SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB/A
[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE FISCAL YEAR ENDED JUNE 30, 2004
or
[_]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number 0-22773
NETSOL
TECHNOLOGIES, INC.
(Name
of small business issuer as specified in its charter)
|
NEVADA |
|
95-4627685 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S.
Employer Identification
Number) |
23901
Calabasas Road, Suite 2072,
Calabasas,
CA 91302
(Address
of principal executive offices) (Zip code)
(818)
222-9195 / (818) 222-9197
(Issuer's
telephone/facsimile numbers, including area code)
SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
(None)
SECURITIES
REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON
STOCK, $.001 PAR VALUE
(TITLE
OF CLASS)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [_]
Check
if disclosure of delinquent filers in response to Item 405 of Regulation S-B, is
not contained in this form and no disclosure will be continued, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
the Form 10-KSB. [_]
Registrant's
net revenues for the fiscal year ended June 30, 2004 were
$5,749,062.
As
of September 13, 2004, Registrant had 9,545,693 shares of its $.001 par value
Common Stock issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
(None)
Transitional
Small Business Disclosure Format (Check one): Yes [_] No [X]
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TABLE
OF CONTENTS AND CROSS REFERENCE SHEET
PART
I
PAGE
|
Item
1 |
Business |
1 |
|
Item
2 |
Properties |
13 |
|
Item
3 |
Legal
Proceedings |
14 |
|
Item
4 |
Submission
of Matters to a Vote of Security Holders |
14 |
PART
II
|
Item
5 |
Market
for Common Equity and Related Stockholder Matters |
14 |
|
Item
6 |
Management's
Discussion and Analysis and Plan of Operations |
16 |
|
Item
7 |
Financial
Statements |
22 |
|
Item
8 |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
22 |
|
Item
8A |
Controls
and Procedures |
22 |
PART
III
|
Item
9 |
Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act |
22 |
|
Item
10 |
Executive
Compensation |
25 |
|
Item
11 |
Security
Ownership of Certain Beneficial Owners and Management |
28 |
|
Item
12 |
Certain
Relationships and Related Transactions |
28 |
PART
IV
|
Item
13 |
Exhibits
and Reports on Form 8-K |
29 |
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Item
14 |
Principal
Accountant Fees and Services |
30 |
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PART
I
This Form
10KSB contains forward looking statements relating to the development of the
Company's products and services and future operation results, including
statements regarding the Company that are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. The words "believe," "expect," "anticipate," "intend," variations of
such words, and similar expressions, identify forward looking statements, but
their absence does not mean that the statement is not forward looking. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Factors that
could affect the Company's actual results include the progress and costs of the
development of products and services and the timing of the market acceptance.
ITEM
1 - BUSINESS
GENERAL
NetSol
Technologies, Inc. (F/K/A NetSol International, Inc. "NetSol" or the "Company")
is an end-to-end information technology ("I/T") and business consulting services
provider for the lease and finance, banking and financial services industries.
Since it was founded in 1997, the Company has developed enterprise solutions
that help clients use I/T more efficiently in order to improve their operations
and profitability and to achieve business results. The Company’s focus has
remained the lease and finance, banking and financial services industries. The
Company operates on a global basis with locations in the U.S., Europe, East Asia
and Asia Pacific. By utilizing its worldwide resources, the Company believes it
has been able to deliver high quality, cost-effective I/T services. NetSol
Technologies Pvt. Ltd. ("NetSol PK") develops the majority of the software for
the Company. NetSol PK was the first software company in Pakistan in 1998 to
achieve the ISO 9001 accreditation and was again the first software company in
Pakistan to obtain Carnegie Mellon’s Software Engineering Institute ("SEI")
Capable Maturity Model ("CMM") Level 3 assessment in 2003. 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 CMM levels developed by SEI in conjunction with the software
industry are the highest levels of recognition for quality and best practices
for a software company.
COMPANY
BUSINESS MODEL
NetSol
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 maturing its software development and
Quality Assurance ("QA") processes. NetSol’s believes its key competitive
advantage is its ability to build high quality enterprise applications using its
offshore development facility in Lahore, Pakistan. In fact, about 80% of
NetSol’s 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. In a
continued pursuit of excellence, the company is now operating on CMM Level 4 and
is looking forward to a formal assessment in this regard in near future. This
assessment would further solidify NetSol’s project delivery ability as well
permit the Company to target a new market segment. This segment comprises of
organizations and corporations who prefer to work with software providers with a
minimal of CMM Level 4 rating. Achieving these CMM targets required dedication
by all levels of the Company and evidenced at every echelon in the company.
SEI’s
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
integratable into a customer’s 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 customer’s system.
The
Company has always strived to improve quality in every aspect of its business.
This quality drive, based on the Company’s vision, trickles from the top to the
lowest levels in the organization. The Company believes that it is this quality
focus that enabled the Company’s software development facility to become the
first ISO 9001 certified software development facility in Pakistan in 1998. This
accomplishment marked the beginning of the Company’s continuing long term
program towards achieving the higher challenges of SW-CMM.
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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.
Company management also made sure that everybody in the Company is 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 of Carnegie Mellon
University. The extreme focus and a major team effort resulted in a CMM level 2
assessment in March 2002. The Company was the first in Pakistan to achieve this
distinction. While proud of this accomplishment, all levels of the Company
continued to strive towards CMM level 3. The quality-engineering department in
specific, and the Company in general, started implementing Level 3 Key Processes
Areas ("KPAs") in a methodical and structured manner. There were Company-wide
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 the Company
achieving the CMM Level 3 in a record 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., the Company’s development facility
was granted the CMM Level 3.
Professional
Services
The
Company offers a broad array of professional services to clients in the global
commercial markets and specializes in the application of advanced and complex
I/T enterprise solutions to achieve its customers' strategic objectives. Its
service offerings include bespoke software development, software analysis and
design, testing services, off shore as well as onsite quality assurance
services, consultancy in quality engineering and process improvement including
assistance in implementation of ISO and CMM quality standards, Business Process
Reengineering, Business Process Outsourcing, System Reengineering, Maintenance
and support of existing systems, Technical Research and Development, Project
Management, Market Research and Project Feasibilities.
Outsourcing
involves operating all or a portion of a customer's technology infrastructure,
including systems analysis, system design and architecture, change management,
enterprise applications development, network operations, desktop computing and
data center management.
Systems
integration encompasses designing, developing, implementing and integrating
complete information systems.
I/T and
management consulting services include advising clients on the strategic
acquisition and utilization of I/T and on business strategy, operations, change
management and business process reengineering.
The
experience gained by the Company through its own software quality endeavors, has
enabled the Company 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 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). NetSol
has already been chosen by the Pakistan Software Export Board under the
direction of the Ministry of Information Technology and Telecommunication to
provide consultancy to local software houses. The ministry plans to have 30
software houses achieve CMM level 3 compliance by the end of 2004. Management
believes this demonstrates that NetSol has not only led the way in setting
standards for the I/T industry in Pakistan but is now involved in facilitating
local companies to achieve quality standards.
LeaseSoft
The
Company also develops advanced software systems for the lease and finance
industries. NetSol has 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 six 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.
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The
constituent software applications are:
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LeaseSoft Electronic Point of Sale (LeaseSoft.ePOS). LeaseSoft.ePOS 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. ePOS 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. ePOS system with a final decision.
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Credit Application Processing System (CAP Formally known as Proposal Management System, PMS) 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 very 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.
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Contract Management System (CMS). LeaseSoft.CMS 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. NetSol’s LeaseSoft.CMS provides business functionality for all areas that are required to run an effective, efficient and customer oriented lease and finance business.
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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 & auditor access and ultimately the pay-off functions.
LeaseSoft
is a state of the art software product and is available on both conventional 32
bit architecture hardware as well as the emerging new standard of high
performance 64 bit computers.
Typically,
NetSol’s sales cycle for these products ranges between two to five months.
NetSol derives its income both from selling the license to use the products as
well as from related software services. The related services include requirement
study/gap analysis, customization on the basis of gaps development, testing,
configuration, installation at the client site, data migration, training, user
acceptance testing, supporting initial live operations and, finally, the long
term maintenance of the system. Any changes or enhancement done is also charged
to the customer. In the requirements study/gaps analysis the NetSol team of
LeaseSoft goes at the client site to study client’s business, functional
requirements and maps them against the existing functionality available in
LeaseSoft. LeaseSoft has now reached a stage where hardly, if any gaps, are
identified as a result of such a study. In the customization phase the gaps are
made part of LeaseSoft through a development cycle. This development takes place
in Lahore Pakistan. Then the new as per requirement system is thoroughly tested.
This phase also takes place in Pakistan. LeaseSoft is a highly parameterized
configurable application and hence it is then configured according to the
business of the customer. This phase can take place both onsite as well as in
Lahore and is usually is partially done in Lahore. Next, follows the
installation of the system at client site. In case the customer was already
using some other system and already has data in electronic form, then NetSol’s
data migration team, through a very well defined set of procedures, migrates
this data from the old system to the LeaseSoft database. Data migration is a mix
of both client site and Lahore based work. The client is also imparted training
in the areas of business user training, functional business training and system
administration training. Training is followed by user acceptance testing (UAT)
where client nominated staff and NetSol consultants test the system against the
business requirements. After UAT the system is put in normal business use.
LeaseSoft is a mission critical software and the whole business operations from
the asset side of a finance / leasing company hinge upon the performance of the
system. Hence in the early days after going live, NetSol consultants remain at
the client site to assist the company in smooth operations. After this phase,
the regular maintenance and support services phase for the implemented software
begins.. In addition to the daily rate paid by the customer for each consultant,
the customer also pays for all the transportation related expenses, boarding of
the consultants, and a living allowance. These practices enable NetSol to
increase marginal revenue in proportion larger than the marginal cost
incurred.
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License
fees can vary generally between $100,000 up to $1,000,000 per license depending
upon the size and complexity of customers’ businesses. There are various
attributes which determine the level of complexity a few of which are number of
contracts, size of the portfolio, business strategy of the company, number of
business users, and, branch network of the customer. 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 annual maintenance fee, 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.
As a
marketing strategy NetSol is preparing a lighter version of LeaseSoft to target
companies with simpler business models. LeaseSoft is highly modular. Hence
various sets of functionalities can be used against the restricted requirements
of the client. For example the colletions module of LeaseSoft can be used for
management of receivables and over due collection. Similarly, business partner
database can be used to manage all the information of individuals and
corporations interacting with the finance companies even if the interaction is
based on multiple roles. Litigation, repossession and remarketing are a few of
the many other modules which can be used in isolation.
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. Both
the groups are being continually trained in the domain of finance and leasing,
the system functionality, communication skills, organizational behavior and
Client Management.
The Asian
continent from the perspective of marketing is targeted from NetSol Technologies
based in Lahore. NetSol Abraxas looks after the marketing activities for
Australia and New Zealand. However, NetSol Technologies’ business development
team also assists NetSol Abraxas in the marketing endeavors. NetSol UK, based
out of London, the financial hub of Europe, looks after the European market.
NetSol UK has also appointed a representative in Denmark to further focus on
Denmark as well as the neighboring countries. The marketing for LeaseSoft in USA
and Canada is carried out by NetSol USA. As with NetSol Abraxas, NetSol
Technologies (Pvt.) Limited services NetSol UK and NetSol USA whenever required.
NetSol
has now established a very strong strategy to aggressively market LeaseSoft in
various regions of the world. As part of the strategy, NetSol is forming
alliances with reputable I/T companies and has already appointed distributors in
Japan and Indonesia. In Japan NetSol is front ended by gedas Japan a subsidiary
of Volkswagen Germany. Furthermore NetSol is looking forward to developing
partner networks all across the world with reputable companies.
Management
believes that LeaseSoft has begun to be recognized as a unique, world-class
solution. This belief is based on the following instances:
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Intel has been recognized as a Solution Blueprint by Intel Corporation. Intel has very stringent technical and market potential criteria for designating a solution as a "solution blueprint".
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Frame Agreement with DaimlerChrysler Services AG (DCS)
NetSol’s
Frame Agreement with DCS short lists LeaseSoft as a preferred software for
managing the wholesale and retail side leasing and finance business of DCS. DCS
supports the sales of DC vehicles through financial services.
The
current LeaseSoft client base includes DaimlerChrysler Services (Australia,
Japan, New Zealand, Singapore, South Korea, Thailand and Taiwan), Yamaha Motors
Finance Australia and Toyota Leasing Thailand.
NetSol
also maintains a LeaseSoft specific product website www.leasesoft.biz
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Status
of New Products and Services
With
the acquisition of Pearl Treasury System, the Company expands its menu of
software into the banking and other financial areas.
Pearl
Treasury System (PTS)
In
2003, NetSol acquired the intellectual property rights ("IPR") of Pearl Treasury
System ("PTS"). PTS was developed to 70% completion in the late 1990s by a group
of banking and I/T visionaries in the UK, led by Noel Thurlow, the system
designer. Noel has 30 plus years in banking through his positions as Trader and
Head of Trading, Treasury, Risk, Operations and I/T for banks such as Bankers
Trust and Mitsubishi Trust & Banking. Along with the IPR, NetSol retained
Noel’s domain knowledge and direct, full-time involvement as the ongoing system
designer and NetSol’s VP and Global Head of Banking Products.
PTS
was originally developed on two tier client server technologies and was designed
to provide full process automation and decision support in the front, middle and
back offices of treasury and capital markets operations. On internal review of
PTS by Noel and NetSol’s already established I/T and banking specialists post
acquisition, it was decided to re-write the system within .NET technologies,
bringing the system into the leading edge n-tier/browser-based environment. The
project name for this program is Trapeze, and 70% of the Phase One deliverable
is complete. PTS and Trapeze have more than 70 person years of development
effort and $4 million already invested.
The
tremendous flexibility enabled by the comprehensive data model and multi-tier
architectural design of Trapeze has been fully recognized, identifying the
potential to further develop Trapeze beyond treasury and capital markets.
Additionally, Trapeze is modular and can therefore be implemented as
best-of-breed solutions for, example, front-office trading, middle office credit
or market risk, or back office settlement. Trapeze can also be implemented to
support all these areas, plus others, as a single fully integrated
solution.
Trapeze
provides NetSol with the significant opportunity to gain a sizable share of the
treasury, capital markets and wholesale banking systems markets. Following a
lull in the banking solution purchase market, caused by Y2K and disasters such
as 9/11, market analysts, such as Celent and IBS Publishing, are forecasting
significant system replacement activity over the next few years, particularly in
the area of treasury management.
NetSol
is currently and actively seeking a small number of banks and financial
institutions to be pilot development partners for the final stage of the Phase
One development program, implementing Trapeze to support their specific
requirements.
Growth
Through Acquisition
In
Mid-2004, NetSol management identified mergers and acquisitions as potential
methods of capitalizing on the demand of the Company’s flagship product,
LeaseSoft and assisting the Company in launching its treasury banking software
systems. This, together with the visable turnaround in the services and
outsourcing sectors in global markets. it made perfect business sense to follow
a growth strategy that would encompass both organic growth and as well mergers
and acquisitions. As 2004 progressed, however, it became necessary to focus the
emphasis growth on capitalizing on organic growth and investing in building up
the Company’s marketing and sales organization.
Given
this, and after several rounds of due diligence and negotiations, the proposed
acquisition of a California based I/T company in early 2004, was mutually and
amicably abandoned by the parties in July 2004. Since this, the Company has
focused on aggressively implementing a marketing and sales plan. While we are
experiencing a solid traction for our core business, we will continue to explore
potential mergers or acquisitions with suitable IT companies with synergy,
strong management teams and the right valuation for acquisition.
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, the Company is looking forward
to establishing a network of partners worldwide. These companies will represent
NetSol in their respective countries and will develop business for NetSol.
In
May 2004, the Company entered into an agreement with gedas Japan, a subsidiary
of Berlin based gedas Group, a division of Volkswagen Germany, whereby gedas
Japan agreed to market and sell the Company’s LeaseSoft product line in the Asia
Pacific markets including Japan.
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Strategic Alliances
LeaseSoft
is recognized as Solution Blueprint by Intel Corporation. Intel has very
stringent technical and market potential criteria for marking a solution as
solution blueprint. The document is also available online from Intel’s website
http://www.intel.com/business/bss/solutions/blueprints/industry/finance/index.htm
NetSol
and Intel Corporation have a strategic relationship that would potentially
permit NetSol to market its core product, ‘LeaseSoft’, through Intel websites.
In a joint press release made earlier in 2004, by both NetSol and Intel, both
companies 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. Intel's website defines Intel’s Solution Blueprints as detailed
technical documents that define pre-configured, repeatable solutions based on
successful real-world implementations. Built on Intel® architecture and flexible
building block components, these solutions help deliver increased customer
satisfaction, lower operating costs, and better productivity. Through this
strong relationship, NetSol has been invited by Intel in China and in San
Francisco to present and introduce the company’s core product line to a global
market.
DaimlerChrysler
Services Asia Pacific has established "Application Support Center (ASC)" in
Singapore to facilitate the regional companies in LeaseSoft related matters.
This support center is powered by highly qualified technical and business
personnel. ASC LeaseSoft in conjunction with NetSol Technologies (Pvt.) Ltd.
Lahore are supporting DCS companies in seven different countries in Asia and
this list can increase as other DCS companies from other countries may also opt
for LeaseSoft.
NetSol
has appointed gedas Japan, a subsidiary of Berlin-based gedas Group, as its
Japanese distributor for the company's LeaseSoft suite of fully integrated
software solutions for the leasing and financial services industries. gedas
Group is a wholly-owned subsidiary of the Volkswagen Group and has a history of
success in the information technology (IT) market that spans some 20 years. In
the year 2003, gedas achieved global revenues totaling EUR 576 million, 80
percent of which were generated in the world's main automotive production
centers.
With
the recent deregulation of Pakistan's telecommunications sector and the
government's 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 country's armed forces.
NetSol
Connect, Pvt. Ltd., a wholly owned IP backbone and broadband subsidiary of the
Company, has recently forged a partnership with UK based computer company,
Akhtar Computers of U.K. Pursuant to this agreement, NetSol has retained control
of the Company with ownership of 50.1% to Akhtar’s 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 Akhtar acquired, for cash, another small internet
connectivity business named Raabta Online in Pakistan. This acquisition expands
the presence of NetSol Akhtar’s connectivity business to at least three major
cities of Pakistan.
In
June 2004, the Company entered into a Frame Agreement with DaimlerChrysler AG.
This agreement, which serves as a base line agreement for use of the LeaseSoft
products by DaimlerChrysler Services AG companies and affiliated companies,
represents an endorsement of the LeaseSoft product line and the capabilities of
NetSol to worldwide DaimlerChrysler entities. This endorsement has had a
tremendous impact on our perspective customers, it has helped our sales and
Business Development personnel to market and sell our LeaseSoft solution to blue
chip customers around the world.
Technical
Affiliations
The
Company currently has 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
The
Company is aggressively growing the marketing and sales organizations in the
United Kingdom, Australia, Pakistan and the USA. Management believes that the
year 2005 will be a year for growth and the launching of footprints in new
markets, while penetrating in the established markets such as Asia Pacific and
Europe.
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While affiliations and partnering result in potential growth for the Company, marketing and selling remain essential to building Company revenue. The objective of the Company's marketing program is to create and sustain preference and loyalty for NetSol as a leading provider of enterprise solutions, e-services consulting and software solutions. 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. As the US technology market gradually
improving , NetSol marketing teams are concentrating on the markets overseas
with cautious entry into the US market.
The
Company generally enters into written commitment letters with clients at or
around the time it commences work on a project. These commitment letters
typically contemplate that NetSol and the client will subsequently enter into a
more detailed agreement, although the client's obligations under the commitment
letter are not conditioned upon the execution of the latter agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and the Company does not generally believe it is appropriate to
characterize them as consisting of backlog. In addition, because these written
commitments and agreements often provide that the arrangement can be terminated
with limited advance notice or penalty, the Company does not believe the
projects in process at any one time are a reliable indicator or measure of
expected future revenues. However, there is a very small probability of
cancellation since the client thoroughly scrutinizes the products and only signs
the contract once it is confident that it meets their requirements. In addition,
NetSol has very little past history of termination once the committment letter
has been signed.
The
Markets
NetSol
provides its services primarily to clients in global commercial industries. In
the global commercial area, the Company's service offerings are marketed to
clients in a wide array of industries including, automotive: chemical; textiles;
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, the Company's revenue mix by major markets was as
follows:
|
2004 |
2003 |
||||||
North
American (NetSol USA) |
12 |
% |
15 |
% | |||
Europe
(NetSol Technologies, UK Ltd.) |
6 |
% |
5 |
% | |||
Other
International (Abraxas, NetSol Technologies Pvt. Ltd., |
82 |
% |
80 |
% | |||
NetSol
Pvt., Ltd., NetSolAkhtar) |
|||||||
Total
Revenues |
100 |
% |
100 |
% | |||
|
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| 7 | ||
|
| ||
Fiscal Year 2003 Performance Overview
The
Company has effectively expanded its development base and technical capabilities
by training its programmers to provide customized I/T solutions in many other
sectors and not limiting itself to the lease and finance industry. The Company
believes 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 $11 billion in the
year 2003-2004 and $9.5 billion in the year 2002-2003 as opposed to $7 billion
in 2001.
NetSol
Technologies PVT Ltd.
Our
off shore development facility continues to perform strongly and has enhanced
its capabilities and expanded its sales and marketing activities. In May 2004,
NetSol inaugurated its newly built Technology Campus in Lahore, Pakistan. This
state of the art, purpose-built and fully dedicated I/T and software development
facility, is the first of its kind in Pakistan. NetSol also signed a strategic
alliance agreement with the IT ministry of Pakistan to convert the technology
campus into a technology park. By this agreement, the IT ministry would invest
nearly 10 million Rupees (approximately $150,000) to install fiber optic lines
and improve the bandwidth for the facility. NetSol has relocated its entire
staff of over 250 employees into this facility and it is continuously growing.
This facility is the backbone of NetSol business model and it provides the world
class I/T talents and cost arbitrage scale of 8:1 to western customers.
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 facilities in
Pakistan, being the engine, which drives NetSol, continues to be the major
source of revenue generation. The Pakistan operation has contributed nearly 55%
of 2004 revenues, with $3,190,000 in revenues for the current year. This was
accomplished primarily through export of I/T Services and product licensed to
the overseas markets. The total revenue of NetSol Pakistan, including the
Pakistan domestic market, was $3.67 million with a record profit of $1.63
million.
NetSol
has signed on new customers for LeaseSoft as well as for bespoke development
services. For LeaseSoft following new projects were earned by the company;
DaimlerChrysler
Leasing Thailand (DCLT) - Licensing and customization of
LeaseSoft.CMS
This
was the significant break since CMS is the largest of the four applications from
the LeaseSoft suit. DCLT till now had been using other products under LeaseSoft
but now with implementation of CMS, end to end assets side business of DCLT will
be on LeaseSoft.
Toyota
Leasing Thailand (TLT) - Licensing, customization and implementation of
LeaseSoft.CAP
TLT
is a volume leader in captive finance companies in Thailand and it has chosen
NetSol’s LeaseSoft.CAP to automate the credit evaluation process. The project is
currently under way and looking at the NetSol expertise in Leasing and Finance
TLT has also shown very keen interest in NetSol’s LeaseSoft.WFS to power its
wholesale finance business. NetSol also considers it a big strategic break as
once delivering successfully in Thailand NetSol will be in a very good position
to target Toyota Finance companies around the world.
CMM
Evaluation Consultancy Services for PSEB.
As
a part of Ministry of Information Technology’s efforts for the process
improvements in the operations of Pakistani software houses, NetSol, under the
auspices of Pakistan Software Export Board, would be undertaking an exercise for
these consultancy services for different software companies. The key aspects of
these services would be CMM introduction, gap analyses for ISO 9001:2000
compliant procedures, CMM Level 2 pre-assessments, evaluations and
tracking/analyses of such improvements.
NetSol
has been identified as a premium I/T company in Pakistan. With its matured
products and services, local demand is surging. A few of the recently signed
agreements in the private and public sectors are:
Software Process Improvement Services for NADRA. (National
Database Registration Authority of Pakistan)
- MM
Training Workshops as consultants for PSEB (Pakistan Software Export Board
).
- Credit
MIS & FIS for PRSP (Punjab Rural Support Program)
- Electronic
Credit Information Bureau for State Bank of Pakistan
- Punjab
Portal
- Consultancy & Automation of Pakistan Administrative Staff College
The
growing domestic business in Pakistan, as stated above is valued over tens of
millions ruppees or hundreds of thousands of US dollars. NetSol has a very
strong pipeline to win many more and major new projects in the public and
private sectors. NetSol will continue to strive to become the most dominant IT
solutions providers in this explosive growth market.
|
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| 8 | ||
|
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NetSol
Technologies UK Ltd
NetSol
Technologies Limited, the United Kingdom ("UK") subsidiary, was formed in Fiscal
2003. Located in the heart of the City of London, one of the world’s major
banking and finance centers, the company is resourced with experts from the
financial services industry, including its Chairman, Ed Holmes, with such
experience as Group Executive Europe and chairman/CEO
of Citibank International Plc. In addition, the UK subsidiary boasts substantial
management, banking and solution sales experience through its high-caliber
personnel. The UK subsidiary is responsible for the Company’s activities in the
UK, Europe and Middle East and include the spearheading of the sales and
marketing efforts for Trapeze, NetSol’s new treasury and wholesale banking
solution; plus ongoing marketing and sales of the LeaseSoft portfolio of leasing
solutions and NetSol’s range of on and off-shore I/T services.
Depending
solely upon organic growth, the UK company produced $356,000 in revenue for the
current fiscal year or 6% of the Company’s total revenues. 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. In May 2004, NetSol
announced the signing of an agreement to develop new software programs for The
Innovation Group ("TiG"), a provider of profit improvement solutions to the
insurance industry.
Most
recently, the UK operations entered into agreements with DCD Group UK, TiG and
Habib Allied Bank in the UK. The revenue contribution for NetSol UK was $357,000
or about 6.2% of the revenues of 2004.
NetSol-Abraxas
The
Australian market continues to be vibrant as NetSol maintains its customers such
as Yamaha Motors, GMAC Australia, St. George Bank, DaimlerChrysler Finance in
New Zealand, and Volvo Australia. The Company continues to pursue new customers
and new business from its existing customers for its core product lines. The
Company signed a strategic partnership agreement with Australian Motor Finance
Pty. Limited ("AMF"), an Australia automotive lender. Under the terms of this
agreement, NetSol will design and implement a point of sale system for AMF’s
wholesale funding initiatives. The terms of the agreement permit NetSol to
participate in transaction based revenue sharing with AMF. There are a number of
new prospects that are in varying degrees of the decision-making process. The
Australian subsidiary contributed 5% of revenues in fiscal year 2004., with
$264,000 in revenues. A key senior person from LeaseSoft has been made a
permanent part of NetSol Abraxas to aggressively follow the Australian and New
Zealand market.
NetSolConnect-NetSol
Akhtar
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 Company’s subsidiary; Pakistan based NetSolConnect Pvt Ltd., an
Internet service provider (ISP) in Pakistan. As part of this Agreement,
NetSolCONNECT changed its name to NetSol Akhtar. A change in the ownership
structure in September 2003 and the consolidation and readjustment of the
revenue model caused revenue reduction in fiscal year 2004 from as compared to
the fiscal year 2003. However, of late, NetSol Connect has steadily grown its
presence in tri cities (Karachi, Lahore and Islamabad.) The company acquired a
small internet online company called Raabta Online in early 2004. This created a
national presence for wireless broadband business in key markets that have
experienced explosive growth. The telecom sector in Pakistan has a potential
market size exceeding $100Million. NetSol Connect with its new laser and
wireless technologies has a potential to become a major brand in
Pakistan.
NetSol
CONNECT was initially launched in early 2000 in Karachi, Pakistan's largest
city. Prior to NetSol CONNECT's technology being brought to Karachi, the concept
of high speed "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 became 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 Akhtar has a subscriber
base in the range of 40,000-50,000 in Karachi and has been in business for over
7 years. The partnership with Akhtar Computers is designed to rollout the
services of connectivity and wireless to the Pakistani national market. This
subsidiary contributed 14% of the revenues in fiscal year 2004, with $779,000 in
revenues.
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. Akhtar owned 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 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 Karachi's 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. The
revenue contribution for NetSol Akhtar was $778,000 or about 14% of 2004
revenues.
|
| ||
| 9 | ||
|
| ||
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. Altvia’s 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.
In
the last fiscal year, NetSol USA signed agreements with CapitalStream, a
Washington based software developer specializing in software to financial
sectors. The revenue generated in fiscal year 2004 from Capital Stream and other
US based customers was in excess of $ 675,000 with attractive profit margins.
NetSol USA represented 12% of total, or $677,000, of the 2004
revenues.
LeaseSoft
Sales
LeaseSoft
got a major recognition when DaimlerChrysler Services (DCS) AG, Germany signed a
global frame agreement with NetSol for LeaseSoft. Under terms of the open-ended
global frame contract, LeaseSoft is named as one of the strategic, asset-based,
finance software solutions for DCS. In addition to its LeaseSoft product suite,
NetSol could also provide DCS with a range of fixed-rate, contractual
professional and IT services, which are also covered by the frame
agreement.
NetSol's
professional services will include product customization, implementation,
technical support, ongoing maintenance and upgrades. The company's technology
and consulting services will include project management, systems analysis and
business process reengineering. According to Naeem Ghauri, NetSol's chief
executive officer, the company is currently providing similar services and a
variety of LeaseSoft modules to DCS companies located in Taiwan, Thailand,
Japan, New Zealand, Australia, South Korea and Singapore.
LeaseSoft
is establishing itself as a dependable and preferred system in the niche market
of asset based lease and finance. In 2003-2004, NetSol was able to sell a number
of LeaseSoft licenses in Asia Pacific, details of which are as follows:
LeaseSoft.CMS
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 NetSol’s Credit Application Processing System.
LeaseSoft.CAP was successfully implemented at DCLT and is enabling DCLT to
process larger numbers of applications per given period of time while
simultaneously reducing probability of a default per approved loan. After the
successful implementation of LeaseSoft.CAP, DCLT has opted for LeaseSoft.CMS to
power their complete operations on retail side financing. The project is in the
implementation phase.
LeaseSoft.CAP
at Toyota Leasing Thailand (TLT).
Toyota Leasing Thailand opted for LeaseSoft.CAP to automate the credit approval
cycle through an objective point score based approval system implemented through
a highly intensive workflow. TLT is a volume leader in Captive Finance companies
in Thailand and getting TLT as LeaseSoft customer means that NetSol has best of
both worlds in Thailand, i.e., DaimlerChrysler Leasing Thailand serving the
Elite and prestige class as well as TLT the volume leaders in the country. This
implementation is based on Oracle and Linux.
LeaseSoft.WFS
Version upgrade at DaimlerChrysler Leasing Thailand (DCLT).
.DCLT was using LeaseSoft.WFS version 3.2. However, the new 4.1 version had
enhanced features and to make use of the new functionality set DCLT upgraded
their version to the latest one.
NetSol
also completed the on going implementation of LeaseSoft.WFS at DaimlerChysler
Services Korea. A peculiar aspect of this implementation is that it is an off
site implementation where by the users sit and use the system in Korea where as
the system in reality is hosted in Singapore.
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
The
Company broke ground for its Technology Campus in January 2000 with a
three-phase plan of completion. Initially, the Company anticipated the
completion of Phase One by fall 2001, but due to the delay in financing, and
other challenges facing the Company, the completion was delayed. The Technology
Campus was completed in May 2004 and the Lahore operations relocated to the
facilities in May 2004. By relocating the entire Lahore operation from its
previously leased premises to the Campus, the Company would save approximately
$150,000 annually. 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 Pakistan's second largest city, Lahore, with
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 & UET. These institutions are also the source of quality
I/T resources for the Company. 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. The Company has made this investment to attract
contracts and projects from blue chip customers from all over the world.
|
| ||
| 10 | ||
|
| ||
People and Culture
The
Company believes it has developed a strong corporate culture that is critical to
its success. Its key values are delivering world-class quality software,
client-focused timely delivery, leadership, long-term relationships, creativity,
openness and transparency and professional growth. The services provided by
NetSol require proficiency in many fields, such as computer sciences,
programming, mathematics, physics, engineering, and communication and
presentation skills. 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 opportunity to participate in its stock option program. Also, the
Company has an intensive orientation program for new employees to introduce our
core values and a number of internal communications and training initiatives
defining and promoting these core values. We believe that our growth and success
are attributable in large part to the high caliber of our employees and our
commitment to maintain the values on which our success has been based. 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 millions of stock options during very
difficult times for the Company. Management believes that its employees are the
most invaluable asset of NetSol. The Company’s survival in the most challenging
times is due, in part, to their dedication towards continuous achievement of
highest quality standards and customer satisfaction.
There
is significant competition for employees with the skills required to perform the
services we offer. The Company believes that it has been successful in its
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 June 30, 2004, we had 294 full-time employees; comprised of 195 I/T project
personnel, 55 employees in general and administration and 44 employees in sales
and marketing. There are 8 employees in the United States, 270 employees in
Pakistan, 6 in Australia and 10 in the United Kingdom. None of our employees are
subject to a collective bargaining agreement.
An
interesting recent trend in Pakistan is that highly skilled and experienced
technical resources are coming back to the country for settling down
permanently. This phenomenon has virtually created a situation of reversal of
the brain drain Pakistan was going through for years. NetSol making use of this
situation has hired some very experienced and highly skilled resources in
Lahore. The improved relationship with neighbor India, the outsourcing trends
seems to be picking steam. As the borders are opened up there is a growing
access of human capital and It infrastructures in both sides. This has
positively affected NetSol business both local and international as we now can
openly compete with the IT markets of India.
Competition
Neither
a single company nor a small number of companies dominate the I/T market in the
space in which the Company competes. A substantial number of companies offer
services that overlap and are competitive with those offered by NetSol. Some of
these are large industrial firms, including computer manufacturers and computer
consulting firms that have greater financial resources than NetSol and, in some
cases, may have greater capacity to perform services similar to those provided
by NetSol.
Some
of the competitors of the Company are International Decisions Systems, McCue
Systems, EDW, Data Scan, KPMG, CresSoft, Kalsoft, Systems Limited, Cybernet,
SouthPac Australia and a few others. These companies are scattered worldwide
geographically. In terms of offshore development, we are in competition with
some of the Indian companies such as 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 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 AG; DaimlerChrysler
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, Toyota Leasing Thailand, and Habib Allied Bank UK. With the Altvia
acquisition, NetsSol has acquired, as clients, some of the most well known
higher education and telecommunications associations based in the United States
East Coast. NetSol is also a strategic business partner for DaimlerChrysler
(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, 2004.
|
| ||
| 11 | ||
|
| ||
As compared to the previous year, NetSol (Pvt.) Ltd. was able to materialize a number of services contracts within the local Pakistani public and defense sectors. An important aspect of these contracts is that not all of them were solely focusing on software development and engineering. This year, NetSol, has gone a step further by providing Quality Assurance, Business Process Re-engineering and CMM consultancy services to organizations so as to improve their quality of operations and services. These clients include private as well as public sector enterprises. Also, NetSol was successful in consolidating its standing as one of the preferred solutions providers for the Military sector and Defense organizations. The service offering portfolio of NetSol has now diversified into a comprehensive supply chain of end to end services and solutions catering to BPR, consultancies, applications development, engineering as well as other supporting processes
New
Local Customers are as follows:
| · | Pakistan Administrative Staff College |
| · | Punjab Portal Government of Punjab |
| · | Punjab Rural Support Program |
| · | Pakistan Software Export Board |
| · | NADRA |
| · | Pakistan Air War College |
| · | State Bank of Pakistan |
The
Internet
The
Company is committed to regaining and extending the advantages of its direct
model approach by moving even greater volumes of product sales, service and
support to the Internet. The Internet provides greater convenience and
efficiency to customers and, in turn, to the Company. The Company receives
150,000 hits per month to www.NetSoltek.com.
The Company also maintains a product specific website for LeaseSoft at
www.leasesoft.biz
.
Through
its Web sites, customers, potential customers and investors can access a wide
range of information about the Company's product offerings, can configure and
purchase systems on-line, and can access volumes of support and technical
information about the Company.
Operations
The
Company's headquarters are in Calabasas, California. Nearly 90% of the
production and development is conducted at NetSol in Lahore, Pakistan. The other
10% 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. These are the core operating
companies engaged in developing and marketing IT solutions and software
development and marketing.
NetSol
UK services and supports the clients in the UK and Europe. NetSol PK services
and supports the customers in the Asia Pacific and South Asia regions.
A
significant portion of the software is developed in Pakistan. Despite of the
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 $13.0 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. about 5,500 in recent
times). Pakistan, now a close US ally, is recognized by the western world as
becoming very conducive and attractive for foreign collaboration and
investments. The Company is in an extremely strong position to continue to use
this offshore model, which includes competitive price advantage to serve its
customers. Just recently Moody’s International assessed Pakistan as less
vulnerable than many countries in the Asia Pacific region. Also, Standard &
Poors rating on Pakistan has been improved to positive. The present government
has taken major bold steps to attract new foreign investment and bolster the
local economy. Foreign Direct Investment exceeded $900 million, a record high,
in 2004. The trend continues to grow steadily. The US dollar reserves of State
Bank of Pakistan has shot up over $13 billion from less than $1 billion in 2000.
Overall, the economy of Pakistan is experiencing substantial growth as
demonstrated by the record high 6.1% growth of the gross domestic product in
2004. The confidence of the local investors and foreign investors has been
undoubtedly enhanced resulting in stronger demand of new listing in the stock
markets. Most recently the telecom sector received a boost when the I/T ministry
was able to successfully auction two new mobile phones licenses for a total of
$592 million to two European Telecom conglomerates. This was a landmark
development and it simply underscores the confidence and growing interest of
foreign companies in investing in Pakistan.
NetSol
USA functions as the service provider for the US based customers both in the
consulting services area as well as in the project management. In addition, the
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.
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| ||
| 12 | ||
|
| ||
Organization
NetSol
Technologies, Inc. (formerly NetSol International, Inc.) was founded in 1997 and
is organized as a Nevada corporation. The Company amended its Articles of
Incorporation on March 20, 2002 to change its name to NetSol Technologies,
Inc.
The
success of the Company, in the near term, will depend, in large part, on the
Company's ability to: (a) minimize additional losses in its operations; (b)
raise funds for continued operations and growth; and, (c) enhance and streamline
sales and marketing efforts in the United States, Asia Pacific region, Pakistan,
Europe, Japan and Australia. However, management's 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, the Company anticipates to be
able to continue to improve operating results at its core by reducing costs and
improving gross margins.
Intellectual
Property
The
Company relies upon a combination of nondisclosure and other contractual
arrangements, as well as common law trade secret, copyright and trademark laws
to protect its proprietary rights. The Company enters into confidentiality
agreements with its employees, generally requires its consultants and clients
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
Current
Company 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 the Company maintains subsidiaries and
conducts 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.
ITEM
2 - PROPERTIES
Company
Facilities
As
of December 2003, the Company’s headquarters were moved from its previous
facility to one with approximately 1,919 rentable square feet and a monthly rent
of $3,933 per month. The lease is a two-year and one-half month lease expiring
in December 2005. The Company’s current facilities are located at 23901
Calabasas Road, Suite 2072, Calabasas, CA, 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 |
||||||
United
Kingdom |
378 |
General
Office |
$ |
5,500 |
||||||
Maryland |
1,380 |
General
Office |
$ |
2,530 |
||||||
The
Australia lease is a three-year lease that expires in September 2007 and
currently is rented at the rate of $1,380 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 facilities in Maryland are
leased for a three-year term that expires in June 2007. The monthly rent is
$2,530.
Upon
expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space.
Lahore
Technology Campus
The
newly built Technology Campus was inaugurated in Lahore, Pakistan in May 2004.
This facility consists of 40,000 square feet of computer and general office
space. This facility is state of the art, purpose-built and fully dedicated for
IT and software development; the first of its kind in Pakistan. Title to this
facility is held by NetSol Technologies Pvt. Ltd. And is not subject to any
mortgages. The Company also signed a strategic alliance agreement with the IT
ministry of Pakistan to convert the technology campus into a technology park. By
this agreement, the IT ministry would invest nearly 10 million Rupees
(approximately $150,000) to install fiber optic lines and improve the bandwidth
for the facility. NetSol has relocated its over 250 employees into this new
facility.
|
| ||
| 13 | ||
|
| ||
ITEM
3 - LEGAL PROCEEDINGS
On
July 26, 2002, the Company was served with a Request for Entry of default by
Surrey Design Partnership Ltd. ("Surrey"). Surrey’s 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. During the
year ended June 30, 2004, we have paid 60,445 British pounds sterling on this
debt.
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
Queen’s 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, 2004 the Company has paid
$73,000 as part of this settlement.
On
March 3, 2004 Uecker and Associates, Inc. as the assignee for the benefit of the
creditors of PGC Systems, Inc. formerly known as Potera Systems, Inc. filed a
request for arbitration demanding payment from NetSol for the amounts due under
a software agreement in the amount of $175,700. On March 31, 2004, we filed an
answering statement to the request of Uecker & Associates denying each and
every allegation contained in the Claim filed by Uecker & Associates and
stating NetSol’s affirmative defenses. The claim is being settled by binding
arbitration before the American Arbitration Association (AAA). The parties
selected an arbitrator in April 2004; however, due to demands to her schedule,
in August 2004, AAA requested that the parties select another arbitrator. The
parties are currently in the process of selecting another arbitrator. Dates for
the arbitration hearing have been set for November 17 and 18. An arbitrator has
been selected and the parties are selecting dates for arbitration in this
matter. NetSol intends to vigorously defend this action.
On
May 12, 2004, Merrill Corporation served an action against NetSol for account
stated, common counts, open book account and unjust enrichment alleging amounts
due of $90,415.33 together with interest thereon from August 23, 2001. On June
24, 2004, the parties reached a settlement agreement. Merrill Corporation agreed
to accept $75,540 as payment in full to be paid $10,450 at the time of
settlement and the balance in five monthly installments of $13,000 per month.
The action with be dismissed with prejudice upon receipt of the final
payment.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fiscal quarter
ending June 30, 2004.
PART
II
ITEM
5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
(a)
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded on
NASDAQ Small Cap under the ticker symbol "NTWK."
The
table shows the high and low intra-day prices of the Company's common stock as
reported on the composite tape of the NASDAQ for each quarter during the last
two fiscal years. Per share stock prices have been adjusted to reflect the 1 for
5 reverse stock split which occurred in August 2003.
|
2003-2004 |
2002-2003 |
||||||||||||
|
Fiscal
Quarter |
High |
Low |
High |
Low |
|||||||||
1st
(ended September 30) |
5.50 |
1.94 |
.80 |
.35 |
|||||||||
2nd
(ended December 31) |
3.16 |
2.05 |
1.30 |
.25 |
|||||||||
3rd
(ended March 31) |
3.15 |
2.07 |
1.24 |
.75 |
|||||||||
4th
(ended June 30) |
3.09 |
2.01 |
3.50 |
.95 |
|||||||||
RECORD
HOLDERS - As of September 13, 2004, the number of holders of record of the
Company's common stock was 110. As of September 13, 2004, there were 9,545,693
shares of common stock issued and outstanding.
|
| ||
| 14 | ||
|
| ||
DIVIDENDS - The Company has not paid dividends on its Common Stock in the past and does not anticipate doing so in the foreseeable future. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The
table shows information related to our equity compensation plans as of June 30,
2004:
|
Number
of securities
to
be
issued upon
exercise
of outstanding
options,warrants
and
rights |
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights |
Number
of securities
remaining
available
for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected
in column
(a)) |
||||||||
|
Equity
Compensation
Plans
approved by
Security
holders |
1,762,277(1 |
) |
$ |
2.15(2 |
) |
1,977,252(3 |
) | |||
|
Equity
Compensation
Plans
not approved by
Security
holders |
None |
None |
None |
|||||||
|
Total |
1,762,277 |
$ |
2.15 |
1,977,252 |
||||||
| (1) | Consists of 189,777 under the 2001 Incentive and Nonstatutory Stock Option Plan; 1,122,500 under the 2002 Incentive and Nonstatutory Stock Option Plan and 450,000 under the 2003 Incentive and Nonstatutory Stock Option Plan. |
| (2) | The weighted average of the options is $3,788,896. |
| (3) | Represents 427,252 options available for future issuance under the 2002 Incentive and Nonstatutory Stock Option Plan and 1,550,000 available for issuance under the 2003 Incentive and Nonstatutory Stock Option Plan . |
(b)
RECENT SALES OF UNREGISTERED SECURITIES
In
August 2003, Mr. Hugh Duddy was issued options to acquire 160,000 shares of
NetSol Technologies, Inc. stock as compensation for consulting services provided
by Mr. Duddy. Mr. Duddy’s 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 NetSol’s nonstatutory stock option plan.
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, NetSol issued warrants to
purchase 81,000 shares of common stock to Maxim Partners, nominee of 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, NetSol 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. On December 16,
2003, the note holder converted the note into 285,715 shares of the Company’s
common stock. 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, NetSol executed an agreement to acquire Pearl Treasury System
Ltd, a United Kingdom company. This acquisition requires NetSol 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. On December 16, 2003, 41,700 shares were issued under this agreement
and the remaining 18,300 were issued on April 20, 2004 upon the completion of
the software delivery warranties.
On
December 16, 2003, we issued 34,843 shares, valued at $100,000, to ACB, Ltd.,
formerly Arab Commerce Bank, as part of a settlement of an action instituted by
ACB Ltd. against NetSol. The shares were issued in reliance on an exemption
available from registration under Regulation S of the Securities Act of 1933, as
amended. On February 6, 2004, NetSol issued an additional 10,352 shares valued
at $35,135 for interest to ACB (formerly Arab Commerce Bank) pursuant to the
terms of the legal settlement dated November 3, 2003. These shares were issued
as part of the settlement agreement with ACB. The shares were issued in reliance
on an exemption available from registration under Regulation S of the Securities
Act of 1933, as amended.
On
December 17, 2003, NetSol entered into a loan agreement with an accredited
non-U.S. investor, Noon Group. Under the terms of the loan, NetSol borrowed
$100,000 from the investor. The note has an interest rate of 6% per annum. The
note is due on a date that is six months from the issuance date. In the event of
default by NetSol only, the note is convertible into shares of common stock at
$1.95 per share, and 51,282 warrants at the exercise price of $3.25 per share
which expire one year 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 March 24, 2004, the loan was converted into 51,282
shares of NetSol’s common stock. On June 10, 2004, an additional 5,861 shares of
the Company’s common stock were issued for interest valued at
$11,429.
|
| ||
| 15 | ||
|
| ||
On December 24, 2003, NetSol entered into a loan agreement with an accredited non-U.S. investor, Akhtar Group. Under the terms of the loan, NetSol borrowed $250,000 from the investor. The note has an interest rate of 6% per annum. The note is due on a date that is one hundred and twenty (120) days from the issuance date. In the event of default by NetSol only, the note is convertible into shares of common stock at $1.85 per share, and 135,135 warrants at the exercise price of $3.00 per share which expire six months 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. Effective March 8, 2004, the loan was converted into 135,135 shares of NetSol’s common stock.
On
March 26, 2004, NetSol issued debentures to 23 accredited investors in a
principal amount of one million two hundred thousand dollars ($1,200,000). The
debentures mature two years from the date of the debenture, or March 26, 2006
and bear interest at the rate of 10% per annum payable in common stock or cash
at NetSol’s option, on a quarterly basis. Pursuant to the terms of a supplement
between NetSol and the debenture holders, the conversion rate was set at one
share for each $1.86 of principal. As part of that amendment, each debenture
holder is entitled to receive, at conversion, warrants to purchase up to 50% of
the shares issuable to the debenture holders at conversion at the exercise price
of $3.30 per share. These warrants expire in June 2009. These debentures and
warrants were issued in reliance on an exemption from registration available
under Regulation D of the Securities Act of 1933, as amended.
On
May 20, 2004, NetSol issued 386,363 shares of common stock and warrants to
acquire up to 163,182 shares of common stock at the exercise price of $3.30 per
share to nine accredited investors. These shares and warrants were issued in
reliance on an exemption from registration available under Regulation D of the
Securities Act of 1933, as amended.
In
June 2004, NetSol issued a total of 45,000 shares of common stock, valued at
$39,240, to its directors as compensation for board service completed in January
2004. These shares were issued in reliance on an exemption from registration
available under Regulation D and S of the Securities Act of 1933, as
amended.
Certain
sales milestones were achieved for the NetSol Altvia subsidiary during the
current year. On February 5, 2004, NetSol issued 100,000 shares to Altvia as
agreed in the acquisition agreement. These shares were issued in reliance on an
exemption available under Regulation D of the Securities Act of 1933, as
amended.
During
the year, a total of 123,350 shares of NetSol’s common stock, valued at
$209,200, were issued to three investors as reimbursement for debts of NetSol
paid by the investors. These shares were issued in reliance on an exemption
available under Regulation S of the Securities Act of 1933, as
amended.
During
the fiscal year ended June 30, 2004 and 2003, employees exercised options to
acquire 1,067,309 and 954,983 shares of common stock in exchange for a total
exercise price of $1,370,551 and $850,816, respectively.
ITEM
6 - MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATIONS
The
following discussion is intended to assist in an understanding of NetSol’s
financial position and results of operations for the year ended June 30, 2004.
Forward
Looking Information
This
report contains certain forward-looking statements and information relating to
NetSol that is based on the beliefs of management as well as assumptions made by
and information currently available to its management. When used in this report,
the words "anticipate", "believe", "estimate", "expect", "intend", "plan", and
similar expressions as they relate to NetSol or its management, are intended to
identify forward-looking statements. These statements reflect management’s
current view of NetSol with respect to future events and are subject to certain
risks, uncertainties and assumptions. Should any of these risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results
may vary materially from those described in this report as anticipated,
estimated or expected. NetSol’s realization of its business aims could be
materially and adversely affected by any technical or other problems in, or
difficulties with, planned funding and technologies, third party technologies
which render NetSol’s technologies obsolete, the unavailability of required
third party technology licenses on commercially reasonable terms, the loss of
key research and development personnel, the inability or failure to recruit and
retain qualified research and development personnel, or the adoption of
technology standards which are different from technologies around which the
Company’s business is built. NetSol does not intend to update these
forward-looking statements.
|
| ||
| 16 | ||
|
| ||
PLAN OF OPERATIONS
Management
has set the following new goals for NetSol’s next 12 months.
Initiatives
and Investment to Grow Capabilities
| · | Achieve CMM Level 4 Accreditation in 2004. |
| · | Enhance Software Design, Engineering and Service Delivery Capabilities by increasing investment in training. |
| · | Enhance and invest in R&D or between 5-7% of yearly budgets in financial, banking and various other domains within NetSol’s core competencies. |
| · | Aggressively expand the sales and marketing organization in all key locations by hiring senior and successful personnel. |
| · | Recruit additional senior level Managers both in Lahore and Bangalore facilities to be able to support potential new customers from the North American, Asia Pacific and European markets. |
| · | Embark on a program of recruiting the best available talent in Project and Program Management. |
| · | Increase Capex, to enhance Communications and Development Infrastructure. |
| · | Launch new business development initiatives in hyper growth economies such as China. |
| · | Create new technology partnership with Oracle and strengthen our relationship with Intel in Asia Pacific and in the USA. |
| · | Aggressively market LeaseSoft specially in Asia Pacific , Europe and globally. |
Top
Line Growth through Investment in aggressively marketing organically and by
mergers and acquisition ("M&A") activities:
| · | Launch LeaseSoft into new markets by assigning new, well-established companies as distributors in Europe, Asia Pacific |
| · | Aggressive marketing in China for LeaseSoft and related services |
| · | Expand relationships with key customers in the US, Europe and Asia Pacific. |
| · | Product Positioning through alliances and partnership. |
| · | Joint Ventures |
| · | Direct Marketing of Services. |
| · | Embark on roll up strategy by broadening M&A activities broadly in the software development domain. |
| · | Enhance the sales and marketing organization by hiring new key executives in the US, UK and Asia. |
| · | Effectively position and marketing campaign for ‘Trapeze’ or PTS. This is a potentially big revenue generator in the banking domain for which NetSol has already invested significant time and resources towards completing the development of this application. |
| · | Explore new diversified opportunities in the areas of Business process Outsourcing. |
With
these goals in mind, we have entered in to the following
arrangements:
LeaseSoft
Distributors.
NetSol appointed gedas Japan, a subsidiary of Berlin-based gedas Group, as its
Japanese distributor for the company's LeaseSoft suite of fully integrated
software solutions for the leasing and financial services industries. gedas
Group is a wholly-owned subsidiary of the Volkswagen Group and has a history of
success in the information technology (IT) market that spans some 20 years. In
the year 2003, gedas achieved global revenues totaling EUR 576 million, 80
percent of which were generated in the world's main automotive production
centers.
Intel
Corporation.
NetSol forged what management believes to be a very important and strategic
alliance with Intel Corporation to develop a blueprint that would give broader
exposure and introduction to NetSol’s LeaseSoft products to a global market.
NetSol recently attended major events in China and in San Francisco through its
Intel relationship, which was designed to connect and introduce NetSol to Intel
partners worldwide.
Launch
of Indian Subsidiary. On
March 17, 2004, NetSol announced that it had launched a wholly owned subsidiary,
NetSol International Pvt. Ltd., in Bangalore, India. NetSol established this
subsidiary as a service delivery base for legacy systems migration, IT
consultancy and certain software engineering skills that are more readily
available in India. The Indian IT-enabled services business produces over $12
billion in export earnings and is growing at over 20% annually. By establishing
the Indian subsidiary, NetSol hopes to tap into the growing Indian
market.
Funding
and Investor Relations.
| · | Raise new capital from emerging markets without or limited usage of NetSol securities |
| · | Attract long term institutional investors and partners both in the US and in Asia. |
| · | Infuse new capital from potential exercise of outstanding investors’ warrants and employees options for business development and enhancement of infrastructures. |
| · | Continuing to efficiently and prudently manage cash requirements and raise capital from the markets only as it deems absolutely necessary to execute the growth strategy. |
| · | Enhance the visibility of company’s stock to US based institutional investors, funds and research analysts. |
Improving
the Bottom Line.
| · | Continue to review costs at every level. |
| · | Grow process automation. |
| · | Profit Centric Management Incentives. |
| · | More local empowerment and P&L Ownership in each Country Office. |
| · | Improve productivity at the development facility and business development activities. |
| · | Cost efficient management of every operation and continue further consolidation to improve bottom line. |
| · | Integrate and centralize the US headquarters operations and improve the costs and bottom line |
|
| ||
| 17 | ||
|
| ||
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. 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 its quality standards, NetSol 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, NetSol is
experiencing a growing demand for its products and alliances from 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. 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.
MATERIAL
TRENDS AFFECTING NETSOL
NetSol
has identified the following material trends affecting NetSol
Positive
trends:
| · | Outsourcing of services and software development is growing worldwide. |
| · | The Global IT budgets are estimated to exceed $1.2 trillion in 2004, according to the internal estimates of Intel Corporation. About 50% of this IT budget would be consumed in the US market alone primarily on the people and processes. |
| · | Overall economic expansion worldwide and explosive growth in the merging markets specifically. |
| · | Regional stability and improving political environment between Pakistan and India. |
| · | Economic turnaround in Pakistan including: a steady increase in gross domestic product; much stronger dollar reserves, which is at an all time high of over $13 billion; stabilizing reforms of government and financial institutions; improved credit ratings in the western markets, and elimination of corruption at the highest level. |
| · | Stronger ties between the US and Pakistan creating new investment and trade opportunities |
| · | Robust growth in outsourcing globally and investment of major US and European corporations in the developing countries |
Negative
trends:
| · | The disturbance in Middle East and rising terrorist activities post 9/11 worldwide have resulted in issuance of travel advisory in some of the most opportunistic markets. In addition, travel restrictions and new immigration laws provide delays and limitations on business travel. |
| · | Negative perception and image created by extremism and terrorism in the South Asian region |
| · | US election uncertainty, not knowing what the new policy of the new administration might be after January 2005 |
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and related public financial information are based on the
application of accounting principles generally accepted in the United States
("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of NetSol
including information regarding contingencies, risk and financial condition.
Management believes our use of estimates and underlying accounting assumptions
adhere to GAAP and are consistently and conservatively applied. Valuations based
on estimates are reviewed for reasonableness and conservatism on a consistent
basis throughout NetSol. Primary areas where our financial information is
subject to the use of estimates, assumptions and the application of judgment
include our evaluation of impairments of intangible assets, and the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions. We
continue to monitor significant estimates made during the preparation of our
financial statements.
VALUATION
OF LONG-LIVED AND INTANGIBLE ASSETS
The
recoverability of these assets requires considerable judgment and is evaluated
on an annual basis or more frequently if events or circumstances indicate that
the assets may be impaired. As it relates to definite life intangible assets, we
apply the impairment rules as required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of" which requires
significant judgment and assumptions related to the expected future cash flows
attributable to the intangible asset. The impact of modifying any of these
assumptions can have a significant impact on the estimate of fair value and,
thus, the recoverability of the asset.
|
| ||
| 18 | ||
|
| ||
INCOME TAXES
We
recognize deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets generated by the
Company or any of its subsidiaries are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Deferred tax assets resulting from the net operating losses
are reduced in part by a valuation allowance. We regularly review our deferred
tax assets for recoverability and establish a valuation allowance based upon
historical losses, projected future taxable income and the expected timing of
the reversals of existing temporary differences. During fiscal year 2003-2004,
we estimated the allowance on net deferred tax assets to be one hundred percent
of the net deferred tax assets.
CASH
RESOURCES
We
were successful in improving our cash position by the end of our fiscal year,
June 30, 2004. In addition, $957,892 was injected by the exercise of options by
several employees in 2004.
CHANGE
IN MANAGEMENT AND BOARD OF DIRECTORS
Board
of Directors
At
the 2004 Annual Shareholders Meeting an eight member board was elected. 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 and,
Mr. Shabir Randeree.
Committees
The
Audit committee is made up of Mr. Jim Moody as chair, Mr. Mustafa and Mr.
Beckert as members. The Compensation committee consists of Mr. Burki as its
chairman and Mr. Randeree and Mr. Mustafa as its members. The Nominating and
Corporate Governance Committee consists of Mr. Beckert as chairman, Mr. Randeree
and Mr. Moody as members.
RESULTS
OF OPERATIONS
THE
YEAR ENDED JUNE 30, 2004 COMPARED TO THE YEAR ENDED JUNE 30, 2003
Net
revenues for the year ended June 30, 2004 were $5,749,062 as compared to
$3,745,386 for the year ended June 30, 2003. Net revenues are broken out among
the subsidiaries as follows:
|
2004 |
2003 |
||||||
|
NetSol
USA |
$ |
676,857 |
$ |
508,868 |
|||
|
NetSol
Tech(1) |
3,190,049
|
1,351,413
|
|||||
|
NetSol
Private(2) |
483,788
|
265,599
|
|||||
|
NetSol
CONNECT |
778,598
|
1,185,162
|
|||||
|
NetSol
UK |
356,215
|
83,737
|
|||||
|
NetSol-Abraxas
Australia |
263,555
|
386,607
|
|||||
|
Total
Net Revenues |
$ |
5,749,062 |
$ |
3,745,386 |
| (1) | Refers to NetSol Technologies (Pvt.) Limited |
| (2) | Refers to NetSol (Private) Limited |
The total
consolidated net revenue for fiscal year 2004 was $5,749,062 compared to
$3,745,386 in fiscal year 2003. This is a nearly 53% increase in revenue. The
increase is attributable to new orders of licenses and an increase in services
business, including additional maintenance work. 70% of the increase is
attributable to new licenses orders and 30% to an increase in services business.
Management believes that the increase in licensing revenue and the increase in
services business is attributable to the overall surge in demand of NetSol
products. The achievement of CMM level 4 quality standard in 2004 is also a
contributing factor of global and rising demand of NetSol software applications.
In addition, NetSol entered into frame agreement with DaimlerChrysler Services
in Germany that pre-qualified NetSol to participate in providing software and
services to many new countries.
NetSol has
made significant progress in new customer acquisition. All of the Company’s
owned subsidiaries have signed contracts with new customers. In the current
quarter, NetSol, as a group, has signed five new customers. All of the new
relationships would add to the top line over the next six months as well as
contributing to revenue growth. The Company added a few new customers such as,
Capital Stream in USA, Cal Portland Cement in USA, Habib Allied Bank, DCD Group,
enhancement in the Yamaha Motors project, DaimlerChrysler New Zealand and a few
local customers in the Pakistan region. NetSol continues to nurture and grow its
relationship with its existing customers, both in sales of new product licenses
and professional services.
The
decrease in NetSolConnect’s revenue in 2004 as compared to 2003 was attributable
to a change in overall management team and strategy. NetSol Connect sold off 49%
of the business to a UK based Company, Akhter Computers in September 2003. This
resulted, as expected, in a modification in business strategy focusing on high
margins which correspondingly had a lower immediate revenue.
Its
U.S. subsidiary, NetSol USA, has created a growing niche in the "not-for-profit"
business space in the Washington D. C. area. The Washington D.C. area office
continues to sign new business for both its Knowledge Base Product and
Professional services.
|
| ||
| 19 | ||
|
| ||
NetSol
UK continues its business development activities and has seen good traction in
its sales pipeline. The UK office recently signed a major new customer in the
insurance business. The relationship with this publicly traded UK company has
the potential to bring significant new recurring revenues to the subsidiary.
NetSol UK has ongoing relationships with Habib Allied Bank and DCD Group. These
relationships are bringing recurring revenues and are expected to continue in
the near term.
As
a direct result of the successful implementations of some of our current systems
with DaimlerChrysler, we are noticing an increasing demand for LeaseSoft.
Although the sales cycle for LeaseSoft is rather long, we are experiencing a
100% increase 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 two million dollars was implemented and delivered to customers in
2003. 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 I/T spending by these companies. NetSol is well positioned to sell
several new licenses in fiscal year 2004 that could potentially increase the
sales and bottom line. As the Company sells 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 $500,000 with additional
charges for customization and maintenance of between 20%-30% each year. The
Company, in parallel, has 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 the
Company expects substantial growth in this area in the coming year.
The
gross profit was $3,092,685 for year ended June 30, 2004 as compared with
$1,966,393 for the same period of the previous year. This is a 57% increase. The
gross profit percentage has increased modestly to approximately 54% in the
current fiscal year from approximately 53%. While the cost of sales and the cost
of delivery of projects have both been reduced in the current year, the Company
maintained all its delivery commitments and has won new business from existing
and new customers. While management is striving to negotiate better pricing on
new agreements, the Company has 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 $5,800,708 for the year ended June 30, 2004 as compared to
$4,434,643 for the year ended June 30, 2003. During the years ended June 30,
2004 and 2003, the Company issued 48,613 and 93,400 restricted common shares in
exchange for services rendered, respectively. The Company recorded this non-cash
compensation expense of $48,240 and $39,200 for the years ended June 30, 2004
and 2003, respectively. Total professional service expense, including non-cash
compensation, was $464,332 and $272,447 for the years ended June 30, 2004 and
2003, respectively. During the years ended June 30, 2004 and 2003, the Company
recorded depreciation and amortization expense of $1,284,090 and $1,183,502
included in this increase is the addition of the completed Lahore facility.
Salaries and wages expenses were $1,493,252 and $934,383 for the years ended
June 30, 2004 and 2003, respectively, or an increase of $558,869 or 60%. The
addition of new management level employees and consultants from the Altvia
acquisition and new employees at our UK subsidiary, as well as an increase in
sales and administration employees resulted in the increase. In addition, key
officers were given a pay raise effective January 1, 2004, the first in
company’s history. Two of the officers have agreed to take the incremental
compensation against exercising options granted to them. General and
administrative expenses were $1,759,607 and $956,644 for the years ended June
30, 2004 and 2003, respectively, an increase of $802,963. In the current year,
the general and administrative expense includes non-recurring expenses for
moving both the headquarters office and the Pakistan companies into the new
facility, $105,608 in costs for placing the convertible debenture and $122,500
for settlement of legal disputes. Also, the Company had to incur extra costs for
executing the reverse split of its common stock through the proxy process,
annual shareholders meeting including proxies mailing and other administrative
related costs and travel expenses increased by approximately $105,934.
Selling
and marketing expenses increased to $253,701 for the year ended June 30, 2004 as
compared to $76,136 for the year ended June 30, 2003, reflecting the growing
sales activity of the Company. The Company wrote-off, as uncollectible, bad
debts of $219,909 and $415,384, during the years ended June 30, 2004 and 2003,
respectively. In addition, the company evaluated the goodwill value of certain
of its subsidiaries and recorded an impairment of $203,312 and $393,388 during
the years ended June 30, 2004 and 2003, respectively.
The
loss from operations in fiscal year 2004 was $2,708,018 which is a 9.71%
increase from $2,468,250 in fiscal year 2003. Included in this amount is are
non-cash charges of depreciation and amortization of $1,284,090, settlement
expenses of $122,500 impairment of assets of $203,302 and bad debt expense
of $219,909. Net losses from continued operations in fiscal year 2004 was
$2,785,369 compared to $2,615,851 in fiscal year 2003 or a 6.48% increase. The
current fiscal year amount includes $273,159 add-back for the 49.9% minority
interest in NetSol Connect owned by another party. The Company also recognized
non-recurring expenses including $137,230 expense for the beneficial conversion
feature on notes payable and convertible debenture, a gain of $104,088, from
writing off a note payable in one of the subsidiaries that had been paid through
the issuance of stock by the parent in the prior year and a gain of $216,230
from the settlement of a debt, and placement fees for the debenture of $105,608.
The net loss per share was $0.38 in 2004 compared to $0.47 in 2003. The total
weighted average of shares outstanding basic and diluted was 7.9 million against
4.5 million in 2003.
The
Company's cash position was $871,161 at June 30, 2004 compared to $214,490 at
June 30, 2003. In addition the Company had $391,403 in certificates of deposit,
of which $121,163 is being used as collateral for the financing of the
directors’ and officers’ liability insurance. The total cash position, including
the certificates of deposits, was $1,260,000 million as of June 30,
2004.
Management
expects to continue to improve its cash position in the current and future
quarters due to the new business signed up in the last quarter. In addition, the
Company anticipates additional exercises of investor warrants and employee stock
options in the current and subsequent quarters. The Company has consistently
improved its cash position in last four quarters through investors’ exercise of
warrants, employee options exercised, private placements and the signing of new
business. We anticipate this trend to continue in the current and future
quarters, further improving the cash resources and liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in December 2003. The company would continue
to inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities. However, management is committed to
ensuring the most efficient and cost effective means of raising capital and
utilization.
|
| ||
| 20 | ||
|
| ||
Going
Concern Qualification
The
Company's independent auditors have included an explanatory paragraph in their
report on the June 30, 2004 consolidated financial statements discussing issues
which raise substantial doubt about the Company's ability to continue as a
"going concern." The going concern qualification is attributable to the
Company's historical operating losses and the amount of capital which the
Company projects it needs to satisfy existing liabilities and achieve profitable
operations. In positive steps, the Company has closed down its loss generating
businesses, and continues to evaluate and implement cost cutting measures at
every entity level. The Company is optimistic that the remaining entities can
become profitable in fiscal 2005. For the year ended June 30, 2004, the Company
continued to experience a negative cash flow from consolidated operations, and
projects that it will need certain additional capital to enable it to continue
operations at its current level beyond the near term. The Company believes that
certain of this needed capital will result from the successful collection of its
accounts receivable balances as projects are completed during the coming fiscal
year. The Company believes it can raise additional funds though private
placements of its common stock.
Liquidity
And Capital Resources
Net
cash used for operating activities amounted to $1,482,402 for the year ended
June 30, 2004, as compared to $2,180,515 for the comparable period last fiscal
year. The decrease is mainly due to an increase in accounts receivable and a
decrease in accounts payable.
Net
cash used by investing activities amounted to $3,406,964 for the year ended June
30, 2004, as compared to providing $678,783 for the comparable period last
fiscal year. The difference lies primarily in the net purchase of $391,403 in
certificates of deposits in the current fiscal year compared to proceeds of
$714,334 in the prior year. During the current fiscal year, the Company had
proceeds of $210,000 from the sale of a minority interest in the Company’s
subsidiary NetSol Connect. In addition, the Company had net purchases of
property and equipment of $2,861,754 compared to $127,822 for the comparable
period last fiscal year. The majority of this reflects the capitalized costs of
the Lahore facility of approximately $2.32 million. Also, the Company
capitalized $439,297 in software development costs.
Net
cash provided by financing activities amounted to $5,486,067 and $1,429,681 for
years ended June 30, 2004, and 2003, respectively. The current fiscal year
included the cash inflow of $1,618,337 from issuance of equity and $1,445,392
from the exercising of stock options and warrants, compared to $365,219 and
845,566 in the prior year, respectively. In the current fiscal year, the Company
had net proceeds from loans of $1,243,795 as compared to $218,896 in the
comparable period last year. The Company also obtained a $1,200,000 convertible
debenture during the current fiscal year.
As
of June 30, 2004 the Company's working capital deficit (current assets less
current liabilities) totaled $10,400, a decrease from a $1.2 million deficit, as
of June 30, 2003. In
fiscal 2004, the Company raised capital from financing with Maxim Group of $1.85
million, net of expenses. In addition, 1.2 million in convertible debentures
were issued during the current fiscal year and approximately $487,000 from the
exercising of warrants. The Company also secured a line of credit for $1 million
from DCD Group. This line of credit has not yet been utilized. The Company has
over $1.9 million in accounts receivable and revenues in excess of billings. The
Company 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.
The
management expects to continue to improve its cash position in the current and
future quarters due to the new business signed up in the last quarter. In
addition, the Company anticipates additional exercises of investor warrants and
employee stock options in the current and subsequent quarters. The Company has
consistently improved its cash position in last four quarters through investors’
exercise of warrants, employee options exercised, private placements and the
signing of new business. We anticipate this trend to continue in the current and
future quarters, further improving the cash resources and liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in December 2003. The company would continue
to inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities. However, management is committed to
ensuring the most efficient and cost effective means of raising capital and
utilization.
NetSol’s
Technology Campus in Lahore was completed in May 2004 and the staff was
relocated into this new building. The Phase 1 will easily hold up to 500
programmers, engineers and other related staff. NetSol expects a positive
response to this move from the business community, our existing customers and
prospective new customers worldwide. The completion of technology campus is a
major milestone for NetSol, employees, customers and the
shareholders.
As a
growing company, we have on-going capital expenditure needs based on our short
term and long term business plans. Although our requirements for capital
expenses vary from time to time, for next 12 months, we have following capital
needs:
|
· |
Injection
of new capital of up to $500,000 in a strategic joint-venture of
NetSol-TiG. This partnership serves to outsource TiG’s software
development business to our offshore-based development facility.
|
|
· |
New
capital requirement for NetSol Akhter, the telecom division in an amount
up to $2.0 million as required by the agreement with
Akhter. |
|
· |
Working
capital of $1.0 million for debts payments, new business development
activities and infrastructure enhancements. |
While
there is no guarantee that any of these methods will result in raising
sufficient funds to meet our capital needs or that even if available will be on
terms acceptable to the Company.
The
methods of raising funds for capital needs may differ based on the following:
| · |
stock
volatility due to market conditions in general and NetSol stock
performance in particular. This may cause a shift in our approach to raise
new capital through other sources such as secured long term
debt. |
| · |
Analysis
of the cost of raising capital in the U.S., Europe or emerging markets. By
way of example only, if the cost of raising capital is high in one market
and it may negatively affect the company’s stock performance, we may
explore options available in other markets.
|
Should
global or other general macro economic factors cause an adverse climate, we
would defer new financing and use internal cash flow for capital
expenditures.
Dividends
and Redemption
It
has been the Company's policy to invest earnings in the growth of the Company
rather than distribute earnings as dividends. This policy, under which dividends
have not been paid since the Company's inception and is expected to continue,
but is subject to regular review by the Board of Directors.
|
| ||
| 21 | ||
|
| ||
ITEM
7. FINANCIAL STATEMENTS
The
Consolidated Financial Statements that constitute Item 7 are included at the end
of this report on page F-1.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
In
connection with the audit of the Company's financial statements for the fiscal
years ended June 30, 2003 and June 30, 2004, 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.
ITEM
8A. CONTROLS AND PROCEDURES
Management,
under the supervision and with the participation of the chief executive officer
and chief financial officer, conducted an evaluation of the disclosure controls
and procedures as of the end of the period covered by this Annual Report on Form
10-KSB. Based on their evaluation, the chief executive officer and chief
financial officer have concluded that as of the evaluation date, the disclosure
controls and procedures are effective to ensure that all material information
required to be filed in this Annual Report on Form 10-KSB has been made known to
them.
Additionally,
in response to the passage of the Sarbanes-Oxley Act of 2002, the Board of
directors and management plans, among other actions, has formed a Nominating and
Corporate Governance Committee comprised of members of the board of directors.
This committee is charged with, among other things, reviewing and developing
policies and procedures to enhance our disclosure controls and procedures. Our
audit committee is charged with reviewing our periodic reports and other public
disclosures.
Other
than as described above, there have been no changes, including corrective
actions with regard to deficiencies or weaknesses in the Company’s internal
controls or in other factors that could significantly affect these controls
subsequent to the evaluation date set forth above.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH
SECTION 16(a) OF THE EXCHANGE ACT
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires that the
Company's directors and executive officers and persons owning more than 10% of
the outstanding Common Stock, file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Executive officers,
directors and beneficial owners of more than 10% of the Company's Common Stock
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based
solely on copies of such forms furnished as provided above, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended June 30, 2004, all Section 16(a) filing requirements
applicable to its executive officers, directors and beneficial owners of more
than 10% of its Common Stock were complied with, except as follows: Messieurs
Burki, Randeree and Moody did not file their Form 5s until the week of September
13, 2004.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The Board of Directors elects the executive
officers of the Company annually. Each year the stockholders elect the Board of
Directors. The executive officers serve terms of one year or until their death,
resignation or removal by the Board of Directors. In addition, there was no
arrangement or understanding between any executive officer and any other person
pursuant to which any person was selected as an executive officer.
|
| ||
| 22 | ||
|
| ||
The directors and executive officers of the Company are as follows:
|
Name
|
Year
First Elected As an Officer Or
Director |
|
Age |
|
Position
Held with the Registrant |
|
Family
Relationship |
||||||
|
Najeeb
Ghauri |
1997 |
50 |
Chief
Financial Officer, Director and Chairman |
Brother
to Naeem and Salim Ghauri |
|||||||||
|
Salim
Ghauri |
1999 |
49 |
President
and Director |
Brother
to Naeem and Najeeb Ghauri |
|||||||||
|
Naeem
Ghauri |
1999 |
47 |
Chief
Executive Officer, Director |
Brother
to Najeeb and Salim Ghauri |
|||||||||
|
Patti
L. W. McGlasson |
2004 |
39 |
Secretary,
Corporate Counsel |
None |
|||||||||
|
Irfan
Mustafa |
1997 |
53 |
Director |
None |
|||||||||
|
Shahid
Javed Burki |
2000 |
65 |
Director
|
None |
|||||||||
|
Eugen
Beckert |
2001 |
58 |
Director |
None |
|||||||||
|
Jim
Moody |
2001 |
68 |
Director |
None |
|||||||||
|
Shabir
Randeree |
2003 |
43 |
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 Company’s CEO from 1999-2001. Currently, he is the Chief Financial Officer
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 Company's 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 is the Chairman of the Board of Directors. Mr. Ghauri serves on the
boards of the US Pakistan Business Council and Pakistan Human Development Fund,
a non-profit organization.
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 Solutions, Pvt. Ltd in Pakistan founded in
1996. Built under Mr. Ghauri's 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. In March 2004, Salim Ghauri, CEO NetSol Pvt. Ltd. was awarded the
5th NCR IT Excellence Award for the year 2003-04 for undertaking a pioneering
effort in the development and nourishment of Pakistan’s IT industry. The major
aspect of this appreciation was the industry wide recognition by noted
professionals and independent observers that under Salim Ghauri’s visionary
leadership, These awards were conceived and distributed by NCR Pakistan and
adjudicated by Ford Rhodes Sidat Hyder, Pakistan’s leading consultancy
organization.
NAEEM
GHAURI has been the Company’s 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.
PATTI
L. W. MCGLASSON joined NetSol as corporate counsel in January 2004 and was
elected to the position of Secretary in March 2004. Prior to joining NetSol, Ms.
McGlasson practiced at Vogt & Resnick, law corporations, where her practice
focused on corporate, securities and business transactions. Ms. McGlasson was
admitted to practice in California in 1991. She received her Bachelor of Arts in
Political Science in 1987 from the University of California, San Diego and, her
Juris Doctor and Masters in Law in Transnational Business from the University of
the Pacific, McGeorge School of Law, in 1991 and 1993,
respectively.
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 the Audit and Compensation Commitees.
|
| ||
| 23 | ||
|
| ||
EUGEN BECKERT was appointed to the Board of Directors in August 2001 to fill a vacancy and continues to serve on the Board. 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. From 1996 to 2000, he acted as director of Processes and Systems (CIO) for Financial Services of DaimlerChrysler Asia Pacific Services. From 2001 to 2004, he served as Vice President in the Japanese Company of DCS. Mr. Beckert is currently a Director for DaimlerChrysler and his office is now based in Stuttgart, Germany. Mr. Beckert is chairman of the Nominating and Corporate Governance Committee and a member of the Audit Committee.
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. Former 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, former 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. From April 2000 to present, Former Congressman Moody serves as
a Financial Advisor to Morgan Stanely in Washington D.C. where he is responsible
for bringing institutional, business and high net-worth individual’s 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 Nominating and Corporate
Governance committee.
SHAHID
JAVED BURKI was appointed to the Board of Directors in February 2003. 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 Advisiors 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: China's
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
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 Warrenby 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. Randeree 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. Randeree is a director of
various U.K. companies including: Brodensbury 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 Albaraka Bank Limited of South
Africa. Mr. Randeree is a member of the Compensation and Nominating and
Corporate Governance Committees.
|
| ||
| 24 | ||
|
| ||
ITEM 10-EXECUTIVE COMPENSATION
SUMMARY
COMPENSATION TABLE AND OPTIONS
The
Summary Compensation Table shows certain compensation information for services
rendered in all capacities during each of the last three fiscal years by the
executive officers of the Company who received compensation of or in excess of
$100,000 during the fiscal year ended June 30, 2004. 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 | |||||
|
Name
and Principal Position |
Fiscal
Year Ended |
Salary |
Bonus |
Long
Term
Compensation
Awards (2)
Restricted
Stock Awards(3) |
Securities
Underlying Options/
SARs
(4) | |
|
Najeeb
U. Ghauri, Chief Financial Officer,
Secretary,
Chairman, Director |
2004
2003 2002 |
$200,000
$120,000 $100,000 |
-0- -0- -0- |
-0- -0- -0- |
50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
-0-
85,000(10) 100,000(11)
20,000(12)
| |
|
Naeem
Ghauri, CEO, Director |
2004 2003 2002 |
$207,900(13)
$125,000 $100,000 |
-0-
-0- -0- |
-0-
-0- -0- |
50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
-0-
70,000(14) 100,000(11)
20,000(12) | |
|
Salim
Ghauri, President, Director |
2004 2003 2002 |
$110,000 $100,000 $100,000 |
-0- -0- -0- |
-0-
-0- -0- |
50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
-0-
70,000(14) 100,000(11)
20,000(12) | |
|
Patti
L. W. McGlasson, Secretary, Corporate Counsel |
2004 |
$82,000 |
-0- |
5,000(15) |
5,000(16)
5,000(17)
20,000(8)
30,000(9) | |
| (1) | No officers received or will receive any bonus or other annual compensation other than salaries during fiscal 2004, nor any benefits other than those available to all other employees that are required to be disclosed. These amounts are not inclusive of automobile allowances, where applicable. |
| (2) | No officers received or will receive any long-term incentive plan (LTIP) payouts or other payouts during fiscal 2004. |
| (3) | All stock awards are shares of Common Stock of the Company. |
| (4) | All securities underlying options are shares of Common Stock of the Company. The Company has not granted any stock appreciation rights. No options were granted in 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 annual report. |
| (5) | Includes options to purchase 50,000 shares of our common stock granted on January 1, 2004 at the exercise price of $2.21 per share. These options must be exercised within five years after the grant date. |
| (6) | Includes options to purchase 50,000 shares of our common stock granted on January 1, 2004 at the exercise price of $3.75 per share. These options must be exercised within five years after the grant date. |
| (7) | Includes options to purchase 12,500 shares of our common stock at $5.00 per share. These options must be exercised within five years after the grant date. |
| (8) | Includes options to purchase 20,000 shares of our common stock at $2.65 per share. These options must be exercised within five years after the grant date. |
| (9) | Includes options to purchase 30,000 shares of our common stock at $5.00 per share. These options must be exercised within five years after the grant date. |
| (10) | 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. |
| (11) | 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. |
| (12) | 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. |
| (13) | Mr. Ghauri salary is 110,000 British Pounds Sterling. The total in this table reflects a conversion rate of 1.89 dollars per pound. |
| (14) | 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. |
| (15) | In May 2004, Ms. McGlasson received 5,000 shares of common stock as a performance bonus arising out of her services as counsel for the Company. |
| (16) | Includes options to purchase 5,000 shares of common stock at the exercise price of the lesser of the $2.30 or the market price of the shares on the date of exercise less $2.00. |
| (17) | Includes options to purchase 5,000 shares of common stock at the exercise price of $3.00 per share. |
|
| ||
| 25 | ||
|
| ||
OPTIONS GRANTS IN LAST FISCAL YEAR(1)
INDIVIDUAL
GRANTS
|
Name |
Number
of Securities Underlying Options |
Percentage
of Total Options Granted to Employees in Fiscal
Year |
Exercise
or Base Price ($/Sh) |
Expiration
Date |
|
Naeem
Ghauri |
(i)
100,000(2) |
18.66% |
$2.21 |
December
31, 2008 |
|
(ii)
100,000(2) |
$3.75 |
December
31, 2008 | ||
|
(iii)
50,000(2) |
$5.00 |
December
31, 2008 | ||
|
(iv)
20,000 |
$2.65 |
March
25, 2009 | ||
|
(v)
30,000 |
$5.00 |
March
25, 2009 | ||
|
Najeeb
Ghauri |
(i)
100,000(2) |
18.66% |
$2.21 |
December
31, 2008 |
|
(ii)
100,000(2) |
$3.75 |
December
31, 2008 | ||
|
(iii)
50,000(2) |
$5.00 |
December
31, 2008 | ||
|
(iv)
20,000 |
$2.65 |
March
25, 2009 | ||
|
(v)
30,000 |
$5.00 |
March
25, 2009 | ||
|
Salim
Ghauri |
(i)
100,000(2) |
18.66% |
$2.21 |
December
31, 2008 |
|
(ii)
100,000(2) |
$3.75 |
December
31, 2008 | ||
|
(iii)
50,000(2) |
$5.00 |
December
31, 2008 | ||
|
(iv)
20,000 |
$2.65 |
March
25, 2009 | ||
|
(v)
30,000 |
$5.00 |
March
25, 2009 | ||
|
Patti
L. W. McGlasson |
(i)
10,000(2) |
4.35% |
$2.30(3) |
December
31, 2008 |
|
(ii)
10,000(2) |
$3.00 |
December
31, 2008 | ||
|
(iii)
20,000 |
$2.65 |
March
25, 2009 | ||
|
(iv)
30,000 |
$5.00 |
March
25, 2009 |
| (1) | There were no SAR grants in the last fiscal year. |
| (2) | These options vest 25% per each quarter of service commencing March 31, 2004 and are fully vested on December 31, 2004. |
| (3) | The exercise price is the lesser of $2.30 or the market price on the date of the exercise less $2.00. |
AGGREGATED
OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
|
Name |
Shares
Acquired On Exercise (#) |
Value
Realized (1) ($) |
Number
of Unexercised Options/SARs at FY-end (###) Exercisable(2)/
Unexercisable |
Value
of Unexercised In-The-Money at FY-end ($) Exercisable/(2)
Unexercisable |
|||||||||
|
Najeeb
Ghauri, CFO, Chairman, Director |
87,223 |
$ |
0.00 |
150,000/150,000 |
$ |
2,000/0.00 |
|||||||
|
Salim
Ghauri, President Director |
67,777 |
$ |
0.00 |
155,000/155,000 |
$ |
2,000/0.00 |
|||||||
|
Naeem
Ghauri, CEO, Director |
51,557 |
$ |
0.00 |
150,000/155,000 |
$ |
2,000/0.00 |
|||||||
|
Patti
L. W. McGlasson |
2,500 |
$ |
0.00 |
60,000/10,000 |
$ |
525/1,050 |
|||||||
| (1) | The closing price of the stock at the June 30, 2004, Fiscal Year End was $2.21. |
| (2) | All options are currently exercisable. |
|
| ||
| 26 | ||
|
| ||
EMPLOYMENT AGREEMENTS
Effective
January 1, 2004, 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 110,000 pounds
sterling. The agreement also provides for such additional compensation as the
Board of Directors determines is proper in recognition of Mr. Ghauri's
contributions and services to us. In addition, the agreement provides Mr. Ghauri
with options to purchase up to 100,000 shares of common stock at an exercise
price of $2.21, 100,000 shares at an exercise price of $3.75 and 50,000 shares
at an exercise price of $5.00. These options vest at the rate of 25% per quarter
and are fully vested on December 31, 2004. These options expire on December 31,
2008. Mr. Ghauri also received options to purchase up to 20,000 shares at the
exercise price of $2.65 per share and options to purchase 30,000 shares at the
exercise price of $5.00 per share. These options vest immediately and are
exercisable until March 25, 2009.
Effective
January 1, 2004, we entered into an employment agreement with Najeeb Ghauri as
Chief Financial Officer. The agreement is for a base term of three years, and
continues thereafter on an at will basis until terminated by either NetSol or
Mr. Ghauri. The agreement provides for a yearly salary of $200,000. The
agreement also provides for such additional compensation as the Board of
Directors determines is proper in recognition of Mr. Ghauri's contributions and
services to us. In addition, the agreement provides Mr. Ghauri with options to
purchase up to 100,000 shares of common stock at an exercise price of $2.21,
100,000 shares at an exercise price of $3.75 and 50,000 shares at an exercise
price of $5.00. These options vest at the rate of 25% per quarter and are fully
vested on December 31, 2004. These options expire on December 31, 2008. Mr.
Ghauri also received options to purchase up to 20,000 shares at the exercise
price of $2.65 per share and options to purchase 30,000 shares at the exercise
price of $5.00 per share. These options vest immediately and are exercisable
until March 25, 2009.
Effective
January 1, 2004, we entered into an employment agreement with Salim Ghauri as
the President of NetSol and Chief Executive Officer of 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 $110,000. The agreement also provides for such
additional compensation as the Board of Directors determines is proper in
recognition of Mr. Ghauri's contributions and services to us. In addition, the
agreement provides Mr. Ghauri with options to purchase up to 100,000 shares of
common stock at an exercise price of $2.21, 100,000 shares at an exercise price
of $3.75 and 50,000 shares at an exercise price of $5.00. These options vest at
the rate of 25% per quarter and are fully vested on December 31, 2004. These
options expire on December 31, 2008. Mr. Ghauri also received options to
purchase up to 20,000 shares at the exercise price of $2.65 per share and
options to purchase 30,000 shares at the exercise price of $5.00 per share.
These options vest immediately and are exercisable until March 25,
2009.
Effective
January 1, 2004, we entered into an employment agreement with Patti L. W.
McGlasson as legal counsel. The agreement provides for a yearly salary of
$82,000. Ms. McGlasson also received options to purchase up to 10,000 shares of
common stock at an exercise price equal to the lesser of $2.30 or the market
price of the shares on the date of exercise less $2.00. These options vest at
the rate of 25% per quarter and are exercisable until December 31, 2008.
Effective March 26, 2004, Ms. McGlasson was elected to the position of
Secretary. In connection with her role as Secretary, Ms. McGlasson received
options to purchase up to 10,000 shares of common stock at $3.00 per share.
These options vest at the rate of 25% per quarter and are exercisable until
December 31, 2008. Ms. McGlasson also received options to purchase up to 20,000
shares at the exercise price of $2.65 per share and options to purchase 30,000
shares at the exercise price of $5.00 per share. These options vest immediately
and are exercisable until March 25, 2009.
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. NetSol currently has three incentive
and nonstatutory stock option plans in force for 2001, 2002 and 2003 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 2,000,000 have been granted. The grant prices range between $.75
and $2.50.
The
2002 plan authorizes the issuance of up to 2,000,000 options to purchase common
stock of which 1,572,748 options have been granted. The grant prices range
between $.75 and $5.00.
In
March 2004, our shareholders approved the 2003 stock option plan. This plan
authorizes up to 2,000,000 options to purchase common stock of which 450,000
have been granted. The grant prices range between $2.64 and $5.00.
COMPENSATION
OF DIRECTORS
For
the 2003 term, Directors of the Company receive any cash compensation of $750
for attendance in person at a board meeting and are entitled to reimbursement of
their reasonable expenses incurred in attending Directors' Meetings. Upon the
full completion of the 2003 term, each director received 7,000 shares of
restricted common stock. In addition, the Company granted each of its directors
the following S-8 registered options: (a) 10,000 stock options, exercise price
of $0.75, vested quarterly; and (b) 20,000 stock options, exercise price of
$2.50 vesting quarterly.
For
the 2004 term, Non-Management members of the Board of Directors of the Company
receive cash compensation of $2,000 for each face to face meeting and $1,000 for
each board teleconference meeting with a minimum duration of two hours. Each
board member is to receive 2,000 shares of restricted common stock upon
completion of the 2004 term and options to purchase up to 20,000 shares at the
exercise price of $2.64 and options to acquire up to 30,000 shares at the
exercise price of $5.00 per share. The options vest and are exercisable
immediately.
|
| ||
| 27 | ||
|
| ||
For the 2004 term, Management members of the Board of Directors of the Company receive no cash compensation for meeting attendance but are granted options to a purchase up to 20,000 shares at the exercise price of $2.64 and options to acquire up to 30,000 shares at the exercise price of $5.00 per share. The options vest and are exercisable immediately.
All
directors are entitled to reimbursement of approved business
expenses.
The
Audit Committee Chairman shall receive $1,100 per month, and 5,000 shares of
restricted common stock issuable upon completion of the 2004 term. The chairs of
the Nominating and Corporate Governance and Compensation Committee receives
5,000 shares of restricted common stock upon completion of service for the 2004
term. Each member of the Audit, Nominating and Corporate Governance and
Compensation Committee shall also receive 4,000 shares of common stock.
ITEM
11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, its only class of outstanding voting
securities as of September 13, 2004, by (i) each person who is known to the
Company to own beneficially more than 5% of the outstanding common Stock with
the address of each such person, (ii) each of the Company's present directors
and officers, and (iii) all officers and directors as a group:
Percentage |
|||||||
Number
of |
Beneficially |
||||||
|
Name
and Address |
Shares(1)(2) |
owned(3) |
|||||
|
Najeeb
Ghauri (4) |
647,650 |
6.78
|
% | ||||
|
Naeem
Ghauri (4) |
421,090 |
4.41 |
% | ||||
|
Irfan
Mustafa (4) |
188,703 |
1.98 |
% | ||||
|
Salim
Ghauri (4) |
549,916 |
5.76 |
% | ||||
|
Jim
Moody (4) |
17,000 |
* |
|||||
|
Eugen
Beckert (4) |
39,000 |
* |
|||||
|
Shahid
Javed Burki(4) |
39,000 |
* |
|||||
|
Shabir
Randeree (4)(5) |
475,000 |
4.98 |
% | ||||
|
Patti
L. W. McGlasson(4) |
46,000 |
* |
|||||
|
All
officers and directors |
|||||||
|
as
a group (nine persons) |
2,448,359 |
25.65 |
% | ||||
*
Less than one percent
| (1) | Except as otherwise indicated, the Company believes that the beneficial owners of Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. |
| (2) | Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock relating to options currently exercisable or exercisable within 60 days of September 15, 2002 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) | Percentage ownership is based on 9,545,693 shares issued and outstanding as of September 13, 2004. |
| (4) | Address c/o NetSol Technologies, Inc. at 23901 Calabasas Road, Suite 2072, Calabasas, CA 91302. |
| (5) | As director of DCD Holdings Ltd. |
ITEM
12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In
January 2004, we entered into employment agreements with Najeeb Ghauri, Naeem
Ghauri and Salim Ghauri. These agreements are discussed in the section entitled
"Executive Compensation" beginning on page 26.
In
March 2004, the board of directors approved compensation for service on the
board. This compensation is discussed in the sections entitled "Executive
Compensation" and "Compensation of Directors" beginning on pages 26 and 28
respectively.
In
July 2004, the board approved compensation for service on the Audit,
Compensation and Nominating and Corporate Governance Committees. This
compensation is discussed in the sections entitled "Compensation of Directors"
beginning on page 28.
The
Company's management believes that the terms of these transactions are no less
favorable to the Company than would have been obtained from an unaffiliated
third party in similar transactions. All future transactions with affiliates
will be on terms no less favorable than could be obtained from unaffiliated
third parties, and will be approved by a majority of the disinterested
directors.
On
November 28, 2003, the Company agreed to loan Najeeb Ghauri, an officer of the
Company, $80,417 for the purpose of purchasing 67,223 shares of the Company’s
common stock through the exercise of a stock option previously granted to Mr.
Ghauri on February 16, 2002. On March 31, 2004, the Company loaned Mr. Ghauri
and additional $25,000 to purchase 10,000 shares of the Company’s common stock
through the exercise of a stock option previously granted to Mr. Ghauri on
February 16, 2002. In addition, in June 2004, accrued wages in the amount of
$12,500 was applied to Mr. Ghauri’s loan. At June 30, 2004, the loan balance for
Mr. Ghauri was $92,917 and accrued interest was $3,154.
On
November 28, 2003, the Company agreed to loan Naeem Ghauri, an officer of the
Company, $48,335 for the purpose of purchasing 41,557 shares of the Company’s
common stock through the exercise of a stock option previously granted to Mr.
Ghauri on February 16, 2002. In addition, in June 2004, accrued wages in the
amount of $9,636 was applied to Mr. Ghauri’s loan. At June 30, 2004, the loan
balance for Mr. Ghauri was $38,699 and accrued interest was $1,661.
On
November 28, 2003, the Company agreed to loan Salim Ghauri, an officer of the
Company, $72,221 for the purpose of purchasing 57,777 shares of the Company’s
common stock through the exercise of a stock option previously granted to Mr.
Ghauri on February 16, 2002. In addition, in June 2004, accrued wages in the
amount of $39,928 was applied to Mr. Ghauri’s loan. At June 30, 2004, the loan
balance for Mr. Ghauri was $32,293 and accrued interest was $2,255.
On
November 28, 2003, the Company agreed to loan Mark Caton, an officer of the
Company at that time, $20,000 for the purpose of purchasing 20,000 shares of the
Company’s common stock through the exercise of a stock option previously granted
to Mr. Caton on February 16, 2002. In January 2004, Mr. Caton terminated his
employment with the Company and the balance owed, including $210 in interest,
was applied to his severance pay and deemed fully paid.
All of
the loans, which were immediately available, bear an interest at the rate of six
percent per annum, have a term of two-years and is payable in deferred salary or
cash. Principal and accrued interest is due and payable at the expiration of the
loan term. The shares of the Company’s common stock acquired with the loan
proceeds secure repayment of the loan. These shares will be held in escrow for
the benefit of the Company pending repayment or substitution of additional or
different collateral in form and amount satisfactory to the
Company.
|
| ||
| 28 | ||
|
| ||
PART
IV
ITEM
13 - EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibits
|
3.1 |
Articles
of Incorporation of Mirage Holdings, Inc., a Nevada corporation, dated
March 18, 1997, incorporated by reference as Exhibit 3.1 to NetSol’s
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 NetSol’s 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 NetSol’s Annual
Report on Form 10-KSB/A filed on February 2, 2001. | |
|
3.4 |
Amendment
to the Articles of Incorporation of NetSol Technologies, Inc. dated August
20, 2003 filed as Exhibit A to NetSol’s Definitive Proxy Statement filed
June 27, 2003. | |
|
3.5 |
Bylaws
of Mirage Holdings, Inc., as amended and restated as of November 28, 2000
incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report for the
fiscal year ending in June 30, 2000 on Form 10K-SB/A filed on February 2,
2001. | |
|
3.6 |
Amendment
to the Bylaws of NetSol Technologies, Inc. dated February 16, 2002
incorporated by reference as Exhibit 3.5 to NetSol’s Registration
Statement filed on Form S-8 filed on March 27, 2002. | |
|
4.1 |
Form
of Common Stock Certificate.(*) | |
|
4.2 |
Form
of Warrant.(*) | |
|
10.1 |
Lease
Agreement for Calabasas executive offices dated December 3, 2003
incorporated by reference as Exhibit 99.1 to NetSol’s Current Report filed
on Form 8-K filed on December 24, 2003. | |
|
10.2 |
Company
Stock Option Plan dated May 18, 1999 incorporated by reference as Exhibit
10.2 to the Company’s Annual Report for the Fiscal Year Ended June 30,
1999 on Form 10K-SB filed September 28, 1999. | |
|
10.2 |
Company
Stock Option Plan dated April 1, 1997 incorporated by reference as Exhibit
10.5 to NetSol’s Registration Statement No. 333-28861 on Form SB-2 filed
June 10, 1997. | |
|
10.3 |
Company
2003 Incentive and Nonstatutory incorporated by reference as Exhibit 99.1
to NetSol’s Definitive Proxy Statement filed February 6,
2004. | |
|
10.4 |
Employment
Agreement, dated January 1, 2004, by and between NetSol Technologies, Inc.
and Naeem Ghauri incorporated by reference as Exhibit 10.1 to NetSol’s
Quarterly Report for the Quarter ended March 31, 2004 on Form 10Q-SB filed
on May 12, 2004. | |
|
10.5 |
Employment
Agreement, dated January 1, 2004, by and between NetSol Technologies, Inc.
and Najeeb Ghauri incorporated by reference as Exhibit 10.2 to NetSol’s
Quarterly Report for the Quarter ended March 31, 2004 on Form 10Q-SB filed
on May 12, 2004. | |
|
10.6 |
Employment
Agreement, dated January 1, 2004, by and between NetSol Technologies, Inc.
and Salim Ghauri incorporated by reference as Exhibit 10.3 to NetSol’s
Quarterly Report for the Quarter ended March 31, 2004 on Form 10Q-SB filed
on May 12, 2004. | |
|
10.7 |
Company
2001 Stock Options Plan dated March 27, 2002 incorporated by reference as
Exhibit 5.1 to NetSol’s Registration Statement on Form S-8 filed on March
27, 2002. | |
|
10.8 |
Consulting
Contract, dated September 1, 1999 by and between Irfan Mustafa and NetSol
International, Inc. incorporated by reference as Exhibit 10.10 to NetSol’s
Annual Report for the Fiscal Year Ended June 30, 2000 on Form 10K-SB filed
on October 15, 2000. | |
|
10.9 |
Sublease
Agreement between RPMC, Inc. and NetSol Technologies, Inc. dated September
20, 2002 incorporated by reference as Exhibit 10.11 to NetSol’s Annual
Report for the Fiscal Year Ended June 30, 2002 on Form 10K-SB filed on
October 15, 2002. | |
|
10.10 |
Lease
Agreement between Century National Insurance Company and NetSol
Technologies, Inc. dated December 15, 2003 incorporated by reference as
Exhibit 99.1 to Form 8-K filed on December 24, 2003. | |
|
10.11 |
Lease
Agreement between Butera properties V, LLC and NetSol USA, Inc. dated June
5, 2004 incorporated by reference as Exhibit 10.12 to NetSol’s amendment
to registration statement 333-116512 filed on Form SB-2 on July 22,
2004. | |
|
21.1 |
A
list of all subsidiaries of the Company |
*
Previously Filed.
|
| ||
| 29 | ||
|
| ||
(b)
Reports on Form 8-K
|
(i) |
On
May 24, 2004 the Company filed an 8-K reporting the sale of unregistered
securities for a total raise of $2,050,000. | |
|
(ii) |
On
May 14, 2004 the Company filed an 8-K reporting the contents of a press
release issued by the Company regarding its second quarter, ending March
31, 2004 results of operations. |
Item
14 Principal Accountant Fees and Services.
Audit
Fees
Kabani
& Co. audited the Company’s financial statements for the fiscal years ended
June 30, 2003 and June 30, 2004. The aggregate fees billed by
Kabani & Co. for the nnual audit and review of financial statements
including in the Company’s Form 10-QSB or services that are normally provided by
Kabani & Company that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for the year ended June 30,
2003 was $34,500 and for the year ended June 30, 2004 was $40,000. The Company’s
previous auditor, Stonefield Josephson, conducted the audit of the financial
statements for the fiscal year 2002. The aggregate fees billed by Stonefield
Josephson was $93,914.45.
Audit
Related Fees
The
aggregate fees billed by Kabani & Co. during fiscal 2003 including
assurance and related audit services not covered in the preceding paragraph was
$29,750. These "Audit Related Fees" were primarily for services in connection
with the review of quarterly financial statements and the Company’s filing of a
Registration Statement on Form SB-2. The aggregate fees billed by Kabani
& Company during fiscal 2004 including assurance and related audit services
not covered in the preceding paragraph was $37,750. These "Audit Related Fees"
were primarily for services in connection with the Company’s filing of a
Registration Statement on Form SB-2.
Tax
Fees
The
Company incurred no fees for taxes for fiscal years 2003 and 2002. Tax fees for
fiscal year 2004 were $22,000 and consisted of the preparation of the Company’s
federal and state tax returns for the fiscal years 2001 and 2002.
All
Other Fees
There
were no other fees billed by Kabani & Co. or services rendered to
NetSol during the fiscal years ended June 30, 2004 and 2003, other than as
described above.
Pre-Approval
Procedures
The
Audit Committee and the Board of Directors are responsible for the engagement of
the independent auditors and for approving, in advance, all auditing services
and permitted non-audit services to be provided by the independent auditors. The
Audit Committee maintains a policy for the engagement of the independent
auditors that is intended to maintain the independent auditor’s independence
from NetSol. In adopting the policy, the Audit Committee considered the various
services that the independent auditors have historically performed or may be
needed to perform in the future. The policy, which is to be reviewed and
re-adopted at least annually by the Audit Committee:
|
|
(i) |
Approves
the performance by the independent auditors of certain types of service
(principally audit-related and tax), subject to restrictions in some
cases, based on the Committee’s determination that this would not be
likely to impair the independent auditors’ independence from
NetSol; |
|
|
(ii) |
Requires
that management obtain the specific prior approval of the Audit Committee
for each engagement of the independent auditors to perform other types of
permitted services; and |
|
|
(iii) |
Prohibits
the performance by the independent auditors of certain types of services
due to the likelihood that their independence would be
impaired. |
Any
approval required under the policy must be given by the Audit Committee, by the
Chairman of the Committee in office at the time, or by any other Committee
member to whom the Committee has delegated that authority. The Audit Committee
does not delegate its responsibilities to approve services performed by the
independent auditors to any member of management.
|
| ||
| 30 | ||
|
| ||
The
standard applied by the Audit Committee in determining whether to grant approval
of an engagement of the independent auditors is whether the services to be
performed, the compensation to be paid therefore and other related factors are
consistent with the independent auditors’ independence under guidelines of the
Securities and Exchange Commission and applicable professional standards.
Relevant considerations include, but are not limited to, whether the work
product is likely to be subject to, or implicated in, audit procedures during
the audit of NetSol’s financial statements; whether the independent auditors
would be functioning in the role of management or in an advocacy role; whether
performance of the service by the independent auditors would enhance NetSol’s
ability to manage or control risk or improve audit quality; whether performance
of the service by the independent auditors would increase efficiency because of
their familiarity with NetSol’s business, personnel, culture, systems, risk
profile and other factors; and whether the amount of fees involved, or the
proportion of the total fees payable to the independent auditors in the period
that is for tax and other non-audit services, would tend to reduce the
independent auditors’ ability to exercise independent judgment in performing the
audit.
SIGNATURES
In
accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused
this amendment to the report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NetSol
Technologies, Inc.
|
Date:
March 23, 2005 |
BY:
/S/ NAEEM GHAURI |
|
| |
|
Naeem
Ghauri | |
|
CEO | |
|
Date:
March 23,
2005 |
BY:
/S/ Najeeb Ghauri |
|
| |
|
Najeeb
Ghauri | |
|
Chief
Financial Officer |
In
accordance with the Exchange Act, this amendment to the report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
|
Date:
March 23, 2005 |
BY:
/S/ NAJEEB U. GHAURI |
|
| |
|
Najeeb
U. Ghauri | |
|
Director,
Chairman | |
|
Chief
Financial Officer | |
|
Date:
March 23, 2005 |
BY:
/S/ SALIM GHAURI |
|
| |
|
Salim
Ghauri | |
|
President, | |
|
Director | |
|
Date:
March 23, 2005 |
BY:
/S/ NAEEM GHAURI |
|
| |
|
Naeem
Ghauri | |
|
Director | |
|
Chief
Executive Officer | |
|
Date:
March 23, 2005 |
BY:
/S/ JIM MOODY |
|
| |
|
Jim
Moody | |
|
Director | |
|
Date:
March 23, 2005 |
BY:
/S/ EUGEN BECKERT |
|
| |
|
Eugen
Beckert | |
|
Director | |
|
Date:
March 23, 2005 |
BY:
/S/ IRFAN MUSTAFA |
|
| |
|
Irfan
Mustafa | |
|
Director |
|
Date:
March 23, 2005 |
BY:
/S/ SHAHID JAVED BURKI |
|
| |
|
Shahid
Javed Burki | |
|
Director | |
|
| ||
| 31 | ||
|
| ||
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Description |
Page |
|
Report of Independent Registered Public Accounting
Firm |
F-2
|
|
Auditor's Report to the Members |
F-3
|
| Consolidated Balance Sheet as of June 30, 2004 (restated) | F-6 |
|
Consolidated
Statements of Operations for the Years Ended June 30, 2004 (restated) and
2003 |
F-7
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended June 30, 2004
(restated) and 2003 |
F-8
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2004 (restated) and
2003 |
F-10
|
|
Notes
to Consolidated Financial Statements |
F-11 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the years ended June 30,
2004 and 2003. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of Network Technologies (PVT) Limited, NetSol (PVT) Limited
and NetSol Connect (PVT) Limited, whose statements reflect combined total assets
of approximately $7,173,282 as of June 30, 2004 and combined total net revenues
of $4,452,435 and $2,766,174 for the years ended June 30, 2004 and 2003,
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 Technologies (PVT) Limited for the years ended June 30,
2004 and 2003, is based solely on the report of the other auditors.
We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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 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 audit report and the report of the other
auditors provide a reasonable bassi 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, 2004 and the results of its consolidated operations
and its cash flows for the years ended June 30, 2004 and 2003 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 an accumulated deficit, has negative cash flows from
operations, and has a net working capital deficit. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
As discussed in note 16, the financial statements for the year
ended June 30, 2004 have been restated.
/s/
Kabani & Company, Inc.
CERTIFIED
PUBLIC ACCOUNTANTS
Huntington
Beach, California
August 2,
2004, except for Note 16, which is as of March 22, 2005
F-2
F-3
F-4
F-5
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
ASSETS |
|||||||||||
|
Current
assets: |
|||||||||||
|
Cash
and cash equivalents |
$ |
871,161
|
|||||||||
|
Certificates
of deposit |
391,403
|
||||||||||
|
Accounts
receivable, net of allowance for doubtful accounts of
$80,000 |
951,994
|
||||||||||
|
Revenues
in excess of billings |
951,905
|
||||||||||
|
Other
current assets |
397,038
|
||||||||||
|
Total
current assets |
3,563,501
|
||||||||||
|
Property
and equipment,
net of accumulated depreciation |
4,203,580
|
||||||||||
|
Intangibles: |
|||||||||||
|
Product
licenses, renewals, enhancedments, copyrights, |
|||||||||||
|
trademarks,
and tradenames, net |
2,409,859
|
||||||||||
|
Customer
lists, net |
641,569
|
||||||||||
|
Goodwill
(restated) |
1,166,611 |
||||||||||
|
Total
intangibles (restated) |
4,218,039 |
||||||||||
|
Total
assets (Restated) |
$ |
11,985,120 |
|||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY |
|||||||||||
|
Current
liabilities: |
|||||||||||
|
Accounts
payable and accrued expenses |
$ |
2,207,822
|
|||||||||
|
Current
portion of notes and obligations under capitalized leases |
803,813
|
||||||||||
|
Billings
in excess of revenues |
103,451
|
||||||||||
|
Loans
payable, bank |
458,861
|
||||||||||
|
Total
current liabilities |
3,573,947
|
||||||||||
|
Obligations
under capitalized leases, less
current maturities |
27,604
|
||||||||||
|
Notes payable |
89,656
|
||||||||||
|
Convertible
debenture |
937,500
|
||||||||||
|
Total
liabilities |
4,628,707 |
||||||||||
|
Minority
interest |
— |
| |||||||||
|
Contingencies |
— |
||||||||||
|
Stockholders'
equity: |
|||||||||||
|
Common
stock, $.001 par value; 25,000,000 share authorized; |
|||||||||||
|
9,482,822
issued and outstanding |
9,483
|
||||||||||
|
Additional
paid-in-capital (restated) |
38,933,621 |
||||||||||
|
Treasury
stock |
(21,457 |
) |
|||||||||
|
Accumulated
deficit (restated) |
(30,917,465 |
) |
|||||||||
|
Stock
subscription receivable |
(497,559 |
) |
|||||||||
|
Other
comprehensive loss |
(150,210 |
) |
|||||||||
|
Total
stockholders' equity (Restated) |
7,356,413 |
||||||||||
|
Total
liabilities and stockholders' equity (Restated) |
$ |
11,985,120 |
|||||||||
See accompanying notes to these consolidated financial
statements
F-6
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
|
For
the Year |
|||||||
|
Ended
June, |
|||||||
|
2004
|
2003
|
||||||
| (Restated) | |||||||
|
Net
revenues |
$ |
5,749,062
|
$ |
3,745,386
|
|||
|
Cost
of revenues |
2,656,377
|
1,778,993
|
|||||
|
Gross
profit |
3,092,685
|
1,966,393
|
|||||
|
Operating
expenses: |
|||||||
|
Selling
and marketing |
253,701
|
76,136
|
|||||
|
Depreciation
and amortization |
1,284,090
|
1,183,502
|
|||||
|
Impairment
of assets |
203,312 | 393,388 | |||||
|
Settlement
costs |
122,500
|
202,759
|
|||||
|
Bad
debt expense |
219,909
|
415,384
|
|||||
|
Salaries
and wages |
1,493,252
|
934,383
|
|||||
|
Professional
services, including non-cash |
|||||||
|
compensation |
464,332
|
272,447
|
|||||
|
General
and adminstrative |
1,759,607
|
956,644
|
|||||
|
Total
operating expenses |
5,800,703
|
4,434,643
|
|||||
|
Loss
from operations |
(2,708,018 |
) |
(2,468,250 |
) | |||
|
Other
income and (expenses) |
|||||||
|
Loss
on sale of assets |
(35,173 |
) |
(5,464 |
) | |||
|
Beneficial
conversion feature |
(137,230 |
) |
— |
||||
|
Gain
on forgiveness of debt |
320,318
|
— |
|||||
|
Interest
expense |
(172,101 |
) |
(135,243 |
) | |||
|
Other
income and (expenses) |
(53,165 |
) |
(6,624 |
) | |||
|
Loss
from continuing operations |
(2,785,369 |
) |
(2,615,581 |
) | |||
| Minority interest in subsidiary | 273,159 | — | |||||
|
Gain
from discontinuation of a subsidiary |
— |
478,075
|
|||||
|
Net
loss |
(2,512,210 |
) |
(2,137,506 |
) | |||
|
Other
comprehensive loss: |
|||||||
|
Translation
adjustment |
(299,507 |
) |
(380,978 |
) | |||
|
Comprehensive
loss |
$ |
(2,811,717 |
) |
$ |
(2,518,484 |
) | |
|
Net
loss per share - basic and diluted: |
|||||||
|
Continued
operations |
$ |
(0.35 |
) |
$ |
(0.58 |
) | |
|
Minority
interest in subsidiary |
$ | 0.03 | $ |
— |
|||
|
Discontinued
operations |
$ |
— |
$ |
0.11
|
|||
|
Net
loss |
$ |
(0.32 |
) |
$ |
(0.47 |
) | |
|
Weighted
average number |
|||||||
|
of
shares outstanding - basic and diluted* |
7,881,554
|
4,512,203
|
|||||
|
*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 these consolidated financial statements
F-7
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE
YEARS ENDED JUNE 30, 2003 AND 2004
|
Additional
|
Stock
|
Other
|
Total
|
|||||||||||||||||||
|
Common
Stock* |
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 |
471,853
|
472
|
371,997
|
372,469
|
||||||||||||||||||
|
Issuance
of common stock in exchange for
services |
90,400
|
90
|
50,776
|
50,866
|
||||||||||||||||||
|
Issuance
of common stock in exchange for accrued compensation |
115,000
|
115
|
107,385
|
107,500
|
||||||||||||||||||
|
Excercise
of common stock options |
790,900
|
791
|
707,609
|
708,400
|
||||||||||||||||||
|
Excercise
of common stock warrants |
60,000
|
60
|
35,940
|
36,000
|
||||||||||||||||||
|
Issuance
of common stock in exchange for notes payable |
111,429
|
111
|
40,889
|
41,000
|
||||||||||||||||||
|
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
|
||||||||||||||||||
|
Common
stock receivable |
—
|
—
|
(41,250 |
) |
(41,250 |
) | ||||||||||||||||
|
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
|
|||||||
Continued
See
accompanying notes to these consolidated financial
statements.
F-8
NETSOL TECHNOLOGIES INC AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - Continued
FOR THE YEARS ENDED JUNE 30, 2003 AND 2004
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - Continued
FOR THE YEARS ENDED JUNE 30, 2003 AND 2004
|
Additional
|
Stock
|
Other
|
Total
|
||||||||||||||||||||||
|
Common
Stock* |
Paid-in
|
Treasury
|
Subscriptions
|
Comprehensive
|
Accumulated
|
Stockholders'
|
|||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Shares
|
Receivable
|
Income/(Loss)
|
Deficit
|
Equity
|
||||||||||||||||||
|
Balance
at June 30, 2003 |
5,757,175
|
5,756
|
33,409,954
|
— |
(84,900 |
) |
149,297
|
(28,405,255 |
) |
5,074,852
|
|||||||||||||||
|
Issuance of common stock for cash (as
restated) |
1,413,187
|
1,414
|
1,616,923 |
1,618,337 |
|||||||||||||||||||||
|
Issuance of common stock for
services |
3,613
|
4
|
8,996
|
9,000
|
|||||||||||||||||||||
|
Excercise
of common stock options |
1,067,309
|
1,068
|
1,369,484
|
(412,659 |
) |
957,893
|
|||||||||||||||||||
|
Excercise
of common stock warrants |
390,000
|
390
|
487,110
|
487,500
|
|||||||||||||||||||||
|
Issuance
of common stock in exchange for notes payable & interest
|
601,393
|
601
|
1,070,628
|
1,070,629
|
|||||||||||||||||||||
|
Issuance
of common stock in exchange for settlement |
45,195
|
45
|
135,088
|
135,133
|
|||||||||||||||||||||
|
Issuance of common stock in exchange
for purchase of Altiva |
100,000
|
100
|
(100 |
) |
— |
||||||||||||||||||||
|
Issuance of common stock in exchange
for purchase of Pearl |
60,000
|
60
|
166,800
|
166,860
|
|||||||||||||||||||||
|
Issuance of common stock to directors in exchange for services
|
45,000
|
45
|
39,195
|
39,240
|
|||||||||||||||||||||
|
Purchase
of treasury shares |
(21,457 |
) |
(21,457 |
) | |||||||||||||||||||||
|
Beneficial
conversion feature |
—
|
—
|
399,730
|
399,730
|
|||||||||||||||||||||
|
Fair
market value of warrants issued |
—
|
—
|
230,413
|
230,413
|
|||||||||||||||||||||
|
Foreign
currency translation adjustments |
—
|
—
|
—
|
(299,507 |
) |
(299,507 |
) | ||||||||||||||||||
|
Net
loss for the year (as restated) |
—
|
—
|
—
|
(2,512,210 |
) |
(2,512,210 |
) | ||||||||||||||||||
|
Balance
at June 30, 2003 (Restated) |
9,482,822
|
$ |
9,483
|
$ |
38,933,621 |
$ |
(21,457 |
) |
$ |
(497,559 |
) |
$ |
(150,210 |
) |
$ |
(30,917,465 |
) |
$ |
7,356,413 |
||||||
See
accompanying notes to these consolidated financial statements.
F-9
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For
the Year |
|||||||
|
Ended
June 30, |
|||||||
|
2004
|
2003
|
||||||
| (Restated) | |||||||
|
Cash
flows from operating activities: |
|||||||
|
Net
loss from continuing operations |
$ |
(2,512,210 |
) |
$ |
(2,137,506 |
) | |
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
— | ||||||
|
Depreciation
and amortization |
1,640,044 |
1,183,502
|
|||||
|
Provision
for uncollectible accounts |
— |
80,000
|
|||||
|
Impairment
of assets |
203,312 | 393,388 | |||||
|
Gain
on discontinued operations |
(478,075 |
) | |||||
|
Gain
on forgiveness of debt |
(320,318 |
) |
—
|
||||
|
Loss
on sale of assets |
35,173
|
5,464
|
|||||
|
Minority
interest in subsidiary |
(273,159 |
) |
—
|
||||
|
Stock
issued for settlement costs |
135,133
|
50,000
|
|||||
|
Stock
issued for services |
9,000
|
39,200
|
|||||
|
Stock
issued to directors for services |
39,240
|
— | |||||
|
Fair
market value of warrants and stock options granted |
230,413
|
26,500
|
|||||
|
Beneficial
conversion feature |
137,230
|
—
|
|||||
|
Changes
in operating assets and liabilities: |
|||||||
|
(Increase)
decrease in assets: |
|||||||
|
Accounts
receivable |
(324,094 |
) |
464,634
|
||||
|
Other
current assets |
(416,780 |
) |
(585,145 |
) | |||
|
Other
assets |
— |
(347,743 |
) | ||||
|
Decrease
in liabilities: |
|||||||
|
Accounts
payable and accrued expenses |
(65,386 |
) |
(874,734 |
) | |||
|
Net
cash used in operating activities |
(1,482,402 |
) |
(2,180,515 |
) | |||
|
Cash
flows from investing activities: |
|||||||
|
Purchases
of property and equipment |
(2,861,754 |
) |
(127,822 |
) | |||
|
Sales
of property and equipment |
75,490
|
92,271
|
|||||
|
Purchases
of certificates of deposit |
(3,241,403 |
) |
—
|
||||
|
Proceeds
from sale of certificates of deposit |
2,850,000
|
714,334
|
|||||
|
Increase
in intangible assets - development costs |
(439,297 |
) |
—
|
||||
|
Proceeeds
from sale of minority interest of subsidiary |
210,000
|
—
|
|||||
|
Net
cash provided (used in) by investing activities
|
(3,406,964 |
) |
678,783
|
||||
|
Cash
flows from financing activities: |
|||||||
|
Proceeds
from sale of common stock |
1,618,337
|
365,219
|
|||||
|
Proceeds
from the exercise of stock options |
1,445,392
|
845,566
|
|||||
|
Purchase
of treasury shares |
(21,457 |
) |
—
|
||||
|
Proceeds
from loans |
1,628,005
|
351,868
|
|||||
|
Proceeds
from convertible debenture |
1,200,000
|
—
|
|||||
|
Payments
on capital lease obligations & loans |
(384,210 |
) |
(132,972 |
) | |||
|
Net
cash provided by financing activities |
5,486,067
|
1,429,681
|
|||||
|
Effect
of exchange rate changes in cash |
59,970
|
199,627
|
|||||
|
Net
increase in cash and cash equivalents |
656,671
|
127,576
|
|||||
|
Cash
and cash equivalents, beginning of year |
214,490
|
86,914
|
|||||
|
Cash
and cash equivalents, end of year |
$ |
871,161
|
$ |
214,490
|
|||
See accompanying notes to these consolidated financial
statements.
|
| ||
| F-10 | ||
|
| ||
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
|
For
the Year |
||||||||||
|
Ended
June 30, |
||||||||||
|
2004 |
2003 |
|||||||||
|
SUPPLEMENTAL
DISCLOSURES: |
||||||||||
|
Cash
paid during the year for: |
|
|||||||||
|
Interest
|
$ |
172,101
|
$ |
135,243
|
||||||
|
Taxes
|
$ |
76,638
|
$ |
10,344
|
||||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES: |
||||||||||
|
Common
stock issued for services and compensation |
$ |
9,000
|
$ |
39,200
|
||||||
|
Common
stock issued for conversion of note payable and interest |
$ |
861,429
|
$ |
25,000
|
||||||
|
Common
stock issued for legal settlement |
$ |
135,133
|
$ |
50,000
|
||||||
|
Common
stock issued for acquisition of product license |
$ |
166,860
|
$ |
— |
||||||
|
Common
stock issued for settlement of debt |
$ |
209,200
|
$ |
— |
||||||
|
Common
stock issued to directors for services |
$ |
39,240
|
$ |
— |
||||||
|
Stock
options granted in exchange for services received |
$ |
— |
$ |
26,500
|
||||||
|
Common
stock issued for acquisition of subsidiary |
$ |
— |
$ |
212,000
|
||||||
See accompanying notes to these consolidated financial
statements.
F-10
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 m arket
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.
F-11
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
Altvia
Corporation
On May
20, 2003, the Company acquired 100% of the outstanding capital stock of Altvia
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.
Pearl
Treasury System Ltd
On
October 14, 2003, the Company executed an agreement to acquire the Pearl
Treasury System Ltd, a United Kingdom company ("Pearl"). This acquisition
required the Company to issue up to 60,000 shares of common stock to the
shareholders of Pearl Treasury System, Ltd. The financial statements of Pearl
are insignificant to the consolidated financials, and therefore, have not been
presented. The total acquisition value of $166,860 has been recorded as an
intangible asset and is included in "product licenses" on the accompanying
consolidated financial statements.
F-12
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Raabta
Online
During
the quarter ended March 31, 2004, the Company’s subsidiary, NetSolCONNECT,
purchased Raabta Online, a Pakistani company, for a cash price of 10,000,000
rupees or $173,500 representing 100% of the value of Raabta. This acquisition is
expected to provide the Company with an established customer base and strong
technical expertise. The purchase price has been allocated to property and
equipment of the acquired entity. The financial statements of Raabta are
insignificant to the consolidated financials, and therefore, have not been
presented.
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.
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 serves as the main marketing and delivery arm for services and
products sold and delivered in the UK and mainland Europe.
During
the period ended June 30, 2004, the Company formed a subsidiary in India, NetSol
Technology India, Limited, as a wholly-owned subsidiary of NetSol Technologies,
Inc. This entity serves as the main marketing and delivery arm for services and
products sold and delivered in India. As of the date of this report, no
operations have begun with this entity.
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 Technologies Limited, NetSol-Abraxas Australia Pty
Ltd., NetSol Altvia, Inc., and its majority-owned subsidiary, NetSol Connect
(Pvt), Ltd., 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 Company’s 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.
F-13
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use
of Estimates:
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective
April 1, 2001, the management determined that the remaining useful life of all
its acquired intangible assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles. This change in estimate
increased the depreciation and amortization expense by approximately $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 effec tive to the Company’s 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.
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
Company’s 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.
Revenues
in excess of billings:
“Revenues
in excess of billings” represent the total of the project to be billed to the
customer over the life of the project. As each phase is completed and billed to
the customer, the corresponding percentage of completion amount is transferred
from this account to “Accounts Receivable.”
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.
F-14
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Going
Concern:
The
Company’s consolidated financial statements are prepared using the accounting
principles generally accepted in the United States of America applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. As of June 30, 2004, the Company
had an accumulated deficit of $30,917,465 and a working capital deficit of
approximately $10,400. Without realization of additional capital, it would be
unlikely for the Company to continue as a going concern. This factor raises
substantial doubt about the Company's ability to continue as a going
concern.
Management
recognizes that the Company must generate additional resources to enable it to
continue operations. In the current year, the Company realized a significant
increase in net revenues of nearly 53%. Management is taking steps to continue
comparable revenue increases in the next fiscal year. Management also continuing
to pursue cost cutting measures at every entity level. Additionally,
management’s plans also include the sale of additional equity securities and
debt financing from related parties and outside third parties. However, of
course, no assurance can be guaranteed that the Company will be successful in
raising additional capital or continue the current growth trend in net revenues.
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.
F-15
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement
of Cash Flows:
In
accordance with Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows," cash flows from the Company's operations are calculated based
upon the local currencies. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
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 Company’s 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 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. 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. Advertising costs for the
years ended June 30, 2004 and 2003 were $253,701 and $76,136,
respectively.
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.
F-16
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 affected 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 Company’s available for sale
securities, currency translation adjustments, and minimum pension liability,
which prior to adoption were reported separately in stockholders’ equity, to be
included in other comprehensive income. 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.,
and NetSol Altvia, Inc., uses 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, 2004 and 2003, comprehensive income
included net translation loss of $299,507 and $380,978, respectively. Other
comprehensive loss, as presented on the accompanying consolidated balance sheet
in the stockholders’ equity section amounted to $150,210 as of June 30,
2004.
Accounting
for Stock-Based Compensation
The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which applies the
fair-value method of accounting for stock-based compensation plans. In
accordance with this standard, the Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
In March
2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 44 (Interpretation 44), "Accounting for Certain Transactions Involving Stock
Compensation." Interpretation 44 provides criteria for the recognition of
compensation expense in certain stock-based compensation arrangements that are
accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 became effective July 1, 2000, with certain provisions that
were effective retroactively to December 15, 1998 and January 12, 2000.
Interpretation 44 did not have any material impact on the Company’s financial
statements.
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, 2004, the Company had net federal and state operating loss carry
forwards expiring in various years through 2024. During the year ended June 30,
2004, the valuation allowance increased by $1,186,800; 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.
F-17
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary
at June 30, 2004 is as follows:
|
Federal
|
State
|
Total
|
||||||||
|
Net
operating loss carry forward |
$ |
18,649,710
|
$ |
11,724,710
|
||||||
| Effective tax rate | 32 | % | 8 | % | ||||||
|
Deferred
tax asset |
5,967,907
|
937,977
|
6,905,884
|
|||||||
| Valuation allowance | (4,407,907 | ) | (547,977 | ) | (4,955,884 | ) | ||||
|
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, |
||||||
|
2004 |
2003
|
||||||
|
Tax
expense (credit) at statutory rate-federal |
(32 |
)% |
(32
|
)% | |||
|
State
tax expense net of federal tax |
(8 |
) |
(8
|
) | |||
|
Permanent
differences |
1 |
1
|
|||||
|
Valuation
allowance |
39 |
39
|
|||||
|
Tax
expense at actual rate |
— |
—
|
|||||
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, the effect of which was
not material to the Company’s financial position or results of operations as the
Company does not participates in such activities.
F-18
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed
of:
Effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and 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
for a Disposal of a Segment of a Business.” The Company periodically evaluates
the carrying value of long-lived assets to be held and used in accordance with
SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized based on the
amount by which the carrying amount exceeds the fair market value of the
long-lived assets. Loss on long-lived assets to be disposed of is determined in
a similar manner, except that fair market values are reduced for the cost of
disposal.
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.
Goodwill
of a reporting unit is reviewed for impairment if event or changes in
circumstances indicated that the carrying amount of its goodwill or intangible
assets may not be recoverable. Impairment of reporting unit goodwill is valuated
based on a comparison of the reporting unit's carrying value to the implied fair
value of the reporting unit. Conditions that indicate that impairment of
goodwill includes a sustained decrease in the market value of the reporting
unit or an adverse change in the business climate.
As of
June 30, 2004 and 2003, the Company evaluated the valuation of goodwill
based upon the performance and market value of NetSol USA and NetSol UK,
respectively. The Company determined the goodwill is impaired and recorded the
impairment of $203,312 and $393,388 at June 30, 2004 and 2003, respectively, in
the accompanying consolidated financial statements.
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 13).
New
Accounting Pronouncements:
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 SFAS No. 123. The proforma information
regarding net loss and loss per share, pursuant to the requirements of FASB 123
for the year end June 30, 2004 has been presented in Note 9.
F-19
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
In
December 2003, the Financial Accounting Standards Board (FASB) issued a revised
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46R).
FIN 46R addresses consolidation by business enterprises of variable interest
entities and significantly changes the consolidation application of
consolidation policies to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conducted through variable interest entities. The Company does
not hold any variable interest entities
Reclassifications:
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform with report classifications of the current
year.
NOTE
3 - MAJOR CUSTOMERS
The
Company is a strategic business partner for DaimlerChrysler (which consists of a
group of many companies), which accounts for approximately 20% of revenue for
the years ended June 30, 2004 and 2003. No other individual client represents
more than 10% of the revenue for the fiscal year ended June 30, 2004 and
2003.
NOTE
4 - OTHER CURRENT ASSETS
Other
current assets consist of the following as of June 30, 2004:
|
Prepaid
Expenses |
$ |
228,479
|
||
|
Advance
Income Tax |
79,302
|
|||
|
Employee
Advances |
21,759
|
|||
|
Security
Deposits |
15,267
|
|||
|
Other
Receivables |
42,097
|
|||
|
Other |
10,134
|
|||
|
Total
|
$ |
397,038
|
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net, consist of the following at June 30, 2004:
|
Office
furniture and equipment |
$ |
491,397
|
||
|
Computer
equipment |
2,131,891
|
|||
|
Web-site
development |
167,305
|
|||
|
Assets
under capital leases |
535,142
|
|||
|
Building |
1,096,639
|
|||
|
Construction
in process |
1,835,436
|
|||
|
Land |
178,578
|
|||
|
Autos |
61,712
|
|||
|
Improvements |
197,391
|
|||
|
Subtotal |
6,695,491
|
|||
|
Accumulated
depreciation and amortization |
(2,491,911 |
) | ||
$ |
4,203,580
|
F-20
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the
years ended June 30, 2003 and 2002, fixed asset depreciation and amortization
expense totaled $520,750 and $474,596, respectively. Of these amounts, $355,954
and $287,235, respectively, are reflected as part of cost of goods sold.
Accumulated depreciation and amortization for assets under capital leases
amounted to $335,156 and $372,623 at June 30, 2004 and 2003,
respectively.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consist of the following at June 30, 2004:
|
Product
Licenses |
Customer
Lists |
Goodwill
|
Total
|
||||||||||
|
Intangible
asset - June 30, 2003 |
$ |
4,894,838 |
$ |
1,977,877 |
$ |
1,369,923 |
$ |
8,242,638 |
|||||
|
Additions
|
650,676 |
—
|
—
|
650,676 |
|||||||||
|
Effect
of translation adjustment |
(4,298 |
) |
— |
— |
(4,298 |
) | |||||||
Accumulated
amortization |
(3,131,357 |
) |
(1,336,308 |
) |
|
(4,467,665 |
) | ||||||
|
Impairment
of Goodwill |
— | — |
(203,312 |
) |
(203,312 |
) | |||||||
|
Net
balance - June 30, 2004 |
$ |
2,409,859 |
$ |
641,569 |
$ |
1,166,611 |
$ |
4,218,039 |
|||||
|
Amortization
expense: |
|||||||||||||
|
Year
ended June 30, 2004 |
$ |
803,629 |
$ |
315,665 |
$ |
— |
$ |
1,119,294 |
|||||
|
Year
ended June 30, 2003 |
$ |
726,630 |
$ |
316,015 |
$ |
— |
$ |
1,042,645 |
|||||
| Impairment of goodwill: | |||||||||||||
| Year ended June 30, 2004 | $ | 203,312 | $ | 203,312 | |||||||||
| Year ended June 30, 2003 | $ | 393,388 | $ | 393,388 | |||||||||
At June
30, 2004 and 2003, product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, included unamortized software development and
enhancement costs of $908,508 and $562,659, respectively, as the development and
enhancement is yet to be completed. Software development amortization expense
was $97,744 and $46,504 for the years ended June 30, 2004 and June 30, 2003,
respectively.
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 Company's financial position or results of operations.
F-21
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - CERTIFICATE OF DEPOSIT HELD AS COLLATERAL
In April
2004, the Company renewed its Directors and Officers Insurance and as part of
the financing agreement was required to purchase a Certificate of Deposit (“CD”)
for $121,163 as collateral for the financing. The CD is held until the loan for
the insurance has been paid. This amount is included in the Certificates of
Deposit on the accompanying balance sheet.
NOTE
8 - DEBTS
NOTES
PAYABLE
Notes
payable consist of the following at June 30,
2004:
|
Balance
at |
Current
|
Long-Term
|
||||||||
|
Name |
6/30/04 |
Maturities |
Maturities |
|||||||
|
A.
Cowler Settlement |
146,516
|
65,160
|
81,356
|
|||||||
|
H.
Smith Settlement |
199,321
|
199,321
|
—
|
|||||||
|
Barclay's
Settlement |
16,598
|
16,598
|
—
|
|||||||
|
A.
Zaman Settlement |
26,300
|
18,000
|
8,300
|
|||||||
|
D&O
Insurance |
58,942
|
58,942
|
—
|
|||||||
|
Subsidiary
capital leases |
35,064
|
35,064
|
—
|
|||||||
|
Subsidiary
notes payable |
410,728
|
410,728 |
—
|
|||||||
|
893,469
|
803,813
|
89,656
| ||||||||
On
September 25, 2002 the Company signed a settlement agreement with Adrian Cowler
("Cowler") and Surrey Design Partnership Ltd. The Company agreed to pay Cowler
£218,000 pound sterling or approximately $320,460 USD including 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. The balance as of June 30,
2003, was $185,424. During the year ended June 30, 2004, the Company paid
£60,445 or $86,857 and accrued $23,788 in interest. In addition, the Company
adjusted the amount due in USD to reflect the change in exchange rates from when
the settlement was reached in 2002. As a result $24,161 was recorded to
translation loss. As of June 30, 2004, the balance was $146,516. Of this amount,
$65,160 has been classified as a current liability and $81,356 as long-term
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. 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. During the year ended June 30, 2004, the Company paid £41,044 or
$73,000. In addition, the Company adjusted the amount due in USD to reflect the
change in exchange rates from when the settlement was reached in 2002. As a
result $107,450 was recorded to translation loss. As of June 30, 2004, the
balance was $199,321. The entire balance has been classified as current and is
included in "Current maturities of notes and obligations under capitalized
leases" in the accompanying consolidated financial statements.
F-22
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Barclay’s Bank
PLC of £130,000 or $188,500 USD. 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 year ended
June 30, 2003, the Company paid approximately £2,000 or $3,336. The balance
owing at June 30, 2003 was $185,164. During the year ended June 30, 2004, the
Company paid £66,000 or $69,421. During the quarter ended March 31, 2004, the
Company entered into a settlement agreement with Barclay’s whereby Barclay’s
agreed to accept £69,000 or $79,098 as payment in full. As a result the Company
recorded a gain on the reduction of debt in the amount of $99,146. As of June
30, 2004, £60,000 or $62,500 has been paid on the settlement amount with the
balance of £9,000 or $16,598 due by July 2, 2004. The entire balance has been
classified as current and is included in "Current maturities of notes and
obligations under capitalized leases" in the accompanying consolidated 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 year the Company paid $22,000. As of June 30, 2004, the
balance was $26,300, of this amount $18,000 has been classified as a current
liability in the accompanying consolidated financial statements.
In
January 2004, the Company renewed its director’s and officer liability insurance
for which the annual premium is $167,000. In April 2004, the Company arranged
financing with AFCO Credit Corporation with a down payment of $50,100 with the
balance to be paid in monthly installments. As part of this financing agreement,
the Company is required to hold a certificate of deposit in the amount of
$121,163 as collateral, Note 7).
.
As part
of the purchase of Altvia in May 2003, the Company was required to pay $45,000
as a note payable. During the six months ended December 31, 2003, the Company
paid the entire balance of $45,000.
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 was 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. As the conversion price per share was
less than the20-day average market value of the stock, the Company recorded an
expense of $96,207 for the beneficial conversion feature of the note. The
convertible debenture was issued in reliance on an exemption available from
registration under Regulation S of the Securities Act of 1933, as amended. On
December 16, 2003, the note holder converted the note into 285,715 shares of the
Company’s common stock.
A former
officer of NetSol USA loaned funds to the subsidiary totaling $104,088. The loan
was due-on-demand, carried no interest and was unsecured. This amount was
written-off from the Company’s books and a gain was recognized.
On
December 24, 2003, the Company entered into a loan agreement with an accredited
non-U.S. investor. Under the terms of the loan, the Company borrowed $250,000
from the investor. The note has an interest rate of 6% per annum. The note is
due six months from the issuance date. On January 1, 2004, the agreement was
modified to include a conversion feature to the note. In the event of default by
the Company only, the principal of the note is convertible into shares of common
stock at $1.85 per share, and 100,000 warrants at the exercise price of $3.00
which expire one year from the conversion date, and 100,000 warrants at an
exercise price of $5.00 per share which expire six months 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.
As the conversion price per share is more the than 20-day average market price,
no beneficial conversion feature expense will be recorded. During the quarter
ended March 31, 2004, the loan was converted into 135,135 shares of the
Company’s common stock.
F-23
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On
December 17, 2003, the Company entered into a loan agreement with an accredited
non-U.S. investor, Sovereign Holdings. Under the terms of the loan, the Company
borrowed $100,000 from the investor. The note has an interest rate of 6% per
annum. The note is due on a date that is six months from the issuance date. In
the event of default by the Company only, the note is convertible into shares of
common stock at $1.95 per share, and 51,282 warrants at the exercise price of
$3.25 per share which expire one year 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 March 24, 2004, the loan was
converted into 51,282 shares of the Company’s common stock. In June 2004, an
addition 5,861 shares of the Company’s common stock were issued for interest
valued at $11,429.
In
addition, the various subsidiaries had current capital leases of $35,064 and
long-term notes of $473,887 as of June 30, 2004.
The
current maturity of notes payable, including capital lease obligations, is as
follows:
| Year ending June 30, 2005 | $ | 803,813 | (current) | |
| Year ending June 30, 2006 | 73,460 | (long-term) | ||
| Year ending June 30, 2007 | 16,196 | (long-term) | ||
|
Total |
$ | 893,469 |
LOANS PAYABLE - BANK
The
Company’s Pakistan subsidiary, NetSol Technologies (Private) Ltd., has three
loans with a bank, secured by the Company’s assets. These notes consist of the
following as of June 30, 2004:
TYPE
OF |
MATURITY |
INTEREST |
BALANCE
|
|||||||
|
LOAN |
DATE |
RATE |
USD
|
|||||||
|
Export
Refinance |
Every
6 months |
4 |
% |
$ |
334,190
|
|||||
|
Term
Loan |
April
20, 2005 |
10 |
% |
38,989
|
||||||
|
Line
of Credit |
On
Demand |
8 |
% |
85,682
|
||||||
|
Total |
$ |
458,861
|
||||||||
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 Company’s common stock at an exercise
price of $6.50 for a term of five years. The remaining unexercised warrants of
51,890 expired on September 15, 2003.
Business
Combinations:
Altvia
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 Altvia Technologies,
Inc., a Delaware corporation in an Asset Purchase Agreement. The shares were
valued at the time of the purchase at $212,000 or $1.00 per share. Proforma
financial statements are not presented, as the net assets and the operations of
Altvia Technologies, Inc. were insignificant prior to the merger.
F-24
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An
additional 100,000 shares were issued to Altvia in February 2004 as part of the
purchase agreement for sales milestones achieved.
Pearl
Treasury System Ltd
In
October 2003, the Company entered into an agreement to acquire the Pearl
Treasury System Ltd, a United Kingdom company ("Pearl"). This acquisition
required the Company to issue up to 60,000 shares of common stock to the
shareholders of Pearl Treasury System, Ltd. The shares were valued at the time
of the purchase at $166,860 or $2.78 per share. On December 16, 2003, the
initial shares of 41,700, valued at $115,968 due at the signing of the agreement
were issued by the Company. In April 2004, the remaining 18,300 shares were
issued upon the completion of the software delivery warranties valued at
$50,892. 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. Proforma financial statements are not presented, as the net
assets and the operations of Pearl were insignificant prior to the
merger.
Private
Placements
In July
2003, the Company sold 1,026,824 shares of the Company’s common stock in 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, commissions, and other expenses paid
from the escrow of the sale for a net of $1,102,050. An SB-2 registration
statement was filed on October 15, 2003 to register the shares for the selling
shareholders in this transaction. The investors included 12 individual
accredited investors with no prior ownership of the Company’s common
stock.
In May
2004, the Company sold 386,363 shares of the Company’s common stock in a private
placement transaction. Maxim Group, LLC in New York acted as the placement agent
for the transaction. The total funds raised were $850,000 with approximately
$103,300 in placement fees, commissions, and other expenses paid from the escrow
of the sale. In addition, the Company issued 243,182 warrants in
connection with the sale. The warrants expire in five years and have an exercise
price of $3.30 per share. The warrants were valued using the fair value method
at $230,413 or $1.41 per share and recorded it against the proceed of the
financing in the accompanying consolidated financial statements. Net proceeds of
the financing was $516,207. The investors included 9 individual accredited
investors with no prior ownership of the Company’s common stock. An SB-2 was
filed on June 15, 2004 to register these shares.
During
the year ended June 30, 2003, the Company sold 459,770 shares of common stock
for $365,219 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, 2004 and 2003, the Company issued 3,613 and 93,400
restricted Rule 144 common shares in exchange for accrued compensation and
services rendered, respectively. The Company recorded compensation expense of
$9,000 and $39,200 for the years ended June 30, 2004 and 2003, respectively.
Compensation expense was calculated based upon the fair market value of the
freely trading shares as quoted on NASDAQ through 2004 and 2004, over the
service period.
F-25
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
February 2003, the Board of Directors and officers were granted the right to
receive 5,000 shares of the Company’s common stock if certain conditions were
met during their 2003 - 2004 term of office. These conditions were met and a
total of 45,000 restricted Rule 144 common shares were issued in June 2004. The
shares were valued at the fair market value at the date of grant of $39,240 or
$0.87 per share.
Issuance
of shares for Conversion of Debt and Settlement of
Litigation
During
the year ended June 30, 2004, a total of 123,350 shares of the Company’s common
stock, valued at $209,200, were issued to three investors as reimbursement for
debts of the Company paid by the investors. In addition, three convertible notes
payable of $850,000 plus $11,429 of interest was converted into 477,993 shares
of the Company’s common stock (see Note 8).
During
the year ended June 30, 2003, the outstanding balance of $25,000 in debt was
converted into 71,429 restricted Rule 144 common shares.
During
the year ended June 30, 2004 and 2003, the Company issued 45,195 and 40,000
shares of common stock in settlement of litigation, respectively. The shares
were valued at $135,135 and $50,000, respectively.
Options
and Warrants Exercised
During
the years ended June 30, 2004 and 2003, the Company issued 1,067,309 and 954,983
shares of its common stock upon the exercise of stock options valued at $957,892
and $809,566, respectively; of this amount $290,000 is has not been received as
of June 30, 2004 and is included in Stock Subscription Receivable in the
accompany consolidated financial statements. The exercise price ranged from
$0.75 and $1.50 per share.
During
the years ended June 30, 2004 and 2003, the Company issued 390,000 and 60,000
shares of its common stock upon the exercise of warrants valued at $487,500 and
$36,000, respectively.
Stock
Subscription Receivable
Stock
subscription receivable represents stock options exercised and issued that the
Company has not yet received the payment from the purchaser as they were in
processing when the quarter ended.
The
balance at June 30, 2003 was $84,900, of this $41,250 was received in the
quarter ended September 30, 2003.
During
the year ended June 30, 2004, four officers of the Company had exercised options
with receivables valued at $207,559. Interest is being accrued on these loans at
6% per annum and was $7,071 at June 30, 2004.
At June
30, 2004, the Company had receivables from three employees and one investor for
options exercised totally $290,000.
.
On
November 28, 2003, the Company agreed to loan the Chief Financial
Officer (CFO) and Chairman of the Company, $80,417 for the purpose of
purchasing 67,223 shares of the Company’s common stock through the exercise of a
stock option previously granted to the officer on February 16, 2002. On March
31, 2004, the Company loaned the officer and additional $25,000 to purchase
10,000 shares of the Company’s common stock through the exercise of a stock
option previously granted to the officer on February 16, 2002. In addition, in
June 2004, accrued wages in the amount of $12,500 was applied to the officer’s
loan. At June 30, 2004, the loan balance for the officer was $92,917 and accrued
interest was $3,154.
F-26
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On
November 28, 2003, the Company agreed to loan the Chief Executive
Officer (CEO) of the Company, $48,335 for the purpose of purchasing 41,557
shares of the Company’s common stock through the exercise of a stock option
previously granted to The officer on February 16, 2002. In addition, in June
2004, accrued wages in the amount of $9,636 was applied to The officer’s loan.
At June 30, 2004, the loan balance for The officer was $38,699 and accrued
interest was $1,661.
On
November 28, 2003, the Company agreed to loan the President, of the Company,
$72,221 for the purpose of purchasing 57,777 shares of the Company’s common
stock through the exercise of a stock option previously granted to The officer
on February 16, 2002. In addition, in June 2004, accrued wages in the amount of
$39,928 was applied to The officer’s loan. At June 30, 2004, the loan balance
for The officer was $32,293 and accrued interest was $2,255.
On
November 28, 2003, the Company agreed to loan the Vice-President of the Company,
$20,000 for the purpose of purchasing 20,000 shares of the Company’s common
stock through the exercise of a stock option previously granted to the officer
on February 16, 2002. In January 2004, the officer terminated his employment
with the Company and the balance owed, including $210 in interest, was applied
to his severance pay and deemed fully paid.
All of
the loans, which were immediately available, bear an interest at the rate of six
percent per annum, have a term of two-years and is payable in deferred salary or
cash. Principal and accrued interest is due and payable at the expiration of the
loan term. The shares of the Company’s common stock acquired with the loan
proceeds secure repayment of the loan. These shares will be held in escrow for
the benefit of the Company pending repayment or substitution of additional or
different collateral in form and amount satisfactory to the
Company.
Treasury
Stock
During
the year ended June 30, 2004, the Company purchased 10,000 shares of its common
stock on the open market for $21,457 as treasury shares.
Common
Stock Purchase Warrants and Options
From time
to time, the Company issues options and warrants as incentives to employees,
officers and directors, as well as to non-employees.
F-27
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common
stock purchase options and warrants consisted of the following as of June 30,
2004:
|
Exercise |
Options
and |
Exercise |
|||||||||||
|
Options |
Price |
Warrants |
Price |
||||||||||
|
Outstanding
and exercisable, June 30, 2003 |
1,132,898 |
$ |
.75
to $5.00 |
840,000
|
$ |
0.50
to $5.00 |
|||||||
|
Granted |
2,337,578 |
$ |
1.00
to $5.00 |
243,182
|
$ |
2.20
to $3.30 |
|||||||
|
Exercised |
(1,067,309 |
) |
$ |
0.75
to $2.50 |
(390,000 |
) |
$ |
0.50
to $1.75 |
|||||
|
Expired |
(640,890 |
) |
$ |
7.20
to $24.75 |
— |
||||||||
|
Outstanding
and exercisable, June 30, 2004 |
1,762,277 |
693,182
|
|||||||||||
During
the year ended June 30, 2004, 2,087,578 options were granted to employees and
officers of the company and are fully vested and expire ten years from the date
of grant unless the employee terminates employment, in which case the options
expire within 30 days of their termination. In addition, on March 26, 2004,
250,000 option shares were granted to the members of the Board of Directors.
These options vest over a period of two years.
In
compliance with FAS No. 148, the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
plan as defined by APB No. 25 and has made the applicable disclosures
below.
Had the
Company determined employee stock based compensation cost based on a fair value
model at the grant date for its stock options under SFAS 123, the Company's net
earnings per share would have been adjusted to the pro forma amounts for years
ended June 30, 2004 and 2003 as follows:
|
2004 |
2003 |
||||||
|
Net
loss - as reported |
$ |
(2,512,210 |
) |
$ | (2,137,506 | ) | |
|
Stock-based
employee compensation expense, |
|||||||
|
included
in reported net loss, net of tax |
— |
— | |||||
|
Total
stock-based employee compensation |
|||||||
|
expense
determined under fair-value-based |
|||||||
|
method
for all rewards, net of tax |
(2,859,750 |
) |
(355,059 | ) | |||
|
Pro
forma net loss |
$ |
(5,829,725 |
) |
$ | (2,492,565 | ) | |
|
Earnings
per share: |
|||||||
|
Basic
and diluted, as reported |
(0.38 |
) |
(0.47 | ) | |||
|
Basic
and diluted, pro forma |
(0.74 |
) |
(0.55 | ) | |||
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:
|
2004 |
2003 |
||||||
|
Expected
life (years) |
10
years |
5-10
years |
|||||
|
Risk-free
interest rate |
3.25 |
% |
6.0 |
% | |||
|
Dividend
yield |
— |
— |
|||||
|
Volatility |
100 |
% |
114 |
% | |||
F-28
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In
addition, the Company issued 243,182 warrants in connection with the sale of
stock under a private placement agreement. The warrants expire in five years and
have an exercise price of $3.30 per share. The warrants were valued using the
fair value method at $230,413 or $1.41 per share and recorded the expense in the
accompanying consolidated financial statements. The Black-Scholes option pricing
model used the following assumptions:
|
Risk-free
interest rate |
3.25% |
|
Expected
life |
5
years |
|
Expected
volatility |
100% |
|
Dividend
yield |
0% |
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 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 exercise prices of options granted under the 1997 Plan for the years
ended June 30, 2004 and 2003 are as follows:
|
Exercise |
Exercise |
||||||||||||
|
2004 |
Price |
2003 |
Price |
||||||||||
|
Outstanding
and exercisable, beginning of year |
9,000
|
$ |
7.20
|
9,000
|
$ |
7.20
|
|||||||
|
Granted |
—
|
—
|
—
|
—
|
|||||||||
|
Exercised |
—
|
—
|
—
|
—
|
|||||||||
|
Expired |
(9,000 |
) |
$ |
7.20
|
—
|
—
|
|||||||
|
Outstanding
and exercisable, end of year |
—
|
9,000
|
$ |
7.20
|
|||||||||
During
the year ended June 30, 2004, all outstanding options in this plan
expired.
F-29
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 exercise prices of options granted under the 1999 Plan for the year
ended June 30, 2004 and 2003 are as follows:
|
Exercise |
Exercise
|
||||||||||||
|
2004 |
Price |
2003 |
Price
|
||||||||||
|
Outstanding
and exercisable, beginning of year |
631,890
|
$ |
24.75
|
631,890
|
$ |
24.75
|
|||||||
|
Granted |
—
|
—
|
—
|
—
|
|||||||||
|
Exercised |
—
|
—
|
—
|
—
|
|||||||||
|
Expired |
(631,890 |
) |
$ |
24.75
|
—
|
—
|
|||||||
|
Outstanding
and exercisable, end of year |
—
|
631,890
|
$ |
24.75
|
|||||||||
During
the year ended June 30, 2004, all outstanding options in this plan
expired.
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.
F-30
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
number and exercise prices of options granted under the 2001 Plan for the years
ended June 30, 2004 and 2003 are as follows:
|
Exercise |
Exercise |
||||||||||||
|
2004 |
Price |
2003 |
Price |
||||||||||
|
Outstanding
and exercisable, beginning of year |
398,408
|
$ |
0.75
to $2.50 |
887,908
|
$ |
0.25
to $1.25 |
|||||||
|
Granted |
555,913
|
$ |
0.75
to $2.50 |
389,083
|
$ |
0.75
to $2.50 |
|||||||
|
Exercised |
(764,544 |
) |
$ |
0.75
to $2.50 |
(878,583 |
) |
$ |
0.25
to $1.25 |
|||||
|
Expired |
—
|
— |
—
|
— |
|||||||||
|
Outstanding
and exercisable, end of year |
189,777
|
$ |
0.75
to $2.50 |
398,408
|
$ |
0.75
to $2.50 |
|||||||
The
2002 Plan
In
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, 2004 and 2003 are as follows:
|
Exercise |
Exercise |
||||||||||||
|
2004 |
Price |
2003 |
Price |
||||||||||
|
Outstanding
and exercisable, beginning of year |
93,600
|
$ |
0.75
to $2.50 |
—
|
— |
||||||||
|
Granted |
1,331,665
|
$ |
1.00
to $5.00 |
170,000
|
$ |
0.75
to $2.50 |
|||||||
|
Exercised |
(302,765 |
) |
$ |
0.75
to $2.50 |
(76,400 |
) |
$ |
0.25
to $1.25 |
|||||
|
Expired |
—
|
— |
—
|
— |
|||||||||
|
Outstanding
and exercisable, end of year |
1,122,500
|
$ |
0.75
to $5.00 |
93,600
|
$ |
0.75
to $2.50 |
|||||||
F-31
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
2003 Plan
In March
2004, 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 2003
Plan for the year ended June 30, 2004 are as follows:
|
Exercise |
|||||||
|
2004 |
Price |
||||||
|
Outstanding
and exercisable, beginning of year |
—
|
— |
|||||
|
Granted |
450,000
|
$ |
2.64
to $5.00 |
||||
|
Exercised |
—
|
— |
|||||
|
Expired |
—
|
— |
|||||
|
Outstanding
and exercisable, end of year |
450,000
|
$ |
2.64
to $5.00 |
||||
NOTE
11 - CONVERTIBLE DEBENTURE
On March
24, 2004, the Company entered into an agreement with several investors for a
Series A Convertible Debenture (the "Bridge Loan") whereby a total of $1,200,000
in debentures were procured through Maxim Group, LLC. The Company received a net
of $1,049,946 after placement expenses. In addition, the beneficial conversion
feature of the debenture was valued at $300,000. The Company has recorded this
as a contra-account against the loan balance and is amortizing the beneficial
conversion feature over the life of the loan. The net balance at June 30, 2004,
is $937,500.
Under the
terms of the Bridge Loan agreements, and supplements thereto, the debentures
bear interest at the rate of 10% per annum, payable on a quarterly basis in
common stock or cash at the election of the Company. The maturity date is 24
months from the date of signing, or March 26, 2006. The debentures are to be
converted at the rate of $1.86 and are automatically converted on the closing of
at least $2,200,000 in additional financing (the "Qualified Financing"),
inclusive of the Bridge Loan.
F-32
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 - COMMITMENTS AND CONTINGENCIES
Leases
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. In December
2003, the moved its headquarters from its previous facility to one with
approximately 1,919 rentable square feet and a monthly rent of $3,934 per month,
the previous location had a monthly rent of $2,993 per month. The term of the
lease is for two years and expires on December 31, 2005. A security deposit of
$3,934 was made and is included in other current assets in the accompanying
consolidated financial statements.
The
facilities in Maryland were on a month-to-month basis rented at the rate of
$1,200 per month. In July 2004 the Maryland office moved to a new location to
one with approximately 1,380 rentable square feet and a monthly rent of $2,530.
The term of the lease is for three years and expires on June 30, 2007. A
security deposit of $2,530 was made and is included in other current assets in
the accompanying consolidated financial statements.
The
Australia lease is a three-year lease that expires in September 2007 and
currently is rented at the rate of $1,380 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.
Upon
expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Rent expense amounted to $220,261 and
$215,000 for the years ended June 30, 2004 and 2003, respectively.
Lahore
Technology Campus
The newly
built Technology Campus was inaugurated in Lahore, Pakistan in May 2004. This
facility consists of 40,000 square feet of computer and general office space.
This facility is state of the art, purpose-built and fully dedicated for IT and
software development; the first of its kind in Pakistan. Title to this facility
is held by NetSol Technologies Pvt. Ltd., and is not subject to any mortgages.
The Company also signed a strategic alliance agreement with the IT ministry of
Pakistan to convert the technology campus into a technology park. By this
agreement, the IT ministry would invest nearly 10 million Rupees (approximately
$150,000) to install fiber optic lines and improve the bandwidth for the
facility. NetSol has relocated its over 250 employees into this new
facility.
Employment
Agreements
Effective
January 1, 2004, the Company entered into an employment agreement with Naeem
Ghauri as 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 110,000
pounds sterling. The agreement also provides for such additional compensation as
the Board of Directors determines is proper in recognition of Mr. Ghauri's
contributions and services to the Company. In addition, the agreement provides
Mr. Ghauri with options to purchase up to 100,000 shares of common stock at an
exercise price of $2.21, 100,000 shares at an exercise price of $3.75 and 50,000
shares at an exercise price of $5.00. These options vest at the rate of 25% per
quarter and are fully vested on December 31, 2004. These options expire on
December 31, 2008. Mr. Ghauri also received options to purchase up to 20,000
shares at the exercise price of $2.65 per share and options to purchase 30,000
shares at the exercise price of $5.00 per share. These options vest immediately
and are exercisable until March 25, 2009.
F-33
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective
January 1, 2004, the Company entered into an employment agreement with Najeeb
Ghauri as Chief Financial Officer. The agreement is for a base term of three
years, and continues thereafter on an at will basis until terminated by either
NetSol or Mr. Ghauri. The agreement provides for a yearly salary of $200,000.
The agreement also provides for such additional compensation as the Board of
Directors determines is proper in recognition of Mr. Ghauri's contributions and
services to the Company. In addition, the agreement provides Mr. Ghauri with
options to purchase up to 100,000 shares of common stock at an exercise price of
$2.21, 100,000 shares at an exercise price of $3.75 and 50,000 shares at an
exercise price of $5.00. These options vest at the rate of 25% per quarter and
are fully vested on December 31, 2004. These options expire on December 31,
2008. Mr. Ghauri also received options to purchase up to 20,000 shares at the
exercise price of $2.65 per share and options to purchase 30,000 shares at the
exercise price of $5.00 per share. These options vest immediately and are
exercisable until March 25, 2009.
Effective
January 1, 2004, the Company entered into an employment agreement with Salim
Ghauri as the President and Chief Executive Officer the Company’s 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 $110,000. The agreement
also provides for such additional compensation as the Board of Directors
determines is proper in recognition of Mr. Ghauri's contributions and services
to the Company. In addition, the agreement provides Mr. Ghauri with options to
purchase up to 100,000 shares of common stock at an exercise price of $2.21,
100,000 shares at an exercise price of $3.75 and 50,000 shares at an exercise
price of $5.00. These options vest at the rate of 25% per quarter and are fully
vested on December 31, 2004. These options expire on December 31, 2008. Mr.
Ghauri also received options to purchase up to 20,000 shares at the exercise
price of $2.65 per share and options to purchase 30,000 shares at the exercise
price of $5.00 per share. These options vest immediately and are exercisable
until March 25, 2009.
Effective
January 1, 2004, the Company entered into an employment agreement with Patti L.
W. McGlasson as legal counsel. The agreement provides for a yearly salary of
$82,000. Ms. McGlasson also received options to purchase up to 10,000 shares of
common stock at an exercise price equal to the lesser of $2.30 or the market
price of the shares on the date of exercise less $2.00. These options vest at
the rate of 25% per quarter and are exercisable until December 31, 2008.
Effective March 26, 2004, Ms. McGlasson was elected to the position of
Secretary. In connection with her role as Secretary, Ms. McGlasson received
options to purchase up to 10,000 shares of common stock at $3.00 per share.
These options vest at the rate of 25% per quarter and are exercisable until
December 31, 2008. Ms. McGlasson also received options to purchase up to 20,000
shares at the exercise price of $2.65 per share and options to purchase 30,000
shares at the exercise price of $5.00 per share. These options vest immediately
and are exercisable until March 25, 2009.
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.
F-34
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
Herbert
Smith, a former attorney representing the Company, commenced a collection
proceeding against the Company in the High Court of Justice, Queen’s 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 years ended June 30, 2004 and 2003 the
Company paid $73,000 and $26,000, respectively on this note.
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
Company’s 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 Company’s 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. Allied’s position is that the Company breached its agreement with
Florian and Leo, the Company’s 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 Company’s restricted Rule 144
stock, with a total value of $50,000 in settlement of this claim.
On
January 29, 2002, the Company reached a settlement with Adrian Cowler and The
Surrey Design Partnership Limited, the former owners of Network Solutions Group
Limited ("NSGL"). The settlement had 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 Plaintiff’s request for Entry
of Judgment and on September 16, 2002, Plaintiff filed its Motion to Strike
NetSol’s 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). During the years ended June 30, 2004 and 2003, the Company paid $86,857 and
$76,248.
F-35
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company’s 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 Company’s 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
$39,178 of interest as of the effective date of the agreement. On December 16,
2003, the Company issued 34,843 shares of its common stock in satisfaction of
the principal amount due. On February 6, 2004, the Company issued 10,352 shares
of its common stock for the accrued interest.
On March
3, 2004, Uecker and Associates, Inc. as the assignee for the benefit of the
creditors of PGC SYSTEMS, INC. f.k.a. Portera Systems Inc. filed a request for
arbitration demanding payment from the Company for the amounts due under the
agreement in the amount of $175,700. On March 31, 2004, the Company filed an
Answering Statement to the Request of Uecker & Associates denying each and
every allegation contained in the Claim filed by Uecker & Associates and
stating NetSol’s affirmative defenses. There was an administrative conference
scheduled with the case manager of the American Arbitration Association on March
17, 2004. An arbitrator has been selected and the parties are selecting dates
for arbitration in this matter. The Company intends to vigorously defend itself
in this matter and reach a favorable resolution.
On June
24, 2004, the Company reached a settlement agreement with, Brobeck, Phelger, et
al, a vendor, for amounts in dispute. The vendor agreed to accept $108,500 as
payment in full to be paid in three installments totaling $54,250 and one
payment of $54,250 to be paid either in cash or in the Company’s common stock.
The Company recorded a gain of $102,119 from the settlement of this debt in the
accompanying consolidated financial statements.
On May
12, 2004, Merrill Corporation served an action against NetSol for account
stated, common counts, open book account and unjust enrichment alleging amounts
due of $90,415.33 together with interest thereon from August 23, 2001. On June
24, 2004, the parties reached a settlement agreement. The vendor agreed to
accept $75,450 as payment in full to be paid $10,450 at the time of signing the
agreement and the balance in five monthly installments of $13,000. The Company
recorded a gain of $14,965 from the settlement of this debt in the accompanying
consolidated financial statements.
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-36
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 - 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, 2004 and 2003:
|
2004 |
2003 |
||||||
|
(restated) |
|||||||
|
Revenues
from unaffiliated customers: |
|||||||
|
North
America |
$ |
676,857
|
$ |
508,868
|
|||
|
International
|
5,072,205
|
3,236,518
|
|||||
|
Consolidated
|
$ |
5,749,062
|
$ |
3,745,386
|
|||
|
Operating
loss: |
|||||||
|
North
America |
$ |
(3,452,920 |
) |
$ |
(2,644,712 |
) | |
|
International
|
744,902
|
176,462
|
|||||
|
Consolidated
|
$ |
(2,708,018 |
) |
$ |
(2,468,250 |
) | |
|
Identifiable
assets: |
|||||||
|
North
America |
$ |
4,316,404 |
$ |
4,689,560
|
|||
|
International
|
7,668,716 |
4,052,691
|
|||||
|
Consolidated
|
$ |
11,985,120 |
$ |
8,742,251
|
|||
|
Depreciation
and amortization: |
|||||||
|
North
America |
$ |
1,080,498 |
$ |
1,047,298 |
|||
|
International
|
203,592
|
136,204
|
|||||
|
Consolidated
|
$ |
1,284,090 |
$ |
1,183,502
|
|||
|
Capital
expenditures: |
|||||||
|
North
America |
$ |
55,986
|
$ |
23,688
|
|||
|
International
|
2,805,768
|
104,134
|
|||||
|
Consolidated
|
$ |
2,861,754
|
$ |
127,822 |
|||
NOTE
14 - 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 Company’s 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 | US$ 200,000 | ||
| The Company | 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 Akhtar’s portion of the
subsidiary. During the quarter ended December 31, 2003, Akhtar paid an
additional $10,000 to the Company for this purchase. For the year ended June 30,
2004, the subsidiary had net losses of $689,000, of which $273,159 was recorded
against the minority interest. The balance of the minority interest at June 30,
2004 was $0.
F-37
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Per the
agreement, it was envisaged that NC would require a maximum $500,000 for
expansion of its business. Akhtar was to meet the initial financial requirements
of the Company until November 1, 2003. As of June 30, both NetSol and Akhtar had
injected the majority of their committed cash to meet the expansion requirement
of the company.
The
following is the proforma financial information of the Company assuming as if
the transaction was consummated from the beginning of the fiscal year ended June
30, 2003:
|
2003 |
||||
Statements
of operations: |
|
|||
|
|
|
|||
|
Net
loss before allocation of minority shareholders |
(2,116,818 |
) | ||
|
|
|
|||
|
Minority
allocation |
(8,041 |
) | ||
|
|
|
|||
|
Net
Loss |
($2,124,859 |
) | ||
|
|
|
|||
|
Basic
and diluted loss per share |
($0.09 |
) | ||
|
|
|
|||
|
Balance
Sheet items as of June 30, 2003: |
|
|||
|
|
|
|||
| Total assets |
$ |
8,932,251 |
||
|
|
|
|||
| Shareholders' equity |
$ |
5,264,852 |
||
NOTE
15 - SUBSEQUENT EVENTS
On August
18, 2004, two holders of the convertible debenture gave the Company notice they
were converting their notes into the Company’s common stock. A total of $100,000
in notes were converted into 53,764 shares of the Company’s common stock and
26,882 warrants were issued.
NOTE
16 - RESTATEMENT
Subsequent
to the issuance of the Company's financial statements for the year ended June
30, 2004, the Company determined that certain transactions and presentation in
the financial statements had not been accounted for properly in the Company's
financial statements. Specifically, the amount of impairment of goodwill was
over-recorded and the expense due to issuance of warrants in connection with the
PIPE financing was not adjusted against the equity.
The
Company has restated its financial statements for these adjustments as of June
30, 2004.
F-38
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The
effect of the correction of the error is as follows:
|
AS
PREVIOUSLY |
AS |
||||||
|
REPORTED |
RESTATED |
||||||
BALANCE
SHEET |
|||||||
AS
OF JUNE 30, 2004 |
|||||||
|
Assets: |
|||||||
|
Goodwill |
$ |
939,260 |
$ |
1,166,611 |
|||
|
Total
intangibles |
$ |
3,990,688 |
$ |
4,218,039 |
|||
|
Total
assets |
$ |
11,757,769 |
$ |
11,985,120 |
|||
|
Stockholder's
Equity: |
|||||||
|
Additional
paid-in capital |
$ |
39,164,034 |
$ |
38,933,621 |
|||
|
Accumulated
deficit |
$ |
(31,375,230 |
) |
$ |
(30,917,465 |
) | |
|
Total
stockholder's equity |
$ |
7,129,061 |
$ |
7,356,413 |
|||
|
STATEMENT
OF OPERATIONS: |
|||||||
|
FOR
THE YEAR ENDED JUNE 30, 2004 |
|||||||
|
Depreciation
and amortization |
$ |
1,714,754 |
$ |
1,284,090 |
|||
|
Impairment
of assets |
$ |
— |
$ |
203,312 |
|||
|
Total
operating expenses |
$ |
6,028,055 |
$ |
5,800,703 |
|||
|
Loss
from operations |
$ |
(2,935,370 |
) |
$ |
(2,708,018 |
) | |
|
Warrants
issued in connection with financing |
$ |
(230,413 |
) |
$ |
— |
||
|
Loss
from continuing operations |
$ |
(3,243,134 |
) |
$ |
(2,785,369 |
) | |
|
Net
loss |
$ |
(2,969,975 |
) |
$ |
(2,512,210 |
) | |
|
Net
loss per share - basic and diluted: |
|||||||
|
Continued
operations |
$ |
(0.41 |
) |
$ |
(0.35 |
) | |
|
Net
loss |
$ |
(0.38 |
) |
$ |
(0.32 |
) | |
|
F-39 | |||