Enterprise Customers at 60 Percent of New Sales, Including Fortune 500 Accounts Transition from Direct to Indirect Sales Model Technological Advantages Position Company for Growth
SEATTLE, July 31 /PRNewswire-FirstCall/ -- N2H2, Inc. (BULLETIN BOARD: NTWO) , a global Internet monitoring and filtering company, today announced financial results for its third quarter ended June 30, 2003. Revenue was $3.098 million for the three months ended June 30, 2003, an increase of 4 percent over 2002's third quarter results.
Operating expenses were $3.064 million for the quarter ended June 30, 2003, a 29 percent improvement over the $4.3 million in expenses during 2002's third quarter. The company achieved a quarterly net profit for the first quarter in its history at $48,000. This first quarterly profit represents a dramatic turnaround in the company's bottom line in the two years since Philip Welt took over as president and CEO of N2H2. In Welt's first quarter with N2H2, the third quarter of 2001, N2H2 posted a net loss of $7.5 million.
On July 29, 2003, Secure Computing Corporation and N2H2 announced an acquisition agreement under which Secure Computing would acquire all the outstanding stock of N2H2, Inc. in an all-stock transaction valued at approximately $19.9 million, based upon the closing sale price of Secure Computing Stock on Nasdaq on July 28, 2003. Under the acquisition agreement, Secure would issue 0.0841 shares of Secure Computing common stock for each outstanding share of N2H2 common stock, or approximately 1.861 million shares. The acquisition is subject to customary closing conditions, including approval by N2H2's shareholders.
"With our first profitable quarter, we have delivered on the promise we made in May 2001 to turn N2H2 toward profitability," said Philip Welt, president and CEO of N2H2. "This quarter's profit is the result of a lot of hard work by every employee of N2H2. Two years ago, we set out to reengineer N2H2 by changing the corporate culture and business model. Our task was to transform a company that sold hardware appliances directly to the education market into a company that sold software through a reseller channel to both the enterprise and education markets. We believe the results for the most recent quarter show the success of this approach. When our products are combined with those of Secure Computing's SmartFilter(R) solutions, we believe the combined company can offer an even more effective solution."
In addition to profitability, other business metrics demonstrate the transformation of N2H2. Sales into the enterprise market now represent 60 percent of all new sales, including Fortune 500 accounts such as PPG Industries. Indirect sales through resellers and OEMs now account for 93 percent of new sales.
"We believe N2H2 is now poised for growth and profitability," said Paul Quinn, CFO of N2H2. "As we stated in Q1, we expect to be cash flow positive for the fiscal year. After our acquisition by Secure Computing, we believe our shareholders will benefit from a combined company that is better positioned in the filtering market because of N2H2's customer base, broad platform support and control list technology."
Among the other highlights for the quarter: -- Added PPG Industries to N2H2's growing list of enterprise customers. Among other enterprise wins were the International Air Transport Association, Windsor Capital, Tennessee Farmers Life Insurance, Medarex, and the Oklahoma Department of Veterans Affairs. -- N2H2 retained its top position in the education market and added a number of large school districts, such as Cypress-Fairbanks (TX), Eanes (TX), and Nash-Rocky Mount (NC). -- Released version 2.0 of N2H2's Red Hat Linux software, incorporating major new features such as Virtual Reviewer and Virtual Inspector along with further enhancements to N2H2's market leading Delegated Administration functionality. -- Broadened the availability of N2H2's software with several significant new integrations. N2H2 products now directly support Cisco routers running the recently released Cisco Systems' IOS firewall version 12.3(1)T or higher; Red Hat Enterprise Linux; Nortel's Alteon Content Cache (ACC); and the Squid Proxy on Linux. About N2H2
N2H2 is a global Internet content filtering company. N2H2 software helps customers control, manage and understand their Internet use by filtering Web content, monitoring Internet access and delivering concise reports on user activity. These safeguards enable organizations of any size to limit potential legal liability, increase user productivity and optimize network bandwidth.
Based in Seattle, Wash. and serving millions of users worldwide, N2H2's Bess(R) and Sentian(tm) product lines are powered by the company's premium-quality filtering database -- a list consistently recognized by independent and respected third-parties as the most effective in the industry. N2H2's Sentian and Bess software (v2.0) is integrated with the Cisco Routers running IOS firewall (v12.2(15)T) and PIX firewall (v6.2 or later), Cisco Content Engine (ACNS v4.1 or later). N2H2's software is Microsoft Gold Certified for the Microsoft ISA firewall, Check Point OPSEC compliant, Red Hat Ready and available for major platforms and devices. Additional information is available at http://www.n2h2.com/ or by phoning 206-336-1501 or 800-971-2622.
Forward-Looking Statements
This press release contains forward-looking statements, including statements about our ability to achieve growth, profitability and cash flow positive operations, statements about the expected consummation of our acquisition by Secure Computing, statements about the expected benefits of the acquisition and statements about the effectiveness, market acceptance and compatibility of our products when combined with those of Secure Computing. Forward-looking statements are based on the judgment and opinions of management at the time the statements are made. Inaccurate assumptions and known and unknown risks and uncertainties can affect the accuracy of forward-looking statements. Actual results could differ materially from those expressed or implied by the forward-looking statements for a number of reasons, including, without limitation, the risk that we are unable to achieve or maintain growth and profitable or cash flow positive operations in future periods, the risk that the acquisition is not consummated, the risk that our shareholders do not realize the expected benefits of the acquisition and the risk that our products are not successfully combined with those of Secure Competing or, when combined, do not compete successfully or achieve acceptance. More detailed information regarding these and other factors that could affect actual results is set forth in our filings with the Securities and Exchange Commission, including our most recent Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (Commission file No. 0-26825). You should not unduly rely on these forward-looking statements which apply only as of the date of this release. We undertake no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances after the date of this release or to reflect the occurrence of unanticipated events.
Additional Information About the Acquisition and Where to Find It
In connection with Secure Computing's proposed acquisition of N2H2, Secure Computing will file with the Securities and Exchange Commission a Registration Statement on Form S-4 and other documents regarding the proposed business combination transaction referenced in this document. N2H2 shareholders are urged to read the Registration Statement, when it becomes available, because it will contain important information about Secure Computing, N2H2 and the merger. A definitive proxy statement/prospectus will be sent to shareholders of N2H2 seeking their approval of the proposed transaction. You may obtain a free copy of the Registration Statement and the proxy statement/prospectus (when it is available) and other documents filed by Secure Computing and N2H2 with the Commission at the Commission's web site at http://www.sec.gov/. The proxy statement/prospectus and these other documents may also be obtained without charge by N2H2 shareholders by directing a request to: N2H2, Inc., 900 Fourth Avenue, Suite 3600, Seattle, WA 98164, Attn: Investor Relations.
Investors and security holders are urged to read the proxy statement/prospectus and the other relevant materials when they become available before making any voting or investment decision with respect to the acquisition.
N2H2 and its executive officers and directors may be deemed to be participants in the solicitation of proxies from the shareholders of N2H2 in favor of the merger. Information about the executive officers and directors of N2H2 and their ownership of N2H2 common stock is set forth in the proxy statement for N2H2's 2003 Annual Meeting of Shareholders, which was filed with the SEC on January 27, 2003. Investors and security holders may obtain more detailed information regarding the direct and indirect interests of N2H2 and its executive officers and directors in the merger by reading the registration statement and the proxy statement/prospectus regarding the acquisition when it becomes available.
N2H2, Inc. Statements of Operations (in thousands, except per share amounts) (unaudited) THREE MONTHS ENDED NINE MONTHS ENDED June 30, June 30, 2003 2002 2003 2002 Revenues $3,098 $2,991 $9,222 $8,556 Operating expenses: Internet filtering services and customer support 581 852 1,749 2,528 Sales and marketing 1,126 1,606 3,809 5,266 General and administrative 814 851 2,440 2,719 Research and development 396 487 1,130 1,375 Depreciation and amortization 147 472 625 1,515 3,064 4,268 9,753 13,403 Loss on disposal of property and equipment -- 28 22 97 Loss on sale of N2H2 Pty Limited -- -- 61 -- Total operating expenses 3,064 4,296 9,836 13,500 Income (loss) from operations 34 (1,305) (614) (4,944) Interest income, net of interest expense 14 27 46 97 Net income (loss) $48 $(1,278) $(568) $(4,847) Net income (loss) per share: Basic net income (loss) per share $0.00 $(0.06) $(0.03) $(0.22) Diluted net income (loss) per share $0.00 $(0.06) $(0.03) $(0.22) Weighted average shares - basic 22,131 21,919 22,023 21,814 Weighted average shares - diluted 22,826 21,919 22,023 21,814 N2H2, Inc Balance Sheets (unaudited, in thousands) June 30, Sept. 30, 2003 2002 ASSETS Current assets: Cash and cash equivalents $1,812 $4,009 Restricted cash and cash equivalents 675 675 Investments 1,600 -- Total cash and investments 4,087 4,684 Accounts receivable, net of allowances 680 1,825 Prepaid expenses and other current assets 181 737 Total current assets 4,948 7,246 Property and equipment, net 638 1,249 Other assets 140 140 Total assets $5,726 $8,635 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $161 $ 262 Accrued payroll & benefits 359 452 Customer deposits 607 101 Other accrued liabilities 386 366 Deferred revenue 4,913 8,179 Note payable -- 58 Current portion of capital lease obligations -- 21 Total current liabilities 6,426 9,439 Deferred revenue 1,069 863 Other non-current liabilities 67 105 Total liabilities 7,562 10,407 Shareholders' equity (deficit): Preferred stock, no par value; 50,000 shares authorized No shares issued and outstanding -- -- Common stock, no par value; 250,000 shares authorized, 22,131 and 22,104 shares issued and outstanding, respectively 92,180 92,176 Notes receivable from shareholders, net of allowances (37) (41) Deferred stock compensation (3) (415) Accumulated other comprehensive loss (18) (102) Accumulated deficit (93,958) (93,390) Total shareholders' equity (deficit) (1,836) (1,772) Total liabilities and shareholders' equity (deficit) $5,726 $8,635
CONTACT: Paul Quinn, CFO of N2H2, Inc., +1-206-336-1520, or pquinn@n2h2.com
Web site: http://www.n2h2.com/
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