Financial Update: Sun To Buy Cobalt In Stock Deal. Red Hat Beats Expectations. Cray Files To Sell $20 Million In Stock.

September 22, 2000

SHORT TAKES

SUN TO BUY COBALT IN STOCK DEAL

Palo Alto, CALIF. — Sun Microsystems Inc. said on Tuesday it would buy Cobalt Networks Inc., a supplier of server appliance products, in a $2 billion stock deal. Sun, a maker of computer servers and workstations, said in a statement that the deal would speed up its entry into the growing server appliance market and bolster its focus on network computing. Server appliances function like engines for the delivery of network-based services.

Under the terms of the deal, each share of Cobalt common stock would be converted into half a Sun share, with a total purchase price of about $2 billion, the statement said. The acquisition would be accounted for as a purchase. It is expected to be completed during Sun’s second quarter of fiscal 2001, which ends Dec. 31. Sun said it expected the deal would add to earnings before interest, taxes, depreciation and amortization, gains on the sale of equity investments and in-process research and development charges for the second half of the fiscal year.

RED HAT SECOND QUARTER BEATS EXPECTATIONS

New York, N.Y. — Linux operating system distributor Red Hat Inc. said last Thursday its second quarter loss bested Wall Street’s expectations as demand for the operating system seen as an alternative to Microsoft Corp.’s Windows continued to rise. Excluding one-time items, Research Triangle Park, N.C.-based Red Hat lost $1.9 million, or one cent per share in the quarter ended Aug. 31, compared with a loss of $4.3 million, or 6 cents, a year earlier. Wall Street analysts on average had expected Red Hat to report an operating loss of 2 cents per share, according to research firm First Call/Thomson Financial. “I think you can see profitability early,” said Merrill Lynch analyst Bill Crawford. The company is not expected to turn a profit until the second quarter of next year, according to the analysts’ consensus.

“They’re a hair’s breadth from break-even now,” Crawford said. “That really is going to be a management decision as for when it’s delivered. It looks like the drivers are in place to get there, and maybe get there a little early. Then it’s going to be a spending issue, which is a management decision.” WR Hambrecht & Co. analyst Prakesh Patel said the company turned in a “standard quarter.” Red Hat is the worldwide market share leader in Linux operating systems that run computer servers, which serve up Web pages. Shares of Red Hat were traded at $23-1/2 in after-hours trading on the Instinet brokerage system, down from its closing price of $25-1/4. In the second quarter, revenues rose 76 percent to $18.5 million from $10.5 million a year ago and 15 percent higher than the previous quarter’s $16 million. Including non-cash charges and one-time acquisition expenses, Red Hat said its net loss for the quarter totaled $15.7 million, or 10 cents a share, compared with a loss of $4.8 million, or 7 cents a share a in the year-ago period. Red Hat also said it gross margins increased to 58 percent for the quarter, a 3.8 percentage point improvement over the prior quarter.

CRAY FILES TO SELL $20 MILLION IN STOCK

Washington, D.C. — Cray Inc., which makes supercomputers, on Tuesday filed with the Securities and Exchange Commission to sell from time to time up to $20 million in common stock. The company plans to use the proceeds from the shelf offering for working capital and other general corporate purposes, the SEC filing said. Shares of the Seattle-based company closed up 5/16 to $5-7/8 on Nasdaq. They have a 52-week high of $11-1/2 and a low of $2-7/8.

SOFTECH ANNOUNCES FY 2000 RESULTS

Grand Rapids, MICH. — SofTech, Inc. announced results for its fiscal year ended May 31, 2000. Revenue for fiscal year 2000 was approximately $19.9 million as compared to $30.6 million for the same period in fiscal 1999. The pro forma net loss (excluding amortization expense related to acquisitions) was $(3.5) million or $(.41) per share for the current fiscal year as compared to a pro forma net loss of $(3.1) million or $(.42) per share for fiscal 1999. The net loss including amortization expense for fiscal 2000 was $(5.9) million or $(.71) per share as compared to a net loss of $(5.8) or $(.77) per share for fiscal 1999. The $10.7 million decrease in revenue from fiscal 1999 to 2000 is the direct result of the previously announced decision at the end of fiscal 1999 to focus the Company’s resources primarily on the marketing and distribution of its own technology and to limit its service offerings to high margin consulting and training efforts. Approximately $8.4 million of the revenue decrease is attributable to this refocusing.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for fiscal year 2000 was $(889,000) as compared to $(396,000) in fiscal year 1999. Revenue for Q4 2000 was $ 3.0 million as compared to $ 5.2 million for the same period one year ago. The pro forma net loss (excluding amortization expense related to acquisitions) was $(3.8) million for Q4 FY 2000 as compared to $(3.3) million for Q4 FY 1999. The net loss including amortization expense for the fourth quarter of fiscal 2000 was $(4.4) million as compared to $(4.1) million for the same period one year ago. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the Q4 of fiscal 2000 as compared to the same period in the prior fiscal year was $(3.2) million and $(2.8) million, respectively. “Our decision a year ago to focus our resources on the development, marketing and sale of our technology primarily was the right decision and one that we expect to result in returning the Company to consistent profitability in fiscal 2001” said Mark Sweetland, President and CEO. “The CAD/CAM market is changing quickly and dramatically. The customers in this marketplace need to find, manage and share engineering data throughout their organization and with their suppliers, customers and partners. We believe our newly introduced DesignGateway technology is an affordable, easy-to-use solution for this need.

SCO/TARANTELLA GETS NEW MONEY, NEW LIFE

San Diego, CALIF. — SCO’s Unix kingdom may belong to leading Linux vendor Caldera, but Tarantella, SCO’s remaining product line, has been given a $13.1 million boost by Security Research Associates Inc., with a private stock purchase of 3,275,000 shares of SCO and SCO owned shares of Caldera Systems. The elder statements of Intel Unix companies, SCO will be renamed Tarantella after the Caldera purchase goes through in October. This reflects that after the sale of its Server Software and Professional Services division, the company will be focusing all of its attention on it middleware Web-enabling software and the ASP market. Its chief competitor in this field is Citrix Systems with its MetaFrame product line.

A familiar cast of SCO characters will manage the company Tarantella. Doug Michels, former president and CEO of SCO, will remain at the helm. Mike Orr, currently president of the SCO Tarantella division, also will continue on in a leading role. Brian Swift, CEO of Security Research Associates Inc. said in a prepared statement that, “We view Tarantella’s Web-enabling software as particularly unique in the industry, and are pleased to be able to provide, through our institutional investors, some additional working capital to assist the company in gaining continued market acceptance of their product.”

NISHAN SYSTEMS CLOSES STRATEGIC ROUND OF FUNDING

San Jose, CALIF. — Nishan Systems, developer of next-generation Storage over IP (SoIP) technology, announced that it has secured $50 million in its third round of funding and signed investment agreements with a number of the world’s leading high technology companies. Nishan’s strategic investors now include Sun Microsystems, Dell Ventures, Siemens Venture Capital, the investment arm of Siemens AG, Quantum Technology Ventures, the investment arm of Quantum Corporation, and other major storage, computer, and networking companies. These investments bring Nishan’s total funding from leading corporations and preeminent venture capital institutions to over $90 million. The venture capital investors are TPG-Comm Partners, ComVentures, Weiss, Peck & Greer Venture Partners, Raza Ventures, Sofinnova Ventures, Discovery Ventures, and Altos Ventures.

Later this year, Nishan Systems will unveil industry-standard SoIP technology that enables end-to-end storage solutions based on the proven networking standards, IP and Gigabit Ethernet. SoIP combines the high availability and performance of today’s first-generation storage area networks (SANs) with the best features of IP networks – product compatibility, established standards, and scalability. Fully compatible with the impending IP Storage standards, SoIP will leverage the market dominance of IP networking to provide the multi-vendor product interoperability that at last will unleash the growth of SANs. “Technology has crucial pivot points that alter its evolution, such as the way IP and the Web changed the face of client/server computing,” said Aamer Latif, president and CEO of Nishan Systems. “IP storage will have a similar impact on the SAN market. Though some see the market two years from now as a $2 billion opportunity, the new applications SoIP enables will significantly expand that amount.” Visit http://www.NishanSystems.com for more information.

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