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FILED BY SUN MICROSYSTEMS, INC. PURSUANT TO RULE 425
UNDER THE SECURITIES ACT OF 1933
SUBJECT COMPANY: COBALT NETWORKS, INC.
COMMISSION FILE NO.: 0-24360
SUN MICROSYSTEMS MASTER Q&A
Sun Microsystems, Inc. announced its intention to acquire Cobalt Networks, Inc.
The following Frequently Asked Questions provide more information about the
proposed acquisition. Completion of the acquisition is subject to customary
closing conditions, including governmental approvals and Blue shareholder
approval.
GENERAL
Q: What was announced?
A: Sun is acquiring Cobalt, a publicly traded company based in Mountain View,
Calif., to accelerate its move into the server appliance area.
Q: Why did Sun choose Cobalt?
A: Sun is accelerating its move into the server appliance industry that is
projected to total $15.8B by 2003 (Dataquest). Sun is a leading provider of
infrastructure and systems for networking computing to the enterprise and
service provider marketplaces and is expanding its product offerings with server
and software offerings with this acquisition. Cobalt is a leader in the server
appliance marketplace with leading edge products and a world-class management
team. Putting Cobalt and Sun together is a synergistic move that will provide an
end-to-end solution, servers from the low-end appliance to mainframe-class
solutions.
Q: How will Sun benefit from the acquisition of Cobalt?
A: Cobalt brings to Sun tremendous experience, skilled management, and
complementary engineering expertise. Sun is now in an excellent position to
expand its business by providing customers with a low-end server appliance
solution that complements our existing server family. Sun, which is already a
leading provider of solutions to service providers, now augments its product
offerings with the addition of a low-cost, easy-to-use, turnkey appliance.
Q: How will Sun customers benefit from the acquisition of Cobalt?
A: The products of these two companies are complementary. Sun's customers will
benefit from the availability of an industry leading, low-end server appliance.
The combination of the two companies provides customers with an end-to-end
solution from appliance to datacenter solution.
Q. What is an server appliance?
A: Server appliances are a complete solution. They are networked based devices
optimized to perform a finite set of related server functions. They deploy in
minutes,
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require little technical knowledge and enable the user to create a web presence
easily and cost-effectively. In minutes the use has access to a full range of
Internet/intranet services, such as e-mail, webhosting, web publishing,
discussion groups, firewall, file sharing, caching and storage.
Q: Why didn't Sun build this technology/product itself?
A: Sun always evaluates entry into a new product area via a make vs. buy
decision. In this case, we wanted to accelerate our time to market. Thus,
acquisition of a complementary product offering provides Sun with enhanced
time-to-market; access to a talented, proven company; and a world-class
management team.
Q: Did Sun consider other companies in this area?
A: Sun is always looking at opportunities in this and other markets that can
provide its customers with solutions they demand and create new opportunity for
the company. In this case, Cobalt's complementary products and commonality of
culture and vision made it a good fit with Sun.
FINANCIAL
Q: How much did Sun pay for Cobalt?
A: Under the terms of the agreement, Sun common stock and options worth an
aggregate value of approximately $2.0 billion will be exchanged for all
outstanding shares and options of Cobalt at an exchange ratio of one Cobalt
share to 0.5 Sun shares.
Q: What impact will the Cobalt acquisition have on Sun's financial statements?
A: The transaction is currently projected to be accretive to operating
earnings before interest, taxes, depreciation, amortization, gains on sale of
equity investments and in-process research & development charges (operating
EBITDA) in the second half of this fiscal year.
On an earnings per share basis (EPS), because of the amortization charges for
intangible assets over very short lives, we currently anticipate that the
transaction will be dilutive by approximately $.15-$.20 in the second half of
this fiscal year and by about $.20 in fiscal 2002.
The Cobalt acquisition will be accounted for as a purchase transaction where Sun
anticipates it will record a one time charge for in-process research &
development of approximately $70 million as required by generally accepted
accounting principles in the period the transaction closes. Additionally, we
anticipate that we will record intangible assets including developed technology
and goodwill of approximately $1.8 billion. For financial reporting purposes
these assets will have a life of between 2 years and 5 years.
Q: Why are you now placing an emphasis on operating EBITDA?
A: As many of you know, there are many companies out there with varying
financial metrics that attempt to focus on the operating performance of their
businesses. We believe that operating EBITDA, as we have defined it, is a very
useful metric to
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understand and measure the performance of our business over the long run.
Shortly, you will see this metric discussed in our fiscal year 2000 annual
report. Additionally, we have made available on our Investor Relations website
10 years of operating EBITDA and will discuss this metric with you during our
quarterly earnings conference calls. We will of course continue to provide GAAP
based net income and EPS information.
Q: You have never made an acquisition of this size; does the purchase price
trouble you? Did you pay too much?
A: For several quarters we have been very clear in stating that we would
continue to invest aggressively to grow our market share and our product
portfolio. The acquisition of Cobalt is an outstanding opportunity to do just
that. We are acquiring a leader in a very high growth arena that is a logical
extension of our business.
ORGANIZATIONAL
Q: How will Cobalt and Sun be integrated?
A: Following the close of the acquisition, Cobalt's business organization will
be integrated into Sun's Network Service Provider (NSP) business under EVP John
McFarlane as a stand-alone product group. Cobalt's key management team will
staff the group. Cobalt's sales force will become a part of Sun's Global Sales
Organization, reporting to EVP Masood Jabbar.
Q: Is Cobalt's management team moving over to Sun?
A: Following the close of the acquisition, the new appliance group inside Sun
will be headed by Stephen Dewitt as VP, reporting to John McFarlane, EVP of the
Network Service Provider Division of Sun. Vivek Methra will be the CTO of the
same appliance group.
Q: Will Cobalt employees be offered positions with Sun?
A: Yes. All of Cobalt's employees will be offered positions at Sun and we
expect to continue hiring.
Q: When will the acquisition close?
A: Subject to regulatory requirements and customary closing conditions, we
expect the acquisition to close within approximately 90 days.
Q: What will happen between now and the closing of the acquisition?
A: Both companies will operate as independent entities until the deal closes.
The parties will identify a transition team that will begin planning for a
smooth
Q. Is this a change in strategy for Sun?
A: This is an extension of Sun's current product line, not a new strategy. Sun
intends to use Cobalt's existing brand and product names in the marketplace. The
Cobalt product line will enhance Sun's existing product line by adding an server
appliance platform. This is primarily an opportunity for Sun to expand its
product offerings to service providers and, over time, it will open new markets.
Sun has been a strong partner and
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supplier to service providers and those relationships will continue to grow with
the addition of Cobalt's programs and product offerings.
Q: When should we expect to see new products from Sun as a result of this
transaction?
A: This will not affect Sun's product line-up. The SPARC/Solaris-based
enterprise servers and the Sun Netra product line will remain unchanged.
Following the closing, existing products from Cobalt will be sold by Sun's sales
force. Details on the first new products based on new product development
between Sun and Cobalt can only be discussed after the close of the deal when
the two companies can begin collaborating in earnest.
ABOUT Cobalt
Q: Who is Cobalt?
A: Cobalt is a worldwide leader in server appliances - software-intensive,
limited function devices. Cobalt's product lines - Cobalt Qube, Cobalt Cache,
Cobalt RaQ and Cobalt NASRaQ - are used as Internet and Web hosting server
appliances at businesses, Service Providers and educational institutions.
Cobalt's solutions are delivered through a global network of distributors,
value-added resellers and ISPs. Founded in 1996, Cobalt went public in November
1999 and is headquartered in Mountain View, California.
Q: What is Cobalt's product?
A: Cobalt's server appliances enable users to establish a Web presence easily
and affordably. Cobalt's customers are service providers who offer hosting
services to end users, as well as the end users themselves. Cobalt's product
prices range from less than $1,000 to over $4,000, are fully deployed in
minutes, and are easy to use. Cobalt products include:
o The Cobalt QUBE. A complete Internet and intranet server in a box that
can connect and serve up to 150 users and millions of web items and
emails everyday.
o The Cobalt RAQ. Server appliance capable of hosting as many as 200
websites or a single, powerful dedicated server.
o The Cobalt Cache. A specialized server for networks where traffic
occasionally exceeds the capacity. Rather than increasing bandwidth,
the Cobalt CacheRaQ stores frequently requested files, freeing
bandwidth for new requests and other traffic.
o The Cobalt NAS. The Cobalt NASRaQ has up to 32gigs of storage; can be
added to a network in a matter of minutes.
Q: Do Cobalt products overlap with any of Sun's products?
A: No. There is no overlap with existing products.
Q: How many customers does Cobalt have?
A: Cobalt has over 4,000 customers, including more than 1,500 service provider
customers worldwide.
Q: How many channel partners does Cobalt have?
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A: There are over 500 Cobalt resellers worldwide.
Q: Does Cobalt offer products outside of North America?
A: Yes, Cobalt derives close to 50% of its revenue from outside of North
America.
Q: How many employees are currently working at Cobalt?
A: Approximately 290.
CUSTOMERS
Q: What will happen to existing Cobalt customers?
A: After the close of the deal, they will be supported by Sun and Sun's
service and sales organizations.
Q: Who will customers call for support of Cobalt products?
A: Until the acquisition closes, Cobalt will continue to use existing
communications channels. After the closing, Sun's service and support
organization will handle support of Cobalt's products.
Q: Where can I find more information about this?
A: www.sun.com and www.cobalt.com
PRODUCTS (existing and under development)
***Please note: Most questions about product plans will require speculation.
Instead, please respond to questions that would require forward looking
statements and speculation with -- "Due to regulatory requirements, neither
company can discuss converged product strategy until the deal is completed. Look
for more details upon the closing of the acquisition."
Q: Doesn't Sun's Netra line compete with Cobalt's offerings?
A: No, Sun's Netra line is its carrier-grade, rack mounted server; this is a
complementary server appliance product. Cobalt's server appliance extends Sun's
product line.
Q: How will Cobalt's products be sold?
A: Via their existing salesforce and existing reseller channels. Following the
close of the transaction, Cobalt's sales team will be integrated into Sun's
Global Sales Organization.
Q: When should we expect to see new products from Sun as a result of this
acquisition?
A: Details on the first new products based on new product development between
Sun and Cobalt can only be discussed after the close of the deal when the two
companies can begin collaborating in earnest.
Q: What's your revenue projection for Cobalt's existing products? Do you see
it as a major contributor to Sun's revenue in the NSP division?
A: Sun doesn't break out revenue by division or product line.
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Q: Is this a departure from Sun's focus on SPARC/Solaris?
Q: Doesn't the Cobalt product line use Linux and AMD chips? Will you migrate
the architecture over to SPARC/Solaris?
Q: Cobalt uses Microsoft products/technologies, most notably ASP? Does this
conflict with Sun's promotion of Java and JSP?
A: Sun purchased Cobalt to accelerate its entry into the server appliance
arena and expand our offerings for service providers. This was an acquisition of
a product, not a specific technology, operating system or chip. Our plan is to
keep the product line as it is and evolve, as needed, over time. Cobalt's
product is a turn-key solution that employs an open architecture allowing it to
function across multiple operating environments -- customers buy server
appliances because the complexity of the underlying technology is transparent to
the user. It's all about the value of the services and functionality provided by
the appliance.
Q: Does this mean Sun will start using Linux in other products?
A: The acquisition of Cobalt is about access to a product and expanding our
business. If Sun were interested in expanding its use of Linux, we could do so
without buying a company.
Q: What do developers write to?
A: They should continue to write to Cobalt's appliance API's.
The foregoing Q&A contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, particularly statements
regarding the effect of the proposed acquisition on Sun's earnings, Sun's
ability to accelerate its expansion into the server appliance arena, Sun's
expectations regarding the acceptance and complementary effect of integrating
Cobalt's products into Sun's product lines, expectations regarding the growth of
the server appliance arena, and the timing of the transaction closing and the
integration of Cobalt into Sun. Actual results may vary materially from the
results discussed in the forward-looking statements. Factors that may cause such
a difference include those risks surrounding the closing of the acquisition, the
successful integration of Cobalt into Sun's business subsequent to the closing
of the acquisition, timely development, production and acceptance of the
products and services contemplated by the proposed acquisition, each company's
ability to compete in the highly competitive and rapidly changing marketplace
and the other risks detailed from time to time in each company's periodic
reports and other documents filed with the Securities and Exchange Commission,
including, but not limited to, Sun's report on Form 10-K for the fiscal year
ended June 30, 1999, Sun's reports on Form 10-Q for its fiscal quarters ending
September 26, 1999, December 26, 1999, and March 26, 2000.
Additional Information: Sun plans to file a Registration Statement on SEC Form
S-4 in connection with the merger and Cobalt expects to mail a Proxy
Statement/Prospectus to its stockholders containing information about the
merger. Investors and security holders are urged to read the Registration
Statement and the Proxy Statement/Prospectus carefully when they are available.
The Registration Statement and the Proxy Statement/Prospectus will contain
important information about Sun , Cobalt, the merger and related matters.
Investors and security holders will be able to obtain free copies of these
documents through the web site maintained by the U.S. Securities and Exchange
Commission at http//www.sec.gov. In addition to the Registration Statement and
the Proxy Statement/Prospectus, Sun and Cobalt file annual, quarterly and
special reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any reports, statements and other
information filed by Sun and Cobalt at the SEC public reference rooms at 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Commission's other public
reference rooms in New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on public reference rooms.
Sun's and Cobalt' filings with the
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Commission also are available to the public from commercial document-retrieval
services and at the web site maintained by the Commission at http//www.sec.gov.
Cobalt, its directors, executive officers and certain members of management and
employees may be soliciting proxies from Cobalt stockholders in favor of the
adoption of the merger agreement. A description of any interests that Cobalt's
directors and executive officers have in the merger will be available in the
Proxy Statement/Prospectus.
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