<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
DATE OF REPORT
April 28, 2000
(AMENDING REPORT OF March 24, 2000)
------------------------
N2H2, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
WASHINGTON 000-26825 91-1686754
(STATE OR OTHER JURISDICTION (COMMISSION FILE (I.R.S. EMPLOYER
OF INCORPORATION) NUMBER) IDENTIFICATION NO.)
900 FOURTH AVENUE, SUITE 3400, SEATTLE, WA 98164
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (206) 336-1501
------------------------
INAPPLICABLE
(FORMER NAME OR FORMER ADDRESS IF CHANGED SINCE LAST REPORT)
================================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 23, 2000, N2H2, Inc. ("Registrant" or "N2H2") completed its
acquisition of iseek, Limited, a privately held company incorporated in
Queensland, Australia, in an all-stock transaction. Pursuant to the Share Sale
Agreement dated February 23, 2000 among the Registrant, and Jason Alan
Gomersall, Bevan Andrew Slattery, Lee Gomersall, Roar Investments Pty Limited
ACN 072098572, an Australian corporation, and Drives and Controls Services, Inc.
a Texas corporation, who are all the Shareholders of iseek Limited
(collectively, the "Shareholders"), the Registrant offered and agreed to buy
from each Shareholder and each Shareholder as beneficial owner agreed to sell to
the Registrant all shares of iseek, Limited.
Under the terms of the acquisition, the shareholders of iseek will receive
925,000 shares of N2H2 common stock. The transaction is valued at approximately
$16 million and will be accounted for using the purchase accounting approach.
Immediately following the acquisition, all employees and offices will remain in
operation, and N2H2 plans on injecting capital for marketing and infrastructure
rollout to accelerate growth in Australia and the Asia-Pacific region. N2H2 CEO
Peter Nickerson and another N2H2 representative will join the iseek board.
The information that is set forth in the Registrant's Press Releases dated
February 24, 2000 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
ITEM 7(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
iSEEK LIMITED (formally Infopro Technologies Pty Ltd)
A.C.N. - 083 996 070
PROFIT & LOSS ACCOUNT
FOR THE PERIOD ENDED 30TH JUNE 1999
<TABLE>
<CAPTION>
Note 1999
Aus$
---- ----------
<S> <C> <C>
OPERATING PROFIT (LOSS) BEFORE INCOME TAX
2 (95,048)
Income Tax Expense 3 -
----------
OPERATING PROFIT (LOSS) AFTER INCOME TAX (95,048)
----------
RETAINED PROFITS (ACCUMULATED LOSSES)
AT END OF FINANCIAL YEAR (95,048)
----------
</TABLE>
The accompanying notes form part of these financial statements.
<PAGE> 3
BALANCE SHEET
AS AT 30TH JUNE 1999
<TABLE>
<CAPTION>
Note 1999
Aus$
---- ----------
<S> <C> <C>
CURRENT ASSETS
Cash 624
Inventories 4 9,130
Other 3,648
----------
TOTAL CURRENT ASSETS 13,402
----------
NON-CURRENT ASSETS
Property, plant and equipment 5 17,123
Intangibles 6 46,244
----------
TOTAL NON-CURRENT ASSETS 63,367
----------
TOTAL ASSETS 76,769
----------
CURRENT LIABILITIES
Creditors and borrowings 7 146,815
----------
TOTAL CURRENT LIABILITIES 146,815
----------
NON-CURRENT LIABILITIES
Creditors and borrowings 7 25,000
----------
TOTAL NON-CURRENT LIABILITIES 25,000
----------
TOTAL LIABILITIES 171,815
----------
NET ASSETS (LIABILITIES) (95,046)
----------
EQUITY
Issued capital 8 2
Accumulated losses (95,048)
----------
TOTAL EQUITY (95,046)
----------
</TABLE>
The accompanying notes form part of these financial statements.
<PAGE> 4
STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED 30TH JUNE 1999
<TABLE>
<CAPTION>
1999
Aus$
----------
<S> <C>
Cash Flows from Operating Activities:
Receipts from Customers 1,840
Payments to Suppliers & Employees (84,476)
----------
Net Cash Provided by (Used in)
Operating Activities (82,636)
----------
Cash Flows from Investing Activities:
Payment for Property, Plant & Equipment (23,335)
Payment for Intangibles (995)
----------
Net Cash Provided by (Used in)
Investing Activities (24,330)
----------
Cash Flows from Financing Activities:
Proceeds on Issue of Share Capital 2
Proceeds of Unsecured Advances 107,588
----------
Net Cash Provided by (Used in)
Financing Activities 107,590
----------
Net Increase (Decrease) in Cash Held 624
----------
NOTES TO THE STATEMENT OF CASH FLOWS
Reconciliation of Cash:
Cash at the end of financial year as shown in the statement
of cash flows is reconciled to the related items in the
balance sheet as follows:
Cash on hand 2
Cash at bank 622
----------
624
----------
Reconciliation of Net Cash provided by Operating Activities
to Operating Profit after Income Tax
Operating Profit (Loss) after Income Tax (95,048)
Non Cash Flows in Operating Profit:
Depreciation 6,212
Changes in Assets & Liabilities:
Decrease (Increase) in Current Inventories (9,130)
Decrease (Increase) in Prepayments (3,648)
Increase (Decrease) in Sundry Creditors 12,083
Increase (Decrease) in Trade Creditors 6,895
----------
Net Cash Provided by Operating
Activities (82,636)
----------
</TABLE>
The accompanying notes form part of these financial statements.
<PAGE> 5
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30TH JUNE 1999
1(a) SIGNIFICANT ACCOUNTING POLICIES - AUSTRALIAN GAAP
The financial statements are a general purpose financial report that have been
prepared in accordance with applicable Accounting Standards, other mandatory
professional reporting requirements. The financial statements have been prepared
on an accruals basis, are based on historical costs and do not take into account
changing money values or, except where stated, current valuations of non-current
assets. Cost is based on the fair values of the consideration given in exchange
for assets. The accounting policies have been consistently applied, unless
otherwise stated.
The following is a summary of the material accounting policies adopted by the
company in the preparation of the financial statements.
Notwithstanding the deficiency of net assets, the financial statements have been
prepared on a going concern basis.
The directors believe the events disclosed in Note 11 of the accounts will
ensure the ability of the company to continue as a going concern.
INCOME TAX
The company adopts the liability method of tax-effect accounting whereby the
income tax expense shown on the profit and loss account is based on the
operating profit before income tax adjusted for any permanent differences.
Timing differences which arise due to the different accounting periods in which
items of revenue and expense are included in the determination of operating
profit before income tax and taxable income, are brought to account as either
provision for deferred income tax or an asset described as future income tax
benefit at the rate of income tax applicable to the period in which the benefit
will be received or the liability will become payable.
Future income tax benefits are not brought to account unless realisation of the
asset is assured beyond any reasonable doubt. Future income tax benefits in
relation to tax losses are not brought to account unless there is virtual
certainty of realisation of the benefit.
<PAGE> 6
The amount of benefits brought to account or which may be realised in the future
is based on the assumption that no adverse change will occur in income taxation
legislation and the anticipation that the company will derive sufficient future
assessable income to enable the benefit to be realised and comply with the
conditions of deductibility imposed by the law.
INVENTORIES
Inventories are measured at the lower of cost and net realisable value. Costs
are specifically assigned to each unit of inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are brought to account at cost or at independent
or directors' valuation, less where applicable any accumulated depreciation or
amortisation. The carrying amount of property, plant and equipment is reviewed
annually by directors to ensure it is not in excess of the recoverable amount
from those assets. The recoverable amount is assessed on the basis of expected
net cash flows which will be received from the assets employment and subsequent
disposal. The expected net cash flows have not been discounted to present values
in determining recoverable amount.
The depreciable amount of all fixed assets including buildings and capitalised
leased assets, but excluding freehold land, are depreciated over their estimated
useful lives to the entity commencing from the time the asset is held ready for
use. Properties held for investment purposes are not subject to a depreciation
charge. The depreciation rate used for each class of depreciable asset are:
Class of fixed asset Depreciation Rate
Plant & Equipment 25% - 40%
CASH
For the purposes of the statement of cash flows, cash includes cash on hand and
in at call deposits with banks or financial institutions, investment in money
market instruments maturing within less than two months, net of bank overdrafts.
LEASES
Leases of fixed assets, where substantially all the risks and benefits
incidental to the ownership of the asset, but not legal ownership, are
transferred to the company are classified as finance leases. Finance leases are
capitalised recording an asset and a liability equal to the present value of
minimum lease payments, including any guaranteed residual value. Leased assets
are amortised on straight line basis over their estimated useful lives where it
is likely that the economic entity will obtain ownership of the asset or over
the term of the lease. Lease payments are allocated between the reduction of the
lease liability and the lease interest expense for the period.
Lease payments under the operating leases, where substantially all the risks and
benefits remain with the lessor, are charged as expenses in which they are
incurred.
FOREIGN CURRENCY TRANSLATIONS AND BALANCES
Foreign currency transactions during the period are converted to Australian
currency at rates of exchange applicable at the dates of the transactions.
Amounts receivable and payable in foreign currencies at balance date are
converted to the rates of exchange ruling at that date.
The gains and losses from conversion of short-term assets and liabilities,
whether realised or unrealised, are included in operating profit before income
tax as they arise.
Exchange differences arising on the hedged transactions undertaken to hedge
foreign currency exposure, other than those for the purchase and sale of goods
and services, are brought to account in the profit and loss account when the
exchange rate changes.
Any material gain or loss arising at the time of entering into hedge
transactions is deferred and brought to account in the profit and loss account
over the lives of the hedges.
<PAGE> 7
Costs or gains arising at the time of entering hedge transaction for the
purchase and sale of goods and services, and exchange differences that occur up
to the date of purchase or sale, are deferred and included in the measurement of
the purchase or sale.
Gains and losses from speculative foreign currency transactions are brought to
account in the profit and loss account when the exchange rate arises.
DATE OF INCORPORATION
The company was incorporated on 20 August 1998 and subsequently no comparative
figures are shown in the financial statements.
REVENUE
Revenue from the sale of goods is recognised upon the delivery of goods or
services to customers.
1(b) SIGNIFICANT ACCOUNTING POLICIES - COMPARISON TO US GAAP
Accounting principles generally accepted in Australia vary in certain respects
from the accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of net profit or
loss expressed in Australian Dollars for the year ended 30th June 1999 and the
determination of shareholders' equity and the financial position also expressed
in Australian Dollars as at 30th June, 1999 to the extent summarized below.
INTANGIBLES
Exclusive Technology Affiliate Agreement - $45,249:
US GAAP requires intangible assets to be amortised over their useful lives, not
to exceed 40 years.
Under Australian GAAP long term assets such as licences are generally valued
using their historical cost. The amortisation of the asset must be allocated on
a systematic basis over its useful life. In the case of a licence this period
will be limited to a term of known duration, fixed by the agreement.
The term of the licence is three years (1 March 1999 to 28 February 2002) with
two option periods of 3 years each. If all options are exercised this would
result in an effective useful life of 9 years. As at 30th June 1999 the
Affiliate Agreement had been in place for 4 months.
Preliminary US GAAP Accounting Adjustment:
Due to immateriality the amortisation was not recognised in the accounts at
balance date and this treatment of the technology licence is not in accordance
with US GAAP. A charge to amortise the licence over its expected useful life or
term is required. At 30th June 1999, the amortisation charge required to be
brought to account would be AU$1676.00.
SOFTWARE REVENUE RECOGNITION
US GAAP requires the revenue from the software contracts to be recognised in
accordance with the requirements of SOP 97-2 and SAB 101. The company's revenue
policy is to recognise as revenue the full amounts received from contracts.
These amounts will include licence fee revenue and ongoing maintenance charges.
Preliminary US GAAP Accounting Adjustment:
The revenues stated in the 30th June, 1999 financial statements do not include
any amounts for licence fees or ongoing maintenance charges. Conforming the
company's accounting policies to US GAAP would require an assessment of the
future revenue components of the contracts on foot subsequent to 30th June 1999,
to determine appropriate recognition policies.
PROPERTY, PLANT AND EQUIPMENT
Under US GAAP long lived assets such as property, plant and equipment are
generally valued using their historical cost basis and depreciated over their
useful lives. Revaluations are not permitted.
<PAGE> 8
US GAAP requires that long lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Asset write downs may not be written back up due to the
recovery of market values in a subsequent period.
Under Australian GAAP long lived assets such as property, plant and equipment
are generally valued using their historical cost basis. Asset revaluations of
long term assets, not in excess of their recoverable amount, are permitted, in
which case depreciation is based on the revalued amount. Revaluation increments
are credited directly to the asset revaluation reserve in equity or to income if
the increment reverses a previous decrement that was charged to income.
Preliminary US GAAP Accounting Adjustment:
The current Australian GAAP accounting policies are consistent with US GAAP.
INCOME TAX
US GAAP requires the use of a comprehensive asset/liability method, which is
balance sheet orientated. Deferred tax assets are recognised for all future tax
effects of temporary differences that will result in deductible amounts in
future years and carry-forwards.
Valuation allowances need to be considered in connection with deferred tax
assets if it is considered "more likely than not" that some portion or all of
the deferred tax asset will not be realised.
Australian GAAP uses the liability method of tax effect accounting whereby
deferred tax assets and liabilities arising from timing differences are recorded
in the balance sheet at the rate of tax expected to be applicable at the time
those timing differences reverse.
Although the liability method is generally consistent with the US GAAP, certain
items such as licences acquired in business combinations may give rise to
temporary differences under US GAAP that are not considered to be timing
differences under Australian GAAP. A deferred tax asset in relation to available
tax losses may be recognised to the extent that there is "virtual certainty" the
losses will be utilised. This criteria is generally more conservative than the
"more-likely-than-not" criteria applied under US GAAP.
Preliminary US GAAP Accounting Adjustment:
The company does not currently record any income tax balances. Conforming the
company's accounting to US GAAP would require an assessment of the Future Income
Tax Benefit not brought to account in accordance with the "more likely than not"
criteria.
INVENTORY
Inventories under US GAAP are required to be valued at the lower of cost or
market value using the first in first out ("FIFO"), last in first out ("LIFO"),
or weighted average method of determining cost. Once inventory is written down
to below cost, such reduced amount is considered to be the cost for subsequent
accounting periods.
Under Australia GAAP inventories are required to be valued at the lower of cost
or net realisable value. The average cost, FIFO, standard cost or specific
identification method are appropriate methods for determining inventory cost.
The LIFO method of valuation is not permitted.
Preliminary US GAAP Accounting Adjustment:
The current Australian GAAP accounting policies are consistent with US GAAP.
<PAGE> 9
<TABLE>
<CAPTION>
1999
Aus$
----------
<S> <C>
2 OPERATING PROFIT (LOSS)
Operating Revenue
Included in operating profit are the following
items of operating revenue:
Sales Revenue 1,840
----------
3 INCOME TAX EXPENSE
The prima facie tax payable on operating
profit is reconciled to the income
tax provided in the accounts as follows:
Prima facie tax benefit on operating loss at 36% (34,217)
Less Permanent Differences:
Non Deductible Expenses 148
FITB on tax losses not brought to account 34,069
----------
Income tax expense attributable to operating
profit -
----------
4 INVENTORIES
CURRENT
Stock on Hand - at cost 9,130
----------
5 PROPERTY, PLANT & EQUIPMENT
Office equipment - at cost 23,335
Less: accumulated depreciation 6,212
----------
17,123
----------
Total property, plant & equipment 17,123
----------
6 INTANGIBLE ASSETS
Formation Costs 995
Exclusive Technology Licence - N2H2 45,249
----------
46,244
----------
7 CREDITORS & BORROWINGS
CURRENT
Sundry Creditors 12,083
Trade Creditors 52,144
Amounts payable to directors:
- B Slattery -
- J Gommersall 82,588
----------
146,815
----------
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
1999
Aus$
----------
<S> <C>
NON-CURRENT
Amounts payable to director related party
- L Gommersall 25,000
----------
8 ISSUED SHARE CAPITAL
22,500,000 Ordinary shares, fully paid 2
----------
9 RELATED PARTY TRANSACTIONS
Directors:
The names of directors who have held office during the
financial year were:
Jason Gomersall
Bevan Slattery
Tanya McDonald - (Resigned 1 September 1998)
Income paid or payable to all directors of the company
by the company and any related parties 10,189
Number of directors whose income from the company
or any related parties was within the following bands: No.
0 - $9999 3
Retirement benefits:
Prescribed benefit given during year by the company or
a related party to a director or prescribed superannuation
fund in connection with the retirement from a prescribed
office -
10 CAPITAL AND LEASING COMMITMENTS
(a) Operating lease commitments:
---------------------------
Non-cancellable operating leases contracted for but
not capitalised in the accounts payable(*)
- not longer than 1 year 49,387
- longer than 1 but not longer than 2 49,338
- longer than 2 but not longer than 5 199,176
- longer than 5 -
(*) - the building owners will require guarantees for
the performance of the lease. The form of guarantee
will be an unconditional bank guarantee to
the value of $30,000.
(b) Capital Expenditure Commitments:
-------------------------------
Not committed for but planned Capital expenditure projects 540,000
----------
</TABLE>
<PAGE> 11
11 EVENTS SUBSEQUENT TO BALANCE DATE
At the end of the financial year the company and its directors/shareholders
entered into the following agreements:
o Subscription Deed
o Shareholders Agreement
o Options Deed
These agreements provide for the injection of an initial amount of development
capital totaling $500,000 to provide the company with the necessary capital to
undertake its development strategy planned for the next 12 months.
The company has entered into Share Option Agreements whereby the option holder
has the option to acquire a further interest in the company (up to a maximum of
33 1/3%) at an exercise price of $1,000,000.
12 SEGMENT REPORTING
The company operates in the Information Technology and Internet industry in the
Australian and South East Asia Region.
<PAGE> 12
DIRECTORS' DECLARATION
In the opinion of the directors of the company:
(a) The financial statements, and the notes to the accounts comply with
Australian accounting standards; and
(b) The financial statements give a true and fair view of the financial
position and performance of the company; and
(c) At the date of this statement, there are reasonable grounds to believe
that the company can meet its debts as and when they fall due.
This statement is made in accordance with a resolution of the Board of Directors
and is signed for and on behalf of the directors by:
Director
Jason Gomersall
/s/ JASON GOMERSALL
Dated this 27th day of April, 2000 at Brisbane, Australia
<PAGE> 13
SPECIAL PURPOSE AUDIT REPORT TO THE MEMBERS OF iSEEK LIMITED
SCOPE
We have audited the accompanying balance sheet as at 30 June 1999, the profit &
loss account and change in financial position (cashflows) for the period ended
30 June 1999, all expressed in Australian Dollars.
The company's directors are responsible for the financial report. We have
conducted an independent audit in order to express an opinion to the members of
the company.
Our audit of this financial report was made in accordance with Australian
Auditing Standards, which we believe are generally accepted in the United
States, and included such tests of the accounting records and such other
auditing procedures as we considered necessary in the circumstances to provide
reasonable assurance whether the financial report is free of material
misstatement. Our procedures included examination, on a test basis, of evidence
supporting the amounts and other disclosures in the financial report, evaluation
of significant accounting policies as disclosed in Note 1(a) and significant
accounting estimates. These procedures have been undertaken to form an opinion
whether, in all material respects, the financial report is presented fairly in
accordance with Australian Accounting Standards, so as to present a view of the
company that is consistent with our understanding of the company's financial
position, the results of its operations and its cash flows.
The audit opinion expressed in this report has been formed on the above basis.
AUDIT OPINION
In our opinion, the financial report referred to above presents fairly, the
financial position of the company at 30 June, 1999, and the results of its
operations and changes in financial position (cashflows) for the period ended
30th June 1999, in conformity with accounting principles generally accepted in
Australia, consistently applied.
CALABRO PARTNERS
Chartered Accountants
/s/ RICHARD EDWARDS
Dated this 27th day of April, 2000 at Brisbane, Australia
<PAGE> 14
ITEM 7(b) PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information gives
effect to the acquisition by N2H2, INC. of ISEEK LTD. in a transaction accounted
for as a purchase. N2H2, INC. and ISEEK LTD. are collectively referred to as the
Companies. The unaudited pro forma combined financial statements are based on
the individual historical financial statements of the Companies for the year
ended September 30, 1999 and the three months ended December 31, 1999. The
historical consolidated financial statements of N2H2, INC. are included in its
annual report on form 10-K for the year ended September 30, 1999 and its
quarterly report on Form 10-Q as of and for the three months ended December 31,
1999.
The following unaudited pro forma combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the results of operations or financial position of the combined Companies that
would have occurred if the acquisition had been consummated on the dates
indicated, nor is it intended to be indicative of future operating results or
financial position of the combined Companies. The unaudited pro forma combined
financial statements should be read in conjunction with the historical
consolidated financial statements of N2H2, INC. included in its Forms 10-K and
10-Q and the audited financial statements of ISEEK LTD. appearing elsewhere in
this current report on Form 8-K, including the notes thereto.
The unaudited pro forma combined balance sheet assumes that the acquisition
took place on December 31, 1999. The unaudited pro forma combined statements of
operations assume that the acquisition took place as of October 1, 1998. The
unaudited pro forma combined financial statements are based on the estimates and
assumptions set forth in the notes to such statements. The total estimated
purchase consideration has been allocated on a preliminary basis to the assets
and liabilities of ISEEK LTD. based on a preliminary valuation with the excess
consideration over net assets acquired allocated to goodwill. This allocation is
subject to change pending final analysis of the fair value of the assets
acquired and liabilities assumed. The impact of these changes could be material.
Unaudited Pro Forma Combined Statement of Operations
Year Ended September 30, 1999
<TABLE>
<CAPTION>
ProForma ProForma
N2H2, INC. ISEEK LTD. Adjustments Combined
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues ............................ $ 6,357,000 $ 21,000 $ (70,000)(a) $ 6,308,000
------------ --------- ------------ ------------
Cost and expenses:
Cost of revenues ................... 2,325,000 1,000 2,326,000
Research and development ........... 2,101,000 0 2,101,000
Sales and marketing ................ 3,460,000 2,000 3,462,000
General and
administrative .................... 6,340,000 136,000 (70,000)(b) 6,406,000
Amortization of
intangible assets ................ 3,257,000 (c) 3,257,000
------------ --------- ------------ ------------
Total costs and expenses .......... 14,226,000 139,000 3,187,000 17,552,000
------------ --------- ------------ ------------
Income (loss) from
operations .......................... (7,869,000) (118,000) (3,257,000) (11,244,000)
Interest and other
income, net ...................... 148,000 2,000 150,000
------------ --------- ------------ ------------
Net income (loss) ................... $ (7,721,000) $(116,000) $(3,257,000) $(11,094,000)
============ ========= ============ ============
Net income (loss) per share:
Basic and diluted weighted ....... $ (0.57) $ (0.76)
============ ============
Shares used in per share calculation:
Basic and Diluted ................. 13,620,000 925,000 (d) 14,545,000
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma combined financial information.
<PAGE> 15
Unaudited Pro Forma Combined Statement of Operations
Three months ended December 31, 1999
<TABLE>
<CAPTION>
ProForma ProForma
N2H2, INC. ISEEK LTD. Adjustments Combined
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues ............................ $ 2,257,000 $ 65,000 $ (34,000)(a) $ 2,288,000
------------ --------- ------------ ------------
Cost and expenses:
Cost of revenues ................... 1,296,000 0 1,296,000
Research and development ........... 1,116,000 0 1,116,000
Sales and marketing ................ 2,570,000 4,000 2,574,000
General and
administrative .................... 2,918,000 141,000 (34,000)(b) 3,025,000
Amortization of
intangible assets ................ 814,000 (c) 814,000
------------ --------- ------------ ------------
Total costs and expenses .......... 7,900,000 145,000 780,000 8,825,000
------------ --------- ------------ ------------
Income (loss) from
operations .......................... (5,643,000) (80,000) (814,000) (6,537,000)
Interest and other
income, net ...................... 524,000 2,000 526,000
------------ --------- ------------ ------------
Net income (loss) ................... $(5,119,000) $ (78,000) $ (814,000) $ (6,011,000)
============ ========= ============ ============
Net income (loss) per share:
Basic and diluted weighted ........ $ (0.24) $ (0.27)
============ ============
Shares used in per share calculation:
Basic and Diluted ................. 21,114,000 925,000 (d) 22,039,000
============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
information.
<PAGE> 16
Unaudited Pro Forma Combined Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
ProForma ProForma
N2H2, INC. ISEEK LTD. Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents ............ $ 10,483,000 $ 115,000 $ 10,598,000
Investments ............. 25,268,000 1,000 25,269,000
Accounts receivable,
net .................... 1,335,000 0 (99,000)(e) 1,236,000
Prepaid expenses and
other assets ........... 908,000 0 908,000
------------ ------------ ------------ ------------
Total current
assets ............... 37,994,000 116,000 (99,000) 38,011,000
------------ ------------ ------------ ------------
Long term investments ..... 16,387,000 0 16,387,000
Property and equipment,
net ....................... 6,047,000 102,000 6,149,000
Intangibles and other
assets .................... 495,000 51,000 16,264,000 (f) 16,810,000
------------ ------------ ------------ ------------
Total assets .......... $ 60,923,000 $ 269,000 $ 16,165,000 $ 77,357,000
============ ============ ============ ============
Current liabilities:
Accounts payable ........ 1,367,000 142,000 188,000 (g) 1,697,000
Accrued liabilities ..... 728,000 0 728,000
Deferred revenue,
current portion ........ 939,000 0 939,000
Capital lease obligation,
current portion ....... 158,000 0 158,000
------------ ------------ ------------ ------------
Total current
liabilities .......... 3,192,000 142,000 188,000 3,522,000
------------ ------------ ------------ ------------
Capital lease obligation .. 436,000 0 436,000
Deferred revenue .......... 236,000 0 236,000
------------ ------------ ------------ ------------
Total liabilities ..... 3,864,000 142,000 188,000 4,194,000
------------ ------------ ------------ ------------
Shareholders' equity
(deficit):
Common stock ............ 75,779,000 325,000 15,779,000 (h) 91,883,000
Note receivable share ... (25,000) 0 (25,000)
Accumulated deficit ..... (17,184,000) (198,000) 198,000 (i) (17,184,000)
Deferred stock
compensation ........... (1,511,000) 0 (1,511,000)
------------ ------------ ------------ ------------
Total shareholders'
equity (deficit) ..... 57,059,000 127,000 15,977,000 73,163,000
------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity
(deficit) ............ $ 60,923,000 $ 269,000 $ 16,165,000 $ 77,357,000
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
information.
<PAGE> 17
Notes to Unaudited Pro Forma Combined Financial Information
Note 1--Basis of Presentation:
The unaudited pro forma combined balance sheet has been prepared to reflect
the acquisition of ISEEK LTD. by N2H2, INC. as if the acquisition had occurred
on December 31, 1999.
The unaudited pro forma combined statement of operations for the year ended
September 30, 1999 and the three months ended December 31, 1999 have been
prepared to reflect the acquisition of ISEEK LTD. by N2H2, INC. as if the
acquisition had occurred on October 1, 1998.
There were no material differences in the accounting policies of N2H2, INC.
and ISEEK LTD. for the periods presented.
Note 2--Purchase Accounting and Pro Forma Adjustments:
Purchase Price
In connection with the acquisition, N2H2, INC. issued or will be obligated
to issue a total of 925,000 shares of N2H2, INC. common stock. The market value
of a share of common stock of $17.41 was determined using the average quoted
market price of the N2H2, INC. common stock for the two days preceding and
following the announcement of the acquisition. All options and warrants
previously issued by ISEEK LTD. were exercised prior to the acquisition. 10% of
the N2H2, INC. common stock will be subject to an escrow agreement to the extent
agreed by the holders of such ISEEK LTD. options.
N2H2, INC. will issue options to purchase 40,000 shares of common stock to
certain individuals upon the closing of the merger. These options will be issued
in connection with employment agreements and will be subject to vesting
requirements. These options have not been included in the determination of the
purchase price and will be accounted for in accordance with APB 25.
The total purchase price is as follows:
<TABLE>
<S> <C>
Common stock issued............................... $16,104,000
Acquisition costs incurred........................ 287,000
Liabilities assumed............................... 54,000
-----------
Total purchase price............................ $16,445,000
===========
</TABLE>
Allocation of Purchase Price
The total purchase price of $16,445,000 was allocated to the fair value of
the assets acquired as follows:
<TABLE>
<CAPTION>
Amortization
Life
------------
<S> <C> <C>
Tangible assets.................................... $ 160,000 --
Client redirect software........................... 969,000 5
Customer lists..................................... 572,000 5
Goodwill........................................... 14,744,000 5
-----------
Total intangible assets....................... $16,285,000
-----------
Total purchase price............................. $16,445,000
===========
</TABLE>
<PAGE> 18
Pro Forma Adjustments
The following adjustments were applied to the historical statements of
operations to arrive at the pro forma combined statement of operations:
(a) Eliminates inter-company sales to ISEEK LTD of $70,000 and $34,000 for the
year ended September 30, 1999 and the three months ended December 31, 1999,
respectively.
(b) Eliminates inter-company expenses incurred by ISEEK LTD of $70,000 and
$34,000 for the year ended September 30, 1999 and the three months ended
December 31, 1999, respectively.
(c) Reflects the additional amortization expense of intangible assets of
$3,257,000 and $814,000 for the year ended September 30, 1999 and three
months ended December 31, 1999, respectively, over their estimated useful
lives of 5 years.
(d) Reflects the 925,000 N2H2, INC. common shares to be issued to ISEEK LTD.
shareholders as if they were outstanding from the beginning of each period
presented.
The following adjustments were applied to the historical balance sheet to
arrive at the pro forma combined balance sheet:
(e) Eliminates accounts receivable from ISEEK LTD. of $99,000 at December 31,
1999.
(f) Reflects the intangible assets acquired of $16,264,000 as if the
acquisition took place on December 31, 1999.
(g) Eliminates accounts payable to N2H2, INC. of $99,000 at December 31, 1999
and reflects the payable for acquisition costs incurred of $287,000.
(h) Reflects the N2H2, Inc. common stock to be issued of $16,104,000 for the
acquisition of ISEEK LTD. and eliminates the ISEEK LTD. common stock
balance of $325,000 at December 31, 1999.
(i) Eliminates the ISEEK LTD. accumulated deficit of $198,000 at December 31,
1999.
ITEM 7(c) EXHIBITS
10.1 Share Sale Agreement dated February 23, 2000 among N2H2, Inc., Jason Alan
Gomersall, Bevan Andrew Slattery, Lee Gomersall, Roar Investments Pty
Limited ACN 072098572, and Drives and Controls Services, Inc. (Previously
filed)
99.1 Text of Press release dated February 24, 2000, regarding the completion
of the acquisition of iseek, Limited. (Previously filed)
- --------------------------------------------------------------------------------
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
N2H2, INC.
By: /s/ PETER H. NICKERSON
---------------------------------
Peter H. Nickerson
Chairman, President and
Chief Executive Officer
Dated: April 28, 2000
