waiting periods, if any, under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early and all material
foreign antitrust approvals required to be obtained prior to the Merger in
connection with the transactions contemplated hereby shall have been obtained.
(d) Tax Opinions. Parent and the Company shall each have received
written opinions from their respective tax counsel (Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Brobeck Phleger & Harrison LLP,
respectively), in form and substance reasonably satisfactory to them, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and such opinions shall not have been withdrawn;
provided, however, that if the counsel to either Parent or the Company shall not
render such opinion, this condition shall nonetheless be deemed to be satisfied
with respect to such party if counsel to the other party hereto shall render
such opinion to such party. The parties hereto agree to make such reasonable
representations as requested by such counsel for the purpose of rendering such
opinions.
(e) Nasdaq Listing. The shares of Parent Common Stock issuable to the
stockholders of the Company in connection with the Merger pursuant to this
Agreement, and such other shares required to be reserved for issuance in
connection with the Merger, shall have been authorized for listing on the
Nasdaq, upon official notice of issuance, or shall be exempt from such
requirement under then applicable laws, regulations and rules of The Nasdaq
Stock Market, Inc.
6.2 Additional Conditions to Obligations of the Company. The obligation of
the Company to consummate and effect the Merger shall be subject to the
satisfaction or fulfillment, at or prior to the Closing Date, of each of the
following conditions, any of which may be waived, in writing, exclusively by the
Company:
(a) Representations and Warranties. The representations and warranties
of Parent and Merger Sub contained in this Agreement (i) shall have been true
and correct in all respects as of the date of this Agreement and (ii) shall be
true and correct in all respects on and as of the Closing Date with the same
force and effect as if made on the Closing Date, except, with respect to clauses
(i) and (ii), (A) in each case, or in the aggregate, as does not constitute a
Material Adverse Effect on Parent, (B) for changes contemplated by this
Agreement, and (C) for those representations and warranties which address
matters only as of a particular date (which representations shall have
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been true and correct (subject to the Material Adverse Effect qualifications as
set forth in the preceding clause (A)) as of such particular date) (it being
understood that, for purposes of determining the accuracy of such
representations and warranties, all "Material Adverse Effect" qualifications and
other qualifications based on the word "material" or similar phrases contained
in such representations and warranties shall be disregarded). The Company shall
have received a certificate with respect to the foregoing signed on behalf of
Parent by duly authorized officer thereof.
(b) Agreements and Covenants. Parent and Merger Sub shall in all
material respects have performed or complied with all agreements and covenants
required by this Agreement to be performed or complied with by them on or prior
to the Closing Date, and the Company shall have received a certificate to such
effect signed on behalf of Parent by a duly authorized officer thereof.
6.3 Additional Conditions to the Obligations of Parent and Merger
Sub. The obligations of Parent and Merger Sub to consummate and effect the
Merger shall be subject to the satisfaction or fulfillment, at or prior to the
Closing Date, of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and warranties
of the Company contained in this Agreement (i) shall have been true and correct
in all respects as of the date of this Agreement and (ii) shall be true and
correct in all respects on and as of the Closing Date with the same force and
effect as if made on and as of the Closing Date, except, with respect to clauses
(i) and (ii), (A) in each case, or in the aggregate, as does not constitute a
Material Adverse Effect on the Company; provided, however, that such Material
Adverse Effect qualifier shall be inapplicable with respect to representations
and warranties contained in Sections 2.3(a) (other than an inaccuracy in the
aggregate amount of no greater than 50,000 shares of Company Common Stock and
shares of Company Common Stock issuable upon exercise of Company Stock Options),
2.3(c), 2.4, 2.18, 2.22, 2.23, 2.24 and 2.25, each of which individually shall
have been true and correct in all respects as of the date of this Agreement and
shall be true and correct in all material respects on and as of the Closing
Date, and provided, further, that such Material Adverse Effect qualifier shall
be inapplicable with respect to representations and warranties contained in
Section 2.19, which individually shall have been true and correct in all
material respects as of the date of this Agreement and shall be true and correct
in all material respects on and as of the Closing Date, (B) for changes
contemplated by this Agreement, and (C) for those representations and warranties
which address matters only as of a particular date (which representations shall
have been true and correct (subject to the Material Adverse Effect
qualifications and limitations set forth in the preceding clause (A)) as of such
particular date) (it being understood that, for purposes of determining the
accuracy of such representations and warranties, (x) all "Material Adverse
Effect" and materiality qualifications and other qualifications based on the
word "material" or similar phrases contained in such representations and
warranties shall be disregarded, and (y) any update of or modification to the
Company Disclosure Letter made or purported to have been made after the date of
this Agreement shall be disregarded). Parent shall have received a certificate
with respect to the foregoing signed on behalf of Company by a duly authorized
officer thereof.
(b) Agreements and Covenants. The Company shall in all material
respects have performed or complied with all agreements and covenants required
by this Agreement to be performed or complied with by it at or prior to the
Closing Date, and Parent shall have received a certificate to such effect signed
on behalf of Company by a duly authorized officer thereof.
(c) Non-Competition Agreements. Each of the employees who have executed
a Non-Competition Agreement shall continue to be employed by the Company as of
the Closing, shall not have notified (whether formally or informally) Parent or
the Company of such employee's intention
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of leaving the employ of Parent or the Company following the Effective Time, and
shall not have rescinded the Non-Competition Agreement to which such employee is
a party.
(d) Consents. The Company shall have obtained the consents, waivers and
approvals required to be obtained in connection with the consummation of the
transactions contemplated hereby, which consents, waivers and approvals are set
forth in Section 6.3(d) of the Company Disclosure Letter.
(e) Severance and Acceleration Waivers. Each of the Severance and
Acceleration Waivers shall be in full force and effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after the requisite approval of the
stockholders of the Company has been obtained in respect of this Agreement and
the Merger:
(a) by mutual written consent of Parent and the Company, duly authorized
by the respective Boards of Directors of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by March 16, 2001 for any reason; provided, however, that the right
to terminate this Agreement under this Section 7.1(b) shall not be available to
any party whose action or failure to act has been a principal cause of or
resulted in the failure of the Merger to occur on or before such date, and such
action or failure to act constitutes a breach of this Agreement;
(c) by either Parent or the Company if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action, in any case having
the effect of permanently restraining, permanently enjoining or otherwise
permanently prohibiting the Merger, which order, decree, ruling or other action
is final and nonappealable and remains in effect at the time of termination;
(d) by either Parent or the Company if the requisite approval of the
stockholders of the Company contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the requisite vote at a meeting of
the stockholders of the Company, duly convened therefor or at any adjournment or
postponement thereof; provided, however, that the right to terminate this
Agreement under this Section 7.1(d) shall not be available to a party in the
event that the failure to obtain the requisite approval of the stockholders of
the Company shall have been caused by the action or failure to act of such party
proposing to exercise its right of termination under this Section 7.1(d), and
such action or failure to act constitutes a breach of this Agreement;
(e) by Parent if a Triggering Event (as defined below) shall have
occurred;
(f) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or if
any representation or warranty of Parent shall have become untrue, in either
case such that the conditions set forth in Section 6.2(a) or Section
6.2(b)hereof would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue; provided,
however, that if such inaccuracy in Parent's representations and warranties or
breach by Parent is curable by Parent through the exercise of its commercially
reasonable efforts, then the Company may not terminate this Agreement under this
Section 7.1(f) for thirty (30) calendar days following the delivery of written
notice from the Company to Parent of such breach, provided Parent continues to
exercise commercially reasonable
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efforts to cure such breach (it being understood and agreed that the Company may
not terminate this Agreement pursuant to this Section 7.1(f) if the Company
shall have materially breached this Agreement or if such breach by Parent is
cured during such thirty (30) calendar day period);
(g) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if any
representation or warranty of Company shall have become untrue, in either case
such that the conditions set forth in Section 6.3(a) or Section 6.3(b) hereof
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue; provided, however, that if
such inaccuracy in the Company's representations and warranties or breach by the
Company is curable by the Company through the exercise of its commercially
reasonable efforts, then Parent may not terminate this Agreement under this
Section 7.1(g) for thirty (30) calendar days following the delivery of written
notice from Parent to the Company of such breach, provided the Company continues
to exercise commercially reasonable efforts to cure such breach (it being
understood and agreed that Parent may not terminate this Agreement pursuant to
this Section 7.1(g) if Parent shall have materially breached this Agreement or
if such breach by the Company is cured during such thirty (30) calendar day
period);
(h) by Parent, if there has been a Material Adverse Effect with respect
to the Company and its subsidiaries that is not curable by the Company through
the exercise of its commercially reasonable efforts; or
(i) by Company, if there has been a Material Adverse Effect with respect
to Parent that is not curable by Parent through the exercise of its commercially
reasonable efforts.
For the purposes of this Agreement, a "TRIGGERING EVENT" shall be deemed to
have occurred if: (i) the Board of Directors of the Company or any committee
thereof shall for any reason have withdrawn or shall have amended or modified,
in either case, in a manner adverse to Parent its unanimous recommendation in
favor of the adoption and approval of the Agreement or the approval of the
Merger; (ii) the Company shall have failed to include in the Proxy
Statement/Prospectus the unanimous recommendation of the Board of Directors of
the Company in favor of the adoption and approval of the Agreement and the
approval of the Merger; (iii) the Board of Directors of the Company shall have
failed to reaffirm its unanimous recommendation in favor of the adoption and
approval of the Agreement and the approval of the Merger within ten (10)
business days after Parent requests in writing that such recommendation be
reaffirmed at any time following the announcement of an Acquisition Proposal;
(iv) the Board of Directors of the Company or any committee thereof shall have
approved or recommended any Acquisition Proposal; (v) the Company shall have
entered into any letter of intent or similar document or any agreement, contract
or commitment accepting any Acquisition Proposal; (vi) the Company shall have
breached any of the terms of Section 5.5 hereof; or (vii) a tender or exchange
offer relating to not less than fifteen percent (15%) of the then-outstanding
shares of capital stock of the Company shall have been commenced by a person
unaffiliated with Parent and the Company shall not have sent to its
securityholders pursuant to Rule 14e-2 promulgated under the Securities Act,
within ten (10) business days after such tender or exchange offer is first
commenced, a statement indicating that the Company recommends rejection of such
tender or exchange offer.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement pursuant to Section 7.1 hereof shall be effective immediately upon the
delivery of written notice of the terminating party to the other party or
parties hereto. In the event of the termination of this Agreement pursuant to
Section 7.1 hereof, this Agreement shall be of no further force or effect,
except (i) as set forth in this Section 7.2, and as set forth in Section 7.3 and
Article VIII (miscellaneous) hereof, each of which shall survive the termination
of this Agreement, and
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(ii) nothing herein shall relieve any party hereto from any liability for any
willful or intentional breach of this Agreement. No termination of this
Agreement shall affect the obligations of the parties hereto contained in the
Confidentiality Agreement, all of which obligations shall survive termination of
this Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as otherwise provided in this Section 7.3, all fees
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such fees and expenses,
whether or not the Merger is consummated; provided, however, that Parent and the
Company shall share equally all fees and expenses, other than attorneys' and
accountants fees and expenses, incurred in relation to the printing and filing
(with the SEC) of the Proxy Statement/Prospectus (including any preliminary
materials related thereto) and the Registration Statement (including financial
statements and exhibits) and any amendments or supplements thereto, and any fees
required to be paid under the HSR Act.
(b) Company Payments.
(i) Notwithstanding anything to the contrary set forth in this
Agreement, in the event that this Agreement is terminated by Parent pursuant to
Section 7.1(e) hereof, the Company shall pay to Parent in immediately available
funds, within one (1) business day after demand by Parent, an amount in cash
equal to $59,000,000 (the "TERMINATION FEE").
(ii) Notwithstanding anything to contrary set forth in this
Agreement, in the event that (A) this Agreement is terminated by Parent or the
Company, as applicable, pursuant to Section 7.1(b) or Section 7.1(d) hereof, (B)
following the date hereof and prior to the termination of this Agreement, a
third party shall have announced an Acquisition Proposal, and (C) within twelve
(12) months following the termination of this Agreement, a Company Acquisition
(as defined in Section 7.3(b)(iv) hereof) is consummated or the Company enters
into an agreement or letter of intent providing for a Company Acquisition, or a
third party commences a tender or exchange offer for a Company Acquisition, then
the Company shall pay to Parent, in immediately available funds, an amount in
cash equal to the Termination Fee upon (x) the consummation of such Company
Acquisition, or (y) the entry by the Company into such agreement or letter of
intent.
(iii) The Company acknowledges that the agreements set forth in this
Section 7.3(b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Parent would not enter into this
Agreement. Accordingly, if the Company shall fail to pay in a timely manner the
amounts due pursuant to this Section 7.3(b), and, in order to obtain such
payment, Parent makes a claim that results in a final judgment against the
Company for the amounts set forth in this Section 7.3(b), the Company shall pay
to Parent its reasonable costs and expenses (including reasonable attorneys'
fees and expenses) in connection with such suit, together with interest on the
amounts set forth in this Section 7.3(b) at the prime rate of The Chase
Manhattan Bank in effect on the date such payment was required to be made.
Payment of the fees described in this Section 7.3(b) shall not be in lieu of
damages incurred in the event of any willful or intentional breach of this
Agreement.
(iv) For all purposes of and under this Agreement, the term "COMPANY
ACQUISITION" shall mean any of the following transactions (other than the
transactions contemplated by this Agreement); (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company pursuant to which the stockholders of the
Company immediately preceding such transaction hold less than fifty percent
(50%) of the aggregate equity interests in the surviving or resulting entity of
such transaction, (ii) a sale or other disposition by the Company of assets
representing in excess of fifty percent (50%) of the aggregate fair market value
of
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the Company's business immediately prior to such sale, or (iii) the acquisition
by any person or group (including by way of a tender offer or an exchange offer
or issuance by the Company), directly or indirectly, of beneficial ownership or
a right to acquire beneficial ownership of shares representing in excess of
fifty percent (50%) of the voting power of the then outstanding shares of
capital stock of the Company.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time, but only by execution of an instrument in
writing, signed on behalf of each of the parties hereto by a duly authorized
officer thereof.
7.5 Extension; Waiver. At any time prior to the Effective Time, any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto, and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Any delay in exercising any right under
this Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of the Company, Parent and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive or call for action to be taken after the Effective Time shall
survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Parent, Merger Sub or the Company (following the Effective Time),
to:
Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, CA 94303
Attention: General Counsel
Telephone No.: (650) 960-1300
Telecopy No.: (650) 336-0530
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Katherine A. Martin, Esq.
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
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and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
One Market, Spear Street Tower
Suite 3300
San Francisco, California 94105
Attention: Michael S. Dorf, Esq.
Telephone: No.: (415) 947-2000
Telecopy No.: (415) 947-2099
(b) if to the Company (prior to the Effective Time), to:
Cobalt Networks, Inc.
555 Ellis Street
Mountain View, CA 94043
Attention: President
Telephone No.: (650) 623-2500
Telecopy No.: (650) 623-2546
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
Attention: Rod J. Howard, Esq.
John Montgomery, Esq.
Telephone No.: (650) 424-0160
Telecopy No.: (650) 496-2885
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise indicated.
When a reference is made in this Agreement to Sections, such reference shall be
to a Section of this Agreement. Unless otherwise indicated the words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. When reference is
made herein to "the business of" an entity, such reference shall be deemed to
include the business of all direct and indirect subsidiaries of such entity
taken together with such entity as a whole. Reference to the subsidiaries of an
entity (the "PARENT ENTITY") shall be deemed to include all direct and indirect
subsidiaries of such Parent Entity, but shall not include any entity of which
less than twenty percent (20%) of the outstanding voting securities or other
equity interests are owned by the Parent Entity.
(b) For purposes of this Agreement the term "KNOWLEDGE" means with
respect to a party hereto, with respect to any matter in question, that any of
the executive officers of such party has actual knowledge of such matter.
(c) For purposes of this Agreement, the term "MATERIAL ADVERSE
EFFECT"when used in connection with an entity means any change, event,
violation, inaccuracy, circumstance or effect that is materially adverse to the
business, assets (including intangible assets), capitalization, financial
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condition or results of operations of such entity and its subsidiaries taken as
a whole. For purposes of this Agreement, the term "person" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or
Governmental Entity; provided, however, that in no event shall any of the
following, alone or in combination, be deemed to constitute, nor shall any of
the following be taken into account in determining whether there has been or
will be a Material Adverse Effect on any entity: (i) any change in such entity's
stock price or trading volume in and of itself; or (ii) any change, event,
violation, inaccuracy, circumstance or effect that such entity successfully
bears the burden of proving results from changes affecting any of the industries
in which such entity operates generally or the United States economy generally
(which changes in each case do not disproportionately affect such entity); or
(iii) any change, event, violation, inaccuracy, circumstance or effect resulting
from the disruption or loss of existing or prospective customer, distributor or
supplier relationships that such entity successfully bears the burden of proving
results from the public announcement or pendency of the transactions
contemplated hereby.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Disclosure Letter
(i) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, it being understood that the Confidentiality Agreement shall continue in
full force and effect until the Closing and shall survive any termination of
this Agreement; and (ii) are not intended to confer upon any other person any
rights or remedies hereunder, except as specifically provided in Section 5.11
hereof.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
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8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, THE COMPANY AND MERGER SUB
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY OR MERGER SUB
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective thereunto duly authorized offices, as of the date
first written above.
SUN MICROSYSTEMS, INC.
By:
---------------------------------------
Name:
Title:
AZURE ACQUISITION CORPORATION
By:
---------------------------------------
Name:
Title:
COBALT NETWORKS, INC.
By:
---------------------------------------
Name:
Title:
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<PAGE> 185
ANNEX B
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as
of September 18, 2000 by and between Sun Microsystems, Inc., a Delaware
corporation ("Parent"), and Cobalt Networks, Inc., a Delaware corporation (the
"Company").
RECITALS:
A. Parent, Merger Sub (as defined below) and the Company have entered into
an Agreement and Plan of Merger and Reorganization (the "Reorganization
Agreement") which provides for the merger (the "Merger") of a wholly-owned
subsidiary of Parent ("Merger Sub") with and into the Company, pursuant to which
all outstanding capital stock of the Company will be converted into the right to
receive Common Stock of Parent. Capitalized terms used but not otherwise defined
herein shall have the respective meanings ascribed thereto in the Reorganization
Agreement.
B. As a condition to Parent's willingness to enter into the Reorganization
Agreement, Parent has requested that the Company agree, and the Company has so
agreed, to grant to Parent an option to acquire shares of Common Stock, par
value $0.0001 per share, of the Company ("Company Shares"), upon the terms and
subject to the conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants, promises and representations set forth herein and in the
Reorganization Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and accepted, the
parties hereto hereby agree as follows:
1. Grant of Option. On the terms and subject to the conditions set forth
herein, the Company hereby grants to Parent an irrevocable option (the "Option")
to acquire up to a number of Company Shares equal to 19.9% of the issued and
outstanding Company Shares as of the first date, if any, upon which an Exercise
Event (as defined in Section 2(a) hereof) shall occur (the "Option Shares"), for
a purchase price of $57.63 per share (the "Exercise Price").
2. Exercise of Option. The Option may be exercised by Parent, in whole or
in part, at any time or from time to time if the Reorganization Agreement is
terminated pursuant to Section 7.1(b), Section 7.1(d) or Section 7.1(e) thereof,
and an event causing the Termination Fee to become payable pursuant to Section
7.3(b) of the Reorganization Agreement occurs (any of such events being referred
to herein as an "Exercise Event"). In the event that Parent shall elect to
exercise the Option pursuant to this Section 2, Parent shall deliver to the
Company a written notice (each an "Exercise Notice") specifying the total number
of Option Shares that Parent wishes to acquire at such time pursuant to the
exercise of the Option.
3. Closing of Option Exercise.
(a) Each closing of a purchase of Option Shares pursuant to the exercise
of the Option (a "Closing") shall occur on a date and at a time, prior to the
termination of the Option pursuant to Section 4 hereof, designated by Parent in
an Exercise Notice delivered to the Company at least two (2) business days prior
to the date of such Closing, which Closing shall be held at the principal
offices of the Company. Subject to the terms of Section 3(b) hereof, at any
Closing, the Company shall deliver to Parent a single certificate in definitive
form representing the number of Company Shares designated by Parent in its
Exercise Notice, such certificate to be registered in the name of Parent and to
bear the legend set forth in Section 10 hereof, against payment by Parent to the
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Company of the aggregate purchase price in cash for the Company Shares so
designated and being purchased at such Closing by delivery of a certified check
or bank check, or wire transfer of immediately available funds to an account
designated by the Company in writing.
(b) The Company shall not be required to issue Option Shares to Parent
pursuant to the exercise of the Option unless and until all of the following
conditions have been satisfied or fulfilled:
(i) all waiting periods under the HSR Act and any foreign laws which
are applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated, and all foreign antitrust approvals applicable to such
issuance shall have been obtained and shall be in full force and effect;
(ii) all material consents, approvals, orders or authorizations of,
or registrations, declarations or filings with, any Federal, state or local
administrative agency or commission or other Federal, state or local
governmental authority or instrumentality, if any, required in connection with
the issuance of the Option Shares hereunder will have been obtained or made, as
the case may be; and
(iii) no preliminary or permanent injunction or other order by any
court of competent jurisdiction prohibiting or otherwise restraining such
issuance will be in effect, and no statute, rule, regulation, executive order,
decree or other order applicable to the Company which has the effect of making
such issuance unlawful shall be in effect.
It is understood and agreed that at any time during which the Option is
exercisable, the parties will use their respective reasonable best efforts to
satisfy all conditions to Closing, so that a Closing may take place as promptly
as practicable.
4. Termination of Option. The Option shall terminate upon the earlier to
occur of (i) the Effective Time, (ii) twelve (12) full months following the date
on which the Reorganization Agreement is terminated pursuant to Section 7.1(b)
or Section 7.1(d) thereof, if no event causing the Termination Fee to become
payable pursuant to Section 7.3(b)(ii) of the Reorganization Agreement has
occurred during such twelve (12) month period, (iii) twelve (12) full months
following the date on which the Reorganization Agreement is terminated pursuant
to Section 7.1(e) thereof, (iv) in the event the Reorganization Agreement has
been terminated pursuant to Section 7.1(b) or Section 7.1(d) thereof and the
Termination Fee became payable pursuant to Section 7.3(b)(ii) thereof, twelve
(12) full months following the payment of the Termination Fee; and (v) the date
on which the Reorganization Agreement is terminated if neither a Triggering
Event nor the announcement of an Acquisition Proposal by a third party occurred
on or prior to the date of such termination; provided, however, that if the
Option cannot be exercised by reason of any applicable governmental order or
because the waiting period under the HSR Act related to the issuance of the
Option Shares shall not have expired or been terminated, then the Option shall
not terminate until the tenth (10(th)) business day after such impediment to
exercise has been removed or has become final and not subject to appeal.
5. Representations, Warranties and Covenants of the Company. The Company
hereby represents, warrants and covenants to Parent as follows:
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has the corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder.
(b) The execution and delivery of this Agreement by the Company, and the
performance by the Company of its obligations hereunder, have been duly
authorized by all necessary corporate action on the part of the Company, and no
other corporate proceedings on the part of the Company are necessary to
authorize this Agreement or any of the transactions contemplated hereby.
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(c) This Agreement has been duly executed and delivered by the Company
and constitutes a legal, valid and binding obligation of the Company and,
assuming this Agreement constitutes a legal, valid and binding obligation of
Parent, is enforceable against the Company in accordance with its terms, except
as such legality, validity, binding effect and enforceability may be limited by
bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent
transfer and other similar laws affecting the rights of creditors generally,
general principles of equity (whether enforcement is sought in a proceeding in
equity or at law).
(d) Except for any filings required under the HSR Act and applicable
foreign laws, the Company has taken all necessary corporate and other action to
authorize and reserve for issuance, and to permit the Company to issue upon
exercise of the Option, and at all times from the date hereof until the
termination of the Option will have reserved for issuance, a sufficient number
of unissued Company Shares to enable Parent to exercise the Option in full, and
shall take all necessary corporate or other action to authorize and reserve for
issuance all additional Company Shares or other securities which may be issuable
pursuant to Section 9(a) hereof upon exercise of the Option, all of which, upon
their issuance and delivery in accordance with the terms of this Agreement, will
be duly authorized and validly issued, fully paid and nonassessable.
(e) Upon delivery of the Company Shares and any other securities to
Parent upon exercise of the Option, Parent will acquire such Company Shares or
other securities free and clear of all claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever, excluding those imposed by
or in respect of Parent.
(f) The execution and delivery of this Agreement by the Company do not,
and the performance by the Company of its obligations hereunder will not, (i)
conflict with or violate the Certificate of Incorporation or Bylaws or
equivalent organizational documents of the Company or any of its subsidiaries,
(ii) conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its subsidiaries or by which its or
any of their respective properties is bound or affected, or (iii) result in any
breach of, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or impair the Company's or any of
its subsidiaries' rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of the Company or any of its subsidiaries pursuant to,
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or its or any of their respective properties are bound or
affected.
(g) The execution and delivery of this Agreement by the Company does
not, and the performance by the Company of its obligations hereunder will not,
require any consent, approval, authorization or permit of, or filing with, or
notification to, any Governmental Entity except pursuant to the HSR Act and any
applicable foreign antitrust laws.
6. Parent "Put" Rights.
(a) Right to "Put" Option Shares. At the request of and upon notice by
Parent to the Company (the "Put Notice"), at any time prior to the termination
of the Option pursuant to Section 4 hereof (the "Purchase Period"), the Company
(or any successor entity thereof) shall purchase the Option from Parent, to the
extent not previously exercised, at the purchase price set forth in Section
6(a)(i) hereof (subject to and as limited by Section 6(a)(iii) hereof), and the
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Option Shares, if any, previously acquired by Parent pursuant to the exercise of
the Option, at the price set forth in Section 6(a)(ii) hereof (subject to and as
limited by Section 6(a)(iii) hereof):
(i) The product obtained by multiplying (x) the difference between
(A) the Market/ Tender Offer Price (as defined below) for the Company Shares as
of the date Parent delivers a Put Notice, and (B) the Exercise Price, by (y) the
aggregate number of Company Shares that may then be purchased pursuant to the
exercise of the Option, but only if the Market/Tender Offer Price is greater
than the Exercise Price. For all purposes of and under this Agreement, the term
"Market/ Tender Offer Price" shall mean the higher of (A) the highest price per
share offered as of such date pursuant to any Acquisition Proposal which was
made prior to such date, and (B) the highest closing sale price of Company
Shares then on the Nasdaq National Market during the twenty (20) consecutive
trading days ending on the trading day immediately preceding such date. For
purposes of determining the highest price offered pursuant to any Acquisition
Proposal which involves consideration other than cash, the value of such
consideration shall be equal to the higher of (A) if securities of the same
class of the proponent of such consideration are traded on any national
securities exchange or by any registered securities association, a value based
on the final closing sale price during regular trading hours or the median
between the final bid and asked prices at the close of regular trading hours for
such securities on their principal trading market on such date, and (B) the
value ascribed to such consideration by the proponent of such Acquisition
Proposal, or if no such value is ascribed, a value determined in good faith by
the Board of Directors of the Company.
(ii) The product obtained by multiplying (x) the sum of (A) the
Exercise Price paid by Parent for Company Shares previously acquired pursuant to
the exercise of the Option, and (B) the difference between (1) the Market/Tender
Offer Price, and (2) such Exercise Price (but only if the Market/Tender Offer
Price is greater than the Exercise Price), by (y) the number of Company Shares
so purchased.
(iii) Notwithstanding anything to the contrary set forth in this
Section 6(a), the Company shall not be required to pay Parent, pursuant to the
exercise by Parent of its rights under this Section 6, any amounts in excess of
(x) $79,000,000, plus (y) the Exercise Price paid by Parent for Company Shares
previously acquired pursuant to the exercise of the Option, minus (z) any
amounts paid to Parent by the Company pursuant to Section 7.3(b) of the
Reorganization Agreement.
(b) Payment and Redelivery of Option or Option Shares. In the event that
Parent exercises its rights under Section 6(a) hereof, the Company shall, within
five (5) business days after Parent delivers a Put Notice to the Company
pursuant to Section 6(a) hereof, pay to Parent the required amount in cash by
wire transfer of immediately available funds to an account designated by Parent
in writing, and Parent shall surrender to the Company the Option and the
certificates evidencing the Company Shares previously purchased by Parent
pursuant to the exercise of the Option.
7. Registration Rights of Parent.
(a) Following the termination of the Reorganization Agreement, Parent
may by written notice to the Company (a "Registration Notice") request the
Company to register under the Securities Act all or any part of the shares
acquired by Parent pursuant to this Agreement (such shares requested to be
registered being referred to in this Section 7 as "Registrable Securities") in
order to permit the sale or other disposition of any or all shares of the
Registrable Securities that have been acquired by or are issuable to Parent upon
exercise of the Option in accordance with the intended method of sale or other
disposition stated by Parent, including a "shelf" registration statement under
Rule 415 under the Securities Act (or any successor provision thereto). Parent
shall cause, and shall cause any underwriters of any sale or other disposition
to cause, any sale or other
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disposition pursuant to such registration statement to be effected on a widely
distributed basis so that, upon consummation thereof, no purchaser or transferee
will own beneficially more than five percent (5%) of the then-outstanding voting
power of the Company. Upon a request by Parent for registration of Registrable
Securities pursuant to the delivery to the Company of a Registration Notice, the
Company shall have the option, exercisable by written notice to Parent within
ten (10) business days after the receipt of such Registration Notice, to
irrevocably agree to purchase all or any part of the Registrable Securities for
cash at a purchase price (the "Option Price") equal to the product obtained by
multiplying (x) the number of Registrable Securities so purchased, by (y) the
per share average of the closing sale prices of the Company's Common Stock on
the Nasdaq National Market for the ten (10) consecutive trading days immediately
preceding the date of the Registration Notice. Any such purchase of Registrable
Securities by the Company hereunder shall take place at a closing to be held at
the principle executive offices of the Company or its counsel at any reasonable
date and time designated by the Company in such notice within ten (10) business
days after delivery of such notice. The payment of the Option Price for the
shares to be so purchased shall be made at the time of such closing by wire
transfer in immediately available funds to an account designated by Parent in
writing.
(b) If the Company shall not elect to exercise its option to purchase
Registrable Securities pursuant to Section 7(a) hereof with respect to all
Registrable Securities, the Company shall use commercially reasonable efforts to
effect, as promptly as practicable, the registration under the Securities Act of
the unpurchased Registrable Securities requested to be registered in the
Registration Notice and to keep such registration statement effective for such
period (not in excess of one hundred and twenty (120) calendar days from the day
such registration statement first becomes effective) as may be reasonably
necessary to effect such sale or other disposition; provided, however, that
Parent shall not be entitled to more than an aggregate of three (3) effective
registration statements hereunder. The obligations of the Company to file a
registration statement and to maintain its effectiveness pursuant hereto may be
suspended for up to one hundred and twenty (120) calendar days in the aggregate
if the Board of Directors of the Company shall have determined that the filing
of such registration statement or the maintenance of its effectiveness would
require premature disclosure of material nonpublic information that would
materially and adversely affect the Company or otherwise interfere with or
adversely affect any pending or proposed offering of securities of the Company
or any other material transaction involving the Company. If consummation of the
sale of any Registrable Securities pursuant to a registration hereunder shall
not occur within one hundred and twenty (120) calendar days after the filing
with the SEC of the initial registration statement therefor, the provisions of
this Section 7 shall again be applicable to any proposed registration. The
Company shall use commercially reasonable efforts to cause any Registrable
Securities registered pursuant to this Section 7 to be qualified for sale under
the securities or "blue sky" laws of such jurisdictions as Parent may reasonably
request and to continue such registration or qualification in effect in such
jurisdictions; provided, however, that the Company shall not be required to
qualify to do business in, or to consent to general service of process in, any
jurisdiction by reason of this provision. If the Company shall effect a
registration under the Securities Act of Company Common Stock for its own
account or for any other stockholders of the Company (other than on Form S-4 or
Form S-8, or any successor form thereto), the Company shall allow Parent the
right to participate in such registration by selling its Registrable Securities,
and such participation will not affect the obligation of the Company to effect
the registration of Registrable Securities for Parent pursuant to this Section
7; provided however, that, if the managing underwriters of such offering advise
the Company in writing that in their opinion the number of shares of Company
Common Stock requested to be included in such registration exceeds the number
which can be sold in such offering, the Company shall include the shares
requested to be included therein by Parent pro rata with the shares intended to
be included therein by the Company.
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(c) In connection with the registration of any Registrable Securities
pursuant to this Section 7, Parent shall provide the Company with such
information with respect to Parent's Registrable Securities, the plan for
distribution thereof, and such other information with respect to Parent as, in
the reasonable judgment of counsel for the Company, is necessary to enable the
Company to include in a registration statement all facts regarding Parent and
its Registrable Securities required to be disclosed with respect to a
registration of Registrable Securities thereunder.
(d) The Company shall pay all fees and expenses incurred in connection
with the registration of Registrable Securities pursuant to this Section 7,
except for underwriting discounts and commissions and the fees and expenses of
counsel to Parent, and the Company shall provide to the underwriters all such
documentation (including certificates, opinions of counsel and "comfort" letters
from auditors) as is customary in connection with underwritten public offerings
and as such underwriters may reasonably require. In connection with any
registration of Registrable Securities pursuant to this Section 7, Parent and
the Company agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type, with the underwriters participating in such offering.
(e) Indemnification.
(i) The Company shall indemnify Parent, each of its directors and
officers and each person who controls Parent within the meaning of Section 15 of
the Securities Act, and each underwriter of the Company's securities, with
respect to any registration, qualification or compliance which has been effected
pursuant to this Agreement, against all expenses, claims, losses, damages or
liabilities (or actions in respect thereof), including any of the foregoing
incurred in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company in
connection with any such registration, qualification or compliance, and the
Company shall reimburse Parent, and each of its directors and officers and each
person who controls Parent within the meaning of Section 15 of the Securities
Act, and each underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action; provided, however, that the Company
shall not be liable in any such case under this Section 7(e)(i) to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission, or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Company by Parent, or director, officer or controlling person
of Parent, or any underwriter seeking indemnification from the Company pursuant
to this Section 7(e)(i).
(ii) Parent shall indemnify the Company, each of its directors and
officers and each underwriter of the Company's securities covered by such
registration statement and each person who controls the Company within the
meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or any
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violation by Parent of any rule or regulation promulgated under the Securities
Act applicable to Parent in connection with any such registration, qualification
or compliance, and Parent shall reimburse the Company, and each of the Company's
directors, officers, control persons and underwriters for any legal or any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by Parent for
use therein; provided, however, that in no event will any liability for
indemnification under this Section 7(e)(ii) exceed the net proceeds of the
registered offering received by Parent.
(iii) Each party entitled to indemnification under this Section 7(e)
(the "Indemnified Party") shall give written notice to the party required to
provide indemnification under this Section 7(e) (the "Indemnifying Party")
promptly after such Indemnified Party has obtained actual knowledge of any claim
as to which indemnity may be sought under this Section 7(e), and shall permit
the Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom; provided, however, that counsel for the Indemnifying Party,
who shall conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not unreasonably be withheld or
delayed), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnifying Party shall pay such
expense if representation of the Indemnified Party by counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding; and provided further, however, that the failure of
any Indemnified Party to give prompt notice as provided herein shall not relieve
the Indemnifying Party of its obligations under this Section 7(e) unless the
failure to give such notice is materially prejudicial to an Indemnifying Party's
ability to defend such action. No Indemnifying Party, in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant(s) or
plaintiff(s) to such Indemnified Party of a release from all liability in
respect to such claim or litigation. No Indemnifying Party shall be required to
indemnify any Indemnified Party with respect to any settlement entered into
without such Indemnifying Party's prior consent (which will not be unreasonably
withheld or delayed).
8. Profit Limitation.
(a) Notwithstanding any other provision in this Agreement or the
Reorganization Agreement, in no event shall Parent's Total Profit (as defined
below) exceed $79,000,000 (the "Maximum Profit") and, if Parent's Total Profit
otherwise would exceed the Maximum Profit, Parent, at its sole discretion, shall
either (i) reduce the number of Option Shares subject to the Option, (ii)
deliver to the Company for cancellation Option Shares (or other securities into
which such Option Shares are converted or exchanged) previously purchased by
Parent, (iii) pay cash to the Company or (iv) any combination of the foregoing,
so that Parent's actually realized Total Profit shall not exceed the Maximum
Profit after taking into account the foregoing actions; provided, however, that
to the extent the payment by the Company of cash to Parent in satisfaction of
the Termination Fee pursuant to Section 7.3 of the Reorganization Agreement
would cause Parent's Total Profit to exceed the Maximum Profit, then the Company
need not pay such cash portion of the Termination Fee.
(b) For purposes of this Agreement, "Total Profit" shall mean: (i) the
aggregate amount (before taxes) of (A) any excess of (x) the net cash amounts or
fair market value of any property received by Parent pursuant to a sale of
Option Shares over (y) the Parent's aggregate purchase price
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for such Option Shares (or other securities), plus (B) any amounts received by
Parent pursuant on the repurchase of the Option by the Company pursuant to
Section 6, plus (C) any termination fee paid in cash by the Company and received
by Parent pursuant to the Reorganization Agreement, minus (ii) the amounts of
any cash previously paid by Parent to the Company pursuant to this Section 8
plus the value of the Option Shares previously delivered by Parent to the
Company for cancellation pursuant to this Section 8.
(c) For purposes of Section 8(a) and clause (ii) of Section 8(b), the
value of any Option Shares delivered by Parent to the Company shall be the
Market/Tender Offer Price of such Option Shares.
9. Adjustment Upon Changes in Capitalization; Stockholder Rights Plans.
(a) In the event of any change in the Company Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the Merger),
recapitalizations, combinations, exchanges of shares and the like, the type and
number of shares or securities subject to the Option and the Exercise Price
shall be adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction, so that Parent will receive, upon
exercise of the Option, the number and class of shares or other securities or
property that Parent would have received in respect of the Company Shares if the
Option had been exercised immediately prior to such event or the record date
therefor, as applicable.
(b) At any time prior to the termination of the Option pursuant to
Section 4 hereof, and at any time after the Option is exercised (in whole or in
part, if at all), the Company shall not adopt (nor permit the adoption of) a
stockholders rights plan that contains provisions for the distribution or
exercise of rights thereunder as a result of Parent or any affiliate or
transferee thereof becoming the beneficial owner of shares of the Company by
virtue of the Option being exercisable or having been exercised (or as a result
of beneficially owning shares issuable in respect of any Option Shares).
10. Restrictive Legends. Each certificate representing Option Shares issued
to Parent hereunder shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF SEPTEMBER
18, 2000, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
It is understood and agreed that (i) the reference to restrictions arising
under the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have been
registered pursuant to the Securities Act, such Option Shares have been sold in
reliance on and in accordance with Rule 144 under the Securities Act or Parent
has delivered to Company a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to the Company
and its counsel, to the effect that such legend is not required for purposes of
the Securities Act, and (ii) the reference to restrictions pursuant to this
Agreement in the above legend will be removed by delivery of substitute
certificate(s) without such reference if the Option Shares evidenced by
certificate(s) containing such reference have been sold or transferred in
compliance with the terms and provisions of this Agreement under circumstances
that do not require the retention of such reference.
11. Listing and HSR Filing. The Company, upon the request of Parent, shall
promptly file an application to list the Company Shares to be acquired upon
exercise of the Option for quotation on
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the Nasdaq National Market and shall use its commercially reasonable best
efforts to obtain approval of such listing as soon as practicable. Promptly
after the date hereof, each of the parties hereto shall promptly file with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice all required premerger notification and report forms and
other documents and exhibits required to be filed under the HSR Act to permit
the acquisition of the Company Shares subject to the Option at the earliest
possible date.
12. Miscellaneous.
(a) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns. Nothing contained in this Agreement, express or implied, is intended to
confer upon any person other than the parties hereto and their respective
successors and permitted assigns any rights or remedies of any nature whatsoever
by reason of this Agreement. Any Company Shares sold in compliance with the
provisions of Section 7 hereof shall, upon consummation of such sale, be free of
the restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of a party hereto.
Certificates representing shares sold in a registered public offering pursuant
to Section 7 hereof shall not be required to bear the legend set forth in
Section 10 hereof.
(b) Specific Performance. The parties hereto recognize and agree that if
for any reason any of the terms and provisions of this Agreement are not
performed in accordance with their specific terms or are otherwise breached,
immediate and irreparable harm or injury would be caused for which money damages
would not be an adequate remedy. Accordingly, each party hereto agrees that, in
addition to other remedies, the other party hereto shall be entitled to an
injunction restraining any violation or threatened violation of the terms and
provisions of this Agreement or the right to enforce any of the covenants or
agreements set forth herein by specific performance. In the event that any
action will be brought in equity to enforce the terms and provisions of the
Agreement, neither party hereto will allege, and each party hereto hereby waives
the defense, that there is an adequate remedy at law.
(c) Entire Agreement. This Agreement and the Reorganization Agreement
set forth the entire agreement and understanding of the Company and Parent with
respect to the subject matter hereof, and supersede all other prior discussions,
agreements and understandings between the Company and Parent, both written and
oral, with respect to the subject matter hereof and thereof.
(d) Further Assurances. Each party hereto will execute and deliver all
such further documents and instruments and take all such further action as may
be necessary in order to consummate the transactions contemplated hereby.
(e) Validity. The invalidity or unenforceability of any provision of
this Agreement will not affect the validity or enforceability of the other
provisions of this Agreement, which will remain in full force and effect. In the
event any Governmental Entity of competent jurisdiction holds any provision of
this Agreement to be null, void or unenforceable, the parties hereto will
negotiate in good faith and will execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
(f) Notices. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt
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confirmed) to the parties at the following addresses or telecopy numbers (or at
such other address or telecopy numbers for a party as will be specified by like
notice):
If to Parent, to:
SunMicrosystems, Inc.
901 San Antonio Road
Palo Alto, CA 94303
Attention: General Counsel
Telephone No.: (650) 960-1300
Telecopy No.: (650) 336-0530
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Katharine A. Martin, Esq.
Telephone: (650) 493-9300
Telecopy: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
One Market, Spear Street Tower
Suite 3300
San Francisco, California 94105
Attention: Michael S. Dorf, Esq.
Telephone: (415) 947-2000
Telecopy: (415) 947-2099
If to the Company, to:
Cobalt Networks, Inc.
555 Ellis Street
Mountain View, CA 94043
Attention: President
Telephone No.: (650) 623-2500
Telecopy No.: (650) 623-2546
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, California 94303
Attention: Rod J. Howard, Esq.
John Montgomery, Esq.
Telephone No.: (650) 424-0160
Telecopy No.: (650) 496-2885
(g) Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within
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such State.(h) Expenses. Except as otherwise expressly provided herein or in the
Reorganization Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement will be paid by the party incurring
such expenses.
(h) Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
(i) Assignment. Neither of the parties hereto may sell, transfer, assign or
otherwise dispose of any of its rights or obligations under this Agreement or
the Option created hereunder to any other person, without the express written
consent of the other party, except that the rights and obligations hereunder
will inure to the benefit of and be binding upon any successor of a party
hereto.
(j) Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their respective thereunto duly authorized officers as of the date
first written above.
SUN MICROSYSTEMS, INC.
By:
------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
COBALT NETWORKS, INC.
By:
------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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ANNEX C
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of
September 18, 2000 by and between Sun Microsystems, Inc., a Delaware corporation
("Parent"), and the undersigned stockholder and/or option holder (the
"Stockholder") of Cobalt Networks, Inc., a Delaware corporation (the "Company").
RECITALS:
A. Parent, the Company and Merger Sub (as defined below) have entered into
an Agreement and Plan of Merger and Reorganization (the "Reorganization
Agreement"), which provides for the merger (the "Merger") of a wholly-owned
subsidiary of Parent ("Merger Sub") with and into the Company, pursuant to which
all outstanding capital stock of the Company will be converted into the right to
receive common stock of Parent, as set forth in the Reorganization Agreement.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such
number of shares of the outstanding capital stock of the Company, and such
number of shares of capital stock of the Company issuable upon the exercise of
outstanding options and warrants, as is indicated on the signature page of this
Agreement.
C. In consideration of the execution of the Reorganization Agreement by
Parent, the Stockholder (in his or her capacity as such) has agreed to vote the
Shares (as defined below) and such other shares of capital stock of the Company
over which the Stockholder has voting power, so as to facilitate consummation of
the Merger.
NOW, THEREFORE, intending to be legally bound hereby, the parties hereto
hereby agree as follows:
1. Certain Definitions. Capitalized terms used but not defined herein shall
have the respective meanings ascribed thereto in the Reorganization Agreement.
For all purposes of and under this Agreement, the following terms shall have the
following respective meanings:
(a) "Expiration Date" shall mean the earlier to occur of (i) such date
and time as the Reorganization Agreement shall have been validly terminated
pursuant to its terms, or (ii) such date and time as the Merger shall become
effective in accordance with the terms and conditions set forth in the
Reorganization Agreement.
(b) "Person" shall mean any individual, any corporation, limited
liability company, general or limited partnership, business trust,
unincorporated association or other business organization or entity, or any
governmental authority.
(c) "Shares" shall mean: (i) all securities of the Company (including
all shares of Company Common Stock and all options, warrants and other rights to
acquire shares of Company Common Stock) owned by the Stockholder as of the date
of this Agreement, and (ii) all additional securities of the Company (including
all additional shares of Company Common Stock and all additional options,
warrants and other rights to acquire shares of Company Common Stock) of which
the Stockholder acquires beneficial ownership during the period commencing with
the execution and delivery of this Agreement until the Expiration Date.
(d) Transfer. A Person shall be deemed to have effected a "Transfer" of
a security if such person directly or indirectly (i) sells, pledges, encumbers,
grants an option with respect to, transfers or otherwise disposes of such
security or any interest therein, or (ii) enters into an agreement or
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commitment providing for the sale of, pledge of, encumbrance of, grant of an
option with respect to, transfer of or disposition of such security or any
interest therein.
2. Transfer of Shares.
(a) Transferee of Shares to be Bound by this Agreement. The Stockholder
hereby agrees that, at all times during the period commencing with the execution
and delivery of this Agreement until the Expiration Date, the Stockholder shall
not cause or permit any Transfer of any of the Shares to be effected, or
discuss, negotiate or make any offer regarding any Transfer of any of the
Shares, unless each Person to which any such Shares, or any interest therein, is
or may be Transferred shall have (i) executed a counterpart of this Agreement
and a proxy in the form attached hereto as Exhibit A (with such modifications as
Parent may reasonably request), and (ii) agreed in writing to hold such Shares,
or such interest therein, subject to all of the terms and conditions set forth
in this Agreement.
(b) Transfer of Voting Rights. The Stockholder hereby agrees that, at
all times commencing with the execution and delivery of this Agreement until the
Expiration Date, the Stockholder shall not deposit, or permit the deposit of,
any Shares in a voting trust, grant any proxy in respect of the Shares, or enter
into any voting agreement or similar arrangement or commitment in contravention
of the obligations of the Stockholder under this Agreement with respect to any
of the Shares.
3. Agreement to Vote Shares. Until the Expiration Date, at every meeting of
stockholders of the Company called with respect to any of the following, and at
every adjournment or postponement thereof, and on every action or approval by
written consent of stockholders of the Company with respect to any of the
following, the Stockholder shall vote, to the extent not voted by the person(s)
appointed under the Proxy (as defined in Section 4 hereof), the Shares:
(a) in favor of approval of the Merger and the adoption and approval of
the Reorganization Agreement, and in favor of each of the other actions
contemplated by the Reorganization Agreement and the Proxy and any action
required in furtherance thereof;
(b) against approval of any proposal made in opposition to, or in
competition with, consummation of the Merger and the transactions contemplated
by the Reorganization Agreement;
(c) against any of the following actions (other than those actions that
relate to the Merger and the transactions contemplated by the Reorganization
Agreement): (A) any merger, consolidation, business combination, sale of assets,
reorganization or recapitalization of the Company or any subsidiary of the
Company with any party, (B) any sale, lease or transfer of any significant part
of the assets of the Company or any subsidiary of the Company, (C) any
reorganization, recapitalization, dissolution, liquidation or winding up of the
Company or any subsidiary of the Company, (D) any material change in the
capitalization of the Company or any subsidiary of the Company, or the corporate
structure of the Company or any subsidiary of the Company, or (E) any other
action that is intended, or could reasonably be expected to, impede, interfere
with, delay, postpone, discourage or adversely affect the Merger or any of the
other transactions contemplated by the Reorganization Agreement; and
(d) in favor of waiving any notice that may have been or may be required
relating to any reorganization of the Company or any subsidiary of the Company,
any reclassification or recapitalization of the capital stock of the Company or
any subsidiary of the Company, or any sale of assets, change of control, or
acquisition of the Company or any subsidiary of the Company by any other person,
or any consolidation or merger of the Company or any subsidiary of the Company
with or into any other person.
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Prior to the Expiration Date, the Stockholder shall not enter into any agreement
or understanding with any person to vote or give instructions in any manner
inconsistent with the terms of this Section 3.
4. Irrevocable Proxy. Concurrently with the execution of this Agreement,
the Stockholder agrees to deliver to Parent a proxy in the form attached hereto
as Exhibit A (the "Proxy"), which shall be irrevocable to the fullest extent
permissible by applicable law, with respect to the Shares.
5. Representations and Warranties of the Stockholder. The Stockholder
hereby represents and warrants to Parent that, as of the date hereof and at all
times until the Expiration Date, the Stockholder (i) is (and will be, unless
Transferred pursuant to Section 2(a) hereof) the beneficial owner of the shares
of Company Common Stock, and the options, warrants and other rights to purchase
shares of Company Common Stock, set forth on signature page of this Agreement,
with full power to vote or direct the voting of the Shares for and on behalf of
all beneficial owners of the Shares; (ii) the Shares are (and will be, unless
Transferred pursuant to Section 2(a) hereof) free and clear of any liens,
pledges, security interests, claims, options, rights of first refusal, co-sale
rights, charges or other encumbrances of any kind or nature; (iii) does not
beneficially own any securities of the Company other than the shares of Company
Common Stock, and options, warrants and other rights to purchase shares of
Company Common Stock, set forth on the signature page of this Agreement; and
(iv) has (and will have, unless Transferred pursuant to Section 2(a) hereof)
full power and authority to make, enter into and carry out the terms of this
Agreement and the Proxy.
6. Legending of Shares. If so requested by Parent, the Stockholder hereby
agrees that the Shares shall bear a legend stating that they are subject to this
Agreement and to an irrevocable proxy. Subject to the terms of Section 2 hereof,
the Stockholder hereby agrees that the Stockholder shall not Transfer the Shares
without first having the aforementioned legend affixed to the certificates
representing the Shares.
7. Termination. This Agreement shall terminate and be of no further force
or effect as of the Expiration Date.
8. Miscellaneous.
(a) Waiver. No waiver by any party hereto of any condition or any breach
of any term or provision set forth in this Agreement shall be effective unless
in writing and signed by each party hereto. The waiver of a condition or any
breach of any term or provision of this Agreement shall not operate as or be
construed to be a waiver of any other previous or subsequent breach of any term
or provision of this Agreement.
(b) Severability. In the event that any term, provision, covenant or
restriction set forth in this Agreement, or the application of any such term,
provision, covenant or restriction to any person, entity or set of
circumstances, shall be determined by a court of competent jurisdiction to be
invalid, unlawful, void or unenforceable to any extent, the remainder of the
terms, provisions, covenants and restrictions set forth in this Agreement, and
the application of such terms, provisions, covenants and restrictions to
persons, entities or circumstances other than those as to which it is determined
to be invalid, unlawful, void or unenforceable, shall remain in full force and
effect, shall not be impaired, invalidated or otherwise affected and shall
continue to be valid and enforceable to the fullest extent permitted by
applicable law.
(c) Binding Effect; Assignment. This Agreement and all of the terms and
provisions hereof shall be binding upon, and inure to the benefit of, the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor any
of the rights, interests or obligations of the Stockholder may be assigned to
any other Person without the prior written consent of Parent.
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<PAGE> 200
(d) Amendments. This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written agreement
executed by each of the parties hereto.
(e) Specific Performance; Injunctive Relief. Each of the parties hereto
hereby acknowledge that (i) the representations, warranties, covenants and
restrictions set forth in this Agreement are necessary, fundamental and required
for the protection of Parent and to preserve for Parent the benefits of the
Merger; (ii) such covenants relate to matters which are of a special, unique,
and extraordinary character that gives each such representation, warranty,
covenant and restriction a special, unique, and extraordinary value; and (iii) a
breach of any such representation, warranty, covenant or restriction, or any
other term or provision of this Agreement, will result in irreparable harm and
damages to Parent which cannot be adequately compensated by a monetary award.
Accordingly, Parent and the Stockholder hereby expressly agree that in addition
to all other remedies available at law or in equity, Parent shall be entitled to
the immediate remedy of specific performance, a temporary and/or permanent
restraining order, preliminary injunction, or such other form of injunctive or
equitable relief as may be used by any court of competent jurisdiction to
restrain or enjoin any of the parties hereto from breaching any representations,
warranties, covenants or restrictions set forth in this Agreement, or to
specifically enforce the terms and provisions hereof.
(f) Governing Law. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the internal laws of the State of
Delaware without giving effect to any choice or conflict of law provision, rule
or principle (whether of the State of Delaware or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of Delaware.
(g) Entire Agreement. This Agreement and the Proxy and the other
agreements referred to in this Agreement set forth the entire agreement and
understanding of Parent and the Stockholder with respect to the subject matter
hereof and thereof, and supersede all prior discussions, agreements and
understandings between Parent and the Stockholder, both oral and written, with
respect to the subject matter hereof and thereof.
(h) Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
respective parties at the following address (or at such other address for a
party as shall be specified by like notice):
If to Parent:
Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, CA 94303
Attention: General Counsel
Telephone No.: (650) 960-1300
Telecopy No.: (650) 336-0530
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with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Larry W. Sonsini, Esq.
Katharine A. Martin, Esq.
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
One Market, Spear Street Tower
Suite 3300
San Francisco, California 94105
Attention: Michael S. Dorf, Esq.
Telephone: (415) 947-2000
Telecopy: (415) 947-2099
If to the Stockholder:
To the address for notice set forth on the signature page hereof.
with a copy to:
Cobalt Networks, Inc.
555 Ellis Street
Mountain View, CA 94043
Attention: President
Telephone No.: (650) 623-2500
Telecopy No.: (650) 623-2546
and to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
220 Geng Road
Palo Alto, California 94303
Attention: Rod Howard, Esq.
John Montgomery, Esq.
Telephone: (650) 424-0160
Telecopy: (650) 947-2099
(i) Further Assurances. The Stockholder (in his or her capacity as such)
shall execute and deliver any additional certificate, instruments and other
documents, and take any additional actions, as Parent may deem necessary or
desirable, in the reasonable opinion of Parent, to carry out and effectuate the
purpose and intent of this Agreement.
(j) Headings. The section headings set forth in this Agreement are for
convenience of reference only and shall not affect the construction or
interpretation of this Agreement in any manner.
(k) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed as of the date first written above.
<TABLE>
<S> <C>
SUN MICROSYSTEMS, INC. STOCKHOLDER:
By: ------------------------------------------------- By:
Signature of Authorized Signatory ----------------------------------------------
Signature
Name: ---------------------------------------------- Name:
----------------------------------------------
Title: Title:
----------------------------------------------- ----------------------------------------------
----------------------------------------------
----------------------------------------------
Print Address
----------------------------------------------
Telephone
----------------------------------------------
Facsimile No.
Share beneficially owned:
------------ shares of Company Common Stock
------------ shares of Company Common Stock
issuable upon the exercise of outstanding
options, warrants or other rights
</TABLE>
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<PAGE> 203
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of Cobalt Networks, Inc., a Delaware
corporation (the "Company"), hereby irrevocably (to the fullest extent permitted
by law) appoints the directors on the Board of Directors of Sun Microsystems,
Inc., a Delaware corporation ("Parent"), and each of them, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Company issued or issuable in respect thereof on or
after the date hereof (collectively, the "Shares") in accordance with the terms
of this Proxy. The Shares beneficially owned by the undersigned stockholder of
the Company as of the date of this Proxy are listed on the final page of this
Proxy. Upon the execution of this Proxy by the undersigned, any and all prior
proxies given by the undersigned with respect to any Shares are hereby revoked
and the undersigned hereby agrees not to grant any subsequent proxies with
respect to the Shares until after the Expiration Date (as defined below).
This Proxy is irrevocable (to the fullest extent permitted by law), is
coupled with an interest and is granted pursuant to that certain Voting
Agreement of even date herewith by and between Parent and the undersigned
stockholder (the "Voting Agreement"), and is granted in consideration of Parent
entering into that certain Agreement and Plan of Merger and Reorganization (the
"Reorganization Agreement"), by and among Parent, Blue Acquisition Corporation,
a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger Sub"),
and the Company, which provides for the merger of Merger Sub with and into the
Company in accordance with its terms (the "Merger"). As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time as
the Reorganization Agreement shall have been validly terminated pursuant to its
terms, or (ii) such date and time as the Merger shall become effective in
accordance with the terms and conditions set forth in the Reorganization
Agreement.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents) at every annual, special, adjourned or postponed meeting of
stockholders of the Company and in every written consent in lieu of such
meeting:
(i) in favor of approval of the Merger and the adoption and approval of
the Reorganization Agreement, and in favor of each of the other actions
contemplated by the Reorganization Agreement and any action required in
furtherance thereof;
(ii) against approval of any proposal made in opposition to, or in
competition with, consummation of the Merger and the transactions contemplated
by the Reorganization Agreement;
(iii) against any of the following actions (other than those actions
that relate to the Merger and the transactions contemplated by the
Reorganization Agreement): (A) any merger, consolidation, business combination,
sale of assets, reorganization or recapitalization of the Company or any
subsidiary of the Company with any party, (B) any sale, lease or transfer of any
significant part of the assets of the Company or any subsidiary of the Company,
(C) any reorganization, recapitalization, dissolution, liquidation or winding up
of the Company or any subsidiary of the Company, (D) any material change in the
capitalization of the Company or any subsidiary of the Company, or the corporate
structure of the Company or any subsidiary of the Company, or (E) any other
action that is intended, or could reasonably be expected to, impede, interfere
with, delay,
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postpone, discourage or adversely affect the Merger or any of the other
transactions contemplated by the Reorganization Agreement; and
(iv) in favor of waiving any notice that may have been or may be
required relating to any reorganization of the Company or any subsidiary of the
Company, any reclassification or recapitalization of the capital stock of the
Company or any subsidiary of the Company, or any sale of assets, change of
control, or acquisition of the Company or any subsidiary of the Company by any
other person, or any consolidation or merger of the Company or any subsidiary of
the Company with or into any other person.
The attorneys and proxies named above may not exercise this Proxy on any
other matter except as provided above. The undersigned stockholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This Proxy is irrevocable (to the fullest extent permitted by law). This
Proxy shall terminate, and be of no further force and effect, automatically upon
the Expiration Date.
Dated: September , 2000
Signature of
Stockholder: ---------------
Print Name of
Stockholder: ---------------
Shares beneficially owned:
---------- shares of the Company
Common Stock
---------- shares of the Company
Common Stock issuable upon
exercise of outstanding
options, or warrants or
other rights
C-8
<PAGE> 205
ANNEX D
GOLDMAN, SACHS & CO.
PERSONAL AND CONFIDENTIAL
September 18, 2000
Board of Directors
Cobalt Networks, Inc.
555 Ellis Street
Mountain View, CA 94043
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.001
per share (the "Shares"), of Cobalt Networks, Inc. (the "Company") of the
exchange ratio of 0.50 shares of Common Stock, par value $0.00067 per share (the
"Sun Shares"), of Sun Microsystems, Inc. ("Sun") to be received for each Share
(the "Exchange Ratio") pursuant to the Agreement and Plan of Merger, dated as of
September 18, 2000, by and among Sun, Azure Acquisition Corporation, a wholly
owned subsidiary of Sun, and the Company (the "Agreement").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having provided certain investment banking services to
the Company from time to time, including having acted as managing underwriter of
its initial public offering of 5,750,000 Shares in November 1999 and having
acted as its financial advisor in connection with, and having participated in
certain of the negotiations leading to, the Agreement. We have also provided
certain investment banking services to Sun from time to time, including having
acted as managing underwriter of a public offering of $1.5 billion in principal
amount of senior notes of Sun in July 1999, and may provide investment banking
services to Sun in the future. Goldman, Sachs & Co. provides a full range of
financial advisory and securities services and, in the course of its normal
trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of the Company or Sun for its own
account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-1, including the prospectus
contained therein dated November 4, 1999, relating to the Company's initial
public offering of 5,750,000 Shares; the Annual Report to Stockholders and the
Annual Report on Form 10-K of the Company for the year ended December 31, 1999;
Annual Reports to Stockholders and Annual Reports on Form 10-K of Sun for the
five fiscal years ended June 30, 1999; certain interim reports to stockholders
and Quarterly Reports on Form 10-Q of the Company and Sun; certain other
communications from the Company and Sun to their respective stockholders; and
certain internal financial analyses and forecasts for the Company prepared by
its management. We also have held discussions with members of the senior
management of the Company and Sun regarding their assessment of the strategic
rationale for, and the potential benefits of, the transaction contemplated by
the Agreement and the past and current business operations, financial condition
and future prospects of their respective companies. In addition, we have
reviewed the reported price and trading activity for the Shares and the Sun
Shares, which like many Internet-related stocks have been and are likely to
continue to be subject to significant short-term price and trading volatility,
compared certain financial and stock market information for the Company and Sun
with similar information for certain other companies the
D-1
<PAGE> 206
The Board of Directors
Cobalt Networks, Inc.
Page 2
securities of which are publicly traded, reviewed the financial terms of certain
recent business combinations in the internet infrastructure and computer
hardware industries specifically and in other industries generally and performed
such other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information discussed with or reviewed by us and have assumed such
accuracy and completeness for purposes of rendering this opinion. As you are
aware, Sun did not make available to us its forecast of future financial
performance of Sun. Accordingly, our review of such matters, with your consent,
was limited to discussions with the senior management of Sun of certain publicly
available research analyst estimates for Sun. In addition, we have not made an
independent evaluation or appraisal of the assets and liabilities of the Company
or Sun or any of their subsidiaries and we have not been furnished with any such
evaluation or appraisal. Our advisory services and the opinion expressed herein
are provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated by
the Agreement and such opinion does not constitute a recommendation as to how
any holder of Shares should vote with respect to such transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio pursuant to the Agreement is fair from a financial point of view
to the holders of the Shares.
Very truly yours,
GOLDMAN, SACHS & CO.
By /s/ GOLDMAN, SACHS & CO.
------------------------------------
Goldman, Sachs & Co.
D-2
<PAGE> 207
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the General Corporation Law of the State of Delaware
("Delaware Corporation Law") provides, in general, that a corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), because the person is or was a director
or officer of the corporation. Such indemnity may be against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action, suit or
proceeding, if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and if, with respect to any criminal action or proceeding, the
person did not have reasonable cause to believe the person's conduct was
unlawful.
Section 145(b) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor because the person is or was a director or officer of the corporation,
against any expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation.
Section 145(g) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director or officer of the corporation against any
liability asserted against the person in any such capacity, or arising out of
the person's status as such, whether or not the corporation would have the power
to indemnify the person against such liability under the provisions of the law.
Article VI of the Bylaws of the Registrant provides in effect that, subject
to certain limited exceptions, the Registrant shall indemnify its directors and
officers to the extent authorized or permitted by the Delaware Corporation Law.
The directors and officers of the Registrant are insured under policies of
insurance maintained by the Company, subject to the limits of the policies,
against certain losses arising from any claims made against them by reason of
being or having been such directors or officers. In addition, the Company has
entered into contracts with certain of its directors providing for
indemnification of such persons by the Registrant to the full extent authorized
or permitted by law, subject to certain limited exceptions.
II-1
<PAGE> 208
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE
EXHIBIT ---------------- FILED PREVIOUSLY
NUMBER EXHIBIT DESCRIPTION FORM DATE HEREWITH FILED
------- ------------------- ------ -------- -------- ----------
<C> <S> <C> <C> <C> <C>
2.1 Agreement and Plan of Merger and
Reorganization, dated as of September 18,
2000, by and among Sun Microsystems, Inc.,
Azure Acquisition Corporation, and Cobalt
Networks, Inc.(1) ......................... x
3.1 Registrant's Restated Certificate of
Incorporation.............................. 10-Q 03/29/98
3.2 Certificate of Amendment of Registrant's
Restated Certificate of Incorporation,
effective November 10, 1999 and filed
November 12, 1999.......................... 10-Q 12/26/99
3.3 Amended Certificate of Designations
effective November 12, 1999................ 10-Q 12/26/99
3.4 Registrant's Bylaws, as amended December
15, 1999................................... 10-Q 12/26/99
4.1 Second Amended and Restated Shares Rights
Agreement dated as of February 11, 1998.... 8-A/A 02/13/98
4.2 Amendment to Second Amended and Restated
Shares Rights Agreement dated April 26,
2000....................................... 8-A/A 04/27/00
4.3 Indenture, dated August 1, 1999 (the
"Indenture") between Registrant and The
Bank of New York, as Trustee............... 8-K 08/06/99
4.4 Form of Subordinated Indenture............. 8-K 08/06/99
4.5 Officers' Certificate Pursuant to Section
301 of the Indenture, without exhibits,
establishing the terms of Registrant's
Senior Notes............................... 8-K 08/06/99
4.6 Form of Senior Notes....................... 8-K 08/06/99
4.7 Technology Transfer Agreement dated
February 27, 1982, for the purchase by the
Registrant of certain technology for cash,
and related Assumption Agreement dated
February 27, 1982.......................... S-1 03/04/86
4.8 Form of Founders' Restricted Stock Purchase
Agreement.................................. S-1 03/04/86
4.9 Registrant's 1982 Incentive Stock Option
Plan, as amended, and representative forms
of Stock Option Agreement.................. 10-Q 12/25/87
4.10 Registrant's Restricted Stock Plan, as
amended, and representative form of Stock
Purchase Agreement......................... 10-Q 12/25/87
4.11 License Agreement dated July 26, 1983, by
and between Registrant and The Regents of
the University of California............... S-1 03/04/86
</TABLE>
II-2
<PAGE> 209
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE
EXHIBIT ---------------- FILED PREVIOUSLY
NUMBER EXHIBIT DESCRIPTION FORM DATE HEREWITH FILED
------- ------------------- ------ -------- -------- ----------
<C> <S> <C> <C> <C> <C>
4.12 Software Agreement effective as of April 1,
1982 by and between Registrant and American
Telephone and Telegraph Company, and
Supplemental Agreement dated effective as
of May 28, 1983............................ S-1 03/04/86
4.13 Registrant's 1987 Stock Option Plan and
representative form of Stock Option
Agreement.................................. 10-Q 12/25/87
4.14 Registrant's 1988 Directors' Stock Option
Plan, as amended on August 11, 1999........ 10-K 06/30/99
4.15 Registrant's 1990 Employee Stock Purchase
Plan, as amended on August 13, 1997........ S-8 11/20/97
4.16 Registrant's 1990 Long-Term Equity
Incentive Plan, as amended on August 11,
1999....................................... S-8 11/12/99
4.17 Representative form of agreement to
Registrant's 1990 Long-Term Equity
Incentive Plan............................. 10-K 06/30/91
5.1 Opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation regarding
the legality of securities being
registered................................. x
8.1 Tax opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation........... x
8.2 Tax opinion of Brobeck, Phleger & Harrison,
LLP........................................ x
10.1 Software Distribution Agreement dated
January 28, 1991 by and between the
Registrant and UNIX Systems Laboratories,
Inc. ...................................... 10-K 06/30/91
10.2 Revolving Credit Agreement dated August 28,
1997, between the Registrant; Citicorp USA,
Inc.; Bank of America National Trust and
Savings Association; ABN AMRO Bank N.V.;
Barclays Bank PLC; Morgan Guaranty Trust
Company of New York; The Fuji Bank Limited,
San Francisco Agency; The Toyo Trust and
Banking Co. Ltd.; The Sumitomo Bank,
Limited; The Sakura Bank Limited, San
Francisco Agency; Banque Nationale de
Paris; Bayerische Vereinsbank AG, Los
Angeles Agency; The Industrial Bank of
Japan, Limited, San Francisco Agency; The
Bank, of New York; Caripolo -- Cassa
Di-Risparmio Delle Provincie Lombade SPA;
Corestes Bank NA; The Northern Trust
Company; Royal Bank Of Canada; Union Bank
of California, N.A.; and The Sumitomo Trust
Banking Co., Ltd. ......................... 10-K 06/30/97
10.3 Registrant's Non-Qualified Deferred
Compensation Plan, as amended December 16,
1998....................................... 10-Q 03/28/99
</TABLE>
II-3
<PAGE> 210
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE
EXHIBIT ---------------- FILED PREVIOUSLY
NUMBER EXHIBIT DESCRIPTION FORM DATE HEREWITH FILED
------- ------------------- ------ -------- -------- ----------
<C> <S> <C> <C> <C> <C>
10.4 Registrant's Section 162(m) Executive
Officer Performance-Based Bonus Plan dated
August 9, 1995............................. 10-K 06/30/95
10.5 Registrant's Equity Compensation
Acquisition Plan, as amended on November
11, 1998................................... 10-Q 03/28/99
10.6 Form of Change of Control Agreement
executed by each corporate executive
officer of Registrant...................... 10-Q 12/29/96
10.7 Form of Change of Control Agreement
executed by Chief Executive Officer of
Registrant................................. 10-Q 12/29/96
10.8 Form of Vice President Change of Control
Severance Plan............................. 10-Q 12/29/96
10.9 Form of Director-Level Change of Control
Severance Plan............................. 10-Q 12/29/96
10.10 Strategic Development and Marketing
Agreement dated November 23, 1998 by and
between America Online, Inc. and the
Registrant................................. 10-Q 12/27/98
13.1 Registrant's 2000 Annual Report to
Stockholders (to be deemed filed only to
the extent required by the instructions to
exhibits for reports on Form 10-K)......... 10-K 06/30/00
21.1 Subsidiaries of Registrant................. 10-K 06/30/00
23.1 Consent of Wilson Sonsini Goodrich &
Rosati, Professional Corporation (included
in exhibits 5.1 and 8.1)...................
23.2 Consent of Brobeck, Phleger & Harrison LLP
(included in exhibit 8.2)..................
23.3 Consent of Ernst & Young LLP, Independent
Auditors................................... x
23.4 Consent of PricewaterhouseCoopers LLP,
Independent Accountants.................... x
24.1 Power of Attorney (included on page II-6 of
this registration statement)............... x
27.1 Financial Data Schedule for the fiscal year
ended June 30, 2000........................ 10-K 06/30/00
27.2 Financial Data Schedule for the fiscal year
ended June 30, 1999........................ 10-K 06/30/00
99.1 Form of Proxy for Cobalt Networks, Inc..... x
99.2 Consent of Goldman, Sachs & Co., financial
advisor to Cobalt Networks, Inc............ x
99.3 Opinion of Goldman, Sachs & Co., financial
advisor to Cobalt Networks, Inc.(2)........ x
</TABLE>
---------------
(1) Included as Annex A to this registration statement.
(2) Included as Annex D to this registration statement.
II-4
<PAGE> 211
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(2) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(3) that every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(4) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request; and
(5) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer, or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE> 212
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Palo Alto, California, on November 1, 2000.
SUN MICROSYSTEMS, INC.
By: /s/ SCOTT G. MCNEALY
------------------------------------
Name: Scott G. McNealy
Title: Chief Executive Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SCOTT G. MCNEALY Chairman of the Board and Chief November 1, 2000
--------------------------------------------- Executive Officer (Principal
Scott G. McNealy Executive Officer)
*/s/ MICHAEL E. LEHMAN Executive Vice President, November 1, 2000
--------------------------------------------- Corporate Resources and Chief
Michael E. Lehman Financial Officer (Principal
Financial Officer)
*/s/ MICHAEL L. POPOV Vice President, Corporate November 1, 2000
--------------------------------------------- Controller (Principal Accounting
Michael L. Popov Officer)
*/s/ JAMES L. BARKSDALE Director November 1, 2000
---------------------------------------------
James L. Barksdale
Director November , 2000
---------------------------------------------
L. John Doerr
*/s/ JUDITH L. ESTRIN Director November 1, 2000
---------------------------------------------
Judith L. Estrin
</TABLE>
II-6
<PAGE> 213
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Director November , 2000
---------------------------------------------
Robert J. Fisher
*/s/ ROBERT L. LONG Director November 1, 2000
---------------------------------------------
Robert L. Long
*/s/ M. KENNETH OSHMAN Director November 1, 2000
---------------------------------------------
M. Kenneth Oshman
*/s/ NAOMI O SELIGMAN Director November 1, 2000
---------------------------------------------
Naomi O. Seligman
* By:/s/ SCOTT G. MCNEALY November 1, 2000
---------------------------------------------
Scott G. McNealy
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 214
EXHIBIT INDEX
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE
EXHIBIT ---------------- FILED PREVIOUSLY
NUMBER EXHIBIT DESCRIPTION FORM DATE HEREWITH FILED
------- ------------------- ------ -------- -------- ----------
<C> <S> <C> <C> <C> <C>
2.1 Agreement and Plan of Merger and
Reorganization, dated as of September 18,
2000, by and among Sun Microsystems, Inc.,
Azure Acquisition Corporation, and Cobalt
Networks, Inc.(1) ......................... x
3.1 Registrant's Restated Certificate of
Incorporation.............................. 10-Q 03/29/98
3.2 Certificate of Amendment of Registrant's
Restated Certificate of Incorporation,
effective November 10, 1999 and filed
November 12, 1999.......................... 10-Q 12/26/99
3.3 Amended Certificate of Designations
effective November 12, 1999................ 10-Q 12/26/99
3.4 Registrant's Bylaws, as amended December
15, 1999................................... 10-Q 12/26/99
4.1 Second Amended and Restated Shares Rights
Agreement dated as of February 11, 1998.... 8-A/A 02/13/98
4.2 Amendment to Second Amended and Restated
Shares Rights Agreement dated April 26,
2000....................................... 8-A/A 04/27/00
4.3 Indenture, dated August 1, 1999 (the
"Indenture") between Registrant and The
Bank of New York, as Trustee............... 8-K 08/06/99
4.4 Form of Subordinated Indenture............. 8-K 08/06/99
4.5 Officers' Certificate Pursuant to Section
301 of the Indenture, without exhibits,
establishing the terms of Registrant's
Senior Notes............................... 8-K 08/06/99
4.6 Form of Senior Notes....................... 8-K 08/06/99
4.7 Technology Transfer Agreement dated
February 27, 1982, for the purchase by the
Registrant of certain technology for cash,
and related Assumption Agreement dated
February 27, 1982.......................... S-1 03/04/86
4.8 Form of Founders' Restricted Stock Purchase
Agreement.................................. S-1 03/04/86
4.9 Registrant's 1982 Incentive Stock Option
Plan, as amended, and representative forms
of Stock Option Agreement.................. 10-Q 12/25/87
4.10 Registrant's Restricted Stock Plan, as
amended, and representative form of Stock
Purchase Agreement......................... 10-Q 12/25/87
4.11 License Agreement dated July 26, 1983, by
and between Registrant and The Regents of
the University of California............... S-1 03/04/86
</TABLE>
<PAGE> 215
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE
EXHIBIT ---------------- FILED PREVIOUSLY
NUMBER EXHIBIT DESCRIPTION FORM DATE HEREWITH FILED
------- ------------------- ------ -------- -------- ----------
<C> <S> <C> <C> <C> <C>
4.12 Software Agreement effective as of April 1,
1982 by and between Registrant and American
Telephone and Telegraph Company, and
Supplemental Agreement dated effective as
of May 28, 1983............................ S-1 03/04/86
4.13 Registrant's 1987 Stock Option Plan and
representative form of Stock Option
Agreement.................................. 10-Q 12/25/87
4.14 Registrant's 1988 Directors' Stock Option
Plan, as amended on August 11, 1999........ 10-K 06/30/99
4.15 Registrant's 1990 Employee Stock Purchase
Plan, as amended on August 13, 1997........ S-8 11/20/97
4.16 Registrant's 1990 Long-Term Equity
Incentive Plan, as amended on August 11,
1999....................................... S-8 11/12/99
4.17 Representative form of agreement to
Registrant's 1990 Long-Term Equity
Incentive Plan............................. 10-K 06/30/91
5.1 Opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation regarding
the legality of securities being
registered................................. x
8.1 Tax opinion of Wilson Sonsini Goodrich &
Rosati, Professional Corporation........... x
8.2 Tax opinion of Brobeck, Phleger & Harrison,
LLP........................................ x
10.1 Software Distribution Agreement dated
January 28, 1991 by and between the
Registrant and UNIX Systems Laboratories,
Inc. ...................................... 10-K 06/30/91
10.2 Revolving Credit Agreement dated August 28,
1997, between the Registrant; Citicorp USA,
Inc.; Bank of America National Trust and
Savings Association; ABN AMRO Bank N.V.;
Barclays Bank PLC; Morgan Guaranty Trust
Company of New York; The Fuji Bank Limited,
San Francisco Agency; The Toyo Trust and
Banking Co. Ltd.; The Sumitomo Bank,
Limited; The Sakura Bank Limited, San
Francisco Agency; Banque Nationale de
Paris; Bayerische Vereinsbank AG, Los
Angeles Agency; The Industrial Bank of
Japan, Limited, San Francisco Agency; The
Bank, of New York; Caripolo -- Cassa
Di-Risparmio Delle Provincie Lombade SPA;
Corestes Bank NA; The Northern Trust
Company; Royal Bank Of Canada; Union Bank
of California, N.A.; and The Sumitomo Trust
Banking Co., Ltd. ......................... 10-K 06/30/97
10.3 Registrant's Non-Qualified Deferred
Compensation Plan, as amended December 16,
1998....................................... 10-Q 03/28/99
</TABLE>
<PAGE> 216
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE
EXHIBIT ---------------- FILED PREVIOUSLY
NUMBER EXHIBIT DESCRIPTION FORM DATE HEREWITH FILED
------- ------------------- ------ -------- -------- ----------
<C> <S> <C> <C> <C> <C>
10.4 Registrant's Section 162(m) Executive
Officer Performance-Based Bonus Plan dated
August 9, 1995............................. 10-K 06/30/95
10.5 Registrant's Equity Compensation
Acquisition Plan, as amended on November
11, 1998................................... 10-Q 03/28/99
10.6 Form of Change of Control Agreement
executed by each corporate executive
officer of Registrant...................... 10-Q 12/29/96
10.7 Form of Change of Control Agreement
executed by Chief Executive Officer of
Registrant................................. 10-Q 12/29/96
10.8 Form of Vice President Change of Control
Severance Plan............................. 10-Q 12/29/96
10.9 Form of Director-Level Change of Control
Severance Plan............................. 10-Q 12/29/96
10.10 Strategic Development and Marketing
Agreement dated November 23, 1998 by and
between America Online, Inc. and the
Registrant................................. 10-Q 12/27/98
13.1 Registrant's 2000 Annual Report to
Stockholders (to be deemed filed only to
the extent required by the instructions to
exhibits for reports on Form 10-K)......... 10-K 06/30/00
21.1 Subsidiaries of Registrant................. 10-K 06/30/00
23.1 Consent of Wilson Sonsini Goodrich &
Rosati, Professional Corporation (included
in exhibits 5.1 and 8.1)...................
23.2 Consent of Brobeck, Phleger & Harrison LLP
(included in exhibit 8.2)..................
23.3 Consent of Ernst & Young LLP, Independent
Auditors................................... x
23.4 Consent of PricewaterhouseCoopers LLP,
Independent Accountants.................... x
24.1 Power of Attorney (included on page II-6 of
this registration statement)............... x
27.1 Financial Data Schedule for the fiscal year
ended June 30, 2000........................ 10-K 06/30/00
27.2 Financial Data Schedule for the fiscal year
ended June 30, 1999........................ 10-K 06/30/00
99.1 Form of Proxy for Cobalt Networks, Inc..... x
99.2 Consent of Goldman, Sachs & Co., financial
advisor to Cobalt Networks, Inc............ x
99.3 Opinion of Goldman, Sachs & Co., financial
advisor to Cobalt Networks, Inc.(2)........ x
</TABLE>
---------------
(1) Included as Annex A to this registration statement.
(2) Included as Annex D to this registration statement.
