-----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, Ks1JnPlm/ou/KlG7ng+vsnV70HRuKqRqFWdEdcY4ecLsj1PX0cev3il3XaZqa9dh UzTyoaJV7SAQgdM+7ZsHyg== 0001019687-03-000121.txt : 20030127 0001019687-03-000121.hdr.sgml : 20030127 20030127171011 ACCESSION NUMBER: 0001019687-03-000121 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20030127 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-28560 FILM NUMBER: 03526384 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/A 1 netguru_10qa2-093002.txt AMEMDMENT NO. 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 2 TO 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 SEPTEMBER 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 17,405,150 on January 17, 2003. Transitional Small Business disclosure Format (Check one): Yes [ ] No [X] PART I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three and six month periods ended September 30, 2002 and 2001(unaudited )..... 3 Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and March 31, 2002................... 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended September 30, 2002 and 2001 (unaudited)..... 5 Notes to Condensed Consolidated Financial Statements (unaudited).... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 16 Item 3. Controls and Procedures............................................. 27 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................... 28 Item 2. Changes in Securities and Use of Proceeds........................... 28 Item 3. Defaults Upon Senior Securities..................................... 28 Item 4. Submission of Matters to a Vote of Security Holders................. 28 Item 5. Other Information................................................... 28 Item 6. Exhibits and Reports on Form 8-K.................................... 28 Signatures................................................................... 29 Certifications of Principal Executive Officer and Principal Financial Officer 30 Exhibits Filed with this Report on Form 10-QSB............................... 32 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 THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2002 2001 ---------------------------------------------------------------------- Net revenues: Engineering and collaborative software solutions $ 2,390 $ 2,106 $ 4,261 $ 4,501 IT services 1,369 2,724 2,783 6,072 Web-based telecommunication and travel services 1,984 1,474 3,116 2,512 ------------- ------------- ------------- ------------- Total net revenues 5,743 6,304 10,160 13,085 Cost of revenues: Engineering and collaborative software solutions 243 194 535 546 IT services 1,024 2,019 2,100 4,365 Web-based telecommunication and travel services 1,860 1,318 2,847 2,231 ------------- ------------- ------------- ------------- Total cost of revenues 3,127 3,531 5,482 7,142 ------------- ------------- ------------- ------------- Gross profit 2,616 2,773 4,678 5,943 ------------- ------------- ------------- ------------- Operating expenses: Selling, general and administrative 2,841 3,001 5,457 6,115 Research and development 547 481 1,011 968 Amortization of goodwill -- 282 -- 616 Depreciation and other amortization 274 305 542 578 Impairment charge 67 -- 67 -- Restructuring 11 -- 104 -- ------------- ------------- ------------- ------------- Total operating expenses 3,740 4,069 7,181 8,277 ------------- ------------- ------------- ------------- Operating loss (1,124) (1,296) (2,503) (2,334) ------------- ------------- ------------- ------------- Other expense (income): Interest, net 54 41 116 72 Other (4) (1) (6) (8) ------------- ------------- ------------- ------------- Total other expense 50 40 110 64 ------------- ------------- ------------- ------------- Loss before income taxes (1,174) (1,336) (2,613) (2,398) Income tax (benefit) expense 68 48 (301) 137 ------------- ------------- ------------- ------------- Net loss $ (1,242) $ (1,384) $ (2,312) $ (2,535) ============= ============= ============= ============= Net loss per common share: Basic $ (0.07) $ (0.08) $ (0.13) $ (0.15) ============= ============= ============= ============= Diluted $ (0.07) $ (0.08) $ (0.13) $ (0.15) ============= ============= ============= ============= Common shares used in computing net loss per common share: Basic 17,326,965 16,920,848 17,306,583 16,989,116 ============= ============= ============= ============= Diluted 17,326,965 16,920,848 17,306,583 16,989,116 ============= ============= ============= ============= 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)
SEPTEMBER 30, MARCH 31, 2002 2002 --------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,065 $ 3,466 Accounts receivable (net of allowance for doubtful accounts of $1,017 and $981, as of September 30, 2002 and March 31, 2002, respectively) 2,565 3,325 Income tax receivable 5 305 Notes and related party loans receivable 158 269 Prepaid expenses and other current assets 981 1,543 --------- --------- Total current assets 5,774 8,908 Property, plant and equipment, net 3,843 4,169 Goodwill (net of accumulated amortization of $4,438 as of September 30, 2002 and March 31, 2002) 9,105 9,105 Other assets 759 884 --------- --------- $ 19,481 $ 23,066 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term bank debt $ 262 $ 259 Current portion of capital lease obligations 431 417 Accounts payable 902 1,012 Accrued expenses 734 1,082 Income taxes payable 24 196 Deferred revenues 1,383 1,760 Deferred income taxes -- 60 Other liabilities 176 199 Accrued restructuring costs 67 157 --------- --------- Total current liabilities 3,979 5,142 Long-term bank debt, net of current portion 389 567 Capital lease obligations, net of current portion 821 1,027 Deferred income taxes, non-current -- 112 Deferred gain on sale-leaseback 863 887 --------- --------- Total liabilities 6,052 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 17,405,150 and 17,265,850 shares (net of 10,965 treasury shares) as of September 30, 2002 and March 31, 2002, respectively 174 173 Additional paid-in capital 33,343 33,057 Accumulated deficit (19,117) (16,805) Accumulated other comprehensive loss: Cumulative foreign currency translation adjustments (971) (1,094) --------- --------- Total stockholders' equity 13,429 15,331 --------- --------- $ 19,481 $ 23,066 ========= ========= See accompanying notes to condensed consolidated financial statements.
4 NETGURU, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
SIX MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 -------- -------- Cash flows from operating activities: Net loss $(2,312) $(2,535) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 707 1,307 Bad debt expense 68 -- Deferred income taxes (172) (7) Compensation expense recognized on issuance of stock options (4) 64 Restructuring 104 -- Impairment charge 67 -- Expense recognized on issuance of stock 236 -- Loss on disposal of property 3 -- Changes in operating assets and liabilities (net of acquisitions): Accounts receivable 779 1,063 Notes and related party loans receivable 112 (2) Income tax receivable 300 -- Prepaid expenses and other current assets 575 (519) Other assets (54) (38) Accounts payable (123) (57) Accrued expenses (353) (460) Income taxes payable (174) 84 Accrued restructuring costs (195) -- Other current liabilities (47) (30) Deferred revenues (416) (689) Deferred gain on sale-leaseback (35) (35) -------- -------- Net cash used in operating activities (934) (1,854) -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (203) (712) Payments to acquire companies, net of cash acquired -- (69) -------- -------- Net cash used in investing activities (203) (781) -------- -------- Cash flows from financing activities: Proceeds from issuance of bank debt 1 41 Repayment of bank debt (132) (273) Repayment of capital lease obligations (208) (68) Issuance of common stock 55 27 Repurchase common stock -- (140) -------- -------- Net cash used in financing activities (284) (413) -------- -------- Effect of exchange rate changes on cash and cash equivalents 20 (64) -------- -------- Decrease in cash and cash equivalents (1,401) (3,112) Cash and cash equivalents, beginning of period 3,466 7,958 -------- -------- Cash and cash equivalents, end of period $ 2,065 $ 4,846 ======== ========
(Continued) 5 NETGURU, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued) (Unaudited) (In thousands)
SIX MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2002 2001 ------------ ------------ Supplemental disclosure of cash flow information: Amounts paid for: Interest $ 133 $ 128 ============ ============ Income taxes $ 25 $ 32 ============ ============ Supplemental disclosure of non-cash investing and financing activities: Acquisition of equipment under capital leases $ 28 $ - ============ ============ See accompanying notes to condensed consolidated financial statements.
6 NETGURU, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 September 30, 2002 and the results of operations and the cash flows for the three and six months ended September 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 and six months ended September 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 contractual obligations that convey to one entity a right to receive cash or other financial instruments from another entity, and impose on the other entity the obligation to deliver cash or other financial instruments to the first entity. At September 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. GOODWILL In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, 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. 7 The Company adopted the provisions of SFAS No. 141 as of July 1, 2001 and SFAS No. 142 became effective for the Company on April 1, 2002. Intangible assets identified as having indefinite useful lives 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. The Company did not record an impairment loss as of the date of adoption because it determined that it did not have any identifiable intangible assets other than goodwill. In connection with the SFAS No. 142 transitional goodwill impairment evaluation, the statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill, to those reporting units as of April 1, 2002. Pursuant to paragraphs 30-31 of SFAS No. 142, the Company identified three "reporting units" as defined in paragraph 17 of SFAS No. 131: 1) Engineering and collaborative software solutions; 2) IT Services; and 3) Web-based telecommunications and travel services. Each of these reporting units was identical to its related operating segment and met the specified criteria as distinct operating units: the component constitutes a business; discrete financial data is available for the component; and segment management routinely reviews the component's operating results. The aggregation criteria for each of the components met the test of: (a) similar economic characteristics over the long term; (b) similar products or services; (c) similar production processes; and (d) similar types or classes of customers. As of March 31, 2002, goodwill balances for each of the reporting units were as follows: Engineering and collaborative software solutions $ 1,859,000 IT services $ 6,765,000 Web based telecommunication and travel services $ 481,000 In connection with adopting this standard, during the second quarter of fiscal year 2003, the Company completed step one of the test for impairment, which indicated that the carrying value of its IT services segment exceeded its estimated fair value, as determined utilizing various valuation techniques including discounted cash flow and comparative market analysis. For the fiscal year ended March 31, 2002, net revenue for the IT Services reporting unit declined $8,150,000, from $18,019,000 for the year ended March 31, 2001 to $9,869,000 for the year ended March 31, 2002. This decline in the revenues for IT Services is not anticipated to substantially improve and may further decline in the next 12 months because the Company does not expect the demand for IT services to improve during this period. In accordance with SFAS No. 142, the Company is currently determining the extent of the impairment in the IT services segment and will report the level of impairment for each reporting unit by fiscal year end. The Company is required to complete the second step of the test for impairment as soon as possible, but no later than March 31, 2003, the end of the year of adoption. In the second step, the Company 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 the Company's statement of operations. 8 As of September 30, 2002, the Company had unamortized goodwill in the amount of $9,105,000, all of which will be subject to the transition provisions of SFAS No. 142. Approximately $6,765,000 of this amount represents unamortized goodwill related to the IT services segment. No amortization expense was recorded during the six month period ended September 30, 2002. The Company will continue to assess for impairment at each reporting date or at any time it becomes aware of factors or circumstances that would warrant the assessment for impairment, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. The following table reconciles previously reported net income (loss) as if the provisions of SFAS No. 142 were in effect in fiscal year 2002 and at fiscal year end 2002 and 2001 (in thousands except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, MARCH 31, 2002 2001 2002 2001 2002 2001 ---- ---- ---- ---- ---- ---- Reported net loss $ (1,242) $ (1,384) $ (2,312) $ (2,535) $ (8,944) $ (6,637) Add back: Goodwill amortization, net of taxes - 269 - 569 1,052 1,282 ------------- ------------- ------------- ------------- ------------- ------------- Adjusted net loss $ (1,242) $ (1,115) $ (2,312) $ (1,966) $ (7,892) $ (5,355) Reported basic and diluted loss per common share $ (0.07) $ (0.08) $ (0.13) $ (0.15) $ (0.53) $ (0.45) Add back: Goodwill amortization, net of taxes - 0.01 - 0.03 0.06 0.09 ------------- ------------- ------------- ------------- ------------- ------------- Adjusted basic and diluted loss per common share $ (0.07) $ (0.07) $ (0.13) $ (0.12) $ (0.47) $ (0.36) ------------- ------------- ------------- ------------- ------------- -------------
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 September 30, 2002, capitalized costs of approximately $521,000, net of accumulated amortization, were included in other assets. Approximately $285,000 of this amount represents software developed in-house and $236,000 represents the cost of software developed on the Company's behalf by third parties. Additions to capitalized software were $28,000 and $208,000 during the six months ended September 30, 2002 and 2001, respectively. 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. During the quarter ended September 30, 2002, the Company recognized a capitalized software impairment loss of approximately $67,000 in the software sales, maintenance, and services segment, since revenues-to-date and forecasted revenues from these assets did not support the carrying value of the recorded amounts. Amortization of software development costs and purchased technology charged to cost of revenues was approximately $69,000 and $50,000 for the quarter ended September 30, 2002 and 2001 respectively and $112,000 and $104,000 for the six months ended September 30, 2002 and 2001 respectively. Accumulated amortization on capitalized software was $444,000 and $525,000 as of September 30, 2002 and 2001, respectively. 9 REVENUE RECOGNITION The Company recognizes revenue when the following criteria are met: 1. Persuasive evidence of an arrangement, such as agreements, purchase orders or written or online requests, exists; 2. Delivery has been completed and no significant obligations remain; 3. The Company's price to the buyer is fixed and determinable; and 4. Collectibility is reasonably assured. The Company's revenues arise from the following segments: enterprise engineering and collaborative software solutions (including digital media products 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 reasonably assured. At the time of sale, the Company provides a 15-day right of return on the purchase of the product during which time the customer may return the product subject to a $50 restocking fee per item returned. Customers may choose to purchase 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. In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the AICPA issued Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. The Company adopted SOP 97-2 in the first quarter of fiscal 1999. 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 determines 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. 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. 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 are recognized primarily on a time and materials basis, with time at a marked-up rate and materials and other reasonable expenses at cost, as services are performed. Certain IT services contracts are fixed price contracts where progress toward completion is measured by mutually agreed upon pre-determined milestones for which we recognize revenue upon achieving such milestones. The Company's fixed price IT contracts are typically for a short duration of one to three months. With regard to the Web-based telecommunication services, revenues from call termination services are recognized at gross sales value with the applicable cost separately stated in the cost of revenues. Revenues from the Company's own phone cards are deferred and recognized on the basis of usage, whereas revenues from re-sale of third-party phone cards are recognized net of returns since no significant obligations remain once product is delivered. 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. Other products and services sold via Internet portals, including certain travel services, where the Company is a travel discounter or an agent, are recognized net of purchase costs when the products and services are delivered and collectibility is reasonably assured. 10 RECLASSIFICATIONS Certain reclassifications have been made to the fiscal 2002 condensed 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 $2,400,000 in fiscal 2001. 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. 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. The total amount charged for the refocus of ISP operations in fiscal 2001 was $1,998,000. This total charge consisted of $117,000 in contractual obligations and $1,827,000 in asset write-offs related to ISP operations in India. These charges did not include any employee costs. The restructuring related to the ISP operations resulted in elimination of depreciation and amortization expenses that would have resulted from the ISP related assets. With regard to the Internet portal business, the Company redirected its primary focus towards the telephony and travel services offered through the portal. The initial restructuring charge related to the refocus of the portal business was $194,000, of which $168,000 was related to asset write-offs, and $26,000 was related to contractual obligations. The entire $194,000 was paid in fiscal 2001. During fiscal 2002, an additional $67,000 relating to contractual obligations for the portal operations was paid. In March 2001, the Company closed its Boston technical support office as part of consolidating the Company's technical support activities. Technical support activities previously offered from the Boston office were consolidated into the California facility. The closing of this office resulted in the termination of two employees. The restructure charge related to the consolidation of technical support facilities was $166,000, of which $49,000 related to accrued severance payments for the two terminated employees and $117,000 related to contractual lease obligations for the vacated space. The Company made cash payments totaling $58,000 in fiscal 2002 towards settlement of obligations related to this activity. During fiscal 2003, the Company made cash payments of $30,000 for severance expenses relating to the termination of one of the employees and $25,000 for lease payments for the vacated office space. The Company expects that employee costs, and the facility costs (once the lease obligations are satisfied) would decrease as a result of this restructure charge. 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 from the Company's continuing external legal counsel. In fiscal 2001, the Company estimated that the restructure charge related to the elimination of the in-house legal department to be $42,000. In fiscal 2002, the Company paid $52,000 toward this restructure charge. An additional charge of $41,000 and $108,000 was recorded in fiscal 2002 and during fiscal 2003, respectively, since the original estimate of severance expenses was insufficient. During the six-months ended September 30, 2002, the Company paid $139,000 to settle all severance payments due to the terminated employee. 11 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 -- -- (55) (139) (194) Adjustments (34) c -- 30 c 108 c 104 -------- -------- -------- -------- -------- September 30, 2002 $ -- $ -- $ 67 $ -- $ 67 ======== ======== ======== ======== ========
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 severance costs for the elimination of the legal department and the consolidation of technical support. The balance at September 30, 2002 includes $42,000 of lease payments for vacated office space scheduled for payment through September 2003. The remaining personnel costs and contractual obligations are expected to be paid by the end of fiscal 2003. 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 three former owners exercised this right. The total repurchase price was $715,000. Agreements were reached with the former owners to extend the cash payment for this repurchase over a period of twelve months. As of September 30, 2002, the Company had paid $163,000 to one of the former owners for the repurchase of 6,000 shares. The remaining $9,000 is to be paid by November 30, 2002, and has been accrued under "accrued expenses." The repurchase of 6,000 shares from another former owner was settled for a total of $100,000, and the entire amount was paid as of September 30, 2002. 12 The owner of the remaining 13,000 shares is holding the stock certificates until full payment is received for these shares. The total cash to be paid for this repurchase was $372,000, of which $128,000 has been paid as of September 30, 2002. Due to a dispute as a result of an apparent breach of the purchase agreement by the former owner, the Company believes that it is probable that the balance of $244,000 will not be paid and therefore has not accrued this amount as a liability. 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 three and six-month periods ended September 30, 2002 and 2001. 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 $1,213,000 and $1,398,000 for the three months ended September 30, 2002 and 2001, respectively, and was $2,189,000 and $2,640,000 for the six months ended September 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 SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------------------------- 2002 2001 2002 2001 ----------------------------------------------------------- Numerator: Net loss (1,242) (1,384) (2,312) (2,535) ----------------------------------------------------------- Numerator for basic and diluted loss per share (1,242) (1,384) (2,312) (2,535) =========================================================== Denominator: Denominator for basic net loss per share - average number of common shares outstanding during the period 17,327 16,921 17,307 16,989 Incremental common shares attributable to exercise of outstanding options, warrants and other common stock equivalents -- -- -- -- ----------------------------------------------------------- Denominator for diluted net loss per share 17,327 16,921 17,307 16,989 =========================================================== Basic net loss per share $ (0.07) $ (0.08) $ (0.13) $ (0.15) =========================================================== Diluted net loss per share $ (0.07) $ (0.08) $ (0.13) $ (0.15) ===========================================================
13 Options, warrants and other common stock equivalents amounting to 493,000 and 614,000 potential common shares for the three and six month periods ended September 30, 2002 respectively and 455,000 and 538,000 potential common shares for the three and six month periods ended September 30, 2001, respectively were excluded from the computation of diluted EPS for the periods presented 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 No. 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 of dollars) are:
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- NET REVENUE Engineering and collaborative software solutions $ 2,390 $ 2,106 $ 4,261 $ 4,501 IT services 1,369 2,724 2,783 6,072 Web-based telecommunication and travel services 1,984 1,474 3,116 2,512 --------- --------- --------- --------- Consolidated $ 5,743 $ 6,304 $ 10,160 $ 13,085 ========= ========= ========= ========= OPERATING (LOSS)/INCOME Engineering and collaborative software solutions $ (767) $ (1,014) $ (1,884) $ (1,916) IT services (76) (24) (161) 158 Web-based telecommunication and travel services (281) (258) (458) (576) --------- --------- --------- --------- Consolidated $ (1,124) $ (1,296) $ (2,503) $ (2,334) ========= ========= ========= =========
14 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 SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- NET REVENUE United States $ 4,073 $ 5,104 $ 7,273 $10,822 The Americas (other than U.S.) 223 82 330 202 Europe 614 541 1,109 1,038 Asia-Pacific 833 577 1,448 1,023 -------- -------- -------- -------- Consolidated $ 5,743 $ 6,304 $10,160 $13,085 ======== ======== ======== ======== EXPORT SALES United States $ 444 $ 97 $ 676 $ 221 ======== ======== ======== ========
SEPTEMBER 30, SEPTEMBER 30, 2002 2001 ----------- ----------- (IN THOUSANDS) LONG-LIVED ASSETS United States $ 12,033 $ 13,366 Europe 350 366 Asia-Pacific 1,324 2,441 ----------- ----------- Consolidated $ 13,707 $ 16,173 =========== =========== 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, financial condition or liquidity. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend that those forward-looking statements be subject to the safe harbors created by those sections. These forward-looking statements generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance, and can generally be identified by the use of the words "believe," "intend," "plan," "expect," "forecast," "project," "may," "should," "could," "seek," "pro forma," "estimates," "continues," "anticipate" and similar words. 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 return to profitability and obtain additional working capital, if required; o our ability to successfully implement our future business plans; o our ability to attract strategic partners, alliances and advertisers; o our ability to hire and retain qualified personnel; o the risks of uncertainty of trademark protection; o risks associated with existing and future governmental regulation to which we are subject; and o uncertainties relating to economic conditions in the markets in which we currently operate and in which we intend to operate in the future. These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. We do not undertake to update, revise or correct any forward-looking statements. Any of the factors described above or in the "Risk Factors" section of our most recent 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, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. OVERVIEW We were incorporated in 1981 under the name Research Engineers, Inc. and changed our name to netGuru, Inc. in 2000. We are a Delaware corporation. Our primary business offerings are: o Engineering and collaborative software solutions (including related services) for businesses worldwide; o Information technology, or IT, services (including value-added IT services); and o Web-based telecommunications and travel services (including long-distance communication services that include call termination services and prepaid phone cards, and travel services). We have provided 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., which further expanded our IT resources and capabilities. Our Internet portal services were started in 1999 and were refocused in fiscal 2001 toward telecommunications and travel services. A more expansive discussion of our business and services is contained in the "Business" section of our most recent annual report on Form 10-KSB. 16 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 the following criteria are met: 1. persuasive evidence of an arrangement, such as agreements, purchase orders or written or online requests exists; 2. delivery has been completed and no significant obligations remain; 3. our price to the buyer is fixed and determinable; and 4. collectibility is reasonably assured. Our revenues arise from the following segments: enterprise engineering and collaborative software solutions (including digital media products 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 reasonably assured. Our software sales do not provide a specific right of return. At the time of sale, we typically provide a 15-day right of return on the purchase of the product. 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. In October 1997, the Accounting Standards Executive Committee ("AcSEC") of the AICPA issued Statement of Position ("SOP") 97-2, SOFTWARE REVENUE RECOGNITION. We adopted SOP 97-2 in the first quarter of fiscal 1999. 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. 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. 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. We adopted SOP 98-9 in the first quarter of fiscal 2000. 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. Revenues from providing IT services are recognized primarily on a time and materials basis, with time at a marked-up rate and materials and other reasonable expenses at cost, as services are performed. Certain IT services contracts are fixed price contracts where progress toward completion is measured by mutually agreed upon pre-determined milestones for which we recognize revenue upon achieving such milestones. Our fixed price IT contracts are typically for a short duration of one to three months. With regard to the Web-based telecommunication services, revenues from call termination services are recognized at gross sales value with the applicable cost separately stated in the cost of revenues. Revenues from our own phone cards are deferred and recognized on the basis of usage, whereas revenues from re-sale of third-party phone cards are recognized net of returns since no significant obligations remain once product is delivered. 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. Other products and services sold via Internet portals, including certain travel services, where we are a travel discounter or an agent, are recognized net of purchase costs when the products and services are delivered and collectibility is reasonably assured. 17 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. We amortize 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. We periodically review the resulting net book value of the capitalized software asset 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 31, 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 was 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 Financial Accounting Standards Board (FASB) issued SFAS No. 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 No. 121, and the accounting and reporting provisions of Accounting Principles Bulletin (APB) No. 30, REPORTING THE RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT OF A BUSINESS. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. We have adopted SFAS No. 144 beginning April 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our consolidated financial position or results of operations. We apply the provisions of SFAS No. 86, ACCOUNTING FOR THE COST OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED for evaluating unamortized capitalized software development costs. At each balance sheet date, we compare the unamortized software development cost of each product to the net realizable value of the product. The amount by which the unamortized software development cost exceeds the net realizable value of the product is written off. During the three month period ended September 30, 2002, we recognized a capitalized software impairment loss of $67,000 in the software, maintenance, and services reporting segment, since revenues-to-date and forecasted revenues from these assets did not support the carrying value of the recorded amounts. 18 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. 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 SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2002 2001 2002 2001 --------- --------- --------- --------- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 54.4 56.0 54.0 54.6 --------- --------- --------- --------- Gross profit 45.6 44.0 46.0 45.4 --------- --------- --------- --------- Selling, general and administrative expenses 49.5 47.6 53.7 46.7 Research and development expenses 9.5 7.6 10.0 7.4 Amortization of goodwill -- 4.5 -- 4.7 Depreciation and software amortization 4.7 4.8 5.3 4.4 Impairment charge 1.2 -- 0.7 -- Restructuring 0.2 -- 1.0 -- --------- --------- --------- --------- Total operating expenses 65.1 64.5 70.7 63.2 Operating loss (19.5) (20.5) (24.7) (17.8) Interest (income) expense, net 0.9 0.7 1.1 0.6 Other (income) expense, net -- -- -- (0.1) --------- --------- --------- --------- Loss before income taxes (20.4) (21.2) (25.8) (18.3) Income tax expense (benefit) 1.2 0.8 (3.0) 1.1 --------- --------- --------- --------- Net loss (21.6)% (22.0)% (22.8)% (19.4)% ========= ========= ========= =========
NET REVENUES. Net revenues for the three months ended September 30, 2002 declined by $561,000 (8.9%) to $5,743,000, from $6,304,000 for the three months ended September 30, 2001. Net revenues for the six months ended September 30, 2002, declined $2,925,000 (22.4%) to $10,160,000 from $13,085,000 for the six months ended September 30, 2001. Our net revenues consisted primarily 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. The overall declines in our net revenues for the three and six months ended September 30, 2002 primarily resulted from the decline in net revenues of our IT services segment, which was partially offset by increases in net revenues of our engineering and collaborative software solutions and increases of our net revenues for Web-based telecommunication and travel service segments during the three and six months ended September 30, 2002. 19 Engineering and collaborative software solutions net revenues increased during the three months ended September 30, 2002 as compared to the comparable period in the prior year, but declined during the six months ended September 30, 2002 as compared to the comparable period in the prior year. Engineering and collaborative software solutions net revenues increased by $284,000 (13.5%) to $2,390,000 for the three months ended September 30, 2002 from $2,106,000 for the three months ended September 30, 2001. This increase was primarily due to lower revenues during the three months ended September 30, 2001, resulting from the events of September 11, 2001 global economic slowdown and customer postponements. Engineering and collaborative software solutions net revenues declined $240,000 (5.3%) to $4,261,000 for the six months ended September 30, 2002 from $4,501,000 for the six months ended September 30, 2001. The decline in net revenues during the six months ended September 30, 2002 primarily consisted of a decline in collaborative software solutions net revenues compared to such sales during the same period in the prior year. The majority of our collaborative software revenue is generated from service-oriented projects, where the revenue is not recognized until the entire project is completed. Collaborative software sales decreased approximately $310,000 in the six months ended September 30, 2002 as compared to the comparable period in the prior year primarily due to one large contract amounting to approximately $300,000 that was completed and recognized in the three months ended June 30, 2001. This decrease was offset by an increase in engineering sales in Asia of approximately $140,000. We believe our sales in Asia increased due to improvements in the Asian economy. As a percentage of total net revenues, engineering and collaborative software solutions net revenues increased to 41.9% for the six months ended September 30, 2002 as compared to 34.4% for the six months ended September 30, 2001 primarily due to greater declines in our IT services segment. Historically, our engineering software sales have improved during the second half of each fiscal year. We expect this trend to continue in the current fiscal year. Additionally, we anticipate improvements in engineering software sales as a result of our efforts to refocus our sales initiatives and to re-engage our international distributors as well as due to improvements in the Asian economy. We also anticipate, but cannot assure you, that collaborative software solutions net revenues will improve during the remainder of the current fiscal year due in part to several agreements and strategic relationships that have come to fruition during the six months ended September 30, 2002. IT services net revenues declined during both the three and six-month periods ended September 30, 2002 as compared to the comparable periods in the prior fiscal year. In dollar terms, IT services net revenues were $1,369,000 and $2,783,000 during the three and six month periods ended September 30, 2002, respectively, compared to $2,724,000 and $6,072,000 for the comparable periods in the prior fiscal year, a decrease of $1,355,000 (49.7%) and $3,289,000 (54.2%), respectively. IT services net revenues represented 23.8% and 27.4% of total net revenues for the three and six month periods ended September 30, 2002, respectively, compared to 43.2% and 46.4% for the comparable periods in the prior fiscal year. During the past year, the IT services industry has been adversely affected by a slow economy, and as many of our customers reduced spending on technology consulting and systems integration services. We do not anticipate significant recovery to occur in the IT services segment as we expect that this period of economic uncertainty may continue to impact our IT services revenue throughout fiscal 2003. In dollar terms, telecommunications and travel services net revenues were $1,984,000 and 3,116,000 during the three and six months ended September 30, 2002 as compared to $1,474,000 and $2,512,000 during the comparable periods in the prior fiscal year, representing increases of $510,000 (34.6%) and $604,000 (24.1%), respectively. These increases were due to $821,000 and $1,185,000 increases in call termination services net revenues during the three and six months ended September 30, 2002, respectively, as compared to the comparable periods in the prior fiscal year, offset by declines in travel services and phone cards revenue. The ramp-up of the call termination services did not start until the beginning of the current fiscal year. Telecommunication and travel services net revenues represented 34.5% and 30.7% of total net revenues for the three and six month periods ended September 30, 2002, respectively, as compared to 23.4% and 19.2%, respectively, for the comparable periods in the prior fiscal year primarily due to declines in our IT services segment. Although telecommunications services net revenues increased during the three and six month periods ended September 30, 2002 as compared to the 20 comparable periods in the prior fiscal year, the recent turmoil in the telecommunications industry has increased the uncertainty of the viability of smaller service providers, some of whom are our customers. As a result, we anticipate that during the remainder of the current fiscal year, telecommunications services net revenues will not improve from current levels. Travel services net revenues declined $312,000 and $217,000 for the three- and six-month periods ended September 30, 2002, due to competition from other online travel services and reductions in travel agency commissions. We do not anticipate that travel services net revenues will improve from current levels during the remainder of the current fiscal year. GROSS PROFIT. In dollar terms, gross profit declined by $1,265,000 (21.3%) to $4,678,000 for the six months ended September 30, 2002 from $5,943,000 for the comparable period in the prior fiscal year. The decrease is mainly due to the decline in gross profit from our IT services business. Gross profit represented 45.6% and 46.0% of total net revenues for the three and six months ended September 30, 2002, respectively, as compared to 44.0% and 45.4% for the comparable periods in the prior fiscal year. In dollar terms, engineering and collaborative software solutions gross profit declined $229,000 (5.8%) for the six-month period ended September 30, 2002 from the comparable period of the prior fiscal year. Gross profit percentage in the engineering and collaborative software solutions segment decreased slightly to 87.4% for the six months ended September 30, 2002 from 87.9% for the six months ended September 30, 2001. Our engineering and collaborative software solutions segment generally produces higher gross margins than our other segments due to the relatively lower costs associated with each sale. The cost of revenues for the engineering and collaborative software solutions segment includes printing services, direct supplies such as hardware locks, which are security devices that are attached to the central processing unit to prevent unauthorized access to licensed software, salaries for the technical support employees, freight out, and software amortization expense. In dollar terms, IT services gross profit declined $1,024,000 (60%) for the six month period ended September 30, 2002 from the comparable period of the prior year. IT services gross profit percentage for the six months ended September 30, 2002 declined to 24.5% for the six months ended September 30, 2002 from 28.1% for the six months ended September 30, 2001. As a result of the market slowdown for the IT industry, net revenues from this segment declined significantly without proportionate declines in our IT services costs, which resulted in lower gross profit. In addition, the demand for some of our services declined during the six months ended September 30, 2002, which caused us to reduce our billing rates from the comparable period in the prior fiscal year. Historically, the IT services gross profit percentage has been lower than the engineering and collaborative software solutions gross profit percentage due to the higher cost of labor associated with service revenue, including salaries, bonuses, and benefits for all of the consulting employees. Our IT service consultants generally receive higher salaries than our technical support employees and we have employed more consultants than technical support staff, both of which contributed to the lower gross profit percentage as compared to the engineering and collaborative software solutions segment. In dollar terms, telecommunication and travel services gross profit declined $12,000 (4.3%) for the six months ended September 30, 2002, respectively, from the comparable period in the prior fiscal year. Telecommunication and travel services gross profit percentage declined to 8.6% for the six months ended September 30, 2002 from 11.2% for the six months ended September 30, 2001. Gross profit declined due to lower revenues from higher margin areas within this segment. The cost of revenues for our Web-based telecommunications and travel services segment includes the cost of buying minutes from another carrier and the cost of purchasing certain airline tickets. The events of September 11, 2001 negatively impacted our travel services. Although the travel business has improved after this initial downturn, continuing threats in the worldwide political climate has hampered the recovery. Competition from other online travel services, many of which have greater resources than we have, as well as reductions in travel agency commissions due to pricing pressures experienced by the airline industry, may also impact the gross profit from our travel business in the near future. 21 In order to improve overall gross profit and gross profit percentage, we are refocusing our sales efforts toward our division with the highest gross profit, namely, our engineering and collaborative software solutions division, by working to develop strategic relationships and to increase our volume of telephone sales, and re-engage with our international distributors. We have cut and will continue to cut the costs of our IT services division in an effort to prevent further deterioration of gross profit and will continue to closely monitor our costs related to the telephony and travel businesses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses decreased by $160,000 (5.3%) and $658,000 (10.8%) during the three- and six-month periods ended September 30, 2002 to $2,841,000 and $5,457,000, respectively. The decrease in SG&A expenses for the six months ended September 30, 2002 is due primarily to a $269,000 reduction in salaries and benefits due to employee terminations, a $231,000 reduction in advertising expenses, and a $49,000 reduction in marketing consulting expenses due to continuing cost control measures, along with an $80,000 reduction in IT sales commissions due to decreased IT revenues. Although the full effects of our cost-cutting measures are not yet known, we do not presently anticipate that our efforts to control SG&A expenses will adversely impact our current sales and marketing initiatives because these initiatives are designed to derive operational efficiencies while controlling costs. RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses consist primarily of software developers' wages. For the three and six months ended September 30, 2002, R&D expenses increased by $66,000 (13.7%) and $43,000 (4.4%) to $547,000 and $1,011,000 from $481,000 and $968,000, respectively, during the comparable periods in the prior fiscal year. The increase in R&D expenses is due to the fact that all of the R&D expenses during three and six months ended September 30, 2002 related to enhancement of our software products that have already been released, and therefore were expensed, whereas during the comparable periods in the prior year certain R&D expenses were capitalized because they related to development of software products. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and other amortization expenses (excluding goodwill amortization and amounts charged to cost of revenues) declined by $31,000 (10.2%) to $274,000 from $305,000 during the three months ended September 30, 2002 as compared to the three months ended September 30, 2001. Depreciation and amortization expenses decreased by $36,000 (6.2%) to $542,000 for the six months ended September 30, 2002 from $578,000 for the six month period ended September 30, 2001 due to a lower level of capital expenditures as part of our continuing efforts to control costs. We anticipate that depreciation and amortization expenses will remain at this lower level through the end of the current fiscal year. RESTRUCTURING. In March 2001, we announced plans to restructure our operations. As a result of this restructuring plan, we recorded a restructuring charge of $2,400,000 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 toward the Web-based telecommunication and travel services. In March 2001, we closed our Boston technical support office. Technical support activities previously offered from that office have been consolidated into our California facility. The elimination of the in-house legal department primarily consisted of the termination of one employee whose position was not refilled. Legal services are being obtained, as needed, through our continuing external legal counsel. During the six months ended September 30, 2002, we provided another $104,000 toward additional expenses from the restructuring plans announced in March 2001 primarily due to additional amounts needed for severance costs for the elimination of the legal department and the consolidation of technical support. As of September 30, 2002, approximately $67,000 remained to be paid, representing lease payments for vacated office space, personnel costs and contractual obligations. IMPAIRMENT CHARGE. We recorded an impairment charge of $67,000 for the six months ended September 30, 2002 as a result of the write-down of a capitalized software asset to its net realizable value. INTEREST EXPENSE. Net interest for the three and six months ended September 30, 2002 increased by $13,000 and $44,000 to $54,000 and $116,000, respectively, from the three and six months ended September 30, 2001. The increase during the six-month period ended September 30, 2002 as compared to the six months ended September 30, 2001was primarily due to a decrease in investment interest income of $36,000 and an increase of $11,000 in interest expense related to capital lease obligations. 22 INCOME TAXES. We recorded an income tax benefit of $301,000 for the six months ended September 30, 2002 as compared to net income tax expense of $137,000 for the six months ended September 30, 2001. 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 for the six months ended September 30, 2002. Tax expense for the six months ended September 30, 2001 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 September 30, 2002 consisted of $2,065,000 of cash and cash equivalents. Cash and cash equivalents declined by $1,401,000 or 40.4% during the six months ended September 30, 2002. As discussed below, the primary reasons for this decline were $934,000 cash used in operations, $203,000 in capital expenditures, $132,000 in repayment of bank debt and $208,000 in payments toward capital lease obligations. Net cash used in operations was $934,000 during the six months ended September 30, 2002 as compared to $1,854,000 during the six months ended September 30, 2001. Net loss was the primary contributor to net cash used in both periods. A $123,000decrease in accounts payable, a $353,000decrease in accrued expenses, a $174,000decrease in income tax payable, a $195,000 decrease in accrued restructuring costs and a $416,000 decrease in deferred revenues contributed to the usage of cash in the six months ended September 30, 2002, offset by cash provided by a $779,000 decrease in accounts receivable balances (net of bad debt expense), a $112,000 decrease in notes and related party loans receivable, a $300,000 decrease in income tax receivable and a $575,000 decrease in prepaid expenses and other current assets. In the comparable period of the prior fiscal year, the primary reason for net cash used in operations was the net loss, offset largely by a $1,063,000 decrease in accounts receivable balance. A $519,000 increase in prepaid expenses and other assets, a $460,000 decrease in accrued expenses and a $689,000 decrease in deferred revenues were primary contributors to cash used in operations during the first six months ended September 30, 2001. Net cash used in investing activities during the six months ended September 30, 2002 consisted of capital expenditures of $203,000, as compared to capital expenditures of $712,000 during the same period in the prior fiscal year, along with $69,000 of cash used to acquire companies. During the six months ended September 30, 2002, we used $284,000 in financing activities primarily to repay bank debt and to pay capital lease obligations. During the comparable period in the prior fiscal year, we used $341,000 primarily to repay bank debt and capital lease obligations and $140,000 to repurchase common stock. We incurred net losses of $2,312,000 and $2,535,000 and used cash in operations of $934,000 and $1,854,000 in the six months ended September 30, 2002 and 2001, 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. 23 The following tables summarize our contractual obligations and commercial commitments at September 30, 2002 (in thousands of dollars):
-------------------------------------------------------------------------------- PAYMENTS DUE BY PERIOD -------------------------------------------------------------------------------- LESS THAN 1 ------------ CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS - ----------------------- ----- ---- --------- --------- ------------- Long-Term Debt 651 262 374 14 1 Capital Lease Obligations 1,252 431 605 216 - Operating Leases 5,389 732 1,223 840 2,594 ------------------------------------------------------------------------------ Total Contractual Cash Obligations 7,292 1,425 2,202 1,070 2,595 ============================================================================== TOTAL AMOUNTS LESS THAN 1 OTHER COMMERCIAL COMMITMENTS COMMITTED YEAR 1-3 YEARS 4-5 YEARS OVER 5 YEARS - ---------------------------- --------- ---- --------- --------- ------------ Purchase commitment 600 600 - - - --------------------------------------------------------------------------- Total Commercial Commitments 600 600 - - - ===========================================================================
During the quarter ended September 30, 2002, one of our major stockholders executed a letter of commitment to provide us with a revolving line of credit expiring March 31, 2003, in the amount of $500,000 at annual interest rates varying from 2.0% over prime rate to 10.0% over prime rate depending on the outstanding balance. The revolving line of credit has no loan covenant or ratio requirements. As of September 30, 2002, we had no borrowings against this revolving line of credit. Although we expect our existing cash and cash equivalent balances to decline further during the next twelve months, 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 for the next twelve months. We have made, and will continue to make, budget cuts to maintain adequate capital reserves. However, our operational plan calls for the raising of additional funds to finance growth 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. If we obtain additional equity funding, our existing shareholders will experience dilution. 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. 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, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. 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 of accounting. 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 24 instead be 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. 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. Intangible assets identified as having indefinite useful lives 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 record an impairment loss as of the date of adoption because we determined that we did not have any identifiable intangible assets other than goodwill. 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, to those reporting units as of April 1, 2002. Pursuant to paragraphs 30-31 of SFAS No.142, we identified three "reporting units" as defined in paragraph 17 of SFAS No. 131: 1) Engineering and collaborative software solutions; 2) IT Services; and 3) Web-based telecommunications and travel services. Each of these reporting units was identical to its related operating segment and met the specified criteria as distinct operating units: the component constitutes a business; discrete financial data is available for the component; and segment management routinely reviews the component's operating results. The aggregation criteria for each of the components met the test of: (a) similar economic characteristics over the long term; (b) similar products or services; (c) similar production processes; and (d) similar types or classes of customers. As of March 31, 2002, goodwill balances for each of the reporting units were as follows: Engineering and collaborative software solutions $ 1,859,000 IT services $ 6,765,000 Web based telecommunication and travel services $ 481,000 In connection with adopting this standard, during the second quarter, we completed step one of the test for impairment, which indicated that the carrying value of our IT services segment exceeded its estimated fair value, as determined utilizing various valuation techniques including discounted cash flow and comparative market analysis. Net revenue for the IT Services reporting unit declined $8,150,000, from $18,019,000 for the year ended March 31, 2001 to $9,869,000 for the year ended March 31, 2002. This decline in the revenues for IT Services is not anticipated to substantially improve and may worsen in the next 12 months because we do not expect the demand for IT services to improve during this period. In accordance with SFAS No. 142, we are currently determining the extent of the impairment in the IT services segment and will report the level of impairment for each reporting unit by fiscal year end. We are required to complete the second step of the test for impairment 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 25 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 September 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. Approximately $6,765,000 of this amount represents unamortized goodwill related to the IT services segment. No amortization expense was recorded during the six month period ended September 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 principle. The following table reconciles previously reported net income (loss) as if the provisions of SFAS No. 142 were in effect in fiscal year 2002 and at fiscal year end 2002 and 2001 (in thousands except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, MARCH 31, 2002 2001 2002 2001 2002 2001 ------------ ------------ ------------ ------------ ------------ ------------ Reported net loss $ (1,242) $ (1,384) $ (2,312) $ (2,535) $ (8,944) $ (6,637) Add back: Goodwill amortization, net of taxes - 269 - 569 1,052 1,282 ------------ ------------ ------------ ------------ ------------ ------------ Adjusted net loss $ (1,242) $ (1,115) $ (2,312) $ (1,966) $ (7,982) $ (5,355) Reported basic and diluted loss per common share $ (0.07) $ (0.08) $ (0.13) $ (0.15) $ (0.53) $ (0.45) Add back: Goodwill amortization, net of taxes - 0.01 - 0.03 0.06 0.09 ------------ ------------ ------------ ------------ ------------ ------------ Adjusted basic and diluted loss per common share $ (0.07) $ (0.07) $ (0.13) $ (0.12) $ (0.47) $ (0.36) ------------ ------------ ------------ ------------ ------------ ------------
In June 2001, the FASB issued SFAS No. 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 No. 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material impact on our consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 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 No. 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 No. 144 is effective for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 beginning April 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our consolidated financial position or results of operations. 26 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 extinguishments 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. ITEM 3. CONTROLS AND PROCEDURES. Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of November 8, 2002 ("Evaluation Date"), that the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated, recorded, processed, summarized and reported to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required. There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken. 27 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In August 2002, we issued 80,000 shares of common stock valued at $180,000 to two former employees in consideration for services rendered. In September 2002, we issued 26,500 shares of common stock valued at $55,915 to a former employee and a former consultant in consideration for services rendered. Exemption from the registration provisions of the Securities Act of 1933 for the transactions described above is claimed under Section 4(2) of the Securities Act of 1933, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide. In each case, appropriate investment representations were obtained, stock certificates were issued with restricted stock legends, and stop transfer orders were placed with our transfer agent. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Number Description ------ ----------- 10.1 Agreement to provide credit facility dated August 12, 2002 between netGuru, Inc. and Peter R. Kellogg. (1) 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. -------------------- (1) Filed as an exhibit to the initial filing of this Form 10QSB on November 14, 2002 and incorporated herein by reference. (b) Reports on Form 8-K On November 5, 2002, we filed a current report on Form 8-K for October 30, 2002, announcing the appointment of Stanley W. Corbett to our board of directors following the resignation of Dr. John Pepin from our board of directors. The Form 8-K included Item 5. Other Events and Item 7. Financial Statements and Exhibits. The exhibit attached was a press release dated October 30, 2002 relating to the appointment. 28 SIGNATURES - ---------- 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: January 27, 2003 NETGURU, INC. By: /S/ BRUCE K. NELSON ------------------- Bruce K. Nelson Chief Financial Officer (duly authorized officer and principal financial and accounting officer) 29 CERTIFICATIONS I, Amrit K. Das, certify that: 1. I have reviewed this amendment no. 2 to quarterly report on Form 10-QSB of netGuru, Inc. ("quarterly report"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 27, 2003 /s/ AMRIT K. DAS ------------------------ Amrit K. Das, Chief Executive Officer (principal executive officer) 30 I, Bruce Nelson, certify that: 1. I have reviewed this amendment no. 2 to quarterly report on Form 10-QSB of netGuru, Inc. ("quarterly report"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 27, 2003 /s/ BRUCE K. NELSON -------------------- Bruce Nelson, Chief Financial Officer (principal financial officer) 31 EXHIBITS FILED WITH THIS AMENDMENT NO. 2 TO REPORT ON FORM 10-QSB Exhibit Number Description - ------ ----------- 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. 32 EX-99.1 3 netguru_10qa2ex99-1.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 amendment no. 2 to the quarterly report on Form 10-QSB of netGuru, Inc. (the "Company") for the quarterly period ended September 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: January 24, 2003 By: /s/ Amrit K. Das --------------- Amrit K. Das Chief Executive Officer In connection with amendment no. 2 to the quarterly report on Form 10-QSB of netGuru, Inc. (the "Company") for the quarterly period ended September 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: January 24, 2003 By: /s/ Bruce K. Nelson -------------------- Bruce K. Nelson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----