SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22773
NETSOL INTERNATIONAL, INC.
(Name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
24025 Park Sorrento, Suite 220,
Calabasas, CA 91302
(Address of principal executive offices) (Zip code)
(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
(None)
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B, is not contained in this form and no disclosure will be continued, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
the Form 10-KSB. [ ]
Registrant's revenues for the fiscal year ended June 30, 2001 were $6,726,836.
As of September 4, 2001, Registrant had 12,344,840 shares of its $.001 par value
Common Stock issued and outstanding with an aggregate market value of the common
stock held by non-affiliates of $1,484,624.61. This calculation is based upon
the closing sales price of $0.21 per share on September 4, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
(None)
Transitional Small Business Disclosure Format (Check one): Yes ; No X
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
PART I
PAGE
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Item 1 Description of Business [_]
Item 2 Description of Property [_]
Item 3 Legal Proceedings [_]
Item 4 Submission of Matters to a Vote of Security Holders [_]
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PART II
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Item 5 Market for Common Equity and Related Stockholder Matters [_]
Item 6 Management's Discussion and Analysis [_]
Item 7 Financial Statements [_]
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure [_]
PART III
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Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act [_]
Item 10 Executive Compensation [_]
Item 11 Security Ownership of Certain Beneficial Owners and
Management [_]
Item 12 Certain Relationships and Related Transactions [_]
PART IV
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Item 13 Exhibits and Reports on Form 8-K [_]
PART I
This Form 10KSB contains forward looking statements relating to the development
of the Company's products and services and future operation results, including
statements regarding the Company that are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. The words "believe," "expect," "anticipate," "intend," variations of
such words, and similar expressions identify forward looking statements, but
their absence does not mean that the statement is not forward looking. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Factors that
could affect the Company's actual results include the progress and costs of the
development of products and services and the timing of the market acceptance.
ITEM 1 - BUSINESS
General
NetSol International, Inc. ("NetSol" or the "Company") is in the business of
information technology ("I/T") services. Since it was founded in 1997, the
Company has developed enterprise solutions that help clients use I/T more
efficiently in order to improve their operations and profitability and to
achieve business results. Network Solutions Pvt. Ltd. ("NetSol PK") develops the
majority of the software for the Company. NetSol PK was the first company in
Pakistan to achieve the ISO 9001 accreditation. The Company is in the process of
attaining SEI CMM Level 3 accreditation. This is one of the highest levels of
recognition for quality and best practices a software house can achieve.
Recent Events-Termination of Recent Proxy Contest/Going Concern Qualification
Beginning in April 26, 2001, a shareholder group (the "NetSol Shareholder
Group") comprised of [Blue Water Master Fund, L.P., Blue Water Partners II, L.P.
PSM International Limited and Dr. Henry Vogel] commenced a proxy contest to take
control of NetSol from the then incumbent management of NetSol. On June 10,
2001, the Shareholder Group purported to convene a NetSol board meeting and
claimed that it had removed the incumbent directors and officers of NetSol and
elected new directors and officers. On June 11, 2001, the Shareholder Group took
physical control of NetSol's Calabasas Premises and the incumbent management
immediately sought a Temporary Restraining Order ("TRO") from Nevada court
requesting the removal of the Shareholder Group and the reinstatement of the
incumbent management. The management purportedly elected by the Shareholder
Group also issued press releases, filed Form 8-Ks and engaged in other
communications with third parties purportedly on behalf of NetSol. On June 19,
2001 the Court ordered a Receiver to take control of the day-to-day operations
of
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the Company with participation of both incumbent management and the Shareholder
Group. The Court also invalidated the June 10, 2001 board actions and all other
actions taken at the direction of the Shareholder Group on behalf of NetSol, and
held that such group acted as "illegitimate management." On August 2, 2001 the
Shareholder Group filed a Schedule 13D reporting the dissolution of the group
and the termination of the plan to control NetSol. On August 3, 2001, the court
dismissed the Receiver and reinstated the incumbent Board of Directors and
officers of NetSol. On July 30, 2001, Cary Burch, one of the incumbent directors
of NetSol who was aligned with the Shareholder Group, resigned.
This proxy contest has had a material adverse effect on NetSol's operations,
including its relations with its customers, suppliers, and investors. In
addition, our stock price has materially declined from $4.80 on April 30, 2001
(the month prior to the Shareholder Group's commencement of the proxy contest)
to less than $1 as of the date of this report. The Company has incurred in
excess of $500,000 in legal and corporate fees, costs, and expenses related to
the proxy contest. As a result of the adverse effect on our business caused by
the proxy contest, recurring losses and negative working capital, the audit
report dated October 5, 2001 of our auditors states that there is substantial
doubt as to our ability to continue as a going concern.
Company Business Model
The Company offers a broad array of professional services to clients in the
global commercial markets and specializes in the application of advanced and
complex I/T enterprise solutions to achieve its customers' strategic objectives.
Its service offerings include outsourcing, systems integration, customized IT
solutions, project/program management and I/T management consultancy, as well as
other professional services, including e-business solutions.
Outsourcing involves operating all or a portion of a customer's technology
infrastructure, including systems analysis, system design and architecture,
change management, enterprise applications development, network operations,
desktop computing and data center management.
Systems integration encompasses designing, developing, implementing and
integrating complete information systems.
I/T and management consulting services include advising clients on the strategic
acquisition and utilization of I/T and on business strategy, operations, change
management and business process reengineering.
The Company also develops sophisticated software systems for the asset based
lease and finance industries. NetSol has developed a complete integrated lease
and finance package, which is a series of five products that can be marketed and
utilized in an integrated system. These products are ePOS, PMS, SMS, CMS (under
development), and WFS. These five applications form the full suite of the asset
based lending Enterprise Resource Planning applications. These applications can
run virtually the entire operations of a captive leasing company.
NetSol ePOS is a browser-based Point of Sale system that can be used by any
front-end selling operation, including motor vehicle dealers and other outlets.
ePOS users create quotations and financing applications for the customers using
predefined financial products. The proposal is submitted to Back Office (PMS)
for credit approval. After analysis, the proposal is sent back to ePOS system
with a final decision.
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Proposal Management System (PMS) provides various finance/leasing companies with
the ability to quickly assess the worthiness of an applicant applying for a loan
or a lease. The core of the system is driven by a strong workflow management
engine with integrated links to credit rating agencies and offers an automated
point scoring strategy for automatic approval/rejection/referral. It can be
customized to link to any Point of Sale System, and it has the ability to
integrate any vehicle data provider such as Glass' Guide in Europe and
Australia.
The NetSol Wholesale Finance System (WFS) is developed to automate and manage
the Whole Sale Finance (Floor Plan) activities of a Finance Company. The design
of the system is based on the concept of One Loan One Asset to facilitate Asset
Tracking and Costing of an asset. The system covers Credit Limit Request,
Payment of Loan, Billing, and Settlement, Auditing of Stocks, Dealer Information
and ultimately the pay-off functions.
Settlement Management System (SMS) verifies the signed document sent by the
dealer/broker/third party against the information stored in the Proposal
Management System database. SMS verifies all calculations before loading the
contract into the Contract Management System. Other main features are collection
of first rental and disbursement of funds to dealers, insurance companies and
other third parties. Workflow software is part of SMS and it enables the users
of SMS to communicate with Proposal Management workflow or within its own
workgroup.
The Contract Management System (CMS) manages lease/finance contracts for
financing of vehicles from inception until completion and creates all the
required accounting entries to interface with a general ledger. The leasing
company is able to establish, maintain and terminate such financial contracts.
Contracts may include added value services such as vehicle maintenance and/or
insurance premiums. It furthermore incorporates functional extensions such as
litigation, remarketing of vehicles, securitization of a portfolio and post
dated check management.
These are traditionally complex business applications and require a great deal
of industry experience both in the development as well as implementation stages.
NetSol, over the years, has developed core competencies in the asset based
lending software space. These are sought after skills shared in a team of
approximately 30 business consultants. NetSol is able to demand a premium for
these consultants and leverages this competency when bidding for new business.
Typically, the sales cycle for these products is anywhere between six to twelve
months and NetSol derives its income both from selling the license to use the
products as well as extensive customization, implementation, support and
maintenance. License fees can vary generally between $75,000 up to $500,000 per
license depending upon the size of the customer and the complexity of the
customization. The revenue for the license and the customization flows in
several phases and could take from six months to two years before its is fully
recognized as income in accordance with generally accepted accounting
principles.
STATUS OF ANY NEW PRODUCTS OR SERVICES
The Company expanded its menu of software into banking and other financial
areas. NetSol PK launched new customized banking applications software. The
Company has the technical know how and capability to successfully enter this
vibrant banking sector. Over eight new business development and project
management teams in the area of banking and finance were created in the second
quarter of 2001. As a result of this new initiative, NetSol added a new fortune
500 customer such as Citibank in Pakistan. The entry in the banking sector was
broadened by creating new relationships with yet new customers such as Askari
Leasing Co. and a few other local customers in Asia Pacific region.
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NetSol further strengthened its US presence on the West and East Coasts.
NetSol's `Proximity Development Center' or PDC model was introduced in the US.
PDC provides the Company with the ability to have on shore competencies in
project management, systems analysis and design as well as customer relationship
management. PDC model provides a face-to-face interaction and interfacing of
project managers and high-level developers with the US based customers at very
competitive prices.
In the fiscal year 2001, NetSol eR, Inc., and NetSol USA, Inc., both wholly
owned subsidiaries of NetSol , implemented PDC models with their customers such
as Leverage Consulting, OPSION Medical, Voice Stream Wireless and Global One.
NetSol USA also specializes in providing professional IT consultants and project
managers to fortune 500 companies and, as a Government Suppliers Agreement
("GSA") approved vendor, it has the ability to participate in numerous
government related contracts and projects tendered by the various government
agencies.
Marketing and Selling
The objective of the Company's marketing program is to create and sustain
preference and loyalty for NetSol as a leading provider of enterprise solutions,
e-services consulting and software solutions provider. Marketing is performed at
the corporate and business unit levels. The corporate marketing department has
overall responsibility for communications, advertising, public relations and our
website and also engineers and oversees central marketing and communications
programs for use by each of our business units.
Our dedicated marketing personnel within the business units undertake a variety
of marketing activities, including sponsoring focused client events to
demonstrate our skills and products, sponsoring and participating in targeted
conferences and holding private briefings with individual companies. We believe
that the industry focus of our sales professionals and our business unit
marketing personnel enhances their knowledge and expertise in these industries
and will generate additional client engagements.
The Company generally enters into written commitment letters with clients at or
around the time it commences work on a project. These commitment letters
typically contemplate that NetSol and the client will subsequently enter into a
more detailed agreement, although the client's obligations under the commitment
letter are not conditioned upon the execution of the later agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and the Company does not generally believe it is appropriate to
characterize them as consisting of backlog. In addition, because these written
commitments and agreements often provide that the arrangement can be terminated
with limited advance notice or penalty, the Company does not believe the
projects in process at any one time are a reliable indicator or measure of
expected future revenues.
NetSol provides its services primarily to clients in global commercial
industries. In the global commercial area, the Company's service offerings are
marketed to clients in a wide array of industries including, automotive;
chemical; tiles/ceramics; Internet marketing; software; medical, banks and
financial services..
Geographically, NetSol has operations throughout North America, the Middle East
and Asia Pacific region.
During the last two fiscal years, the Company's revenue mix by major markets was
as follows:
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2001 2000
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North American (NetSol USA, NetSol eR, Intereve) 38% 13%
Europe (NetSol UK, Network Solutions Group) 15% 32%
Other International (Abraxas, Network Solutions PK, NetSol 47% 55%
Private PK, NetSol Connect)
Total Revenues 100% 100%
Fiscal Year 2001 Performance Overview
During fiscal 2001, continuing with its strategy of growth through acquisitions,
NetSol acquired a Company in Northern California. Effective March 1, 2001,
NetSol acquired Intereve Corporation, a Silicon Valley IT company with senior
level architects and developers recruited from India. This acquisition was
accounted for using the purchase method of accounting under APB Opinion No. 16,
and accordingly, the purchase price was allocated to the assets purchased and
liabilities assumed based upon their estimated fair values as determined by
management on the date of acquisition, which approximated $245,000.
Global Commercial Market: new contracts were awarded in various markets
worldwide. NetSol added these customers: Citibank Pakistan, Pakistan; Askari
Leasing, Pakistan; Volvo Finance Australia, Australia; OPSION Medical, USA;
Leverage Consulting, USA; SAIF Games, Pakistan; Daimler-Chrysler Asia Pacific,
Thailand and Singapore; Mercedes Benz Finance, Australia; iLAS, Germany; Matrix
42, Germany; and World Online, Germany.
The Company diversified its offerings by launching new customized IT solutions
for financial and banking sectors. The Company built a new team of technical and
marketing staff to cater to this sector exclusively. NetSol development teams
are diligently working on designing the system for Citibank. The Company has
effectively expanded its development base and technical capabilities by training
its programmers to provide customized IT solutions in many other sectors and not
limiting itself to lease and finance industries. The Company believes that the
offshore development concept has been successful as evidenced by India, which
according to the recent statistics by the Indian IT agency, NASSCOM, had
software exports exceeded $5 billion in the calendar year 2000. This upward
trend is expected to continue despite the general decline in technology sector
in the recent months because the offshore development model offers tremendous
cost savings and higher productivity to the western customers. According to an
article by Reuters dated August 23, 2001, India's software association scaled
down export growth target estimates to between 40 and 45 percent and forecasts
exports to reach $8.5-9 billion in the year to March 2002, compared with the
previous year. About 60% of the business currently comes from the United States.
The Company has refocused its marketing efforts primarily in the North American
markets. In the first half of fiscal 2001, NetSol was awarded new contracts with
customers such as OPSION Medical, Leverage Consulting and enhancements in some
of the existing contracts with VoiceStream Wireless. The marketing efforts were
strengthened as the Company hired five new business developers on the East and
West coasts, to penetrate the biggest IT market in the world. Although in the
second half of fiscal year 2001 the IT services sector was adversely impacted
due to overall decline in the technology sector, the Company has continued to
experience some increased demand of its customized IT solutions and is focusing
to maintain this trend.
The Asia Pacific markets have been slow as a result of global technology
slowdown. The Australian market continues to be vibrant as NetSol maintains its
customers such as GMAC Australia, St. George
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Bank and Volvo Australia. The Company continues to pursue new customers and new
business from its existing customers for its core product lines.
NetSol CONNECT was launched in early 2000 in Karachi, Pakistan's largest city.
Prior to NetSol CONNECT's technology being brought to Karachi, the concept of
high speed Internet Service Provider ("ISP") backbone infrastructure was new in
Pakistan. NetSol was the first company to turn such concept into reality. In 15
months NetSol CONNECT has become the second largest high speed and fast access
internet service provider in Karachi. NetSol believes the ISP space is still in
its infancy and the growth prospects are extremely good. By the end of Fiscal
year 2001, the direct membership was over 20,000 subscribers. The main
competitor of NetSol CONNECT has subscriber base in the range of 30,000-40,000
in Karachi and has been in business for over 7 years. NetSol CONNECT has been
able to attract a number of local and multi-national corporate clients in
addition to individual retail customers.
Subsidiary Closures
NetSol acquired SuperNet AG in May 2000, in Frankfurt Germany to establish a
presence in Germany in developing internet based software products. A few months
after acquiring SuperNet, there was a decline in the e-commerce industry. The
Company responded to the dramatic decline of e-commerce related businesses
globally, and also overall correction in the technology sector. Due to a massive
correction in the technology market, the Company lacked the financial and human
resources to continue to invest in any non-core and cash intensive businesses.
Therefore, the decision was made in the fourth quarter of 2001 to completely
divest the business and exit from the German market.
To divest from SuperNet AG, in May 2001 the Company sold all the stock of
SuperNet AG to the original founders of SuperNet AG in a management lead buyout.
In connection with the sale, the original founders agreed to settle the
outstanding liabilities of over $600,000 of the Company or SuperNet AG, which
were owed to them for $120,000 in cash, paid in installments. The installment
payments started in May 2001, and the final payments are due November 2001 by
NetSol. More than 12 employees were laid off from the German operation and some
technical staff were relocated back to Pakistan.
Consistent to NetSol's refocus in core competencies to develop and market its
core products and services, the Company decided earlier in the second half of
fiscal 2001 to divest from its non-core businesses in the UK market as well.
Network Solutions Group UK ("NSG"), a wholly owned subsidiary of NetSol, a
company acquired in August 1999 as part of an all-stock transaction. Subsequent
to NetSol's decision to divest but prior to actual divestiture, NetSol became
aware of what it believes are certain misrepresentations of facts, concerning
NSG's financial statements by the previous management. This resulted in
deterioration of the business despite continued investment made by the parent
into the business. Eventually, it was decided by the board and the management to
pursue a damages claim against the previous owners of NSG. Currently, this
action is in litigation and an outcome is expected in the first quarter of the
next calendar year. In addition, due to a sudden decline in the networking
market in the UK the management decided to downsize this operation. As disclosed
in the second and third quarters of 2001 the plans for this divestment, the
Company laid off the entire staff but two employees in its office in Milton
Keynes, UK. The Company was awarded a major contract in the first half of 2001
with Swindon Schools of UK. As a part of the consolidation strategy, this UK
entity retained 2 consultants to provide maintenance service to its customers in
line with the warranties provided by NetSol to its customers. As soon as these
maintenance guarantees expire the management is intends to liquidate this entity
completely.
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Technology Campus
The Company broke ground for its Technology Campus in January 2000. Initially,
the Company anticipated the completion of Phase 1 (of three phases) by fall
2000, but due to the delay in financing activities, the completion is expected
now sometime in the first half of 2002. The campus is expected to house over
3,000 I/T professionals and is approximately three acres in size. The campus
site is located in Pakistan's second largest city, Lahore, which has a
population of six million. An educational and cultural center, the city is home
to several leading universities of Engineering and Technology and FAST, the
largest computer research and training institute in Pakistan. The city is also
the home of The University of Punjab founded in 1882, the oldest university in
Pakistan. The Company is making this investment to attract contracts and
projects from blue chips customers from all over the world. This campus will be
the first purpose built software building with state of the art technology and
communications infrastructure.
People and Culture
The Company has developed a strong corporate culture that is critical to its
success. Its key values are delivering world-class quality software,
client-focused timely delivery, leadership, long-term relationships, creativity,
openness and transparency and professional growth. The services provided by
NetSol require proficiency in many fields, such as computer sciences,
programming, mathematics, physics, engineering, and communication and
presentation skills. The majority of our software developers are proficient in
the English language as it is the second most spoken language in Pakistan and is
mandatory in middle and high schools.
To encourage all employees to build on our core values, we reward teamwork and
promote individuals who demonstrate these values. NetSol offers all of its
employee's opportunity to participate in its stock option program. Also, the
Company has an intensive orientation program for new employees to introduce our
core values and a number of internal communications and training initiatives
defining and promoting these core values. We believe that our growth and success
are attributable in large part to the high caliber of our employees and our
commitment to maintain the values on which our success has been based.
There is significant competition for employees with the skills required to
perform the services we offer. We believe that we have been successful in our
efforts to attract and retain the highest level of talent available, in part
because of our emphasis on our core values, training and professional growth. We
intend to continue to recruit, hire and promote employees who share this vision
As of June 30, 2001, we had 334 full-time employees; comprised of 250 I/T
project personnel, 30 employees in general and administration and 54 employees
in sales and marketing. There are 34 employees in the United States, 290
employees in Pakistan, eight in Australia and two in United Kingdom. None of our
employees are subject to a collective bargaining agreement. We believe that we
have excellent relationships with our employees and our attrition rate for the
Company is less than 5%.
Competition
Neither single company nor a small number of companies dominate the I/T market
in the space in which the Company competes. A substantial number of companies
offer services that overlap and are competitive with those offered by NetSol.
Some of these are large industrial firms, including computer manufacturers and
computer consulting firms that have greater financial resources than NetSol and,
in some cases, may have greater capacity to perform services similar to those
provided by NetSol.
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Some of the competitors of the Company are International Decisions Systems, Data
Scan, KPMG, CrestSoft, Systems Limited, Cybernet, Tenhill, SouthPac Australia
and a few others. These companies are scattered worldwide geographically. In
terms of offshore development, we are in competition with some of the Indian
companies such as InfoSys, Satyam, Infoway and others.
Many of the competitors of NetSol have longer operating history, larger client
bases, and longer relationships with clients, greater brand or name recognition
and significantly greater financial, technical, and public relations resources
than NetSol. Existing or future competitors may develop or offer services that
are comparable or superior to ours at a lower price, which could have a material
adverse effect on our business, financial condition and results of operations.
Customers
Some of the customers of NetSol include Daimler Chrysler Finance - Singapore;
Mercedes Benz Leasing - Thailand; Debis Portfolio Systems, UK and Mercedes Benz
Finance - Australia. In addition, NetSol provides off shore development and
customized I/T solutions to blue chip customers such as Citibank, Pakistan;
VoiceStream Wireless, USA; Leverage Consulting, USA; OPSION Medical, USA; Askari
Leasing, Pakistan. Two of our customers each individually accounted for more
than 10% and in the aggregate for approximately 35% of total revenues for the
year ended June 30, 2001.
The Internet
The Company is committed to regaining and extending the advantages of its direct
model approach by moving even greater volumes of product sales, service and
support to the Internet. The Internet provides greater convenience and
efficiency to customers and, in turn, to the Company. The Company receives
200,000 hits per month to www.netsol-Intl.com.
Through its Web site, customers, potential customers and investors can access a
wide range of information about the Company's product offerings, can configure
and purchase systems on-line and can access volumes of support and technical
information about the Company.
Operations
The Company's headquarters are in Calabasas, California. In fiscal 2001, to cut
costs, the Company terminated its relationship with Cramer Krassler, its
investor and public relations firm and had taken the responsibility of investor
relations in-house. Nearly 75% of the production and development is conducted at
NetSol in Lahore, Pakistan. The other 25% of development is conducted in the
Proximity Development Center or "PDC" in the US. The majority of the marketing
is conducted through NetSol USA, NetSol eR and Abraxas who also service and
support the clients in Europe and USA. NetSol PK services and supports the
customers in the Asia Pacific and South Asia regions.
NetSol is in the process of winding down both its NetSol UK offices. SuperNet AG
in Germany was sold off in May 2001.
NetSol USA (comprising NetSol eR in Calabasas and NetSol USA in Virginia)
functions as the service provider for the US based customers both in the
consulting services area as well as in the project management. In addition, the
Virginia office provides greater access to the emerging markets on the East
Coast.
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Organization
NetSol International, Inc. (formerly Mirage Holdings, Inc.) was founded in 1997
and is organized as a Nevada corporation.
The success of the Company in the near term will depend, in large part, on the
Company's ability to (a) minimize additional losses in its operations; (b) raise
funds for continued operations and growth; and (c) launch a strong sales and
marketing initiative in the United States and Australia. However, management's
outlook for the continuing operations, which has been consolidated and is being
streamlined in recent months, remains optimistic.. With continued emphasis on a
shift in product mix towards the higher margin consulting services, the Company
anticipates to be able to improve operating results at its core by reducing
costs and improving gross margins.
Risk Factors
The following important factors, among others, could cause our actual results to
differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-KSB or presented elsewhere by management from time
to time.
WE HAVE RECEIVED A GOING CONCERN OPINION FROM OUR AUDITORS INDICATING THERE IS
DOUBT AS TO WHETHER WE CAN REMAIN IN BUSINESS.
In its audit report dated October 12, 2001, our auditors indicated that there
was substantial doubt as to our ability to continue as a going concern and that
our ability to continue as a going concern was dependant upon our obtaining
sufficient additional financing for our operations or reaching profitability.
There can be no assurance that we will be able to do either of these.
THE COMPANY MAY NOT BE ABLE TO REALIZE THE BENEFIT OF ITS STRATEGIC
RESTRUCTURING PLAN
While the Company is confident of its ability to realize the benefits of the
strategic restructuring plan, the level of benefits to be realized could be
affected by a number of factors including, without limitations, (a) the
Company's ability to raise sufficient funds, (b) to close down the ineffective
operations of the Company, (c) to operate the Company as planned without further
shareholder hostile takeover interruptions, and (d) to tolerate and stabilize
during the changes in the US market in the technology industry (e) react
effectively to the global political and business effects of the events of
September 11, 2001 in the United States.
TERRORIST ATTACKS, SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON,
D.C., ON SEPTEMBER 11, 2001, AND OTHER ATTACKS OR ACTS OF WAR MAY
ADVERSELY AFFECT THE MARKETS ON WHICH OUR COMMON STOCK TRADES, THE MARKETS IN
WHICH WE OPERATE, OUR OPERATIONS AND OUR PROFITABILITY.
On September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope. These attacks have caused major instability in the U.S. and
other financial markets. Leaders of the U.S. government have announced their
intention to actively pursue those behind the attacks and to possibly initiate
broader action against global terrorism. The attacks and any response may lead
to armed
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hostilities or to further acts of terrorism in the United States or elsewhere,
and such developments would likely cause further instability in financial
markets. In addition, armed hostilities and further acts of terrorism may
directly impact our physical facilities and operations, which are located in
North America, Australia and the Middle East, or those of our clients.
Furthermore, the recent terrorist attacks and future developments may result in
reduced demand from our clients for our services or may negatively impact our
clients' ability to outsource. These developments will subject our worldwide
operations to increased risks and, depending on their magnitude, could have a
material adverse effect on our business and your investment.
IF REGIONAL HOSTILITIES OR TERRORIST ATTACKS INCREASE, OUR BUSINESS COULD SUFFER
AND THE PRICE OF OUR EQUITY SHARES AND OUR REVENUES COULD GO DOWN.
Pakistan has from time to time experienced social and civil unrest and
hostilities with neighboring countries. In recent years, there have been
military confrontations between India and Pakistan in the Kashmir region.
Currently, there are tensions involving Afghanistan, a neighbor of Pakistan.
These hostilities and tensions could lead to political or economic instability
in Pakistan and a possible adverse effect on our business, our future financial
performance and the price of our equity shares and our revenues. This is
important in the current context, as the terrorist attacks in the US in
September 2001 have affected the markets all over the world. The possible
prolonged battle against terrorism by the US could lengthen these regional
hostilities and tensions thereby affecting the Pakistani economy as well as our
business, our future financial performance, our stockholders' equity and the
price of our equity shares and our revenues.
IF WE DO NOT ATTRACT AND RETAIN QUALIFIED PROFESSIONAL STAFF, WE MAY NOT BE ABLE
TO ADEQUATELY PERFORM OUR CLIENT ENGAGEMENTS, WHICH COULD LIMIT OUR ABILITY TO
ACCEPT NEW CLIENT ENGAGEMENTS
Our business is labor intensive and our success depends in large part upon our
ability to attract, retain, train and motivate highly skilled employees. Because
of the rapid growth in the Information Technology or I/T sector, there is
intense competition for employees who have data modeling, creative application
design, technical and program management experience. In addition, the Internet
has created many opportunities for people with the skills we seek to form their
own companies or join startup companies and these opportunities frequently offer
the potential for significant future financial profit through equity incentives,
which we cannot match. We may not be successful in attracting a sufficient
number of highly skilled employees in the future, or in retaining, training and
motivating the employees we are able to attract. Any inability to attract,
retain, train and motivate employees could impair our ability to adequately
manage and complete existing projects and to bid for or accept new client
engagements.
INTERNATIONAL EXPANSION OF OUR BUSINESS COULD RESULT IN FINANCIAL LOSSES DUE TO
CHANGES IN FOREIGN POLITICAL AND ECONOMIC CONDITIONS OR FLUCTUATIONS IN CURRENCY
AND EXCHANGE RATES
We expect to continue to expand our international operations. We currently have
offices in Pakistan and Australia. We have limited experience in marketing,
selling and providing our services internationally. International operations are
subject to other inherent risks, including:
11
- political uncertainty in Pakistan and the South-East Asian
Region, particularly in light of the events in the United States
on September 11, 2001.
- recessions in foreign countries;
- fluctuations in currency exchange rates;
- difficulties and costs of staffing and managing foreign
operations;
- reduced protection for intellectual property in some countries;
- political instability or changes in regulatory requirements or
overthrowing the current government in the foreign countries;
and
- U.S. imposed restrictions on the import and export of
technologies.
WE DEPEND HEAVILY ON A LIMITED NUMBER OF CLIENT PROJECTS AND THE LOSS OF ANY
WOULD ADVERSELY AFFECT OUR OPERATING RESULTS
We have derived, and believe that we will continue to derive, a significant
portion of our revenues from a limited number of clients for whom we perform
large projects. Two of our clients each individually accounted for more than 10%
and approximately 35% in the aggregate of our total revenue for the year ended
June 30, 2001. The loss of any principal client for any reason, including as a
result of the acquisition of that client by another entity, could have a
material adverse effect on our business, financial condition and results of
operations.
IF ANY CLIENT UNEXPECTEDLY TERMINATES THEIR CONTRACTS WITH US OUR BUSINESS COULD
BE ADVERSELY AFFECTED
Our clients, with limited advance notice and without significant penalty, can
cancel some of our contracts. Termination by any client of a contract for our
services could result in a loss of expected revenues and additional expenses for
staff, which were allocated to that client's project. The cancellation or a
significant reduction in the scope of a large project could have a material
adverse effect on our business, financial condition and results of operations.
OUR STOCK PRICE IS VOLATILE AND MAY RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS
The trading price of our common stock could be subject to wide fluctuations in
response to:
- quarterly variations in operating results and our achievement of
key business metrics;
- changes in earnings estimates by securities analysts;
- any differences between reported results and securities
analysts' published or unpublished expectations;
- announcements of new contracts or service offerings by us or our
competitors;
- market reaction to any acquisitions, joint ventures or strategic
investments announced
12
by us or our competitors;
- general economic or stock market conditions unrelated to our
operating performance; and
- In the past, securities class action litigation has often been
instituted against companies following periods of volatility in
the market price of their securities. This type of litigation
could result in substantial costs and a diversion of management
attention and resources.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR COMPETITIVE POSITION WILL
SUFFER
Our markets and the technologies used in our solutions are characterized by
rapid technological change. Failure to respond in a timely and cost-effective
way to these technological developments would have a material adverse effect on
our business, financial condition and results of operations. We expect to derive
a substantial portion of our revenues from providing software that is based upon
leading technologies and that is capable of adapting to future technologies. As
a result, our success will depend on our ability to offer services that keep
pace with continuing changes in technology, evolving industry standards and
changing client preferences. We may not be successful in addressing future
developments on a timely basis. Our failure to keep pace with the latest
technological developments would have a material adverse effect on our business,
financial condition and results of operations.
WE FACE SIGNIFICANT COMPETITION IN MARKETS THAT ARE NEW AND RAPIDLY CHANGING
The markets for the services we provide are highly competitive. We believe that
we currently compete principally with strategy consulting firms, Internet
professional services firms, systems integration firms, software developers,
technology vendors and internal information systems groups. Many of the
companies that provide services in our markets have significantly greater
financial, technical and marketing resources than we do and generate greater
revenues and have greater name recognition than we do. In addition, there are
relatively low barriers to entry into our markets and we have faced, and expect
to continue to face competition from new entrants into our markets.
We believe that the principal competitive factors in our markets include:
- ability to integrate strategy, experience modeling, creative
design and technology services;
- quality of service, speed of delivery and price;
- industry knowledge;
- sophisticated project and program management capability; and
- Internet technology expertise and talent.
We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:
- the ability of our competitors to hire, retain and motivate
professional staff;
13
- the development by others of Internet services or software that
is competitive with our solutions; and
- the extent of our competitors' responsiveness to client needs.
There can be no assurance that we will be able to compete successfully in our
markets.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY SOFTWARE, OUR BUSINESS COULD BE
ADVERSELY AFFECTED
Our success depends, in part, upon our proprietary software and other
intellectual property rights. We rely upon a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect our proprietary rights. We enter into confidentiality agreements
with our employees, generally require that our consultants and clients enter
into these agreements, and limit access to and distribution of our proprietary
information. There can be no assurance that the steps we take in this regard
will be adequate to deter misappropriation of our proprietary information or
that we will be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. In addition, although we believe that
our services and products do not infringe on the intellectual property rights of
others, there can be no assurance that infringement claims will not be asserted
against us in the future, or that if asserted that any infringement claim will
be successfully defended. A successful claim against us could materially
adversely affect our business, financial condition and results of operations.
WE MAY NOT HAVE THE RIGHT TO RESELL OR REUSE SOFTWARE DEVELOPED FOR SPECIFIC
CLIENTS
A portion of our business involves the development of software for specific
client engagements. Ownership of these solutions is the subject of negotiation
and is frequently assigned to the client, although we may retain a license for
certain uses. Some clients have prohibited us from marketing the software
developed for them for specified periods of time or to specified third parties
and there can be no assurance that clients will not demand similar or other
restrictions in the future. Issues relating to the ownership of and rights to
use solutions can be complicated and there can be no assurance that disputes
will not arise that affects our ability to resell or reuse these solutions. Any
limitation on our ability to resell or reuse a solution could require us to
incur additional expenses to develop new solutions for future projects.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
Our success will depend in large part upon the continued services of a number of
key employees, including Messrs. Salim Ghauri and Naeem Ghauri. The loss of the
services of either of these or of one or more of our other key personnel could
have a material adverse effect on our business, financial condition and results
of operations. In addition, if one or more of our key employees resigns from
NetSol to join a competitor or to form a competing company, the loss of such
personnel and any resulting loss of existing or potential clients to any such
competitor could have a material adverse effect on our business, financial
condition and results of operations. In the event of the loss of any personnel,
there can be no assurance that we would be able to prevent the unauthorized
disclosure or use of our technical knowledge, practices or procedures by such
personnel.
14
ITEM 2 - PROPERTIES
The Company moved to its new headquarters in Calabasas, California with its
subsidiary NetSol eR, Inc. in October 2000. The new facilities, which house
NetSol eR and NetSol, are approximately 4,690 rentable square feet and the
monthly rent for both NetSol eR and NetSol is $11,490.50 per month with
escalators built in. The Company is presently in discussions with the landlord
regarding any downward adjustments to the monthly amount. No agreement has been
reached at this time. The term of this lease is for seven years. The facilities
are located at 24025 Park Sorrento, Calabasas, CA. 91302.
Other leased properties as of the date of this report are as follows:
Location/Approximate Square Feet Purpose/Use
Australia............... 1,250 Computer and General Office
Facility
Pakistan................ 30,000 Computer and General Office
Facility
United Kingdom.......... 2,400 General Office
Virginia................ 1,254 General Office
Upon expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Lease expiration dates range from
fiscal 2001 through 2004.
Technology Campus
The Company broke ground for its Technology Campus in January 2000. The campus
is expected to house over 3,000 I/T professionals and is approximately 1.5 acres
in size. The campus site is located in Lahore, the second largest Pakistani
city, has a population of six million. An educational and cultural center, the
city is home to several leading universities of Engineering and Technology
founded in 1961 and FAST, the largest computer research and training institute
in Pakistan. The city is also home to The University of Punjab founded in 1882,
the oldest university in Pakistan.
NetSol selected this site after careful consideration and research of the
long-term benefits of the location and return on investment. Due to the fast
growth of technology business in Pakistan, the city of Lahore is fast becoming
the "Silicon Valley" of Pakistan. Just recently quite a few multi-national IT
related firms have launched their presence in Lahore. NetSol is making this
investment to ultimately attract much bigger contracts and projects from the
major and blue chips customers from all over the world. This campus will be the
first and fully dedicated software building with state of the Art technology and
communications infrastructure. Initially, NetSol anticipated the completion of
Phase 1 (of three phases) by fall 2000, but due to the delay in financing
activities the completion is expected now in 2002. However, the company has
already leased a second building to accommodate the growing numbers of engineers
and programmers. After the completion of Phase 1, about 600 programmers can be
accommodated.
There are over eight universities and technology schools that NetSol visits to
build its employee pool from. In addition, there is a new airport being
constructed only 2.7 kilometers from the technology campus. The campus is
estimated to cost approximately three million dollars and it will consist of
three buildings to house all the IT professionals. The campus will have offices,
a training center, a cafeteria, a gym and a few resting quarters for the
employees. To the best knowledge of the Company there are
15
no other technology campuses that are in existence in Lahore. Since the building
is in the construction stage, there is no issue of insurance.
ITEM 3 - LEGAL PROCEEDINGS
1. The Company is currently party to a dispute filed by its former Chief
Financial Officer and director, Gill Champion, which involves litigation. The
plaintiff filed a Complaint for Declaratory Relief on May 9, 2000 in the Los
Angeles, CA Superior Court (Case No. BC229642). The plaintiff contends that, on
or about May 29, 1998, he was granted 120,000 options at a $.01 per share
exercise price. The Company has responded that the Board originally granted the
options to all board members but later all of the directors agreed to forego
such grant, and none received such options as the Plaintiff claims were granted
him. The parties completed discovery. Shortly thereafter the Company filed a
Motion for Summary Judgment. Prior to filing a response to the Motion for
Summary Judgment, the plaintiff and the Company reached a settlement.
2. The Company is currently involved in proceedings with Adrian Cowler and The
Surrey Design Partnership Limited, the former owners of Network Solutions Group
Limited ("NSGL"). By a written agreement dated 13th August 1999 the Claimants
agreed to sell the entire issued share capital of NSGL to the Company. The
consideration for the sale was specified newly issued shares in the Company. It
was agreed that the Company's lawyers would hold these shares in escrow for one
year and within seven days of the end of the one-year period the Company would
deliver shares to the Claimants' solicitors. If the Company were to make any
written claim (within the one year period) then the Company's lawyers were to
withhold delivery of the consideration shares pending final adjudication of the
claim. On August 11, 2000 NetSol delivered a written claim to the Claimants
based on misrepresentation as to the financial information provided to the
Company upon the acquisition and since that date the Company's lawyers have
withheld delivery of the consideration shares. The Claimants commenced
proceedings in Queen's Bench Court on October 2, 2000 to seek delivery of the
consideration shares and/or damages. The Company has counterclaimed and alleges
that it was induced to enter into the agreement by pre-contractual
misrepresentations as to financial information, customer base and goodwill. The
Company's primary claim is for rescission of the agreement and, in the
alternative, alleges that the Claimants were in breach of a series of warranties
and failed to deliver draft figures for inclusion in the Completion Accounts.
The Claimants filed its Particulars of Claim on 2nd October 2000 and NetSol
served its Defense and Counterclaim on 13th December 2000. The Claimants served
a Reply and Defense to Counterclaim on 5th February 2001. The disclosure stage
of the proceedings was completed on 20th April 2001. The parties' witness
statements were served on 3rd August 2001. NetSol's expert report is due to be
served on 21st September 2001; the Claimants' expert report is due to be served
on 16th November 2001. The court has ordered that the action is stayed between
23rd November 2001 and 21st December 2001 to allow the parties the opportunity
to settle the dispute. The trial has been fixed for 4th March 2002.
3. A Nevada state court placed the Company into a Receivership on June 19, 2001
as a result of a proxy contest by a group of shareholders. Ultimately, the Court
invalidated their actions and the shareholders group disbanded their actions and
dissolved their group; whereupon, the court removed the Receiver from the
Company on August 3, 2001 and returned full control of NetSol to the incumbent
Board of Directors and management.
16
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Proxy Contest
On May 7, 2001 the Company announced it had been notified by a dissident
stockholder group that the group intended to propose an alternate slate of nine
directors at a special meeting of the stockholders. The intentions of that group
are more fully described in the group's Schedule 13D and the preliminary proxy
materials filed by the Company and separately by the dissident stockholder
group. Management estimates that this proxy contest has resulted in externally
generated expenses in excess of $500,000 in the fourth quarter of fiscal 2001
and first quarter of 2002. In addition, the Company believes that its internal
costs as it pertains to salary costs in the form of management time in
addressing the proxy fight to be in excess of $200,000.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
(a) MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - Common stock of NetSol International, Inc. is listed and
traded on NASDAQ Small Cap under the ticker symbol "NTWK."
The table shows the high and low intra-day prices of the Company's common stock
as reported on the composite tape of the NASDAQ for each quarter during the last
two fiscal years.
2001 2000
Fiscal -------------------- ----------------
Quarter High Low High Low
----- ----- ----- ------
1st (ended September 30) 35.00 11.31 5.50 3.125
2nd (ended December 31) 15.25 4.00 22.50 5.125
3rd (ended March 31) 8.875 2.375 80.00 17.625
4th (ended June 30) 6.00 0.625 66.00 15.125
RECORD HOLDERS - As of September 4, 2001, the number of holders of record of the
Company's common stock was 130. As of September 4, 2001, 12,344,840 shares of
common stock were issued and outstanding.
DIVIDENDS - The Company has not paid cash dividends on its Common Stock in the
past and does not anticipate doing so in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development and
growth of its business.
(b) RECENT SALES OF UNREGISTERED SECURITIES
The Company conducted two private raises in fiscal year 2001:
1. In July 2000, the Company sold 63,666 shares of its common stock for gross
proceeds in the amount of $955,000. The shares of common stock were issued in a
private placement in reliance on the exemption from registration under Section
4(2) of the Securities Act of 1933 (the "Securities Act"). The
17
class of persons to whom such securities were sold were all individual
"accredited investors" which were considered "friends and family" of the
Company.
2. On January 8, 2001, the Company entered into an agreement for equity
financing with Deephaven Capital Management, an investment fund ("Deephaven")
pursuant to which the Company sold shares of common stock in a private placement
transaction, which closed in two traunches. Under the terms of our securities
purchase agreement with Deephaven, we issued 183,150 shares of common stock to
Deephaven in connection with a first closing, which occurred on January 8, 2001
for gross proceeds of $1 million. We also issued warrants to purchase an
aggregate of up to 54,945 shares of common stock to Deephaven in the first
closing at an exercise price of $6.83 per share. We issued 279,720 shares of
common stock to Deephaven in connection with a second closing, which occurred on
February 20, 2001 for gross proceeds of $1 million. We also issued warrants to
purchase an aggregate of up to 83,916 shares of common stock to Deephaven in the
second closing at an exercise price of $4.47 per share. All warrants are
exercisable for a period of five years from the date of issuance and have
adjustment provisions for dilution events in connection with issuances of our
common stock and other equivalents below the applicable warrant exercise price
and for stock splits, stock dividends and similar transactions.
In connection with our sale of common stock pursuant to the Deephaven securities
purchase agreement, we paid an aggregate of $100,000 to Jessup & Lamont, the
placement agent in the transaction, and issued warrants to purchase up to 9,158
shares of common stock at an exercise price of 6.83 per share in the first
closing and warrants to purchase up to 13,986 shares of common stock at an
exercise price of $4.47 per share in the second closing. These warrants have the
same terms as the warrants issued to Deephaven pursuant to the Deephaven
securities purchase agreement. The shares of common stock and warrants issued to
Deephaven and Jessup & Lamont were issued in reliance on the exemption from
registration under Section 4(2) of the Securities Act. The Company agreed to
file and have declared effective a registration statement pursuant to the terms
of a registration rights agreement with Deephaven with respect to such
securities. The Company has filed a registration statement with respect to the
shares of common stock and warrants held by Deephaven and Jessup & Lamont, which
has not been declared effective as of the date of this report. The Company is in
default with respect to some of its obligations under the registration rights
agreement.
18
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's objective is to maximize stockholder value by executing a strategy
that focuses on a balance of three priorities: growth, profitability and
liquidity. The following discussion highlights the Company's performance in the
context of these priorities. This discussion should be read in conjunction with
the Consolidated Financial Statements, including the related notes.
The most recent achievement of NetSol's management is its ability to steer the
Company back to its day to day operational status after the damaging effects of
the actions taken by the dissident NetSol Shareholder Group LLC ("Shareholders
Group") led by the Bluewater Master Fund LP.
By end of fiscal year June 30, 2001, as result of the actions prompted by the
dissident Shareholders Group, NetSol was under the control of a Receiver
appointed by a Nevada Court. The last quarter of fiscal 2001 was entirely
devoted to resolving the proxy contest initiated by Shareholders Group to gain
control of the Board and management of NetSol. Therefore there was no business
development activity, no capital infusion activity and no increase in the
project delivery activity. After regaining control of offices, the management
focused to successfully continue delivery of programming and support resources
to our customers and ensure that the customers and employees of NetSol maintain
their relationship with the Company.
PERFORMANCE OF NETSOL USA AND NETSOL ER
Compared to fiscal 2000, the gross revenues for NetSol USA and NetSol eR
improved by approximately over 150% which evidences management's focus in
enhancing business activity in the US. The management strives to continue with
this trend to grow and reach profitability in the near future. Both subsidiaries
continue their marketing efforts to seek additional new business.
CASH RESOURCES
When the Management regained control of the company in August, 2001, the cash
resources had been significantly depleted. The current management acted quickly
to stabilize the Company and concentrated on collection of its accounts
receivable from its customers. Funding from insiders, collections and
cooperation from key employees to accept deferred salaries helped the Company be
steered back to stabilization.
CHANGE IN BOARD OF DIRECTORS
In August 2001, the Board of Directors and management under went a change. The
Board of Directors was reduced by three members with the departure of Cary
Burch, who resigned his position after the failed proxy contest by the
Shareholders Group, Naeem Ghauri and Shahab Ghauri who resigned to create
vacancies to fill the board with new members. Mr. Eugen Beckert filled a senior
officer of a key NetSol customer, Daimler Chrysler a vacancy.
CHANGE IN MANAGEMENT
A key change in management has been the departure of NetSol's former CEO, Mr.
Najeeb Ghauri. Mr. Ghauri continues to hold his seat as a member of the Board of
Directors. The Board examined fourth quarter events of Fiscal 2001 and
determined a change in management will make the company better positioned to go
forward with its immediate goals. The management's immediate goals were to
reestablish stability within NetSol with its employees and customers, seek new
forms of capital to be invested into the Company and increase business
development efforts after the three month stay in such development activities
caused by the proxy contest. The Board of Directors as of August 27, 2001
appointed Naeem Ghauri, who has experience in controlling and delivering global
software solutions as CEO.
THE COMMITMENT OF THE MANAGEMENT AND EMPLOYEES
The commitment of the current management and NetSol employees is summarized in
their focus to rebuild the Company and strengthen its position in the IT
industry. By cutting costs and reestablishing itself, the management hopes to
take NetSol into the next phase of sustained growth that it demonstrated during
the first three years of its inception when it grew from $1m to $3m to $7m in
revenues during fiscal 1998, 1999 and 2000 respectively.
BUSINESS DEVELOPMENT
The Management has initiated a new business development effort by partnering
with a Direct Marketing Company to increase the number of sales leads and new
business opportunities. This is showing results and may significantly enhance
the ability to close new business. The Company has also put in place large
business opportunity monitoring system that will enable the key executives to be
aware of the progress of in this area and help resolve issues that reduce the
chances of closing large new business.
OPERATIONAL PROCESSES
In addition to the monitoring of processes for business development, NetSol has
acquired a system that will help in the management of Engagements,
Administration, Resources and Knowledge. This will increase the efficiency of
the deployment of the assets of company and maximize the return on assets.
Business Combinations
THE COMPANY COMPLETED ONE BUSINESS COMBINATION DURING THE YEAR ENDED JUNE 30,
2001.
ACQUISITION OF INTEREVE CORPORATION
During fiscal 2001, continuing with its strategy of growth through acquisitions,
NetSol acquired a Company in Northern California. Effective March 1, 2001, the
Company acquired Intereve Corporation, a Silicon Valley IT company with senior
level architects and developers recruited from India. This acquisition was
accounted for using the purchase method of accounting under APB Opinion No. 16,
and accordingly, the purchase price was allocated to the assets purchased and
liabilities assumed based upon their estimated fair values as determined by
management on the date of acquisition, which approximated $245,000. The
management of the Company allocated the entire purchase price to customer lists.
This amount has been determined to be impaired in its entirety and has been
written off as an asset impairment charge at year-end. The accelerated slowdown
of the economy in the Silicon Valley resulted in most of the contracts
accompanying the customers acquired to be terminated at or near year-end. The
acquisition did not constitute a significant acquisition and the proforma
adjustments related to the acquisition are immaterial to the consolidated
financial statements at June 30, 2001 , proforma financial information is not
presented herein.
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2001 COMPARED TO THE YEAR ENDED JUNE 30, 2000
Net revenues for the year ended June 30, 2001 were $6,726,836 as compared to
$6,675,150 (restated for comparative presentation of discontinued operations)
for the year ended June 30, 2000. Net revenues is broken out among the
subsidiaries as follows:
2001 2000 (restated)
NetSol UK/Network Solutions $ 1,038,261 $ 2,106,041
Group UK
Network Solutions PK, NetSol Private PK, $ 2,922,088 $ 3,325,478
NetSol Connect
Abraxas $ 222,612 $ 355,693
NetSol eR, NetSol USA and Intereve $ 2,543,875 $ 887,938
Corporation
Total Net Revenues $ 6,726,836 $ 6,675,150
The Company experienced a significant revenue increase from the prior year for
its North American operations. The Company is aligning itself to seize the
opportunities in the growing IT consulting and services industry along the East
coast of North America. Outsourcing IT professionals at competitive prices is
the primary generator of North American revenues. Since the acquisition in
August 1999, NetSol USA has generated an impressive $2,869,940 of revenues
.NetSol PK also added revenue from CFS and some local industries in Pakistan.
Due to the maturity of the lease and finance products, The Company is
positioning itself to market these licenses to the North American and other
global markets. The Company anticipates the growth pattern for NetSol PK to
increase in the coming fiscal year, both for export software products and local
industries. This is due to product maturity and market demand with several
existing customers, among them CFS, Daimler-Chrysler and other leasing and
finance company's. The Company continued to experience a downturn in its
consulting revenues in the UK markets in fiscal 2001 . The acquisition of
Network Solutions Group in fiscal 2000 continued to caused the Company to
experience integration challenges such as employee retention, which affected the
business adversely. The downturn in consulting revenues was largely attributable
to a decrease in network services caused by a slowdown in new orders a result of
the IT economic slowdown. Abraxas has key software products, which are being
developed in our NetSol PK development facility, which will be marketed in
Australia as well as other markets. These products are targeted towards the
banking, insurance and leasing and finance industries. Management believes that
the prospects for the future of
19
Abraxas are to have modest sales growth, anticipating being able to leverage on
an enhanced product line and by expanding its customer base. The Company
believes that a modest sales growth for its operating subsidiaries for fiscal
2002 is reasonable based upon its ability to further penetrate the IT market.
Gross profit was 38.6% of revenues in fiscal 2001, compared to 56.7% in fiscal
2000 (restated due to presentation of discontinued operations). The decrease is
largely due to a significant reduction in revenues in the fourth quarter of
fiscal 2001, while overhead expenses contributing to cost of revenues were not
reduced. The Company believes that a portion of the revenue reduction in the
fourth quarter is a result of the invalid insurgent shareholder group action,
both in terms of negative publicity and significant management distraction. The
Company is working aggressively towards getting its gross profit margins back up
to pre-fourth quarter levels in fiscal 2002.
Operating expenses were $18,076,642 for the year ended June 30, 2001 as compared
to $6,953,296 (restated from prior year due to presentation of discontinued
operations) for the year ended June 30, 2000. During the years ended June 30,
2001 and 2000 , the Company issued 27,500 and 252,500 restricted common shares
in exchange for services rendered, respectively. The Company recorded this
non-cash compensation expense of $ 81,675 and $1,017,575 for the years ended
June 30, 2001 and 2000, respectively. Total professional service expense,
including non-cash compensation, was $2,333,425 and $1,926,188 for the years
ended June 30, 2001 and 2000, respectively. During the years ended June 30, 2001
and 2000, respectively, the Company recorded depreciation and amortization
expense of $ 1,509,624 and $1,408,873 . Operating expenses in total, including
all general and administrative expenses, have also increased as a result of
higher salaries and related costs primarily due to additional staff at all
levels of the Company and the continuing build-up of the Company's
infrastructure, both at the parent level and the subsidiary levels. The majority
of the increase is attributable to three specific items: foreign currency
remeasurement loss of $1,297,773, impairment loss of $6,128,755 and bad debt
expense of $1,569,541. This foreign currency remeasurement loss is due to the
remeasurement of intercompany loan balances between the Company and its foreign
subsidiaries in the fourth quarter. These remeasured loan balances have been
converted into permanent equity as of June 30, 2001. The impairment loss is a
result mainly due to the write down of the intangible assets resulting from the
acquisitions of the operations in Pakistan and UK. The remaining net book value
of the Company's intangible assets will be amortized over a period of five
years. This is reflected as a change in accounting estimate beginning in the
fourth quarter of fiscal 2001. The reduced book value will result in a lower
amount of amortization to be recorded going forward into fiscal 2002. Bad debt
expense of $1,569,541 has been recorded based upon the Company's customers being
negatively affected by the overall economic slowdown, and to an extent the
cancellation of certain contracts that were in progress as a result of the
invalid insurgent shareholder group action. The Company is confident that the
accounts receivable balance as of June 30, 2001 will provide a good source of
working capital for fiscal 2002. These three specific items are all non-cash
expenses or charges in nature. Salaries and wages expenses were $ 2,512,801 and
$1,684,318 for the years ended June 30, 2001 and 2000, respectively. General and
administrative expenses were $ 2,347,140 and $1,871,950 for the years ended June
30, 2001 and 2000, respectively. As a result of the disposal of Supernet AG, the
Company has presented this as a discontinued operation. For comparative
purposes, the Company has also shown the same presentation for Supernet AG for
the year ended June 30, 2000, as required by generally accepted accounting
principles. For the year ended June 30, 2001, the Company is showing a loss of
$1,717,375 for discontinued operations and a gain on disposal of $226,305. As a
result of this disposal, which calls for total payments to the buying party of
$120,000, the Company was able to divest itself of more than $600,000 of
liabilities.
20
Net loss was $14,049,942 or $1.25 per share (basic and diluted) for the year
ended June 30, 2001 as compared to $3,401,076 or $0.35 per share (basic and
diluted) for the year ended June 30, 2000. . This resulted in a loss per share,
basic and diluted, from continuing operations of $1.12 for fiscal 2001 as
compared with $0.31 for fiscal 2000. The loss per share for discontinued
operations was $0.13 for fiscal 2001 as compared with $0.04 for fiscal 2000.
The Company's cash position was $1,056,125 at June 30, 2001. This is presented
on the audited financial statements as $306,125 as cash and cash equivalents,
and a total $750,000 as certificates of deposit, of which all of the $750,000 is
included in other assets.
Income Taxes
Deferred income taxes are reported using the liability method. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets generated by the Company or
any of its subsidiaries are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Deferred tax assets resulting from the net operating losses
are reduced in part by a valuation allowance.
Going Concern Qualification
The Company's independent auditors have included an explanatory paragraph in
their report on the June 30, 2001 consolidated financial statements discussing
issues which raise substantial doubt about the Company's ability to continue as
a "going concern." The going concern qualification is attributable to the
Company's historical operating losses, the Company's lack of cash reserves and
capital, and the amount of capital which the Company projects it needs to
satisfy existing liabilities and achieve profitable operations. In positive
steps, the Company has closed down its loss generating UK entities, disposed of
its German subsidiary, and is evaluating cost cutting measures at every entity
level. The Company is optimistic that the remaining entities can become
profitable in fiscal 2002. For the year ended June 30, 2001, the Company
continued to experience a negative cash flow from consolidated operations, and
projects that it will need certain additional capital to enable it to continue
operations at its current level beyond the near term. The Company believes that
certain of this needed capital will result from the successful collection of its
accounts receivable balances as projects are completed during the coming fiscal
year. The Company believes it can raise additional funds though private
placements of its common stock.
Liquidity And Capital Resources
At June 30, 2001 the Company's working capital (current assets less current
liabilities) totaled a deficit of $.6 million, a decrease from 3.01 million at
March 31, 2001. The Company has taken recent actions to re-focus on its
profitable operations and scale back on loss making operations and anticipated
capital expenditures. Two of the Company's self sustaining operating
subsidiaries, NetSol eR and NetSol USA, are continuing to expand their revenue
base both by means of IT outsourcing and software development projects. The
majority of the contracts for NetSol eR and NetSol USA are time and materials
contracts which provides good liquidity to fund specific working capital
requirements for those entities. In generating this revenue growth, the Company
anticipates that capital expenditures requirements can be kept at very low
levels. The Company continues to estimate that it will be able to reduce its
current monthly rate of using working capital beginning in its fiscal 2nd
quarter. The Company completed during the year a $2 million round of financing
with Deephaven Capital Management ("Deephaven"). In the
21
opinion of management, the Company believes that the impact from certain
software sales contracts will have an impact upon its liquidity in the short
term; however, management does believe that its anticipated positive cash flows
from re-focusing on its profitable operations, a reduction in the Company's
projected capital expenditure requirements for the next twelve months, along
with the financing options being pursued, cash flows will be sufficient for the
foreseeable future to manage the short term liquidity impact from these specific
software contracts, finance anticipated working capital requirements and fund
limited capital expenditures. The Company believes that certain of its needed
capital will result from the successful collection of its accounts receivable
balances as projects are completed during the coming fiscal year. The Company
also is confident it can raise sufficient additional funds though private
placements of its common stock.
Dividends and Redemption
It has been the Company's policy to invest earnings in the growth of the Company
rather than distribute earnings as dividends. This policy, under which dividends
have not been paid since the Company's inception and is expected to continue,
but is subject to regular review by the Board of Directors.
Euro Introduction
On January 1, 1999 the Euro currency was introduced in 11 of the 15 member
countries in the European Union. Although Euro notes and coins will not be
available until the latter part of the transition period in 2002, the Euro is
traded on the currency exchanges and is available for non-cash transactions.
The Company was ready by January 1, 1999 to deal with any customer or supplier
who wished to transact in Euros and all European intercompany transactions since
January 1,1999 have been invoiced and settled in Euros in the participating
countries. The Company's European operations have either been closed down or
disposed of. As a result, the incremental system cost to NetSol of introducing
the Euro will not be material.
As of June 30, 2001, the transition to the Euro has not resulted in any material
adverse impact on NetSol's financial positions or results of operations. NetSol
does not believe or expect the conversion to have a material impact on its
overall financial position or results of operations, particularly in light of
fact that the European operations are being closed down.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2001, the Financial Accounting Standards Board Emerging Issues Task
Force issued EITF 00-27 effective for convertible debt instruments issued after
November 16, 2000. This pronouncement requires the use of the intrinsic value
method for recognition of the detachable and imbedded equity features included
with indebtedness, and requires amortization of the amount associated with the
convertibility feature over the life of the debt instrument rather than the
period for which the instrument first becomes convertible. Inasmuch as all debt
instruments that were entered into prior to November 16, 2000 and all of the
debt discount relating to the beneficial conversion feature was previously
recognized as expense in accordance with EITF 98-5, there is no impact on these
financial statements. EITF 00-27 could impact future financial statements should
the Company enter into such agreements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," (SFAS 141) and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations
be accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets apart from
goodwill. SFAS 142 requires that ratable amortization of goodwill be replaced
with periodic tests of the
22
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of SFAS 142 will be effective for fiscal years
beginning after December 15, 2001, and will thus be adopted by the Company, as
required, in fiscal year 2002. The impact of SFAS 141 and SFAS 142 on the
Company's financial statements has not yet been determined.
Forward-Looking Statements
All statements contained in this annual report, or in any document filed by the
Company with the Securities and Exchange Commission, or in any press release or
other written or oral communication by or on behalf of the Company, that do not
directly and exclusively relate to historical facts constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements represent the Company's expectations and beliefs, and
no assurance can be given that the results described in such statements will be
achieved.
These statements are subject to risks, uncertainties and other factors, many of
which are outside of the Company's control that could cause actual results to
differ materially from the results described in such statements. These Factors
include, without limitation, the following: (i) competitive pressures; (ii) the
Company's ability to consummate strategic acquisitions and alliances; (iii) the
Company's ability to attract and retain key personnel; (iv) changes in the
demand for information technology outsourcing and business process outsourcing;
(v) changes in U.S. federal government spending levels for information
technology services; (vi) the Company's ability to continue to develop and
expand its service offerings to address emerging business demands and
technological trends; (vii) changes in the financial condition of the Company's
commercial customers; (viii) the future profitability of the Company's customer
contracts, and (ix) general economic conditions and fluctuations in currency
exchange rates in countries in which we do business.
23
PART II - OTHER INFORMATION
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 7 are included at
the end of this report on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The Board of Directors elects the executive
officers of the Company annually. Each year the stockholders elect the Board of
Directors. The executive officers serve terms of one year or until their death,
resignation or removal by the Board of Directors. In addition, there was no
arrangement or understanding between any executive officer and any other person
pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
Year
First
Elected
As an Term as Positions Held
Officer or Officer or with The
Name Age Director Director Registrant Family Relationship
---- --- ---------- ---------- -------------- -------------------
Salim Ghauri 46 1999 Indefinite President Brother to Naeem,
Director Shahab and Najeeb
Ghauri
Najeeb Ghauri 47 1997 Indefinite Chief Executive Brother to Naeem,
Officer Shahab and Salim
24
(Resigned Ghauri
August 2001)
Director
Naeem Ghauri 44 1999 Indefinite Chief Operating Brother to Najeeb,
Officer; Chief Shahab and Salim
Executive Ghauri
Officer (From
August 2001)
Director
(Resigned as
Director August
2001)
Rick Poole 37 2000 Indefinite Corporate None
Controller and
Secretary
Syed Husain 46 2000 Indefinite Chief Financial None
Officer
Shahab Ghauri 51 1999 Resigned Director Brother to Najeeb,
(August Naeem and Salim Ghauri
2001)
Irfan Mustafa 50 1997 Indefinite Director None
Waheed Akbar 50 1999 Indefinite Director None
Cary Burch 40 1999 Resigned Director None
(July
2001)
Nasim Ashraf 51 2000 Indefinite Director None
Eugen Beckert 55 2001 Indefinite Director None
Business Experience of Officers and Directors
SALIM GHAURI has been with the Company since 1999 as the President and Director
of the Company. Mr. Ghauri is also the CEO of Network Solutions (Pvt.) Ltd., a
wholly owned subsidiary of the Company located in Lahore, Pakistan. Mr. Ghauri
received his Bachelor of Science degree in Computer Science from University of
Punjab in Lahore, Pakistan. Before Network Solutions (Pvt.) Ltd., Mr. Ghauri was
employed with BHP in Sydney, Australia from 1987-1995, where he commenced his
employment as a consultant. Mr. Ghauri was the original founder of Network
Solutions, Pvt. Ltd in Pakistan founded in 1996. Built under Mr. Ghauri's
leadership Network Solutions (Pvt) Ltd. gradually built a strong team of IT
professionals and infrastructure in Pakistan and became the first software house
in Pakistan certified as ISO 9001.
NAJEEB U. GHAURI has been the President and a Director of the Company since
1997. He was then elected Chief Executive Office of the Company from December
2000 to August 2001. During his tenure as CEO, Mr. Ghauri was responsible for
managing the day-to-day operations of the Company, as
25
well as the Company's overall growth and expansion plan. Prior to joining the
Company, Mr. Ghauri was part of the marketing team of Atlantic Richfield Company
("ARCO"), a Fortune 500 company, from 1987-1997. Mr. Ghauri received his
Bachelor of Science degree in Management/Economics from Eastern Illinois
University in 1979, and his M.B.A. in Marketing Management from Claremont
Graduate School in California in 1983.
NAEEM GHAURI has been the Chief Operating Officer since April 2000 and was a
Director of the Company since 1999. Mr. Ghauri took over the position of CEO
upon Mr. Najeeb Ghauri's resignation in August 2001 and resigned his position
from the Board at the same time. Mr. Ghauri was also the Managing Director of
NetSol (UK) Ltd., a wholly owned subsidiary of the Company located in Milton
Keys, England. With the dissolution of NetSol (UK) Ltd., Mr. Ghauri has moved to
the United States to oversee the operations of NetSol. Mr. Ghauri was
responsible for the launch of NetSol e R, Inc. and built NetSolConnect in
Pakistan and spearheaded the acquisition of SuperNet AG, in Germany. Mr. Ghauri
is the CEO for NetSol eR, Inc. Prior to joining the Company, Mr. Ghauri was
Project Director for Mercedes-Benz Finance Ltd., a subsidiary of Daimler-
Chrysler, Germany from 1994-1999. Mr. Ghauri supervised over 200 project
managers, developers, analysis and users in nine European Countries. Mr. Ghauri
earned his degree in Computer Science from Brighton University, England.
RICK POOLE has been the Corporate Controller of the Company since August 2000,
and the Corporate Secretary of the Company since November 2000. Mr. Poole joins
NetSol from Stonefield Josephson, Inc. where he was a senior manager in the
firm's audit and attest services division. He was responsible for the delivery
of audit and consulting services to a variety of clients in the IT,
manufacturing and professional services industries. Mr. Poole is responsible for
coordinating with the CFO all aspects of the Company's audit and tax filings,
implementing and overseeing financial controls, and compliance of all regulatory
filings and requirements. Mr. Poole has a B.S. from California State University
at Fullerton, and is a licensed Certified Public Accountant and a member of the
American Institute of Certified Public Accountants.
SYED HUSAIN has been the Chief Financial Officer of the Company since April
2000. Mr. Husain joins NetSol International from General Electric where he was
Consultant Program Director of Global Financial Risk Management. He was
responsible for the delivery of financial, operational and risk management
services to global investment banks. Prior to joining General Electric, Mr.
Husain managed global implementations of the financial, operational and
reporting processes as well as corporate, treasury and investment banking
systems at Andersen Consulting. Mr. Husain is responsible for all aspects of
financial management, controls, investment banking relationships and compliance
of all regulatory filings and requirements. Mr. Husain has a B.S. from The
University of Karachi, Pakistan and has attended many advanced level business
related courses with GE and Anderson Consulting in the USA and Europe.
SHAHAB GHAURI was a Director of the Company since 1999 and resigned his position
in August 2001. Mr. Ghauri was the Managing Director of Network Solutions Group,
UK Ltd. Mr. Ghauri was one of the key-founding members of Network Solutions,
Pvt. Ltd., in which he injected all the initial seed capital. During his tenure
as a member of the Board, he advised on strategic decisions for global growth
and expansion. Mr. Ghauri drew only 1-pound sterling salary as Managing Director
of Network Solutions Group Ltd. Mr. Ghauri received his Bachelor of Arts degree
in Economics from the University of Punjab in Pakistan in 1971.
26
IRFAN MUSTAFA has been the Chairman of the Board and a Director of NetSol
International, Inc. since the inception of the Company in April 1997. Mr.
Mustafa has an M.B.A. from IMD (formerly Imede), Lausanne, Switzerland (1975);
an M.B.A. from the Institute of Business Administration, Karachi, Pakistan
(1974); and a B.S.C. in Economics, from Punjab University, Lahore, Pakistan
(1971). Mr. Mustafa began his 14 year career with Unilever, Plc where he where
he was one of the youngest senior management and board members. Later, he was
employed with Pepsi International from 1990 to 1997 as a CEO in Pakistan,
Bangladesh, Sri Lanka and Egypt. He spent two years in the US with Pepsi in
their Executive Development Program from 1996-97. Mr. Mustafa was relocated to
Dubai as head of TRICON Middle East and North African regions. Pepsi
International spun off TRICON in 1997. Mr. Mustafa has been a strategic advisor
to NetSol from the beginning and has played a key role in every acquisition by
the company. His active participation with NetSol management has helped the
company to establish a stronger presence in Pakistan. Mr. Mustafa is a member of
NetSol's Compensation Committee and the Audit Committee.
WAHEED AKBAR has been a Director of the Company since 1999. Dr. Akbar is an
orthopedic surgeon with licenses in New York, Michigan, Florida and California.
Dr. Akbar is the Past President of Saginaw County Medical Society, Past
President of Medical Staff at St. Mary's Hospital and a present board member of
Field Neuroscience Institute. Dr. Akbar has been instrumental in attracting a
group of Pakistani-American physicians and businesspersons whom invested in
NetSol in exchange of restricted shares in 1999-2000. Dr. Akbar actively pursues
various financial opportunities for NetSol. Dr. Akbar is a member of NetSol's
Compensation Committee and Audit Committee.
CARY BURCH was a Director of the Company since 1999. After aligning himself with
the dissident shareholders group during the failed proxy battle, Mr. Burch
resigned in July 2001.
NASIM ASHRAF has been a Director of the Company since November 2000. Dr. Ashraf
is a prominent US based physician residing in Maryland. He has practiced
medicine for nearly 25 years as a nephrologist. He is also very actively
involved in promoting and developing the young IT industry in Pakistan through
his high level association with several ministries and cabinets in Pakistan. Dr.
Ashraf has been a key figure in an effort to improve the US and Pakistan
relationship and is very active in several educational, human development and
medical causes in the under-develop countries. Dr. Ashraf will play a key role
in financing and public relations activities in both the US and Pakistan.
EUGEN BECKERT, was appointed to the Board of Directors in August 2001 to fill a
vacancy. A native of Germany, Mr. Beckert has been with Mercedes-Benz AG/Daimler
Benz AG since 1973, working in technology and systems development. In 1992 he
was appointed director of Global IT (CIO) for Debis Financial Services, the
services division of Daimler Benz. In 1996 he was appointed director of
Processes and Systems (CIO) for Financial Services Asia/Pacific. His office is
now based in Tokyo.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
27
Based solely on a review of the copies of such reports furnished to the Company
and written representations that no other reports were required during the year
ended June 30, 2001, the Company believes that all reporting requirements under
Section 16(a) for such fiscal year were met in a timely manner by its directors,
executive officers and greater than 10% beneficial owners.
ITEM 10-EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE AND OPTIONS
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the last three fiscal years
by the officers of the Company who received compensation in excess of $100,000
during the fiscal year ended June 30, 2001. The following information for the
officers includes the dollar value of base salaries, bonus awards, the number of
stock options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Fiscal Annual Compensation Awards (2)
Year ---------------------------- Restricted stock Underlying
Name and Principal Position Ended Salary (1) Bonus Awards (3) Options (4)
--------------------------- ----- ---------- ------- ---------------- -----------
Najeeb U. Ghauri, 2001 $100,000 -0- -0- 25,000 (8)
Chief Executive Officer (a), 2000 100,000 -0- -0- 20,000 (5)
Director 1999 100,000 -0- -0- 100,000 (6)
150,000 (7)
150,000 (7)
Naeem Ghauri, Chief 2001 $125,000 (b) -0- -0- 25,000 (8)
Operations Officer, Chief 2000 150,000 -0- -0- 20,000 (5)
Executive Officer (b), 1999 150,000 $30,000 (9) -0- 150,000 (7)
Director 150,000 (7)
Salim Ghauri, President, 2001 $100,000 -0- -0- 25,000 (8)
Director 2000 100,000 -0- -0- 20,000 (5)
1999 100,000 -0- -0- 150,000 (7)
28
150,000 (7)
Syed Husain, 2001 $100,000 -0- 5,000 (10) 100,000 (10)
Chief Financial 2000 100,000 -0- 5,000 (10) 50,000 (10)
Officer 1999 N/A N/A N/A N/A
N/A
Rick Poole, Secretary, 2001 $100,000 -0- 5,000 (11) 80,000 (11)
Corporate Controller 2000 N/A -0- N/A 50,000 (11)
1999 N/A N/A N/A -0-
N/A
----------
(1) No officers received or will receive any bonus or other annual compensation
other than salaries during fiscal 2001, nor any benefits other than those
available to all other employees that are required to be disclosed. These
amounts are not inclusive of automobile allowances, where applicable.
(2) No officers received or will receive any long-term incentive plan (LTIP)
payouts or other payouts during fiscal 2001.
(3) All stock awards are shares of Common Stock of the Company.
(4) All securities underlying options are shares of Common Stock of the Company.
(5) Includes options to purchase 20,000 shares of Common Stock of the Company
granted to each Director of the Company for the 1999-2000 term at an exercise
price of $5.50, which vested at the end of the 1999-2000 term. Options must be
exercised within five years after the September 1999 date of grant.
(6) Includes options to purchase 100,000 shares of Common Stock of the Company
granted to Najeeb Ghauri as an officer of the Company in February 2000 with an
exercise price of $21.00 per share, exercisable immediately from the date of
grant. The options must be exercised within five years from the date of grant.
(7) Includes options to purchase 150,000 shares of Common Stock of the Company
granted under the Employment Contract between the Company and Employee at an
exercise price of $2.58, vesting in April 2000; and additional options to
purchase 150,000 shares of Common Stock of the Company granted under the
Employment Contract between the Company and Employee at an exercise price of
$3.58, vesting in April 2001.
(8) For fiscal year 2000 --2001, the Directors received options to purchase
25,000 shares of common stock of the Company under the Incentive and
Nonstatutory Stock Option Plan. The options vest at the
29
end of the director's term in December 2001, with an exercise price of $5.50.
These options were granted in October 2001.
(9) Naeem Ghauri received a signing bonus upon the execution of his employment
agreement dated April, 17, 1999.
(10) Includes options to purchase 50,000 shares of Common Stock of the Company
granted to Mr. Husain as part of his compensation with an exercise price of
$21.00 to vest at the end of one year from May 2000. The options must be
exercised within five years from May 2000. In October 2000, 50,000 options were
granted to Mr. Husain as part of his compensation with an exercise price of
$5.00 per shares. These options vest one year from the date of grant and expire
in October 2004. In April 2001, 50,000 options were granted to Mr. Husain as
part of his compensation with an exercise price of $2.00 per share. These
options vested immediately and they expire in April 2005. Mr. Husain received
5,000 shares of restricted common stock as part of his compensation package in
both fiscal 2000 and 2001.
(11) Includes options to purchase 40,000 shares of common stock of the Company
granted to Mr. Poole as part of his compensation in August 2000 with an exercise
price of $25.00 per share vesting one year from the date of grant. Includes
40,000 options granted to Mr. Poole as part of his compensation in October 2000
with an exercise price of $5.00 per share vesting one year from the date of
grant. Includes 50,000 options granted to Mr. Poole as part of his compensation
in April 2001, vesting immediately with an exercise price of $2.00 per share.
Mr. Poole received 5,000 shares of restricted common stock as part of his
compensation package in fiscal year 2001.
(a) Mr. Najeeb Ghauri resigned his position as the Chief Executive
Officer of the Company in August 2001.
(b) Mr. Naeem Ghauri was appointed as the Chief Executive Officer of
the Company in August 2001 and maintains his position as the
Chief Operating Officer. Mr. Naeem Ghauri resigned his position
as a Director in August 2001. Mr. Naeem Ghauri reduced his
salary from $150,000 to $125,000 to assist the finances of the
Company.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Percent of
total
Number of options/SARs
Securities granted to Exercise
Underlying employees Or
Options/SARs in fiscal Base price Expiration
Name granted (#) year ($/Sh) Date
---- ----------- ----------- ----------- --------------
Najeeb Ghauri, CEO, 25,000 3.0% $5.50/Share September 2004
Director
Salim Ghauri, 25,000 3.0% $5.50/Share September 2004
President, Director
Naeem Ghauri, COO, CEO, 25,000 3.0% $5.50/Share September 2004
Director
Syed Husain, CFO 12.0%
30
50,000(1) 5.00/Share October 2004
50,000 2.00/Share April 2005
Rick Poole, Secretary 40,000(2) $25.00/Share August 2004
40,000(1) 16.0% $5.00/Share October 2004
50,000 $2.00/Share April 2005
(1) One year vesting period from the date of grant of October 2000.
(2) One year vesting period from the date of grant of August 2000;
fully vested as of this time.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
Number of
unexercised Value of
Shares options/SARs Options/SARs
Acquired Value at FY-end (#) at FY-end (#)
On realized exercisable/ exercisable(2)/
Name Exercise (#) ($) unexercisable unexercisable
---- ------------ ---------- ------------- ---------------
Najeeb Ghauri, (a)CEO, 220,000 $9,987,300 445,000/0/ $587,400/0
Director
Salim Ghauri, President, -0- $ -0- 345,000/0 $445,400/0
Director
Naeem Ghauri (b), -0- $ -0- 345,000/0 $445,400/0
CEO,COO, Director
Syed Husain, CFO -0- $ -0- 150,000/0 $198,000/0
Rick Poole, Secretary -0- $ -0- 130,000/0 $171,600/0
(2) The closing price of the stock at Fiscal Year End was $1.32.
(a) Mr. Najeeb Ghauri resigned his position as the Chief Executive
Officer of the Company in August 2001.
(b) Mr. Naeem Ghauri was appointed as the Chief Executive Officer of
the Company in August 2001 and maintains his position as the
Chief Operating Officer. Mr. Naeem Ghauri resigned his position
as a Director in August 2001. Mr. Naeem Ghauri reduced his
salary from $150,000 to $125,000 to assist the finances of the
Company.
EMPLOYMENT AGREEMENTS
Effective April 17, 1999, the Company entered into an employment agreement with
Najeeb Ghauri as Chief Executive Officer, President and Interim Chief Financial
Officer. The agreement is for a base term of three years, and continues
thereafter on an at will basis until terminated by either the Company or Mr.
Ghauri. The agreement provides for a yearly salary of $100,000. The agreement
also provides for such additional compensation as the Board of Directors of the
Company determines is proper in recognition of Mr. Ghauri's contributions and
services to the Company. In addition, the agreement provides for option grants
under the Company's employee stock option plan as follows (grant date of May
1999 for all 450,000 options, 33% vesting beginning of each agreement year):
31
(a) On May 18, 1999, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $1.58 per share;
(b) On May 18, 2000, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $2.58 per share;
(c) On May 18, 2001, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $3.58 per share;
Effective April 17, 1999, the Company entered into an employment agreement with
Salim Ghauri as Chief Executive Officer of the Company's Pakistan branch. The
agreement is for a base term of three years, and continues thereafter on an at
will basis until terminated by either the Company or Mr. Ghauri. The agreement
provides for a yearly salary of $100,000. The agreement also provides for such
additional compensation as the Board of Directors of the Company determines is
proper in recognition of Mr. Ghauri's contributions and services to the Company.
In addition, the agreement provides for option grants under the Company's
employee stock option plan as follows (grant date of May 1999 for all 450,000
options, 33% vesting beginning of each agreement year):
(a) On May 18, 1999, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $1.58 per share;
(b) On May 18, 2000, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $2.58 per share;
(c) On May 18, 2001, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $3.58 per share;
Effective April 17, 1999, the Company entered into an employment agreement with
Naeem Ghauri as Chief Operating Officer, and as Chief Executive Officer of the
Company's UK branch. The agreement is for a base term of three years, and
continues thereafter on an at will basis until terminated by either the Company
or Mr. Ghauri. The agreement provides for a yearly salary of $150,000, with a
signing bonus of $30,000. The agreement also provides for such additional
compensation as the Board of Directors of the Company determines is proper in
recognition of Mr. Ghauri's contributions and services to the Company. In
addition, the agreement provides for option grants under the Company's employee
stock option plan as follows (grant date of May 1999 for all 450,000 options,
33% vesting beginning of each agreement year):
(a) On May 18, 1999, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $1.58 per share;
(b) On May 18, 2000, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $2.58 per share;
(c) On May 18, 2001, issuance of options to purchase 150,000 shares of
common stock of the Company at an exercise price of $3.58 per share;
All of the above agreements provide for certain Company-paid benefits such as
employee benefit plans and medical care plans at such times as the Company may
adopt them. The agreements also provide for reimbursement of reasonable
business-related expenses and for two weeks of paid vacation. The
32
agreements also provide for certain covenants concerning non-competition,
non-disclosure, and assignment of intellectual property rights.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any cash compensation, but are entitled
to reimbursement of their reasonable expenses incurred in attending Directors'
Meetings. In addition, the Company has granted to each of its seven directors
options to purchase 20,000 shares of common stock of the Company under the
Company's Incentive and Nonstatutory Stock Option Plan. The options vest at the
end of the director's term in November 2000, with an exercise price of $5.00.
These options were granted in September 1999.
For the fiscal year 2000-2001, the Directors received options to purchase 25,000
shares of common stock of the Company under the Incentive and Nonstautory Stock
Option Plan. The options vest at the end of the director's term in December
2001, with an exercise price of between $5.00 and $5.50. These options were
granted in October 2001.
Effective as of September 1, 1999, the Company entered into a Consulting
Agreement with one of the directors of the Company, Irfan Mustafa, for Mr.
Mustafa to develop and advise the Company on marketing strategies, develop
investor relations and develop strategic alliances. In addition, Mr. Mustafa is
to assist the Board of Directors in mergers, acquisitions and other business
combinations. The agreement is for a base term of three years, and is renewed
automatically thereafter for succeeding one-year terms until terminated by
either party. The agreement provides for a monthly retainer of $4,000. The
agreement also provides for certain covenants concerning confidentiality and
non-competition.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, its only class of outstanding voting
securities as of September 4, 2001, by (i) each person who is known to the
Company to own beneficially more than 5% of the outstanding Common Stock with
the address of each such person, (ii) each of the Company's directors and
officers, and (iii) all officers and directors as a group:
Percentage
Name and Number of Beneficially
Address Shares(1)(2) owned
-------- ------------ ------------
Najeeb Ghauri (3) 760,416 6.16%
Naeem Ghauri (3) 1,182,182 9.58%
Irfan Mustafa (3) 245,517 1.99%
Salim Ghauri (3) 1,397,666 11.32%
Rick Poole (3) 5,000 *
33
Syed Husain (3) 210,000 1.70%
Shahab Ghauri (3) 1,379,418 (4) 11.17%
Waheed Akbar (3) 25,000 *
Nasim Ashraf (3) 50,000 *
Eugen Beckert (3) 25,000 *
All officers and directors
as a group (10 persons) 5,280,199 41.92%
----------
* Less than one percent
(1) Except as otherwise indicated, the Company believes that the
beneficial owners of Common Stock listed below, based on
information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community
property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment
power with respect to securities.
(2) Beneficial ownership is determined in accordance with the rules
of the Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock
relating to options currently exercisable or exercisable within
60 days of September 30, 2001 are deemed outstanding for
computing the percentage of the person holding such securities
but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named
in the table above have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
(3) Address c/o the Company at 24025 Park Sorrento, Suite 220,
Calabasas, CA 91302.
(4) Shahab Ghauri made a loan to NetSol in the amount of $425,611,
which was repaid, in restricted shares of the Company by issuing
him 115,420 shares.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company acquired land in fiscal 2000 with an original cost basis of $200,000
from Salim Ghauri, Naeem Ghauri, Shahab Ghauri and Najeeb Ghauri (who are
officers and/or stockholders). The purchase price was applied to the exercising
of stock options.
Shahab Ghauri made a loan to NetSol for working capital purpose in the amount of
$425,611 which was repaid effective March 1, 2001 in the form of restricted Rule
144 Shares by issuing him 115,420 Shares valued at $3.69 per share.
Effective as of September 1, 1999, the Company entered into a Consulting
Agreement with one of the directors of the Company, Irfan Mustafa, for Mr.
Mustafa to develop and advise the Company on marketing strategies, develop
investor relations and develop strategic alliances. In addition, Mr. Mustafa
34
is to assist the Board of Directors in mergers, acquisitions and other business
combinations. The agreement is for a base term of three years, and is renewed
automatically thereafter for succeeding one-year terms until terminated by
either party. The agreement provides for a monthly retainer of $4,000. The
agreement also provides for certain covenants concerning confidentiality and
non-competition.
The Company's management believes that the terms of these transactions are no
less favorable to the Company than would have been obtained from an unaffiliated
third party in similar transactions. All future transactions with affiliates
will be on terms no less favorable than could be obtained from unaffiliated
third parties, and will be approved by a majority of the disinterested
directors.
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM
(a) Exhibits
3.1 Articles of Incorporation of Mirage Holdings, Inc., a Nevada
corporation, dated March 18, 1997(1)
3.2 Amendment to Articles of Incorporation dated May 21, 1999 (2)
3.3 Bylaws of Mirage Holdings, Inc., as amended and restated as of
November 28, 2000(8)
10.1 Current Lease Agreement for Calabasas executive offices (6)
10.2 Company Stock Option Plan dated May 18, 1999 (2)
10.3 Company Stock Option Plan dated April 1, 1997 (1)
10.4 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Najeeb U. Ghauri (2)(4)
10.5 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Salim Ghauri (2)(4)
10.6 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Naeem Ghauri (2)(4)
10.7 Consulting Contract, dated September 1, 1999 by and between
Irfan Mustafa and NetSol International, Inc. (3)
21.1 A list of all subsidiaries of the Company
23.1 Consent of Stonefield Josephson, Inc.
23.2 Consent of Saeed Kamran Patel & Co.
23.3 Consent of Mazars Neville Russel.
35
----------
(1) Incorporated by reference to the Company's Registration Statement No.
333-28861 filed on Form SB-2 filed June 10, 1997.
(2) Incorporated by reference to the Company's Annual Report on Form 10K-SB
filed September 28, 1999.
(3) Previously filed with the Company's Annual Report on Form 10K-SB filed
October 13, 2000.
(4) Management contract.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
filed June 21, 2000.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed October 26, 2000.
(7) Previously filed with the Company's Annual Report on Form 10K-SB filed
October 13, 2000.
(8) Incorporated by reference to the Company's Annual Report on Form
10-KSB/A filed on February 2, 2001.
(b) Reports on Form 8-K
On August 28, 2001, a Form 8-K was filed announcing at a meeting held on August
18, 2001, Naeem Ghauri and Shahab Ghauri resigned their positions as board
members. On August 7, 2001, a Form 8-Kwas filed announcing a letter of
resignation was received from Cary Burch dated July 30, 2001. On August 3, 2001,
a Form 8-K was filed announcing that on July 31, 2001, the District Court of
Nevada removed the Receiver it had appointed on June 20, 2001 once it had
learned that the Shareholders Group is no longer interested in taking over the
company. On July 16, 2001 a from 8-K was filed announcing that the court had
approved the settlement between the management of NetSol and the shareholders
Group. On July 9, 2001, a Form 8-K was filed announcing on July 6, 2001, the
Nevada District Count had granted a preliminary injunction in favor of the
Company. On June 20, 2001 a Form 8-K was filed announcing that the Court had
appointed a temporary receiver for the company. On June 12, 2001, a Form 8-K was
filed announcing that on June 11, 2001 the management had obtained a Temporary
Restraining Order prohibiting the Shareholders Group LLC from taking any actions
with respect to the Company at least until the hearing on June 15, 2001. On June
7, 2001, a Form 8-K/A was filed attaching the audited financials of NetSol UK
Ltd. and Network Solutions Group Ltd. In addition, on January 23, 2001, a Form
8-K was filed announcing the sale of common stock of the Company for an
aggregate purchase price of $2,000,000 to Deephaven Private Placement Trading
Ltd. On October 25, 2000, a Form 8-K was filed announcing the Company
headquarters had moved to Calabasas California. On July 25, 2000, a Form 8-K was
filed announcing the Company had recovered 16(b) violations from Blue Water
Group in the amount of $1,427,145. On June 21, 2000, a Form 8-K was filed
announcing the SuperNet AG acquisition and providing the financial statements of
SuperNet AG as of December 31, 1999.
36
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this amendment to the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NetSol International, Inc.
Date: October 15, 2001 BY: /S/ NAEEM GHAURI
-------------------- --------------------------------
Naeem Ghauri
CEO
Date: October 15, 2001 BY: /S/ Syed Husain
-------------------- --------------------------------
Syed Husain
Chief Financial Officer
In accordance with the Exchange Act, this amendment to the report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: October 15, 2001 BY: /S/ NAJEEB U. GHAURI
-------------------- --------------------------------
Najeeb U. Ghauri
Director
Date: October 15, 2001 BY: /S/ SALIM GHAURI
-------------------- --------------------------------
Salim Ghauri
President,
Director
Date: October 15, 2001 BY: /S/ NAEEM GHAURI
-------------------- --------------------------------
Naeem Ghauri
Chief Operating Officer,
Chief Executive Officer
Date: October 15, 2001 BY: /S/ SYED HUSAIN
-------------------- --------------------------------
Syed Husain
Chief Financial Officer
Date: October 15, 2001 BY: /S/ Rick Poole
-------------------- --------------------------------
Rick Poole
Corporate Controller, Secretary
Date: October 15, 2001 BY: /S/ EUGEN BECKERT
-------------------- --------------------------------
Eugen Beckert
Director
Date: October 15, 2001 BY: /S/ IRFAN MUSTAFA
-------------------- --------------------------------
Irfan Mustafa
Director
37
Date: October 15, 2001 BY: /S/ WAHEED AKBAR
-------------------- --------------------------------
Waheed Akbar
Director
Date: October 15, 2001 BY: /S/ NASIM ASHRAF
-------------------- --------------------------------
Nasim Ashraf
Director
38
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY MIRAGE HOLDINGS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001 AND 2000
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5 - F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-28
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Netsol International, Inc. and subsidiaries
Calabasas, California
We have audited the accompanying consolidated balance sheet of Netsol
International, Inc. and subsidiaries as of June 30, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of Network Solutions (PVT) Limited, Netsol
(PVT) Limited and Netsol Connect (PVT) Limited, whose statements reflect
combined total assets of approximately $4,750,000 as of June 30, 2001 and
combined total net revenues of $2,925,000 for the year then ended; and we did
not audit the financial statements of Network Solutions (PVT), Limited, Netsol
Connect (PVT), Limited, Netsol UK, Limited, Network Solutions Group and
Subsidiaries whose statements reflect combined total net revenues of $3,325,000
for the year ended June 30, 2000. Those statements were audited by other
auditors whose report have been furnished to us, and our opinion, insofar as it
relates to the amounts included for Network Solutions (PVT) Limited, Netsol
(PVT) Limited, Netsol Connect (PVT) Limited for the years ended June 30, 2001
and 2000, Netsol UK, Limited and Network Solutions Group and Subsidiaries for
the year ended June 30, 2000, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Netsol International,
Inc. and subsidiaries as of June 30, 2001, and the results of its consolidated
operations and its cash flows for the years ended June 30, 2001 and 2000 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company has incurred net losses from operations, has negative
cash flows from operations, and has a net working capital deficit. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
October 5, 2001
F-2
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - JUNE 30, 2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 306,125
Accounts receivable, net of allowance for doubtful
amounts of $426,093 2,172,663
Revenues in excess of billings 110,882
Other current assets 179,946
------------
Total current assets $ 2,769,616
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 3,035,438
OTHER ASSETS 841,021
INTANGIBLES:
Product licenses, renewals, enhancements,
copyrights, trademarks and tradenames, net 3,400,625
Customer lists, net 1,508,987
Goodwill, net 1,950,000
------------
Total intangibles 6,859,612
------------
$ 13,505,687
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,047,609
Current maturities of obligations under capitalized leases 208,586
Billings in excess of revenues 30,868
Loan payable, bank 77,640
------------
Total current liabilities $ 3,364,703
OBLIGATIONS UNDER CAPITALIZED LEASES,
less current maturities 248,582
CONTINGENCIES -- NOTE 12 --
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 25,000,000 shares
authorized, 11,717,191 shares issued and outstanding 11,717
Additional paid-in capital 30,043,461
Stock subscriptions receivable (43,650)
Other comprehensive income 149,759
Accumulated deficit (20,268,885)
------------
Total stockholders' equity 9,892,402
------------
$ 13,505,687
============
See accompanying notes to consolidated financial statements.
F-3
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended
June 30, 2001 June 30, 2000*
------------- -------------
NET REVENUES $ 6,726,836 $ 6,675,150
COST OF REVENUES 4,129,973 2,893,395
------------ ------------
GROSS PROFIT 2,596,863 3,781,755
------------ ------------
OPERATING EXPENSES:
Selling and marketing 350,583 61,967
Depreciation and amortization 1,509,624 1,408,873
Foreign currency remeasurement 1,297,773 --
Bad debt expense 1,569,541 --
Salaries and wages 2,512,801 1,684,318
Loss on impairment of intangibles 6,128,755 --
Professional services, including
non-cash compensation 2,333,425 1,926,188
General and administrative 2,374,140 1,871,950
------------ ------------
Total operating expenses 18,076,642 6,953,296
------------ ------------
LOSS FROM OPERATIONS (15,479,779) (3,171,541)
OTHER (INCOME)/EXPENSE (70,907) 43,507
INCOME TAX BENEFIT - DEFERRED (2,850,000) (250,000)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (12,558,872) (2,965,048)
------------ ------------
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS:
Income/(loss) from operations
(1,717,375) (436,028)
Gain/(loss) on disposal of segment, net of income taxes 226,305 --
------------ ------------
(1,491,070) (436,028)
------------ ------------
NET LOSS $(14,049,942) $ (3,401,076)
============ ============
NET LOSS PER SHARE -- BASIC AND DILUTED:
Continuing operations $ (1.12) $ (0.31)
Discontinued operations $ (0.13) $ (0.04)
------------ ------------
Net loss $ (1.25) $ (0.35)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING -
basic and diluted 11,226,544 9,666,115
============ ============
* Restated for discontinued operation (See Note 1).
See accompanying notes to consolidated financial statements
F-4
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2001 AND 2000
Common stock Additional Stock Other Total
------------ paid-in subscriptions comprehensive Accumulated stockholders'
Shares Amount capital receivable income deficit equity
--------- -------- ------------- ------------- ------------- ----------- -------------
Balance at July 1, 1999 8,027,665 $ 8,028 $ 14,031,660 $ -- $ -- $(2,817,867) $ 11,221,821
Common stock sold through
private placement 633,366 633 1,578,028 (25,000) 1,553,661
Conversion of debt and
offering costs 47,693 48 249,952 250,000
Issuance of common stock in
exchange for services rendered 252,500 252 1,017,323 1,017,575
Exercise of common stock options 620,000 620 867,730 (43,650) 824,700
Exercise of warrants to convert
to common stock 905,900 906 5,434,494 5,435,400
Issuance of common stock relating
to acquisition of subsidiaries 405,000 405 1,453,293 1,453,698
Short swing profit contribution
(Note 12) 1,427,145 1,427,145
Foreign currency translation
adjustments 22,847 22,847
Net loss for the year
ended June 30, 2000 (3,401,076) (3,401,076)
---------- -------- ------------- ---------- ----------- ----------- -------------
Balance at June 30, 2000 10,892,124 10,892 26,059,625 (68,650) 22,847 (6,218,943) 19,805,771
(Continued)
See accompanying notes to consolidated financial statements.
F-5
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
Common stock Additional Stock Other Total
------------------------ paid-in subscriptions comprehensive Accumulated stockholders'
Shares Amount capital receivable income deficit equity
------------ -------- ----------- ------------- ------------- ----------- -------------
Common stock sold through
private placement 526,536 527 2,804,520 2,805,047
Exercise of warrants to
convert to common stock 26,600 27 163,353 163,380
Collection of receivable 25,000 25,000
Conversion of debt to equity 16,494 16 105,513 105,529
Conversion of debt to equity --
related party 115,420 115 425,496 425,611
Exercise of common stock options 87,000 87 122,913 123,000
Issuance of common stock in
exchange for services rendered 53,017 53 114,541 114,594
Common stock options granted
for services 247,500 247,500
Foreign currency translation
adjustment 126,912 126,912
Net loss for the year
ended June 30, 2001 (14,049,942) (14,049,942)
------------ -------- ------------- ---------- ----------- ------------ ------------
Balance at June 30, 2001 11,717,191 $ 11,717 $ 30,043,461 $ (43,650) $ 149,759 $(20,268,885) $ 9,892,402
============ ======== ============= ========== =========== ============ ============
See accompanying notes to consolidated financial statements.
F-6
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
June 30, 2001 June 30, 2000*
------------- --------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss from continuing operations $(12,558,872) $(2,965,048)
------------ -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING
ACTIVITIES:
Depreciation and amortization 1,509,624 1,408,873
Income tax benefit - deferred (2,850,000) (250,000)
Non-cash compensation expense 417,623 1,017,575
Bad debts 1,569,541 --
Impairment loss 6,128,755 --
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (978,414) (1,781,132)
Other current assets 837,430 (339,504)
Other assets (8,018) (666,076)
INCREASE (DECREASE) IN LIABILITIES -
accounts payable and accrued expenses 377,991 (334,721)
------------ -----------
Total adjustments 7,004,532 (944,985)
------------ -----------
Net cash used for operating activities (5,554,340) (3,910,033)
------------ -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Purchase of property and equipment (586,150) (1,548,176)
Proceeds from (purchase of) investments - certificates of deposit 1,000,000 (1,750,000)
Acquisition of subsidiaries (105,000) (119,524)
------------ -----------
Net cash used for investing activities 308,850 (3,417,700)
------------ -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of common stock and warrants, net 2,968,427 6,989,061
Short swing profit contribution -- 1,427,145
Exercise of stock options 73,000 668,350
Proceeds from (advances to) stockholders and directors, net 428,251 (27,540)
Proceeds from (payments on) convertible notes -- 350,000
Contribution of capital -- 1,391,667
Principal payments on capital lease obligations (280,996) (70,812)
Stock subscription receivable 25,000 (68,650)
------------ -----------
Net cash provided by financing activities 3,213,682 10,659,221
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS (2,031,808) 3,331,488
CASH USED FOR DISCONTINUED OPERATIONS (643,113) (436,028)
------------ -----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (2,674,921) 2,895,460
CASH AND CASH EQUIVALENTS, beginning of year, restated 2,981,046 85,586
------------ -----------
CASH AND CASH EQUIVALENTS, end of year $ 306,125 $ 2,981,046
============ ===========
* Restated for discontinued operation (see Note 1).
(Continued)
See accompanying notes to consolidated financial statements.
F-7
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended Year ended
June 30, 2001 June 30, 2000*
------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 107,743 $ 59,644
============ ============
Income taxes paid $ 4,000 $ 3,200
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of common stock shares per stock purchase agreements $ -- $ 1,453,698
============ ============
Deferred tax liability arising from business combinations $ -- $ 3,100,000
============ ============
Granting of common stock options in exchange for
services received (including exercise of options for services) $ 297,500 $ --
============ ============
Issuance of common shares for services received $ 114,594 $ 1,017,575
============ ============
Conversion of debt to equity and related cost $ 531,140 $ 250,000
============ ============
Purchase of land from officer-stockholders $ -- $ 200,000
============ ============
* Restated for discontinued operation (see Note 1).
See accompanying notes to consolidated financial statements.
F-8
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2001 AND 2000
(1) GENERAL:
Netsol International, Inc. and subsidiaries (the "Company"), formerly
known as Mirage Holdings, Inc., was incorporated under the laws of the
State of Nevada on March 18, 1997. During November of 1998, Mirage
Collections, Inc., a wholly owned and non-operating subsidiary, was
dissolved.
During April 1999, February 2000 and March 2000, the Company formed
Netsol USA, Inc., Netsol eR, Inc. and Netsol (PVT), Limited,
respectively, as wholly owned subsidiaries.
BUSINESS COMBINATIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD:
Network Solutions PVT, Limited and Netsol UK, Limited
On September 15, 1998 and April 17, 1999, the Company purchased
from related parties, 51% and 49%, respectively, of the
outstanding common stock of Network Solutions PVT, Limited, a
Pakistani Company, and 43% and 57% of the outstanding common
stock of Netsol UK, Limited, a United Kingdom Company, for the
issuance of 4,690,000 restricted common shares of the Company
and cash payments of $775,000, for an aggregate purchase price
of approximately $12.9 million. These acquisitions were
accounted for using the purchase method of accounting, and
accordingly, the purchase price was allocated to the assets
purchased and liabilities assumed based upon their estimated
fair values on the date of acquisition, which approximated
$300,000. Included in the accompanying consolidated financial
statements are other assets acquired at fair market value
consisting of product licenses, product renewals, product
enhancements, copyrights, trademarks, tradenames and customer
lists. At the date of acquisition, the management of the Company
allocated approximately $6.3 million to these assets, based on
independent valuation reports prepared for the Company. The
excess of the purchase prices over the estimated fair values of
the net assets acquired, was recorded as goodwill, and was being
amortized by use of the straight-line method from the date of
each purchase. Effective April 1, 2001, the management
determined that the remaining useful life of all its acquired
intangible assets to be approximately five years, and
accordingly, accelerated the amortization of these intangibles.
During June 2001, the management decided to close its operations
in the United Kingdom, and accordingly, the Company recognized a
loss from impairment of various intangible assets related to
Netsol UK, Limited, as recoverability of these assets (measured
by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset) seemed highly
unlikely.
Mindsources, Inc.
On August 13, 1999, the Company through its wholly owned
subsidiary, Netsol USA, Inc. acquired 100% of the outstanding
capital stock of Mindsources, Inc., a Virginia and US based
Company, through the issuance of 250,000 shares of Rule 144
restricted common shares of the Company for an aggregate
purchase price of approximately $1,260,000. This acquisition was
accounted for using the purchase method of accounting under APB
Opinion No. 16, and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based
upon their estimated fair values as determined by management on
the date of acquisition, which approximated $900,000. The
management of the Company allocated the entire purchase price to
customer lists acquired, and is being amortized by use of the
straight-line method from the date of acquisition. The excess of
the purchase prices over the estimated fair values of the net
assets acquired, approximately $360,000, was recorded as
goodwill and is being amortized by use of the straight-line
method from the date of purchase. Effective April 1, 2001, the
management determined that the remaining useful life of all its
acquired intangible assets to be approximately five years, and
accordingly, accelerated the amortization of these intangibles.
F-9
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(1) GENERAL, CONTINUED:
BUSINESS COMBINATIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD,
CONTINUED:
Network Solutions Group Limited and Subsidiaries
On August 18, 1999, the Company acquired 100% of the outstanding
capital stock of Network Solutions Group Limited and
Subsidiaries, a United Kingdom Company, through the issuance of
155,000 shares of Rule 144 restricted common shares of the
Company for an aggregate purchase price of approximately
$940,000. This acquisition was accounted for using the purchase
method of accounting under APB Opinion No. 16, and accordingly,
the purchase price was allocated to the assets purchased and
liabilities assumed based upon their estimated fair values on
the date of acquisition, which approximated a deficit of
$700,000. The management of the Company allocated approximately
$600,000 to customer lists, which are being amortized by use of
the straight-line method from the date of acquisition. The
excess of the purchase price over the estimated fair values of
the net assets acquired, approximately $1,040,000, was recorded
as goodwill, and was being amortized by use of the straight-line
method over the estimated useful life from the date of
acquisition. Effective April 1, 2001, the management determined
that the remaining useful life of all its acquired intangible
assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles. During June
2001, the management decided to close its operations in the
United Kingdom, and accordingly, the Company recognized a loss
from impairment of various intangible assets related to these
entities, as recoverability of these assets (measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset) seemed highly
unlikely.
Intereve Corporation
During March 2001, the Company acquired 100% of the outstanding
capital stock of Intereve Corporation for an aggregate purchase
price of $245,000. This acquisition was accounted for using the
purchase method of accounting under APB Opinion No. 16, and
accordingly, the purchase price was allocated to the assets
purchased and liabilities assumed based upon their estimated
fair values on the date of acquisition, which equaled to zero.
The management of the Company allocated the entire purchase
price of $245,000 to customer lists. During June 2001, the
management ceased operations of this entity and consequently,
the Company recognized an impairment loss of $245,000 to
customer list, as recoverability of these assets (measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset) seemed highly
unlikely.
Pro forma results of operations and net loss per share
information for business combinations occurring during the year
ended June 30, 2001 have not being presented as it was
immaterial to the financial statements taken as a whole.
F-10
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(1) GENERAL, CONTINUED:
BUSINESS COMBINATIONS ACCOUNTED FOR UNDER THE POOLING OF INTEREST
METHOD:
Abraxas Australia Pty, Limited
On January 3, 2000, the Company issued 150,000 of Rule 144
restricted common shares in exchange for 100% of the outstanding
capital stock of Abraxas Australia Pty, Limited, an Australian
Company. This business combination was accounted for using the
pooling of interest method of accounting under APB Opinion No.
16., and accordingly, the accompanying financial statements have
been restated to show the results of operations as if the
combination had occurred at the beginning of all periods
presented. Selected financial information of the combining
entities under the pooling of interest method of Business
Combination is presented in Note 12.
SuperNet Aktiengesellschaft
On May 2, 2000, the Company issued 425,600 of Rule 144
restricted common shares in exchange for 100% of the outstanding
capital stock of SuperNet Aktiengesellschaft, a German Company.
This business combination was accounted for using the pooling of
interest method of accounting under APB Opinion No. 16, and
accordingly, the accompanying financial statements have been
restated to show the results of operations as if the combination
had occurred at the beginning of all periods presented. Selected
financial information of the combining entities under the
pooling of interest method of Business Combination is presented
in Note 12.
On May 1, 2001, management of the Company committed to a formal
plan to dispose of Supernet AG, a division or segment of the
Company, through a sale of all the issued and outstanding shares
of Supernet AG. The closing date was on May 21, 2001. The
Company is following the guidance of APB No. 30 in the
accounting for and disclosure of this disposal. The losses from
operations of this discontinued division and the loss on the
disposal of the division is presented on the face on the
Statement of Operations for all periods presented. There are no
applicable corresponding income tax effects, which applied to
this disposal. Revenues applicable to this discontinued division
were $839,308 through the date of disposal on May 1, 2001 and
$309,389 for the year ended June 30, 2000. Included in accounts
payable and accrued expenses is approximately $160,000 that the
Company is obligated to pay under the terms of the sale
agreement.
F-11
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
Network Solutions (PVT), Limited, Netsol (PVT), Limited, Netsol
Connect (PVT), Limited, Netsol UK, Limited, Network Solutions
Group Limited and Subsidiaries, Netsol-Abraxas Australia Pty
Limited, Netsol eR, Inc., Intereve Corporation, Supernet AG and
Netsol USA, Inc. All material intercompany accounts have been
eliminated in consolidation.
BUSINESS ACTIVITY:
The Company designs, develops, markets, and exports proprietary
software products to customers in the automobile finance and
leasing industry worldwide. The Company also provides consulting
services in exchange for fees from customers.
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 and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Effective April 1, 2001, the management determined that the
remaining useful life of all its acquired intangible assets to
be approximately five years, and accordingly, accelerated the
amortization of these intangibles. This change in estimate
increased the depreciation and amortization expense by
approximately $400,000 during the three months ended June 30,
2001. Due to impairment losses recognized to intangibles, the
remaining net intangible balance of approximately $6,860,000
(including goodwill of $1,950,000) will be amortized over the
remaining life of 57 months. The Company is evaluating any
accounting effect, if any, arising from the recently issued SFAS
No. 142, "Goodwill and Other Intangibles".
CASH:
Equivalents
For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original
maturities of three months or less which are not securing any
corporate obligations.
Concentration
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts.
F-12
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FAIR VALUE:
Unless otherwise indicated, the fair values of all reported
assets and liabilities which represent financial instruments,
none of which are held for trading purposes, approximate
carrying values of such amounts.
GOING CONCERN:
The Company's consolidated financial statements are prepared
using the accounting principles generally accepted in the United
States of America applicable to a going concern, which
contemplates the realization of assets and liquidation of
liabilities in the normal course of business. Without
realization of additional capital, it would be unlikely for the
Company to continue as a going concern. This factor raises
substantial doubt about the Company's ability to continue as a
going concern.
Management recognizes that the Company must generate additional
resources to enable it to continue operations. Management's
plans include closing down its loss generating UK entities,
disposal of its German subsidiary, and is evaluating cost
cutting measures at every entity level. Additionally,
management's plans also include the sale of additional equity
securities and debt financing from related parties and outside
third parties. However, no assurance can be given that the
Company will be successful in raising additional capital.
Further, there can be no assurance, assuming the Company
successfully raises additional equity, that the Company will
achieve profitability or positive cash flow. If management is
unable to raise additional capital and expected significant
revenues do not result in positive cash flow, the Company will
not be able to meet its obligations and may have to cease
operations.
STATEMENT OF CASH FLOWS:
In accordance with Statement of Financial Accounting Standards
No. 95, "Statement of Cash Flows," cash flows from the Company's
operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on
the statement of cash flows will not necessarily agree with
changes in the corresponding balances on the balance sheet.
F-13
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION:
Revenue is recognized when earned. The Company's revenue
recognition policies are in compliance with all applicable
accounting regulations, including American Institute of
Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, Software Revenue Recognition, as amended by SOP
98-4 and SOP 98-9. Any revenues from software arrangements with
multiple elements are allocated to each element of the
arrangement based on the relative fair values using specific
objective evidence as defined in the SOPs. If no such objective
evidence exists, revenues from the arrangements are not
recognized until the entire arrangement is completed and
accepted by the customer. Once the amount of the revenue for
each element is determined, the Company recognizes revenues as
each element is completed and accepted by the customer. For
arrangements that require significant production, modification
or customization of software, the entire arrangement is
accounted for by the percentage of completion method, in
conformity with Accounting Research Bulletin ("ARB") No. 45 and
SOP 81-1.
In December 1999, the Securities and Exchange Commission (the
Commission) issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, which is to be applied
beginning with the fourth fiscal quarter of fiscal years
beginning after December 15, 1999, to provide guidance related
to recognizing revenue in circumstances in which no specific
authoritative literature exists. The application of this Staff
Accounting Bulletin to the Company's financial statements did
not have any material change in the amount of revenues we
ultimately expect to realize.
INTANGIBLE ASSETS:
Intangible assets consisting of product licenses, renewals,
enhancements, copyrights, trademarks, tradenames, customer lists
and goodwill will be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable as required by FASB No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
OTHER COMPREHENSIVE INCOME:
SFAS 130 requires unrealized gains and losses on the Company's
available for sale securities, currency translation adjustments,
and minimum pension liability, which prior to adoption were
reported separately in stockholders' equity, to be included in
other comprehensive income. During the year ended June 30, 2001,
comprehensive income (loss) included net loss and translation
gains of $126,912. Other comprehensive income, as presented on
the accompanying balance sheet, amounted to $149,759 as of June
30, 2001.
F-14
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to earnings as incurred;
additions, renewals and betterments are capitalized. When
property and equipment are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the
respective accounts, and any gain or loss is included in
operations. Depreciation is computed using various methods over
the estimated useful lives of the assets, ranging from three to
seven years.
NET LOSS PER SHARE:
Net loss per share has been computed using the weighted average
number of shares outstanding. Common stock equivalents have been
excluded from the net loss per share calculation because their
effect would reduce loss per share.
FOREIGN CURRENCY:
The accounts of Network Solutions Group Limited and Subsidiaries
and Netsol UK, Limited use the British Pounds, Network Solutions
PK, Limited, Netsol (PVT), Limited, and Netsol Connect PVT,
Limited use Pakistan Rupees, Netsol Abraxas Australia Pty,
Limited uses the Australian dollar, Supernet AG uses the German
Mark, Netsol International, Inc., Netsol USA, Inc., Intereve
Corporation and Netsol eR, Inc. use the U.S. dollars as the
functional currencies. Assets and liabilities are translated at
the exchange rate on the balance sheet date, and operating
results are translated at the average exchange rate throughout
the period. Translation gains of $126,912 during 2001 and
$22,847 during 2000 are classified as an item of other
comprehensive income in the stockholders' equity section of the
consolidated balance sheet. A foreign currency loss in the
amount of $1,297,773 has been recorded in the consolidated
statement of operations for the year ended June 30, 2001. This
loss is due to the re-measurement of intercompany loan balances
between the Company and its foreign subsidiaries. These
re-measured loan balances (during the fourth quarter of 2001)
have been converted into permanent equity as of June 30, 2001.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, which applies the fair-value method of
accounting for stock-based compensation plans. In accordance
with this standard, the Company accounts for stock-based
compensation in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees.
In March 2000, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 44 (Interpretation 44),
"Accounting for Certain Transactions Involving Stock
Compensation." Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based
compensation arrangements that are accounted for under APB
Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 became effective July 1, 2000, with certain
provisions that were effective retroactively to December 15,
1998 and January 12, 2000. Interpretation 44 did not have any
material impact on the Company's financial statements.
F-15
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES:
Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary
differences and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
As of June 30, 2001, the Company had net federal and state
operating loss carryforwards expiring in various years through
2021. During the year ended June 30, 2001, the valuation
allowance decreased by $1,950,000, primarily due to the
Company's ability to offset the net operating loss carryforward
against taxable income arising from amortization of
non-deductible bases differences from purchased business
combinations. Deferred tax assets resulting from the net
operating losses are reduced by a valuation allowance, when in
the opinion of management, utilization is not reasonably
assured.
A summary is as follows:
Federal State Total
-------------- ------------ ------------
Net operating loss carryforward $ 10,500,000 $ 5,325,000
Effective tax rate 32% 8%
-------------- ------------
Deferred tax asset 3,360,000 426,000 3,786,000
Valuation allowance (1,800,000) (36,000) (1,836,000)
-------------- ------------ ------------
Net deferred tax asset 1,560,000 390,000 1,950,000
-------------- ------------ ------------
Deferred tax liability arising from
non-taxable business combinations 1,560,000 390,000 1,950,000
-------------- ------------ ------------
Net deferred tax liability $ -- $ -- $ --
============== ============ ============
DERIVATIVE INSTRUMENTS:
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 requires the Company to recognize all derivatives as
either assets or liabilities and measure those instruments at
fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow and
foreign currency hedges and establishes respective accounting
standards for reporting changes in the fair value of the
derivative instruments. After adoption, the Company is required
to adjust hedging instruments to fair value in the balance sheet
and recognize the offsetting gains or losses as adjustments to
be reported in net income or other comprehensive income, as
appropriate. The Company has complied with the requirements of
SFAS 133 in fiscal year 2001, the effect of which was not
material to the Company's financial position or results of
operations as the Company does not participates in such
activities.
F-16
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
The Company adopted the provision of FASB No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This statement requires 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 cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair values of the assets. In
assessing the impairment of these identifiable intangible
assets, identifiable goodwill will be allocated on a pro rata
basis using fair values of the assets at the original
acquisition date. In estimating expected future cash flows for
determining whether an asset is impaired and if expected future
cash flows are used in measuring assets that are impaired,
assets will be grouped at the lowest level (entity level) for
which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. Assets
to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. In recording an
impairment loss, related goodwill would be reduced to zero
before reducing the carrying amount of any identified impaired
asset.
For goodwill not identifiable with an impaired asset, the
Company will establish benchmarks at the lowest level (entity
level) as its method of assessing impairment. In measuring
impairment, unidentifiable goodwill will be considered impaired
if the fair value at the lowest level is less than its carrying
amount. The fair value of unidentifiable goodwill will be
determined by subtracting the fair value of the recognized net
assets at the lowest level (excluding goodwill) from the value
at the lowest level. The amount of the impairment loss should be
equal to the difference between the carrying amount of goodwill
and the fair value of goodwill. In the event that an impairment
is recognized, appropriate disclosures would be made.
During the fourth quarter of the year ended June 30, 2001, an
impairment loss of $6,128,755 was recognized. During the year
ended June 30, 2000, this statement did not have a material
impact on the Company's financial position, results of
operations or liquidity.
NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued SFAS No. 141 "Business
Combinations." SFAS No. 141 supersedes Accounting Principles
Board ("APB") No. 16 and requires that any business combinations
initiated after June 30, 2001 be accounted for as a purchase;
therefore, eliminating the pooling-of-interest method defined in
APB 16. The statement is effective for any business combination
initiated after June 30, 2001 and shall apply to all business
combinations accounted for by the purchase method for which the
date of acquisition is July 1, 2001 or later. The Company does
not expect the adoption to have a material impact to the
Company's financial position or results of operations since the
Company has not participated in such activities covered under
this pronouncement.
F-17
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 addresses the initial recognition,
measurement and amortization of intangible assets acquired
individually or with a group of other assets (but not those
acquired in a business combination) and addresses the
amortization provisions for excess cost over fair value of net
assets acquired or intangibles acquired in a business
combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001
for any intangibles acquired in a business combination initiated
after June 30, 2001. The Company is evaluating any accounting
effect, if any, arising from the recently issued SFAS No. 142,
"Goodwill and Other Intangibles" on the Company's financial
position or results of operations.
In January 2001, the Financial Accounting Standards Board
Emerging Issues Task Force issued EITF 00-27 effective for
convertible debt instruments issued after November 16, 2000.
This pronouncement requires the use of the intrinsic value
method for recognition of the detachable and imbedded equity
features included with indebtedness, and requires amortization
of the amount associated with the convertibility feature over
the life of the debt instrument rather than the period for which
the instrument first becomes convertible. Inasmuch as all debt
instruments that were entered into prior to November 16, 2000
and all of the debt discount relating to the beneficial
conversion feature was previously recognized as expense in
accordance with EITF 98-5, there is no impact on these financial
statements. This EITF 00-27, could impact future financial
statements, should the Company enter into such agreements.
(3) MAJOR CUSTOMERS:
Included in accounts receivable as of June 30, 2001 is approximately
$550,000 due from two customers. During the year ended June 30, 2001,
two customers accounted for approximately 35% of net revenues, and
during the year ended June 30, 2000, one customer accounted for
approximately 16% of net revenues.
(4) OTHER CURRENT ASSETS:
A summary is as follows:
Prepaid expenses $ 101,677
Due from officer-stockholders (interest free and
due on demand) 63,733
Employee advances 14,536
-----------
$ 179,946
===========
F-18
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(5) PROPERTY AND EQUIPMENT:
A summary is as follows:
Computer equipment $ 1,532,786
Office furniture and equipment 515,927
Assets under capital leases 762,871
Construction in progress 452,692
Land 200,001
Capitalized website costs 167,305
Automobiles 120,802
Building improvements 147,200
-----------
3,899,584
Less accumulated depreciation and amortization 864,146
-----------
$ 3,035,438
===========
Depreciation and amortization expense related to property and equipment
amounted to $471,327 ($172,617 included in "Loss from discontinued
operations" on the accompanying consolidated statements of operations)
and $346,561 for the years ended June 30, 2001 and 2000, respectively.
Accumulated depreciation and amortization for assets under capital
leases amounted to $195,130 at June 30, 2001.
(6) OTHER ASSETS:
Lease Agreement
Effective October 1, 2000, the Company entered into a rental lease
agreement to occupy office space. Pursuant to this agreement, the
Company will pay rent of approximately $12,500 per month through July
31, 2007 (See Note 14). The Company was required to secure an
Irrevocable Stand-By Letter of Credit for the benefit of the Landlord in
the amount of $250,000. In the event the Company fails to renew the
Letter of Credit as set forth in the Letter of Credit Agreement, the
Landlord shall be entitled to draw on the Letter of Credit in full. The
renewal of each annual Letter of Credit will be reduced by $35,714 per
annum. During August 2001, this Letter of Credit was reduced to
approximately $214,000.
Letter of Credit
During September 2000, the Company opened a certificate of deposit with
Merrill Lynch Bank USA in the amount of $500,000, as security for an
Irrevocable Standby Letter of Credit for the benefit of one of its
customers. This letter of credit expires by December 31, 2003.
F-19
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(7) PRODUCT LICENSES, RENEWALS, ENHANCEMENTS, COPYRIGHTS, TRADEMARKS AND
TRADENAMES:
A summary is as follows:
Product licenses, renewals, enhancements,
copyrights, trademarks and tradenames $ 4,332,180
Less accumulated amortization 931,555
-----------
$ 3,400,625
===========
Amortization expense related to product licenses, renewals,
enhancements, copyrights, trademarks and tradenames amounted to $476,444
and $341,333 for the years ended June 30, 2001 and 2000, respectively.
In addition, the Company recognized an impairment loss of $787,820
during the fourth quarter of 2001, as recoverability of these assets
(measured by a comparison of the carrying amount to future net cash
flows expected to be generated by the asset) seemed highly unlikely.
(8) CUSTOMER LISTS:
A summary is as follows:
Customer lists $ 1,947,704
Less accumulated amortization 438,717
-----------
$ 1,508,987
===========
Amortization expense related to customer lists amounted to $231,412 and
$180,638 for the years ended June 30, 2001 and 2000, respectively. In
addition, the Company recognized an impairment loss of $761,873 during
the fourth quarter of 2001, as recoverability of these assets (measured
by a comparison of the carrying amount to future net cash flows expected
to be generated by the asset) seemed highly unlikely.
(9) GOODWILL:
A summary is as follows:
Goodwill $ 2,995,577
Less accumulated amortization 1,045,577
-----------
$ 1,950,000
===========
Amortization expense related to goodwill amounted to $503,058 and
$540,341 for the years ended June 30, 2001 and 2000, respectively. In
addition, the Company recognized an impairment loss of $4,579,062 during
the fourth quarter of 2001, as recoverability of goodwill identifiable
to other intangible assets (measured by a comparison of the carrying
amount to future net cash flows expected to be generated by the asset)
seemed highly unlikely.
F-20
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(10) STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING:
On September 15, 1998, the Company completed the sale of its minimum
offering of shares in its initial public offering which generated gross
proceeds of $1,385,647 from the sale of 251,000 shares of common stock
and 929,825 warrants, each warrant to purchase one share of the
Company's common stock at an exercise price of $6.50 for a term of five
years. During the years ended June 30, 2001 and 2000, 26,600 and 905,900
warrants were exercised for gross proceeds of $163,380 and $5,435,400,
respectively. The total number of warrants outstanding at June 30, 2001
is 259,453, with exercise prices ranging from approximately $4.50 to
$7.00 per warrant.
BUSINESS COMBINATIONS:
Network Solutions PVT, Limited and Netsol UK, Limited
On September 15, 1998, the Company purchased 51% of the outstanding
common stock of Network Solutions PVT, Limited, a Pakistani Company, and
43% of the outstanding common stock of Netsol UK, Limited, a United
Kingdom Company, in exchange for cash payment of $775,000 and issuance
of 490,000 restricted common shares of Netsol International, Inc.
On April 17, 1999, the Company acquired an additional 49% of the
outstanding common stock of Network Solutions PVT, Limited, and 57% of
the outstanding common stock of Netsol UK, Limited through the issuance
of 4,200,000 restricted common shares of Netsol International, Inc.
Mindsources, Inc.
On August 13, 1999, the Company through its wholly owned subsidiary,
Netsol USA, Inc. acquired 100% of the outstanding capital stock of
Mindsources, Inc., a Virginia and US based Company, through the issuance
of 250,000 shares of Rule 144 restricted common shares of the Company.
Network Solutions Limited
On August 18, 1999, the Company acquired 100% of the outstanding capital
stock of Network Solutions Group Limited and Subsidiaries, a United
Kingdom Company, through the issuance of 155,000 shares of Rule 144
restricted common shares of the Company.
Abraxas Australia Pty, Limited
On January 3, 2000, the Company issued 150,000 of Rule 144 restricted
common shares in exchange for 100% of the outstanding capital stock of
Abraxas Australia Pty, Limited, an Australian Company. Shares issued
under this business combination have been presented as a restatement to
the earliest period presented in the accompanying Statement of
Stockholders' Equity.
F-21
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(10) STOCKHOLDERS' EQUITY:
BUSINESS COMBINATIONS, CONTINUED:
SuperNet Aktiengesellschaft
On May 2, 2000, the Company issued of 425,600 Rule 144 restricted common
shares in exchange for 100% of the outstanding capital stock of SuperNet
Aktiengesellschaft ("SuperNet AG"), a German Company. Shares issued
under this business combination have been presented as a restatement to
the earliest period presented in the accompanying Statement of
Stockholders' Equity. During May 2001, management determined that the
products, services and customers of Supernet AG were dissimilar to the
Company's customer profiles, products and services and hence, disposed
of Supernet AG. This transaction has been accounted for as a
discontinued operation.
Private Placements
During the year ended June 30, 2000, the Company sold 633,366 restricted
Rule 144 common shares through private placement offerings for gross
proceeds of $1,553,661, which is net of stock subscriptions receivable
of $25,000. This receivable was collected in 2001. The private
placements were exempt from the registration provisions of the
Securities and Exchange Commission Act of 1933 under Regulation D.
During the quarter ended September 30, 2000, the Company sold 63,666
shares of its restricted Rule 144 common stock for gross proceeds of
$955,000 through a private placement offering pursuant to Rule 506 of
Regulation D of the Securities and Exchange Act of 1933.
During January and February 2001, the Company entered into an equity
financing agreement with Deephaven Capital Management ("Deephaven").
Pursuant to this agreement, the Company sold an aggregate of 462,870
restricted common shares for proceeds of $1,850,047, net of offering
costs of $150,000. In addition, the Company issued warrants to purchase
an aggregate of up to 54,945 shares of common stock at an exercise price
of $6.83 per share in January 2001 and warrants to purchase an aggregate
of up to 83,916 shares of common stock at an exercise price of $4.47 per
share in February 2001, respectively. All warrants are exercisable for a
period of five years from the date of issuance and have adjustment
provisions for dilution events in connection with issuances of our
common stock and other equivalents below the applicable warrant exercise
price and for stock splits, stock dividends and similar transactions. In
the event of default, the Company may become potentially liable up to
$400,000 with respect to some of its obligations under the registration
rights agreement with Deephaven.
Services
During the years ended June 30, 2001 and 2000, the Company issued 53,017
and 252,500 restricted Rule 144 common shares in exchange for services
rendered, respectively. The Company recorded compensation expense of
$114,594 and $1,017,575 for the years ended June 30, 2001 and 2000,
respectively. Compensation expense was calculated based upon the fair
market value of the freely trading shares as quoted on OTCBB through
December 1999 and effective January 2000, on NASDAQ over the service
period less an average discount of 30% for the restriction feature or
the fair value of services received, whichever was more clearly
determinable.
F-22
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(10) STOCKHOLDERS' EQUITY:
BUSINESS COMBINATIONS, CONTINUED:
Conversion of Debt
During November 1999, the Company issued 8% notes payable with
non-detachable warrants, which were convertible to restricted Rule 144
common shares at $6.50 per share. The Company raised a total of $350,000
of which, $250,000 was converted into 38,462 shares. In connection with
this offering, the Company issued 57,000 non-detachable warrants with an
exercise price of $6.50 per share. The Company also issued 9,231 shares
of Rule 144 restricted common shares and 9,600 warrants with an exercise
price of $6.50 per share. Offering cost of $60,000 has been recognized
related to this offering during 2000. During the year ended June 30,
2001, the outstanding balance of $105,529 (including accrued interest of
$5,529) was converted into 16,494 restricted Rule 144 common shares.
A principal stockholder of the Company advanced funds for working
capital during the quarter ended September 30, 2000. Effective March 1,
2001, the unpaid outstanding loan balance of $425,611 was converted (at
fair value of the underlying common stock on the date of conversion)
into 115,420 restricted shares of the Company's common stock.
Short Swing Profits
During the second and third quarters of the year ending June 30, 2000,
Blue Water, a hedge fund and principal stockholder, purchased and sold
shares of the Company's common stock on the public market within a six
month period and failed to make adequate disclosures, which constituted
a violation of the federal securities statute. Profits of $1,427,145
arising from the sale of these shares of common stock were contributed
to the Company in June 2000.
(11) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN:
The 1997 Plan
On April 1, 1997, the Company adopted an Incentive and Nonstatutory
Stock Option Plan (the "1997 Plan") for its employees and consultants
under which a maximum of 500,000 options may be granted to purchase
common stock of the Company. Two types of options may be granted under
the Plan: (1) Incentive Stock Options (also known as Qualified Stock
Options) which may only be issued to employees of the Company and
whereby the exercise price of the option is not less than the fair
market value of the common stock on the date it was reserved for
issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is less than the fair market value of the
common stock on the date it was reserved for issuance under the plan.
Grants of options may be made to employees and consultants without
regard to any performance measures. All options listed in the summary
compensation table ("Securities Underlying Options") were issued
pursuant to the Plan. An additional 20,000 Incentive Stock Options were
issued to a non-officer-stockholder of the Company. All options issued
pursuant to the Plan vest over an 18 month period from the date of the
grant per the following schedule: 33% of the options vest on the date
which is six months from the date of the grant; 33% of the options vest
on the date which is 12 months from the date of the grant; and 34% of
the options vest on the date which is 18 months from the date of the
grant. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
F-23
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(11) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, CONTINUED:
The 1997 Plan, Continued
The number and weighted average exercise prices of options granted under
the 1997 Plan for the years ended June 30, 2001 and 2000 are as follows:
2001 2000
----------------- ------------------
Average Average
Exercise Exercise
Number Price Number Price
------- -------- ------- --------
Outstanding at the beginning of the year 85,000 $ 1.10 230,000 $ 0.77
Outstanding at the end of the year 45,000 $ 1.44 85,000 $ 1.10
Granted during the year -- $ -- -- $ -
Exercised during the year 40,000 $ 0.73 145,000 $ 0.57
Exercisable at the end of the year 45,000 $ 1.44 85,000 $ 1.10
Canceled/forfeited during the year -- $ -- -- $ --
Weighted average remaining life (years) 2.5 3.5
Under the 1997 Plan, during the year ended June 30, 2000, 145,000
options were exercised into 145,000 shares of common stock for total
consideration of $82,650, of which, 95,000 options were exercised by an
officer-stockholder for $32,650, all of which is presented on the
accompanying balance sheet in stock subscriptions receivable in the
stockholders' equity section. The remaining 50,000 options were
exercised by an unrelated party at $1.00 per share, for cash.
During the year ended June 30, 2001, 40,000 options were exercised by
related parties into 40,000 shares of common stock for total
consideration of $29,000.
The 1999 Plan
On May 18, 1999, the Company enacted an Incentive and Nonstatutory Stock
Option Plan (the "1999 Plan") for its employees, directors and
consultants under which a maximum of 5,000,000 options may be granted to
purchase common stock of the Company. Two types of options may be
granted under the Plan: (1) Incentive Stock Options (also known as
Qualified Stock Options) which may only be issued to employees of the
Company and whereby the exercise price of the option is not less than
the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which
may be issued to either employees or consultants of the Company and
whereby the exercise price of the option is less than the fair market
value of the common stock on the date it was reserved for issuance under
the plan. Grants of options may be made to employees, directors and
consultants without regard to any performance measures. All options
issued pursuant to the Plan are nontransferable and subject to
forfeiture.
F-24
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(11) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, CONTINUED:
The 1999 Plan, Continued
Any Option granted to an Employee of the Corporation shall become
exercisable over a period of no longer than ten (10) years and no less
than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Incentive Stock Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted
unless the Board shall specifically determine otherwise, as provided
herein. In no event shall any Option be exercisable after the expiration
of ten (10) years from the date it is granted, and no Incentive Stock
Option granted to a Ten Percent Holder shall, by its terms, be
exercisable after the expiration of ten (10) years from the date of the
Option. Unless otherwise specified by the Board or the Committee in the
resolution authorizing such option, the date of grant of an Option shall
be deemed to be the date upon which the Board or the Committee
authorizes the granting of such Option.
The number and weighted average exercise prices of options granted under
the 1999 Plan for the year ended June 30, 2001 and 2000 are as follows:
2001 2000
-------------------- --------------------
Average Average
Exercise Exercise
Number Price Number Price
--------- -------- --------- --------
Outstanding at the beginning of the year 1,982,250 $ 6.77 1,350,000 $ 1.58
Outstanding at the end of the year 2,992,250 $ 5.31 1,982,250 $ 6.77
Granted during the year 1,168,000 $ 3.29 1,107,250 $ 9.75
Exercised during the year 47,000 $ 2.00 475,000 $ 1.65
Exercisable at the end of the year 2,205,175 $ 5.48 842,146 $ 7.55
Canceled/forfeited during the year 111,000 $11.53 -- $ --
Weighted average remaining life (years) 3.8 4.2
Under the 1999 Plan, during the year ended June 30, 2000, 475,000
options were exercised into 475,000 shares of common stock for total
consideration of $786,000, of which, 450,000 options were exercised by
officer-stockholders for $711,000 at an exercise price of $1.58 per
share. These officer-stockholders paid $500,000 in cash, conveyed land
with original cost basis of $200,000 and the remaining balance of
$11,000 is presented on the accompanying balance sheet as a contra
equity balance in the stockholders' equity section. The remaining 25,000
options were exercised by an unrelated party at $3.00 per share, for
cash.
During the year ended June 30, 2001, 47,000 options were exercised into
47,000 shares of common stock for total consideration of $94,000, which
included $50,000 of non-cash compensation.
During the year ended June 30, 2001, the Company granted 65,000 fully
vested options to consultants in exchange for services at an exercise
price of $4.00 per share. An expense of $97,500 was recorded based upon
computations using the fair value Black-Scholes option pricing model.
In addition, the Company granted 100,000 fully vested options to a
director in exchange for services as a consultant at an exercise price
of $2.00 per share. An expense of $150,000 was recorded based upon
computations using the fair value Black-Scholes option pricing model.
F-25
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(11) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, CONTINUED:
The 1999 Plan, Continued
Pro forma information regarding the effect on operations is required by
SFAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that
statement. Pro forma information using the Black-Scholes method at the
date of grant based on the following assumptions:
Expected life (years) 5-10 years
Risk-free interest rate 6.0%
Dividend yield --
Volatility 1.49
Proforma information regarding net loss and loss per share, pursuant to
the requirements of FASB 123 for the years ended June 30, 2001 and 2000
are as follows:
2001 2000
---------------------------- ---------------------------
Historical Proforma Historical Proforma
----------- ------------- ------------ -----------
Net loss $14,049,942 $ 19,079,166 $ 3,401,076 $ 6,016,293
=========== ============= ============ ===========
Net loss per share -
basic and diluted $ 1.25 $ 1.70 $ 0.35 $ 0.62
=========== ============= ============ ===========
(12) COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases its facilities under leases that expire at various
times through July 31, 2007. The following is a schedule by years of
future minimum rental payments (including subsequent event) required
under operating leases that have noncancellable lease terms in excess of
one year as of June 30, 2000:
Year ending June 30,
2002 $ 193,505
2003 164,590
2004 144,000
2005 144,000
2006 144,000
Beyond five years 84,000
-----------
$ 874,095
===========
Rent expense amounted to $419,004 and $273,759 for the years ended June
30, 2001 and 2000, respectively.
F-26
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(12) COMMITMENTS AND CONTINGENCIES, CONTINUED:
Employment Agreements
Effective May 18, 1999, the Company entered into employment agreements
with 3 officers for a period of three years. Pursuant to the agreements,
these officers will be compensated at salaries ranging from $100,000 to
$150,000 annually. In addition, these officers have also been granted
450,000 stock options each, which are fully vested and are exercisable
at prices ranging from $1.58 to $3.50.
Uncertainties
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. These attacks have caused major
instability in the U.S. and other financial markets. Leaders of the U.S.
government have announced their intention to actively pursue those
behind the attacks and to possibly initiate broader action against
global terrorism. Due to these attacks, any response may lead to armed
hostilities or to further acts of terrorism in the United States or
elsewhere, and such developments would likely cause further instability
in financial markets. In addition, armed hostilities and further acts of
terrorism may directly impact the Company's physical facilities and
operations, which are located in North America, Australia and the
Southeast Asian Region (including collectively significant subsidiaries
located in Pakistan), or those of their customers. Furthermore, the
recent terrorist attacks and future developments may result in reduced
demand from customers for services or may negatively impact the clients'
ability to outsource. Currently, there are tensions involving
Afghanistan, a neighbor of Pakistan. These hostilities and tensions
could lead to political or economic instability in Pakistan and a
possible adverse effect on operations and future financial performance.
These developments will subject the Company's worldwide operations to
increased risks and, depending on their magnitude, could have a material
adverse effect on the Company's financial position, results of
operations or liquidity.
Securities Registration
The Company, in the event of default, may become potentially liable up
to $400,000 with respect to some of its obligations under the
registration rights agreement with Deephaven (See Note 10).
Litigation
The Company and its subsidiaries have been named as a defendant in legal
actions arising from its normal operations, and from time-to-time is
presented with claims for damages arising out of its actions. The
Company anticipates that any damages or expenses it may incur in
connection with these actions, individually and collectively, will not
have a material adverse effect on the Company.
F-27
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2001 AND 2000
(13) SUBSEQUENT EVENTS:
A Nevada state court placed the Company into a Receivership on June 19,
2001 as a result of a proxy contest by a group of shareholders.
Ultimately, the Court invalidated their actions and the shareholders
group disbanded their actions and dissolved their group; whereupon, the
court removed the Receiver from the Company on August 3, 2001 and
returned full control of NetSol to the incumbent Board of Directors and
management.
Subsequent to June 30, 2001, the Company has obtained approximately
$115,000 of debt for working capital purposes from unrelated parties.
These loans are unsecured, due on demand and interest free.
F-28
EXHIBIT INDEX
3.1 Articles of Incorporation of Mirage Holdings, Inc., a Nevada
corporation, dated March 18, 1997(1)
3.2 Amendment to Articles of Incorporation dated May 21, 1999 (2)
3.3 Bylaws of Mirage Holdings, Inc., as amended and restated as of
November 28, 2000
10.1 Current Lease Agreement for Calabasas executive offices (6)
10.2 Company Stock Option Plan dated May 18, 1999 (2)
10.3 Company Stock Option Plan dated April 1, 1997 (1)
10.4 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Najeeb U. Ghauri (2)(4)
10.5 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Salim Ghauri (2)(4)
10.6 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Naeem Ghauri (2)(4)
10.7 Consulting Contract, dated September 1, 1999 by and between
Irfan Mustafa and NetSol International, Inc. (3)
21.1 A list of all subsidiaries of the Company
23.1 Consent of Stonefield Josephson, Inc.
23.2 Consent of Saeed Kamran Patel & Co.
(1) Incorporated by reference to the Company's Registration Statement No.
333-28861 filed on Form SB-2 filed June 10, 1997.
(2) Incorporated by reference to the Company's Annual Report on Form 10K-SB
filed September 28, 1999.
(3) Previously filed with the Company's Annual Report on Form 10K-SB filed
October 13, 2000.
(4) Management contract.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
filed June 21, 2000.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
filed October 26, 2000.
(7) Previously filed with the Company's Annual Report on Form 10K-SB filed
October 13, 2000.