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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 2003
REGISTRATION NO. 333-109703
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NETSOL TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
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Nevada |
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2834 |
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95-4627685 |
(State or Other Jurisdiction |
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(Primary Standard |
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(IRS Employer |
of Incorporation |
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Industrial Classification SIC |
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Identification Number) |
or Organization |
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Code Number |
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24011 Ventura Blvd., Suite 101
Calabasas, CA 91302
Phone: (818) 222-9195
Fax: (818) 222-9197
(Address including the zip code & telephone number including area code, of
registrants principal executive office)
NAEEM GHAURI
CHIEF EXECUTIVE OFFICER
NETSOL TECHNOLOGIES, INC.
24011 Ventura Blvd., Suite 101
Calabasas, CA 91302
Phone: (818) 222-9195
Fax: (818) 222-9197
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
MALEA FARSAI
GENERAL COUNSEL
NETSOL TECHNOLOGIES, INC.
24011 Ventura Blvd., Suite 101
Calabasas, CA 91302
Phone: (818) 222-9195
Fax: (818) 222-9197
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE
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Number of |
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Proposed |
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Shares to be |
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Offering |
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Proposed |
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Amount of |
Title of Each Class of Securities to |
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Registered(1) |
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Price Per |
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Aggregate |
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Registration |
be Registered |
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(2) |
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Share(1) (2) |
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Offering Price |
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Fee |
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Shares of Common Stock, $.001
par value |
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1,008,478 |
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$ |
2.93 |
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$ |
2,954,841 |
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$ |
239.05 |
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Shares of Common Stock, $.001
par value, underlying warrants |
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59,485 |
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$ |
2.93 |
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$ |
174,291 |
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$ |
14.10 |
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TOTAL |
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1,067,963 |
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$ |
3,129,132 |
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$ |
253.15 |
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(1) |
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NetSol Technologies, Inc. conducted a one for five reverse stock split in
August 2003. The share numbers set forth herein are based on post-split
calculations. |
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(2) |
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Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o). |
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(3) |
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Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of common stock as may
become issuable pursuant to anti-dilution provisions upon exercise of the
warrants. |
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
PROSPECTUS
1,067,963 SHARES OF COMMON STOCK
OF
NETSOL TECHNOLOGIES, INC.
This prospectus relates to the offering for resale of NetSol Technologies, Inc.
common stock by certain selling stockholders, who will use this prospectus to
resell their shares of common stock. The shares of common stock being offered
were acquired by the selling stockholders in a private placement. In addition,
certain shares of common stock underlying warrants were acquired pursuant to
consulting agreements with the warrant holders. In this prospectus, we
sometimes refer to the common stock as the securities. In this prospectus, the
terms NetSol, we, or us will each refer to NetSol Technologies, Inc.
We will not receive any proceeds from sales by the selling stockholders.
Our common stock is traded on the NASDAQ Small Cap Market under the symbol
NTWK. The closing price of our common stock on December 1, 2003, was $2.93.
We will bear all expenses, other than selling commissions and fees, in
connection with the registration and sale of the shares being offered by this
prospectus.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE RISK
FACTORS BEGINNING ON PAGE 3
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIESCOMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
December 3, 2003
TABLE OF CONTENTS
TABLE OF CONTENTS
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PROSPECTUS SUMMARY |
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RISK FACTORS |
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3 |
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS |
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USE OF PROCEEDS |
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SELLING STOCKHOLDERS |
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PLAN OF DISTRIBUTION |
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LEGAL PROCEEDINGS |
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
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DESCRIPTION OF SECURITIES TO BE REGISTERED
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DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES |
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DESCRIPTION OF BUSINESS
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MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS |
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DESCRIPTION OF PROPERTY |
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39 |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
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EXECUTIVE COMPENSATION |
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FINANCIAL STATEMENTS |
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F-1 |
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
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WHERE YOU CAN FIND MORE INFORMATION |
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EXHIBITS |
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UNDERTAKING |
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48 |
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PROSPECTUS SUMMARY
The following summary contains basic information about NetSol and this
prospectus. Because it is a summary, it does not contain all of the
information that you should consider before investing in this offering. For a
more complete understanding of this offering, you should read the entire
prospectus carefully, including the Risk Factors starting on page 3.
We are an end-to-end information technology (IT) and business consulting
services provider for the lease and finance, banking and financial services
industries. We operate on a global basis with locations in the U.S., Europe,
East Asia and Asia Pacific. We help our clients identify, evaluate, and
implement technology solutions to meet their most critical business challenges
and maximize their bottom line. Our products include sophisticated software
applications for the asset-based lease and finance industry. By utilizing our
worldwide resources, we believe we are able to deliver high quality,
cost-effective IT services, ranging from consulting and application development
to systems integration and outsourcing. We have achieved the ISO 9001 and SEI
(Software Engineering Institute) Capable Maturity Model Level 3 certifications.
Additionally, through our IP Backbone, located in Karachi, Pakistan, we offer
a package of wireless broadband services, which include high-speed Internet
access, support and maintenance.
Our subsidiary, Network Technologies Pvt. Ltd., a Pakistan Limited
Company, (NetSol PK) develops the majority of our software. NetSol PK was
the first company in Pakistan to achieve the ISO 9001 and Software Engineering
Institute Capability Maturity Model Level 3 software development assessment.
As maintained by the SEI, maturity levels measure the maturity of a software
companys methodology that in turn ensures enhanced product quality resulting
in faster project turn-a-round and a shortened time to market.
During recent years, we have focused on developing software applications
for the leasing and financial service industries. In late 2002, we launched a
new suite of software products under the name LeaseSoft. The LeaseSoft suite
is comprised of four major integrated asset based leasing/financing software
applications. The suite, consisting of a Credit Application Creation System
(LeaseSoft.CAC), a Credit Application Processing System (LeaseSoft.CAP), a
Contract Activation & Management System (LeaseSoft.CAM) and a Wholesale Finance
System (LeaseSoft.WFS), whether used alone or together, provides the user with
an opportunity to address specific sub-domains of the leasing/financing cycle
from the credit approval process through the tracking of the finance contract
and asset.
We recently acquired Pearl Treasury System Ltd., a United Kingdom company.
Pearl Treasury Systems has developed the PTS system for use by financial
institutions and customers. The system is designed to seamlessly handle
foreign exchange and money market trading, trading in derivative products, risk
management, credit control, pricing and various interfaces for rate feeds, with
one system platform. The system platform, modular in design, also allows
financial institutions to purchase only the modules they require. The PTS
system was developed over five years with a $4 million investment by a group of
visionaries in the U.K. This group completed nearly 80% of the product and
needed a stronger development and business partner who could take over
completion and marketing. With the acquisition, NetSol believes we have become
that partner.
We market our software products worldwide to companies primarily in the
automobile finance, leasing and banking industries. In February 2003, we
successfully implemented our LeaseSoft.CAM for Daimler Chrysler Singapore and
received a fee in excess of $2 million. Some of our other customers include:
Mercedes Benz Finance Japan; Yamaha Motors Finance Australia; Tung-Yang
Leasing Company Taiwan; Debis Portfolio Systems UK; DaimlerChrysler Services
Australia;
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DaimlerChrysler Leasing Thailand; DaimlerChrysler Services Korea; UMF
Leasing Singapore; and,
DaimlerChrysler Services New Zealand. In addition, NetSol provides offshore
development and customized I/T solutions to blue chip customers such as
Citibank Pakistan, DCD Holding UK and Habib Allied Bank UK. With the
acquisition of Altvia Technologies, Inc. (now NetSol USA) in June 2003, we
believe we acquired, as clients, some of the most well known higher education
and telecommunications associations based on the east coast of the United
States. We are also a strategic business partner for DaimlerChrysler Services
Asia Pacific, which consists of a group of many companies, including some of
the ones referred to above.
We were incorporated under the laws of the State of Nevada on May 21,
1999. Our principal executive offices are located at 24011 Ventura Blvd.,
Suite 101, Calabasas, CA 91302. Our telephone phone number is (818) 222-9195
and our website address is http://www.netsoltek.com.
This prospectus relates to the offering for resale of NetSol Technologies,
Inc. common stock by certain selling stockholders, who will use this prospectus
to resell their shares of common stock. The majority of the shares of common
stock being offered were acquired by the selling stockholders in a private
placement. The remaining shares being offered underly warrants provided to
consultants for business services provided to NetSol and to the placement agent
as compensation for services provided to NetSol in the private placement. We
will not receive any proceeds from sales by the selling stockholders. For
further information about the selling stockholders, see Selling Stockholders.
THE OFFERING
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Common Stock Offered |
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The selling stockholders are offering up to 1,067,963 shares of our
common stock. The selling stockholders will determine when they
will sell their shares. |
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Common Stock
outstanding |
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We have 7,590,263 shares of common stock issued and outstanding as of
November 28, 2003. |
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Use of Proceeds |
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We will not receive any of the proceeds from sale of shares of
common stock offered by the selling stockholders. |
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Trading Market |
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Our common stock is currently listed on the NASDAQ SmallCap Market
under the trading symbol NTWK. |
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Risk Factors |
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Investment in our common stock involves a high degree of risk. You
should carefully consider the information set forth in the Risk
Factors section of this prospectus as well as other information set
forth in this prospectus, including our financial statements and
related notes. |
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RISK FACTORS
An investment in our securities is extremely risky. You should carefully
consider the following risks, in addition to the other information presented in
this prospectus, before deciding to buy our securities. If any of the
following risks actually materialize, our business and prospects could be
seriously harmed, the price and value of our securities could decline and you
could lose all or part of your investment. The risks and uncertainties
described below are intended to be the material risks that are specific to us
and to our industry.
RISKS RELATED TO OUR BUSINESS
We Have Received A Going Concern Opinion From Our Auditors Indicating That
There Is Substantial Doubt As To Whether We Can Remain In Business.
In an audit report dated August 11, 2003, Kabani & Company, Certified Public
Accountants, our auditors, indicated that there was substantial doubt as to our
ability to continue as a going concern. Our ability to continue as a going
concern is dependant upon our obtaining sufficient additional financing for
our operations or reaching profitability. We cannot assure you that we will be
able to either generate funds internally or raise sufficient funds to continue
our operations, or that our auditors will not issue another going concern
opinion. Our failure to raise sufficient additional funds, either through
additional financing or continuing operations, will have a material adverse
effect on our business and financial condition and we may be forced to curtail
operations.
We Will Require Additional Financing; We May Not Achieve Profitability; We
Anticipate Continued Losses; Current Liabilities Exceed Current Assets.
As of the fiscal year ended June 30, 2003, we had a current working capital
deficit of $759,061, and at September 30, 2003, it was $743,696. We have a
current short-term liability to three banks in the amount of $348,426, which
needs to be satisfied by April 15, 2004. We had a net loss of $2,137,506 in
fiscal 2003 and a net loss of $868,350 in the first quarter of fiscal 2004,
ended September 30, 2003. In addition, we continue to operate at a deficit on
a monthly basis, which is not expected to change in the foreseeable future,
even with the implementation of our current business plan. See Managements
Discussion and Analysis and Plan of Operations on page 32 of this prospectus
for further information about our current business plan. Notwithstanding that
we raised $1,215,000 in July 2003, we will need to raise additional funds in
the amount of at least $2,000,000 to continue operations for the next year. We
anticipate that current funds are sufficient to operate our business for 6
months. If we ever do achieve profitability, we cannot assure you that we can
sustain or increase profitability. If revenues grow slower than we anticipate,
or if operating expenses exceed our expectations or cannot be adjusted
accordingly, our business, results of operations and financial condition will
be materially and adversely affected. No assurance can be given that the we
will improve our financial condition.
We May Have Difficulty Raising Needed Capital in the Future, Which Could
Significantly Harm Our Business.
We will require additional financing in order to support further expansion,
develop new or enhanced services or products, respond to competitive pressures,
acquire complementary businesses or technologies or take advantage of
unanticipated opportunities. Our ability to arrange such financing in the
future will depend in part upon the prevailing capital market conditions, as
well as our business performance. There can be no assurance that we will be
successful in our efforts to arrange additional financing on
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satisfactory terms. If additional financing is raised by the issuance of our
shares, control of NetSol may
change and stockholders may suffer additional dilution. If adequate funds are
not available, or are not available on acceptable terms, we may not be able to
take advantage of opportunities, or otherwise respond to competitive pressures
and remain in business.
We May Not Be Able To Realize The Benefits Of Our Strategic Plan.
As discussed in Description of
Business starting on page 39, after the
restructuring undertaken in fiscal year 2002 and part of fiscal year 2003, we
have undertaken a business plan designed to optimize this restructuring.
Although our management is confident about our ability to realize some
benefits from the restructuring, the level of benefits to be realized could be
affected by a number of factors including, without limitation, (a) our ability
to raise sufficient funds, (b) our ability to continue to operate as planned
without further stockholder hostile takeover attempts, (c) our ability to
prosper given the current uncertainty in the US technology industry; and, (c)
our ability to react effectively to the global political and business effects
of the political events around the world and particularly in Pakistan.
We Depend Heavily On A Limited Number Of Client Projects And The Loss Of Any
Such Projects Would Adversely Affect Our Operating Results.
As of the fiscal year ended June 30, 2003, and the quarter ended September 30,
2003, we derived approximately 20% of our net revenues from DaimlerChrysler
Asia Pacific Services (which consists of a group of companies and clients).
DaimlerChrysler Asia Pacific Services consists of a number of companies, each
of which are uniquely different customers and none of which represents greater
than 10% of our net revenues. We also have other significant clients whose
business is critical to our success. The loss of any of our principal clients
for any reason, including as a result of the acquisition of that client by
another entity, could have an adverse effect on our business, financial
condition and results of operations.
If Any Our Clients Terminate Their Contracts With Us, Our Business Could Be
Adversely Affected.
Many of our clients have the ability to cancel certain of their contracts with
us with limited advance notice and without significant penalty. Any such
termination could result in a loss of expected revenues related to that
clients project. A 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.
If We Are Unable To Protect Our Proprietary Software, Our Business Could Be
Adversely Affected.
Our success as a company depends, in part, upon our work product being deemed
proprietary software, along with other intellectual property rights. While
both the LeaseSoft and NetSol trade names and marks are copyrighted and
trademarked in Pakistan, we have not registered any trademarks or filed any
copyrights in any other jurisdictions. We rely on a combination of
nondisclosure and other contractual arrangements, and common law intellectual
property, trade secret, copyright and trademark laws to protect our proprietary
rights. As a matter of course, we generally enter into confidentiality
agreements with our employees, and require that our consultants and clients
enter into similar agreements. We also limit access to our proprietary
information. There can be no assurance that these steps will be adequate to
deter misappropriation of 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
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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, any such 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.
There can be no assurance that our clients will not demand similar or other
restrictions in the future. Issues relating to the ownership of and rights to
use our software solutions can be complicated and there can be no assurance
that potential disputes will not affect our ability to resell or reuse these
software solutions. While we have not incurred such expense in the past,
limitations on our ability to resell or reuse software solutions could require
us to incur additional expenses to develop new solutions for future projects.
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. As well as the
two offices in the United States, we currently have offices in Pakistan, the UK
and Australia. In fact, approximately 80% of our revenue is generated by
non-U.S. sources. Our international operations are subject to other inherent
risks, including:
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political uncertainty in Pakistan and the South-East Asian
Region, particularly in light of the United States war on terrorism
and the Iraq war. |
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recessions in foreign countries; |
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fluctuations in currency exchange rates; |
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difficulties and costs of staffing and managing foreign operations; |
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reduced protection for intellectual property in some countries; |
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political instability or changes in regulatory requirements
or the potential overthrowing of the current government in certain
foreign countries; and, |
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U.S. imposed restrictions on the import and export of
technologies. |
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U.S. imposed restrictions on the issuances of business and
travel visas to foreign workers primarily those from Middle Eastern
or East Asian countries. |
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We Are Controlled By and Are Dependent On Our Key Personnel.
Our management is currently controlled and operated by various members of the
Ghauri family. Our success will depend in large part upon the continued
services of those individuals including Messrs. Salim Ghauri, Najeeb Ghauri and
Naeem Ghauri. The death or loss of the services of any one of them or of any
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one or more of our other key personnel could have a material adverse effect on
our business, financial
condition and results of operations. We do not have key man life insurance on
these individuals. In addition, if one or more of our key employees resigns 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 key personnel, there
can be no assurance that we will be able to prevent the unauthorized disclosure
or use of our technical knowledge, practices or procedures by such personnel.
We entered into employment agreements with Messrs. Salim, Najeeb and Naeem
Ghauri on April 22, 2002, for a period of three (3) years. Messrs. Salim,
Najeeb and Naeem Ghauri have non-competition and anti-raid clauses in their
employment agreements with us.
Certain Of Our Management Team Have Relationships Which May Potentially Result
In Conflicts Of Interests.
In fiscal year 2003 certain of our management team loaned funds to our company
for operating costs. Similar transactions occurred in fiscal year 2004. While
these transactions were approved by the board of directors, and we deem such
transactions to be fair in their terms, and such transactions have not resulted
in the management team choosing personal gain over company gain, such
transactions constitute a potential conflict of interest between our management
members personal interest and the interest of our company in that management
could be motivated to repay debts owed to the management team rather than using
that money for the company growth . See Certain Relationships and Related
Transactions on page 40 for information about relationships between our
officers and/or directors which could result in a Conflict of Interest.
We Face Significant Competition In Markets That Are New And Rapidly Changing.
The markets for the services we provide are highly competitive. We principally
compete 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 the
markets we have targeted have significantly greater financial, technical and
marketing resources than we do, have greater name recognition and generate
greater revenues. Potential customers may also have in house employees that
can compete with or replace us. In addition, there are relatively low barriers
to entry into these markets and we expect to continue to face competition from
new entrants into these same markets. We believe that the principal
competitive factors in these markets include:
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our ability to integrate strategy, experience modeling,
creative design and technology services; |
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quality of service, speed of delivery and price; |
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industry knowledge; |
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sophisticated project and program management capability; and |
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Internet technology expertise and talent. |
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We believe that our ability to compete also depends on a number of competitive
factors outside our control, including:
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ability of our competitors to hire, retain and motivate professional
staff; |
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development by others of Internet services or software that
is competitive with our solutions; and |
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extent of our competitors responsiveness to client needs. |
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There can be no assurance that we will be able to compete successfully in these
markets.
RISKS RELATED TO INVESTING IN THIS OFFERING
Our Stock Price Has Historically Been Volatile; Our Stock Price After This
Offering Will Be Subject To Market Factors. Investing In Our Stock May Result
In Substantial Losses for Investors.
The trading price of our common stock has historically been volatile. The
future trading price of our common stock could be subject to wide fluctuations
in response to:
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quarterly variations in operating results and achievement of key business metrics; |
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changes in earnings estimates by securities analysts, if any; |
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any differences between reported results and securities
analysts published or unpublished expectations; |
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announcements of new contracts or service offerings by the
Company or competitors; |
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market reaction to any acquisitions, joint ventures or
strategic investments announced by the Company or competitors; |
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demand for our services and products; |
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changes of shares being sold pursuant to Rule 144 or upon
exercise of the warrants; and |
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general economic or stock market conditions unrelated to the
Companys operating performance. |
Potential Future Sales Pursuant To Rule 144 May Have A Depressive Effect On The
Trading Price Of Our Securities.
Certain shares of common stock presently held by officers, directors and
certain others are restricted securities as that term is defined in Rule 144,
promulgated under the Act. Under Rule 144, a person (or persons whose shares
are aggregated) who has satisfied a one year holding period, may, under certain
circumstances sell within any three month period a number of shares which does
not exceed the greater of 1% of the then outstanding shares of common stock, or
the average weekly trading volume during the four calendar weeks prior to such
sale. Rule 144 also permits, under certain circumstances, including a two-year
holding period, the sale of shares by a person without any quantity limitation.
Such holding periods have already been satisfied in many instances.
Therefore, actual sales or the prospect of sales of such shares under Rule 144
in the future may depress the prices of our common stock.
7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Prospectus Summary, Risk Factors,
Managements Discussion and
Analysis of Financial Condition and Plan of Operation, Description of
Business in this prospectus are forward-looking statements. These statements
involve known and unknown risks, uncertainties, and other factors that may
cause our or our industrys actual results, levels of activity, performance, or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by forward-looking
statements. Such factors include, among other things, those listed under Risk
Factors and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology such
as may, will, should, expects, plans, anticipates, believes,
estimates, predicts, potential, proposed, intended, or continue or
the negative of these terms or other comparable terminology. You should read
statements that contain these words carefully, because they discuss our
expectations about our future operating results or our future financial
condition or state other forward-looking information. There may be events in
the future that we are not able to accurately predict or control. Before you
invest in our securities, you should be aware that the occurrence of any of the
events described in these risk factors and elsewhere in this prospectus could
substantially harm our business, results of operations and financial condition,
and that upon the occurrence of any of these events, the trading price of our
securities could decline and you could lose all or part of your investment.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, growth rates,
levels of activity, performance, or achievements. We are under no duty to
update any of the forward-looking statements after the date of this prospectus
to conform these statements to actual results.
USE OF PROCEEDS
We will not receive any of the proceeds from the offering of common stock for
sale by the selling stockholders. Proceeds received by us as a result of the
exercise of the warrants will be used for working capital purposes.
8
SELLING STOCKHOLDERS
The following table and notes set forth, the name of each selling stockholder,
the nature of any position, office, or other material relationship, if any,
which the selling stockholder has had, within the past three years, with NetSol
or with any of our predecessors or affiliates, the amount of shares of NetSol
common stock that are beneficially owned by such stockholder, the amount to be
offered for the stockholders account and the amount to be owned by such
stockholder upon completion of the offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
|
of |
|
|
|
|
|
Number of Shares of |
|
|
NetSol Common |
|
|
|
|
|
NetSol Common |
|
|
Stock |
|
Number of Shares of |
|
Stock to be |
|
|
Beneficially Owned |
|
NetSol Common |
|
Beneficially Owned |
Name of Selling |
|
Prior |
|
Stock |
|
Upon Completion of |
Stockholder(1) |
|
to the Offering |
|
Being Offered Hereby |
|
the Offering(2) |
|
|
|
|
|
|
|
Maxim Group LLC(3) |
|
|
81,000 |
|
|
|
81,000 |
|
|
|
0 |
|
Richard E. Kent |
|
|
70,145 |
|
|
|
70,145 |
|
|
|
0 |
|
Emeric Holderith |
|
|
7,794 |
|
|
|
7,794 |
|
|
|
0 |
|
The Russell Family
Investment(4) |
|
|
311,757 |
|
|
|
311,757 |
|
|
|
0 |
|
SA Properties Co.,
LP(5) |
|
|
187,054 |
|
|
|
187,054 |
|
|
|
0 |
|
Carlsbad Industrial
Assoc., L.P.(6) |
|
|
46,764 |
|
|
|
46,764 |
|
|
|
0 |
|
Leo Long |
|
|
233,818 |
|
|
|
233,818 |
|
|
|
0 |
|
Jane OConnor |
|
|
3.897 |
|
|
|
3.897 |
|
|
|
0 |
|
John OJohnston |
|
|
7,794 |
|
|
|
7,794 |
|
|
|
0 |
|
Bradford Gerber |
|
|
38,970 |
|
|
|
38,970 |
|
|
|
0 |
|
Thomas Fischetti |
|
|
3,897 |
|
|
|
3,897 |
|
|
|
0 |
|
Peter J. Jegou(7) |
|
|
59,485 |
|
|
|
19,485 |
|
|
|
40,000 |
|
Lola D. Carson |
|
|
15,588 |
|
|
|
15,588 |
|
|
|
0 |
|
Hugh Duddy(8) |
|
|
160,000 |
|
|
|
40,000 |
|
|
|
120,000 |
|
TOTAL |
|
|
1,227,963 |
|
|
|
1,067,963 |
|
|
|
160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
None of the Selling Stockholders has held an employment, officer or
director position with NetSol within the past three years. Maxim Group
LLC, Mr. Jegou and Mr. Duddy have agreements with NetSol whereby these
selling stockholders provide services to NetSol. |
|
|
|
|
(2) |
|
Based on 7,590,293 shares of common stock issued and outstanding as
of November 28, 2003, and, assuming that all shares being registered
hereby will be sold only Mr. Duddy, with 1.6%, will hold a greater than
1% interest in the shares of NetSol. Based on these assumptions, no
other selling stockholder will hold a percentage interest in the shares
of the company in excess of 1 percent at the completion of the
offering. |
|
|
|
|
|
|
(3) |
|
Anthony Sarkis is a beneficial owner
of Maxim Group LLC. |
|
|
|
|
(4) |
|
The Russell Family Investment is beneficially owned by John
Russell. |
|
|
|
|
(5) |
|
SA Properties Co., L.P. is beneficially owned by John Russell. |
|
|
|
|
(6) |
|
Carlsbad Industrial Association L.P. is beneficially owned by John
Russell. |
|
9
|
|
(7) |
|
Peter J. Jegou is the beneficial holder of 19,485 shares of NetSol
Technologies, Inc. stock through his acquisition of these shares in the
2003 private offering and 40,000 shares of NetSol Technologies, Inc.
stock through his ownership of warrants to purchase 40,000 shares of
common stock. Mr. Jegous warrants were granted to him as compensation
under the terms of a consulting agreement with NetSol. Mr. Jegou may
exercise warrants to exercise 20,000 shares of common stock at the
price of $1.75 per share until May 31, 2004. He may also exercise
warrants to exercise 20,000 shares of common stock at the price of
$3.75 per share until May 31, 2004. |
|
|
|
|
(8) |
|
Hugh Duddy is the beneficial holder of 160,000 shares of NetSol
Technologies, Inc. stock through his ownership of options to purchase
160,000 shares of common stock. Mr. Duddys options entitle him to
acquire up to 40,000 shares of common stock at the exercise price of
$1.00 per share; 40,000 shares of common stock at the exercise price of
$2.50 per share; 40,000 shares at the exercise price of $3.75 per
share; and 40,000 shares at the exercise price of $5.00 per share.
Each option may be exercised from the date of grant until November 14,
2007 or as otherwise limited by NetSols nonstatutory stock option
plan. |
|
The majority of the selling stockholders received their shares in a private
placement offering which closed prior to the reverse stock split in August
2003, in which the Company sold approximately 946,963, post-reverse split,
shares of its restricted common stock to 12 accredited investors for total
consideration of $1,215,000 in reliance on an exemption from registration
available under Rule 506 of Regulation D of the Securities Act of 1933, as
amended. This offering originally provided units consisting of shares of
common stock and warrants to acquire common stock but was amended in August
2003 to remove the provision of warrants and adjust the number of shares
consistent with NASDAQ compliance requirements. The placement agent for this
offering, Maxim Group LLC, received as compensation for their participation in
the offering 81,000 shares of our common stock. Mr. Jegou
received his warrants as compensation for the provision of business consulting
services to NetSol. Such services included introduction to financial advisors
and identification of potential merger and acquisition targets. Mr. Duddy also
received options as compensation for business consulting services provided to
NetSol. Mr. Duddys services consisted of: identifying potential financial
advisors, assisting in the preparation of press releases, assisting with the
implementation and presentation of road shows, and identifying and introducing
potential merger opportunities to NetSol. Mr. Jegou and Mr. Duddys services
are unrelated to the private placement conducted by Maxim Group, LLC as
placement agent for NetSol.
Because the selling stockholders may, under this prospectus, sell all or some
portion of their NetSol common stock, only an estimate can be given as to the
amount of NetSol common stock that will be held by the selling stockholders
upon completion of the offering. In addition, the selling stockholders
identified above may have sold, transferred or otherwise disposed of all or a
portion of their NetSol common stock after the date on which they provided
information regarding their shareholdings.
10
PLAN OF DISTRIBUTION
Selling stockholders may offer and sell, from time to time, the shares of our
common stock covered by this prospectus. The term selling stockholders
includes donees, pledgees, transferees or other successors-in-interest selling
securities received after the date of this prospectus from a selling
stockholder as a gift, pledge, partnership distribution or other non-sale
related transfer. The selling stockholders will act independently of us in
making decisions with respect to the timing, manner and size of each sale.
Sales may be made on one or more exchanges or in the over-the-counter market or
otherwise, at prices and under terms then prevailing or at prices related to
the then current market price or in negotiated transactions. The selling
stockholders may sell their securities by one or more of, or a combination of,
the following methods:
|
|
|
purchases by a broker-dealer as principal and resale by the broker-dealer for its own
account pursuant to this prospectus; |
|
|
|
|
ordinary brokerage transactions and transactions in which the broker solicits purchasers; |
|
|
|
|
block trades in which the broker-dealer so engaged will attempt to sell the securities
as agent but may position and resell a portion of the block as principal to facilitate
the transaction; |
|
|
|
|
|
an over-the-counter sale; |
|
|
|
|
|
|
in privately negotiated transactions; and |
|
|
|
|
|
in options transactions. |
The shares of our common stock will be listed, and may be traded, on the NASDAQ
Small Cap Market under the symbol NTWK. In addition, the selling
stockholders may sell pursuant to Rule 144 under the Securities Act or pursuant
to an exemption from registration.
To the extent required, we may amend or supplement this prospectus to describe
a specific plan of distribution. In connection with distributions of the
securities or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with those transactions, broker-dealers or other financial institutions may
engage in short sales of shares of our
common stock in the course of hedging the positions they assume with selling
stockholders. The selling stockholders may also sell shares of our common
stock short and redeliver the securities to close out their short positions.
The selling stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions that require the delivery to the
broker-dealer or other financial institution of securities offered by this
prospectus, which securities the broker-dealer or other financial institution
may resell pursuant to this prospectus, as supplemented or amended to reflect
the transaction. The selling stockholders may also pledge securities to a
broker-dealer or other financial institution, and, upon a default, the
broker-dealer or other financial institution, may affect sales of the pledged
securities pursuant to this prospectus, as supplemented or amended to reflect
the transaction.
In effecting sales, broker-dealers or agents engaged by the selling
stockholders may arrange for other broker-dealers to participate.
Broker-dealers or agents may receive commissions, discounts or concessions from
the selling stockholders in amounts to be negotiated immediately prior to the
sale.
11
In offering the securities covered by this prospectus, the selling stockholders
and any broker-dealers who execute sales for the selling stockholders may be
treated as underwriters within the meaning of the Securities Act in
connection with sales. Any profits realized by the selling stockholders and
the compensation of any broker-dealer may be treated as underwriting discounts
and commissions.
The selling stockholders and any other person participating in a distribution
will be subject to the Securities and Exchange Act of 1934, as amended (the
Exchange Act). The Exchange Act rules include, without limitation,
Regulation M, which may limit the timing of purchases and sales of any of the
securities by the selling stockholders and other participating persons. In
addition, Regulation M may restrict the ability of any person engaged in the
distribution of the securities to engage in market-making activities with
respect to the particular security being distributed for a period of up to five
business days prior to the commencement of the distribution. This may affect
the marketability of the securities and the ability of any person or entity to
engage in market-making activities with respect to the securities. We have
informed the selling stockholders that the anti-manipulation rules of the SEC,
including Regulation M promulgated under the Exchange Act, may apply to their
sales in the market.
Additionally, we have informed the Selling Stockholders involved in the private
placement, through the offering documents of the following Telephone
Interpretation in the SEC Manual of Publicly Available Telephone
Interpretations (July 1997):
|
|
|
A.65. Section 5 |
|
|
|
|
|
An issuer filed a Form S-3 registration statement for a secondary
offering of common stock which is not yet effective. One of the selling
shareholders wanted to do a short sale of common stock against the box
and cover the short sale with registered shares after the effective date.
The issuer was advised that the short sale could not be made before the
registration statement becomes effective, because the shares underlying
the short sale are deemed to be sold at the time such sale is made.
There would, therefore, be a violation of Section 5 if the shares were
effectively sold prior to the effective date. |
|
Each Selling Stockholder represented and warranted that he/she/it had complied
with all applicable provisions of the Act, the rules and regulations
promulgated by the SEC thereunder, including Regulation M, and the applicable
state securities laws.
In addition to the investors in the offering who were made aware of the
requirements of Regulation M and
the above-referenced telephone interpretation, both Mr. Jegou and Mr. Duddy
have been made aware of the above.
We will make copies of this prospectus available to the selling stockholders
for the purpose of satisfying the prospectus delivery requirements of the
Securities Act, which may include delivery through the
facilities of the NASDAQ Small Cap Market pursuant to Rule 153 under the
Securities Act. The selling stockholders may indemnify any broker-dealer that
participates in transactions involving the sale of the securities against
certain liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of securities is made, if required, a prospectus
supplement will be distributed that will set forth the number of securities
being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter, any
discount, commission and other item constituting compensation, any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
12
LEGAL PROCEEDINGS
On May 23, 2002, Allied Interstate, Inc. filed a complaint seeking damages from
the Company for breach of contract, open book account, account stated and
reasonable value in the Superior Court of California, County of Los Angeles.
This dispute arose out of the purchase of a German ISP provider. A settlement
agreement was entered into by and between Allied and Allieds principals
whereby 200,000 pre-reverse split shares of the Companys common stock were
issued to the principals as full and complete settlement.
On July 26, 2002, the Company was served with a Request for Entry of default by
Surrey Design Partnership Ltd. (Surrey). Surreys complaint for damages
sought $288,743.41 plus interest at the rate of 10% above the Bank of England
base rate from January 12, 2002 until payment in full is received, plus costs.
The parties agreed to entry of a Consent Order whereby NetSol agreed to make
payments according to a payment schedule. NetSol made payments up to May of
2002 but was unable to make payments thereafter. On September 25, 2002, the
parties signed an Agreement to stay Enforcement of Judgment whereby NetSol will
make further payments to Surrey until the entire sum is paid. The current
terms of the payments schedule require the payment of 4,000 pounds sterling for
a period of 24 months commencing March 31, 2003 and ending 24 months
thereafter.
On July 31, 2002, Herbert Smith, a law firm in England, which represented
NetSol in the Surrey matter filed claim for the sum of approximately $248,871
(which represents the original debt and interest thereon) in the High Court of
Justice Queens Bench Division. On November 28, 2002, a Consent Order was
filed with the Court agreeing to a payment plan, whereby the Company paid
$10,000 on execution, $4,000 a month for one year and $6,000 per month
thereafter until the debt is paid. During the year ended June 30, 2003, the
Company has paid $26,000 as part of this settlement.
On March 27, 2003, Arab Commerce Bank (ACB) filed a complaint in the Supreme
Court of the State of New York (Index No. 600709/03) seeking damages for breach
of a Note Purchase Agreement and Note. ACB alleged that NetSol did not issue
stock in a timely manner in December 2000 resulting in compensatory damages in
the amount of $146,466.72. The litigation arises out of a transaction from
late 1999 in which Arab Commerce Bank invested $100,000 in the Companys
securities through a private placement. ACB claimed that the removal of the
legend on its shares of common stock took longer than contractually permitted.
During this purported delay, the market value of the Companys common shares
decreased. Essentially, the ACB complaint sought the lost value of its shares.
In the event ACB was unable to collect the amount sought, the complaint
requested that NetSol repay the principal sum of the Note of $100,000 and
interest at the rate of 9% per annum based on the maturity date of December 10,
2000. This matter has been settled pursuant to the terms of a settlement
agreement whereby NetSol agreed to issue to ACB shares of common stock of the
Company equal in value to $100,000 plus interest as of the effective date of
the agreement.
13
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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 Officer |
|
|
|
|
|
|
|
|
Name |
|
Or Director |
|
Age |
|
Position Held with the Registrant |
|
Family Relationship |
|
|
|
|
|
|
|
|
|
Najeeb Ghauri |
|
|
1997 |
|
|
|
49 |
|
|
Chief Financial Officer,
Secretary, Director and Chairman
|
|
Brother to Naeem
and Salim Ghauri |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salim Ghauri |
|
|
1999 |
|
|
|
48 |
|
|
President and Director
|
|
Brother to Naeem
and Najeeb Ghauri |
|
Naeem
Ghauri |
|
|
1999 |
|
|
|
46 |
|
|
Chief Executive Officer and
Director
|
|
Brother to Najeeb
and Salim Ghauri |
|
|
|
|
|
|
|
|
|
|
|
|
|
Irfan Mustafa |
|
|
1997 |
|
|
|
52 |
|
|
Director
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shahid Javed Burki |
|
|
2000 |
|
|
|
65 |
|
|
Director
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
Eugen Beckert |
|
|
2001 |
|
|
|
56 |
|
|
Director
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
Jim Moody |
|
|
2001 |
|
|
|
63 |
|
|
Director
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shabir Randeree |
|
|
2003 |
|
|
|
43 |
|
|
Director
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Caton |
|
|
2003 |
|
|
|
52 |
|
|
Director
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Experience of Officers and Directors:
NAJEEB U. GHAURI has been a Director of the Company since 1997. Mr. Ghauri
served as the Companys CEO from 1999-2001. Currently, he is the Chief
Financial Officer, Secretary and Chairman of the Company. During his tenure as
CEO, Mr. Ghauri was responsible for managing the day-to-day operations of the
Company, as well as the Companys overall growth and expansion plan. As the
CFO of the Company, Mr. Ghauri seeks financing for the Company as well as
oversees the day-to-day financial position of the Company. 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. Mr. Ghauri serves on the boards of the
US Pakistan Business Council and Pakistan Human Development Fund, a non-profit
organization. Mr. Ghauri is the Chairman of the Board of 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 Technologies (Pvt.) Ltd.,
(F/K/A/ 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 Technologies (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
14
Solutions, Pvt. Ltd in Pakistan founded in 1996. Built under Mr. Ghauris
leadership Network Solutions (Pvt) Ltd. gradually built a strong team of I/T
professionals and infrastructure in Pakistan and became the first software
house in Pakistan certified as ISO 9001 and CMM Level 3 assessed.
NAEEM GHAURI has been the Companys CEO since August 2001. Mr. Ghauri has been
a Director of the Company since 1999. Mr. Ghauri serves as the Managing
Director of NetSol (UK) Ltd., a wholly owned subsidiary of the Company located
in London, England. Mr. Ghauri was responsible for the launch of NetSolConnect
in Pakistan. Prior to joining the Company, Mr. Ghauri was Project Director for
Mercedes-Benz Finance Ltd., a subsidiary of DaimlerChrysler, 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.
IRFAN MUSTAFA has been a Director of NetSol 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 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 (now YUM Restaurant Services Group, Inc.)
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 NetSols Compensation
and Audit Committees.
EUGEN BECKERT was appointed to the Board of Directors in August 2001. 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 of DaimlerChrysler in Asia-Pacific. His office is
now based in Tokyo, Japan.
JIM MOODY was appointed to the Board of Directors in 2001. Mr. Moody served in
the United States Congress from 1983-1993 where he was a member of the Ways &
Means, Transportation and Public Woks committees. Congressman Moody also
served on the subcommittees of Health, Social Security, Infrastructure and
Water Resources. After his tenure with the U.S. Congress, he was appointed
Vice President and Chief Financial Officer of International Fund for
Agriculture Development in Rome, Italy from 1995-1998 where he was responsible
for formulating and administering $50 million operating budget in support of
$500 million loan program as well as managing a $2.2 billion reserve fund
investment portfolio. From 1998-2000, Congressman Moody served as the President
and CEO of InterAction, a coalition of 165 U.S. based non-profit organizations
in disaster relief, refugee assistance and economic development located in
Washington, D.C. Since April 2000, Congressman Moody has served as a Financial
Advisor to Morgan Stanley in Alexandria, VA where he is responsible for
bringing institutional, business and high net-worth individuals assets under
management. Mr. Moody also represents Morgan Stanley on the ATC Executive
Board. Mr. Moody received his B.A. from Haverford College; his M.P.A. from
Harvard University and his Ph.D. in Economics from U.C. Berkeley. Mr. Moody is
the Chairman of the Audit Committee and a member of the Compensation committee.
15
SHAHID JAVED BURKI was appointed to the Board of Directors in February 2003.
Mr. Burki is also a
member of the Audit and Compensation Committees. He had a distinguished career
with World Bank at various high level positions from 1974 to 1999. He was a
Director of Chief Policy Planning with World Bank from 1974-1981. He was also a
Director of International Relations from 1981-1987. Mr. Burki served as
Director of China Development from 1987-1994 and Vice President of Latin
America with World Bank from 1994-1999. In between, he briefly served as the
Finance Minister of Pakistan from 1996-1997. Mr. Burki also served as the CEO
of the Washington based investment firm EMP Financial Advisors from 1992-2002.
Presently, he is the Chairman of Pak Investment & Finance Corporation. He was
awarded a Rhodes Scholarship in 1962 and M.A in Economics from Oxford
University in 1963. He also earned a Master of Public Administration degree
from Harvard University, Cambridge, MA in 1968. Most recently, he attended
Harvard University and completed an Executive Development Program in 1998.
During his lifetime, Mr. Burki has authored many books and articles including:
Chinas Commerce (Published by Harvard in 1969) and Accelerated Growth in Latin
America (Published by World Bank in 1998). Mr. Burki is a member of the
Compensation and Audit Committee.
SHABIR RANDEREE, was appointed to the Board of Directors in February 2003.
Mr. Randeree is a Group Managing Director of DCD London and Mutual Plc, a
position he has held since 1990. DCD L&M is the UK arm of the DCD Group. The
DCD Group, with offices in the UK, United States, UAE, India and South Africa
has core businesses in finance, property and investments. From 1988 to 1990,
Mr. Randeree served as Managing Director of Warranty Limited, a business
initiated to provide an alternate approach to international trade finance and
real estate investments in the U.K. From 1986 to 1988, Mr. Randeree was Sales
and Financial Director of Dominion Clothing Distributors Limited. Mr. Renderee
received his B.A. in 1984 in Accounting and Finance from Kingston University in
Surrey and his MBA in 1985 from Schiller International University in London.
Mr. Renderee is a director of various U.K. companies including: Bradensbury
Park Hotel Ltd.; Collins Leisure Ltd.; DCD Factors PLC; DCD Properties Ltd.;
Pelham Incorporated Ltd.; Redbush Tea Company Ltd.; Wimbledon Bear Company
Ltd.; Tarhouse Management Ltd.; Thornbury Estates Ltd.; and; the Support Store
Ltd. He is a trustee and advisor to various educational trusts and Director of
Albarka Bank Limited of South Africa.
MARK CATON, was appointed to the Board of Directors in February 2003. Mr.
Caton was later appointed President of NetSol USA, Inc., and a wholly owned
subsidiary of NetSol Technologies, Inc. Joining the Company in April 2002 as
V.P Sales, Mr. Caton has over all 25 years of marketing and sales experience in
business development, technology, and corporate finance, having held positions
with AT&T Capital, Memorex Corporation, Sprint and Entertainment Systems
Technology. He has a B.A in Psychology from UCLA (University of California, Los
Angeles) and currently serves on the Board of Directors of the UCLA Alumni
Association. Mr. Caton is the Chairman of the Compensation Committee.
16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Companys Common Stock, its only class of outstanding voting
securities as of November 20, 2003, 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 Companys present 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) |
|
|
537,850 |
|
|
|
7.08 |
% |
Naeem Ghauri (3) |
|
|
331,090 |
|
|
|
4.36 |
% |
Irfan Mustafa (3) |
|
|
108,703 |
|
|
|
1.43 |
% |
Salim Ghauri (3) |
|
|
469,916 |
|
|
|
6.19 |
% |
Jim Moody (3) |
|
|
2,000 |
|
|
|
* |
|
Eugen Beckert (3) |
|
|
34,000 |
|
|
|
* |
|
Omar Atiq (3)(4) |
|
|
270,000 |
|
|
|
3.56 |
% |
Shahid Javed Burki |
|
|
35,000 |
|
|
|
* |
|
Shabir Randeree (3)(5) |
|
|
470,000 |
|
|
|
6.19 |
% |
Mark Caton(3) |
|
|
106,000 |
|
|
|
1.39 |
% |
All officers and directors
as a group (nine persons) |
|
|
2,094,559 |
|
|
|
27.59 |
% |
|
|
|
|
|
|
|
|
|
* Less than one percent
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of the 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 November 20, 2003 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 NetSol Technologies, Inc. at 24011 Ventura Blvd., Suite 101,
Calabasas, CA 91302.
(4) Omar Atiq (800,000), Atiq LLC (250,000 common shares) and Profit Sharing
Plan for Omar Atiq (300,000 common shares) own these shares.
(5) As managing director of DCD Holdings Ltd.
(6) Mark Caton was granted options to purchase 40,000 shares of common stock
of NetSol under our 2002 Nonstatutory and Incentive Stock Option Plan, in July
2003. The terms of his grant permit him to acquire up to 20,000 shares at the
exercise price of $3.00 per share and 20,000 shares at the exercise price of
$5.00 per share.
17
DESCRIPTION OF SECURITIES TO BE REGISTERED
The selling stockholders are offering for sale shares of our common stock, par
value $0.001 per share. We only have one class of common stock. Each share of
common stock is entitled to one vote at annual or special stockholders
meetings. There are no pre-emption rights. We have never declared or paid any
dividends on our common stock or other securities and we do not intend to pay
any cash dividends with respect to our common stock in the foreseeable future.
For the foreseeable future, we intend to retain any earnings for use in the
operation of our business and to fund future growth.
EXPERTS
The audited financial statements for our company as of the year ended June 30,
2003, and the unaudited financial statements for our company as of the quarter
ended September 30, 2003, included in this prospectus are reliant on the
reports of Kabani & Company, Inc., independent certified public accountants,
as stated in their reports therein, upon the authority of that firm as experts
in auditing and accounting.
Malea Farsai, Esq., counsel for our Company, has passed on the validity of the
securities being offered hereby.
Kabani & Company, Inc. was not hired on a contingent basis, or will it
receive a direct of indirect interest in the business of the issuer. Neither
Kabani & Company, Inc. nor its principals are, or will be, a promoter,
underwriter, voting trustee, director, officer or employee of NetSol. Malea
Farsai, Esq. is an employee of NetSol. She has received, as part of her
compensation with NetSol, options to purchase and grants of shares of common
stock. As of November 20, 2003, Ms. Farsai is the holder of 49,120 shares of
common stock of NetSol and options to purchase 35,000 shares of common stock at
the exercise price of $.75 per share. These options expire on February 16,
2007. Ms. Farsai is not nor is it intended that she will be a promoter,
underwriter, voting trustee, director or officer of NetSol.
DISCLOSURE OF COMMISSION POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
We have indemnified each member of the board of directors and our executive
officers to the fullest extent authorized, permitted or allowed by law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the Act) may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
For the purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
18
DESCRIPTION OF BUSINESS
GENERAL
NetSol Technologies, Inc. (f/k/a NetSol International, Inc.) (NetSol) is in
the business of information technology (I/T) services. Since we were founded
in 1997, we have developed enterprise solutions that help clients use I/T more
efficiently in order to improve their operations and profitability and to
achieve business results. Our focus has remained the lease and finance,
banking and financial services industries. We operate on a global basis with
locations in the U.S., Europe, East Asia and Asia Pacific. By utilizing our
worldwide resources, we believe we have been able to deliver high quality,
cost-effective I/T services. NetSol Technologies Pvt. Ltd. (NetSol PK)
develops the majority of the software for us. NetSol PK was the first company
in Pakistan to achieve the ISO 9001 accreditation. This year, we also obtained
the
Carnegie Mellons Software Engineering Institute (SEI) Capable Maturity Model
(CMM) Level 3 assessment. According to the SEI website, the CMM is a model
for judging the maturity of the software process of an organization and for
identifying the key practices that are required for the maturity of these
processes. The software CMM has been developed by the software community with
stewardship by the SEI. There are only a few software companies worldwide that
have achieved SEI CMM Level 3 as of April 2003. NetSol obtained SEI CMM Level
2 assessment in 2002. According to the SEI website,
www.sei.cmu/sema/pdf/sw-cmm/2003apr.pdf, the CMM levels developed by SEI in
conjunction with the software industry are the highest levels of recognition
for quality and best practices a software company can achieve.
COMPANY BUSINESS MODEL
Our business model has evolved over the past six years. NetSol now offers a
broad spectrum of I/T products and I/T services that deliver a high return on
investment for its customers. NetSol has perfected its delivery capabilities
by continuously investing in its software development and Quality Assurance
(QA) processes. NetSol believes its key competitive advantage is its ability
to build high quality enterprise applications using its offshore development
facility in Lahore, Pakistan. In fact, over 80% of NetSols revenue is
generated in US Dollars and 80% of its overhead is incurred in Rupees,
providing NetSol with a distinct cost arbitrage business model.
Achieving Software Maturity and Quality Assurance.
NetSol, from the outset, invested heavily in creating a state of the art,
world-class software development capability. A series of QA initiatives have
delivered to NetSol the ISO 9001 certification as well as the CMM level 3
assessment. Achieving this CMM level 3 required dedication at all our
corporate levels.
SEIs CMM, which is organized into five maturity levels, has become a de facto
standard for assessing and improving software processes. Through the CMM, SEI
and the software development community have established an effective means for
modeling, defining, and measuring the maturity of the processes used by
software professionals. The CMM for software describes the principles and
practices underlying software process maturity and is intended to help software
organizations improve the maturity of their software processes in terms of an
evolutionary path from ad hoc, chaotic processes to mature, disciplined
software processes. Mature processes meet standardized software engineering
methods and integrable into a customers system. Mature processes ensure
enhanced product quality resulting in faster project turn around and a
shortened time-to-market. In short, a mature process would, ideally, have
fewer bugs and integrate better into the customers system.
19
We have always strived to improve quality in every aspect of its business.
This quality drive, based on our vision, trickles from the top to the lowest
levels in the organization. We believe that it is this quality focus that
enabled our software development facility to become the first ISO 9001
certified software development facility in Pakistan in 1999. This
accomplishment marked the beginning of our 3-year program towards achieving the
higher challenges of CMM (Software Engineering Institute).
The first step of the program was to launch a dedicated Quality Engineering
team mandated with software process improvement and achieving CMM ratings. The
department was provided every facility, from overseas training to complete
commitment of higher management, to enable it to achieve the desired goals.
Our management also made sure that everybody in NetSol was committed to
achieving CMM. The whole organization went through a comprehensive
transformation cycle. The process included, but was not limited to, the hiring
and training of key personnel in the U.S. and Pakistan, and following the
standards and processes designed and instituted by the SEI. The extreme focus
and a major team effort resulted in a CMM level 2 assessment in March 2002. We
were the first in Pakistan to achieve this distinction. While proud of this
accomplishment, all our levels continued to strive towards CMM level 3. The
quality-engineering department in specific, and we in general, started
implementing Level 3 Key Processes Areas (KPAs) in a methodical and
structured manner. There were training programs conducted by in-house
personnel, local experts and foreign consultants on various topics related to
defining goals, processes, interpreting KPAs and implementing them. This focus
and commitment resulted in us achieving the CMM Level 3 in 16 months compared
to the world average of 21 months. Upon passing the rigorous, nearly two week
final assessment, conducted by Rayney Wong, SEI CMM Lead Assessor from Xerox
Singapore Software Centre, Fuji Xerox Asia Pacific Pte. Ltd., our development
facility was granted the CMM Level 3. This is notable in that, according to
SEI CMM-CBA IPI and SPA Appraisal Results, Maturity Profile April 2003, there
are only 164 software development facilities in the world with software -CMM
Level 3 ratings.
Professional Services.
We offer a broad array of professional services to clients in the global
commercial markets and specialize in the application of advanced and complex
I/T enterprise solutions to achieve its customers strategic objectives. Our
service offerings include outsourcing, systems integration, customized I/T
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 customers 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 experience gained by us through its own software quality endeavors, has
enabled us to offer consultancy services in the areas of Software Quality,
Process Improvement, ISO Certification and SW-CMM Implementation. ISO
certification and CMM services include, but are not limited to GAP Analysis
against the standard ISO/CMM; Orientation Workshops; Guiding the Implementation
of the plan
20
developed after the GAP Analysis; Training on Standard Processes; Process
implementation support off-site and on-site; assessment training; and
assistance through the final assessment (Certification Audit for ISO).
LeaseSoft
We also develop advanced software systems for the asset based lease and finance
industries. We have developed LeaseSoft a complete integrated lease and
finance package. LeaseSoft, a robust suite of four software applications, is
an end-to-end solution for the lease and finance industry. The four
applications under LeaseSoft have been designed and developed for a highly
flexible setting and are capable of dealing with multinational, multi-company,
multi-asset, multi-lingual, multi-distributor and multi-manufacturer
environments.
LeaseSoft is a result of more than 6 years of effort resulting in over 60
modules grouped in four comprehensive applications. These four applications are
complete systems in themselves and can be used independently to exhaustively
address specific sub-domains of the leasing/financing cycle. And, if used
together, they fully automate the entire leasing / financing cycle.
The constituent software applications are:
Credit Application Creation System (CAC). Leasesoft.CAC is a web-based
point of sale system for the use of dealers, brokers, agents and sales officers
to initiate credit applications. It is a web-based system and, though it can
be used with equal efficiently on an intranet, the real ability is to harness
the power of the Internet to book sales. LeaseSoft.CAC users create quotations
and financing applications (Proposals) for their customers using predefined
financial products. The application is submitted to the back office system
[such as LeaseSoft.CAP] for approval. After analysis, the application is sent
back to the LeaseSoft.CAC system with a final decision.
Credit Application Processing System (CAP). LeaseSoft.CAP provides
companies in the financial sector an environment to handle the incoming credit
applications from dealers, agents, brokers and the direct sales force.
LeaseSoft.CAP automatically gathers information from different interfaces like
credit rating agencies, evaluation guides, contract management systems and
scores the applications against defined scorecards. All of this is done in a
mechanized workflow culminating with credit team members making their decisions
more quickly and accurately. Implementation of LeaseSoft.CAP dramatically
reduces application-processing time in turn resulting in greater revenue
through higher number of applications finalized in a given time. LeaseSoft.CAP
is also an excellent tool to reduce probability of a wrong decision thus again
providing a concrete business value through minimizing the bad debt portfolio.
Contract Activation & Management System (CAM). LeaseSoft.CAM provides
comprehensive business functionality that enables its users to effectively and
smoothly manage and maintain a contract with the most comprehensive details
throughout its life cycle. It also provides interfaces with company banks and
accounting systems. LeaseSoft.CAM also effectively maintains details of all
business partners that do business with the company including, but not limited
to, customers, dealers, debtors, guarantors, insurance companies and banks. A
number of leasing consultants have provided their business knowledge to make
this product a most complete lease and finance product. NetSols LeaseSoft.CAM
provides business functionality for all areas that are required to run an
effective, efficient and customer oriented lease and finance business.
21
Wholesale Finance System (WFS). LeaseSoft.WFS automates and manages the
floor plan/bailment activities of dealerships through a finance company. The
design of the system is based on the concept of one asset/one loan to
facilitate asset tracking and costing. The system covers credit limit, payment
of loan, billing and settlement, stock auditing, online dealer and auditor
access and ultimately the pay-off functions.
Typically, NetSols sales cycle for these products ranges between six to twelve
months. We derive our income both from selling the license to use the products
as well as from related software services. The related services include
extensive customization, implementation, and post deployment support. License
fees can vary generally between $75,000 up to $1,000,000 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. The post implementation support which usually
is an agreed upon percentage of overall monetary value of the implementation
then becomes an ongoing revenue stream realized on a yearly basis.
NetSol manages this sale cycle by having two specialized pools of resources for
each of the four products under LeaseSoft. One group focuses on software
development required for customization and enhancements. The second group
comprises of LeaseSoft consultants concentrating on implementation and onsite
support.
NetSol also maintains a LeaseSoft specific product website www.leasesoft.biz
Status of New Products and Services
Effective October 14, 2003, we acquired Pearl Treasury System Ltd., in exchange
for the issuance of up to 60,000 shares of common stock of NetSol. With this
acquisition, we are expanding our menu of software into banking and other
financial areas.
Pearl Treasury System (PTS)
PTS was founded in 2000, and designed for use by financial institutions with
treasury departments. Treasury department transactions are high revenue
generating with individual deal values in the range of $10 million to over $1
billion. According to IBS Publishing, over 80 contracts for treasury systems
were signed in 2002, representing approximately $155 million in revenues.
The PTS system will seamlessly handle foreign exchange and money market
trading, trading in derivative products, risk management, credit control,
pricing, and various interfaces for rate feeds, with one system platform. The
system platform, modular in design, also allows financial institutions to
purchase only the modules they require. The PTS system was developed over five
years with a $4 million investment by a group of visionaries in the U.K. This
group completed nearly 80% of the product and needed a stronger development and
business partner who could take over completion and marketing. With the
acquisition, NetSol believes that it has become that partner.
Pearl Banking Solutions (PBS) (a component of PTS) provides a complete but
modular solution for front, middle and back office treasury requirements,
incorporating all of the following instruments: foreign exchange; money
market; long term securities; financial futures; over-the-counter derivatives;
OTC options; and, exchange traded options. In addition to this total coverage,
a unique selling point of PTS is the flexibility of incorporating new
instruments as they arise. PTS is a highly sophisticated, totally integrated
treasury product operating in real time. It has been specified and designed by
Noel Thurlow, a
22
leading authority in investment banking, to provide total treasury management.
Advanced technology and innovative architecture provide the system with a
comprehensive set of functions and complete flexibility. In the past, NetSol
has developed and marketed smaller banking solutions to Citibank in Pakistan.
While there are no assurances, Management hopes to couple the sophistication of
PTS with its own experience in developing and marketing banking solutions to
our advantage.
Growth Through Acquisition
After a period of consolidation and disposals, we believe it is the right time
to look at M&A opportunities
again. With the technology downturn, valuations have become more realistic and
many smaller private
companies have found raising capital for growth a major challenge.
With this backdrop, NetSol identified Altvia Technologies Inc. of the
Maryland/Washington D.C. area as a potential acquisition. In order to benefit
from the recent turnaround in technology spending which has focused on
off-shore outsourcing of software engineering and customer service, NetSol
acquired Altvia Technologies, Inc. which had a successful offshore model.
Altvia provides the platform to take advantage of this out-sourcing, as it uses
a similar methodology as NetSol.
Altvia provides NetSol with an immediate presence, processes, high-level sales
and marketing resources and existing customers to offer its array of products
and services to the mainstream US markets.
We will continue to explore merger and acquisition opportunities, which will
benefit us by providing market opportunities or economies of scale.
Growth through Establishing Partners Network
NetSol is well aware that market reach is essential to effectively market I/T
products and services around the globe. For this purpose, we are looking
forward to establishing a network of partners worldwide. These companies will
represent NetSol in their respective countries and will develop business for
NetSol.
We hope to initially find partners in Denmark, for the Scandinavian markets,
and Holland, for the Benelux countries.
Strategic Alliances
Making well thought out strategic alliances result in corporate synergies
enabling accomplishments otherwise unattainable. NetSol has recently made such
an alliance with Hyundai Information Technology Co., Ltd. (HIT) of South
Korea. HIT has had a successful experience in implementing a $25 Million I/T
project for the State Bank of Pakistan. As per the mandate of this alliance,
NetSol and HIT anticipate to bid work as a team on all potential infrastructure
development and defense related projects within Pakistan. These projects will
primarily involve the public sector and Pakistans armed forces. Despite the
alliance, no assurances can be given that any project will be awarded to the
NetSol-HIT team.
With the recent deregulation of Pakistans telecommunications sector and the
governments desire to attract investors to the country, while experiencing an
unprecedented increase in exports, Pakistan is keen to build a solid technology
infrastructure to support the growth expected over the next several years. The
areas within Pakistan expected to receive major information technology
investments by the government are education, public sector automation, railways
and the countrys armed forces.
23
NetSol Connect, Pvt. Ltd., a wholly owned IP backbone and broadband subsidiary
of ours, has recently forged a partnership with UK based computer company,
Akhtar Computers of U.K. Pursuant to this agreement, NetSol has retained
control of them with ownership of 50.1% to Akhtars 49.9%. This alliance is
designed to permit NetSol to benefit from the potentially high growth of the
telecommunications market by bringing in new technology, new resources and
capital while permitting NetSol to focus on its core competencies of developing
and marketing software.
NetSol and Intel Corporation recently announced a strategic relationship that
would potentially permit NetSol to market its core product, LeaseSoft,
through Intel websites. In a joint press release made
recently by both NetSol and Intel, both companies agreed that they would
deliver a new Solution Blueprint for its core leasing solution. With the
collaboration to create a world-class blueprint for the leasing and finance
industry, deployment should become even faster and smoother for our customers.
This alliance is discussed at www.Intel.com/ebusiness/Solutions/finance.htm.
Technical Affiliations
We currently have technical affiliations as: a MicroSoft Certified Partner; a
member of the Intel Early Access Program; and, an Oracle Certified Partner.
Marketing and Selling
The Marketing Program
While affiliations and partnering result in potential growth for us, marketing
and selling remain essential to building our revenue. The objective of our
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. Marketing is performed at the corporate and business unit levels.
The corporate marketing department has overall responsibility for
communications, advertising, public relations and the website and also
engineers and oversees central marketing and communications programs for use by
each of the 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. With the US technology market
slow down, NetSol marketing teams are concentrating on the overseas markets
with gradual and cautious entry into the US market.
We generally enter 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 clients obligations under the commitment
letter are not conditioned upon the execution of the latter agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and we do 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, we do not believe the projects in process at
any one time are a reliable indicator or measure of expected future revenues.
24
The Markets
NetSol provides its services primarily to clients in global commercial
industries. In the global commercial area, our service offerings are marketed
to clients in a wide array of industries including, automotive: chemical;
tiles/ceramics; Internet marketing; software; medical; banks; U.S. higher
education and telecommunication associations and, financial services.
Geographically, NetSol has operations on the West and East Coast of the United
States, Central Asia, Europe, and Asia Pacific regions.
During the last two fiscal years ended June 30, 2003, the Companys revenue mix
by major markets was as follows:
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
North American (NetSol USA, Intereve) |
|
|
15 |
% |
|
|
41 |
% |
Europe (NetSol Technologies, UK Ltd.) |
|
|
5 |
% |
|
|
0 |
% |
Other International (Abraxas, NetSol Technologies Pvt. Ltd.,
NetSol Pvt., Ltd., NetSol Connect) |
|
|
80 |
% |
|
|
59 |
% |
Total Revenues |
|
|
100 |
% |
|
|
100 |
% |
Fiscal Year 2003 Performance Overview
We have effectively expanded our development base and technical capabilities by
training our programmers to provide customized I/T solutions in many other
sectors and not limiting ourselves to the lease and finance industry. We
believe that the offshore development concept has been successful as evidenced
by several companies in India, which according to the recent statistics by the
Indian I/T agency, NASSCOM, showed software exports exceeding $9.5 billion in
the year 2002-2003 as opposed to $7 billion in 2001. This upward growth, though
not phenomenal anymore, is expected to remain unchanged for the next few years.
NetSol Technologies PVT Ltd.
Our subsidiary in Pakistan continues to perform strongly and has enhanced its
capabilities and expanded its sales and marketing activities. The Lahore
operation supports our worldwide customer base of the LeaseSoft suite of
products and all other product offerings. NetSol has continued to lend support
to the Lahore subsidiary to further develop its quality initiatives and
infrastructure. The major initiative in this area is the final stage of phase 1
of the development of the technology campus. The development facility in
Pakistan, being the engine, which drives NetSol, continues to be the major
source of revenue generation. The Pakistan operation has contributed nearly
43% of 2003 revenues primarily through export of I/T Services and product
licensed to the overseas markets. NetSol Pakistan has signed on new customers
such as Mercedes Benz Finance Japan, DaimlerChrysler Finance Korea and,
DaimlerChrysler Leasing Thailand. It also recently signed development
contracts with Yamaha Motors of Australia with the marketing and customer
support provided by NetSols subsidiary in Adelaide, Australia.
25
NetSol Technologies UK Ltd
We launched our UK subsidiary in Fiscal 2003. The UK company is resourced with
experts from the financial services industry. The senior executives joining our
UK group brings substantial experience gained from CitiGroup as well as
academic excellence from the worlds renowned IIT of India. The main focus of
this entity is to market the array of banking and leasing solutions in the
heart of the financial district in London and the rest of Europe. The UK
company has grown completely organically to a business expected to produce over
$0.5 Million in revenue by the end of the current fiscal year.
The UK company will shortly launch the marketing of the LeaseSoft suite of
products. A comprehensive benchmarking of the LeaseSoft Suite will precede the
launch. We have retained a consultancy firm to
conduct a Gap Analysis for the European market. This exercise will help the UK
subsidiary position LeaseSoft as a solution that provides a core set of
functionality for the European markets. In addition, the pending acquisition
of PTS is designed to create incremental business and new revenue base by
penetrating into the UK and European banking segments. Most recently, the UK
operations entered into agreements with Citibank Bahrain, DCD Group UK and
Habib Allied Bank in the UK.
NetSol-Abraxas
The Australian market continues to be active as NetSol maintains its customers
such as Yamaha Motors, GMAC Australia, St. George Bank and Volvo Australia. We
continue to pursue new customers and new business from its existing customers
for its core product lines.
We signed Yamaha Motors in Australia and DaimlerChrysler Finance in New Zealand
as new customers of the LeaseSoft suite. There are a number of new prospects
that are in varying degrees of the decision-making process. The Australian
subsidiary contributed over 12% of our revenues in fiscal year 2003.
NetSol CONNECT
In August 2003, NetSol entered into an agreement with United Kingdom based
Akhtar Group PLC (Akhtar). Under the terms of the agreement, Akhtar Group
acquired 49.9 percent of our subsidiary, Pakistan based NetSol Connect PTV
Ltd., an Internet service provider (ISP) in Pakistan. As part of this
Agreement, NetSolCONNECT changed its name to NetSol Akhtar.
NetSol CONNECT was launched in early 2000 in Karachi, Pakistans largest city.
Prior to NetSol CONNECTs technology being brought to Karachi, the concept of
high speed ISP backbone infrastructure was new in Pakistan. NetSol was the
first company to turn such concept into reality. In the past two years, NetSol
CONNECT has become the second largest high speed and fast access ISP 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 2002, the direct
membership was over 40,000 subscribers. The main competitor of NetSol CONNECT
has a subscriber base in the range of 40,000-50,000 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. NetSol IR, a brand of NetSol Connect, was ranked by Pakistans
Ministry of Science & Technology as one of the leading brands in the regional
markets of Karachi, Pakistan with respect to high-speed connectivity and
service. NetSol IRs rapid growth has contributed over 25% to NetSols revenue.
The retail business continues to hold steady accounting for close to 60% of
NetSol CONNECTs revenue while corporate clients accounted for 40%. The new
partnership with Akhtar Computers is designed to rollout the services of
connectivity and wireless to the Pakistani national market.
26
Akhtar, one of the oldest established computer companies in the UK, is well
recognized as a provider of managed Internet services, integrated networks,
both local area networks and wide area networks, as well as metropolitan area
networks within the UK.
Akhtars proprietary broadband technologies and solutions will provide NetSol
CONNECT a technologically strong platform for strengthening its
telecommunications infrastructure within Pakistan with a goal of becoming a
leading provider of broadband Internet access to both residential and
commercial users.
The initial stage of the agreement provides NetSol with an investment of up to
$1 million in early 2004 in cash to launch a broadband infrastructure in
Karachi, the largest business hub in Pakistan. The initial infrastructure will
provide a 155MB backbone and a 5MB broadband to customer premises using a
proprietary broadband technology and an infrastructure consisting of 20 hubs.
After the successful launch of the initial six-month beta program to Karachis
residential and commercial customers, additional rollouts of the hubs are
scheduled in Lahore and Islamabad within a 12-month period.
The second investment into the program could provide up to $20 million to
create the first Terabit backbone in Pakistan. This will allow NetSol to
provide data, voice, video and other multi-media services to major cities
within Pakistan.
NetSol Akhtar Pvt Ltd. shall continue to aggressively seek revenues to growth.
NetSol USA
In May 2003, NetSol acquired the assets of Altvia Technologies, Inc.
(Altvia). Altvia provided NetSol an experienced management team familiar with
the offshore software development model. From 2000 2003, Altvia maintained an
offshore development team in Islamabad, Pakistan. Altvias clients included
major member-based higher education and telecommunications trade associations
in the Washington, D.C. and Baltimore area. The acquisition allows NetSol to
extend its business presence in the United States, specifically in the
high-growth, greater-Washington, D.C. market. NetSol USA functions as the
service provider for the US based customers both in the consulting services
area as well as project management. The office provides greater access to the
emerging East Coast markets.
LeaseSoft Sales
LeaseSoft is establishing itself as a dependable and preferred system in the
niche market of asset based lease and finance. In 2002-2003, NetSol was able to
sell a number of LeaseSoft licenses in Asia, details of which are as follows:
LeaseSoft.WFS at Yamaha Motors Finance Australia (YMF). This was an
implementation carried out in only 10 weeks. A pilot project within the client
organization, YMF has recommended this software for future implementations
wherever YMF may start a wholesale lease and finance business.
LeaseSoft.CAP DaimlerChrysler Leasing Thailand (DCLT). DCLT was already
using LeaseSoft.WFS for managing their wholesale finance business and as soon
as they decided to aggressively follow retail side leasing in Thailand they
opted for NetSols Credit Application Processing System. LeaseSoft.CAP will
enable DCLT to process larger numbers of applications per given period of time
while simultaneously providing the functionalities to reduce the probability of
default per approved loan.
27
LeaseSoft.CAP at UMF Leasing Singapore. UMF Leasing Singapore was already
using LeaseSoft.CAM and opted for another application from the LeaseSoft suite,
LeaseSoft.CAP. Both the applications (LeaseSoft.CAM and LeaseSoft.CAP)
seamlessly integrate to provide back office automated processing of credit
applications and comprehensive management of the resulting contracts.
LeaseSoft.CAP at DaimlerChrysler Services New Zealand. DaimlerChrysler was
already using this system in Australia and opted for this system as they
started their operations in New Zealand.
Management believes this highlights that the LeaseSoft system has satisfied and
built a brand loyal customer base.
Shin DB (Database Model of retail side LeaseSoft) at Mercedes Benz Finance
Japan (MBFJ). MBFJ has acquired an integrated Database Model of LeaseSoft.CAP
and LeaseSoft.CAM.
LeaseSoft.WFS at DaimlerChrysler Services South Korea. Looking at the success
of this software in Thailand, DaimlerChrysler purchased and implemented this
software while establishing their operations in South Korea.
Pay per use Pricing Strategy for LeaseSoft
NetSol understands that the high upfront cost of acquiring LeaseSoft can be
barrier to entry for some medium to small size companies. To continue to
aggressively broaden the client base, NetSol has been innovative in this regard
and plans to introduce PAY PER USE pricing strategy for all LeaseSoft
constituent applications. According to this strategy, small and medium scale
clients will only pay for the system for the amount of time they use it or the
number of transactions they carry out through it. NetSol plans to introduce
this novel pricing by end of first quarter 2004.
Technology Campus
We broke ground for our Technology Campus in January 2000 with a three-phase
plan of completion. Initially, we anticipated the completion of Phase One by
fall 2001, but due to the delay in financing, and other challenges we faced,
the completion was delayed. However, Phase One is nearly complete and the
Lahore operation is expected to be moved to the Technology Campus before
February 2004. By relocating the entire Lahore operation from its current
leased premises to the Campus, we will save approximately $150,000 annually, in
rent and rent or other facility related expenses. Once fully operational and
completed, the campus is expected to house over 2,500 I/T professionals in
approximately three acres of land. The campus site is located in Pakistans
second largest city, Lahore, with a population of six million. An educational
and cultural center, the city is home to most of the leading technology
oriented academia of Pakistan including names like LUMS, NU-FAST and UET. These
institutions are also the source of quality I/T resources for us. Lahore is a
modern city with very good communication infrastructure and road network, The
Technology campus is located at about a 5-minute drive from the newly
constructed advanced and high-tech Lahore International Airport. This campus
will be the first purpose built software building with state of the art
technology and communications infrastructure in Pakistan. We have made this
investment to attract contracts and projects from blue chip customers from all
over the world.
28
Employees
We believe we have developed a strong corporate culture that is critical to our
success. Our 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. Almost every one of our software developers is proficient
in the English language. English 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
employees the opportunity to participate in its stock option program. Also, we
have 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.
NetSol worldwide is an equal opportunity employer. NetSol attracts
professionals not just from Pakistan, where it is very well known, but also I/T
professionals living overseas.
NetSol believes it has gathered, over the course of many years, a team of very
loyal, dedicated and committed employees. Their continuous support and belief
in the management has been demonstrated by their further investment of cash.
Most of these employees have exercised their stock options during very
difficult times for us. Management believes that its employees are the most
valuable asset of NetSol.
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 the emphasis on core values, training and professional growth. We
intend to continue to recruit, hire and promote employees who share this
vision.
As of September 30, 2003, we had 253 full-time employees; comprised of 173 I/T
project personnel, 54 employees in general and administration and 26 employees
in sales and marketing. There are 8 employees in the United States, 235
employees in Pakistan, 5 in Australia and 5 in the United Kingdom. None of our
employees are subject to a collective bargaining agreement.
Competition
Neither a single company nor a small number of companies dominate the I/T
market in the space in which we compete. 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.
Some of our competitors are International Decisions Systems, Inc., McHugh
Systems, Ltd., Data Scan, Inc., KPMG, CresSoft Pvt Ltd., Systems Limited,
Cybernet Pvt. Ltd., Tenhill Plc, and SouthPac Australia. These companies are
scattered worldwide geographically. In terms of offshore development, we are in
competition with some of the Indian companies such as Wipro, HCL, TCS, 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
29
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: DaimlerChrysler Services Asia Pacific
- Singapore; Mercedes Benz Finance Japan; Yamaha Motors
Finance Australia;
Tung-Yang Leasing Company Taiwan; Debis Portfolio Systems UK; DaimlerChrysler
Services Australia; DaimlerChrysler Leasing Thailand; DaimlerChrysler
Services Korea; UMF Leasing Singapore; and, DaimlerChrysler Services New
Zealand. In addition, NetSol provides offshore development and customized I/T
solutions to blue chip customers such as Citibank Pakistan, DCD Holding UK,
and, Habib Allied Bank UK. With the Altvia acquisition, NetSol has acquired,
as clients, some of the most well known higher education and telecommunications
associations based in the United States. NetSol is also a strategic business
partner
for DaimlerChrysler Services Asia Pacific (which consists of a group of many
companies), which accounts for approximately 20% of our revenue. No other
individual client represents more than 10% of the revenue for the fiscal year
ended June 30, 2003.
The Internet
We are committed to regaining and extending the advantages of our 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 us. We receive 150,000 hits per month to
www.netsoltek.com. We also maintain a product specific website for LeaseSoft
at www.leasesoft.biz.
Through our Web sites, customers, potential customers and investors can access
a wide range of information about our product offerings, can configure and
purchase systems on-line, and can access volumes of support and technical
information about us.
Operations
Our headquarters are in Calabasas, California. Nearly 75% of the production
and development is conducted at NetSol PK in Lahore, Pakistan. The other 25% of
development is conducted in the Proximity Development Center or PDC in
Adelaide, Australia. The majority of the marketing is conducted through NetSol
USA, NetSol Abraxas Australia, and NetSol UK.
NetSol UK services and supports the clients in the UK and Europe. NetSol PK
services and supports the customers in the Asia and South Asia regions.
A significant portion of our software is developed in Pakistan. Despite global
unrest, regional tension and downturn in the US markets, the economy of
Pakistan is bouncing back. For the first time in the history of Pakistan, the
foreign exchange reserve has exceeded $11.0 billion in comparison with just
below $2.0 billion in 2000. The stock market in Pakistan is the most bullish in
the Asia Pacific region with market growth over 300% year to date (Karachi
Stock Exchange on October 18, 2001 was at 1,103 points vs. 4,500 points on
September 1, 2003). Pakistan, now a close US ally, is recognized by the western
world as becoming a very conducive and attractive country for foreign
collaboration and investments. We believe that we are in a strong position to
continue to use this offshore model, which includes competitive price
advantage, to serve our customers. Just recently Moodys International
assessed Pakistan as less vulnerable than many countries in the Asia Pacific
region. Also, Standard & Poors rating on Pakistan
30
has been improved to positive. The present government has taken major bold
steps to attract new foreign investment and bolster the local economy.
NetSol USA functions as the service provider for US based customers both in the
consulting services area as well as in the project management. In addition, the
Maryland office provides greater access to the emerging markets on the East
Coast. NetSol USA is exploring opportunities for marketing alliances with
local companies to further enhance its marketing capabilities.
Organization
NetSol Technologies, Inc. (formerly NetSol International, Inc.) was founded in
1997 and is organized as a
Nevada corporation. We amended our Articles of Incorporation on March 20, 2002
to change our name to NetSol Technologies, Inc.
Our success, in the near term, will depend, in large part, on our ability to:
(a) minimize additional losses in our operations; (b) raise funds for continued
operations and growth; and, (c) enhance and streamline sales and marketing
efforts in the United States, Asia Pacific region, Pakistan, Europe, Japan and
Australia. However, managements outlook for the continuing operations, which
has been consolidated and has been streamlined, remains optimistic and bullish.
With continued emphasis on a shift in product mix towards the higher margin
consulting services, we anticipate to be able to continue to improve operating
results at its core by reducing costs and improving gross margins.
Intellectual Property
We rely upon a combination of nondisclosure and other contractual arrangements,
as well as common law trade secret, copyright and trademark laws to protect our
proprietary rights. We enter into confidentiality agreements with our
employees, generally requires its consultants and clients to enter into these
agreements, and limits access to and distribution of its proprietary
information. The NetSol logo and name, as well as the LeaseSoft logo and
product name have been copyrighted and trademark registered in Pakistan.
Governmental Approval and Regulation
Our current operations do not require specific governmental approvals. Like
all companies, including those with multinational subsidiaries, we are subject
to the laws of the countries in which we maintain subsidiaries and conduct
operations. Pakistani law allows a 15-year tax holiday on exports of I/T
products and services. There are no State Bank restrictions on profits and
dividends repatriation. Accordingly, foreign-based companies are free to
invest safely in Pakistan and at the same time transfer their investment out of
Pakistan without any approvals or notices. The present Pakistani government
has effectively reformed the policies and regulations effecting foreign
investors and multinational companies thus, making Pakistan an attractive and
friendly country in which to do business.
31
MANAGEMENTS DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
Our management and global team of engineers have set clear goals and objectives
to transform NetSol into a profitable enterprise. Management believes that we
have turned the corner by reaching the significant milestone of preserving its
NASDAQ SmallCap Market listing with the approval by the stockholders of a 1 for
5 stock split in June 2003, thus removing a major distraction for its key
executives. After successful recapitalization of share structure, management
is re-focused on the fundamentals. Execution of a revised marketing plan,
aligned with an increased awareness and demand for its product and services,
will play a key role in improvement of fundamentals as incremental top line
growth is beginning to demonstrate.
Going forward, management has set new goals to achieve over the next two
quarters.
Initiatives and Investment to Grow Capabilities.
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Achieve CMM Level 4 Accreditation |
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Enhance Software Design and Engineering Capabilities by increasing
investment in training |
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Embark on a program of recruiting the best available talent in
Project and Program Management |
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Complete the first phase of its dedication and fully owned Technology Campus |
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Increase Capex, enhance Communications and Development Infrastructure |
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Further enhance the development and outsourcing capabilities in
regional South East Asian markets |
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Top Line Growth through Investment in Marketing and Positioning.
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Launch LeaseSoft into new markets |
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Product Positioning through alliances and partnership |
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Direct Marketing of Services |
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Embark on aggressive M&A activities broadly in the software development domain |
|
NetSol-Intel Corporation. NetSol forged what management believes to be a very
important and strategic alliance with Intel Corporation to develop a blue print
that would give broader exposure and introduction to NetSols Lease Soft
products to a global market.
NetSol Hyundai IT. NetSol collaborated with Hyundai IT Group, from South
Korea, as a local development partner. By virtue of this relationship, NetSol
and Hyundai as a partner will bid in major public sector and infrastructure
projects in Pakistan,
Funding and Investor Relations.
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Grow its relationships with new Investment Banking Partners |
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Continue to raise capital at attractive terms through private
placements, convertible debt debentures and as needed new public
offerings, for its many initiatives and programs |
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Infuse new capital from potential exercise of outstanding investors
warrants and employees options for business development and enhancement
of infrastructures |
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Re-write its Investor Relations plan and share our turnaround with
the investment community |
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32
Improving the Bottom Line.
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Continue to review costs at every level |
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Grow process automation |
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Profit Centric Management Incentives |
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More local empowerment and P&L Ownership in each Country Office |
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In summary, the drive for consolidation and cost cutting continued in fiscal
year 2003. From the biggest loss in the history in fiscal year 2001 of $14
million, the loss in fiscal year 2003 was reduced to $2,600,000 and we believe
NetSol is now well positioned to achieve profitability based on trends and
initiatives taken by the management. The parent company took a major step by
terminating its previous office lease in September 2002. Just in rent and
related expenses, it saved over $130,000 approximately in one year. In
addition, a number of senior positions were eliminated saving another $250,000
annually.
After streamlining key operations, Management believes that NetSol is in a
position to derive higher productivity based on current capital employed.
Management continues to be focused on building its delivery capability and has
achieved key milestones
in that respect. Generally, key projects are being delivered on time and on
budget, quality initiatives are succeeding, especially in maturing internal
processes. Management believes that further leverage was provided by the
development engine of NetSol, which became CMM Level 2 in early 2002. In a
quest to continuously improve the quality standards, NetSols reached CMM Level
3 assessment in July 2003. According to the website of SEI of Carnegie Mellon
University, USA, only a few software companies in the world have announced
their assessment of level 3. As a result of achieving CMM level 3, we are
experiencing a growing demand for its products and alliances from the blue chip
companies worldwide. NetSol is now aiming for CMM level 4 in 2004 and
potentially CMM level 5, the highest CMM level, in 2005. NetSol plans to
further enhance its capabilities by creating similar development engines in
other Southeast Asian countries with CMM levels quality standards. We believe
this would make NetSol much more competitive in the industry and provide the
capabilities for development in multiple locations. Increases in the number
of development locations with these CMM levels of quality standards will
provide customers with options and flexibility based on costs and broader
access to skills and technology.
CASH RESOURCES
We were successful in improving our cash position by the end of our fiscal
year, June 30, 2003, and as of the end of the first quarter of fiscal 2004,
September 30, 2003. In addition to $809,566 injected by the exercise of
options by several employees in 2003, we also entered into a financing deal
with a UK based institution, DCD Group Ltd. This agreement was reached in
February 2003 by which a first tranche of $257,000 was raised through equity
placement. We also offered a substantial number of warrants to DCD Group. If
exercised, these are potentially valued over $1.7 million with exercise prices
ranging from $1.75, $2.50 and $5.00 per share. There is also a standing line
of credit of $1 million with DCD Group to fund new development related
projects.
On May 5, 2003, we entered into an investment banking relationship with Maxim
Group LLC, a New York based investment bank. In July, we closed the first
Private Placement Offering with Maxim as the placement agent for approximately
$1.2 million for 946,963 shares. We are registering the shares of these
shareholders in this Registration Statement. We may explore new financing once
this registration is effective, based on its capital needs.
33
Early in the second quarter of 2003, we were successful in getting a release of
a $500,000 performance bond from one of its biggest customers, Daimler
Chrysler-Singapore. This bond was posted by NetSol upon request of the customer
in 2000. The release of this bond not only helped us financially, but it also
reflected the confidence of the customer in our deliverability and
capabilities.
In October 2002, NetSol terminated its rental lease agreement with Kilroy
Realty for the office space it occupied from 2000. We were able to recover over
$200,000 cash from the letter of credit it provided to Kilroy in 2000.
As a result of stock price recovery and stability, we have witnessed employees
willing to exercise their stock options and inject cash into us. Unexercised
options and warrants, if exercised in full, represent an approximate $3 million
addition of capital to the Company and are detailed in other sections.
Continued exercise of options our employees could result in an increased cash
flow for us.
CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS
During the fiscal year 2002, Syed Husain, the Chief Operating Officer (COO)
and Rick Poole, the
Chief Financial Officer (CFO) left the Company. Najeeb Ghauri was appointed
CFO and secretary in addition to his role of Chairman of the Board of
Directors. Mark Caton joined the Company as a President of NetSol USA, Inc., a
subsidiary of NetSol. He is employed as a consultant and is responsible for
sales and marketing for North America.
Board of Directors
At the 2003 Annual Shareholders Meeting in January, the board was expanded to
nine members. The shareholders voted in an overwhelming majority for the new
slate of directors. The board now consists of: Mr. Najeeb U. Ghauri; Mr. Jim
Moody; Mr. Salim Ghauri; Mr. Eugen Beckert; Mr. Naeem U. Ghauri; Mr. Shahid
Burki; Mr. Irfan Mustafa; Mr. Mark Caton; and, Mr. Shabir Randeree.
Committees
Our Audit Committee consists of Mr. Jim Moody, Chairman, Mr. Shahid Burki,
member, and Mr. Irfan Mustafa, member. The Compensation committee consists of
Mr. Mark Caton, Chairman, Mr. Shahid Burki, member, and Mr. Irfan Mustafa,
member.
RESULTS OF OPERATIONS
The Year Ended June 30, 2003 Compared To The Year Ended June 30, 2002
Net revenues for the year ended June 30, 2003 were $3,745,386 as compared to
$3,578,112 for the year ended June 30, 2002. Net revenues are broken out among
the subsidiaries as follows:
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2003 |
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2002 |
|
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Netsol USA |
|
$ |
467,662 |
|
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$ |
1,453,819 |
|
Netsol - Altiva |
|
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41,206 |
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Netsol TECH and Private |
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1,581,012 |
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1,931,639 |
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Netsol Connect |
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1,185,162 |
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Netsol UK |
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83,737 |
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Netsol-Abraxas Australia |
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386,607 |
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192,655 |
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Total Net Revenues |
|
$ |
3,745,386 |
|
|
$ |
3,578,113 |
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34
The total consolidated net revenue for fiscal year 2003 was $3,745,386 compared
to $3,578,112 in fiscal year 2002. This is a nearly 5% increase in revenue,
which could be directly attributed to an increased demand of LeaseSoft products
and services. The operating loss from operations in fiscal year 2003 was
$2,265,491 including a depreciation and amortization charge of $1,576,890. The
loss also includes settlement expenses of $202,759 for the UK and German
entities. The total loss from operations including the above mentioned non-cash
charges was $2,615,581, which is a significant reduction of 63% from $5,229,134
in fiscal year 2002. The net loss in fiscal year 2003 was $2,615,581 compared
to $5,998,864 in fiscal year 2002 or 57% reduction. Similarly the net loss per
share dropped to $0.47 in 2003 compared to $2.00 in 2002. The total weighted
average of shares outstanding basic and diluted was 4.5 million against 3.0
million in 2002.
We experienced a revenue decrease from the prior year for its North American
operations. We are aligning ourselves with the current reduction in demand for
its services in the US markets. This has been achieved by laying off 10
employees from its US operations and by downsizing our office space in Virginia
and Calabasas, resulting in major cost reductions. Since August 1999, NetSol
USA has generated a total of $3,876,561 of revenues.
Operating expenses were $4,231,884 for the year ended June 30, 2003 compared to
$5,845,567 for the year ended June 30, 2002. During the years ended June 30,
2003 and 2002, we issued 93,400 and 163,000 restricted common shares,
respectively, in exchange for services rendered. We recorded this non-cash
compensation expense of $39,200 and $116,995 for the years ended June 30, 2003
and 2002, respectively. Total professional service expense, including non-cash
compensation, was $272,447 and $964,508 for the years ended June 30, 2003 and
2002, respectively. During the years ended June 30, 2003 and 2002, we recorded
depreciation and amortization expense of $1,576,890 and $2,115,399. Operating
expenses in total, including all general and administrative expenses, have also
decreased as a result of reduction in salaries and related costs primarily due
to reduction in staff at all levels of Netsol and the continuing monitoring of
our infrastructure, both at the parent and the subsidiary levels. We believe
that the accounts receivable balance as of June 30, 2003 will provide a good
source of working capital for fiscal 2004. Salaries and wages expenses were
$934,383 and $1,461,157 for the years ended June 30, 2003 and 2002,
respectively. This reduction was due in part to the elimination of higher
salaried positions. General and administrative expenses were $956,644 and
$1,135,560 for the years ended June 30, 2003 and 2002, respectively. The
decrease was due in part to the cost savings actions taken by us. Gross Profit
was 47.5% of revenues for fiscal 2003, compared to 17.23% of revenues in fiscal
2002. Net loss was $2,137,506 or $0.47 per share (basic and diluted) for the
year ended June 30, 2003 as compared to $5,998,864 or $2.00 per share (basic
and diluted) for the year ended June 30, 2002. This resulted in a loss per
share, basic and diluted, from continuing operations of $0.57 for fiscal 2003
as compared with $2.00 for fiscal 2002. The loss per share for discontinued
operations was $0.11 for fiscal 2003. Our United Kingdom and German operations
were discontinued in 2002 and the early part of 2003.
Our cash position was $214,490 at June 30, 2003. After year-end June 30, 2003,
in July 2003, we closed a private placement financing of more than $1.2 million
through the sale of 946,963 shares of our common stock. In this private
placement, the placement agent received a warrant to purchase 81,000 shares of
our common stock.
Three Month Period Ended September 30, 2003 Compared To The Three Month Period
Ended September 30, 2002:
Net revenues were $972,612 and $653,331 for the three-month periods ended
September 30, 2003 and September 30, 2002, respectively. This reflects an
increase of $319,281 (48%) in the three month period
35
ended September 30, 2003. This increase is attributable to new license sales
and an increase in services business, including additional maintenance work.
We added a few new customers such as Habib Allied Bank, enhancement in the
Yamaha Motors project, DaimlerChrysler New Zealand and a few local customers in
Pakistan. Due to successful implementation s of some of our current systems
with DaimlerChrysler we are noticing an increasing demand for Lease Soft.
Although the sales cycle for Lease Soft is rather long, we are experiencing
100% increase from 2002 in product demonstration, evaluation and assessment by
blue chip companies in the UK, Australia, Japan, Europe and Pakistan. The crown
jewel of our product line CMS (Contract Management System) which was sold to
three companies of DaimlerChrysler Asia Pacific Region in 2001 for a combined
value in excess of $2 million is being implemented and delivered to customer in
2003. Maturity of our key products has given rise to a positive interest by
many new blue chip customers globally. We believe a number of large leasing
companies will be looking to renew legacy applications. This places NetSol in
a very strong position to capitalize on any upturn in IT spending by these
companies. We believe that we
are well positioned to sell several new licenses in fiscal year 2003-2004 that
could potentially increase the sales and bottom line. As we sell more of these
licenses, management believes it is possible that the margins could increase to
upward of 70%. The License prices of these products vary from $100,000 to
$1,000,000 with additional charges for customization and maintenance of between
20%-30% each year. We, in parallel, have developed banking applications
software to boost its product line and these systems were sold to Citibank and
Askari Banks in Pakistan in 2002. New customers in the banking sector are also
growing and we expect substantial growth in this area in the coming year.
The gross profit was $512,235 in the quarter ending September 30, 2003 as
compared with $323,296 for the same quarter of the previous year. The gross
profit percentage has increased modestly to approximately 52% in the quarter
ended September 30, 2003 from approximately 49% for the quarter ended September
30, 2002 as a result of us reducing cost across the board without compromising
on its delivery capabilities. Whilst the cost of sales and the cost of
delivery of projects have both been reduced in the quarter, we maintained all
its delivery commitments and have won new business from existing and new
customers. While management is striving to negotiate better pricing on new
agreements, we have been required to react to overall general economic factors
in determining its present pricing structure. The gross profit margin was also
improved due to improved quality standards such as achieving the assessment of
CMM Level 3 in 2003.
Operating expenses were $1,342,333 for the three-month period ending September
30, 2003 as compared to $1,454,554, for the corresponding period last year. The
decrease in the current fiscal year is largely attributable to the focus on
reduction of all non-essential costs. We have streamlined it operations by
consolidation, divestment and enhanced operating efficiencies. Depreciation and
amortization expense amounted to $412,801 and $457,162 for the three-month
period ended September 30, 2003 and September 30, 2002, respectively. This
decrease was attributable to selling of assets by our subsidiaries. Combined
salaries and wage costs were $315,540 and $258,500 for the three month period
ended September 30, 2003 and 2002, respectively, or an increase of $57,040 from
the corresponding period last year. While we reduced operation expenses
overall, the addition of new management level employees and consultants from
the Altvia acquisition and new employees at our UK subsidiary, resulted in an
overall increase.
Selling and marketing expenses decreased to $19,222 in the three-month period
ended September 30, 2003 as compared to $41,714 in the three-month period ended
September 30, 2002. We wrote-off as uncollectible bad debts of $52,318 in the
current quarter compared to $81,312 for the comparable prior
period. Professional services expense decreased to $29,801 in the three-month
periods ended September 30, 2003, from $201,482 in the corresponding periods
last year.
36
Loss from continued operations was $830,098 in the three month period ended
September 30, 2003 as compared to $1,131,258 for the corresponding periods last
year. This represents a reduction of $301,160 for the three-month period
compared to prior year. This reduction is attributable to improved operating
margins.
Net Losses were $868,350 in the three-month period ended September 30, 2003 as
compared to $1,146,787 for the corresponding period last year. The current
period amount includes $35,309 add-back for the 49.9% minority interest in
NetSol Connect owned by another party. This is reduction of 24.2% compared to
prior year. Net loss per share, basic and diluted, was $0.13 for the three
month periods ended September 30, 2003 as compared with $0.30 for the
corresponding period last year.
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 us 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
Our independent auditors have included an explanatory paragraph in their report
on the June 30, 2003 consolidated financial statements discussing issues which
raise substantial doubt about our ability to continue as a going concern. The
going concern qualification is attributable to our historical operating losses,
our lack of cash reserves and capital, and the amount of capital which we
project our needs to satisfy existing liabilities and achieve profitable
operations. In positive steps, we have closed down our loss generating
businesses, and continue to evaluate and implement cost cutting measures at
every entity level. We are optimistic that the remaining entities can become
profitable in fiscal 2004. For the year ended June 30, 2003, we 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. We believe that certain of this needed
capital will result from the successful collection of our accounts receivable
balances as projects are completed during the coming fiscal year. We believe we
can raise additional funds though private placements of its common stock.
Liquidity And Capital Resources
Three Month Period Ended September 30, 2003 Compared to the Three Month Period
Ended September 30, 2002.
Net cash used for operating activities amounted to $1,086,059 for the three
months ended September 30, 2003, as compared to $290,469 for the three months
ended September 30, 2002, mainly due to an increase in accounts receivable.
Net cash used by investing activities amounted to $268,004 for the three months
ended September 30, 2003, as compared to providing $258,853 for the three
months ended September 30, 2002. The difference
37
is mainly in the net purchase of $520,000 in certificates of deposits and
proceeds of $200,000 from the sale of a minority interest in our subsidiary
NetSol Connect. The cash position is projected to improve in the current and
future quarters due to new business signed up in the last quarter. We
anticipate substantial exercises of investor warrants and employee stock
options in the current and subsequent quarters.
Net cash provided by financing activities amounted to $1,491,711 for the three
months ended September 30, 2003 compared to net cash used of $5,150 for the
three months ended September 30, 2002. The three-month period ended September
30, 2003 included the cash inflow of $1,112,050 from issuance of equity,
$238,250 from the exercising of stock options and $500,000 from proceeds of
loans as compared to $34,596 from proceeds of loans in the quarter ended
September 30, 2002. Our cash position was $292,528 at September 30, 2003. In
addition we had $520,000 in certificates of deposit.
As of September 30, 2003, we had an accumulated deficit of $29,273,605 and a
working capital deficit of approximately $743,696.
Year Ended June 30, 2003 compared to Year Ended June 30, 2002.
As of June 30 our working capital (current assets less current liabilities)
totaled a deficit of $1.2 million, a decrease in deficit from $2.7 million, as
of June 30, 2002. In Fiscal 2003, we raised capital of $257,000 from DCD
Group, UK. Ltd. In addition, there are approximately $1.7 million worth of
outstanding warrants with DCD Group that could potentially be exercised in
Fiscal Year 2004. We also secured a line of credit for $1 million from DCD
Group. This line of credit has not yet been utilized. The financing with
Maxim Group LLC of approximately $1.2 million was closed in July 2003. We have
over $1.2 million in accounts receivable and revenues in excess of billings.
We will be pursuing various and feasible means of raising new funding to expand
its infrastructure, enhance product offerings and beef up marketing and sales
activities in strategic markets.
During the fiscal years 2003 and 2002, we raised a total of $708,400 and
$461,249 in cash, respectively, by way of management and employees exercise of
stock options. In the first fiscal quarter of 2004, we raised a total of
$208,250 in cash by way of management and employee exercise of stock options
This will continue to be an important source of raising cash for us. We will
continue to inject new cash through the employees exercise of options and
warrants from some investors. There is a considerable amount of stock options
and warrants outstanding that could potentially be exercised in Fiscal Year
2004. Management believes it will be able to eventually secure cash reserves
for at least 6 months based on projected Fiscal Year 2004 revenue.
Additionally, in fiscal 2003 and fiscal 2002 we issued 1,205,400 and 163,000
restricted common shares, respectively, in exchange for services rendered. This
further reduced cash needs and compensated for some of the cash shortfall for
the years.
Dividends and Redemption
It has been our policy to invest earnings in the growth of our rather than
distribute earnings as dividends. This policy, under which dividends have not
been paid since our inception and is expected to continue, but is subject to
regular review by the Board of Directors.
Forward-Looking Statements
All statements contained in this prospectus, or in any document filed by us
with the Securities and Exchange Commission, or in any press release or other
written or oral communication by or on our
38
behalf, 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 our
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 our 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) our
ability to consummate strategic acquisitions and alliances; (iii) our 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)
our 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 our commercial customers; (viii) the future
profitability of our customer contracts, and (ix) general economic conditions
and fluctuations in currency exchange rates in countries in which we do
business.
DESCRIPTION OF PROPERTY
Company Facilities
As of October of 2002, we moved from its corporate headquarters in California
to one with approximately 1,575 rentable square feet and a monthly rent of
$2,993.00. The previous location had a monthly rent of over $13,000 per month.
The lease is on a month-to-month basis. Our current facilities are located
at 24011 Ventura Blvd., Suite 101, Calabasas, California, 91302.
Other leased properties as of the date of this report are as follows:
|
|
|
|
|
|
|
|
|
|
|
Location/Approximate Square Feet |
|
Purpose/Use |
|
Monthly Rental Expense |
Australia |
|
|
1,140 |
|
|
Computer and General Office
|
|
$ |
1,380 |
|
Pakistan |
|
|
30,000 |
|
|
Computer and General Office
|
|
$ |
10,000 |
|
United Kingdom |
|
|
378 |
|
|
General Office
|
|
$ |
3,000 |
|
Maryland |
|
|
165 |
|
|
General Office
|
|
$ |
1,200 |
|
The Australian lease is a three year lease that expires in September 2007. It
is rented at the rate of $1,380 per month. The Pakistani facility is on a
month-to-month basis and is currently rented at the rate of approximately
$10,000 per month. Our move into the Technology Campus, expected in spring
2004, will result in a cost savings of $150,000 per year from the savings of
monthly rental costs and related leasing expenses. UK operations are currently
conducted in leased premises operating on a month-to-month basis with current
rental costs of approximately $3,000 per month. The facilities in Maryland are
subject to a
six-month lease, which expires in December 2003 and thereafter operates on a
month-to-month basis rented at the rate of $1,200 per month.
39
Upon expiration of its leases, the Company does not anticipate any difficulty
in obtaining renewals or alternative space.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 2003, DCD Holdings, Ltd. signed a $2 million investment agreement
with NetSol and is one of NetSols largest Investors. Shabir Randeree,
managing director of DCD Holdings was appointed director of NetSol in 2003,
filling a vacancy on the board. A subsidiary of DCD Holdings, DCD Trade
Services Ltd., has recently provided a $1 million revolving line of credit to
support and launch new customer projects requiring initial investment. In
November 2003, DCD Holdings, Ltd., exercised warrants for 200,000 shares of our
common stock for $350,000 or $1.75 per share.
Management believes that the terms of these transactions are no less favorable
to us 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.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - Common stock of NetSol Technologies, Inc. is listed and
traded on the NASDAQ SmallCap Market under the ticker symbol NTWK.
The table shows the high and low intra-day prices of our common stock as
reported on the composite tape of the NASDAQ for each quarter during the last
two fiscal years. Per share stock prices have been adjusted to reflect the 1
for 5 reverse stock split which occurred in August 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001-02 |
|
2002-03 |
|
2003-04 |
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
High |
|
Low |
|
High |
|
Low |
|
|
|
|
|
|
|
|
|
|
|
|
|
1st (ended
September 30) |
|
|
11.25 |
|
|
|
.85 |
|
|
|
.80 |
|
|
|
.35 |
|
|
$ |
5.50 |
|
|
$ |
1.94 |
|
2nd(ended
December 31) |
|
|
2.30 |
|
|
|
1.71 |
|
|
|
1.30 |
|
|
|
.25 |
|
|
|
|
|
|
|
|
|
3rd (ended March 31) |
|
|
2.05 |
|
|
|
1.20 |
|
|
|
1.24 |
|
|
|
.75 |
|
|
|
|
|
|
|
|
|
4th (ended June 30) |
|
|
1.35 |
|
|
|
.55 |
|
|
|
3.50 |
|
|
|
.95 |
|
|
|
|
|
|
|
|
|
RECORD HOLDERS - As of November 28, 2003, the number of holders of record of
our common stock was 172. As of November 28, 2003, there were 7,590,263 shares
of common stock issued and outstanding.
DIVIDENDS - We have not paid dividends on its Common Stock in the past and do
not anticipate doing so in the foreseeable future. We currently intend to
retain future earnings, if any, to fund the development and growth of its
business.
40
EXECUTIVE COMPENSATION
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the last three fiscal years
by the executive officers of NetSol who received compensation of, or in excess
of, $100,000 during the fiscal year ended June 30, 2003. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation(1) |
|
Long Term Compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards (2) |
|
Underlying |
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
Options/ |
Name and Principal Position |
|
Ended |
|
Salary |
|
Bonus |
|
Awards(3) |
|
SARs (4) |
|
|
|
|
|
|
|
|
|
|
|
Najeeb U. Ghauri, Chief Financial Officer, Secretary, |
|
|
2003 |
|
|
$ |
120,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Chairman, Director |
|
|
2002 |
|
|
$ |
100,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
85,000 |
(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
(7) |
|
|
|
2001 |
|
|
$ |
100,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
Naeem Ghauri, CEO, Director |
|
|
2003 |
|
|
$ |
125,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
2002 |
|
|
$ |
100,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
70,000 |
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
(7) |
|
|
|
2001 |
|
|
$ |
125,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
Salim Ghauri, President, Director |
|
|
2003 |
|
|
$ |
100,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
2002 |
|
|
$ |
100,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
70,000 |
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
(7) |
|
|
|
2001 |
|
|
$ |
100,000 |
|
|
|
-0- |
|
|
|
-0- |
|
|
|
|
|
(1) No officers received any bonus or other annual compensation other than
salaries during fiscal 2003 or 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 any long-term incentive plan (LTIP) payouts or other
payouts during fiscal years
41
2003, 2002 or 2001.
(3) All stock awards are shares of our Common Stock.
(4) All securities underlying options are shares of our Common Stock. We have
not granted any stock appreciation rights. No options were granted to the
named executive officers in fiscal year 2003. Options are reflected in
post-reverse split numbers. All options are currently exercisable or may be
exercised within sixty (60) days of the date of this prospectus and are fully
vested.
(5) Includes options to purchase 85,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $.75 per share. Options must be
exercised within five years after the grant date.
(6) Includes options to purchase 100,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $1.25 per share.
(7) Includes options to purchase 200,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $2.50 per share.
(8) Includes options to purchase 70,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $.75 per share. Options must be
exercised within five years after the grant date.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised |
|
Value of unexercised |
|
|
|
|
|
|
|
|
|
|
Options/SARs at |
|
in-the-money at fiscal |
|
|
|
|
|
|
|
|
|
|
fiscal year end (##) |
|
year end |
|
|
Shares Acquired on |
|
|
|
|
|
Exercisable (2) / |
|
($)Exercisable (2) / |
Name |
|
Exercise (#) |
|
Value Realized (1)($) |
|
Unexercisable |
|
Unexercisable |
|
|
|
|
|
|
|
|
|
Najeeb Ghauri, CFO
Secretary, Director
, Chairman |
|
|
200,000 |
|
|
$ |
8,000 |
|
|
|
436,115/0 |
|
|
$ |
305,280.50/0 |
|
Salim Ghauri,
President, Director |
|
|
211,112 |
|
|
$ |
8,445 |
|
|
|
388,888/0 |
|
|
$ |
272,221.60/0 |
|
Naeem Ghauri, CEO,
Director |
|
|
328,332 |
|
|
$ |
13,133 |
|
|
|
321,668/0 |
|
|
$ |
225,167.60/0 |
|
|
(1) |
|
The closing price of the stock at the June 30, 2003, Fiscal Year
End was $0.74. |
|
|
|
(2) |
|
All options are currently exercisable. |
|
EMPLOYMENT AGREEMENTS
Effective October 2002, we entered into a Consulting Agreement with Mark Caton.
The Agreement was for one year with a consulting fee of $60,000 and a stock
option package consisting of options to purchase 40,000 shares of common stock
as the exercise price of $.75, all of which are vested, for an additional one
year term at a fee of $60,000 and a stock option package consisting of options
to purchase 20,000 shares of common stock at the exercise price of $2.50.
These options vest quarterly.
42
Effective April 22, 2002, we entered into an employment agreement with Naeem
Ghauri as our Chief Executive Officer. The agreement is for a base term of
three years, and continues thereafter on an at will basis until terminated by
either NetSol or Mr. Ghauri. The agreement provides for a yearly salary of
$125,000. The salary shall increase to $150,000 per year at the time we reach
profitability for a full fiscal year. The agreement also provides for such
additional compensation as the Board of Directors determines is proper in
recognition of Mr. Ghauris contributions and services to the us. In addition,
the agreement provides for option grants under our employee stock option plan
of 100,000 options (post-reverse split) granted on April 2002, 25% of which
vest at the beginning of each quarter. Further, 40,000 additional options are
to be granted upon our achievement of $9,500,000 in revenues and $50,000 EBITDA
for the calendar year 2002.
Effective April 22, 2002, we entered into an employment agreement with Najeeb
Ghauri as Corporate Secretary. The agreement is for a base term of three years,
and continues thereafter on an at will basis until terminated by either NetSol
or Mr. Ghauri. The agreement provides for a yearly salary of $125,000. In June
2002, Mr. Ghauris responsibilities were increased when he was appointed Chief
Financial Officer and elected Chairman of the Board. The salary is to increase
to $150,000 per year at the time we reach profitability for a full fiscal year.
The agreement also provides for such additional compensation as the Board of
Directors determines is proper in recognition of Mr. Ghauris contributions and
services to NetSol. In addition, the agreement provides for option grants under
the Companys employee stock option plan of 100,000 options (post-reverse
split) granted on April 2002, 25% of which vest at the beginning of each
quarter. Further, 40,000 additional options are to be granted upon our
achievement of $9,500,000 in revenues and $50,000 EBITDA for the calendar year
2002.
Effective April 22, 2002, we entered into an employment agreement with Salim
Ghauri as the President and Chief Executive Officer our Pakistan subsidiary.
The agreement is for a base term of three years, and continues thereafter on an
at will basis until terminated by either us or Mr. Ghauri. The agreement
provides for a yearly salary of $100,000. The salary is to increase to
$150,000 per year at the time we reach profitability for a full fiscal year.
The agreement also provides for such additional compensation as the Board of
Directors determines is proper in recognition of Mr. Ghauris contributions and
services to NetSol. In addition, the agreement provides for option grants under
our employee stock option plan of 100,000 options (post-reverse split) granted
on April 2002, 25% of which vest at the beginning of each quarter. Further,
40,000 additional options are to be granted upon our achievement of $9,500,000
in revenues and $50,000 EBITDA for the calendar year 2002.
All of the above agreements provide for certain paid benefits such as employee
benefit plans and medical care plans at such times as we may adopt them. The
agreements also provide for reimbursement of reasonable business-related
expenses and for two weeks of paid vacation. The agreements also provide for
certain covenants concerning non-competition, non-disclosure, indemnity and
assignment of intellectual property rights.
The Company currently has two
Incentive and Nonstatutory stock option plans in force for 2001 and
2002 and two other plans from 1997 and 1999. No options have been
issued under the 1997 and 1999 plans in the past two fiscal years.
The 2001 plan authorizes the issuance of up to 2,000,000 options to purchase
common stock of which 1,717,000 have been granted. The average price of grants
is $1.17.
The 2002 plan authorizes the issuance of up to $2,000,000 options to purchase
common stock of which 553,083 options have been granted. The average price of
these grants is $1.70.
43
FINANCIAL STATEMENTS
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Description |
|
|
|
|
Independent Auditors Report |
|
|
F-2 |
|
Consolidated Balance Sheet as of June 30, 2003 |
|
|
F-3 |
|
Consolidated Statements of Operations for the Years Ended June 30, 2003 and 2002 |
|
|
F-4 |
|
Consolidated Statements of Stockholders Equity for the Years Ended June 30, 2003 and 2002 |
|
|
F-5 |
|
Consolidated Statements of Cash Flows for the Years Ended June 30, 2003 and 2002 |
|
|
F-6 |
|
Notes to Consolidated Financial Statements |
|
|
F-9 |
|
F-1
INDEPENDENT AUDITORS REPORT
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the accompanying consolidated balance sheet of NetSol
Technologies, Inc. and subsidiaries as of June 30, 2003, and the related
consolidated statements of operations, stockholders equity and cash flows for
the years ended June 30, 2003 and 2002. These financial statements are the
responsibility of the Companys 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 $4,233,424 as of June 30, 2003 and
combined total net revenues of $2,766,174 and $1,932,000 for the years ended
June 30, 2003 and 2002, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and in 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,
2003 and 2002, 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 reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of NetSol Technologies,
Inc. and subsidiaries as of June 30, 2003 and the results of its consolidated
operations and its cash flows for the years ended June 30, 2003 and 2002 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 accumulated deficit, has negative cash flows from
operations, and has a net working capital deficit. These factors raise
substantial doubt about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
August 11, 2003
F-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
214,490 |
|
|
|
|
|
|
|
Accounts receivable, net of allowance of allowance for doubtful debts of $80,000 |
|
|
627,900 |
|
|
|
|
|
|
|
Revenues in excess of billings |
|
|
603,647 |
|
|
|
|
|
|
|
Other current assets |
|
|
328,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
1,774,553 |
|
Property and equipment, net of accumulated depreciation and amortization |
|
|
|
|
|
|
2,037,507 |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
|
Product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, net |
|
|
2,603,035 |
|
|
|
|
|
|
|
Customer lists, net |
|
|
957,234 |
|
|
|
|
|
|
|
Goodwill, net |
|
|
1,369,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles |
|
|
|
|
|
|
4,930,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,742,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
2,090,159 |
|
|
|
|
|
|
|
Current portion of notes and obligations under capitalized leases |
|
|
760,786 |
|
|
|
|
|
|
|
Billings in excess of revenues |
|
|
104,079 |
|
|
|
|
|
|
|
Loan payable, bank |
|
|
578,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
3,533,614 |
|
Obligations under capitalized leases, |
|
|
|
|
|
|
|
|
|
|
less current maturities |
|
|
|
|
|
|
7,111 |
|
Loans payable |
|
|
|
|
|
|
126,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
3,667,399 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 25,000,000 share authorized;
5,757,175 issued and outstanding |
|
|
5,757 |
|
|
|
|
|
|
Additional paid-in-capital |
|
|
33,409,953 |
|
|
|
|
|
|
Accumulated deficit |
|
|
(28,405,255 |
) |
|
|
|
|
|
Stock subscription receivable |
|
|
(84,900 |
) |
|
|
|
|
|
Other comprehensive income |
|
|
149,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
|
|
|
|
5,074,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,742,251 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
|
|
|
$ |
3,745,386 |
|
|
$ |
3,578,113 |
|
Cost of revenues |
|
|
|
|
|
|
1,778,993 |
|
|
|
2,961,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
1,966,393 |
|
|
|
616,433 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
|
|
|
|
76,136 |
|
|
|
168,840 |
|
|
Depreciation and amortization |
|
|
|
|
|
|
1,576,890 |
|
|
|
2,115,399 |
|
|
Bad debt expense |
|
|
|
|
|
|
415,384 |
|
|
|
|
|
|
Salaries and wages |
|
|
|
|
|
|
934,383 |
|
|
|
1,461,157 |
|
|
Professional services, including non-cash compensation |
|
|
|
|
|
|
272,447 |
|
|
|
964,508 |
|
|
General and administrative |
|
|
|
|
|
|
956,644 |
|
|
|
1,135,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
4,231,884 |
|
|
|
5,845,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
|
(2,265,491 |
) |
|
|
(5,229,134 |
) |
Other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement expenses |
|
|
|
|
|
|
(202,759 |
) |
|
|
(549,860 |
) |
|
Loss on sale of assets |
|
|
|
|
|
|
(5,464 |
) |
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
(135,243 |
) |
|
|
(113,005 |
) |
|
Miscellaneous |
|
|
|
|
|
|
(6,624 |
) |
|
|
(106,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses |
|
|
|
|
|
|
(350,090 |
) |
|
|
(769,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
|
|
|
|
(2,615,581 |
) |
|
|
(5,998,864 |
) |
Gain from discontinuation of a subsidiary |
|
|
|
|
|
|
478,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
$ |
(2,137,506 |
) |
|
$ |
(5,998,864 |
) |
Other comprehensive (loss)/gain - Translation adjustment |
|
|
|
|
|
|
(380,978 |
) |
|
|
380,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
$ |
(2,518,484 |
) |
|
$ |
(5,618,348 |
) |
Net loss per share - basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued operations |
|
|
|
|
|
$ |
(0.57 |
) |
|
$ |
(2.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
$ |
0.11 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
$ |
(0.47 |
) |
|
$ |
(2.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number
of shares outstanding - basic and diluted* |
|
|
|
|
|
|
4,512,203 |
|
|
|
3,006,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*( The basic and diluted net loss per share has been retroactively restated to effect a 5:1 reverse
stock split on August 18, 2003
F-4
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 2002 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock* |
|
Additional |
|
Stock |
|
Other |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in |
|
Subscriptions |
|
Comprehensive |
|
Accumulated |
|
Stockholders |
|
|
|
|
|
|
Shares |
|
Amount |
|
|
|
|
|
Capital |
|
Receivable |
|
Income/(Loss) |
|
Deficit |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2001 |
|
|
|
|
|
|
2,343,438 |
|
|
$ |
2,343 |
|
|
|
|
|
|
$ |
30,052,835 |
|
|
$ |
(43,650 |
) |
|
$ |
149,759 |
|
|
$ |
(20,268,885 |
) |
|
$ |
9,892,402 |
|
Common stock sold through
private placements |
|
|
|
|
|
|
403,436 |
|
|
|
403 |
|
|
|
|
|
|
|
324,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324,850 |
|
Issuance of common stock in
exchange for settlement |
|
|
|
|
|
|
130,000 |
|
|
|
130 |
|
|
|
|
|
|
|
103,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,000 |
|
Issuance of common stock in
exchange for services rendered |
|
|
|
|
|
|
163,000 |
|
|
|
163 |
|
|
|
|
|
|
|
116,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,995 |
|
Exercise of common stock options |
|
|
|
|
|
|
825,718 |
|
|
|
826 |
|
|
|
|
|
|
|
861,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
862,295 |
|
Common stock options granted
for services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338,007 |
|
Short swing profit contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,650 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,516 |
|
|
|
|
|
|
|
380,516 |
|
Net loss for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,998,864 |
) |
|
|
(5,998,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2002 |
|
|
|
|
|
|
3,865,592 |
|
|
|
3,865 |
|
|
|
|
|
|
|
31,807,110 |
|
|
|
(43,650 |
) |
|
|
530,275 |
|
|
|
(26,267,749 |
) |
|
|
6,029,851 |
|
Continued
F-5
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY - Continued
FOR THE YEARS ENDED JUNE 30, 2002 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock* |
|
Additional |
|
Stock |
|
Other |
|
|
|
|
|
Total |
|
|
|
|
Paid-in |
|
Subscriptions |
|
Comprehensive |
|
Accumulated |
|
Stockholders |
|
|
|
|
|
|
Shares |
|
Amount |
|
|
|
|
|
Capital |
|
Receivable |
|
Income/(Loss) |
|
Deficit |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2002 |
|
|
|
|
|
|
3,865,593 |
|
|
|
3,865 |
|
|
|
|
|
|
|
31,807,110 |
|
|
|
(43,650 |
) |
|
|
530,275 |
|
|
|
(26,267,749 |
) |
|
|
6,029,851 |
|
Common stock sold through
private placements |
|
|
|
|
|
|
459,770 |
|
|
|
460 |
|
|
|
|
|
|
|
364,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
365,219 |
|
Issuance of common stock in
exchange for services |
|
|
|
|
|
|
48,400 |
|
|
|
48 |
|
|
|
|
|
|
|
16,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,700 |
|
Issuance of common stock in
exchange for accrued compensation |
|
|
|
|
|
|
45,000 |
|
|
|
45 |
|
|
|
|
|
|
|
22,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,500 |
|
Exercise of common stock options |
|
|
|
|
|
|
954,983 |
|
|
|
955 |
|
|
|
|
|
|
|
849,861 |
|
|
|
(41,250 |
) |
|
|
|
|
|
|
|
|
|
|
809,566 |
|
Exercise of common stock warrants |
|
|
|
|
|
|
60,000 |
|
|
|
60 |
|
|
|
|
|
|
|
35,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,000 |
|
Issuance of common stock in
exchange for notes payable |
|
|
|
|
|
|
71,429 |
|
|
|
71 |
|
|
|
|
|
|
|
24,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
Issuance of common stock in
exchange for settlement |
|
|
|
|
|
|
40,000 |
|
|
|
40 |
|
|
|
|
|
|
|
49,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
Issuance of common stock in
exchange for purchase of Altiva |
|
|
|
|
|
|
212,000 |
|
|
|
212 |
|
|
|
|
|
|
|
211,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,000 |
|
Common stock options granted
for services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,500 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380,978 |
) |
|
|
|
|
|
|
(380,978 |
) |
Net loss for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,137,506 |
) |
|
|
(2,137,506 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2003 |
|
|
|
|
|
|
5,757,175 |
|
|
$ |
5,756 |
|
|
|
|
|
|
$ |
33,409,954 |
|
|
$ |
(84,900 |
) |
|
$ |
149,297 |
|
|
$ |
(28,405,255 |
) |
|
$ |
5,074,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*All share amounts have been retro-actively restated to reflect the reverse stock split of 5:1 effected on August 18, 2003.
F-6
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years |
|
|
|
|
Ended June 30, |
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
|
|
|
$ |
(2,137,506 |
) |
|
$ |
(5,998,864 |
) |
|
Adjustments to reconcile net loss to net cash
Used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
1,576,890 |
|
|
|
2,115,399 |
|
|
Provision for uncollectible accounts |
|
|
|
|
|
|
80,000 |
|
|
|
|
|
|
Gain on discontinued operations |
|
|
|
|
|
|
(478,075 |
) |
|
|
|
|
|
Loss on disposal of assets |
|
|
|
|
|
|
5,464 |
|
|
|
|
|
|
Fair market value of stock options granted |
|
|
|
|
|
|
26,500 |
|
|
|
|
|
|
Stock issued for accrued compensation |
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
Stock issued for services |
|
|
|
|
|
|
39,200 |
|
|
|
856,048 |
|
|
Stock issued for settlement costs |
|
|
|
|
|
|
50,000 |
|
|
|
104,000 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
464,634 |
|
|
|
1,004,375 |
|
|
|
Other current assets |
|
|
|
|
|
|
(585,145 |
) |
|
|
(58,074 |
) |
|
|
Other assets |
|
|
|
|
|
|
(347,743 |
) |
|
|
(126,257 |
) |
|
(Decrease) increase in liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
|
|
|
|
(899,734 |
) |
|
|
971,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
|
|
|
|
(2,180,515 |
) |
|
|
(1,131,912 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
|
|
|
|
|
(127,822 |
) |
|
|
(126,283 |
) |
|
Sales of fixed assets |
|
|
|
|
|
|
92,271 |
|
|
|
|
|
|
Proceeds from sale of certificates of deposit |
|
|
|
|
|
|
714,334 |
|
|
|
35,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
|
678,783 |
|
|
|
(90,617 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock |
|
|
|
|
|
|
365,219 |
|
|
|
324,850 |
|
|
Proceeds from the exercise of stock options & warrants |
|
|
|
|
|
|
845,566 |
|
|
|
461,249 |
|
|
Proceeds from loans |
|
|
|
|
|
|
351,868 |
|
|
|
|
|
|
Payments on capital lease obligations |
|
|
|
|
|
|
(132,972 |
) |
|
|
(163,476 |
) |
|
Short swing profit contribution |
|
|
|
|
|
|
|
|
|
|
9,650 |
|
|
Proceeds from convertible notes |
|
|
|
|
|
|
|
|
|
|
371,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
1,429,681 |
|
|
|
1,003,318 |
|
Effect of exchange rate changes in cash |
|
|
|
|
|
|
199,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
|
|
|
|
127,576 |
|
|
|
(219,211 |
) |
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
86,914 |
|
|
|
306,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
|
|
|
|
$ |
214,490 |
|
|
$ |
86,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
135,243 |
|
|
$ |
74,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes |
|
$ |
10,344 |
|
|
$ |
4,000 |
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Common stock issued for services and accrued compensation |
|
$ |
39,200 |
|
|
$ |
116,995 |
|
|
|
|
|
|
|
|
|
|
|
|
Granting of common stock options in exchange for
services received (including exercise of options for services) |
|
$ |
26,500 |
|
|
$ |
739,053 |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for notes payable |
|
$ |
25,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for legal settlement |
|
$ |
50,000 |
|
|
$ |
104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition of subsidiary |
|
$ |
212,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
F-8
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS
NetSol Technologies, Inc. and subsidiaries (the Company), formerly known as
Netsol International, Inc. and 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, Ltd. 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, Ltd., a Pakistani Company, and 43% and 57%
of the outstanding common stock of NetSol UK, Limited, a United Kingdom
Company, for the issuance of 938,000 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,
trade names 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
using 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, 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. On March 18, 2002, the final Winding-up Order was made relating
to the liquidation of for NetSol UK on the petition of a creditor in
respect of services supplied presented to the Court. |
|
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 50,000 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 using
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
using 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. |
|
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 31,000 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 |
|
F-9
|
|
|
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 using 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 using 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. |
|
Altiva Corporation
|
|
|
On May 20, 2003, the Company acquired 100% of the outstanding capital
stock of Altiva Technologies, Inc. for an aggregate purchase price of
$257,000. 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
$257,000. The management of the Company allocated $30,000 of the purchase
price to customer lists & $23,688 to property and equipment. The excess
of the purchase price over the estimated fair values of the net assets
acquired of $203,312, was recorded as goodwill,. |
|
Business Combinations Accounted for Under the Pooling of Interest Method:
Abraxas Australia Pty, Limited
|
|
|
On January 3, 2000, the Company issued 30,000 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. |
|
Winding-up order:
|
|
|
Effective November 26, 2001, Network Solutions Ltd., the operating
subsidiary of Network Solutions Group Ltd., entered into a Winding-up Order
with The Insolvency Service in the United Kingdom (UK). The Insolvency
Service is an executive agency within the Department of Trade and Industry
in the UK. The Company also placed NetSol UK Ltd, Network Solutions Group
Ltd. and Network Solutions Northern Ltd. (non-operating entities) into the
Winding-up Order status. None of the UK entities have had any operations
for the year ended June 30, 2003 and 2002. NetSol Technologies negotiated
a settlement agreement with the largest creditor of Network Solutions Ltd.
NetSol Technologies has now assumed this debt of approximately $188,500
(See Note 8). This settlement was reached to remove the personal guarantee
of a prior director of NetSol Technologies, subject to the terms of the
agreement being satisfied. |
|
|
|
|
|
On March 18, 2002, the final Winding-up Order was made relating to the
liquidation of this subsidiary on the petition of a creditor in respect of
services supplied presented to the Court. During the six month period
ending |
|
F-10
|
|
|
December 31, 2002, the Company wrote-off debts of NetSol (UK) Ltd. in the
amount of $478,075, based upon the Companys counsel that the creditors
have no standing to enforce their claims on the Parent Company in the
United States. The Company has reflected such write-off as a gain from
discontinuation of subsidiary in the accompanying statements of operation. |
|
Formation of Subsidiary:
|
|
|
During the period ended December 31, 2002, the Company formed a subsidiary
in the UK, NetSol Technologies Ltd., as a wholly-owned subsidiary of
NetSol Technologies, Inc. This entity is planned to serve as the main
marketing and delivery arm for services and products sold and delivered in
the UK and mainland Europe. |
|
NOTE 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, NetSol Technologies (Pvt),
Ltd., NetSol (Pvt), Limited, NetSol Connect (Pvt), Ltd., NetSol
Technologies Limited, Network Solutions Group Ltd. and Subsidiaries,
NetSolAbraxas Australia Pty Ltd., NetSol eR, Inc., Intereve Corporation
(dormant in 2003), Supernet AG (dormant in 2002), NetSol USA, Inc., and
NetSol Altiva, Inc. All material inter-company accounts have been
eliminated in consolidation. |
|
Company name change:
|
|
|
Effective February 8, 2002, the Company changed its name from NetSol
International, Inc. to NetSol Technologies, Inc. The name change was
approved by a majority of shareholders at the Companys annual
shareholders meeting held on January 25, 2002. |
|
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 consolidated financial statements in conformity with
generally accepted accounting principles 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 $700,000 for the year ended June 30, 2002 and $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) at the date of
change in estimation in 2001 has been amortized over the remaining life of
57 months. The Company evaluates, on on-going basis, the accounting effect
arising from the recently issued SFAS No. 142, Goodwill and Other
Intangibles which becomes effective to the Companys financial statements
beginning July 1, 2002. |
|
Cash and Cash Equivalents:
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. |
|
F-11
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. |
|
Accounts Receivable:
|
|
|
The Companys customer base consists of a geographically dispersed
customer base. The Company maintains reserves for potential credit losses
on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations,
customer credit worthiness, current economic trends and changes in
customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis. |
|
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. |
|
|
|
|
|
The Company accounts for the costs of computer software developed or
obtained for internal use in accordance with Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. The Company capitalizes costs of materials, consultants,
and payroll and payroll-related costs for employees incurred in developing
internal-use computer software. These costs are included with Computer
equipment and software. Costs incurred during the preliminary project
and post-implementation stages are charged to general and administrative
expense. |
|
Intangible Assets:
|
|
|
Intangible assets consist of product licenses, renewals, enhancements,
copyrights, trademarks, trade names, customer lists and goodwill. The
Company evaluates intangible assets, goodwill and other long-lived assets
for impairment, at least on an annual basis and whenever events or changes
in circumstances indicate that the carrying value may not be recoverable
from its estimated future cash flows. Recoverability of intangible assets,
other long-lived assets and, goodwill is measured by comparing their net
book value to the related projected undiscounted cash flows from these
assets, considering a number of factors including past operating results,
budgets, economic projections, market trends and product development
cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second
test is performed to measure the amount of impairment loss. Potential
impairment of goodwill after July 1, 2002 is being evaluated in accordance
with SFAS No. 142. The SFAS No. 142 is applicable to the financial
statements of the Company beginning July 1, 2002. |
|
|
|
|
|
As part of intangible assets, the Company capitalizes certain computer
software development costs in accordance with SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.
Costs incurred internally to create a computer software product or to
develop an enhancement to an existing product are charged to expense when
incurred as research and development expense until technological
feasibility for the respective product is established. Thereafter, all
software development costs are capitalized and reported at the lower of
unamortized cost or net realizable value. Capitalization ceases when the
product or enhancement is available for general release to customers. |
|
|
|
|
|
The Company makes on-going evaluations of the recoverability of its
capitalized software projects by comparing the amount capitalized for each
product to the estimated net realizable value of the product. If such
evaluations indicate that the unamortized software development costs exceed
the net realizable value, the Company writes off the amount which the
unamortized software development costs exceed net realizable value.
Capitalized and purchased computer software development costs are being
amortized ratably based on the projected revenue associated with the
related software or on a straight-line basis over three years, whichever
method results in a
higher level of amortization. |
|
F-12
Going Concern:
|
|
|
The Companys 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. As of
June 30, 2003, the Company had an accumulated deficit of $28,405,255 and a
working capital deficit of approximately $1,759,061.. 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 Companys
ability to continue as a going concern. |
|
|
|
|
|
Management recognizes that the Company must generate additional resources
to enable it to continue operations. Management has closed down its loss
generating UK entities, disposed of its German subsidiary, and is
continually evaluating cost cutting measures at every entity level.
Additionally, managements plans also include the sale of additional equity
securities and debt financing from related parties and outside third
parties (note 13). 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. |
|
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 Companys physical facilities and
operations, which are located in North America, Australia, England, 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. The war in Iraq and a poor
economy may also have a material adverse effect on the Companys operations
and future financial performance. These developments will subject the
Companys worldwide operations to increased risks and, depending on their
magnitude, could have a material adverse effect on the Companys financial
position, results of operations or liquidity. |
|
Statement of Cash Flows:
|
|
|
In accordance with Statement of Financial Accounting Standards No. 95,
Statement of Cash Flows, cash flows from the Companys operations is
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. |
|
Revenue Recognition:
|
|
|
The Company recognizes its revenue in accordance with the Securities and
Exchange Commissions (SEC) Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101) and The American Institute
of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, as amended as amended by SOP 98-4 and
SOP 98-9. The Companys revenue recognition policy is as follows: |
|
|
|
|
|
License Revenue. The Company recognizes revenue from license contracts
when a non-cancelable, non-contingent license agreement has been signed,
the software product has been delivered, no uncertainties exist surrounding
product acceptance, fees from the agreement are fixed and determinable and
collection is probable. 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 |
|
F-13
|
|
|
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. |
|
|
|
|
|
Services Revenue. Revenue from consulting services is recognized as the
services are performed for time-and-materials contracts and contract
accounting is utilized for fixed-price contracts. Revenue from training
and development services is recognized as the services are performed.
Revenue from maintenance agreements is recognized ratably over the term of
the maintenance agreement, which in most instances is one year. |
|
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. |
|
Advertising Costs:
|
|
|
The Company expenses the cost of advertising as incurred or, as
appropriate, the first time the advertising takes place. Advertising costs
for the years ended June 30, 2003 and 2002 were insignificant. |
|
Net Loss Per Share:
|
|
|
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), Earnings per share.
Basic net loss per share is based upon the weighted average number of common
shares outstanding. Diluted net loss per share is based on the assumption
that all dilutive convertible shares and stock options were converted or
exercised. Dilution is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average
market price during the period. |
|
|
|
|
|
The weighted average number of shares used to compute basic and diluted loss
per share is the same in these financial statements since the effect of
dilutive securities is anti-dilutive. |
|
Reverse stock split:
|
|
|
On August 18, 2003, the Company effected a 1 for 5 reverse stock split for
all the issued and outstanding shares of common stock. All historical share
and per share amounts in the accompanying consolidated financial statements
have been restated to reflect the 5:1 reverse stock split. |
|
Other Comprehensive Income & Foreign Currency Translation:
|
|
|
SFAS 130 requires unrealized gains and losses on the Companys 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. The accounts of NetSol
UK, Limited use British Pounds, NetSol Technologies (Pvt) Ltd., NetSol (Pvt),
Ltd., and NetSol Connect Pvt, Ltd. use Pakistan Rupees, NetSol Abraxas
Australia Pty, Ltd. uses the Australian dollar as the functional currencies.
NetSol Technologies, Inc., NetSol USA, Inc., Intereve Corporation and NetSol
eR, Inc., and NetSol Altiva, Inc., use 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. During the year ended June 30, 2003 and
2002, comprehensive income included net translation loss and translation gain
of $380,978 and $380,516, respectively. Other comprehensive income, as
presented on the accompanying consolidated balance sheet in the stockholders
equity section amounted to $149,297 as of June 30, 2003. |
|
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. |
|
F-14
|
|
|
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 Companys financial statements. |
|
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, 2003, the Company had net federal and state operating loss
carry forwards expiring in various years through 2023. During the year ended
June 30, 2003, the valuation allowance increased by $855,000; primarily due
to the net operating loss carry forward. 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 at June 30, 2003 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
State |
|
Total |
|
|
|
|
|
|
|
Net operating loss carry forward |
|
$ |
16,137,500 |
|
|
$ |
9,212,500 |
|
|
|
|
|
Effective tax rate |
|
|
32 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset |
|
|
5,164,000 |
|
|
|
737,000 |
|
|
|
5,901,000 |
|
Valuation allowance |
|
|
(3,604,000 |
) |
|
|
(347,000 |
) |
|
|
(3,951,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the
Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
June 30, |
|
|
2003 |
|
2002 |
|
|
|
|
|
Tax expense (credit) at statutory rate-federal |
|
|
(32 |
)% |
|
|
(32 |
)% |
State tax expense net of federal tax |
|
|
(8 |
) |
|
|
(8 |
) |
Permanent differences |
|
|
1 |
|
|
|
|
|
Valuation allowance |
|
|
39 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
Tax expense at actual rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
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 2003 and 2002, the
effect of which was not material to the Companys financial position or
results of operations as the Company does not participates in such
activities. |
|
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 establishes
benchmarks at the lowest level (entity level) as its method of assessing
impairment. In measuring impairment, unidentifiable goodwill is considered
impaired if the fair value at the lowest level is less than its carrying
amount. The fair value of unidentifiable goodwill is 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 is equal to the difference between the carrying amount of
goodwill and the fair value of goodwill. In the event that impairment is
recognized, appropriate disclosures are made. |
|
|
|
|
|
As of June 30, 2003, the Company determined the fair value of goodwill was
equal to its carrying value. |
|
Reporting segments:
|
|
|
Statement of financial accounting standards No. 131, Disclosures about
segments of an enterprise and related information (SFAS No. 131), which
superceded statement of financial accounting standards No. 14, Financial
reporting for segments of a business enterprise, establishes standards for
the way that public enterprises report information about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial statements regarding products
and services, geographic areas and major customers. SFAS No. 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performances. The Company allocates its resources and assesses the
performance of its sales activities based upon geographic locations of its
subsidiaries (note 12). |
|
New Accounting Pronouncements:
|
|
|
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, was issued in August 2001. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, and addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121 Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal |
|
F-16
|
|
|
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a
business. The adoption of SFAS 144 does not have a material effect on the
earnings or financial position of the Company. |
|
|
|
|
|
In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). SFAS 145 rescinds the automatic treatment of gains
or losses from extinguishments of debt as extraordinary unless they meet the
criteria for extraordinary items as outlined in APB Opinion No. 30, Reporting
the Results of Operations, Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions and makes various technical corrections to
existing pronouncements. The provisions of SFAS 145 related to the
rescission of FASB Statement 4 are effective for fiscal years beginning after
May 15, 2002, with early adoption encouraged. All other provisions of SFAS
145 are effective for transactions occurring after May 15, 2002, with early
adoption encouraged. The adoption of SFAS 145 does not have a material
effect on the earnings or financial position of the Company. |
|
|
|
|
|
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF Issue 94-3, a liability for an exit cost, as
defined, was recognized at the date of an entitys commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. The adoption of SFAS 146 does not have a material
effect on the earnings or financial position of the Company. |
|
|
|
|
|
On January 1, 2002, the Company adopted Financial Accounting Standards Board
Emerging Issues Task Force No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred, (EITF
01-14). EITF 01-14 requires companies to characterize reimbursements
received for out-of-pocket expenses incurred as revenue and to reclassify
prior period financial statements to conform to current year presentation for
comparative purposes. The Companys Services revenues now include
reimbursable out-of-pocket expenses and Cost of services expenses include
the costs associated with reimbursable out-of-pocket expenses. Prior to the
adoption of EITF 01-14 the Companys historical financial statements recorded
these expenses as net amounts in Cost of services. The adoption of EITF
01-14 did not have a significant impact on the services gross margin
percentage and had no effect on net loss. |
|
|
|
|
|
In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also requires that at all
times a company issues a guarantee, ANZA must recognize an initial liability
for the fair market value of the obligations it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions of FIN 45
apply on a prospective basis to guarantees issued or modified after December
31, 2002. The adoption of this requirement has not had a material effect on
its financial position or results of operations. |
|
|
|
|
|
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51 for certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies to variable interest entities created after January
31, 2003, and to variable interest entities in which an enterprise obtains an
interest after that date. The Company believes that the adoption of the
disclosure provisions of this statement will not have a material effect on
its financial position or results of operations. |
|
|
|
|
|
In March 2003, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. This Statement amends SFAS No.
123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company does not expect
to adopt |
|
F-17
|
|
|
SFAS No. 123. The additional presentation requirements are not
meaningful since few employee options were granted during the periods
presented. The proforma information regarding net loss and loss per share,
pursuant to the requirements of FASB 123 for the years end June 30, 2003 and
2002 have been presented in the note 10. |
|
|
|
|
|
On April 30, the FASB issued FASB Statement No. 149 (SFAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149
amends and clarifies the accounting guidance on (1) derivative instruments
(including certain derivative instruments embedded in other contracts) and
(2) hedging activities that fall within the scope of FASB Statement No. 133
(SFAS 133), Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 also amends certain other existing pronouncements, which will result
in more consistent reporting of contracts that are derivatives in their
entirety or that contain embedded derivatives that warrant separate
accounting. SFAS 149 is effective (1) for contracts entered into or modified
after June 30, 2003, with certain exceptions, and (2) for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The adoption of SFAS 149 does not have a material effect on
the earnings or financial position of the Company. |
|
|
|
|
|
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, (SFAS No.
150). SFAS No. 150 establishes standards for how an issuer classifies and
measurers in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In
accordance with SFAS No. 150, financial instruments that embody obligations
for the issuer are required to be classified as liabilities. SFAS No. 150
shall be effective for financial instruments entered into or modified after
May 31, 2003, and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS 150 does
not have a material effect on the earnings or financial position of the
Company. |
|
Reclassifications:
|
|
|
For comparative purposes, prior years consolidated financial statements have
been reclassified to conform with report classifications of the current year. |
|
NOTE 3 MAJOR CUSTOMERS
|
|
|
Included in accounts receivable as of June 30, 2002 is approximately $761,000
due from one major customer. During the years ended June 30, 2002, one major
customer accounted for approximately 11% of net revenues. The Company did not
have a major customer with over 10% of net revenue, in the year ended June
30, 2003. |
|
NOTE 4 OTHER CURRENT ASSETS
|
|
|
Other current assets comprise of the following as of June 30, 2003: |
|
|
|
|
|
|
|
Prepaid Expenses |
|
$ |
153,239 |
|
Advance Income Tax |
|
|
50,185 |
|
Employee Advances |
|
|
6,134 |
|
Security Deposits |
|
|
18,837 |
|
Other Receivables |
|
|
100,121 |
|
|
|
|
|
|
|
Total |
|
$ |
328,516 |
|
|
|
|
|
|
F-18
NOTE 5 - PROPERTY AND EQUIPMENT
|
|
|
Property and equipment, net, consist of the following at June 30, 2003: |
|
|
|
|
|
|
|
|
Office furniture and equipment |
|
$ |
418,612 |
|
Computer equipment |
|
|
1,767,168 |
|
Web-site development |
|
|
181,499 |
|
Assets under capital leases |
|
|
664,322 |
|
Construction in process |
|
|
614,639 |
|
Land |
|
|
179,903 |
|
Autos |
|
|
133,220 |
|
Improvements |
|
|
188,516 |
|
|
|
|
|
|
|
Subtotal |
|
|
4,147,879 |
|
Accumulated depreciation & amortization |
|
|
(2,110,372 |
) |
|
|
|
|
|
|
|
$ |
2,037,507 |
|
|
|
|
|
|
|
|
|
|
For the years ended June 30, 2003 and 2002, depreciation and amortization
expense totaled $187,362 and $779,587, respectively. Accumulated
depreciation and amortization for assets under capital leases amounted to
$372,623 and $348,791 at June 30, 2003 and 2002, respectively. |
|
NOTE 6 - INTANGIBLE ASSETS
|
|
|
Intangible assets consist of the following at June 30, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Licenses |
|
Customer Lists |
|
Goodwill |
|
Total |
|
|
|
|
|
|
|
|
|
Intangible asset |
|
$ |
4,894,838 |
|
|
$ |
1,977,877 |
|
|
$ |
2,153,311 |
|
|
$ |
9,026,026 |
|
Accumulated amortization |
|
|
(2,291,803 |
) |
|
|
(1,020,643 |
) |
|
|
(783,389 |
) |
|
|
(4,095,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,603,035 |
|
|
$ |
957,234 |
|
|
$ |
1,369,922 |
|
|
$ |
4,930,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2003 |
|
$ |
680,125 |
|
|
$ |
316,015 |
|
|
$ |
393,388 |
|
|
$ |
1,389,528 |
|
Year ended June 30, 2002 |
|
$ |
680,125 |
|
|
$ |
265,687 |
|
|
$ |
390,000 |
|
|
$ |
1,335,812 |
|
|
|
|
At June 30, 2003, product licenses, renewals, enhancements, copyrights,
trademarks, and trade names, included unamortized software development and
enhancement costs of $562,659 as the development and enhancement is yet to be
completed. |
|
|
|
|
|
Effective July 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, (SFAS 142).
SFAS 142 requires that goodwill no longer be amortized and that it be
assessed for impairment on an annual basis. The Company is evaluating any
accounting effect, if any, arising from the recently issued SFAS No. 142,
Goodwill and Other Intangibles on the Companys financial position or
results of operations. |
|
NOTE 7 - LETTER OF CREDIT
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.
The customer, Daimler Chrysler Singapore released the letter of credit
performance bond in September 2002. The company was able to utilize the
cash of $500,000 in five months starting from September 2002. As of June 30,
2003, |
|
F-19
|
|
|
the Company has no letter of credit outstanding. |
|
NOTE 8 NOTES PAYABLE
|
|
|
In December 2001, as part of the winding up of Network Solutions Ltd. the
parent agreed to assume the note payable of one of the major creditors,
Barclays Bank PLC of £130,000 or $188,500 USD (see Note 1). In November
2002, the parties agreed upon a settlement agreement whereby the Company
would pay £1,000 per month for twelve months and £2,000 per month thereafter
until paid. During the fiscal years ended June 30, 2003 and 2002, the
Company paid approximately £2,000 ($3,336) and £0, respectively. The balance
owing at June 30, 2003 was $185,164. The entire balance has been classified
as current and is included in Current maturities of notes and obligations
under capitalized leases in the accompanying financial statements. |
|
|
|
|
|
In June 2002, the Company signed a settlement agreement with a former
consultant for payment of past services rendered. The Company agreed to pay
the consultant a total of $75,000. The agreement calls for monthly payments
of $1,500 per month until paid. During the current fiscal year the Company
paid $21,700. The balance owing at June 30, 2003 was $53,300, of this
amount, $18,000 has been classified as a current liability in the
accompanying financial statements. |
|
|
|
|
|
On September 25, 2002 the Company signed a settlement agreement with Adrian
Cowler (Cowler) and Surrey Design Partnership Ltd. (see Note 11). The
Company agreed to pay Cowler £218,000 pound sterling or approximately
$285,860USD plus interest, which the Company has recorded as a note payable
in the accompanying consolidated financial statements. The agreement calls
for monthly payments of £3,000 until March 2004 and then £4,000 per month
until paid. During the fiscal years ended June 30, 2003 and 2002, the
Company paid £48,731 and £24,815 or $76,248 and $35,000, respectively and
accrued $10,812 in interest. As of June 30, 2003, the balance was $185,424,
of this amount, $94,050 has been classified as a current liability in the
accompanying financial statements. |
|
|
|
|
|
In November 2002, the Company signed a settlement agreement with Herbert
Smith for £171,733 or approximately $248,871, including interest (see Note
11). The Company agreed to pay $10,000 upon signing of the agreement, $4,000
per month for twelve months, and then $6,000 per month until paid. During
the fiscal years ended June 30, 2003 and 2002, the Company paid $26,000 and
$58,000, respectively. The balance owing at June 30, 2003 was $164,871. The
entire balance has been classified as current and is included in Current
maturities of notes and obligations under capitalized leases in the
accompanying financial statements. |
|
|
|
|
|
The current maturity of notes payable, including capital lease
obligations, is as follows: |
|
|
|
|
|
|
|
Year ended June 30, 2003 |
|
$ |
760,786 |
|
Year ended June 30, 2004 |
|
|
97,200 |
|
Year ended June 30, 2005 |
|
|
29,474 |
|
|
|
|
|
|
Total |
|
$ |
887,460 |
|
|
|
|
|
|
|
NOTE 9 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 50,200 shares of common stock and 929,825
warrants, each warrant to purchase one share of the Companys common stock at
an exercise price of $6.50 for a term of five years. The total number of
warrants outstanding at June 30, 2003 is 51,890 with exercise prices ranging
from approximately $4.50 to $7.00 per warrant. |
|
F-20
Business Combinations:
|
|
|
|
|
Altiva Technologies, Inc. |
|
|
|
|
|
|
|
|
|
On May 20, 2003, the Company issued 212,000 Rule 144 restricted common shares
in exchange for all the assets and certain liabilities of Altiva
Technologies, Inc., a Delaware corporation in an Asset Purchase Agreement.
The shares were valued at the time of the purchase at $212,000 or $0.20 per
share. Proforma financial statements are not presented, as the net assets and
the operations of Altiva Technologies, Inc. were insignificant prior to the
merger. |
|
|
|
Private Placements
|
|
|
|
|
During the years ended June 30, 2003 and 2002, the Company sold 459,770 and
403,436 shares of common stock for $365,219 and $324,850, respectively,
through private placement offerings pursuant to Rule 506 of Regulation D of
the Securities and Exchange Act of 1933. The private placements were
intended to be exempt from the registration provisions of the Securities and
Exchange Commission Act of 1933 under Regulation D. |
|
|
|
Services
|
|
|
|
|
During the years ended June 30, 2003 and 2002, the Company issued 93,400 and
163,000 restricted Rule 144 common shares in exchange for accrued
compensation and services rendered, respectively. The Company recorded
compensation expense of $39,200 and $116,995 for the years ended June 30,
2003 and 2002, respectively. Compensation expense was calculated based upon
the fair market value of the freely trading shares as quoted on NASDAQ
through 2003 and 2002, over the service period. |
|
|
|
|
Issuance of shares for Conversion of Debt and Settlement of Litigation
|
|
|
|
|
During the year ended June 30, 2003, the outstanding balance of $25,000 was
converted into 71,429 restricted Rule 144 common shares. |
|
|
|
|
|
|
|
|
|
During the year ended June 30, 2003 and 2002, the Company issued 40,000 and
130,000 shares of common stock in settlement of litigation, respectively.
The shares were valued at $50,000 and $104,000, respectively. |
|
|
|
Short Swing Profits
|
|
|
|
|
During the year ending June 30, 2002, a principal stockholder, purchased and
sold shares of the Companys 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 $9,650 arising from
the sale of these shares of common stock were contributed to the Company in
June 2002. |
|
|
|
Options Exercised
|
|
|
|
|
During the years ended June 30, 2003 and 2002, the Company issued 954,983 and
825,718 shares of its common stock upon the exercise of stock options. The
Company received proceeds of $809,566 and $862,295, respectively. |
|
|
|
NOTE 10 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
The 1997 Plan
|
|
|
|
|
On April 1, 1997, the Company adopted an Incentive and Non-statutory Stock
Option Plan (the 1997 Plan) for its employees and consultants under which a
maximum of 100,000 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) Non-statutory 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 4,000 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 |
|
|
|
F-21
|
|
|
|
|
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. |
|
|
|
|
|
|
|
|
|
The number and weighted average exercise prices of options granted under the
1997 Plan for the years ended June 30, 2003 and 2002 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Number |
|
Price |
|
Number |
|
Price |
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year |
|
|
9,000 |
|
|
$ |
7.20 |
|
|
|
9,000 |
|
|
$ |
7.20 |
|
Outstanding at the end of the year |
|
|
9,000 |
|
|
$ |
7.20 |
|
|
|
9,000 |
|
|
$ |
7.20 |
|
Granted during the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Exercised during the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Exercisable at the end of the year |
|
|
9,000 |
|
|
$ |
7.20 |
|
|
|
9,000 |
|
|
$ |
7.20 |
|
Canceled/forfeited during the year |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Weighted average remaining life (years) |
|
|
.5 |
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
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. There was no activity during the year ended June 30, 2002. |
|
|
|
The 1999 Plan
|
|
|
|
|
On May 18, 1999, the Company enacted an Incentive and Non-statutory Stock
Option Plan (the 1999 Plan) for its employees, directors and consultants
under which a maximum of 1,000,000 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) Non-statutory 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. |
|
|
|
|
|
|
|
|
|
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, 2003 and 2002 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Number |
|
Price |
|
Number |
|
Price |
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year |
|
|
631,890 |
|
|
$ |
24.75 |
|
|
|
598,450 |
|
|
$ |
26.55 |
|
Outstanding at the end of the year |
|
|
631,890 |
|
|
$ |
24.75 |
|
|
|
631,890 |
|
|
$ |
24.75 |
|
Granted during the year |
|
|
|
|
|
$ |
|
|
|
|
421,866 |
|
|
$ |
1.25 |
|
|
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Number |
|
Price |
|
Number |
|
Price |
|
|
|
|
|
|
|
|
|
Exercised during the year |
|
|
|
|
|
$ |
|
|
|
|
340,426 |
|
|
$ |
1.25 |
|
Exercisable at the end of the year |
|
|
631,890 |
|
|
$ |
24.75 |
|
|
|
631,890 |
|
|
$ |
24.75 |
|
Canceled/forfeited during the year |
|
|
|
|
|
$ |
|
|
|
|
48,000 |
|
|
$ |
11.25 |
|
Weighted average remaining life (years) |
|
|
3.5 |
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
There were no options granted, exercised, cancelled, or expired under this
plan during the year ended June 30, 2003. During the year ended June 30,
2002, 340,426 options were exercised into 340,426 shares of common stock for
total consideration of $425,533 including 251,466 options exercised by
Directors and officers of the Company. |
|
|
|
|
|
|
|
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 |
|
|
1.14 |
|
|
The 2001 Plan
|
|
|
|
|
On March 27, 2002, the Company enacted an Incentive and Non-statutory Stock
Option Plan (the 2001 Plan) for its employees and consultants under which a
maximum of 2,000,000 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) Non-statutory 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 issued pursuant to the Plan
are nontransferable and subject to forfeiture. |
|
|
|
|
|
|
|
|
|
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
2001 Plan for the years ended June 30, 2003 and 2002 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Number |
|
Price |
|
Number |
|
Price |
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year |
|
|
887,908 |
|
|
$ |
0.90 |
|
|
|
|
|
|
$ |
|
|
Outstanding at the end of the year |
|
|
398,408 |
|
|
$ |
1.10 |
|
|
|
887,908 |
|
|
$ |
0.90 |
|
Granted during the year |
|
|
389,083 |
|
|
$ |
1.30 |
|
|
|
1,373,200 |
|
|
$ |
0.90 |
|
Exercised during the year |
|
|
878,583 |
|
|
$ |
.90 |
|
|
|
485,292 |
|
|
$ |
0.90 |
|
Exercisable at the end of the year |
|
|
398,408 |
|
|
$ |
1.10 |
|
|
|
887,908 |
|
|
$ |
0.90 |
|
Canceled/forfeited during the year |
|
|
|
|
|
$ |
|
|
|
|
48,000 |
|
|
$ |
|
|
Weighted average remaining life (years) |
|
|
8.4 |
|
|
|
|
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
Under the 2001 Plan, during the year ended June 30, 2003 and 2002, 878,583
options were exercised into 878,583 shares of common stock for total
consideration of $733,166 and $436,762. |
|
|
|
F-23
|
|
|
|
|
During the year ended June 30, 2003, non-cash compensation included in the
options exercised was $135,166 for 164,083 shares of common stock. Of this
amount, $75,000 or 60,000 shares of common stock was issued to officers of
the Company. Included in the options exercised was non-cash compensation of
$401,046 for 2,045,342 shares of common stock to officers of the Company, in
the year ended June 30, 2002. |
|
|
|
The 2002 Plan
|
|
|
|
|
On January 2003, the Company enacted an Incentive and Non-statutory Stock
Option Plan (the 2002 Plan) for its employees and consultants under which a
maximum of 2,000,000 options may be granted to purchase restricted Rule 144
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)
Non-statutory 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 issued pursuant to the Plan are nontransferable and subject to
forfeiture. |
|
|
|
|
|
|
|
|
|
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
2002 Plan for the year ended June 30, 2003 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
Number |
|
Price |
|
|
|
|
|
Outstanding at the beginning of the year |
|
|
|
|
|
|
|
|
Outstanding at the end of the year |
|
|
93,600 |
|
|
$ |
1.00 |
|
Granted during the year |
|
|
170,000 |
|
|
$ |
1.13 |
|
Exercised during the year |
|
|
76,400 |
|
|
$ |
1.00 |
|
Exercisable at the end of the year |
|
|
93,600 |
|
|
$ |
1.13 |
|
Canceled/forfeited during the year |
|
|
|
|
|
|
|
|
Weighted average remaining life (years) |
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
Under the 2002 Plan, during the year ended June 30, 2003, 76,400 options were
exercised into 76,400 shares of common stock for total consideration of
$76,400. |
|
|
|
|
|
|
|
|
|
Proforma information regarding net loss and loss per share, pursuant to the
requirements of FASB 123 for the years ended June 30, 2003 and 2002 are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
Proforma |
|
Historical |
|
Proforma |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
2,137,506 |
|
|
$ |
7,242,796 |
|
|
$ |
5,998,864 |
|
|
$ |
7,242,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share -
basic and diluted |
|
$ |
.47 |
|
|
$ |
0.48 |
|
|
$ |
2.00 |
|
|
$ |
2.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
NOTE 11 COMMITMENTS AND CONTINGENCIES
Leases
|
|
|
As of October of 2002, the Company moved its headquarters from its previous
facility to one with approximately 1,575 rentable square feet and a monthly
rent of $2,993.00 per month. The previous location had a monthly rent of
over $13,000 per month. The lease is on a month-to-month basis. The
facilities in Maryland are subject to a six month lease which expires in
December 2003 and thereafter operates on a month-to-month basis rented at the
rate of $1,200 per month. The Australia lease is a four-year lease that
expires in September 2003 and currently is rented at the rate of $1,380 per
month. The Pakistani facility is on a month-to-month basis and is currently
rented at the rate of approximately $10,000 per month. UK operations are
currently conducted in leased premises operating on a month-to-month basis
with current rental costs of approximately $3,000 per month. |
|
|
|
|
|
The Company entered in to a lease agreement for its corporate office in the
US beginning September 23, 2002. The term of the lease is on month-to-month
basis with either party entitled to terminate it after February 20, 2003.
Rent for the period from September 23, 2002 to September 30, 2002 was $630
and thereafter it was raised to $2,365 per month. In September 2002, the
Company paid a sum of $17,167 which constitutes a prorata rent payment for
September, six months rent in advance and a security deposit of $2,362. |
|
|
|
|
|
Rent expense amounted to $215,000 and $419,004 for the years ended June 30,
2002 and 2001, respectively. |
|
Employment Agreements
|
|
|
Effective October 2002, the Company entered into a Consulting Agreement with
Mark Caton. The Agreement was for one year with a consulting fee of $60,000
and a stock option package consisting of options to purchase 200,000 (40,000
post-reverse split) shares of common stock as the exercise price of $.015
($.75 post reverse split), all of which are vested, for an additional one
year term at a fee of $60,000 and a stock option package consisting of
options to purchase 20,000 shares of common stock at the exercise price of
$2.50. These options vest quarterly. |
|
|
|
|
|
Effective April 22, 2002, the Company entered into an employment agreement
with Naeem Ghauri as Chief Executive Officer of the Company. 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 $125,000. The salary shall increase to
$150,000 per year at the time the Company reaches profitability for a full
fiscal year. The agreement also provides for such additional compensation as
the Board of Directors of the Company determines is
proper in recognition of Mr. Ghauris contributions and services to the
Company. In addition, the agreement provides for option grants under the
Companys employee stock option plan of 100,000 options (post-reverse split)
granted on April 2002, 25% of which vest at the beginning of each quarter.
Further, 40,000 additional options are to be granted upon the Companys
achievement of $9,500,000 in revenues and $50,000 EBITDA for the calendar
year 2002. |
|
|
|
|
|
Effective April 22, 2002, the Company entered into an employment agreement
with Najeeb Ghauri as Corporate Secretary. 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 $125,000. In June 2002, Mr. Ghauris responsibilities were
increased when he was appointed Chief Financial Officer and elected Chairman
of the Board. The salary is to increase to $150,000 per year at the time the
Company reaches profitability for a full fiscal year. The agreement also
provides for such additional compensation as the Board of Directors of the
Company determines is proper in recognition of Mr. Ghauris contributions and
services to the Company. In addition, the agreement provides for option
grants under the Companys employee stock option plan of 100,000 options
(post-reverse split) granted on April 2002, 25% of which vest at the
beginning of each quarter. Further, 40,000 additional options are to be
granted upon the Companys achievement of $9,500,000 in revenues and $50,000
EBITDA for the calendar year 2002. |
|
|
|
|
|
Effective April 22, 2002, the Company entered into an employment agreement
with Salim Ghauri as the President of the Company and Chief Executive Officer
of the Companys Pakistan subsidiary. 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 $125,000. The salary is to increase to $150,000 per year at the time the
Company reaches profitability for a full fiscal year. The agreement also
provides for such additional compensation as |
|
F-25
|
|
|
the Board of Directors of the
Company determines is proper in recognition of Mr. Ghauris contributions and
services to the Company. In addition, the agreement provides for option
grants under the Companys employee stock option plan of 100,000 options
(post-reverse split) granted on April 2002, 25% of which vest at the
beginning of each quarter. Further, 40,000 additional options are to be
granted upon the Companys achievement of $9,500,000 in revenues and $50,000
EBITDA for the calendar year 2002. |
|
|
|
|
|
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 agreements
also provide for certain covenants concerning non-competition,
non-disclosure, indemnity and assignment of intellectual property rights. |
|
Litigation
|
|
|
Herbert Smith, a former attorney representing the Company, commenced a
collection proceeding against the Company in the High Court of Justice,
Queens Bench Division, on July 31, 2002, claiming the Company owed a sum
certain to it. The Company had signed an engagement letter dated October 18,
2000. Herbert Smith (HS) was hired to proceed against Surrey Design
Partnership Ltd. HS claimed the Company owed 171,733 pounds sterling or
approximately $248,871 USD. This sum includes interest in the amount of 8%
per annum and has been recorded as a note payable on the accompanying
consolidated financial statements (see note 8). On November 28, 2002, a
Consent Order was filed with the Court agreeing to a payment plan, whereby
the Company is to pay $10,000 USD upon signing of the agreement, $4,000 USD a
month for one year and $6,000 USD, per month thereafter until the debt is
paid. During the year ended June 30, 2003 the Company paid $26,000 on this
note. |
|
|
|
|
|
On April 29, 2002, Kilroy Realty L.P filed an unlawful detainer action
against the Company for unpaid rent. The parties entered a Stipulation to
Entry of Judgment on July 10, 2002 whereby the rent owed by the Company would
be taken out of a Letter of Credit held by Kilroy and the rent from August
2002 to February 2003 would be paid from the letter of credit with a promise
by the Company to replenish the letter of credit in February. Kilroy did not
draw on the letter of credit and on September 26, 2002, the Parties agreed to
terminate the lease and NetSol agreed to pay $70,000 for the back rent owed
to Kilroy. The settlement amount of $70,000 has been accrued in the
accompanying consolidated financial statements. On October 10, 2002, the
Company paid Kilroy the $70,000 due. |
|
|
|
|
|
On May 23, 2002, Allied Interstate Inc. filed a lawsuit for breach of
contract, open book account, account stated, and reasonable value against the
Company. Allied was assigned the claim from SuperNet AG, a subsidiary of
NetSol
which was acquired from Florian Zgunea and Leonard Metcsh in Frankfurt
Germany in May 2000. After almost two years, SuperNet failed to produce any
revenues and the Companys board of directors agreed with the management to
sell back SuperNet to Florian and Leonard and divest itself from the ISP
business in Germany. The price of $120,000 was agreed upon and $40,000 was
wired to Florian and Leo. Subsequently, the proxy battle with Shareholders
Group LLC ensued whereby a Receiver was in place until August 2001. Once the
Companys management was placed back in control, discussion with Florian and
Leo commenced. Again, the Company agreed to make four payments of $80,000
and a promise to cooperate by providing all the books and records of SuperNet
to the Company. In August 2001, the Company sent another payment of $20,000
as agreed upon. However, soon thereafter, the Company received an electronic
correspondence from Florian that if the Company wanted all the books and
records full payment was to be made. The Company did not make full payment
and obtained books and records from alternate sources. Allieds position is
that the Company breached its agreement with Florian and Leo, the Companys
position is that because they refused to provided access to the books and
records, they breached a covenant of the Agreement. The parties agreed on a
settlement and on May 5, 2003, Florian and Leo were issued 160,000 and
40,000, respectively, shares of the Companys restricted Rule 144 stock, with
a total value of $50,000 in settlement of this claim. |
|
|
|
|
|
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). On October 2, 2000, the Claimants filed its
Particulars of Claim and NetSol served its Defense and Counterclaim on 13th
December 2000. The Parties reached a settlement on January 29, 2002 with the
following terms I) NetSol to pay 50,000 pounds sterling; II) 3,000 pounds
sterling to be paid for 24 months beginning 31, March 2002; III) 4,000 pounds
sterling to be paid for 24 months beginning March 31, 2004; IV) NetSol to
release 155,000 shares in escrow; V) 650,000 144 shares to be issued to
Surrey Design. NetSol made some of the payments and issued all the shares.
On June 11, 2002, Plaintiff filed an enforcement of judgment in California
Superior Court of Los Angeles to enforce the judgment. A request for Entry
of Default was filed on July 30, 2002. On September 10, 2002 NetSol filed
its Opposition to Plaintiffs request for Entry |
|
F-26
|
|
|
of Judgment and on September
16, 2002, Plaintiff filed its Motion to Strike NetSols Opposition. On
September 25, 2002, the Company and Surrey Design entered into an Agreement
to Stay Enforcement of Judgment. The terms of the Agreement included (i)
NetSol to pay 25,000 pounds sterling upon execution of this Agreement; (ii)
By February 20, 2003, NetSol to pay an addition 25,000 pounds sterling; (iii)
From October 31, 2002 to February 28, 2003, NetSol to pay 3,000 pounds
sterling; and (iv) from March 31, 2003 for a period of 24 months, NetSol to
pay 4,000 pounds sterling. The settlement amount has been recorded in the
accompanying consolidated financial statements as a note payable (see Note
8). As of June 30, 2003, the Company has paid approximately 73,546 pounds
sterling or $111,248 USD. |
|
|
|
|
|
On March 27, 2003, Arab Commerce Bank filed a complaint in the Supreme Court
of the State of New York (Index No. 600709/03) seeking damages for breach of
a Note Purchase Agreement and Note. Plaintiff alleges that NetSol did not
issue stock in a timely manner in December 2000 resulting in compensatory
damages in the amount of $146,466.72. The litigation arises out of a
transaction from late 1999 in which Arab Commerce Bank invested $100,000 in
the Companys securities through a private placement. Plaintiff claims that
the removal of the legend on its shares of common stock longer than
contractually required. During this purported delay, the market value of the
Companys common shares decreased. The Plaintiff is essentially seeking the
lost value of its shares. In the event the Plaintiff is unable to collect
the amount sought, the complaint requests that NetSol repay the principal sum
of the Note of $100,000 and interest at the rate of 9% per annum based on the
maturity date of December 10, 2000. The Company is in the process of
negotiating a settlement on this matter. |
|
|
|
|
|
In addition, the Company and its subsidiaries have been named as a defendant
in legal actions arising from its normal operations, and from time-to-time,
are 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
NOTE 12 SEGMENT AND GEOGRAPHIC AREAS
|
|
|
The following table presents a summary of operating information and certain
year-end balance sheet information for the years ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
Revenues from unaffiliated customers: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
508,868 |
|
|
$ |
1,453,819 |
|
|
International |
|
|
3,236,518 |
|
|
|
2,124,294 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,745,386 |
|
|
$ |
3,578,113 |
|
|
|
|
|
|
|
|
|
|
Operating loss: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
(2,644,712 |
) |
|
$ |
(4,648,129 |
) |
|
International |
|
|
176,462 |
|
|
|
(1,130,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
(2,468,250 |
) |
|
$ |
(5,778,994 |
) |
|
|
|
|
|
|
|
|
|
Identifiable assets: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
4,689,560 |
|
|
$ |
5,888,343 |
|
|
International |
|
|
4,052,691 |
|
|
|
4,541,842 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
8,742,251 |
|
|
$ |
10,430,185 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
1,440,686 |
|
|
$ |
2,031,472 |
|
|
International |
|
|
136,204 |
|
|
|
83,927 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
1,576,890 |
|
|
$ |
2,115,399 |
|
|
|
|
|
|
|
|
|
|
Capital expenditure |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
23,688 |
|
|
$ |
|
|
|
International |
|
|
127,822 |
|
|
|
90,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
151,510 |
|
|
$ |
90,172 |
|
|
|
|
|
|
|
|
|
|
NOTE 13 SUBSEQUENT EVENTS
|
|
|
On May 5, 2003, the Company entered into an investment banking relationship
with a New York based bank; Maxim Group LLC. In July, the Company closed the
first Private Placement Offering with Maxim as the placement agent for
$1.2MN. The Company is required to register these shareholders shares on a
Selling Shareholders registration statement. The Company may explore new
financing once this registration is effective, based on its capital needs. |
|
|
|
|
|
On August 18, 2003, the Company effected a 1 for 5 reverse stock split for
all the issued and outstanding shares of common stock, approved by the
shareholders on August 15, 2003. The reverse stock split was affected to
create a capital structure that met with the minimum bid requirements of
NASDAQ Small Cap and to ensure that the Companys shares are traded at a
price that is consistent with the expectations of the investment community. |
|
|
|
|
|
In an offering closing prior to the reverse stock split in August 2003, the
Company sold approximately 946,963, post-reverse split, shares of restricted
Common Stock to 12 accredited investors for total consideration of $1,215,000
in reliance on an exemption from registration available under Rule 506 of
Regulation D of the Securities Act of 1933, as amended. This offering
originally provided units consisting of shares of common stock and warrants
to acquire common stock but was amended to adjust the number of shares
consistent with NASDAQ compliance requirements. |
|
F-28
On August 20, 2003, the Company entered into a loan agreement with an
accredited non-U.S. investor. Under the terms of the loan, the Company
borrowed $500,000 from the investor. The note has an interest rate of 8% per
annum. The note is due on a date that is one hundred (120) days from the
issuance date. In the event of default by the Company only, the note is
convertible into shares of common stock at $1.75 per share, and 100,000
warrants at the exercise price of $3.25 which expire one year from the
conversion date, and 100,000 warrants at an exercise price of $5.00 per share
which expire two years from the conversion date. The convertible debenture
was issued in reliance on an exemption available from registration under
Regulation S of the Securities Act of 1933, as amended.
In August 2003, Netsol entered into an agreement with United Kingdom based
Akhtar Group PLC (Akhtar). Under the terms of the agreement, Akhtar Group
acquired 49.9 percent of the Companys subsidiary, Pakistan based Netsol
Connect PTV Ltd. (NC), an Internet service provider (ISP) in Pakistan. As
part of this Agreement, NC changed its name to NetSol Akhtar. The new
partnership with Akhtar Computers is designed to rollout the services of
connectivity and wireless to the Pakistani national market. On signing of
this Agreement, the Shareholders agreed to make the following investment in
the Company against issuance of shares:
|
|
|
|
|
Akhtar |
|
US$ 190,000 |
|
The Company |
|
US$ 60,000 |
Per the agreement, it was envisaged that NC will require a maximum US$
500,000 for expansion of its business. Akhtar will meet the initial financial
requirements of the Company up til November 1, 2003. 50.1% of the aforesaid
investment by Akhtar shall be reimbursed by the Company to ACL within 180
days of the said investment. In case of default in payment, the Company shall
transfer its shares in the Company equivalent to the amount of default. For
purposes of determining the value of such shares it is hereby agreed between
the Shareholders that the fair value of the NC stands at US$ 1,000,000.
The following is the proforma financial information of the Company assuming
as if the transaction was consummated from the beginning of the periods
presented in the accompanying consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
Statements of operations: |
|
|
|
|
|
|
|
|
Net loss before allocation of minority shareholders |
|
|
(2,116,818 |
) |
|
|
(5,998,864 |
) |
|
Minority allocation |
|
|
(8,041 |
) |
|
|
273,363 |
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
($ |
2,124,859 |
) |
|
($ |
5,725,501 |
) |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
($ |
0.09 |
) |
|
($ |
0.38 |
) |
|
|
|
|
|
|
|
|
|
Balance Sheet items as of June 30, 2003: |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,932,251 |
|
|
|
|
|
Shareholders equity |
|
$ |
5,264,852 |
|
|
|
|
|
F - 29
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Unaudited Balance Sheet as of September 30, 2003 |
|
ff-2 |
Comparative Unaudited Consolidated Statements of Operations for the three Months
Ended September 30, 2003 and 2002 |
|
ff-3 |
Comparative Unaudited Consolidated Statements of Cash Flow for the three Months
Ended September 30, 2003 and 2002 |
|
ff-4 |
Notes to the Unaudited Consolidated Financial Statements |
|
ff-6 |
ff - 1
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2003
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
292,528 |
|
|
|
|
|
|
Certificates of deposits |
|
|
520,000 |
|
|
|
|
|
|
Accounts receivable, net of allowance of $80,000 |
|
|
1,102,923 |
|
|
|
|
|
|
Revenues in excess of billings |
|
|
527,943 |
|
|
|
|
|
|
Other current assets |
|
|
356,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
2,799,485 |
|
Property and equipment, net of accumulated depreciation |
|
|
|
|
|
|
1,951,461 |
|
Intangibles: |
|
|
|
|
|
|
|
|
|
Product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, net |
|
|
2,433,486 |
|
|
|
|
|
|
Customer lists, net |
|
|
878,318 |
|
|
|
|
|
|
Goodwill, net |
|
|
1,262,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles |
|
|
|
|
|
|
4,574,062 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
$ |
9,325,008 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
2,017,628 |
|
|
|
|
|
|
Current portion of notes and obligations under capitalized leases |
|
|
1,126,024 |
|
|
|
|
|
|
Billings in excess of revenues |
|
|
51,103 |
|
|
|
|
|
|
Loan payable, bank |
|
|
348,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
3,543,181 |
|
Obligations under capitalized leases, less current maturities |
|
|
|
|
|
|
5,670 |
|
Loans payable |
|
|
|
|
|
|
134,452 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
3,683,303 |
|
Minority interest in subsidiary |
|
|
|
|
|
|
164,691 |
|
Contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 25,000,000 share authorized;
6,769,174 issued and outstanding |
|
|
6,769 |
|
|
|
|
|
|
Additional paid-in-capital |
|
|
34,717,991 |
|
|
|
|
|
|
Accumulated deficit |
|
|
(29,273,605 |
) |
|
|
|
|
|
Stock subscription receivable |
|
|
(43,650 |
) |
|
|
|
|
|
Other comprehensive income |
|
|
69,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
|
|
|
|
5,477,014 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
|
|
|
|
$ |
9,325,008 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
ff- 2
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Month Periods |
|
|
|
|
Ended September 30, |
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
Net revenues |
|
$ |
972,612 |
|
|
$ |
653,331 |
|
Cost of revenues |
|
|
460,377 |
|
|
|
330,035 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
512,235 |
|
|
|
323,296 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
19,222 |
|
|
|
41,714 |
|
|
Depreciation and amortization |
|
|
412,801 |
|
|
|
457,162 |
|
|
Bad debt expense |
|
|
52,318 |
|
|
|
81,312 |
|
|
Salaries and wages |
|
|
315,540 |
|
|
|
258,500 |
|
|
Professional services, including non-cash
compensation |
|
|
29,801 |
|
|
|
201,482 |
|
|
General and adminstrative |
|
|
512,651 |
|
|
|
414,384 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,342,333 |
|
|
|
1,454,554 |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(830,098 |
) |
|
|
(1,131,258 |
) |
Other income and (expenses): |
|
|
|
|
|
|
|
|
|
Loss on sale of assets |
|
|
(36,988 |
) |
|
|
|
|
|
Other income and (expenses) |
|
|
(36,573 |
) |
|
|
(15,529 |
) |
Minority interest in subsidiary |
|
|
35,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(868,350 |
) |
|
$ |
(1,146,787 |
) |
Other comprehensive (loss)/gain: |
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
(79,788 |
) |
|
|
(277,462 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(948,138 |
) |
|
$ |
(1,424,249 |
) |
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(0.13 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
Weighted average number
of shares outstanding - basic and diluted* |
|
|
6,577,913 |
|
|
|
3,881,658 |
|
|
|
|
|
|
|
|
|
|
*( The basic and diluted net loss per share has been retroactively restated to
effect a 5:1 reverse
stock split on August 18, 2003
See accompanying notes to consolidated financial statements.
ff- 3
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
Ended September 30, |
|
|
|
|
2003 |
|
2002 |
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(868,350 |
) |
|
$ |
(1,146,787 |
) |
|
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
412,801 |
|
|
|
457,162 |
|
|
Loss on disposal of assets |
|
|
36,988 |
|
|
|
|
|
|
Minority interest in subsidiary |
|
|
(35,309 |
) |
|
|
|
|
|
Stock issued for compensation |
|
|
|
|
|
|
6,200 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(475,023 |
) |
|
|
558,395 |
|
|
|
Other current assets |
|
|
48,129 |
|
|
|
(51,116 |
) |
|
|
Other assets |
|
|
|
|
|
|
(219,646 |
) |
|
(Decrease) increase in liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
(205,295 |
) |
|
|
105,323 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(1,086,059 |
) |
|
|
(290,469 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchases of property & equipment |
|
|
(78,189 |
) |
|
|
(41,147 |
) |
|
Disposal of property & equipment |
|
|
130,185 |
|
|
|
|
|
|
Purchases of certificates of deposit |
|
|
(920,000 |
) |
|
|
|
|
|
Proceeds from sale of certificates of deposit |
|
|
400,000 |
|
|
|
300,000 |
|
|
Proceeds from sale of subsidiary stock to minority interest |
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(268,004 |
) |
|
|
258,853 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock |
|
|
1,112,050 |
|
|
|
|
|
|
Proceeds from the exercise of stock options and warrants |
|
|
238,250 |
|
|
|
|
|
|
Proceeds from loans |
|
|
500,000 |
|
|
|
34,596 |
|
|
Payments on capital lease obligations & loans |
|
|
(358,589 |
) |
|
|
(39,746 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
1,491,711 |
|
|
|
(5,150 |
) |
Effect of exchange rate changes in cash |
|
|
(59,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
78,038 |
|
|
|
(36,766 |
) |
Cash and cash equivalents, beginning of period |
|
|
214,490 |
|
|
|
86,914 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
292,528 |
|
|
$ |
50,148 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
ff- 4
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
Ended September 30, |
|
|
|
|
2003 |
|
2002 |
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
37,169 |
|
|
$ |
25,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Common stock issued for services and compensation |
|
$ |
|
|
|
$ |
6,200 |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
ff- 5
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The Company designs, develops, markets, and exports proprietary software
products to customers in the automobile finance and leasing, banking and
financial services industries worldwide. The Company also provides consulting
services in exchange for fees from customers.
The consolidated condensed interim financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Companys annual report
on Form 10-KSB for the year ended June 30, 2003. The Company follows the same
accounting policies in preparation of interim reports. Results of operations
for the interim periods are not indicative of annual results.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, NetSol Technologies (PVT), Ltd.,
NetSol (PVT), Limited, NetSolCONNECT (PVT), Ltd. (now, NetSol Akhtar Pvt.
Ltd.), NetSol Abraxas Australia Pty Ltd., NetSol USA and NetSol Technologies
UK, Ltd. All material intercompany accounts have been eliminated in
consolidation.
For comparative purposes, prior years consolidated financial statements have
been reclassified to conform with report classifications of the current year.
(2) USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States, 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.
(3) NEW ACCOUNTING PRONOUNCEMENTS:
On April 30 2003, the FASB issued FASB Statement No. 149 (FAS 149), Amendment
of Statement 133 on Derivative Instruments and Hedging Activities. FAS 149
amends and clarifies the accounting guidance on (1) derivative instruments
(including certain derivative instruments embedded in other contracts) and (2)
hedging activities that fall within the scope of FASB Statement No. 133 (FAS
133), Accounting for Derivative Instruments and Hedging Activities. FAS 149
also amends certain other existing pronouncements, which will result in more
consistent reporting of contracts that are derivatives in their entirety or
that contain embedded derivatives that warrant separate accounting. FAS 149 is
effective (1) for contracts entered into or modified after June 30, 2003, with
certain exceptions, and (2) for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The adoption of SFAS 148
does not have a material effect on the earnings or financial position of the
Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, (SFAS No.
150). SFAS No. 150 establishes standards for how an issuer classifies and
measurers in its statement of financial position certain financial instruments
with characteristics of both liabilities and equity. In accordance with SFAS
No. 150, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. SFAS No. 150 shall be effective for
financial instruments entered into or modified after May 31, 2003, and
ff- 6
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 does not have a
material effect on the earnings or financial position of the Company.
(4) NET LOSS PER SHARE:
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), Earnings per share. Basic net
loss per share is based upon the weighted average number of common shares
outstanding. Diluted net loss per share is based on the assumption that all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period.
Weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements since the effect of dilutive
securities is anti-dilutive.
(5) FOREIGN CURRENCY:
The accounts of NetSol Technologies UK, Ltd. use the British Pound; NetSol
Technologies, (PVT), Ltd, NetSol (Pvt), Limited and NetSol Connect PVT, Ltd.
use Pakistan Rupees; NetSol Abraxas Australia Pty, Ltd. uses the Australian
dollar as the functional currencies. NetSol Technologies, Inc. and subsidiary
NetSol USA, 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 $69,509 at September 30, 2003 is classified as an
item of other comprehensive income in the stockholders equity section of the
consolidated balance sheet. During the three month period ended September 30,
2003 and 2002, comprehensive loss in the consolidated statements of operation
included translation loss of $79,788 and $277,462, respectively.
(6) DEBTS
NOTES PAYABLE
In December 2001, as part of the winding up of Network Solutions Ltd. the
Company, as the parent of Network Solutions Ltd., agreed to assume the note
payable of one of the major creditors, Barclays Bank PLC of £130,000 or
$188,500 USD. In November 2002, the parties entered into on a settlement
agreement whereby the Company would pay £1,000 per month for twelve months and
£2,000 per month thereafter until paid. The balance owing at June 30, 2003 was
$185,164. During the three months ended September 30, 2003, the Company paid
approximately £2,000 ($3,336). The balance owing at September 30, 2003 was
$181,828. The entire balance has been classified as current and is included in
Current maturities of notes and obligations under capitalized leases in the
accompanying financial statements.
In June 2002, the Company signed a settlement agreement with a former
consultant for payment of past services rendered. The Company agreed to pay
the consultant a total of $75,000. The agreement calls for monthly payments of
$1,500 per month until paid. The balance owing at June 30, 2003 was $53,300.
During the current fiscal quarter the Company paid $4,000. The balance owing
at September 30, 2003 was $49,300, of this amount, $18,000 has been classified
as a current liability and $31,300 as long-term in the accompanying financial
statements.
On September 25, 2002 the Company signed a settlement agreement with Adrian
Cowler (Cowler) and Surrey Design Partnership Ltd. (see Note 9). The Company
agreed to pay Cowler £218,000 pound sterling or approximately $285,860USD plus
interest, which the Company has recorded as a note payable in the accompanying
consolidated financial statements. The agreement calls for monthly payments of
£3,000 until March 2004 and then £4,000 per month until paid. As of June 30,
2003, the balance was $185,424. During the fiscal quarter ended September 30,
2003, the Company paid £14,821 or $25,035 and accrued $2,163 in interest. As
of September 30, 2003, the balance was $162,552. Of this amount, $59,400 has
been classified as a current liability and $103,152 as long-term in the
accompanying financial statements.
In November 2002, the Company signed a settlement agreement with Herbert Smith
for £171,733 or approximately $248,871, including interest (see Note 9). The
Company agreed to pay $10,000 upon signing of the agreement, $4,000 per month
for twelve months, and then $6,000 per month until paid. The balance owing at
June 30, 2003 was $164,871.
ff- 7
During the fiscal quarter ended September 30, 2003, the Company paid $12,000.
The balance owing at September 30, 2003 was $152,871. The entire balance has
been classified as current and is included in Current maturities of notes and
obligations under capitalized leases in the accompanying financial statements.
In January 2003, the Company entered into an agreement with Canawill Insurance
Company to finance the directors and officers liability insurance. The
amount financed was $155,338 with monthly payments of $14,662, including
interest. The balance at June 30, 2003 was $100,092. During the fiscal
quarter ended September 30, 2003, the Company paid $42,355. As of September
30, 2003, the balance was $57,735. The entire balance has been classified as
current and is included in Current maturities of notes and obligations under
capitalized leases in the accompanying financial statements.
As part of the purchase of Altiva in May 2003, the Company was required to pay
$45,000 as a note payable. During the fiscal quarter ended September 30, 2003,
the Company paid $30,000. As of September 30, 2003, the balance was $15,000.
The entire balance has been classified as current and is included in Current
maturities of notes and obligations under capitalized leases in the
accompanying financial statements.
On August 20, 2003, the Company entered into a loan agreement with an
accredited non-U.S. investor. Under the terms of the loan, the Company
borrowed $500,000 from the investor. The note has an interest rate of 8% per
annum. The note is due on a date that is one hundred (120) days from the
issuance date. In the event of default by the Company only, the principal of
the note is convertible into shares of common stock at $1.75 per share, and
100,000 warrants at the exercise price of $3.25 which expire one year from the
conversion date, and 100,000 warrants at an exercise price of $5.00 per share
which expire two years from the conversion date. The convertible debenture was
issued in reliance on an exemption available from registration under Regulation
S of the Securities Act of 1933, as amended. The balance owing at September
30, 2003 was $500,000. The entire balance has been classified as current and
is included in Current maturities of notes and obligations under capitalized
leases in the accompanying financial statements.
A former officer of NetSol USA loaned funds to the subsidiary totaling
$104,088. The loan s are due-on-demand, carry no interest and are unsecured.
As of September 30, 2003, the balance was $104,088. The entire balance has
been classified as current and is included in Current maturities of notes and
obligations under capitalized leases in the accompanying financial statements.
In addition, the various subsidiaries had current notes payable of $37,102 as
of September 30, 2003.
The current maturity of notes payable, including capital lease obligations, is
as follows:
|
|
|
|
|
Year ended June 30, 2004 |
|
$ |
1,126,024 |
|
Year ended June 30, 2005 |
|
|
77,400 |
|
Year ended June 30, 2006 |
|
|
57,052 |
|
|
|
|
|
|
Total |
|
$ |
1,260,476 |
|
|
|
|
|
|
BANK LOAN
The Companys Pakistan subsidiary, NetSol Technologies (Private) Ltd, has three
loans with a bank, secured by the Companys assets. These notes consist of the
following as of September 30, 2003:
ff- 8
|
|
|
|
|
|
|
|
|
|
|
|
|
TYPE OF |
|
MATURITY |
|
INTEREST |
|
BALANCE |
LOAN |
|
DATE |
|
RATE |
|
USD |
|
|
|
|
|
|
|
Export Refinance |
|
Every 6 months |
|
|
3 |
% |
|
$ |
258,398 |
|
Term Loan |
|
April 15, 2004 |
|
|
12 |
% |
|
|
54,780 |
|
Line of Credit |
|
On Demand |
|
|
16 |
% |
|
|
35,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
348,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7) STOCKHOLDERS EQUITY:
REVERSE STOCK SPLIT:
On August 18, 2003, the Company effected a 1 for 5 reverse stock split for all
the issued and outstanding shares of common stock. All historical share and per
share amounts in the accompanying consolidated financial statements have been
restated to reflect the 5:1 reverse stock split.
EQUITY TRANSACTIONS:
In July 2003, the Company completed a private placement transaction. Maxim
Group LLC in New York acted as the placement agent for the transaction. The
total funds raised were $1,215,000 with approximately $102,950 in placement
fees and commissions reimbursed to the placement agent. The outside lawyers
were paid $50,000 to assist in preparing and filing the SB-2 registration
statement for the selling shareholders in this transaction. The investors
included 12 individual accredited investors with no prior ownership of the
Companys common stock.
During the quarter ended September 30, 2003, the Company issued 162,000 shares
of common stock for the exercise of stock options valued at $208,250. The
exercise price ranged from $0.75 and $1.25 per share. The Company also issued
40,000 shares valued at $30,000 for the exercise of warrants.
(8) INTANGIBLE ASSETS:
Intangible assets consist of product licenses, renewals, enhancements,
copyrights, trademarks, trade names, customer lists and goodwill. The Company
evaluates intangible assets, goodwill and other long-lived assets for
impairment, at least on an annual basis and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable from its
estimated future cash flows. Recoverability of intangible assets, other
long-lived assets and, goodwill is measured by comparing their net book value
to the related projected undiscounted cash flows from these assets, considering
a number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book
value of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss. Potential impairment of goodwill after July 1, 2002 is being
evaluated in accordance with SFAS No. 142. The SFAS No. 142 is applicable to
the financial statements of the Company beginning July 1, 2002.
As part of intangible assets, the Company capitalizes certain computer software
development costs in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. Costs incurred
internally to create a computer software product or to develop an enhancement
to an existing product are charged to expense when incurred as research and
development expense until technological feasibility for the respective product
is established. Thereafter, all software development costs are capitalized and
reported at the lower of unamortized cost or net realizable value.
Capitalization ceases when the product or enhancement is available for general
release to customers.
The Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate
that the unamortized software development costs exceed the net realizable
value, the Company writes off the amount by which the unamortized software
development costs exceed net realizable value. Capitalized and purchased
computer software development costs are being amortized ratably based on the
projected revenue associated with the related software or on a straight-line
basis over three years, whichever method results in a higher level of
amortization.
ff- 9
Intangible assets consist of the following as of September 30, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Licenses |
|
Customer Lists |
|
Goodwill |
|
Total |
|
|
|
|
|
|
|
|
|
|
Intangible asset - June 30, 2003 |
|
$ |
4,894,838 |
|
|
$ |
1,977,877 |
|
|
$ |
2,153,311 |
|
|
$ |
9,026,026 |
|
Additions during the quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of translation adjustment |
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
483 |
|
Accumulated amortization |
|
|
(2,461,834 |
) |
|
|
(1,099,559 |
) |
|
|
(891,054 |
) |
|
|
(4,452,447 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance - Sept. 30, 2003 |
|
$ |
2,433,487 |
|
|
$ |
878,318 |
|
|
$ |
1,262,257 |
|
|
$ |
4,574,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended Sept. 30, 2003 |
|
$ |
170,031 |
|
|
$ |
78,916 |
|
|
$ |
107,666 |
|
|
$ |
356,613 |
|
Quarter ended Sept 30, 2002 |
|
$ |
170,031 |
|
|
$ |
77,417 |
|
|
$ |
97,500 |
|
|
$ |
344,948 |
|
(9) LITIGATION:
On May 23, 2002, Allied Interstate, Inc. filed a complaint seeking damages from
the Company for breach of contract, open book account, account stated and
reasonable value in the Superior Court of California, County of Los Angeles.
This dispute arose out of the purchase of a German ISP provider. A settlement
agreement was entered into by and between Allied and Allieds principals
whereby 200,000 pre-reverse split shares of the Companys common stock were
issued to the principals as full and complete settlement.
On July 26, 2002, the Company was served with a Request for Entry of default by
Surrey Design Partnership Ltd. (Surrey). Surreys complaint for damages
sought $288,743.41 plus interest at the rate of 10% above the Bank of England
base rate from January 12, 2002 until payment in full is received, plus costs.
The parties agreed to entry of a Consent Order whereby NetSol agreed to make
payments according to a payment schedule. NetSol made payments up to May of
2002 but was unable to make payments thereafter. On September 25, 2002, the
parties signed an Agreement to stay Enforcement of Judgment whereby NetSol will
make further payments to Surrey until the entire sum is paid. The current
terms of the payments schedule require the payment of 4,000 pounds sterling for
a period of 24 months commencing March 31, 2003 and ending 24 months
thereafter.
On July 31, 2002, Herbert Smith, a law firm in England, which represented
NetSol in the Surrey matter filed claim for the sum of approximately $248,871
USD (which represents the original debt and interest thereon) in the High Court
of Justice Queens Bench Division. On November 28, 2002, a Consent Order was
filed with the Court agreeing to a payment plan, whereby the Company paid
$10,000 USD on execution $4,000 USD a month for one year and $6,000 USD per
month thereafter until the debt is paid. During the year ended June 30, 2003
the Company has paid $26,000 as part of this settlement.
(10) GOING CONCERN:
The Companys 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. As of September
30, 2003, the Company had an accumulated deficit of $29,273,605 and a working
capital deficit of approximately $743,696. 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 Companys ability to continue as
a going concern.
Management recognizes that the Company must generate additional resources to
enable it to continue operations. Management has closed down its loss
generating UK entities, disposed of its German subsidiary, and is continually
evaluating cost cutting measures at every entity level. Additionally,
managements 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.
ff- 10
(11) SEGMENT INFORMATION
The following table presents a summary of operating information and certain
year-end balance sheet information for the three-month periods ended September
30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
2002 |
Revenues from unaffiliated customers: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
80,348 |
|
|
$ |
150,503 |
|
|
International |
|
|
892,264 |
|
|
|
502,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
972,612 |
|
|
$ |
653,331 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
(841,189 |
) |
|
$ |
(1,041,278 |
) |
|
International |
|
|
11,091 |
|
|
|
(89,980 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
(830,098 |
) |
|
$ |
(1,131,258 |
) |
|
|
|
|
|
|
|
|
|
|
Identifiable assets: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
4,790,055 |
|
|
$ |
5,386,479 |
|
|
International |
|
|
4,534,952 |
|
|
|
4,004,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
9,325,007 |
|
|
$ |
9,390,962 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
371,667 |
|
|
$ |
236,523 |
|
|
International |
|
|
41,134 |
|
|
|
84,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
412,801 |
|
|
$ |
321,162 |
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
North America |
|
$ |
19,019 |
|
|
$ |
|
|
|
International |
|
|
59,170 |
|
|
|
41,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
78,189 |
|
|
$ |
41,887 |
|
|
|
|
|
|
|
|
|
|
|
(12) MINORITY INTEREST IN SUBSIDIARY
In August 2003, the Company entered into an agreement with United Kingdom based
Akhtar Group PLC (Akhtar). Under the terms of the agreement, Akhtar Group
acquired 49.9 percent of the Companys subsidiary; Pakistan based Netsol
Connect PVT Ltd. (NC), an Internet service provider (ISP), in Pakistan through
the issuance of additional NC shares. As part of this Agreement, NC changed
its name to NetSol Akhtar. The new partnership with Akhtar Computers is
designed to rollout connectivity and wireless services to the Pakistani
national market. On signing of this Agreement, the Shareholders agreed to make
the following investment in the Company against issuance of shares of NC.
|
|
|
|
|
Akhtar
The Company |
|
US$ 200,000
US$ 50,000 |
During the quarter ended September 30, 2003, the funds were received by NC and
a minority interest of $200,000 was recorded for Akhtars portion of the
subsidiary. The subsidiary had net losses of $212,281, of which $35,309 was
recorded against the minority interest. The balance of the minority interest
at September 30, 2003 was $164,691.
ff- 11
Per the agreement, it was envisaged that NC would require a maximum US$ 500,000
for expansion of its business. Akhtar will meet the initial financial
requirements of the Company until November 1, 2003.
(13) SUBSEQUENT EVENTS
On October 14, 2003, the Company announced the execution of an agreement to
acquire the Pearl Treasury System Ltd, (Pearl) a United Kingdom company.
This acquisition requires the Company to issue up to 60,000 shares of common
stock to the shareholders of Pearl Treasury System, Ltd. The shares used to
acquire this asset were issued in reliance on an exemption available from
registration under Regulation S of the Securities Act of 1933, as amended. The
financial statements of Pearl are insignificant to the consolidated financials,
and therefore, have not been presented.
On March 27, 2003, Arab Commerce Bank (ACB) filed a complaint in the Supreme
Court of the State of New York (Index No. 600709/03) seeking damages for breach
of a Note Purchase Agreement and Note. ACB alleged that NetSol did not issue
stock in a timely manner in December 2000 resulting in compensatory damages in
the amount of $146,466.72. The litigation arises out of a transaction from
late 1999 in which Arab Commerce Bank invested $100,000 in the Companys
securities through a private placement. ACB claimed that the removal of the
legend on its shares of common stock longer than contractually required.
During this purported delay, the market value of the Companys common shares
decreased. Essentially, the ACB complaint sought the lost value of its shares.
In the event ACB was unable to collect the amount sought, the complaint
requested that NetSol repay the principal sum of the Note of $100,000 and
interest at the rate of 9% per annum based on the maturity date of December 10,
2000. Subsequent to September 30, 2003, this matter was been settled pursuant
to the terms of a settlement agreement whereby NetSol agreed to issue to ACB
shares of common stock of the Company equal in value to $100,000 plus interest
as of the effective date of the agreement.
ff- 12
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On July 9, 2002, NetSol changed accountants beginning with the audit of the
financial statements for the fiscal year ended June 30, 2002, from Stonefield
Josephson, Certified Public Accountants (SJ) to Kabani & Company, Certified
Public Accountants (Kabani & Company). NetSol dismissed SJ as the Companys
accountant on or about July 9, 2002 (see Item 13 concerning filing of Form 8-K
in connection with change of accountants). The Board of Directors of NetSol
approved the change in auditors at a special meeting of the Board of Directors.
Kabani & Companys report on the Companys financial
statements for the fiscal years ended June 30, 2002 and June 30, 2003, did not contain an adverse
opinion or disclaimer of opinion, and was not qualified or modified as to
uncertainty, audit scope, or accounting principles, except for a going concern
uncertainty.
In connection with the audit of the Companys financial statements for the
fiscal years ended June 30, 2001 and June 30, 2000, there were
no disagreements, disputes, or differences of opinion with SJ on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures, which, if not resolved to the satisfaction of SJ would
have caused SJ to make reference to the matter in its report.
In connection with the audit of the Companys financial statements for the
fiscal years ended June 30, 2002 and June 30, 2003 there were no disagreements, disputes, or
differences of opinion with Kabani & Company on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures, which, if not resolved to the satisfaction of Kabani & Company
would have caused Kabani & Company to make reference to the matter in its
report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act, and the rules and regulations
promulgated thereunder, with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document. For
further information with respect to us and the common stock, reference is
hereby made to the registration statement and the exhibits thereto, which may
be inspected and copied at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may
be obtained at prescribed rates from the Commissions Public Reference Section
at such addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
We are in compliance with the information and periodic reporting requirements
of the Exchange Act and, in accordance therewith, will file periodic reports,
proxy and information statements and other information with the Commission.
Such periodic reports, proxy and information statements and other information
will be available for inspection and copying at the principal office, public
reference facilities and Web site of the Commission referred to above.
44
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
We are required by our Bylaws and Certificate of Incorporation to
indemnify, to the fullest extent permitted by law, each person that we are
permitted to indemnify. Our Bylaws it to indemnify such parties to the fullest
extent permitted by Nevada law.
Nevada corporation law permits us to indemnify our directors, officers,
employees, or agents against expenses, including attorneys fees, judgments,
fines and amounts paid in settlements actually and reasonably incurred in
relation to any action, suit, or proceeding brought by third parties because
they are or were directors, officers, employees, or agents of the corporation.
In order to be eligible for such indemnification, however, our directors,
officers, employees, or agents must have acted in good faith and in a manner
they reasonably believed to be in, or not opposed to, our best interests. In
addition, with respect to any criminal action or proceeding, the officer,
director, employee, or agent must have had no reason to believe that the
conduct in question was unlawful.
In derivative actions, we may only indemnify our officers, directors,
employees, and agents against expenses actually and reasonably incurred in
connection with the defense or settlement of a suit, and only if they acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, our best interests. Indemnification is not permitted in the event that the
director, officer, employee, or agent is actually adjudged liable to the
corporation unless, and only to the extent that, the court in which the action
was brought so determines.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the Act) may be permitted to our controlling directors,
officers, or persons pursuant to the foregoing provisions, we have been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Expenses of Issuance and Distribution
The following is an estimate of the expenses that we expect to incur in
connection with this registration. We will pay all of these expenses, and the
selling stockholders will not pay any of them.
|
|
|
|
|
|
SEC Registration fee |
|
$ |
241.12 |
|
Printing and engraving expenses |
|
$ |
300.00 |
* |
Legal fees and expenses |
|
$ |
30,000.00 |
* |
Accounting fees and expenses |
|
$ |
1,000.00 |
* |
Miscellaneous |
|
$ |
0.00 |
* |
|
|
|
|
|
|
Total |
|
$ |
31,541.12 |
* |
|
|
|
|
|
* Estimate, and subject to future contingencies.
Recent Sale of Unregistered Securities
In February 2003, DCD Holdings Ltd., a UK investment company, signed an
agreement to acquire 1,350,000 Rule 144 restricted shares of NetSol
Technologies, Inc., in a private placement. The agreement also includes
warrants for underlying shares of restricted Rule 144 stock totaling 2,750,000
with an average price of $0.625. NetSol immediately received approximately
$260,000. The shares were issued in reliance on an exemption from registration
available under Regulation S of the Securities Act of 1933.
45
In an offering closing prior to the reverse stock split in August 2003, we sold
809,999, post-reverse split, shares of restricted common stock to 12 accredited
investors for total consideration of $1,215,000 in reliance on an exemption
from registration available under Rule 506 of Regulation D of the Securities
Act of 1933, as amended. This offering originally provided units consisting of
shares of common stock and warrants to acquire common stock but was amended to
adjust the number of shares consistent with NASDAQ compliance requirements. As
part of the placement agent agreement with Maxim Group LLC, we issued warrants
to purchase 81,000 shares of common stock to Maxim Group LLC.
On August 20, 2003, we entered into a loan agreement with an accredited
non-U.S. investor. Under the terms of the loan, we borrowed $500,000 from the
investor. The note has an interest rate of 8% per annum. The note is due on a
date that is one hundred (120) days from the issuance date. In the event of
default by us only, the note is convertible into shares of common stock at
$1.75 per share, and 100,000 warrants at the exercise price of $3.25 which
expire one year from the conversion date, and 100,000 warrants at an exercise
price of $5.00 per share which expire two years from the conversion date. The
note was issued in reliance on an exemption available from registration under
Regulation S of the Securities Act of 1933, as amended.
On October 14, 2003, we announced the execution of an agreement to acquire
Pearl Treasury System Ltd, a United Kingdom company. This acquisition requires
us to issue up to 60,000 shares of common stock to the shareholders of Pearl
Treasury System, Ltd. The shares used to acquire this asset were issued in
reliance on an exemption available from registration under Regulation S of the
Securities Act of 1933, as amended.
Certain employees exercised 162,000 stock options with exercise prices ranging
from $0.75-$1.25 during this quarter for $30,000 cash.
Exhibits and Financial Statement Schedules
|
|
3.1 |
|
Articles of Incorporation of Mirage Holdings, Inc., a Nevada
corporation, dated March 18, 1997, incorporated by reference as
Exhibit 3.1 to the Companys Registration Statement No. 333-28861
filed on Form SB-2 filed June 10. 1997 |
|
|
|
3.2 |
|
Amendment to Articles of Incorporation dated May 21, 1999,
incorporated by reference as Exhibit 3.2 to the Companys Annual
Report for the fiscal year ended June 30, 1999 on Form 10K-SB filed
September 28, 1999. |
|
|
3.3 |
|
Amendment to the Articles of Incorporation of NetSol
International, Inc. dated March 20, 2002 incorporated by reference as
Exhibit 3.3 to the Companys Annual Report on Form 10-KSB/A filed on
February 2, 2001. |
|
|
3.4 |
|
Bylaws of Mirage Holdings, Inc., as amended and restated as of
November 28, 2000 incorporated by reference as Exhibit 3.3 to the
Companys Annual Report for the fiscal year ending in June 30, 2000
on Form 10K-SB/A filed on February 2, 2001. |
|
|
3.5 |
|
Amendment to the Bylaws of NetSol Technologies, Inc. dated
February 16, 2002 incorporated by reference as Exhibit 3.5 to the
Companys Registration Statement filed on Form S-8 filed on March 27,
2002. |
|
|
4.1 |
|
Form of Common Stock Certificate.(1) |
|
|
|
4.2 |
|
Form of Warrant.(1) |
|
46
|
|
5.1 |
|
Opinion of Malea Farsai, counsel to the company, as to the
legality of the securities being registered.(1) |
|
|
|
|
10.1 |
|
Lease Agreement for Calabasas executive offices dated July 2000
incorporated by reference as Exhibit 10.0 to the Companys Current
Report filed on Form 8-K filed on October 26, 2000. |
|
|
|
|
10.2 Company Stock Option Plan dated May 18, 1999 incorporated by
reference as Exhibit 10.2 to the Companys Annual Report for the Fiscal
Year Ended June 30, 1999 on Form 10K-SB filed September 28, 1999. |
|
|
|
|
10.3 Company Stock Option Plan dated April 1, 1997 incorporated by
reference as Exhibit 10.5 to the Companys Registration Statement No.
333-28861 on Form SB-2 filed June 10, 1997. |
|
|
|
|
10.4 |
|
Employment Agreement, dated April 22, 2002, by and between
NetSol Technologies, Inc. and Najeeb U. Ghauri incorporated by
reference as Exhibit 10.4 to the Companys Annual Report for the
Fiscal Year Ended June 30, 2002 on Form 10K-SB filed on October 15,
2002. |
|
|
|
|
10.5 |
|
Employment Agreement, dated April 22, 2002, by and between
NetSol Technologies, Inc. and Salim Ghauri incorporated by reference
as Exhibit 105 to the Companys Annual Report for the Fiscal Year
Ended June 30, 2002 on Form 10K-SB filed on October 15, 2002 |
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10.6 |
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Employment Agreement, dated April 22, 2002, by and between
NetSol Technologies, Inc. and Naeem Ghauri incorporated by reference
as Exhibit 10.6 to the Companys Annual Report for the Fiscal Year
Ended June 30, 2002 on Form 10K-SB filed on October 15, 2002 |
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10.7 |
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Consulting Agreement, dated October 15, 2002, by and between
Netsol Technologies, Inc. and Mark Caton, incorporated by Reference
as Exhibit 10.7 to the Companys Annual Report for the Fiscal Year
Ended June 30, 2003 on Form 10K-SB filed on October 15, 2003. |
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10.8 |
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Company 2001 Stock Options Plan dated March 27, 2002
incorporated by reference as Exhibit 5.1 to the Companys
Registration Statement on Form S-8 filed on March 27, 2002. |
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10.10 |
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Consulting Contract, dated September 1, 1999 by and between
Irfan Mustafa and NetSol International, Inc. incorporated by
reference as Exhibit 10.10 to the Companys Annual Report for the
Fiscal Year Ended June 30, 2000 on Form 10K-SB filed on October 15,
2000. |
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10.11 |
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Sublease Agreement between RPMC, Inc. and NetSol Technologies,
Inc. dated September 20, 2002 incorporated by reference as Exhibit
10.11 to the Companys Annual Report for the Fiscal Year Ended June
30, 2002 on Form 10K-SB filed on October 15, 2002. |
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21.1 |
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A list of all subsidiaries of the Company (1) |
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23.1 |
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Consent of Kabani & Company (2) |
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23.2 |
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Consent of Malea Farsai, Esq.(2) |
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(1) Previously filed
(2) Filed herewith
47
Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in the volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the Calculation of Registration Fee table in the effective registration
statement.
(iii) To include any additional or changed material information on the
plan of distribution.
(2) For purposes of determining liability under the Securities Act, to treat
each post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of the
securities that remains unsold at the end of the offering.
48
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Amendment No. 1 to Form SB-2 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Calabasas, State of California on
December 3, 2003.
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NETSOL TECHNOLOGIES, INC. |
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By: |
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/s/ Naeem Ghauri |
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Naeem Ghauri, Chief Executive Officer |
49