Network Engines Reports Second-Quarter Results; Cash Position Remains Strong at $94 Million; Cost Control Initiatives Reduce Cash Burn Rate

Business Wire, April 26, 2001

Business/Technology Editors

CANTON, Mass.--(BUSINESS WIRE)--April 26, 2001

Network Engines, Inc. (Nasdaq: NENG), a leading provider of scalable Internet server appliances, today reported net revenues of $2.5 million in the quarter ended March 31, 2001, a decrease of approximately 59% from the $6.1 million in the quarter ended March 31, 2000 and a decrease of approximately 64% from the $6.9 million in the quarter ended December 31, 2000. Pro forma net loss was $11.2 million, or $0.33 per share, in the quarter ended March 31, 2001, compared to $3.5 million, or $0.14 per share, in the quarter ended March 31, 2000 and $8.9 million, or $0.26 per share, in the quarter ended December 31, 2000.

The pro forma net loss and net loss per share excludes non-cash charges for the amortization of stock-based compensation and intangible assets, accretion of redeemable convertible preferred stock, as well as charges to operations to reduce inventory to its net realizable value and to write off certain fixed assets as itemized in the attached Pro Forma Condensed Consolidated Statement of Operations. The inventory write off of $8.7 million in the quarter ended March 31, 2001 resulted from the unanticipated decline in revenues and the current economic environment. The fixed assets write off of $1.2 million in the quarter ended March 31, 2001 is related to equipment used in the production and sale of previous generation web content server appliances.

Commenting on the results, John Curtis, newly appointed president and Chief Executive Officer of Network Engines said, "As we indicated in our pre-announcement on April 4, 2001, our revenue has continued to be affected by the sharp and continued downturn in IT spending. This downturn has clearly had a significant effect on our customer base of largely `new economy' companies. The downturn, coupled with product transition issues related to our new WebEngine Sierra server appliance and our Network-Attached Storage appliance StorageEngine Voyager created a difficult business environment for Network Engines this quarter.

"The cost-saving actions we announced earlier this month will align our business with the realities of the present market environment and will significantly slow our cash-burn rate. Three of our immediate priorities are to: conserve cash, enhance our tactical sales efforts, and identify and implement a new product development process that is necessary for our long-term success.

He concluded, "Our balance sheet remains strong, with over $94 million in cash at the end of the quarter, permitting us to continue to invest in key areas of product development. We have talented, dedicated employees and solid, feature-rich products. We're committed to taking the necessary action to establish a successful company."

Outlook:

Like many other companies in our sector, based on the continuing lack of visibility and the current economic environment, we cannot provide meaningful guidance with respect to revenue and gross margin expectations. We will, however, provide limited guidance relative to operating expenses.

We have taken aggressive actions to reduce current operating expenses and therefore conserve cash. These actions include the company-wide reduction in headcount that we announced on April 17th. We expect to take a restructuring charge in the third quarter of approximately $3.5 million in connection with this reduction. Additionally, we are curtailing discretionary SG&A expenditures, consolidating our European operations and deferring our expansion into Asia. Capital spending will also be closely scrutinized.

We expect the full effect of these initiatives will be felt in our fiscal fourth quarter and are expected to reduce the Company's operating expenses, excluding non-cash items, beginning in that quarter by approximately 30-35% as compared to our fiscal second quarter's operating expenses.

Depending on the timing of key payables, $12.7 million of which is due to the inventory adjustments, we expect our cash position by year-end to be in the range of $55 million to $65 million. We believe that our quarterly cash burn rate in the fourth quarter of this year, once these adjustments are fully recognized, will be approximately $8 million.

Network Engines will host a conference call today at 5:00 p.m. EST to discuss this announcement. This event is also available live at the investor relations section of the Network Engines web site: www.networkengines.com. The call will be archived on the Network Engines site for one week. The Company assumes no obligation to update the information included in this press release.

About Network Engines

Network Engines (Nasdaq: NENG) provides high-density, scalable Internet server appliances that support large Web-based applications for web hosting and service providers, content infrastructure providers, application service providers, and other e-commerce based businesses. The Company was founded in 1997 and is based in Canton, Massachusetts. For more information, visit the company's Web site at www.networkengines.com.