10QSB 1 netguru_10q-093001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 [ ] 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 incorporation or organization) Identification No.) 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 16,920,848 on November 09, 2001. PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations for the three and six month periods ended September 30, 2001 and 2000 Condensed Consolidated Balance Sheets as of September 30, 2001 and March 31, 2001 Condensed Consolidated Statements of Cash Flows for the six month periods ended September 30, 2001 and 2000 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NETGURU, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except share and per share amounts)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ------------------------------------------------------------------- Net revenues: IT services $ 2,724 $ 4,977 $ 6,072 $ 9,894 Software sales, maintenance and services 2,021 2,034 4,057 4,208 Internet, e-commerce, and ASP services 1,529 520 2,919 720 Digital media products and animation services 30 - 37 - ------------------------------------------------------------------- Total net revenues 6,304 7,531 13,085 14,822 Cost of revenues: IT services 2,019 3,305 4,365 6,472 Software sales, maintenance and services 144 329 393 623 Internet, e-commerce, and ASP services 1,318 254 2,241 388 Digital media products and animation services - - 39 - ------------------------------------------------------------------- Total cost of revenues 3,481 3,888 7,038 7,483 ------------------------------------------------------------------- Gross profit 2,823 3,643 6,047 7,339 ------------------------------------------------------------------- Operating expenses: Selling, general and administrative 3,001 3,126 6,081 6,124 Research and development 481 670 1,002 1,345 Amortization of goodwill 282 345 616 689 Depreciation and other amortization 355 239 682 452 ------------------------------------------------------------------- Total operating expenses 4,119 4,380 8,381 8,610 ------------------------------------------------------------------- Operating loss (1,296) (737) (2,334) (1,271) ------------------------------------------------------------------- Other (income) expense: Interest, net 41 (126) 72 (216) Other (1) (19) (8) (37) ------------------------------------------------------------------- Total other (income) expense 40 (145) 64 (253) ------------------------------------------------------------------- Loss before income taxes (1,336) (592) (2,398) (1,018) Income tax expense (benefit) 48 73 137 (37) ------------------------------------------------------------------- Net loss $ (1,384) $ (665) $ (2,535) $ (981) =================================================================== Net loss per common share: Basic $ (0.08) $ (0.06) $ (0.15) $ (0.10) =================================================================== Diluted $ (0.08) $ (0.06) $ (0.15) $ (0.10) =================================================================== Common shares used in computing net loss per common share: Basic 16,920,848 13,651,900 16,989,116 13,507,294 =================================================================== Diluted 16,920,848 13,651,900 16,989,116 13,507,294 =================================================================== 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, 2001 2001 -------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,846 $ 7,958 Accounts receivable (net of allowance for doubtful accounts of $749 and $832, as of September 30, 2001 and March 31, 2001 respectively) 3,904 4,937 Deferred income taxes 405 342 Notes and related party loans receivable 16 14 Prepaid expenses and other current assets 1,889 1,375 -------------- -------------- Total current assets 11,060 14,626 Property, plant and equipment, net 4,883 4,796 Goodwill and intangible assets (net of accumulated amortization of $3,578 and $2,962, as of September 30, 2001 and March 31, 2001 respectively) 10,290 10,847 Deferred income taxes, non-current 936 936 Other assets 1,000 1,076 -------------- -------------- $ 28,169 $ 32,281 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term bank debt $ 587 $ 591 Current portion of capital lease obligations 149 151 Accounts payable 1,125 1,179 Accrued expenses 1,221 1,558 Income taxes payable 253 116 Deferred maintenance revenue 1,316 1,992 Deferred income taxes 60 60 Accrued restructuring costs and other liabilities 360 309 -------------- -------------- Total current liabilities 5,071 5,956 Long-term bank debt, net of current portion 586 840 Capital lease obligations, net of current portion 475 532 Deferred income taxes, non-current 112 104 Deferred gain on sale-leaseback 922 957 -------------- -------------- Total liabilities 7,166 8,389 -------------- -------------- 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 16,920,848 and 16,864,604 shares (net of 10,965 treasury shares) as of September 30, 2001 and March 31, 2001 respectively 169 169 Additional paid-in capital 32,373 32,621 Accumulated deficit (10,397) (7,861) Accumulated other comprehensive loss: Cumulative foreign currency translation adjustments (1,142) (1,037) -------------- -------------- Total stockholders' equity 21,003 23,892 -------------- -------------- $ 28,169 $ 32,281 ============== ============== 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, 2001 2000 -------------- -------------- Cash flows from operating activities: Net loss $ (2,535) $ (981) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,307 1,141 Deferred income taxes (7) (119) Compensation expense recognized on issuance of stock options 64 56 Changes in operating assets and liabilities (net of acquisitions): Accounts receivable 1,063 (422) Notes and related party loans receivable (2) 112 Prepaid expenses and other current assets (519) 90 Other assets (38) (859) Accounts payable (57) 310 Accrued expenses (460) (543) Income taxes payable 84 66 Deferred maintenance revenue (689) (97) Deferred gain on sale-leaseback (35) (34) Other liabilities (30) 46 -------------- -------------- Net cash used in operating activities (1,854) (1,234) -------------- -------------- Cash flows from investing activities: Purchase of property, plant and equipment (712) (1,810) Payments to acquire companies, net of cash acquired (69) (1,591) -------------- -------------- Net cash used in investing activities (781) (3,401) -------------- -------------- Cash flows from financing activities: Proceeds from bank debt 41 139 Repayment of bank debt (273) (873) Repayment of capital lease obligations (68) (58) Proceeds from issuance of common stock 27 3,549 Payments to repurchase common stock (140) - -------------- -------------- Net cash (used in) provided by financing activities (413) 2,757 -------------- -------------- Effect of exchange rate changes on cash and cash equivalents (64) (219) -------------- -------------- (Decrease) increase in cash and cash equivalents (3,112) (2,097) Cash and cash equivalents, beginning of period 7,958 13,265 -------------- -------------- Cash and cash equivalents, end of period $ 4,846 $ 11,168 ============== ============== Supplemental disclosure of cash flow information: Amounts paid for: Interest $ 128 $ 66 Income taxes $ 32 $ 33 Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock and warrants in connection with $ - $ 750 acquisitions See accompanying notes to consolidated financial statements. 5
NETGURU, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (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, 2001 and the results of operations and the cash flows for the three and six months ended September 30, 2001 and 2000, 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, 2001 are not necessarily indicative of the results to be expected for the full year ending March 31, 2002. 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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior quarter amounts have been reclassified to conform to the current quarter presentation. REVENUE RECOGNITION The Company recognizes revenue when it is realized or realizable and earned. The Company's revenues arise from the following segments: information technology ("IT") services; software sales, maintenance and services; and Internet portals and digital media products and services. Revenue from providing IT services is primarily recognized on a time and material basis as services are performed. Certain IT services contracts are fixed cost type contracts for which revenue is recognized upon achieving certain milestones. Revenue from software sales is recognized upon shipment, provided that no significant post-contract support obligations remain outstanding and collection of the resulting receivable is deemed probable. The Company's sales do not provide a specific right of return. At the time of sale, the Company typically provides 120-day initial maintenance and support to the customer. Costs relating to this initial 120-day support period, which include primarily telephone support, are not considered material. After the initial support period, customers may choose to purchase ongoing maintenance contracts that include telephone, e-mail and other methods of support, and the right to receive upgrades. Revenue from these maintenance contracts is deferred and recognized ratably over the life of the contract, usually twelve months. 6 Revenues from products and services sold via Internet portals, including telecommunications and travel services, are predominantly recognized net of purchase costs when the products and services are delivered and collectibility is probable. 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. Revenues from digital media and animation services are recognized upon achievement of certain pre-determined milestones. PROVISION FOR RESTRUCTURING OPERATIONS In March 2001, the Company announced plans to restructure its operations. As a result of this restructuring plan, the Company recorded a restructuring charge of $2.4 million in the fourth quarter of fiscal 2001. The restructuring plan: 1) refocused strategic direction of Internet service provider ("ISP") initiatives; 2) refocused strategic direction of Internet portal initiatives; 3) consolidated the Company's technical support activities; and 4) eliminated the Company's in-house legal department. In the Internet portal business, the Company has redirected its primary focus towards the telephony and travel services offered through the portal. For the Company's ISP initiatives in India, the Company has redirected its primary focus towards the telephony, communication and connectivity services targeted at the corporate market. 7 A roll-forward of the restructuring accrual activity is as follows (in thousands): ASSET CONTRACTUAL WRITE-OFFS SEVERANCE OBLIGATIONS TOTAL --------- --------- --------- --------- Refocus of ISP operations - - 101 101 Refocus of portal operations - - - - Consolidation of technical support activities - 49 117 166 Elimination of legal department - 42 - 42 --------- --------- --------- --------- Balance at March 31, 2001 $ - $ 91 $ 218 $ 309 --------- --------- --------- --------- Refocus of ISP operations - - - - Refocus of portal operations - - - - Payments towards technical support activities - - (12) (12) Elimination of legal department - - - - --------- --------- --------- --------- Balance at June 30, 2001 $ - $ 91 $ 206 $ 297 --------- --------- --------- --------- Payments towards ISP operations - - (63) (63) Payments towards portal operations - - - - Payments towards technical support activities - - (12) (12) Elimination of legal department - - - - --------- --------- --------- --------- Balance at September 30, 2001 $ - $ 91 $ 131 $ 222 ========= ========= ========= ========= The provision included $117,000 of lease payments for vacated office space scheduled for payment through September 2003. The remaining personnel costs are expected to be paid out and contractual obligations fulfilled by the end of fiscal 2002. The accrued costs are included in "Accrued restructuring costs and other liabilities" on the Company's condensed consolidated balance sheets. STOCKHOLDERS' EQUITY In April 2000, the Company issued 25,000 shares of common stock as a portion of the purchase price for the acquisition of Allegria Software, Inc ("Allegria"). The recipients of these shares were given the right to demand the Company to repurchase these shares at a price of $28.60 per share at the end of one year. In April 2001, each of the former owners exercised this right. The total repurchase price is $715,000. Agreements were reached with all parties to extend cash payment for this repurchase over a twelve-month period. The Company paid a total of $140,000 during the first quarter of fiscal 2002 to two of the former owners for the repurchase of 12,000 shares, which were retired prior to June 30, 2001. The remaining $203,000 payable over the next twelve months has been accrued under "accrued expenses." 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 is $372,000, of which $128,000 was paid as of September 30, 2001. 8 COMPREHENSIVE INCOME (LOSS) The Company applies the provisions of Statement of Financial Accounting Standards ("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 $1,398,000 and $922,000 for the three months ended September 30, 2001 and 2000, respectively, and was $2,640,000 and $1,414,000 for the six months ended September 30, 2001 and 2000, 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, --------------------------------------------- 2001 2000 2001 2000 --------------------------------------------- Numerator: Net loss $ (1,384) $ (665) $ (2,535) $ (981) Cumulative preferred stock dividends $ - $ (139) $ - $ (312) --------------------------------------------- Numerator for basic and diluted loss per share $ (1,384) $ (804) $ (2,535) $ (1,293) ============================================= Denominator: Denominator for basic net loss per share - average number of common shares outstanding during the period 16,921 13,652 16,989 13,507 Incremental common shares attributable to exercise of outstanding options, warrants and other common stock equivalents - - - - --------------------------------------------- Denominator for diluted net loss per share 16,921 13,652 16,989 13,507 ============================================= Basic net loss per share $ (0.08) $ (0.06) $ (0.15) $ (0.10) ============================================= Diluted net loss per share $ (0.08) $ (0.06) $ (0.15) $ (0.10) =============================================
Options, warrants and other common stock equivalents amounting to 455,000 and 538,000 potential common shares for the three and six month periods ended September 30, 2001, respectively and 1,701,000 and 1,730,000 potential common shares for the three and six month periods ended September 30, 2000 were excluded from the computation of diluted EPS because the Company reported net losses and, therefore, the effect would be antidilutive. SEGMENT AND GEOGRAPHIC DATA The Company is an integrated Internet and IT technology and services company operating in four primary business segments; 1) IT services; 2) engineering software products, maintenance and services; 3) Internet portals focused on telecommunications and travel services for Asian expatriates and ASP solutions; and 4) digital media products and animation services. 9 The Company has provided computer-aided engineering software solutions to customers for about 20 years. During the past 16 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. With the Company's experience in India and understanding of the global Indian community, it began offering online Internet portal services in 1999. The Company's portal offerings are primarily focused on telecommunications and travel services for Asian expatriates. The Company continues to provide digital media services, including computer animation, and has used this expertise to enhance its Internet portal offerings. The significant components of worldwide operations by reportable operating segment (in thousands) are:
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- NET REVENUE IT services $ 2,724 $ 4,977 $ 6,072 $ 9,894 Software sales, maintenance and services 2,021 2,034 4,057 4,208 Internet, e-commerce, and ASP services 1,529 520 2,919 720 Digital media and animation services 30 - 37 - --------- --------- --------- --------- Consolidated $ 6,304 $ 7,531 $ 13,085 $ 14,822 ========= ========= ========= ========= OPERATING (LOSS)/INCOME IT Services $ (24) $ 813 $ 198 $ 1,645 Software sales, maintenance and services (643) (664) (1,424) (1,282) Internet, e-commerce, and ASP services (522) (886) (850) (1,634) Digital media and animation services (107) - (258) - --------- --------- --------- --------- Consolidated $ (1,296) $ (737) $ (2,334) $ (1,271) ========= ========= ========= =========
10 The Company's operations are based worldwide through foreign and domestic subsidiaries and branch offices in the United States, India, the United Kingdom, France, Germany and Asia-Pacific. The following are significant components of worldwide operations by geographic location: THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET REVENUE United States $ 5,104 $ 6,322 $10,822 $12,480 The Americas (other than U.S.) 82 123 202 326 Europe 541 592 1,038 1,060 Asia-Pacific 577 494 1,023 956 -------- -------- -------- -------- Consolidated $ 6,304 $ 7,531 $13,085 $14,822 ======== ======== ======== ======== EXPORT SALES United States $ 97 $ 165 $ 221 $ 551 ======== ======== ======== ======== AT SEPTEMBER AT SEPTEMBER 30, 2001 30, 2000 ------------ ------------ LONG-LIVED ASSETS United States $ 13,366 $ 12,992 Europe 366 375 Asia-Pacific 2,441 3,122 ------------ ------------ Consolidated $ 16,173 $ 16,489 ============ ============ CONTINGENCIES The Company is party to various litigation 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 result of operations or financial condition. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Quarterly Report on Form 10-QSB is forward-looking, such as information including the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance. The forward-looking statements and associated risks may include, relate to or be qualified by the uncertainty associated with other important factors, including, without limitation, o our ability to transition into new lines of business as planned; o our ability to become a leading integrated Internet technology and services company addressing the global Indian market, the worldwide information technology services market and the worldwide Internet engineering software market; o our ability to successfully market and sell ASP services through our recently launched engineering portal; o market growth; o new competition; o competitive pricing; o new technologies; o our ability to successfully implement our future business plans; o our ability to execute our business strategy and our expansion strategy; o our ability to attract strategic partners, alliances and advertisers; o uncertainties relating to economic conditions in the markets in which we currently operate and in which we intend to operate in the future; o our ability to hire and retain qualified personnel; o our ability to obtain capital, if required; o our ability to successfully implement our brand building campaign; o trademark protection; o our plans for expanding our Internet portal network and the services offered through such network; o our plans regarding our telephony infrastructure and service offerings; o our beliefs regarding the growth of Internet usage within the global Indian community; o our beliefs regarding the demand for our products and our competitive advantages; o the negative impact of economic slowdowns and recessions; and o existing and future government regulation to which we are subject. We do not undertake to update, revise or correct any forward-looking statements. The information contained in this report is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report, and in our other materials filed with the Securities and Exchange Commission, including our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2001 (and, in particular, in the "Risk Factors" section therein) that discuss our business in greater detail and that also disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition. Any of the factors described above or in the "Risk Factors" section of our Annual Report on Form 10-KSB could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results. 12 As a result, we believe that period-to-period comparisons of the results of our operations are not necessarily meaningful and should not be relied upon as any indication of future performance. Fluctuations in our operating results could 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 an integrated Internet technology and services company providing: o Internet-based information technology, or IT, services; o Internet and personal computer-based engineering software products; o Internet content and commerce through our portal network, NETGURUINDIA.COM, which is focused on the "global Indian" community, consisting of resident Indians and persons of Indian origin, or PIOs; and o Digital media and animation products and services. We have been providing computer-aided engineering software solutions to our customers for about 20 years. For the past 16 years, we have supported our engineering software business with our India-based software programming and IT resources. In 1999, we acquired two IT services companies in the U.S., further expanding our IT resources and capabilities. With our experience in India and our understanding of the global Indian community, we began offering our Internet portal services in 1999. In addition, based upon our knowledge and understanding of the engineering software market, combined with our Internet technology resources and experience, we launched WEB4ENGINEERS.COM, an engineering portal hosting our engineering software applications online and providing applications services provider, or ASP, services to engineering software providers and their licensees worldwide. We provide a full suite of IT consulting services to our customers from our IT services divisions in the Silicon Valley and the Boston area. We support our IT services operations with our offshore facility in India. Our IT consulting customers include companies such as General Electric, Fidelity, Netscape, Sun Microsystems, Cisco Systems and Hewlett Packard. We have positioned ourselves to capitalize on our IT services methodology in order to provide Internet-based IT consulting services to businesses worldwide and to enable us to provide business-to-business Web solutions in India. We develop and market cost-effective, high-quality engineering software solutions. Our comprehensive line of structural, mechanical, civil and process/piping engineering software products provide our customers with fully-integrated, easy-to-use design automation and analysis solutions. We currently license our software products to more than 20,000 companies accounting for over 50,000 software installations. Based on our customer surveys, we estimate that there are approximately 150,000 users at these installations worldwide. Our customers include: Bechtel Corporation, British Telecom, Jet Propulsion Laboratories, Exxon Corporation, Fluor Daniel, Inc., General Dynamics, NASA, Rocketdyne, Siemens AG and Toyo Engineering. In April 2000, we acquired Allegria, a company with Internet technology resources and online collaborative software. This acquisition, combined with our Web-enabling technology, allows us to offer to our current and prospective customers our engineering software products online with real-time, online collaboration through our WEB4ENGINEERS.COM portal. Our WEB4ENGINEERS.COM portal offers ASP services, including applications hosting, data hosting and portal services for engineering companies worldwide. Our Internet portal, NETGURUINDIA.COM, currently provides Internet content and commerce services, including travel, telecommunications and gifts, to PIOs through destinations that address the specific Indian cultural and ethnic needs of the targeted communities. Our portal network provides 13 comprehensive digitally-rich media content and e-commerce services for PIOs, including direct-to-customer fulfillment and Internet tools such as chat rooms and other digital communication capabilities. In August 2001, the Company entered into the global telephony wholesale market by offering call termination services through its privately managed switching network to Mexico, China and the Philippines. We have developed proprietary digital multi-media expertise and resources in our studios in Calcutta, India and in the U.S. to offer our entertainment, advertising and corporate customers animation software such as AXA Web, digital multi-media, and features and other digital products and services worldwide. We plan to further enrich our offerings by providing full motion video and sound through internet portals, allowing the user to view content in full-screen format on the user's computer without distortion or degradation of either video or audio quality. 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, ----------------- ----------------- 2001 2000 2001 2000 ------- ------- ------- ------- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 55.2 51.6 53.8 50.5 ------- ------- ------- ------- Gross profit 44.8 48.4 46.2 49.5 ------- ------- ------- ------- Selling, general and administrative expenses 47.6 41.5 46.4 41.3 Research and development expenses 7.6 8.9 7.7 9.1 Amortization of goodwill 4.5 4.6 4.7 4.6 Depreciation and software amortization 5.6 3.2 5.2 3.1 ------- ------- ------- ------- Total operating expenses 65.3 58.2 64.0 58.1 Operating loss (20.5) (9.8) (17.8) (8.6) Interest (income) expense, net 0.7 (1.7) 0.6 (1.5) Other (income) expense, net - (0.3) - (0.2) ------- ------- ------- ------- Loss before income taxes (21.2) (7.8) (18.4) (6.9) Income tax expense (benefit) 0.8 1.0 1.0 (0.3) ------- ------- ------- ------- Net loss (22.0)% (8.8)% (19.4)% (6.6)% ======= ======= ======= =======
NET REVENUES. Our revenues were primarily from (1) IT services, (2) engineering software products, maintenance and services, and (3) Internet content, e-commerce and ASP services. Net revenues for the three months ended September 30, 2001 decreased by $1,227,000 or 16.3% to $6,304,000 from $7,531,000 for the three months ended September 30, 2001. For the six months ended September 30, 2001, net revenues declined $1,737,000 or 11.7% from $14,822,000 to $13,085,000. Management believes that the events of the September 11th incident adversely affected the net revenues for the quarter ended September 30, 2001 specifically in IT services, software sales, and travel services. 14 IT services net revenues represented 43.2% of total net revenues for the quarter ended September 30, 2001 compared to 66.1% for the quarter ended September 30, 2000. For the six months ended September 30, 2001, IT services revenues declined $3,822,000 or 38.6% from $9,894,000 to $6,072,000. The decline in IT services net revenue of $2,253,000 or 45.3% during the quarter ended September 30, 2001 compared to the same period in the prior year reflected the general decline in the market for IT services. Our net revenues from software sales, maintenance and services increased as a percentage of total net revenues to 32.1% in the second quarter of fiscal 2002 from 27.0% in the second quarter of fiscal 2001. For the six-month period ended September 30, 2001, net revenues from software sales, maintenance and support increased to 31.0% of the total net revenues from 28.4% of the total net revenues. In dollar terms, revenues from software sales, maintenance and services declined to $2,021,000 in the second quarter of fiscal 2002 from $2,034,000 in the same period of the prior fiscal year, and to $4,057,000 in the first half of fiscal 2002 from $4,208,000 in the same period in the prior year. The decline in revenues is due to the global economic slowdown and to customer postponements. Internet content, e-commerce, and ASP services comprise an emerging business segment for our company. Revenues in the second quarter of fiscal 2002 amounted to $1,529,000 compared to $520,000 from this segment in the comparable period of the prior fiscal year. These revenues were generated primarily from travel services and phone cards sold as part of our NETGURUINDIA.COM portal business, and to a smaller extent from our ASP services. In the second quarter of fiscal 2002, we started providing call termination services through our own privately managed internet protocol telephony switch. Revenues from this business in the amount of approximately $279,000, is included in the Internet content, e-commerce and ASP services segment for the three months ended September 30, 2001. Revenues for the six months period ended September 30, 2001 increased to $2,919,000 from $720,000 during the same period in the prior year. GROSS PROFIT. Gross profit decreased by $820,000 or 22.5% to $2,823,000 for the three months ended September 30, 2001 from $3,643,000 for the three months ended September 2000. For the six months ended September 30, 2001, gross profit decreased $1,292,000 or 17.6% from $7,339,000 to $6,047,000. As a percentage of total net revenues, gross profit decreased to 44.8% for the three months ended September 30, 2001 from 48.4% for the three months ended September 30, 2000. For the six months ended September 30, 2001, gross profit as a percentage of total net revenues decreased to 46.2% from 49.5% for the six months ended September 30, 2000. The decrease in gross profit was mainly due to the decline in IT services, partially offset by increases in gross profit for the software product sales, maintenance and support segment and the Internet, e-commerce and ASP services segment. The gross profit percentage from the IT services segment is ordinarily lower than the gross profit percentage from the software sales, maintenance and services segment. In addition, the general decline in the IT services market contributed to a further decline in the gross profits in this segment, resulting in a decrease from 33.6% for the three months ended September 30, 2000 to 25.6% for the three months ended September 30, 2001. For the six months ended September 30, 2001, IT services gross margin decreased from 34.6% to 28.1%. The events of September 11, 2001 also contributed to the decline in gross profit dollars due to customer postponement of previously closed sales. The gross profit percentage from the Internet, e-commerce, and ASP services segment decreased from 51.0% for the three months ended September 30, 2000 to 13.8% for the three months ended September 30, 2001. For the six months ended September 30, 2001, internet, e-commerce, and ASP services gross margin decreased to 23.2% from 46.1% for the six months ended September 30, 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative ("SG&A") expenses decreased $125,000 or 4.0% to $3,001,000 for the three months ended September 30, 2001 from $3,126,000 for the three months ended September 30, 2000. For the six months ended September 30, 2001 SG&A decreased slightly by $43,000 or 0.7% to $6,081,000 as compared to $6,124,000 for the same period in the prior year. Although SG&A expenses decreased only slightly in the first half of fiscal 2002 compared to the same period in the prior fiscal year, they actually decreased approximately $1,557,000 compared to the six months ended March 31, 2001. The cost control measures put in place after the restructuring in the last quarter of the prior fiscal year continue to be reflected in the decrease in SG&A expenses in the three months and six ended September 30, 2001. 15 RESEARCH AND DEVELOPMENT EXPENSES. Research and development ("R&D") expenses consist primarily of software developers' wages. R&D expenses declined both as a percentage of total net revenue and in dollar terms, by $189,000 or 28.2% to $481,000 for the three months ended September 30, 2001 compared to $670,000 for the same period in the prior year. During the six months ended September 30, 2001, R&D expenses decreased $343,000 or 25.5% from $1,345,000 in fiscal year 2001 to $1,001,000 in fiscal year 2002. As a percentage of the software product sales, maintenance and support revenues (to which the R&D expenses are more closely related), R&D expenses decreased from 32.0% in the first half of fiscal year 2001 to 24.7% in the first half of fiscal year 2002. The decrease in R&D expenses is primarily attributable to our efforts to control costs and expenses. AMORTIZATION OF GOODWILL. Goodwill amortization expense for the three months ended September 30, 2001 decreased $63,000 or 18.3% to $282,000 from $345,000 for the comparable period in fiscal year 2001. During the six months ended September 30, 2001, amortization expense decreased $73,000 or 10.6% from $689,000 in the comparable period to $616,000. The decrease in amortization expense is primarily due to goodwill from two prior acquisitions that was completely amortized prior to the beginning of fiscal year 2002. DEPRECIATION AND OTHER AMORTIZATION EXPENSE. Depreciation and other amortization expense of $355,000 for the three months ended September 30, 2001 increased $116,000 or 48.5% from $239,000 for the comparable period in the prior year. During the six months ended September 30, 2001, depreciation and other amortization expense increased $230,000 or 50.1% from $452,000 in the comparable period to $682,000. The increase in depreciation expense is primarily attributable to the increase in capital expenditures in the prior periods. OTHER (EXPENSE) INCOME. Net interest expense was $41,000 for the three months ended September 30, 2001 and $72,000 for the six months ended September 30, 2001, compared to net interest income of $126,000 for the three months ended September 30, 2000 and $216,000 for the six months ended September 30, 2001. This change is primarily due to the reduction in cash balances deposited in interest earning accounts. INCOME TAXES. We recorded an income tax expense of $137,000 in the first half of fiscal 2002 compared to an income tax benefit of $37,000 in the first half of fiscal 2001. The change resulted largely from an increase in the valuation allowance against deferred tax assets recorded for the six months ended September 30, 2001. In assessing the realizability of the net deferred tax assets, management considers 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 to recover income taxes previously paid during the carryback period. As of September 30, 2001, we had a valuation allowance of $3,502,000 to reduce the net deferred tax assets due to the potential expiration of certain tax credit and net operating loss carryforwards prior to their utilization. LIQUIDITY AND CAPITAL RESOURCES We currently finance our operations (including capital expenditures) primarily through existing cash and cash equivalent balances. Our principal sources of liquidity at September 30, 2001 consisted of $4,846,000 of cash and cash equivalents. Cash and cash equivalents decreased by $3,112,000 during the six months ended September 30, 2001. The decrease was largely due to cash used in operating activities and to a lesser extent by cash used in investing and financing activities. During the same six-month period in the prior year, the decrease in cash and cash equivalents was $2,097,000. The larger decrease in cash and cash equivalents in the current period is due to a reduction in cash provided by financing activities. Cash used in operating activities was $1,854,000 for the six months ended September 30, 2001 and $1,234,000 for the six months ended September 30, 2000. The primary contributors were: o A larger net loss in fiscal 2002 ($2,535,000) compared to fiscal 2001 ($981,000); and o Decrease in maintenance billings as reflected by a decrease of $689,000 in deferred maintenance revenue in fiscal 2002 compared to a decrease of $97,000 in fiscal 2001. 16 These contributors were partially offset by: o Reductions in accounts receivable of $1,063,000 in fiscal 2002 compared to increase in accounts receivable of $422,000 at September 30, 2000. In the first half of the current fiscal year (fiscal 2002), we used $413,000 primarily to repay bank debt and to repurchase common stock. During the first half of the prior fiscal year (fiscal 2001), we received $2,757,000 from financing activities, mainly from an issuance 200,000 shares of our common stock for approximately $3,075,000 (net of certain commissions and offering costs) to two investors on June 22, 2000 in a private transaction not involving a public offering. We received an additional $474,000 through the exercise of stock options and warrants during the first half of fiscal 2001. During the six months ended September 30, 2001, we used approximately $781,000 of cash in investing activities primarily to purchase property, plant and equipment compared to $3,401,000 during the six months ended September 30, 2000. The decrease was partly due to the Company's prior year acquisiton of Allegria, in which we paid $1,500,000 as a portion of the purchase price for Allegria's outstanding capital stock. The decrease in the purchases of property, plant, and equipment from September 30, 2000 is due to the Company's prior year purchases made for the development of the infrastructure for our Internet business, including our ISP network. This decrease is offset by the purchase of the internet protocol telephony switch for approximately $500,000 in the first half of fiscal 2002. We believe that our current cash and cash equivalents balances will provide adequate working capital to fund our operations at currently anticipated levels through March 31, 2002. We are currently under negotiations to renew our line of credit, which expired August 31, 2001. To the extent that such amounts are insufficient to finance our working capital requirements, we will be required to raise additional funds through public or private equity or debt financing. There can be no assurance that such additional financing will be available, if needed, or, if available, will be on terms satisfactory to us. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The provisions of the statement require the recognition of all derivatives as either assets or liabilities in the consolidated balance sheet and the measurement of those instruments at fair value. The accounting for the changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. We have not historically entered into derivative contracts or related instruments. Transactions between our domestic entities and foreign entities, including our foreign subsidiaries, are typically denominated in the US dollar. Transactions between our foreign subsidiaries and third parties are typically denominated in the local functional currency in the country in which the subsidiary operates. We adopted SFAS 133, as amended, effective April 1, 2001, the implementation of which resulted in no material impact on our consolidated financial statements and results of operations. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." The Company is required to adopt the provisions of SFAS 141 immediately, except with regard to business combinations initiated prior to July 1, 2001. SFAS No. 141 requires that all business combinations be accounted for under a single method - the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 required that the purchase method be used for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. Under SFAS No. 142, the amortization of goodwill ceases upon adoption of the Statement and it, is effective for fiscal years beginning after December 15, 2001 and shall be initially applied at the beginning of a fiscal year. 17 The Company has historically amortized its goodwill and other intangible assets over their estimated useful lives. Beginning with the adoption of SFAS No. 142, the Company will cease amortizing its goodwill and certain intangible assets. The Company anticipates adopting SFAS No. 142 as of the beginning of fiscal year 2003 (i.e., April 1, 2002). As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $9,574,000, which will be subject to the transition provisions of SFAS 141 and 142. The Company recorded amortization expense in the amount of $1,360,000 for the fiscal year ended March 31, 2001, $616,000 for the six months ended September 30, 2001 and $689,000 for the six months ended September 30, 2000. To the extent that no impairment charges are recorded upon adoption or application of SFAS No. 142, similar amounts amortization will not be recorded in future periods, although the Company has not fully completed its analysis of the effects of adopting these standards. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" in September 2001. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Management does not believe the application of this standard will have a material effect on the Company's financial position, results of operations or liquidity. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in October 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management has not assessed whether the application of this standard will have a material effect on the Company's financial position, results of operations or liquidity. 18 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None 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) Exhibits None (b) Reports on Form 8-K None 19 SIGNATURES ---------- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 14, 2001 NETGURU, INC. By: /S/ JYOTI CHATTERJEE ------------------------------------- Jyoti Chatterjee President and Chief Operating Officer and Acting Chief Financial Officer (principal financial and accounting officer) 20