-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IOUANl5m6kf7nr9+SkGyLEw0o+md4qJU5VUdTfycL2aENs4TG7BvcrLTFG5Mt77H rkMW8g491AYFq83UsArrZQ== 0001019687-02-001528.txt : 20020814 0001019687-02-001528.hdr.sgml : 20020814 20020814161422 ACCESSION NUMBER: 0001019687-02-001528 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETGURU INC CENTRAL INDEX KEY: 0001015920 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 222356861 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28560 FILM NUMBER: 02736749 BUSINESS ADDRESS: STREET 1: 22700 SAVI RANCH PARKWAY CITY: YORBA LINDA STATE: CA ZIP: 92887 BUSINESS PHONE: 7149742500 MAIL ADDRESS: STREET 1: 22700 SAVI RANCH PKWY CITY: YORBA LINDA STATE: CA ZIP: 92887 FORMER COMPANY: FORMER CONFORMED NAME: RESEARCH ENGINEERS INC DATE OF NAME CHANGE: 19960603 FORMER COMPANY: FORMER CONFORMED NAME: RESEARCH ENGINEERS INC/ DATE OF NAME CHANGE: 20000317 10QSB 1 netguru_10q-063002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission file number: 0-28560 NETGURU, INC. (Exact name of small business issuer as specified in its charter) DELAWARE 22-2356861 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 22700 SAVI RANCH PARKWAY, YORBA LINDA, CA 92887 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (714) 974-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the registrant's only class of Common Stock, $.01 par value, was 17,296,650 on August 12, 2002. PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three-month periods ended June 30, 2002 and 2001 Condensed Consolidated Balance Sheets as of June 30, 2002 and March 31, 2002 Condensed Consolidated Statements of Cash Flows for the three-month periods ended June 30, 2002 and 2001 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETGURU, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) ($ in thousands except share and per share amounts)
THREE MONTHS ENDED JUNE 30, -------------------------------- 2002 2001 ------------- ------------- Net revenues: Engineering and collaborative software solutions $ 1,871 $ 2,395 IT services 1,414 3,348 Web-based telecommunication and travel services 1,132 1,038 ------------- ------------- Total net revenues 4,417 6,781 Cost of revenues: Engineering and collaborative software solutions 249 298 IT services 1,076 2,345 Web-based telecommunication and travel services 987 914 ------------- ------------- Total cost of sales 2,312 3,557 ------------- ------------- Gross profit 2,105 3,224 ------------- ------------- Operating expenses: Selling, general and administrative 2,616 3,114 Research and development 464 487 Amortization of goodwill -- 334 Depreciation and other amortization 311 327 Restructuring 93 -- ------------- ------------- Total operating expenses 3,484 4,262 ------------- ------------- Operating loss (1,379) (1,038) ------------- ------------- Other expense (income): Interest, net 62 32 Other (2) (8) ------------- ------------- Total other expense 60 24 ------------- ------------- Loss before income taxes (1,439) (1,062) Income tax (benefit) expense (369) 89 ------------- ------------- Net loss $ (1,070) $ (1,151) ============= ============= Net loss per common share: Basic $ (0.06) $ (0.07) ============= ============= Diluted $ (0.06) $ (0.07) ============= ============= Common shares used in computing net loss per common share: Basic 17,285,977 16,877,539 ============= ============= Diluted 17,285,977 16,877,539 ============= =============
See accompanying notes to condensed consolidated financial statements. 3 NETGURU, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
JUNE 30, MARCH 31, 2002 2002 --------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,485 $ 3,466 Accounts receivable (net of allowance for doubtful accounts of $973 and $981, as of June 30, 2002 and March 31, 2002, respectively) 3,013 3,325 Income tax receivable 309 305 Notes and related party loans receivable 198 269 Prepaid expenses and other current assets 1,011 1,543 --------- --------- Total current assets 7,016 8,908 Property, plant and equipment, net 4,014 4,169 Goodwill and intangible assets (net of accumulated amortization of $4,438 as of June 30, 2002 and March 31, 2002) 9,105 9,105 Other assets 948 884 --------- --------- $ 21,083 $ 23,066 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term bank debt $ 257 $ 259 Current portion of capital lease obligations 428 417 Accounts payable 1,091 1,012 Accrued expenses 630 1,082 Income taxes payable -- 196 Deferred maintenance revenue 1,652 1,760 Deferred income taxes -- 60 Other liabilities 152 199 Accrued restructuring costs 237 157 --------- --------- Total current liabilities 4,447 5,142 Long-term bank debt, net of current portion 456 567 Capital lease obligations, net of current portion 926 1,027 Deferred income taxes, non-current -- 112 Deferred gain on sale-leaseback 870 887 --------- --------- Total liabilities 6,699 7,735 --------- --------- Stockholders' equity: Preferred stock, par value $.01 (Authorized 5,000,000 shares; no shares issued and outstanding) -- -- Common stock, par value $.01; authorized 150,000,000 shares; issued and outstanding 17,296,650 and 17,265,850 shares (net of 10,965 treasury shares) as of June 30, 2002 and March 31, 2002, respectively 173 173 Additional paid-in capital 33,086 33,057 Accumulated deficit (17,875) (16,805) Accumulated other comprehensive loss: Cumulative foreign currency translation adjustments (1,000) (1,094) --------- --------- Total stockholders' equity 14,384 15,331 --------- --------- $ 21,083 $ 23,066 ========= =========
See accompanying notes to condensed consolidated financial statements. 4 NETGURU, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
THREE MONTHS THREE MONTHS ENDED ENDED JUNE 30, 2002 JUNE 30, 2001 ------------- ------------- Cash flows from operating activities: Net loss $(1,070) $(1,151) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 311 661 Bad debt expense 25 -- Deferred income taxes (172) (7) Compensation expense recognized on issuance of stock options (23) 34 Restructuring 93 -- Changes in operating assets and liabilities (net of acquisitions): Accounts receivable 361 1,094 Notes and related party loans receivable 71 (1) Income tax receivable (4) -- Prepaid expenses and other current assets 535 (294) Other assets (88) 153 Accounts payable 69 (57) Accrued expenses (456) (437) Income taxes payable (199) 68 Accrued restructuring costs (13) -- Other current liabilities (73) 38 Deferred maintenance revenue (140) (525) Deferred gain on sale-leaseback (17) (29) -------- -------- Net cash used in operating activities (790) (453) -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (88) (167) Payments to acquire companies, net of cash acquired -- (67) -------- -------- Net cash used in investing activities (88) (234) -------- -------- Cash flows from financing activities: Proceeds from issuance of bank debt 1 19 Repayment of bank debt (115) (109) Repayment of capital lease obligations (84) (36) Issuance of common stock 52 27 Repurchase common stock -- (140) -------- -------- Net cash used in financing activities (146) (239) -------- -------- Effect of exchange rate changes on cash and cash equivalents 43 (68) -------- -------- Decrease in cash and cash equivalents (981) (994) Cash and cash equivalents, beginning of period 3,466 7,958 -------- -------- Cash and cash equivalents, end of period $ 2,485 $ 6,964 ======== ======== Supplemental disclosure of cash flow information: Amounts paid for: Interest $ 63 $ 21 Income taxes $ 1 $ 14
See accompanying notes to condensed consolidated financial statements. 5 NETGURU, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of netGuru, Inc. and its wholly owned subsidiaries (the "Company"). All significant transactions among the consolidated entities have been eliminated upon consolidation. These condensed consolidated financial statements have been prepared by the Company and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at June 30, 2002 and the results of operations and the cash flows for the three months ended June 30, 2002 and 2001, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual consolidated financial statements. Results of operations for the three months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year ending March 31, 2003. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards ("SFAS") No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires management to disclose the estimated fair value of certain assets and liabilities defined by SFAS No. 107 as financial instruments. Financial instruments are generally defined by SFAS No. 107 as cash or a contractual obligation that conveys to one entity a right to receive cash or other financial instruments from another entity, as well as impose on the other entity the obligation to deliver cash or other financial instruments to the first entity. At June 30, 2002, management believes the carrying amounts of cash and cash equivalents, receivable and payable amounts, and accrued expenses approximate fair value because of the short maturity of these financial instruments. The Company also believes that the carrying amounts of its long-term debt and capital lease obligations approximate their fair value as the interest rates approximate a rate that the Company could obtain under similar terms at the balance sheet date. SOFTWARE DEVELOPMENT COSTS AND PURCHASED TECHNOLOGY The Company capitalizes costs related to the development of certain software products. Capitalization of costs begins when technological feasibility has been established and ends when the product is available for general release to customers. As of June 30, 2002, capitalized costs of approximately $657,000, net of accumulated amortization, were included in other assets. Approximately $303,000 of this amount represents software developed in-house and $261,000 represents the cost of software developed on the Company's behalf by third parties. The remaining $93,000 represents purchased technology. Additions to capitalized software were $28,000 and $2,500 during the quarters ended June 30, 2002 and 2001, respectively. 6 The Company amortizes capitalized software development costs and purchased technology using the straight-line method over three to five years, or the ratio of actual sales to anticipated sales, whichever is greater. Amortization of software development costs and purchased technology charged to operations was approximately $43,000 and $54,000 for the quarter ended June 30, 2002 and 2001 respectively. Accumulated amortization on capitalized software was $533,000 and $432,000 as of June 30, 2002 and 2001, respectively. REVENUE RECOGNITION The Company recognizes revenue when it is realized or realizable and earned. The Company's revenues arise from the following segments: enterprise engineering and collaborative software solutions (including digital media products and services); information technology ("IT") services; and Web-based telecommunication and travel services. Revenue from software sales is recognized upon shipment, provided that no significant post-contract support obligations remain outstanding and collection of the resulting receivable is deemed probable. The Company's software sales do not provide a specific right of return. At the time of sale, the Company typically provides 120-day initial maintenance and support to the customer. Costs relating to this initial 120-day support period, which include primarily telephone support, are not considered material. After the initial support period, customers may choose to purchase ongoing maintenance contracts that include telephone, e-mail and other methods of support, and the right to receive upgrades. Revenue from these maintenance contracts is deferred and recognized ratably over the life of the contract, usually twelve months. Revenues from digital media and animation services are recognized upon achievement of certain pre-determined milestones. The Company recognizes revenue from providing IT services primarily on a time and material basis as services are performed. Certain IT services contracts are fixed cost type contracts for which the Company recognizes revenue upon achieving certain milestones. In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the AICPA issued Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. SOP 97-2 distinguishes between significant and insignificant vendor obligations as a basis for recording revenue with a requirement that each element of a software licensing arrangement be separately identified and accounted for based on relative fair values of each element. The Company adopted SOP 97-2 in the first quarter of fiscal 1999. In 1998 the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS, which modifies SOP 97-2 to allow for use of the residual method of revenue recognition provided that certain criteria have been met. The Company adopted SOP 98-9 in the first quarter of fiscal 2000. Revenues from Web-based telecommunication and travel services, are predominantly recognized net of purchase costs when the products and services are delivered and collectibility is probable. Revenues from certain phone card transactions are deferred and recognized on the basis of usage. Revenues from call termination services are recognized when the services are completed and the cost of these services are recognized when incurred. Certain travel services, based on their nature, are recognized at the gross sales value with purchase costs stated as a separate cost of revenues in accordance with Emerging Issues Task Force Issue No. 99-19, RECORDING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS AN AGENT. 7 RECLASSIFICATIONS Certain reclassifications have been made to the fiscal 2002 consolidated financial statements to conform to the fiscal 2003 presentation. PROVISION FOR RESTRUCTURING OPERATIONS In March 2001, the Company announced plans to restructure its operations. As a result of this restructuring plan, the Company recorded a restructuring charge of $2.4 million. The restructuring plan consisted of four major points: 1) refocused strategic direction of internet service provider ("ISP") initiatives; 2) refocused strategic direction of Internet portal initiatives; 3) consolidation of the Company's technical support activities; and 4) elimination of the Company's in-house legal department. In the Internet portal business, the Company redirected its primary focus towards the telephony and travel services offered through the portal. With regard to the Company's ISP initiatives in India, the Company redirected its primary focus towards the communication and connectivity services targeted at the corporate market. Activity relating to the restructuring charge is as follows (in thousands):
REFOCUS OF REFOCUS OF CONSOLIDATION ELIMINATION ISP PORTAL OF TECHNICAL OF LEGAL OPERATIONS OPERATIONS SUPPORT DEPARTMENT TOTAL ----------- ---------- ------------- ------------ -------- March 31, 2000 -- -- -- -- -- Restructuring charge $ 1,998 194 $ 166 $ 42 $ 2,400 Cash payments (1,897) (194) -- -- (2,091) -------- -------- -------- -------- -------- March 31, 2001 $ 101 $ -- $ 166 $ 42 $ 309 -------- -------- -------- -------- -------- Cash payments -- (67) (58) (52) (177) Adjustments (67) a 67 a (16) b 41 b 25 -------- -------- -------- -------- -------- March 31, 2002 $ 34 $ -- $ 92 $ 31 $ 157 -------- -------- -------- -------- -------- Cash payments -- -- (13) (13) Adjustments (16) c -- 109 c 93 -------- -------- -------- -------- -------- June 30, 2002 $ 18 $ -- $ 79 $ 140 $ 237 ======== ======== ======== ======== ========
a. Represents reversal of over-accrual for contractual obligations for ISP operations and additional amounts accrued for contractual obligations related to the portal operations. b. Represents reversal of over-accrual for technical support severance costs and additional amounts accrued for anticipated severance costs for the elimination of the legal department. c. Represents reversal of over-accrual for contractual obligation for ISP operations and additional amounts accrued for anticipated severance costs for the elimination of the legal department. The balance at June 30, 2002 includes $54,000 of lease payments for vacated office space scheduled for payment through September 2003. The remaining personnel costs and contractual obligations are expected to be completed by the end of the third quarter of fiscal 2003. 8 STOCKHOLDERS' EQUITY In April 2000, the Company issued 25,000 shares of common stock as a portion of the purchase price for the acquisition of Allegria Software, Inc ("Allegria"). The recipients of these shares were given the right to demand the Company to repurchase these shares at a price of $28.60 per share at the end of one year. In April 2001, each of the former owners exercised this right. The total repurchase price was $715,000. Agreements were reached with all parties to extend cash payment for this repurchase over a twelve-month period. One of the owners is holding the stock certificates for 13,000 shares until full payment is received for these shares. The total cash to be paid for this repurchase is $372,000, of which $128,000 was paid as of June 30, 2002. FOREIGN CURRENCY TRANSLATION The financial position and results of operations of the Company's foreign subsidiaries are accounted for using the local currency as the functional currency. Assets and liabilities of the subsidiaries are translated into U.S. dollars (the reporting currency) at the exchange rate in effect at the period-end. Statements of operations accounts are translated at the average rate of exchange prevailing during the respective periods. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in the consolidated balance sheets. Gains and losses resulting from foreign currency transactions are included in operations and are not material to the first quarter of fiscal 2003 and the first quarter of fiscal 2002. COMPREHENSIVE INCOME (LOSS) The Company applies the provisions of SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which prescribes rules for the reporting and display of comprehensive income (loss) and its components. SFAS No. 130 requires foreign currency translation adjustments, which are reported separately in stockholders' equity, to be included in other comprehensive income (loss). Total comprehensive loss was $976,000 and $1,242,000 for the quarter ended June 30, 2002 and 2001, respectively. NET LOSS PER SHARE Basic Earnings (Loss) Per Share ("EPS") is calculated by dividing net income (loss) by the weighted-average common shares outstanding during the period. Diluted EPS reflects the potential dilution to basic EPS that could occur upon conversion or exercise of securities, options, or other such items, to common shares using the treasury stock method based upon the weighted-average fair value of the Company's common shares during the period. The following table illustrates the computation of basic and diluted net loss per share (in thousands except per share amounts):
THREE MONTHS ENDED JUNE 30, ----------------------- 2002 2001 --------- --------- Numerator: Net loss & numerator for basic and diluted loss per share $ (1,070) $ (1,151) ========= ========= Denominator: Denominator for basic net loss per share - average number of common shares outstanding during the period 17,286 16,877 Incremental common shares attributable to exercise of outstanding options, warrants and other common stock equivalents -- -- --------- --------- Denominator for diluted net loss per share 17,286 16,877 ========= ========= Basic net loss per share $ (0.06) $ (0.07) ========= ========= Diluted net loss per share $ (0.06) $ (0.07) ========= =========
9 Options, warrants and other common stock equivalents amounting to 737,000 and 608,000 potential common shares were excluded from the computation of diluted EPS for the quarters ended June 30, 2002 and 2001, respectively, because the Company reported net losses and, therefore, the effect would be antidilutive. SEGMENT AND GEOGRAPHIC DATA The Company is an integrated information technology and services company operating in three primary business segments: 1) enterprise engineering and collaborative software solutions; 2) IT services; and 3) Web-based telecommunication and travel services. The Company has provided computer-aided engineering software solutions to customers for over 20 years. During the past 18 years, the Company has supported the engineering software business with India-based software programming and IT resources. In addition, based upon the Company's knowledge and understanding of the engineering software market, combined with the Company's Internet technology resources and experience, the Company launched Web4engineers.com, an engineering applications service provider ("ASP") portal hosting the Company's engineering software applications online and providing ASP services to engineering software providers and their licensees worldwide. With the acquisitions of R-Cube Technologies in February 1999 and NetGuru Systems completed in December 1999, the Company further expanded its IT resources and capabilities and its presence in the IT services industry, providing expertise in data-mining and embedded technologies, Internet/Intranet design and development and systems and software integration and implementation to companies in North America. The Company has expanded its IT services business into Europe and intends to further expand its services in India and Southeast Asia. The Company applies the provisions of SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 requires segments to be determined and reported based on how management measures performance and makes decisions about allocating resources. The significant components of worldwide operations by reportable operating segment (in thousands) are: THREE MONTHS ENDED JUNE 30, --------------------------- 2002 2001 -------- -------- (IN THOUSANDS) NET REVENUE Engineering and collaborative software solutions $ 1,871 $ 2,395 IT services 1,414 3,348 Web-based telecommunication and travel services 1,132 1,038 ======== ======== Consolidated $ 4,417 $ 6,781 ======== ======== OPERATING (LOSS)/INCOME Engineering and collaborative software solutions $(1,135) $ (763) IT services (67) 183 Web-based telecommunication and travel services (177) (458) ======== ======== Consolidated $(1,379) $(1,038) ======== ======== 10 The Company's operations are based worldwide through foreign and domestic subsidiaries and branch offices in the United States, India, the United Kingdom, France, Germany and Asia-Pacific. The following are significant components of worldwide operations by geographic location: THREE MONTHS ENDED JUNE 30, ------------------------ 2002 2001 ------- ------- (IN THOUSANDS) NET REVENUE United States $3,200 $5,718 The Americas (other than U.S.) 107 120 Europe 495 497 Asia-Pacific 615 446 ------- ------- Consolidated $4,417 $6,781 ======= ======= EXPORT SALES United States $ 232 $ 124 ======= ======= JUNE 30, JUNE 30, 2002 2001 -------- -------- (IN THOUSANDS) LONG-LIVED ASSETS United States $12,342 $14,105 Europe 365 386 Asia-Pacific 1,360 2,570 -------- -------- Consolidated $14,067 $17,061 ======== ======== CONTINGENCIES The Company is party to various litigation matters arising in the normal course of business. Management believes the resolution of these matters will not have a material adverse effect on the Company's results of operations or financial condition. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This Management's Discussion and Analysis of Financial Condition and Results of Operations" section contains certain statements, which are not historical in nature and are intended to be, are hereby identified as forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include without limitation, statements relating to (i) anticipated trends in our financial condition and results of operations (including expected changes in our gross profit and SG&A expenses); (ii) our ability to finance our working capital requirements; (iii) our business strategy for expanding our presence in our business segments; and (iv) our ability to distinguish ourselves from our current and future competitors. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include, the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation, o our ability to transition into new lines of business as planned; o our ability to become a leading integrated information technology and services company addressing the worldwide engineering and collaborative software market, the worldwide IT services market and the Web-based telecommunications and travel services market; o our ability to successfully market and sell ASP services through our engineering portal; o market growth; o new competition; o competitive pricing; o new technologies; o our ability to successfully implement our future business plans; o our ability to return to profitability; o statements about our business strategy and our expansion strategy; o our ability to attract strategic partners, alliances and advertisers; o uncertainties relating to economic conditions in the markets in which we currently operate and in which we intend to operate in the future; o our ability to hire and retain qualified personnel; o our ability to obtain capital, if required; o our ability to successfully implement our brand building campaign; o the risks of uncertainty of trademark protection; o our plans regarding our telephony infrastructure and service offerings; o our beliefs regarding the demand for our products and our competitive advantages; o the negative impact of economic slowdowns and recessions; and o risks associated with existing and future government regulation to which we are subject. o our belief that the resolution of various litigation matters arising in the normal course of business will not have a material adverse effect on our results of operations We do not undertake to update, revise or correct any forward-looking statements. When used in this report, the words "anticipate," "believe," "intends," "estimate," "plan," "could," "should," "would," and "expect" and similar expressions as they relate to us or our management are intended to identify such forward-looking statements. The information contained in this report is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report and in our other materials filed with the Securities and Exchange Commission, including our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2002 (and, in particular, in the "Risk Factors" section therein) that discuss our business in greater detail and that also disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition. 12 Any of the factors described above or in the "Risk Factors" section of our Annual Report on Form 10-KSB could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results. OVERVIEW We were incorporated in 1981 under the name Research Engineers, Inc. and changed our name to netGuru, Inc. in 2000. We are an integrated Internet technology and services company providing: o Enterprise engineering and collaborative software solutions (including digital media and animation products and services) to businesses worldwide; o IT services; and o Web-based telecommunication and travel services We have been providing computer-aided engineering software solutions to our customers for over 20 years. For the past 18 years, we have supported our engineering software business with our India-based software programming and IT resources. In 1999, we acquired two IT services companies in the U.S., further expanding our IT resources and capabilities. Our Internet portal services were started in 1999. In fiscal 2001, we refocused our Internet portal services to provide telecommunications and travel services. In fiscal 2001 we also began to offer our ASP services. Our stand-alone and network-based engineering software products provide fully integrated, easy-to-use design automation and analysis solutions for use by engineering analysis and design professionals worldwide. We have developed a comprehensive line of structural, mechanical, civil and process/piping engineering software products, including our STAAD/Pro(R) family of products, FabriCAD, ADLPIPE, STARDYNE(R), CIVILSOFT and CIVILMASTER(R). Our products assist engineers in performing mission-critical functions, including analysis and design of industrial, commercial, transportation and utility structures; pipelines, machinery, automotive and aerospace products; and survey, contour and digital terrain modeling. We currently license our software products to more than 20,000 companies accounting for over 50,000 software installations. Based on our customer surveys, we estimate that there are approximately 150,000 users at these installations worldwide. Our customers include: Bechtel Corporation, British Telecom, Jet Propulsion Laboratories, Exxon Corporation, Fluor Daniel, Inc., General Dynamics, NASA, Rocketdyne, Siemens AG and Toyo Engineering. In April 2000, we acquired Allegria Software, Inc., a developer of Web-based document management and collaborative tools for engineers and manufacturers, and added their e-Review and ForReview collaboration products to our offerings. Some of our eReview customers are Agilent Technologies, Case New Holland, LG Engineering & Construction Corp., Paxonix, Astley-Gilbert, Tekla, Inc., RISA Technologies, Engineered Software, Structural Research Analysis Corp, Constructware, eBuild, (SRAC)/Dassault Systems, Integrated Technical Software and CADopia, LLC. In 1999, we acquired three IT services companies: R-Cube Technologies, Inc., NetGuru Systems, Inc. and NetGuru Consulting. We provide a full suite of IT consulting services to our customers from our IT services divisions in the Silicon Valley and the Boston area. We have built our IT services offerings around a proven set of proprietary software products and solutions. Our value-added IT services incorporate our eReview technology, providing a Web-based real-time collaboration/engineering solution for document review and markup. As a Total Solutions Provider, we provide our business-to-business clients with custom application solutions or integrate existing third party software solution stacks. Over the past 20 years we have built a global customer base of 20,000 loyal business clients that use our software products. We have provided IT services and software solutions to almost every vertical industry market with emphasis on engineering, aerospace, e-commerce, semiconductors, finance, education, insurance, manufacturing, distribution, retail, government, pharmaceuticals and healthcare. We are best positioned to provide mass customized IT services to high-end, high growth clients who are interested in delivering Web-based real-time collaboration for document review and markup technologies to the world markets. 13 Our Internet solutions consist of long-distance communication services including call termination services and phone cards and travel services targeted towards certain niche markets. In August 2001, the Company entered into the global telephony wholesale market by providing communication services to and from global destinations to consumers, carriers and corporations. We offer communication service providers long distance call termination services globally through our gateway in the United States by traditional delivery methods such as international leased lines and satellite access. CRITICAL ACCOUNTING POLICIES We have identified the following as accounting policies critical to our company: revenue recognition, capitalization of software development, allowances for accounts receivable, impairment of long-lived assets including goodwill, and deferred income taxes. REVENUE RECOGNITION - ------------------- We recognize revenue when it is realized or realizable and earned. Our revenues arise from the following segments: enterprise engineering and collaborative software solutions (including digital media and animation services); IT services; and Web-based telecommunication and travel services. Revenue from software sales is recognized upon shipment, provided that no significant post-contract support obligations remain outstanding and collection of the resulting receivable is deemed probable. Our software sales do not provide a specific right of return. At the time of sale, we typically provide 120-day initial maintenance and support to the customer. Costs relating to this initial 120-day support period, which consist primarily of telephone support, are not considered material. After the initial support period, customers may choose to purchase ongoing maintenance contracts that include telephone, e-mail and other methods of support, and the right to receive upgrades. Revenue from these maintenance contracts is deferred and recognized ratably over the life of the contract, usually twelve months. Revenues from digital media and animation services are recognized upon achievement of certain pre-determined milestones. Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION, as amended, generally requires revenue earned on software transactions involving multiple elements to be allocated to each element based on the relative fair value of the elements. The fee for multiple-element transaction is allocated to each element of the transaction, such as maintenance and support services, based on the relative fair value of the elements. We determine the fair value of each element in multi-element transactions based on vendor-specific objective evidence ("VSOE"). VSOE for each element is based on the price charged when the same element is sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the transaction fee is recognized as revenue. Revenue from providing IT services is primarily recognized on a time and material basis as services are performed. Certain IT services contracts are fixed cost type contracts for which revenue is recognized upon achieving certain milestones. We recognize revenues from Web-based telecommunication and travel services, net of purchase costs when the products and services are delivered and collectibility is probable. Revenues from certain phone card transactions are deferred and recognized on the basis of usage. Certain travel services, based on their nature, are recognized at the gross sales value with purchase costs stated as a separate cost of revenues in accordance with Emerging Issues Task Force Issue No. 99-19, RECORDING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS AN AGENT. 14 ACCOUNTING FOR SOFTWARE DEVELOPMENT COST AND PURCHASED TECHNOLOGY - ----------------------------------------------------------------- We develop software in-house, employ third parties to develop software for us as well as purchase software technology. Costs related to the development of certain software products are capitalized. Capitalization of costs begins when technological feasibility has been established and ends when the product is available for general release to customers. Additional costs to enhance products after release are expensed as they are incurred. Capitalized software development costs and purchased technology are amortized using the straight-line method over three to five years, or the ratio of actual sales to anticipated sales, whichever is greater. The resulting net book value of the capitalized software asset is reviewed periodically for recoverability based on estimated future revenues from products based on that particular technology. When significant uncertainties exist with respect to the recoverability of the capitalized cost of the asset, we write the cost of the asset down to its potential recoverable value. ALLOWANCE FOR ACCOUNTS RECEIVABLE - --------------------------------- We sell to our customers on credit and grant credit to those who are deemed credit worthy based on our analysis of their credit history. We review our accounts receivable balances and the collectibility of these balances on a periodic basis. Based on our analysis of the length of time that the balances have been outstanding, the pattern of customer payments, our understanding of the general business conditions of our customers and our communications with the customers, we estimate the recoverability of these balances. When recoverability is uncertain and the unrecoverable amounts can be reasonably estimated, we record bad debt expense and increase the allowance for accounts receivable by an amount equal to the amount estimated to be unrecoverable. IMPAIRMENT OF LONG-LIVED ASSETS - ------------------------------- Through March 3, 2002, we applied the provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement required that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized was measured as the amount by which the carrying amount of the asset exceeded the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In August 2001, the FASB issued SFAS No. 144 ("SFAS 144"), ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement addresses financial accounting and reporting for the impairment of long-lived assets and supersedes SFAS 121, and the accounting and reporting provisions of APB No. 30, REPORTING THE RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT OF A BUSINESS. SFAS 144 in effective for fiscal years beginning after December 15, 2001. We have adopted SFAS 144 beginning April 1, 2002. The adoption of SFAS 144 does not have a material impact on our consolidated financial position or results of operations. DEFERRED INCOME TAXES - --------------------- We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 15 In assessing the realizability of the net deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon either the generation of future taxable income during the periods in which those temporary differences become deductible or the carryback of losses to recover income taxes previously paid during the carryback period. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of our net revenues.
THREE MONTHS ENDED JUNE 30, -------------------------------- 2002 2001 ---- ---- Net revenues 100.0% 100.0% Cost of revenues 52.3 52.5 -------------- -------------- Gross profit 47.7 47.5 -------------- -------------- Selling, general and administrative expenses 59.2 45.9 Research and development expenses 10.6 7.2 Amortization of goodwill - 4.9 Depreciation and software amortization 7.0 4.8 Restructuring 2.1 - -------------- -------------- Total operating expenses 78.9 62.8 Operating loss (31.2) (15.3) Interest expense, net 1.4 0.5 Other income, net - (0.1) -------------- -------------- Loss before income taxes (32.6) (15.7) Income tax benefit (expense) 8.4 (1.3) -------------- -------------- Net loss (24.2)% (17.0)% ============== ==============
NET REVENUES. Net revenues for the quarter ended June 30, 2002 decreased by $2,364,000 (34.9%) to $4,417,000, as compared to $6,781,000 for the quarter ended June 30, 2001. Our total revenues for the current period primarily consisted of revenues from (1) enterprise engineering and collaborative software solutions (including digital media products and animation services), (2) IT services, and (3) Web-based telecommunication and travel services. Net revenues from engineering and collaborative software solutions, increased as a percentage of total revenues to 42.4% in the first quarter of fiscal 2003 from 35.3% in the first quarter in fiscal 2002 primarily due to greater declines in other segments. In dollar terms, net revenues from engineering and collaborative software solutions were $1,871,000 in the first quarter of fiscal 2003 compared to $2,395,000 in the first quarter of fiscal 2002, a decrease of 21.9%. The decrease was partially due to reduced engineering software sales in North America and Europe and partially due to a decline in revenues in collaborative software offset by a slight increase in sales in Asia. Collaborative software revenues for the quarter ended June 30, 2002 decreased by $273,000 to $79,000 as compared to $352,000 for the same period in the prior year. We expect software sales from North America and Europe to remain flat and software sales from the Far East and Asia to improve during the remainder of the fiscal year. 16 IT services net revenues represented 32.0% of total net revenues for the quarter ended June 30, 2002 compared to 49.4% for the quarter ended June 30, 2001. In dollar terms, IT services net revenues were $1,414,000 during the quarter ended June 30, 2002 compared to $3,348,000 in the same period in the prior year, a decrease of $1,934,000 or 57.8%. During the past year, the IT services industry was marked by a severe worldwide downturn. Our IT services business was negatively impacted by this downturn. Net revenues for our telecommunication and travel services segment increased as a percentage of total revenues to 25.6% in the first quarter of fiscal 2003 from 15.3% in the first quarter of fiscal 2002 due primarily to declines in other segments. In dollar terms, revenues from this segment were $1,132,000 during the first quarter of fiscal 2003 compared to $1,038,000 during the first quarter of fiscal 2002, an increase of $94,000 or 9.1%. This increase is due to an increase in revenues from call termination services, offset by a decrease in travel services and phone cards revenue. GROSS PROFIT. Gross profit as a percentage of net revenues increased slightly to 47.7% for the quarter ended June 30, 2002 compared to 47.5% for the quarter ended June 30, 2001. Historically, the gross profit percentage from the IT services segment has been lower than the gross profit percentage from the engineering and collaborative software solutions segment. IT service gross profit as a percentage of sales for the quarter ended June 30, 2002 decreased to 23.9% from 30.0% for the same period in the prior year as a result of the market slowdown for the IT industry. Gross profit percentage in the engineering and collaborative software solutions segment decreased to 86.7% in the first quarter of fiscal 2003 from 87.6% in the first quarter of fiscal 2002 due to slightly lower revenues from higher margin products within this segment. Gross profit as a percentage of sales from the telecommunication and travel services segment increased to 12.8% in the first quarter of fiscal 2003 from 11.9% in the first quarter of fiscal 2002. In dollar terms, total gross profit decreased by $1,119,000 (34.7%) to $2,105,000 in the first quarter of fiscal 2003 from $3,224,000 in the same period of the prior year. The decrease is mainly due to the decline in gross profit from the IT services business. In order to improve gross profits, we have enhanced our IT services offerings by incorporating our collaboration software tools. To a lesser extent, the decrease in gross profit from the travel services also contributed to the decline in total gross profit. Continuing threats in the worldwide political climate, competition from other online travel services and reductions in travel agency commissions due to pricing pressures, may impact the gross profit from our travel business in the near future. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses decreased by $498,000 (16.0%) to $2,616,000 for the quarter ended June 30, 2002 as compared to $3,114,000 for the quarter ended June 30, 2001 primarily due to a decrease in sales commissions as well as due to our continuing emphasis on cost control. RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses consist primarily of software developers' wages. For the quarter ended June 30, 2002, R&D expenses decreased by $23,000 (4.7%) to $464,000 from $487,000 for the quarter ended June 30, 2001. The decrease in R & D expenses in fiscal 2003 is the result of our continuing efforts to control costs. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and other amortization expenses (excluding goodwill amortization) decreased by $16,000 (4.9%) to $311,000 in the first quarter of fiscal 2003 from $327,000 in the first quarter of fiscal 2002 primarily due to the disposal of fixed assets in our European offices in the fourth quarter of fiscal 2002. RESTRUCTURING. In March 2001, we announced plans to restructure our operations. As a result of this restructuring plan, we recorded a restructuring charge of $2.4 million in the fourth quarter of fiscal 2001. The restructuring plan consisted of four major points: 1) refocused strategic direction of ISP initiatives; 2) refocused strategic direction of Internet portal initiatives; 3) consolidation of technical support activities; and 4) elimination of our in-house legal department. In the Internet portal business, we redirected our primary focus towards Web-based telecommunications and travel services. In March 2001, we closed our Boston technical support office as part of consolidating our technical support activities. Technical support activities previously offered 17 from that office have been consolidated into the California facility. The elimination of the in-house legal department primarily consisted of the termination of one employee whose position was not filled. Legal services are being obtained, as needed, through our continuing external legal counsel. During the quarter ended June 30, 2002, we provided an additional $93,000 towards additional expenses from the restructuring plans announced in March 2001. INTEREST EXPENSE. Net interest for the quarter ended June 30, 2002 increased by $30,000 to $62,000 from $32,000 for the quarter ended June 30, 2001. The increase was primarily due to an increase in capital leases obligations, offset by a decrease in bank debt as compared to the same period in the prior year. INCOME TAXES. We recorded an income tax benefit of $369,000 in the first quarter of fiscal 2003 compared to net income tax expense of $89,000 in the first quarter of fiscal 2002. Due to our net operating loss position, we reversed tax liabilities recorded in prior periods that are no longer required, which resulted in a tax benefit in the first quarter of fiscal 2003. Tax expense in the first quarter of the prior year resulted from provisions for local and state taxes. LIQUIDITY AND CAPITAL RESOURCES Currently we finance our operations (including capital expenditures) primarily through existing cash and cash equivalent balances. We have used debt and equity financing when appropriate and practicable. Our principal sources of liquidity at June 30, 2002 consisted of $2,485,000 of cash and cash equivalents. Cash and cash equivalents decreased by $981,000 or 28.3% during the quarter ended June 30, 2002. The primary reasons for this decline were cash used in operations, capital expenditures, repayment of bank debt and payments toward capital lease obligations. Net cash used in operations was $790,000 in first quarter of fiscal 2003 compared to $453,000 in the first quarter of fiscal 2002. Net loss was the primary contributor to net cash used in both periods. Decrease in accrued expenses of $456,000, decrease in income tax payable of $199,000, decrease in deferred income taxes of $172,000 and decrease in deferred maintenance revenues of $140,000 contributed to the usage of cash in the first quarter of fiscal 2003. This was offset by cash provided by a decrease of $535,000 in prepaid expenses and other current assets, and a decrease of $361,000 in accounts receivable, net of bad debt expense. In the comparable quarter of the prior fiscal year, the primary reason for net cash used in operations was the net loss, offset largely by a decrease in accounts receivable balance of $1,094,000. Increases in prepaid expenses and other assets of $294,000, decrease in deferred maintenance revenue of $525,000, and decrease in accrued expenses of $437,000 were primary contributors to cash used in operations during the first quarter of the prior fiscal year. Net cash used in investing activities in the first quarter of fiscal 2003 consisted of capital expenditures of $88,000 compared to $167,000 and $67,000 of cash used to acquire companies during the same period in the prior fiscal year. In the first quarter of fiscal 2003, we used $146,000 in financing activities primarily to repay bank debt and to pay capital lease obligations. In the first quarter of the prior fiscal year, we used $239,000 primarily to repay bank debt, capital lease obligations and to repurchase common stock. We incurred net losses of $1,070,000 and $1,151,000 and have used cash in operations of $790,000 and $453,000 in first quarter of fiscal years 2003 and 2002, respectively. Our future capital requirements will depend upon many factors, including sales and marketing efforts, the development of new products and services, possible future strategic acquisitions, the progress of research and development efforts, and the status of competitive products and services. We believe we will be able to generate cash from operations or through additional sources of debt and equity financing. We have continued our program to reduce costs and expenses. If adequate funds are not available, we may be required to delay, scale back, or eliminate our research and development programs and our marketing efforts or to obtain funds through arrangements with partners or others who may require us to relinquish rights to certain of our technologies or potential products or assets. Accordingly, the inability to obtain needed financing could adversely affect our business, financial condition and results of operations. 18 The following table summarizes our contractual obligations and commercial commitments at June 30, 2002 (in thousand dollars):
--------------------------------------------------------------------- PAYMENTS DUE BY PERIOD --------------------------------------------------------------------- LESS ----- THAN 1 ------ CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS ----------------------- ----- ---- --------- --------- ------------- Long-Term Debt 713 257 430 16 10 Capital Lease Obligations 1,354 428 670 256 - Operating Leases 4,428 579 811 672 2,366 --------------------------------------------------------------------- Total Contractual Cash Obligations 6,495 1,264 1,911 944 2,376 ===================================================================== TOTAL AMOUNTS LESS THAN 1 OTHER COMMERCIAL COMMITMENTS COMMITTED YEAR 1-3 YEARS 4-5 YEARS OVER 5 YEARS - ---------------------------- --------- ---- --------- --------- ------------ Letter of Credit 55 55 - - - ---------------------------------------------------------------------- Total Commercial Commitments 55 55 - - - ======================================================================
Subsequent to the quarter ended June 30, 2002, one of our major shareholders executed a letter of commitment to provide us with a revolving line of credit expiring March 31, 2003, in the amount of $500,000. Although we expect our existing cash and cash equivalent balances to decline further during the next twelve months, as described in the first paragraph of this section, we believe that our current cash and cash equivalents balances along with the line of credit mentioned above will be sufficient to meet our working capital needs at currently anticipated levels through March 31, 2003. We have made, and will continue to make budget cuts to maintain adequate capital reserves. However, if we are unable to execute our operational plan for the next twelve months, we may be required to raise additional funds through public or private equity or debt financing. We cannot be certain that additional financing will be available, if needed, or, if available, will be on terms satisfactory to us. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, BUSINESS COMBINATIONS, (SFAS No. 141) and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 also requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values. In addition, SFAS No. 142 includes provisions upon adoption for the reclassification of certain existing recognized intangibles as goodwill, reclassification of certain intangibles out of previously reported goodwill, reassessment of the useful lives of recognized intangibles and testing for impairment of those intangibles. 19 We adopted the provisions of SFAS No. 141 as of July 1, 2001 and SFAS No. 142 became effective for us on April 1, 2002. Upon adoption of SFAS No. 142, we evaluated our existing intangible assets and goodwill that were acquired in purchase business combinations and made the necessary reclassifications in order to conform to the new classification criteria in SFAS No. 141 for recognition separate from goodwill. We also re-assessed the useful lives and residual values of all intangible assets acquired, and made the necessary amortization period adjustments at the end of the quarter ended June 30, 2002, the end of the first interim period after adoption. Intangible assets identified as having an indefinite useful life were required to be tested for impairment in accordance with the provisions of SFAS No. 142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. We did not have an impairment loss required to be recorded as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the SFAS No. 142 transitional goodwill impairment evaluation, the Statement requires us to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, we identified our reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of April 1, 2002. We have until October 1, 2002 to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, and an indication exists that the reporting unit goodwill may be impaired, we must perform the second step of the transitional impairment test. The second step is required to be completed as soon as possible, but no later than March 31, 2003, the end of the year of adoption. In the second step, we must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our statement of operations. As of June 30, 2002, we had unamortized goodwill in the amount of $9,105,000, all of which will be subject to the transition provisions of SFAS No. 142. No amortization expense was recorded during the three month period ended June 30, 2002. We will continue to assess for impairment at each reporting date or at any time we become aware of factors or circumstances that would warrant the assessment for impairment, including whether we will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principles. The following table reconciles previously reported net income (loss) as if the provisions of SFAS No. 142 were in effect in fiscal year 2002 (in thousands except per share amounts): THREE MONTHS ENDED JUNE 30, --------------------------- 2002 2001 ---- ---- Reported net loss $ (1,070) $ (1,151) Add back: Goodwill amortization, net of taxes - 198 ------------ ------------ Adjusted net loss $ (1,070) $ (953) ------------ ------------ Reported basic and diluted loss per common share $ (0.06) $ (0.07) Add back: Goodwill amortization, net of taxes - 0.01 Adjusted basic and diluted loss per common share $ (0.06) $ (0.06) 20 In June 2001, the FASB issued SFAS No. 143 ("SFAS 143"), ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, or normal use of the asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS 143 to have a material impact on our consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144 ("SFAS 144"), ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement addresses financial accounting and reporting for the impairment of long-lived assets and supersedes SFAS 121, and the accounting and reporting provisions of APB No. 30, REPORTING THE RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT OF A BUSINESS. SFAS 144 is effective for fiscal years beginning after December 15, 2001. We have adopted SFAS 144 beginning April 1, 2002. The adoption of SFAS 144 does not have a material impact on our consolidated financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, RESCISSION OF THE FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. We do not expect the adoption of SFAS No. 145 to have a material impact on our consolidated financial position or results of operations. In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activities. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, we cannot determined the potential effects that adoption of SFAS No. 146 will have on our consolidated financial statements. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended June 30, 2002, no matters were submitted for vote to our common stockholders. ITEM 5. OTHER INFORMATION None 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 99-1: Certifications of chief executive officer and chief financial officer pursuant to 18 U.S.C section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On April 16,2002, the Company filed a current report on Form 8-K announcing the appointment of Bruce K. Nelson to the office of Chief Financial Officer. On August 13, 2002, the Company filed a current report on Form 8-K announcing a scheduled conference call and clarifying the Company's acquisition, merger, public offering or similar activities in India. 22 SIGNATURE - --------- In accordance with 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 thereunto duly authorized. Date: August 14, 2002 NETGURU, INC. By: /S/ BRUCE K. NELSON ------------------- Bruce K. Nelson Chief Financial Officer (principal financial and accounting officer) 23 Exhibit Index ------------- Exhibit 99.1 Certifications of chief executive officer and chief financial officer pursuant to 18 U.S.C section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 24 EX-99.1 3 netguru_10q-ex991.txt EXHIBIT 99.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-QSB of netGuru, Inc. (the "Company") for the quarterly period ended June 30, 2002 (the "Report"), the undersigned hereby certifies in his capacity as Chief Executive Officer of the Company, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2002 By: /s/ Amrit K. Das ----------------- Amrit K. Das Chief Executive Officer In connection with the quarterly report on Form 10-QSB of netGuru, Inc. (the "Company") for the quarterly period ended June 30, 2002 (the "Report"), the undersigned hereby certifies in his capacity as Chief Financial Officer of the Company, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2002 By: /s/ Bruce K. Nelson --------------- Bruce Nelson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----