Prospectus Summary
You should read the following summary together with the more detailed information regarding our company and our financial statements and notes to those statements appearing elsewhere in this prospectus.
Cobalt Networks, Inc.
We are a leading provider of server appliances. Server appliances are a new category of network infrastructure devices that are specifically designed and optimized 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 optimized for any particular function. Our 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, we believe the demand for server appliances will continue to grow.
Our principal product lines, the Cobalt Qube and Cobalt RaQ, enable our 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. Our products tightly integrate the open source Linux operating system with software applications embedded in dedicated hardware designs. This software includes a rich set of core applications developed by us and by the open source software developer community, as well as proprietary third-party applications. Our use of the Linux operating system enables us to leverage the rapid application development cycles of the open source software community to reduce the time to market for our new and innovative products.
As of July 2, 1999, we had sold over 11,000 appliances to more than 1,000 end user customers in more than 60 countries. We market and sell our products globally through our direct sales force and our channel partners. Our target customers are small- to medium-sized organizations, including businesses, educational and government entities and branch offices of large organizations. We also target web hosting and application service providers that offer outsourced Internet services to these end users.
Our Market Opportunity Traditionally, creating an online presence has required complex network technologies and the deployment of costly general purpose servers, which require a technically skilled staff to maintain. However, these limitations often prevent their adoption by small- to medium-sized organizations seeking to deploy their own infrastructure, due to limited budgets and technology skills. The high cost and complexity of general purpose servers 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.
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 optimized to provide one or a few dedicated applications, they can be easy to use, administer and integrate with other infrastructure components, while providing a low cost, reliable solution.
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 expects the Linux- based server appliance market to grow at approximately 69% a year between 1999 and 2003 and represent approximately 24% of the total server appliance market, or $3.8 billion, in 2003.
Our Strategy
Our objective is to become the leading global provider in the emerging market for flexible, low cost server appliances. To accomplish our objective we intend to:
. Increase market acceptance of server appliances. We intend to increase market acceptance of server appliances by continuing to offer products that are simple to manage at a low cost of total ownership.
. Attract and support application developers. We intend to continue to promote third-party development of software applications for our products through partnership programs with independent, open source software developers.
. Develop and leverage partnerships to enhance our market reach. We actively seek to encourage channel partners, original equipment manufacturers and web hosting and application service providers to add value to our products by modifying our solutions for specific customer needs.
. Establish a strong brand identity. We intend to continue to create brand awareness with innovative, award winning products, progressive product styling and creative marketing.
. Provide focused server appliances for specific needs. We intend to continue to develop and release products that meet specific customer needs while retaining their relatively low prices and optimized functionality.
Other Information
Unless otherwise noted, this prospectus assumes:
. our reincorporation in Delaware to be completed prior to this offering;
. the automatic conversion of our outstanding mandatorily redeemable convertible preferred stock into common stock upon the closing of this offering;
. the filing of our amended and restated certificate of incorporation authorizing a class of 10,000,000 shares of undesignated preferred stock upon the closing of the offering; and . no exercise by the underwriters of their option to purchase additional shares of our common stock in the offering.
Our net revenues were $3.5 million for 1998 and $7.7 million for the six months ended July 2, 1999. Our net losses were $10.5 million and $8.2 million for the same periods. Our total accumulated deficit was $13.2 million as of December 31, 1998 and was $22.6 million as of July 2, 1999.
We filed our articles of incorporation in California in October 1996 under the name Viavision Systems, Inc. We changed our name to Cobalt Microserver, Inc. in March 1997 and to Cobalt Networks, Inc. in June 1998. We intend to reincorporate in Delaware prior to the completion of this offering. Our principal executive offices are located at 555 Ellis Street, Mountain View, California 94043. Our telephone number is (650) 623-2500.
The Offering
Shares offered by Cobalt................ shares Shares to be outstanding after the offering............................... shares Use of proceeds......................... For general corporate purposes, including working capital, funding our operating losses, capital expenditures and potential acquisitions of complementary businesses, products and technologies. Proposed Nasdaq National Market symbol.. "COBT" The above information is based on 22,010,103 shares outstanding as of July 2, 1999 and excludes:
. 2,144,943 shares issuable upon exercise of options outstanding at a weighted average exercise price of $0.69 per share as of July 2, 1999;
. 525,665 shares issuable upon exercise of warrants outstanding at a weighted average exercise price of $2.74 per share as of July 2, 1999; and . a total of 6,407,870 shares available for future issuance under our various stock plans excluding the annual increases in the number of shares authorized under each of our plans beginning January 1, 2001. See "Management--Incentive Plans" for a description of how these annual increases are determined.
Summary Consolidated Financial Information (in thousands, except per share data) The following table sets forth a summary of our consolidated statement of operations data for the periods presented. The pro forma net loss per share for the year ended December 31, 1998 and the six months ended July 2, 1999 reflects the conversion of our mandatorily redeemable convertible preferred stock and the elimination of dividends and related charges.
Year Ended
Period from December 31, Six Months Ended
Oct. 18, 1996 ----------------- -----------------
(inception) to June 30, July 2,
Dec. 31, 1996 1997 1998 1998 1999
Consolidated Statement of Operations Data: Net revenues............. $ -- $ -- $ 3,537 $ 449 $ 7,663 Gross profit (loss)...... -- -- 414 (133) 2,507 Loss from operations..... (82) (1,757) (10,545) (3,749) (8,244) Net loss................. (82) (1,769) (10,478) (3,752) (8,244) Accretion of mandatorily redeemable convertible preferred stock................... -- -- (828) -- (1,191) Net loss attributable to holders of common stock................... (82) (1,769) (11,306) (3,752) (9,435) Basic and diluted net loss per share attributable to holders of common stock......... $ (4.10) $ (5.47) $ (2.09) $ (2.83) Pro forma basic and diluted net loss per share .................. $ (1.43) $ (0.60) Basic and diluted weighted average shares outstanding............. 432 2,065 1,792 3,338 Pro forma basic and diluted weighted average shares outstanding...... 7,330 13,808 The following table sets forth a summary of our consolidated balance sheet data as of July 2, 1999:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all of the outstanding shares of our mandatorily redeemable convertible preferred stock into shares of common stock upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the automatic conversion of
the mandatorily redeemable convertible preferred stock and our receipt
of the estimated net proceeds from the sale of shares of
common stock in this offering at an assumed initial public offering
price of $ per share.
July 2, 1999 Pro forma Actual Pro forma as adjusted
Consolidated Balance Sheet Data: Cash and cash equivalents..................... $ 27,426 $ 27,426 $ Working capital............................... 24,539 24,539 Total assets.................................. 34,902 34,902 Notes payable, less current portion........... 64 64 Mandatorily redeemable convertible preferred stock........................................ 45,646 -- Total stockholders' equity (deficit).......... (19,850) 25,796