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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
or
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-28861
NETSOL INTERNATIONAL, INC.
(Name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5000 North Parkway Calabasas, Suite 202,
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 PURSUANT TO SECTION 12(b) OF THE ACT:(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:(None)
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. / /
As of September 30, 2000, Registrant had 11,006,373 shares of its $.001 par
value Common Stock issued and outstanding with an aggregate market value of the
common stock held by non-affiliates of $80,619,806. There are 147,192 warrants
outstanding as of September 15, 2000. This calculation is based upon the closing
sales price of $20.25 per share on September 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: (1) Form 10-KSB
for the fiscal year ended June 30, 1999, filed with the SEC on September 28,
1999 (File No. 333-28861), is incorporated in Part III, Item 13(A); and (2)
Registration Statement on Form SB-2, effective with the SEC on April 27,
1998,(Registration No. 333-28861), is incorporated in Part III, Item 13(A).
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TABLE OF CONTENTS AND CROSS REFERENCE SHEET
PART I PAGE
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Item 1 Description of Business 3
Item 2 Description of Property 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders
PART II
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Item 5 Market for Common Equity and Related Stockholder Matters 18
Item 6 Management's Discussion and Analysis 18
Item 7 Financial Statements 26
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
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Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act 27
Item 10 Executive Compensation 29
Item 11 Security Ownership of Certain Beneficial Owners and
Management 31
Item 12 Certain Relationships and Related Transactions 32
PART IV
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Item 13 Exhibits and Reports on Form 8-K 33
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PART I
ITEM 1 - BUSINESS
GENERAL
NetSol International, Inc. ("NetSol" or the "Company") is in the
business of information technology ("I/T") services. Since it was founded in
1997, the Company has helped clients use I/T more efficiently in order to
improve their operations and profitability and to achieve business results.
Network Solutions Pvt. Ltd. ("NetSol PK") develops the majority of the software
for the Company. NetSol PK was the first company in Pakistan to achieve the ISO
9001 accreditation. The Company is in the process of attaining SEI CMM Level 3
accreditation. This is one of the highest level of recognition for quality and
best practices a software house can achieve.
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 to achieve its customers' strategic objectives. Its service
offerings include outsourcing, systems integration, and I/T and management
consulting and other professional services, including e-business solutions.
Outsourcing involves operating all or a portion of a customer's technology
infrastructure, including systems analysis, applications development, network
operations, desktop computing and data center management.
Systems integration encompasses designing, developing, implementing and
integrating complete information systems.
I/T and management consulting services include advising clients on the strategic
acquisition and utilization of I/T and on business strategy, operations, change
management and business process reengineering.
The Company also develops sophisticated software systems for the lease and
finance industry. NetSol has developed a fully integrated leasing and finance
package which is a series of five products that can be marketed in an integrated
system. These products are ePOS, PMS, SMS, CMS, and WFS. These five applications
form the full suite of asset based lending Enterprise Resource Planning
applications. These applications can run almost the entire operations of a
captive leasing company.
NetSol ePOS is a browser-based Point of Sale system that is used by the
dealership and other outlets. ePOS users create quotations and financing
applications for the customers using predefined Financial Products. The proposal
is submitted to Back Office (PMS) for approval. After analysis, the proposal is
sent back to ePOS system with a final decision.
Proposal Management System (PMS) provides Finance/Leasing Companies with the
ability to quickly assess the worthiness of an applicant applying for a loan or
a lease. The System is equipped with strong
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workflow management, integrated link to Credit Rating Agencies, automated point
scoring strategy for automatic approval/rejection/referral, can be customized to
link to any Point of Sale System, ability to integrate any vehicle data provider
such as Glass's Guide in Europe and Australia,
The NetSol Wholesale Finance System (WFS) is developed to automate and manage
the Whole Sale Finance (Floor Plan) activities of a Finance Company. The design
of the system is based on the concept of One Loan One Asset to facilitate Asset
Tracking and Costing of an asset. The system covers from Credit Limit Request,
Payment of Loan, Billing, and Settlement, Auditing of Stocks, Dealer Information
and ultimately the pay-off functions.
Settlement Management System (SMS) verifies the signed document sent by the
dealer/broker/third party against the information stored in the Proposal
Management System database. Settlement Management System verifies all
calculations before loading the contract into the Contract Management System.
Other main features are collection of first rental, disbursement of funds to
dealers, Insurance Company and other third parties. Workflow software is part of
Settlement Management System and it enables the users of Settlement Management
System to communicate with Proposal Management workflow or within its own
workgroup.
The Contract Management System (CMS) manages lease contracts for financing of
vehicles from inception till completion. The leasing company is able to
establish, maintain and terminate such financial contracts. Contracts may
include added value services such as vehicle maintenance and/or insurance
premiums. It furthermore incorporates functional extensions such as litigation,
remarketing of vehicles, securitization of a portfolio and post dated check
management.
These are traditionally complex business applications and require a great deal
of industry experience both in the development as well as implementation stages.
NetSol, over the years, has developed core competencies in the asset based
lending software space. These are extremely sought after skills shared in a team
of approximately 30 business consultants. NetSol is able to demand a premium for
these consultants and leverages this competency when bidding for new business.
Typically, the sales cycle for these products is anywhere between six to twelve
months and NetSol derives its income both from selling the license to use the
products as well as customization. License fees can vary between $75,000 to up
to $1,000,000 per license depending upon the size of the customer and the
complexity of the customization. The revenue for the license and the
customization flows in several phases and could take from six months to two
years before its is fully recognized as income.
MARKETING AND SELLING
The objective of the Company's marketing program is to create and sustain
preference and loyalty for NetSol as a leading e-services consulting and
software solutions provider. Marketing is performed at the corporate and
business unit levels. The corporate marketing department has overall
responsibility for communications, advertising,
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public relations and our website and also engineers and oversees central
marketing and communications programs for use by each of our business units.
Our dedicated marketing personnel within the business units undertake a variety
of marketing activities, including sponsoring focused client events to
demonstrate our skills and products, sponsoring and participating in targeted
conferences and holding private briefings with individual companies. We believe
that the industry focus of our sales professionals and our business unit
marketing personnel enhances their knowledge and expertise in these industries
and will generate additional client engagements.
In March 2000, the Company entered into a Software Distribution Agreement with
CFS Group PLC ("CFS") whereby the Company granted CFS the exclusive right to
market and sublicense certain software products of NetSol. The term of this
agreement is for three years. This agreement provided the Company with the
opportunity to expand its marketing efforts by offering its products to
customers of CFS and others in need of lease and finance software. CFS will pay
a minimum of $1.2 million regardless of the amount of actual sales achieved. The
minimum guarantee is for each twelve-month period beginning from the time NetSol
delivers the US version of the products.
The Company generally enters into written commitment letters with clients at or
around the time it commences work on a project. These commitment letters
typically contemplate that NetSol and the client will subsequently enter into a
more detailed agreement, although the client's obligations under the commitment
letter are not conditioned upon the execution of the later agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and the Company does not generally believe it is appropriate to
characterize them as consisting of backlog. In addition, because these written
commitments and agreements often provide that the arrangement can be terminated
with limited advance notice or penalty, the Company does not believe the
projects in process at any one time are a reliable indicator or measure of
expected future revenues.
NetSol provides its services primarily to clients in global commercial
industries. In the global commercial area, the Company's service offerings are
marketed to clients in a wide array of industries including schools; automotive;
chemical; tiles/ceramics; Internet marketing; software; banks and financial
services.
Geographically, NetSol has operations throughout North America, Europe and Asia
Pacific region.
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During the last two fiscal years, the Company's revenue mix by major markets was
as follows:
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2000 1999
(Restated)
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North American (NetSol USA) 13% N/A
Europe (NetSol UK, Network Solutions Group, SuperNet 34% 64%
Other International (Abraxas, NetSol PK, NetSolConnect 53% 36%
Total Revenues 100% 100%
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Fiscal Year 2000 Performance Overview
During fiscal 2000, continuing with its strategy of growth through acquisitions,
NetSol acquired four companies globally. These acquisitions were in United
States, Australia, United Kingdom and Germany. In addition, during fiscal 2000
NetSol was awarded the highest revenues from the contracts it entered into.
Global Commercial Market: Highlights
Within the global commercial market, there were several significant contracts
granted to NetSol.
Consulting-In fiscal 2000, NetSol was awarded contracts in USA with
VoiceStream, Inc. (formerly Omnipoint Technologies); ATS, Inc. In
Australia-St George Bank, GMAC Australia. In UK, The Swindon Schools Systems,
Current Drugs, Debis Portfolio Systems.
CMS - by Daimler Chrysler Financial Services ( Australia, Taiwan & Singapore)
WFS - by Chrysler Financial Taiwan
EPOS - by Daimler Chrysler Financial Services Australia
EPos for Tung Yung Leasing Company Taiwan
CTG - Outsourcing of Software Development
CFS
Outsourcing of software Development
Distribution of NetSol Lease and Finance Products (ePOS, PMS, SMS)
Additionally, NetSol continued to expand in the commercial area during fiscal
2000 through strategic acquisitions. NetSol acquired Network Solutions Group
Ltd. located in London, England which specializes in managed network services,
including design, configuration, installation, training and support &
maintenance. The business derives majority of its business from servicing the
education sector in the UK and general and with the Local Education Authorities
(LEAs). This strengthened the Company's position in a sector that is getting
considerable attention from the government to improve computer and Internet
access for government run schools. This is part of a major UK government
initiative known as the NGFL(National Grid for Learning)in England. With the
acquisition of Abraxas Software Pty. Ltd., located in Adelaide, Australia,
NetSol increased its market presence in the South Asian market. The Company also
acquired Mindsources Inc., a company organized under the laws of the State of
Virginia with a I/T consulting services specialty. The acquisition of
Mindsources was designed to achieve a presence in the east coast's growing IT
market. Virginia, Maryland and Washington, D.C. areas are influential in the
I/T, software development and consulting industries on the east coast. This
gives NetSol USA a good opportunity for marketing NetSol products and services.
The acquisition of Mindsources allowed NetSol to further develop some of the new
software applications and ultimately launch and market in the US market,
changing the name of Mindsources to NetSol
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USA. Finally, the Company acquired SuperNet AG, in Frankfurt Germany to
establish presence as an Internet Service Provider in Germany. Through SuperNet,
the Company has been able to market its offshore software development expertise
to German based companies. In February 2000, the Company formed NetSol eR, Inc.,
a Company formed under the laws of the state of Nevada ("NetSol eR"), a majority
owned subsidiary of the Company. NetSol eR will focus on the Internet aspect of
the Company.
NetSol eR was formed to create a focused business in the Internet solutions
space. This includes entering the Internet connectivity business in virgin
territories such as Pakistan. The management believes that the South East Asian
region is 5 to 7 years behind the developed world in terms of opportunities for
market leadership and profitability in the ISP business. This would be one of
the last remaining territories where a "profitable" ISP business model exists
for companies that can bring world-class technology infrastructure and a known
brand. NetSol eR leveraged this by launching its subsidiary NetSol Connect Pvt.
Ltd. which is currently the only IP backbone provider in Pakistan other than
state monopoly PTCL. This opens an array of business opportunities, being the
provider of bandwidth to multi-national companies, as well as other retail ISPs
in the country. The second area of business for NetSol eR is in building
eBusiness solutions, proprietary tools and eCommunities. This plan is further
implemented by the acquisition of SuperNet AG, Germany and the imminent launch
of NetSol eR, USA in Calabasas, California.
SuperNet has two distinct revenue streams. First is from SuperNet's
specialization in building Internet communities. They successfully deployed a
number of these communities prior to acquisition. Subsequently, a number of new
communities have gone online generating millions of page impressions per month
e.g. Superflirt.de and Supergamer.de. SuperNet is also filling a big gap in the
German market as an e-Business solution provider and integrator. As of September
2000, SuperNet has won three contracts to deploy full blown e-business solutions
for Matrix42, World online and iLAS. German market, like the US, is facing a
severe shortage of IT resources. For the first time ever it has opened
immigration for IT engineers from the Indian sub-continent i.e. Pakistan and
India. NetSol is already leveraging this opportunity and is moving a number of
its engineers from Lahore, Pakistan to support SuperNet in providing highly
sought after skills such as JAVA, EnterpriseJAVA Beans (EJB), Oracle, C++
Visual C, to the German marketplace. The acquisition of SuperNet is executing
NetSol's strategy to have presence in the e-commerce space in major regions of
Europe, the US and Asia. Our business model allows us to sell services into
these markets and benefit from the cost arbitrage that exists as a result of our
ability to sell in United States Dollars, British Pounds and German Mark and buy
in Rupees. NetSol has effectively and efficiently made entry into e-commerce
segment, which has been a strategic part of our business plan.
In March 2000, the Company entered into a Software Distribution Agreement and a
Software Development Agreement with CFS Group LTD, a company formed under the
laws of the United Kingdom. In the Software Distribution Agreement, the Company
granted CFS an exclusive right to sell certain products for 50% of the license
fee it obtains from its customers. In the Software Development Agreement, CFS
granted certain software development to NetSol. These products (PMS, ePOS, SMS,
WFS)
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are being customized as per CFS requirements for the North American market. They
are scheduled to be completed by December 2000. In the meanwhile, CFS has
already initiated marketing efforts to sell these products in the North American
market. In the Software Development Agreement, CFS granted certain software
development to NetSol. Training of NetSol developers on CFS product CLPr has
been completed and the software development is being done as per customer
requirements at Lahore. Training of NetSol developers on CFS product CLLM is
currently underway and is scheduled to be completed by October 2000, and will be
followed by Software Development at Lahore.
The Company broke ground for its Technology Campus in January 2000. The campus
is expected to house over 3,000 I/T professionals and is approximately 3 acres
in size. The campus site is located in the second largest city of Lahore in
Pakistan which has a population of 6 million. An educational and cultural
center, the city is home to several leading universities of Engineering and
Technology founded in 1961 and FAST, the largest computer research and training
institute in Pakistan. The city is also the home of The University of Punjab
founded in 1882, the oldest university in Pakistan.
The Company selected this site after careful consideration and research of the
long-term benefits of the location and return on investment. Due to the fast
growth of technology business in Pakistan, the city of Lahore is fast becoming
the Silicon Valley of Pakistan. Just recently several multi-national IT related
firms have launched their presence in Lahore. The Company is making this
investment to attract contracts and projects from blue chips customers from all
over the world. This campus will be the first purpose built software building
with state of the art technology and communications infrastructure. Initially,
the Company anticipated the completion of Phase 1 by fall 2000, but due to the
delay in financing activities the completion is expected now in the first
quarter 2001. However, the Company has already leased a second building to
accommodate the growing numbers of engineers and programmers. After the
completion of the first phase, about 600 programmers can be accommodated.
Globally, NetSol has major offices in the United States, Australia, Germany,
Pakistan and United Kingdom. The Company provides substantially the same
services to its international customers that it provides to its U.S. customers.
PEOPLE AND CULTURE
The Company has developed a strong corporate culture that is critical to its
success. Its key values are 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
Presentation and Communication skills. The majority of our software developers
are proficient in the English language as English is the second most spoken
language in Pakistan and is mandatory in middle schools and high schools.
To encourage the achievement of these values, we reward teamwork and promote
individuals who demonstrate these values. NetSol offers all of
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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.
There is significant competition for employees with the skills required to
perform the services we offer. We believe that we have been successful in our
efforts to attract and retain employees, in part because of our emphasis on our
core values, training and professional growth. We intend to continue to recruit,
hire and promote employees who share our values.
As of June 30, 2000, we had 354 full-time employees; comprised of 295 I/T
project personnel, 30 employees in general and administration and 29 employees
in sales and marketing. None of our employees are subject to a collective
bargaining agreement. We believe that we have excellent relationships with our
employees and our attrition rate for the Company is less than 10%.
COMPETITION
A single company or a small number of companies does not dominate the I/T market
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 Research Machines, Ltd.; Viglen
Computers, Ltd.; and Akhtar, Ltd.; all based in the United Kingdom. In Pakistan
our ISP business is in competition with Cybernet, SuperNet, etc. In the software
development we are now competing with some of the oldest software houses like
Systems Ltd, Techlogix, Softnet and CrestSoft. In the leasing and finance
sectors, we have global competition with Data Scan of Atlanta, Decisions
Software, Inc., Tenhill, Southpac Australia and a few others. In terms of
offshore development, we are in competition with some of the Indian companies
such as InfoSys, Satyam, Infoway and others.
Many of the competitors of NetSol have longer operating history, larger client
bases, and longer relationships with clients, greater brand or name recognition
and significantly greater financial, technical, and public relations resources
than NetSol. There are relatively low barriers to entry into the Internet
professional services market. As a result, new market entrants pose a threat to
NetSol's business. 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.
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CUSTOMERS
Some of NetSol customers include Mercedes Benz Finance - Singapore; Mercedes
Benz Leasing - Thailand; Debis Portfolio Systems, UK and Mercedes Benz Finance -
Australia. In addition, NetSol provides off shore development and customized I/T
solutions to blue chip customers such as ICI of UK, CFS Group, PLC and 1st Net
Technologies, Inc., USA. CFS with its recent merger with Decision Systems Inc
has now become the number one company in the world in the asset based lending
software business. Their customer base has grown to over 650 companies. Our
agreement would now, by default, is with the enlarged group. This opens up a
significant marketing channel for NetSol. Our agreement to perform customization
work for CFS opens the door to their customer base. We would leverage that to
offer our offshore development services for the customers' other software needs.
No customers singly account for more than 10% of total revenues.
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, perhaps the purest and most efficient
form of direct model, provides greater convenience and efficiency to customers
and, in turn, to the Company. Since its launch in April 2000 the Company was
receiving in excess of 3,473 visits per month to www.netsol-Intl.com.
Through its Web site, customers, potential customers and investors can access a
wide range of information about the Company's product offerings, can configure
and purchase systems on-line and can access volumes of support and technical
information about the Company.
OPERATIONS
The Company's headquarters are in Calabasas, California. In fiscal 2000, the
Company enhanced its internal operation at the parent level by hiring a CFO,
in-house corporate counsel and a corporate controller. In addition, the Company
engaged a new Investor Relations and Public Relations firm Cramer-Krasselt. The
Company plans on moving its headquarters to new larger premises in Calabasas,
California by the end of October 2000.
Nearly all of the production and development is conducted at NetSol PVT in
Lahore, Pakistan. The majority of the marketing is conducted through NetSol UK,
NetSol USA and Abraxas who also service and support the clients in Europe and
USA. NetSol PK services and supports the customers in the Asia Pacific and South
Asia regions.
NetSol UK's main function is to support and provide consulting services to the
UK based customers. NetSol has a staff of IT professionals and administrative
personnel to perform these services.
Our newly acquired subsidiary in Germany provides services to the local
customers for both Business-to-Business and Business to Customers. This has
given NetSol a strong platform to market and penetrate in one of the most
dynamic European markets.
NetSol USA functions as the service provider for the US based customers both in
the consulting services area as well as in the project
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management. In addition, the Virginia office provides greater access to the
emerging markets on the east coast.
RISK FACTORS
The following important factors, among others, could cause our actual
results to differ materially from those contained in forward-looking statements
made in this Annual Report on Form 10-KSB or presented elsewhere by management
from time to time.
IF WE DO NOT ATTRACT AND RETAIN QUALIFIED PROFESSIONAL STAFF, WE MAY NOT BE ABLE
TO ADEQUATELY PERFORM OUR CLIENT ENGAGEMENTS, WHICH COULD LIMIT ACCEPT OUR
ABILITY TO NEW CLIENT ENGAGEMENTS
The Company's business is labor intensive and our success depends in large part
upon our ability to attract, retain, train and motivate highly skilled
employees. Because of the rapid growth in the Information Technology sector,
there is intense competition for employees who have strategic, experience
modeling, creative design, technical and program management experience. In
addition, the Internet has created many opportunities for people with the skills
we seek to form their own companies or join startup companies and these
opportunities frequently offer the potential for significant future financial
profit through equity incentives which we cannot match. We may not be successful
in attracting a sufficient number of highly skilled employees in the future, or
in retaining, training and motivating the employees we are able to attract. Any
inability to attract, retain, train and motivate employees could impair our
ability to adequately manage and complete existing projects and to bid for or
accept new client engagements.
IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR OPERATING RESULTS WILL BE
ADVERSELY AFFECTED
Our growth has placed significant demands on our management and other
resources. Our revenues increased approximately 97% from 3.5 million (restated)
in 1999 to $7.0 million in 2000. Our staff increased from 112 full-time
employees at June 30, 1999 to 354 at June 30, 2000. Our future success will
depend on our ability to manage our growth effectively, including by:
- developing and improving our operational, financial and other internal
systems;
- integrating and managing acquired businesses, joint ventures and
strategic investments;
- training, motivating and managing our employees;
- estimating fixed-price fees and project timeframes accurately;
- maintaining high rates of employee utilization; and
- maintaining project quality and client satisfaction.
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WE HAVE SIGNIFICANT FIXED OPERATING COSTS, WHICH MAY BE DIFFICULT TO ADJUST IN
RESPONSE TO UNANTICIPATED FLUCTUATIONS IN REVENUES
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result, unanticipated
variations in the number, or progress toward completion, of our projects may
cause significant variations in operating results in any particular quarter and
could have a material adverse effect on operations for that quarter.
An unanticipated termination of a major project, a client's decision not to
proceed with a project we anticipated, or the completion during a quarter of
several major client projects could require us to maintain underutilized
employees and could therefore have a material adverse effect on our business,
financial condition and results of operations. Our revenues and earnings may
also fluctuate from quarter to quarter based on such factors as:
- the contractual terms and timing of completion of projects;
- any delays incurred in connection with projects;
- the adequacy of provisions for losses and bad debts;
- the accuracy of our estimates of resources required to complete ongoing
projects; and general economic conditions.
IF BUSINESSES DO NOT INCREASE THEIR USE OF THE INTERNET AS A MEANS FOR
CONDUCTING COMMERCE, OUR REVENUES WILL BE ADVERSELY AFFECTED
One of the sources of revenue for the Company is use of its software
on-line. The Company has spent resources to develop its software so that it will
be used via the Internet. The Company's future success depends on the increased
acceptance and use of the Internet as a means for conducting commerce. If
commerce on the Internet does not continue to grow, or grows more slowly than
expected, revenue growth would slow or decline and business, financial condition
and results of operations would be materially adversely affected. Consumers and
businesses may delay adoption of the Internet as a viable medium for commerce
for a number of reasons, including:
- inadequate network infrastructure;
- delays in the development of Internet enabling technologies and
performance improvements;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity;
- delays in the development of security and authentication technology
necessary to effect secure transmission of confidential information;
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- changes in, or insufficient availability of, telecommunications services
to support the Internet; and
- failure of companies to meet their customers' expectations in delivering
goods and services over the Internet.
INTERNATIONAL EXPANSION OF OUR BUSINESS COULD RESULT IN FINANCIAL LOSSES DUE TO
CHANGES IN FOREIGN ECONOMIC CONDITIONS OR FLUCTUATIONS IN CURRENCY AND EXCHANGE
RATES
We expect to continue to expand our international operations. We currently have
offices in the United Kingdom, Germany, Pakistan and Australia. We have limited
experience in marketing, selling and providing our services internationally.
International operations are subject to other inherent risks, including:
- recessions in foreign countries;
- fluctuations in currency exchange rates;
- the scheduled conversion to the euro by most European Union members;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property in some countries;
- political instability or changes in regulatory requirements or
overthrowing the current government in the foreign countries; and
- U.S. imposed restrictions on the import and export of technologies.
WE DEPEND HEAVILY ON A LIMITED NUMBER OF CLIENT PROJECTS AND THE LOSS OF ANY
WOULD ADVERSELY AFFECT OUR OPERATING RESULTS
We have derived, and believe that we will continue to derive, a
significant portion of our revenues from a limited number of clients for whom we
perform large projects. In 2000, our largest clients accounted for approximately
15% of our revenues. In addition, revenues from a large client may constitute a
significant portion of our total revenues in a particular quarter. The loss of
any principal client for any reason, including as a result of the acquisition of
that client by another entity, could have a material adverse effect on our
business, financial condition and results of operations.
IF WE ARE UNABLE TO ACHIEVE ANTICIPATED BENEFITS FROM ACQUISITIONS, JOINT
VENTURES AND STRATEGIC INVESTMENTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED
During the past year, we have completed four acquisitions and entered
into one alliance. The anticipated benefits from these and future acquisitions,
joint ventures and strategic investments may not be achieved. For example, when
we acquire a company, we cannot be
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certain that customers of the acquired business will continue to do business
with us or that employees of the acquired business will continue their
employment or become well integrated into our operations and culture. The
identification, consummation and integration of acquisitions, joint ventures and
strategic investments require substantial attention from management. The
diversion of the attention of management relating to these activities, as well
as any difficulties encountered in the integration process, could have an
adverse impact on our business, financial condition and results of operations.
IF ANY CLIENTS UNEXPECTEDLY TERMINATE THEIR CONTRACTS WITH US OUR BUSINESS COULD
BE ADVERSELY AFFECTED
The client with limited advance notice and without significant penalty
can cancel some of our contracts. Termination by any client of a contract for
our services could result in a loss of expected revenues and additional expenses
for staff which were allocated to that client's project. The cancellation or a
significant reduction in the scope of a large project could have a material
adverse effect on our business, financial condition and results of operations.
OUR STOCK PRICE IS VOLATILE AND MAY RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS
The trading price of our common stock could be subject to wide
fluctuations in response to:
- quarterly variations in operating results and our achievement of key
business metrics;
- changes in earnings estimates by securities analysts;
- any differences between reported results and securities analysts'
published or unpublished expectations;
- announcements of new contracts or service offerings by us or our
competitors;
- market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors; and
- general economic or stock market conditions unrelated to our operating
performance.
In the past, securities class action litigation has often been
instituted against companies following periods of volatility in the market price
of their securities. This type of litigation could result in substantial costs
and a diversion of management attention and resources.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR COMPETITIVE POSITION WILL
SUFFER
14
<PAGE>
Our markets and the technologies used in our solutions are
characterized by rapid technological change. Failure to respond in a timely and
cost-effective way to these technological developments would have a material
adverse effect on our business, financial condition and results of operations.
We expect to derive a substantial portion of our revenues from providing
software that is based upon leading technologies and that is capable of adapting
to future technologies. As a result, our success will depend on our ability to
offer services that keep pace with continuing changes in technology, evolving
industry standards and changing client preferences. We may not be successful in
addressing future developments on a timely basis. Our failure to keep pace with
the latest technological developments would have a material adverse effect on
our business, financial condition and results of operations.
WE FACE SIGNIFICANT COMPETITION IN MARKETS THAT ARE NEW AND RAPIDLY CHANGING
The markets for the services we provide are highly competitive. We
believe that we currently compete principally with strategy consulting firms,
Internet professional services firms, systems integration firms, software
developers, technology vendors and internal information systems groups. Many of
the companies that provide services in our markets have significantly greater
financial, technical and marketing resources than we do and generate greater
revenues and have greater name recognition than we do. In addition, there are
relatively low barriers to entry into our markets and we have faced, and expect
to continue to face competition from new entrants into our markets.
We believe that the principal competitive factors in our markets include:
- ability to integrate strategy, experience modeling, creative design and
technology services;
- quality of service, speed of delivery and price;
- industry knowledge;
- sophisticated project and program management capability; and
- Internet technology expertise and talent.
We believe that our ability to compete also depends in part on a number of
competitive factors outside our control, including:
- the ability of our competitors to hire, retain and motivate professional
staff;
- the development by others of Internet services or software that is
competitive with our solutions; and
- the extent of our competitors' responsiveness to client needs.
15
<PAGE>
There can be no assurance that we will be able to compete successfully in our
markets.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY SOFTWARE, OUR BUSINESS COULD BE
ADVERSELY AFFECTED
Our success depends, in part, upon our proprietary software and other
intellectual property rights. We rely upon a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect our proprietary rights. We enter into confidentiality agreements
with our employees, generally require that our consultants and clients enter
into these agreements, and limit access to and distribution of our proprietary
information. There can be no assurance that the steps we take in this regard
will be adequate to deter misappropriation of our proprietary information or
that we will be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. In addition, although we believe that
our services and products do not infringe on the intellectual property rights of
others, there can be no assurance that infringement claims will not be asserted
against us in the future, or that if asserted that any infringement claim will
be successfully defended. A successful claim against us could materially
adversely affect our business, financial condition and results of operations.
WE MAY NOT HAVE THE RIGHT TO RESELL OR REUSE SOFTWARE DEVELOPED FOR SPECIFIC
CLIENTS
A portion of our business involves the development of software for
specific client engagements. Ownership of these solutions is the subject of
negotiation and is frequently assigned to the client, although we may retain a
license for certain uses. Some clients have prohibited us from marketing the
software developed for them for specified periods of time or to specified third
parties and there can be no assurance that clients will not demand similar or
other restrictions in the future. Issues relating to the ownership of and rights
to use solutions can be complicated and there can be no assurance that disputes
will not arise that affects our ability to resell or reuse these solutions. Any
limitation on our ability to resell or reuse a solution could require us to
incur additional expenses to develop new solutions for future projects.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
Our success will depend in large part upon the continued services of a
number of key employees, including Messrs. Salim Ghauri, Najeeb Ghauri and Naeem
Ghauri. The loss of the services of either of these or of one or more of our
other key personnel could have a material adverse effect on our business,
financial condition and results of operations. In addition, if one or more of
our key employees resigns from NetSol to join a competitor or to form a
competing company, the loss of such personnel and any resulting loss of existing
or potential clients to any such competitor could have a material adverse effect
on our business, financial condition and results of operations. In the event of
the loss of any personnel, there can be no assurance that we would be able to
prevent the unauthorized disclosure or use of our technical knowledge, practices
or procedures by such personnel.
16
<PAGE>
ITEM 2 - PROPERTIES
The Company currently leases approximately 800 square feet office
facility in Calabasas, California as its headquarters. The month-to-month lease
requires monthly payments of approximately $2,300. The Company plans to move to
new headquarters with its subsidiary NetSol eR, Inc. by the latest, end of
October 2000, to new facilities in Calabasas, California. The new facilities,
which will house NetSol eR and NetSol, are approximately 4,690 rentable square
feet and the monthly rent for both NetSol eR and NetSol is $11,490.50 per month.
The term of this new lease is for seven years. The new facilities are located at
24025 Park Sorerento, Calabasas, CA. 91302.
<TABLE>
<CAPTION>
Other Leased properties as of
September 30, 2000
----------------------- Approximate Square Feet Purpose/Use
<S> <C>
Australia................1,250 Computer and General Office Facility
Germany................ 2,450 Computer and General Office Facility
Pakistan................30,000 Computer and General Office Facility
United Kingdom...........2,400 General Office
Virginia............... 1,254 General Office
</TABLE>
Upon expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Lease expiration dates range from
fiscal 2001 through 2004.
Technology Campus
The Company broke ground for its Technology Campus in January 2000. The campus
is expected to house over 3,000 I/T professionals and is approximately 3 acres
in size. The campus site is located in the second largest city of Lahore in
Pakistan which has a population of 6 million. An educational and cultural
center, the city is home to several leading universities of Engineering and
Technology founded in 1961 and FAST, the largest computer research and training
institute in Pakistan. The city can boast for The University of Punjab founded
in 1882, the oldest university in Pakistan.
NetSol selected this site after careful consideration and research of the
long-term benefits of the location and return on investment. Due to the fast
growth of technology business in Pakistan, the city of Lahore is fast becoming
the Silicon Valley of Pakistan. Just recently quite a few multi-national IT
related firms have launched their presence in Lahore. NetSol is making this
investment to ultimately attract much bigger contracts and projects from the
major and blue chips customers from all over the world. This campus will be the
first and fully dedicated software building with state of the Art technology and
communications infrastructure. Initially, NetSol anticipated the completion of
Phase 1 by fall 2000, but due to the delay in financing activities the
completion is expected now in the first quarter 2001. However, the company has
already leased a second building to
17
<PAGE>
accommodate the growing numbers of engineers and programmers. After the
completion of phase 1, about 600 programmers can be accommodated.
ITEM 3 - LEGAL PROCEEDINGS
The Company is currently party to one dispute filed by its former Chief
Financial Officer which involves litigation. The Company is currently defending
the action and believes it will win on its merits.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION. Common stock of NetSol International, Inc. is listed and
traded on NASDAQ Small Cap under the ticker symbol "NTWK."
As of September 15, 2000, the number of registered shareholders of the Company's
common stock was 143. This does not include the holders that have their shares
held in a depository trust in "street" name. As of September 30, 2000,
11,006,373 shares have been issued and outstanding.
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 calendar years and through September 30, 2000.
<TABLE>
<CAPTION>
Calendar 2000 1999
Quarter
High Low High Low
<S> <C> <C> <C> <C> <C>
1st 65 46.25 3.03 2.75
2nd 48.75 16.06 3.43 2.50
3rd 25.50 18.12 5.12 4.93
4th Not Available 18.56 8.56
</TABLE>
(c) DIVIDENDS - The Company has not paid cash dividends on its Common
Stock in the past and does not anticipate doing so in the foreseeable future.
The Company currently intends to retain future earnings, if any, to fund the
development and growth of its business.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's objective is to maximize stockholder value by executing a strategy
that focuses on a balance of three priorities: growth, profitability and
liquidity. The following discussion highlights the Company's performance in the
context of these priorities. This discussion should be read in conjunction with
the Consolidated Financial Statements, including the related notes.
18
<PAGE>
Business Combinations
THE COMPANY COMPLETED FOUR BUSINESS COMBINATIONS DURING THE YEAR ENDED JUNE 30,
2000. THESE ARE LISTED BELOW IN CHRONOLOGICAL ORDER.
ACQUISITION OF 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, USA based company, through the issuance of 250,000 shares of Rule 144
restricted common shares (two year restriction placed on these 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
Accounting Principles Bulletin No. 16 ("APB 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 net assets of $900,000. The Company allocated
the purchase price to customer lists acquired, and this amount is being
amortized straight line over 15 years from the date of acquisition. The
excess of the purchase price over the estimated fair values of the net assets
acquired, approximately $360,000, was recorded as goodwill, and is being
amortized straight line over the estimated useful life of 15 years from the
date of acquisition.
ACQUISITION OF NETWORK SOLUTIONS LIMITED
On August 18, 1999, the Company acquired 100% of the outstanding capital
stock of Network Solutions Group Limited and Subsidiaries, a United Kingdom
Company, through the issuance of 155,000 shares of Rule 144 restricted common
shares of the Company for an aggregate purchase price of approximately
$940,000. This acquisition was accounted for using the purchase method of
accounting under APB 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 the negative net book
value of $700,000. The management of the Company allocated approximately
$600,000 to customer list, which is being amortized straight line over 15
years 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 is being amortized straight line over the
estimated useful life of 15 years from the date of acquisition.
ACQUISITION OF ABRAXAS AUSTRALIA PTY, LIMITED
On January 3, 2000, the Company issued 150,000 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 16, and
accordingly, the audited financial statements have been restated to show the
results of operations as if the combination had occurred at the beginning of all
periods presented. Selected financial information of the combining entities
under the pooling of interest method of Business Combination is presented below.
ACQUISITION OF SUPERNET AG
On May 2, 2000, the Company issued 425,600 Rule 144 restricted common shares in
exchange for 100% of the outstanding capital stock of SuperNet AG, a German
Company. This business combination was accounted for using the pooling of
interest method of accounting under APB 16, and
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<PAGE>
accordingly, the audited financial statements have been restated to show the
results of operations as if the combination had occurred at the beginning of
all periods presented. Selected financial information of the combining
entities under the pooling of interest method of Business Combination is
presented below.
Due to the pooling of interest method of accounting for the acquisitions of
Abraxas and SuperNet AG, the consolidated financial statements are restated to
show the effects of the acquired business as if they were acquired at the
beginning of the earliest period presented in the current audited financial
statements. Thus, the consolidated income statement for the year ended June 30,
1999 has been appropriately restated as is presented here to allow for a
meaningful comparative discussion of results of operations for the years ended
June 30, 2000 to June 30, 1999.
RESTATEMENT OF CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
SUPERNET AG ABRAXAS NETSOL INTERNATIONAL TOTAL CONSOLIDATED
& RESTATED
<S> <C> <C> <C> <C>
Net Revenue $24,100 $519,714 $3,002,107 $3,545,921
Operating Expenses $220,829 $259,134 $2,872,953 $3,352,907
Net income (loss) $(286,106) $48,561 $(1,756,234) $(1,993,770)
Before extraordinary Item
Extraordinary item-gain - - $129,500 $129,500
on
Extinguishments of debt
Net income (loss) $(286,106) $48,561 $(1,626,734) $(1,864,279)
Net loss per share-basic $(0.44) $(0.43)
and diluted
</TABLE>
20
<PAGE>
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2000 COMPARED TO THE YEAR ENDED JUNE 30, 1999
Net revenues for the year ended June 30, 2000 were 6,984,539 compared to
3,545,921 (restated) for the year ended June 30, 1999. This amounts to an
increase of approximately 97% from the prior year after the restatement, or
approximately 132% before restatement of the prior year due to pooling of
interest accounting treatment as discussed above. Net revenues is broken out
among the subsidiaries as follows:
<TABLE>
<CAPTION>
2000 1999 (restated)
<S> <C> <C>
NetSol UK/Network Solutions $2,106,041 $2,236,219
Group
NetSol PK $3,325,478 $765,888
Abraxas $ 355,693 $519,714
SuperNet AG $ 309,389 $24,100
MindSource, Inc. $ 887,938 $ n/a
Total Net Revenues $6,984,539 $3,545,921
</TABLE>
The Company experienced a significant revenue increase from the prior year for
NetSol PK. This was attributable to several factors. NetSol PK was awarded
several new projects for the fiscal year 2000 relating to lease and finance
applications from various new and repeat customers, as compared to the prior
year where revenues were generated more from consulting services. NetSol PK also
added CFS, First Net Technologies and some local industries in Pakistan as new
customers. Due to the maturity of the lease and finance products, The Company is
positioning itself to market these licenses to the North American and other
global markets. The Company anticipates the growth pattern for NetSol PK to
continue to grow steadily in the coming fiscal year due to product maturity and
market demand with several existing customers, among them CFS, Daimler-Chrysler
and other leasing and finance companies. NetSol PK anticipates benefiting from
the September 2000 acquisition made by CFS of Decision Systems, Inc. by having a
larger customer base and marketing resources. The Company experienced a downturn
in its consulting revenues in the UK markets in fiscal 2000 compared to fiscal
1999. The acquisition of Network Solutions Group in Fiscal 2000 (terms of the
acquisition discussed above) caused the Company to experience integration
challenges such as employee retention, which affected the business adversely.
The downturn in consulting revenues was largely attributable to a decrease in
network services caused by a slowdown in new orders a result of the
well-publicized Y2K problem. Management has now streamlined the operations group
by hiring new key employees and reducing overhead expenses significantly. This
strategy will assist the UK operations in obtaining higher revenues and improved
operating results. Through a strategic acquisition of Abraxas Australia, the
Company wanted to provide products and services to existing and potential new
customers in Australia. Abraxas experienced a downturn in revenues in fiscal
2000 from fiscal 1999 due largely to delays by customers caused by Y2K related
problems. Abraxas has key software products, which are being developed in NetSol
PK development facility, which will be marketed in Australia as well as other
markets. These products are targeted towards the banking, insurance and leasing
and finance industries. Management believes that the prospects for the future of
Abraxas are to have steady sales growth because of an enhanced product line and
by expanding its customer base. Another strategic acquisition was the
acquisition of Mindsources, Inc. by NetSol USA, a wholly owned subsidiary of the
Company, for the purpose of launching the Company's presence in North America.
The Company is aligning itself to seize the opportunities in the growing IT
consulting and services industry along the East coast of North America.
Outsourcing IT professionals at competitive prices is the primary generator of
Mindsources revenues. Since the acquisition in August 1999, Mindsources
generated revenues of $887,938. The Company believes that a steady, yet strong
sales growth is for fiscal 2001 is reasonable based upon new business generated
since year end and the ability to further penetrate the IT market.
21
<PAGE>
Gross profit improved to 48.7% of revenues in fiscal 2000, compared to 42.9% in
fiscal 1999 (restated due to pooling of interest accounting). The improvement is
largely based upon the growth of revenues in NetSol PK as NetSol PK contributes
a strong gross profit percentage to the overall consolidated financial
statements. 1999 margins were also strong and the Company was working on
increasing its revenue volume in fiscal 2000 to capitalize on the strong
contributions made by not only NetSol PK, but also the other subsidiaries.
Operating expenses were $7,292,993 for the year ended June 30, 2000 as
compared to $3,352,907 (restated from $2,872,953 per table above due to
pooling of interest accounting) for the year ended June 30, 1999. During the
years ended June 30, 2000 and 1999, the Company issued 252,500 and 235,000
restricted Rule 144 common shares in exchange for services rendered,
respectively. The Company recorded this non-cash compensation expense of
$1,017,575 and $710,866 for the years ended June 30, 2000 and 1999,
respectively. During the years ended June 30, 2000 and 1999, the Company
recorded depreciation and amortization expense of $1,408,873 and $359,814 for
the years ended June 30, 2000 and 1999, respectively. The increase in the
current fiscal year is attributable to the amortization of goodwill and other
intangible assets for a full twelve months, as opposed to approximately 3
months in the prior fiscal year. Operating expenses have also increased as a
result of higher salaries and related costs primarily due to additional staff
at all levels of the Company. Operating results for both fiscal 2000 and 1999
were impacted as the Company applied pooling of interest accounting rules to
two of its four acquisitions - Abraxas in Australia and SuperNet AG of
Germany. Its consolidated statement of operations includes the operations of
both Abraxas and SuperNet AG for both years ended June 30, 2000 and June 30,
1999. This resulted in the inclusion of net revenues of $665,082 and
$543,814, and operating expenses of $782,961 and $479,954 for the years ended
June 30, 2000 and June 30, 1999, respectively. The Company also incurred
acquisition costs directly related to these two acquisitions of $155,750 that
is appropriately included in current year operating expenses.
Net loss was $3,401,076 for the year ended June 30, 2000 as compared to
$1,864,279 (restated) for the year ended June 30, 1999. This resulted in a loss
per share, basic and diluted, of $0.35 for fiscal 2000 as compared with $0.43
(restated) for fiscal 1999.
The Company's cash position was $4,731,046 at June 30, 2000. This is presented
on the audited financial statements as $2,981,046 as cash and cash equivalents,
and a total $1,750,000 as certificates of deposit, of which $750,000 is included
in other assets.
During the second and third quarters of the year ending June 30, 2000, a
principal stockholder, purchased and sold shares of the Company's common
stock on the public market within the same six month period in connection
with Section 16(b) of the Securities and Exchange Act of 1934. The Short
Swing Profits of $1,427,145 arising from the sale of these shares of common
stock were recovered by the Company in June 2000 and are presented as a
contribution to additional paid in capital in the statement of stockholders'
equity in the audited financial statements.
22
<PAGE>
Income Taxes
Deferred income taxes are reported using the liability method. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets generated by the Company
or any of its subsidiaries are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment. Deferred tax assets resulting for the net operating
losses are reduced in full by a valuation allowance.
Liquidity And Capital Resources
At June 30, 2000, the Company's working capital (Current assets less current
liabilities) totaled $4.73 million, an increase of $5.09 million since June 30,
1999 (June 30, 1999 restated for pooling of interest accounting as discussed
previously and in footnotes to audited financial statements). The Company
utilizes working capital to fund both existing operations, for anticipated
capital expenditures and further development of new business. At June 30, 2000,
due to its strong cash position, the Company has elected to not set up a
revolving credit facility, but is evaluating various financing activities which
will enable the Company to execute it business plan and meet its capital demands
in the coming year. The Company's principle capital requirements have been to
fund acquisitions, working capital, and capital expenditures. The Company does
not believe that the nature of their software sales contracts will have a
negative material impact upon its liquidity. In the opinion of management, the
Company currently has sufficient funds and adequate financial sources available
to provide it with liquidity to meet its current foreseeable cash needs for at
least the next year. Management believes that its anticipated cash flows from
financing and investing activities, existing cash balances and any newly sought
after borrowings and private raises, will be sufficient for the foreseeable
future to finance anticipated working capital requirements and 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.
Year 2000
As previously reported in the Company's fiscal 1999 10-KSB, the Company did not
experience any significant problems caused by year 2000 issues related to the
Company's internal systems, contractual obligations to customers or
non-performance of suppliers in December 1999 and
23
<PAGE>
continuing on to the year 2000. Based on currently available information, the
Company does not expect any future year 2000 issues.
Euro Introduction
On January 1, 1999 the euro currency was introduced in 11 of the 15 member
countries in the European Union. Although euro notes and coins will not be
available until the latter part of the transition period in 2002, the euro is
traded on the currency exchanges and is available for non-cash transactions.
The Company was ready by January 1, 1999 to deal with any customer or supplier
who wished to transact in euros and all European intercompany transactions since
January 1,1999 have been invoiced and settled in euros in the participating
countries. The Company's European operations has completed the development of
the infrastructure that provides all the internal systems functionality required
to deal with the euro during the transition period and thereafter. The
transition period lasts until July 2002 when the national currencies will no
longer be legal tender. The incremental system cost to NetSol of introducing the
euro will not be material.
As of June 30, 2000, the transition to the euro has not resulted in any material
adverse impact on NetSol's financial position or results of operations. All of
the contracts NetSol enters into are either in U.S. dollars or pound sterling.
NetSol does not believe or expect the conversion to have a material impact on
its overall financial position or results of operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires all derivatives to be recorded on the balance sheet at fair
value and establishes accounting standards for hedging activities. In June 1999,
the FASB issued SFAS No. 137, which amended SFAS No. 133 by deferring its
effective date by one year to fiscal years beginning after June 15, 2000. The
Company anticipates that due to its limited use of derivative instruments, if
any, the adoption of SFAS No. 133 will not have a material impact on its
consolidated financial position or results of operations.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires the
capitalization of internal use computer software costs provided that certain
criteria are met. These capitalized software costs will be amortized on a
straight-line basis over the useful life of the software. The adoption of this
statement had no material impact on the company's consolidated financial
position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. In March 2000, the
SEC issued SAB 101A "Amendment:
24
<PAGE>
Revenue Recognition in Financial Statement" which delays implementation of SAB
101. In June 2000, the SEC issued SAB 101B "Second Amendment: Revenue
Recognition in Financial Statements," which also delays the implementation of
SAB 101.. NetSol will adopt SAB 101, 101A and 101B and is currently in the
process of evaluating the impact, if any, of these on its consolidated financial
position or results of operations. In March 2000, the FASB issued Interpretation
No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB 25. This Interpretations clarifies (a)
the definition of employee for purposes of applying Opinion 25, (b) the criteria
for determining whether a plan qualifies as a no compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option of award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. This Interpretation is effective
July 1, 2000, but certain conclusions of the Interpretation cover specific
events that occur after December 15, 1998, or January 12, 2000. To the extent
that this Interpretation covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before, the effective date of July
1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000.
Forward-Looking Statements
All statements contained in this annual report, or in any document filed by
the Company with the Securities and Exchange Commission, or in any press release
or other written or oral communication by or on behalf of the Company, that do
not directly and exclusively relate to historical facts constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements represent the Company's
expectations and beliefs, and no assurance can be given that the results
described in such statements will be achieved.
These statements are subject to risks, uncertainties and other factors, many
of which are outside of the Company's control that could cause actual results to
differ materially from the results described in such statements. These Factors
include, without limitation, the following: (i) competitive pressures; ii) the
Company's ability to consummate strategic acquisitions and alliances;(iii) the
Company's ability to attract and retain key personnel; (iv) changes in the
demand for information technology outsourcing and business process outsourcing;
(v) changes in U.S. federal government spending levels for information
technology services; (vi) the Company's ability to continue to develop and
expand its service offerings to address emerging business demands and
technological trends; (vii) changes in the financial condition of the Company's
commercial customers; (viii) the future profitability of the Company's customer
contracts, and (ix) general economic conditions and fluctuations in currency
exchange rates in countries in which we do business.
25
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rates
The Company has minimal fixed-rate long-term debt obligations, short-term
commercial paper and other borrowings subject to market risk from changes in
interest rates. Sensitivity analysis is one technique used to measure the impact
of changes in interest rates on the value of market-risk sensitive financial
instruments. A hypothetical 10% movement in interest rates would not have a
material impact on the Company's future earnings or cash flows Foreign Currency
During the ordinary course of business, the Company enters into certain
contracts denominated in foreign currency (Pound Sterling). Potential foreign
currency exposures arising from these contracts are analyzed during the contract
bidding process. The Company generally manages these transactions by ensuring
costs to service contracts are incurred in the same currency in which revenue is
received. Short-term contract financing requirements are met by borrowing in the
same currency. By matching revenues, costs and borrowings to the same currency,
the Company has been able to substantially mitigate foreign currency risk to
earnings. If necessary, the Company may also use foreign currency forward
contracts or options to hedge exposures arising from these transactions. The
Company does not foresee changing its foreign currency exposure management
strategy.
The accounts of Network Solutions Group Ltd. and NetSol UK, Limited use the
British Pounds, Network Solutions PK, Ltd. and NetSol Connect PVT, Ltd. use
Pakistan Rupees, NetSol Abraxas Australia Pty, Ltd. uses the Australian dollar,
Supernet AG uses the German Mark, NetSol International, Inc. NetSol USA, Inc.
and NetSol eR, Inc. use the U.S. dollars as their functional currencies.
Exchange gains and losses that result from translating functional currency
amounts into reporting currency amounts (US dollars) are reported as other
comprehensive income. 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. A foreign currency translation gain of
$22,847 at June 30, 2000 (not material at June 30, 1999) is classified as other
comprehensive income in the stockholders' equity section of the consolidated
balance sheet.
PART II - OTHER INFORMATION
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 7 are
included at the end of this report beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current
directors and executive officers of the Company, the principal offices and
positions with the Company held by each person and the date such person became a
director or executive officer of the Company. The Board of Directors elects the
executive officers of the Company annually. Each year the stockholders elect the
board of directors. The executive officers serve terms of one year or until
their death, resignation or removal by the Board of Directors. In addition,
there was no arrangement or understanding between any executive officer and any
other person pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Year First Term as Officer Positions Held with Family Relationship
Elected The Registrant
As An Officer
<S> <C> <C> <C> <C> <C>
Salim Ghauri* 45 1999 Indefinite Chief Executive Brother to Naeem
Officer And Najeeb Ghauri
Najeeb Ghauri* 46 1997 Indefinite President Brother to Naeem and
Salim Ghauri
Naeem Ghauri* 43 1999 Indefinite Chief Operating Brother to Najeeb and
Officer Salim Ghauri
Aiesha Ghauri 33 1999 Indefinite Secretary Wife to Najeeb Ghauri
Syed Husain 45 2000 Indefinite Chief Financial None
Officer
</TABLE>
--------
* Director of the Company
Business Experience of Officers
SALIM GHAURI is the Chief Executive Officer and Director of the Company
since 1998. Mr. Ghauri is also the CEO of Network Solutions (Pvt.) Ltd. a wholly
owned subsidiary of the Company located in Lahore, Pakistan. Before starting
that Company, Mr. Ghauri was employed with BHP in Sydney, Australia from
1987-1995 where he commenced his employment as a consultant and was promoted to
senior project manager. Mr. Ghauri received his Bachelor of Science degree in
computer science from University of Punjab in Lahore, Pakistan, in 1980.
NAJEEB U. GHAURI is the President and Director of the Company since
1997. Mr. Ghauri is responsible for the managing the day-to-day operations of
the Company, as well as the Company's overall growth and expansion plan. Prior
to joining the Company, Mr. Ghauri was part of the marketing team of Atlantic
Richfield Company ("ARCO"), a Fortune
27
<PAGE>
500 company, from 1987-1997. Mr. Ghauri received his Bachelor of Science degree
in Management/Economics from Eastern Illinois University in 1979, and his M.B.A.
in Marketing Management from Claremont Graduate School in California in 1983.
NAEEM GHAURI is the Chief Operations Officer and Director of the
Company since 1999. Mr. Ghauri is also the managing Director of NetSol UK Ltd.,
a wholly owned subsidiary of the Company located in Milton Keyes, England. Prior
to joining the NetSol team, Mr. Ghauri was Project Director for Mercedes-Benz
Finance Ltd., a subsidiary of Daimler-Chrysler, Germany from 1994-1999. Mr.
Ghauri supervised over 200 project managers, software developers, analysts and
users in nine European countries. Mr. Ghauri has his B.S. in computer science
from Brighton University, United Kingdom, and a diploma in programming and
maintenance from Computer Learning Center in Los Angeles, California.
AIESHA GHAURI is the Secretary of the Company since 1999. NetSol has
employed Ms. Ghauri over 2 years as corporate secretary. Her combined experience
includes retail banking, retail and corporate loans, IPOs and SEC corporate
administration with Manhattan West, Inc. As the Corporate secretary, Ms. Ghauri
is responsible for all corporate and administrative matters and works closely
with legal advisors, auditors and corporate bankers and company board and
management.
SYED HUSAIN is the Chief Financial Officer of the Company since April
2000. Mr. Husain joins NetSol International from General Electric where he was
Consultant Program Director of Global Financial Risk Management. He was
responsible for the delivery of financial, operational and risk management
services to global investment banks. Prior to joining General Electric, Mr.
Husain managed global implementations of the financial, operational and
reporting processes as well as corporate, treasury and investment banking
systems at Andersen Consulting. Mr. Husain is responsible for all aspects of
financial management, controls, investment banking relationships and compliance
of all regulatory filings and requirements. Mr. Husain has a B.S from The
University of Punjab, Pakistan and has attended many advanced level business
related courses with GE and Anderson Consulting in the USA and Europe.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
The following disclosure is based solely upon a review of the Forms 3
and 5 and any amendments thereto furnished to the Company during the Company's
fiscal year ended June 30, 2000. Based on this review, no individuals who were
directors, officers and beneficial owners of more than 10% of the Company's
outstanding Common Stock during such fiscal year filed late reports on Forms 3
and 5.
28
<PAGE>
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 two fiscal years
by the Officers of the Company. The following information for the Officers and
Directors include the dollar value of base salaries, bonus awards, the number of
stock options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and Principal position Year Ended Annual Bonus Awards Restricted Underlying Options (4)
Compensation(1) Stock Securities (3)
<S> <C> <C> <C> <C> <C>
Najeeb U. Ghauri, 2000 $100,000 -0- 735,000(14) 20,000(8)
President, Director 1999 100,000 -0- 705,000 100,000(9)
150,000(5)
150,000(5)
Naeem Ghauri, Chief Operations 2000 $150,000 -0- 1,376,416 20,000(8)
Officer, Director 1999 150,000 $30,000 (11) 1,157,666 150,000(5)
150,000 (5)
Salim Ghauri, 2000 $100,000 -0- 1,386,416 20,000 (8)
Chief Executive Officer, Director 1999 100,000 -0- 1,170,666 150,000 (5)
150,000 (5)
Aiesha Ghauri, Secretary 2000 $24,000 -0- -0- 10,000 (16)
1999 N/A N/A N/A N/A
Syed Husain, Chief Financial 2000 $100,000 -0- -0- 50,000 (12)
Officer 1999 N/A N/A N/A N/A
Shahab Ghauri, Director 2000 -0- -0- 1,236,416 20,000(8)
1999 -0- -0- 1,301,666 20,000 (10)
Irfan Mustafa, Director 2000 -0- -0- 140,000 20,000(8)
1999 -0- -0- 120,000 20,000 (7)
45,000 (6)
Waheed Akbar, Director 2000 -0- -0- -0- 20,000 (8)
1999 N/A N/A
Cary Burch, Director 2000 -0- -0- -0- 20,000 (8)
1999 N/A N/A
All Officers and Directors as a 2000 $474,000 -0- 4,377,998 170,000(8)
Group (9 Persons) 1999 450,000 30,000 4,454,998 1,185,000
</TABLE>
----------
(1) No officers received or will receive any bonus or other annual compensation
other than salaries during fiscal 2000. The table does not include any amounts
for personal benefits extended to officers of the Company, such as the cost of
automobiles, life insurance and supplemental medical insurance,
29
<PAGE>
because the specific dollar amounts of such personal benefits, if any, cannot be
ascertained.
(2) No officers received or will receive any long-term incentive plan (LTIP)
payouts or other payouts during fiscal 1999.
(3) All stock awards are shares of Common Stock of the Company.
(4) All securities underlying options are shares of Common Stock of the Company.
(5) Includes 150,000 options granted under the Employment Contract between the
Company and Employee at an exercise price of $2.50 vesting in April 2000;
additional 150,000 options granted under the Employment Contract between the
Company and Employee at an exercise price of $3.50. The later 150,000 options
have not vested, they will vest in April 2001. All underlying shares are
restricted under Rule 144.
(6) Includes 20,000 options granted to each Director for the term 1998-1999 at
an exercise price of $1.44 for five years from May 18, 1999; includes 25,000
options granted as Chairman of the Board at an exercise price of $1.44 for five
years from May 18, 1999;
(7) Includes 20,000 options granted to each Director for the term 1998-1999 at
an exercise price of $1.44 for five years from May 18, 1999.
(8) Includes 20,000 Options granted to each Director of the Company for the
1999-2000 term at an exercise price of $5.00 to vest at the end of the term.
Options are for a five-year term from September 1999.
(9) Includes 100,000 options granted to Najeeb Ghauri as the officer of the
Company in February 2000 with an exercise price of $19.00 per share. The options
vested immediately and the underlying shares are for Rule 144 shares. The
options have a term of five years from date of grant.
(10) Includes 20,000 Options granted to Officers of NetSol UK in August 1999, at
an exercise price of $5.00 to vest one year from the date of grant. Options are
for a term of five years from August 1999.
(11) Naeem Ghauri received a signing bonus upon the execution of his employment
agreement dated April, 17, 1999.
(12) Includes 50,000 Options granted to Mr. Husain as part of his compensation
with an exercise price of $21 to vest at the end of one year from May, 2000.
Options are for a term of five years from May 2000.
(13) The Company entered into an Agreement with Mr. Mustafa whereby he would
advise the Company on marketing strategies, develop investor relations and
develop strategic alliances. In addition, Mr. Mustafa is to assist the board
of directors on mergers, acquisitions and other business combinations.
30
<PAGE>
the date of grant which is September 1999. All underlying shares are restricted
under Rule 144.
(14) Mr. Ghauri pledged 448,750 of his shares as collateral to obtain a margin
loan. The financial institution provided the loan under the condition that the
stock price not fall below $20 per share. Should it falls below $20, then the
financial institution would force sale of the shares to recover the loan amount.
Due to a decline in NetSol's stock price, the financial institution demanded the
entire loan be paid back. Mr. Ghauri returned majority portion of the loan;
however, between September 15 and September 30, 2000, the financial institution
sold 72,900 shares to cover the loan.
(15) Dr. Akbar participated in a Private Placement in August 1999 underwritten
by the Company and obtained such shares in that offering.
(16) Ms. Ghauri was given 10,000 options under the Company's Stock Option Plan
granted in May 2000 with an exercise price of $20.00. The options are for a term
of five years from May 2000.
EMPLOYMENT AGREEMENTS
On April 17, 1999, Messrs. Najeeb Ghauri, Salim Ghauri and Naeem Ghauri
each executed employment agreements with the Company for a term of three (3)
years.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any cash compensation, but
are entitled to reimbursement of their reasonable expenses incurred in
attending Directors' Meetings. In addition, the Company has granted to each
of its seven directors 20,000 options to purchase common stock of the Company
under the Company's Incentive and Nonstatutory Stock Option Plan. The options
vest at the end of the director's term in November 2000, with an exercise
price of $5.00. These options were granted in September 1999.
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 30, 2000, by (i) each person who
is known to the Company to own beneficially more than 10% of the outstanding
Common Stock with the address of each such person, (ii) each of the Company's
directors and officers, and (iii) all officers and directors as a group:
<TABLE>
<CAPTION>
---------------------------- ------------- ------------------------
Percentage
Number of Beneficially
Name Shares(1) owned
---------------------------- ------------- ------------------------
<S> <C> <C>
Najeeb Ghauri 735,000 6.7%
---------------------------- ------------- ------------------------
Naeem Ghauri 1,376,416 12.5%
---------------------------- ------------- ------------------------
31
<PAGE>
Irfan Mustafa 140,000 1.3%
---------------------------- ------------- ------------------------
Salim Ghauri 1,386,416 12.6%
---------------------------- ------------- ------------------------
Aiesha Ghauri -0- *
---------------------------- ------------- ------------------------
Syed Husain -0- *
---------------------------- ------------- ------------------------
Shahab Ghauri 1,236,416 11.2%
---------------------------- ------------- ------------------------
Cary Burch -0- *
---------------------------- ------------- ------------------------
Waheed Akbar 35,000 *
---------------------------- ------------- ------------------------
Blue Water Master Fund LP(2) 2,115,900 19.22%
---------------------------- ------------- ------------------------
All officers and directors
as a group (9 persons) 4,909,248 44.6%
---------------------------- ------------- ------------------------
</TABLE>
----------
* Less than one percent or Zero
(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) Blue Water Master Fund LP reported its holdings on Schedule 13D/A as
filed with the Securities and Exchange Commission on April 27, 2000.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In September 1999, the Company entered into a Consulting Contract with one
of the directors of the Company, Irfan Mustafa, for Mr. Mustafa to develop and
advise the Company on marketing strategies, develop investor relations and
develop strategic alliances. In addition, Mr. Mustafa is to assist the board of
directors in mergers, acquisitions and other business combinations. The
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.
32
<PAGE>
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM
Exhibits
3.1 Articles of Incorporation of Mirage Holdings, Inc., a Nevada
corporation, dated March 18, 1997(1)
3.2 Bylaws of Mirage Holdings, Inc., dated March 18, 1997(1)
3.3 Amendment to Articles of Incorporation dated May 21, 1999 (2)
10.1 Lease Agreement for Calabasas executive offices
10.2 Company Stock Option Plan dated May 18, 1999 (2)
10.3 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Najeeb U. Ghauri (2)
10.4 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Salim Ghauri (2)
10.5 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Naeem Ghauri (2)
10.6 Consulting Contract between Irfan Mustafa and NetSol International,
Inc.
21.1 A list of all subsidiaries of the Company
27 Financial Data Schedule
---------------------
(1) Incorporated by reference to Registration Statement No. 333-28861 on
Form SB-2.
(2) Incorporated by reference to 10K-SB filed September 28, 1999.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NetSol International, Inc.
Date: October 12, 2000 BY:/S/ NAJEEB U. GHAURI
------------------------ --------------------------------
Najeeb U. Ghauri
President
Date: October 12, 2000 BY:/S/ Syed Husain
------------------------ --------------------------------
Syed Husain
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: October 12, 2000 BY:/S/ NAJEEB U. GHAURI
---------------------- ---------------------------------
Najeeb U. Ghauri
President and Director
Date: October 12, 2000 BY:/S/ SALIM GHAURI
-------------------------- ---------------------------------
Salim Ghauri
Chief Executive Officer,
Director
Date: October 12, 2000 BY:/S/ NAEEM GHAURI
-------------------------- ---------------------------------
Naeem Ghauri
Chief Operating Officer,
Director
Date: October 12, 2000 BY:/S/ SYED HUSAIN
-------------------------- ---------------------------------
Syed Husain
Chief Financial Officer
34
<PAGE>
Date: October 12, 2000 BY:/S/ AIESHA GHAURI
-------------------------- ---------------------------------
Aiesha Ghauri
Secretary
Date: October 12, 2000 BY:/S/ SHAHAB GHAURI
-------------------------- --------------------------------
Shahab Ghauri
Director
Date: October 12, 2000 BY:/S/ IRFAN MUSTAFA
-------------------------- --------------------------------
Irfan Mustafa
Director
Date: October 12, 2000 BY:/S/ NAEEM GHAURI
-------------------------- --------------------------------
Naeem Ghauri
Chief Operating Officer
Date: October 12, 2000 BY:/S/ WAHEED AKBAR
-------------------------- --------------------------------
Naeem Ghauri
Director
Date: October 12, 2000 BY:/S/ CARY BURCH
-------------------------- -------------------------------
Cary Burch
Director
35
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
(FORMERLY MIRAGE HOLDINGS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000 AND 1999
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statement of Stockholders' Equity 4-5
Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-23
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Netsol International, Inc. and subsidiaries (formerly
Mirage Holdings, Inc.)
Calabasas, California
We have audited the accompanying consolidated balance sheet of Netsol
International, Inc. and subsidiaries (formerly Mirage Holdings, Inc.) as of June
30, 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended June 30, 2000 and 1999. 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 audit. We did not audit the financial statements of
Network Solutions PVT, Ltd., Netsol UK, Limited, Network Solutions Group and
Subsidiaries, Netsol-Abraxas Australia Pty Ltd. and Netsol Connect PVT, Ltd.,
wholly owned subsidiaries, whose statements reflect combined total assets of
$7,100,000 as of June 30, 2000 and combined total net revenues of $6,096,000 and
$3,546,000 for the two years then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Network Solutions PVT, Ltd., Netsol UK,
Limited, Network Solutions Group and Subsidiaries, Netsol-Abraxas Australia Pty
Ltd. and Netsol Connect PVT, Ltd., is based solely on the report of the other
auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Netsol International,
Inc. and subsidiaries as of June 30, 2000, and the results of its consolidated
operations and its cash flows for the years ended June 30, 2000 and 1999 in
conformity with generally accepted accounting principles.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
September 26, 2000
1
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - JUNE 30, 2000
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,981,046
Certificates of deposit 1,000,000
Accounts receivable 2,768,036
Other current assets 229,414
------------
Total current assets $ 6,978,496
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 2,490,151
OTHER ASSETS 1,727,601
INTANGIBLES:
Product licenses, renewals, enhancements,
copyrights, trademarks and tradenames, net 4,664,889
Customer lists, net 2,502,272
Goodwill, net 6,857,760
------------
Total intangibles 14,024,921
------------
$ 25,221,169
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,072,976
Current maturities of obligations under capitalized leases 101,604
Loan payable 75,000
------------
Total current liabilities $ 2,249,580
DEFERRED TAX LIABILITY 2,850,000
OBLIGATIONS UNDER CAPITALIZED LEASES,
less current maturities 215,818
8% CONVERTIBLE NOTE PAYABLE 100,000
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 25,000,000 shares
authorized, 10,892,124 shares issued and outstanding 10,892
Additional paid-in capital 26,059,625
Stock subscriptions receivable (68,650)
Other comprehensive income 22,847
Accumulated deficit (6,218,943)
------------
Total stockholders' equity 19,805,771
------------
$ 25,221,169
============
</TABLE>
See accompanying independent auditors' report and notes to consolidated
financial statements.
2
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended
June 30, 2000 June 30, 1999 *
------------- -------------
<S> <C> <C>
NET REVENUES $ 6,984,539 $ 3,545,921
COST OF REVENUES 3,583,693 2,024,256
----------- -----------
GROSS PROFIT 3,400,846 1,521,665
OPERATING EXPENSES 7,292,993 3,352,907
OTHER INCOME 241,071 143,079
----------- -----------
NET LOSS BEFORE INCOME ALLOCATED TO
MINORITY INTEREST (3,651,076) (1,688,163)
MINORITY INTEREST IN SUBSIDIARIES' EARNINGS -- (305,616)
----------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM AND
INCOME TAXES (3,651,076) (1,993,779)
INCOME TAX BENEFIT - DEFERRED (250,000) --
----------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM (3,401,076) (1,993,779)
GAIN ON FORGIVENESS OF DEBT, net of tax -- 129,500
----------- -----------
NET LOSS $(3,401,076) $(1,864,279)
=========== ===========
NET LOSS PER SHARE -
basic and diluted $ (0.35) $ (0.43)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING -
basic and diluted 9,666,115 4,309,206
=========== ===========
</TABLE>
* Restated for business combinations accounted for under the Pooling of
Interest method (see Note 12).
See accompanying independent auditors' report and notes to consolidated
financial statements.
3
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Additional Stock Other Total
Common stock paid-in subscriptions comprehensive Accumulated stockholders'
Shares Amount Capital receivable income deficit equity
------ ------ ------- ---------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1998 * 2,349,665 $ 2,350 $ 2,173,078 $ -- $ -- $ (953,588) $ 1,221,840
Common stock and warrants sold
through initial public offering, net 251,000 251 987,733 987,984
Issuance of common stock in
exchange for services rendered 235,000 235 710,631 710,866
Common stock options granted
for services 199,844 199,844
Exercise of common stock options 105,000 105 945 1,050
Sale of common stock warrants 5,667 5,667
Exercise of warrants to convert to
common stock 397,000 397 294,952 295,349
Issuance of common stock relating
to acquisition of subsidiaries 4,690,000 4,690 9,658,810 9,663,500
Net loss for the year ended
June 30, 1999 * (1,864,279) (1,864,279)
---------- ------- ----------- ----------- --------- ----------- -----------
Balance at June 30, 1999 8,027,665 8,028 14,031,660 -- -- (2,817,867) 11,221,821
---------- ------- ----------- ----------- --------- ----------- -----------
</TABLE>
* Restated for business combinations accounted for under the Pooling of
Interest method (see Note 12).
(Continued)
See accompanying independent auditors' report and notes to consolidated
financial statements.
4
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Additional Stock Other Total
Common stock paid-in subscriptions comprehensive Accumulated stockholders'
Shares Amount Capital receivable income deficit equity
------ ------ ------- ---------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock sold through private
placement 633,366 633 1,578,028 (25,000) 1,553,661
Conversion of debt and offering
costs 47,693 48 249,952 250,000
Issuance of common stock in
exchange for services rendered 252,500 252 1,017,323 1,017,575
Exercise of common stock options 620,000 620 867,730 (43,650) 824,700
Exercise of warrants to convert to
common stock 905,900 906 5,434,494 5,435,400
Issuance of common stock relating
to acquisition of subsidiaries 405,000 405 1,453,293 1,453,698
Short swing profit contribution
(Note 12) 1,427,145 1,427,145
Foreign currency translation
adjustments 22,847 22,847
Net loss for the year ended
June 30, 2000 (3,401,076) (3,401,076)
----------- -------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 10,892,124 $ 10,892 $26,059,625 $ (68,650) $ 22,847 $(6,218,943) $19,805,771
=========== ======== =========== =========== =========== =========== ===========
</TABLE>
See accompanying independent auditors' report and notes to consolidated
financial statements.
5
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Year ended Year ended
June 30, 2000 June 30, 1999*
------------- -------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (3,401,076) $ (1,864,279)
------------ ------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 1,408,873 373,363
Income tax benefit - deferred (250,000) --
Non-cash compensation expense 1,017,575 910,710
Minority interest income -- (305,616)
Forgiveness of debt -- (129,500)
Foreign currency translation 22,847 --
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (1,781,132) (566,348)
Other current assets (339,504) (251,923)
Other assets (666,076) 168,614
INCREASE (DECREASE) IN LIABILITIES -
accounts payable and accrued expenses (357,568) 815,088
------------ ------------
Total adjustments (944,985) 1,014,388
------------ ------------
Net cash used for operating activities (4,346,061) (849,891)
------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Purchase of property and equipment (1,548,176) (479,220)
Purchase of investments - certificates of deposit (1,750,000) --
Acquisition of subsidiaries (119,524) (184,618)
------------ ------------
Net cash used for investing activities (3,417,700) (663,838)
------------ ------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of common stock and warrants, net 6,989,061 1,687,713
Short swing profit contribution 1,427,145 --
Exercise of stock options 668,350 --
Proceeds from (advances to) stockholders and directors, net (27,540) 51,746
Proceeds from (payments on) convertible notes 350,000 (328,110)
Contribution of capital 1,391,667 187,050
Principal payments on capital lease obligations (70,812) (3,240)
Stock subscription receivable (68,650) --
------------ ------------
Net cash provided by financing activities 10,659,221 1,595,159
------------ ------------
NET INCREASE IN CASH 2,895,460 81,430
CASH AND CASH EQUIVALENTS, beginning of year, restated 85,586 4,156
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,981,046 $ 85,586
============ ============
</TABLE>
* Restated for business combinations accounted for under the Pooling of
Interest method (see Note 12).
(Continued)
See accompanying independent auditors' report and notes to consolidated
financial statements.
6
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Year ended Year ended
June 30, 2000 June 30, 1999*
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 59,644 $ 27,899
=========== ===========
Income taxes paid $ 3,200 $ 2,400
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock shares per stock purchase agreements $ 1,453,698 $ 9,663,500
=========== ===========
Deferred tax liability arising from business combinations $ 3,100,000 $ --
=========== ===========
Granting of common stock options in exchange for
services received $ -- $ 199,844
=========== ===========
Issuance of common stock shares for services received $ 1,017,575 $ 710,866
=========== ===========
Conversion of debt to equity and related cost $ 250,000 $ --
=========== ===========
Forgiveness of debt $ -- $ 129,500
=========== ===========
Deferred offering costs offset against gross proceeds from
initial public offering $ -- $ 203,813
=========== ===========
Purchase of land from officer-stockholders $ 200,000 $ --
=========== ===========
</TABLE>
* Restated for business combinations accounted for under the Pooling of
Interest method (see Note 12).
See accompanying independent auditors' report and notes to consolidated
financial statements.
7
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000 AND 1999
(1) GENERAL:
Netsol International, Inc. and subsidiaries (the "Company"), formerly
known as Mirage Holdings, Inc., was incorporated under the laws of the
State of Nevada on March 18, 1997. During November of 1998, Mirage
Collections, Inc., a wholly owned and non-operating subsidiary, was
dissolved.
During April 1999 and February 2000, the Company formed Netsol USA, Inc.
and Netsol eR, Inc., 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 4,690,000 restricted common shares of the Company
and cash payments of $775,000, for an aggregate purchase price
of approximately $12.9 million. These acquisitions were
accounted for using the purchase method of accounting, and
accordingly, the purchase price was allocated to the assets
purchased and liabilities assumed based upon their estimated
fair values on the date of acquisition, which approximated
$300,000. Included in the accompanying consolidated financial
statements are other assets acquired at fair market value
consisting of product licenses, product renewals, product
enhancements, copyrights, trademarks, tradenames and customer
lists. The management of the Company allocated approximately
$6.3 million to these assets, which is being amortized by use of
the straight-line method over 15 years, 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, approximately $6.3 million, was recorded as goodwill,
and is being amortized by use of the straight-line method over
15 years from the date of each purchase.
MINDSOURCES, INC.
On August 13, 1999, the Company through its wholly owned
subsidiary, Netsol USA, Inc. acquired 100% of the outstanding
capital stock of Mindsources, Inc., a Virginia and US based
Company, through the issuance of 250,000 shares of Rule 144
restricted common shares of the Company for an aggregate
purchase price of approximately $1,260,000. This acquisition was
accounted for using the purchase method of accounting under APB
Opinion No. 16, and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based
upon their estimated fair values as determined by management on
the date of acquisition, which approximated $900,000. The
management of the Company allocated the entire purchase price to
customer lists acquired, and is being amortized by use of the
straight-line method over 15 years from the date of acquisition.
The excess of the purchase prices over the estimated fair values
of the net assets acquired, approximately $360,000, was recorded
as goodwill and is being amortized by use of the straight-line
method over 15 years from the date of purchase.
See accompanying independent auditors' report.
8
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(1) GENERAL, CONTINUED:
NETWORK SOLUTIONS GROUP LIMITED AND SUBSIDIARIES
On August 18, 1999, the Company acquired 100% of the outstanding
capital stock of Network Solutions Group Limited and
Subsidiaries, a United Kingdom Company, through the issuance of
155,000 shares of Rule 144 restricted common shares of the
Company for an aggregate purchase price of approximately
$940,000. This acquisition was accounted for using the purchase
method of accounting under APB Opinion No. 16, and accordingly,
the purchase price was allocated to the assets purchased and
liabilities assumed based upon their estimated fair values on
the date of acquisition, which approximated a deficit of
$700,000. The management of the Company allocated approximately
$600,000 to customer lists, which are being amortized by use of
the straight-line method over 15 years 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 is being amortized by
use of the straight-line method over the estimated useful life
of 15 years from the date of acquisition.
UNAUDITED PROFORMA DISCLOSURES
The following unaudited proforma results of operations and net
loss per share assume that the acquisitions of Network Solutions
PVT, Ltd., Netsol UK, Limited, Network Solutions Group, Ltd. and
Mindsources, Inc. occurred as of the beginning of each period
presented, after giving effect to proforma adjustments. The
proforma adjustment represents amortization of goodwill, product
licenses, renewals, enhancements, copyrights, trademarks and
tradenames, and customer lists. The proforma adjustment also
includes adjustments to common stock shares issued and
outstanding, that relate to the acquisition of subsidiaries, as
if they had occurred as of the beginning of each period
presented. The proforma financial information is presented for
informational purposes only and may not necessarily be
indicative of the operating results that would have occurred had
these acquisitions been consummated as of the beginning of each
period presented, nor is it indicative of future operating
results.
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Net revenues $ 6,984,539 $ 5,310,761
============ ============
Cost of revenues $ 3,583,693 $ 3,405,072
============ ============
Operating expenses $ 7,292,993 $ 5,111,611
============ ============
Net loss before extraordinary item $ (3,401,076) $ (3,168,460)
============ ============
Net loss $ (3,401,076) $ (3,038,960)
============ ============
Net loss per share - basic and diluted $ (0.35) $ (0.41)
============ ============
</TABLE>
See accompanying independent auditors' report.
9
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(1) GENERAL, CONTINUED:
BUSINESS COMBINATIONS ACCOUNTED FOR UNDER THE POOLING OF INTEREST
METHOD:
ABRAXAS AUSTRALIA PTY, LIMITED
On January 3, 2000, the Company issued 150,000 Rule 144
restricted common shares in exchange for 100% of the outstanding
capital stock of Abraxas Australia Pty, Limited, an Australian
Company. This business combination was accounted for using the
pooling of interest method of accounting under APB Opinion No.
16, and accordingly, the accompanying financial statements have
been restated to show the results of operations as if the
combination had occurred at the beginning of all periods
presented. Selected financial information of the combining
entities under the pooling of interest method of Business
Combination is presented in Note 12.
SUPERNET AKTIENGESELLSCHAFT
On May 2, 2000, the Company issued 425,600 Rule 144 restricted
common shares in exchange for 100% of the outstanding capital
stock of SuperNet Aktiengesellschaft, a German Company. This
business combination was accounted for using the pooling of
interest method of accounting under APB Opinion No. 16, and
accordingly, the accompanying financial statements have been
restated to show the results of operations as if the combination
had occurred at the beginning of all periods presented. Selected
financial information of the combining entities under the
pooling of interest method of Business Combination is presented
in Note 12.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
Network Solutions PVT, Ltd., Netsol UK, Limited, Network
Solutions Group Ltd. and Subsidiaries, Netsol-Abraxas Australia
Pty Ltd., Netsol Connect PVT, Ltd., Netsol eR, Inc., Supernet AG
and Netsol USA, Inc. All material intercompany accounts have
been eliminated in consolidation.
BUSINESS ACTIVITY:
The Company designs, develops, markets, and exports proprietary
software products to customers in the automobile finance and
leasing industry worldwide. The Company also provides consulting
services in exchange for fees from customers.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
See accompanying independent auditors' report.
10
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FAIR VALUE:
Unless otherwise indicated, the fair values of all reported
assets and liabilities which represent financial instruments,
none of which are held for trading purposes, approximate
carrying values of such amounts.
CASH:
EQUIVALENTS
For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original
maturities of three months or less which are not securing any
corporate obligations.
CONCENTRATION
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts.
ACCOUNTS RECEIVABLE:
No allowance for doubtful accounts was needed at June 30, 2000.
INTANGIBLE ASSETS:
Intangible assets consisting of product licenses, renewals,
enhancements, copyrights, trademarks, tradenames, customer lists
and goodwill will be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable as required by FASB No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
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.
See accompanying independent auditors' report.
11
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NET INCOME (LOSS) PER SHARE:
Common stock equivalents have been excluded from the net loss
per share calculation because their effect would reduce loss per
share.
FOREIGN CURRENCY:
The accounts of Network Solutions Group Ltd. and Subsidiaries
and Netsol UK, Limited use the British Pounds, Network Solutions
PK, Ltd. and Netsol Connect PVT, Ltd. use Pakistan Rupees,
Netsol Abraxas Australia Pty, Ltd. uses the Australian dollar,
Supernet AG uses the German Mark, Netsol International, Inc. and
subsidiaries Netsol USA, Inc. and Netsol eR, Inc. use the U.S.
dollars and the functional currencies. Assets and liabilities
are translated at the exchange rate on the balance sheet date,
and operating results are translated at the average exchange
rate throughout the period. Translation gains of $22,847 at June
30, 2000 (not material at June 30, 1999) is classified as an
item of other comprehensive income in the stockholders' equity
section of the consolidated balance sheet.
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.
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, 2000, the Company had net federal and state
operating loss carryforwards expiring in various years through
2020. Deferred tax assets resulting for the net operating losses
are reduced in full by a valuation allowance.
See accompanying independent auditors' report.
12
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES, CONTINUED:
A summary is as follows:
<TABLE>
<CAPTION>
Federal State Total
----------- ----------- -----------
<S> <C> <C> <C>
Net operating loss carryforward $(4,200,000) $(2,125,000)
Effective tax rate 32% 8%
----------- ----------- -----------
Deferred tax asset (1,344,000) (170,000) (1,514,000)
Valuation allowance 1,344,000 170,000 1,514,000
----------- ----------- -----------
Net deferred tax asset -- -- --
=========== =========== ===========
Deferred tax liability arising from
non-taxable business combinations 2,280,000 570,000 2,850,000
----------- ----------- -----------
Net deferred tax liability $ 2,280,000 $ 570,000 $ 2,850,000
=========== =========== ===========
</TABLE>
OTHER COMPREHENSIVE INCOME:
SFAS 130 requires unrealized gains and losses on the Company's
available for sale securities, currency translation adjustments,
and minimum pension liability, which prior to adoption were
reported separately in stockholders' equity, to be included in
other comprehensive income.
During the year ended June 30, 2000, comprehensive income (loss)
included net loss and translation gains of $22,847.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF:
The Company adopted the provision of FASB No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This statement requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair values of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of
this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
See accompanying independent auditors' report.
13
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission (the
Commission) issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, which is to be applied
beginning with the fourth fiscal quarter of fiscal years
beginning after December 15, 1999, to provide guidance related
to recognizing revenue in circumstances in which no specific
authoritative literature exists. The Company is reviewing the
application of the Staff Accounting Bulletin to the Company's
financial statements, however, any potential accounting changes
are not expected to result in a material change in the amount of
revenues we ultimately expect to realize.
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 is effective July 1, 2000, with certain
provisions that are effective retroactively to December 15, 1998
and January 12, 2000. Interpretation 44 is not expected to have
an impact on the Company's financial statements.
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. Upon adoption, the Company will be
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 is evaluating its expected
adoption date and currently expects to comply with the
requirements of SFAS 133 in fiscal year 2001. The Company does
not expect the adoption will be material to the Company's
financial position or results of operations since the Company
does not believe it participates in such activities.
(3) MAJOR CUSTOMERS:
During the year ended June 30, 2000, there were no major customers;
however, during the year ended June 30, 1999, one customer accounted for
approximately 47% of total sales.
See accompanying independent auditors' report.
14
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(4) OTHER CURRENT ASSETS:
A summary is as follows:
<TABLE>
<CAPTION>
<S> <C>
Prepaid expenses $ 162,113
Due from officer-stockholders (interest free and
due on demand) 50,794
Employee advances 16,507
---------
$ 229,414
=========
</TABLE>
(5) PROPERTY AND EQUIPMENT:
A summary is as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment $ 1,168,494
Office furniture and equipment 592,545
Assets under capital leases 413,933
Construction in progress 277,145
Land 200,001
Automobiles 133,017
Building improvements 97,835
-----------
2,882,970
Less accumulated depreciation and amortization 392,819
-----------
$ 2,490,151
===========
</TABLE>
Depreciation and amortization expense related to property and equipment
amounted to $346,561 and $56,380 for the years ended June 30, 2000 and
1999, respectively. Accumulated depreciation and amortization for assets
under capital leases amounted to $64,610 at June 30, 2000.
(6) OTHER ASSETS:
A summary is as follows:
<TABLE>
<CAPTION>
<S> <C>
Certificates of deposit - restricted (see Note 16) $ 750,000
Deposits and other assets 977,601
-----------
$ 1,727,601
===========
</TABLE>
See accompanying independent auditors' report.
15
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(7) PRODUCT LICENSES, RENEWALS, ENHANCEMENTS, COPYRIGHTS, TRADEMARKS AND
TRADENAMES:
A summary is as follows:
<TABLE>
<CAPTION>
<S> <C>
Product licenses, renewals, enhancements,
copyrights, trademarks and tradenames $ 5,120,000
Less accumulated amortization 455,111
-----------
$ 4,664,889
===========
</TABLE>
Amortization expense related to product licenses, renewals,
enhancements, copyrights, trademarks and tradenames amounted to $341,333
and $113,778 for the years ended June 30, 2000 and 1999, respectively.
(8) CUSTOMER LISTS:
A summary is as follows:
<TABLE>
<CAPTION>
<S> <C>
Customer lists $ 2,709,577
Less accumulated amortization 207,305
-----------
$ 2,502,272
===========
</TABLE>
Amortization expense related to customer lists amounted to $180,638 and
$26,667 for the years ended June 30, 2000 and 1999, respectively.
(9) GOODWILL:
A summary is as follows:
<TABLE>
<CAPTION>
<S> <C>
Goodwill $ 7,574,639
Less accumulated amortization 716,879
-----------
$ 6,857,760
===========
</TABLE>
Amortization expense related to goodwill amounted to $540,341 and
$176,538 for the years ended June 30, 2000 and 1999, respectively.
(10) FORGIVENESS OF DEBT:
During the year ended June 30, 1999, the Company recognized an
extraordinary gain from forgiveness of debt of $129,500, net of tax
effect. Basic and diluted earnings per share, net of tax effect,
amounted to $0.03.
Total interest expense amounted to $59,644 and $27,899 for the years
ended June 30, 2000 and 1999, respectively.
See accompanying independent auditors' report.
16
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(11) CONVERTIBLE NOTE PAYABLE:
During November 1999, the Company issued 8% notes payable with
non-detachable warrants which are convertible to restricted Rule 144
common shares at $6.50 per share. The Company raised a total of $350,000
of which, $250,000 was converted into 38,462 shares. In connection with
this offering, the Company issued 57,000 non-detachable warrants with an
exercise price of $6.50 per share. The Company also issued 9,231 shares
of Rule 144 restricted common shares and 9,600 warrants with an exercise
price of $6.50 per share. Offering cost of $60,000 has been recognized
related to this offering.
(12) STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING:
On September 15, 1998, the Company completed the sale of its
minimum offering of shares in its initial public offering which
generated gross proceeds of $1,385,647 from the sale of 251,000
shares of common stock and 929,825 warrants, each warrant to
purchase one share of the Company's common stock at an exercise
price of $6.50 for a term of five years. Deferred offering costs
of $397,663 have been netted against gross proceeds of
$1,385,647 and are presented in the accompanying statement of
stockholders' equity. During December of 1998, the Company sold
an additional 56,667 warrants for gross proceeds of $5,667.
During the year ended June 30, 2000, 905,900 warrants were
exercised for gross proceeds of $5,435,400. The total number of
warrants outstanding at June 30, 2000 is 147,192.
BUSINESS COMBINATIONS:
NETWORK SOLUTIONS PVT, LTD. AND NETSOL UK, LIMITED
On September 15, 1998, the Company purchased 51% of the
outstanding common stock of Network Solutions PVT, Ltd., a
Pakistani Company, and 43% of the outstanding common stock of
Netsol UK, Limited, a United Kingdom Company, in exchange for
cash payment of $775,000 and issuance of 490,000 restricted
common shares of Netsol International, Inc. and subsidiaries On
April 17, 1999, the Company acquired an additional 49% of the
outstanding common stock of Network Solutions PVT, Ltd., and 57%
of the outstanding common stock of Netsol UK, Limited through
the issuance of 4,200,000 restricted common shares of Netsol
International, Inc. and subsidiaries
MINDSOURCES, INC.
On August 13, 1999, the Company through its wholly owned
subsidiary, Netsol USA, Inc. acquired 100% of the outstanding
capital stock of Mindsources, Inc., a Virginia and US based
Company, through the issuance of 250,000 shares of Rule 144
restricted common shares of the Company.
NETWORK SOLUTIONS LIMITED
On August 18, 1999, the Company acquired 100% of the outstanding
capital stock of Network Solutions Group Limited and
Subsidiaries, a United Kingdom Company, through the issuance of
155,000 shares of Rule 144 restricted common shares of the
Company
See accompanying independent auditors' report.
17
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(12) STOCKHOLDERS' EQUITY, CONTINUED:
BUSINESS COMBINATIONS, CONTINUED:
ABRAXAS AUSTRALIA PTY, LIMITED
On January 3, 2000, the Company issued 150,000 Rule 144
restricted common shares in exchange for 100% of the outstanding
capital stock of Abraxas Australia Pty, Limited, an Australian
Company. Shares issued under this business combination have been
presented as a restatement to the earliest period presented in
the accompanying Statement of Stockholders' Equity.
SUPERNET AKTIENGESELLSCHAFT
On May 2, 2000, the Company issued 425,600 Rule 144 restricted
common shares in exchange for 100% of the outstanding capital
stock of SuperNet Aktiengesellschaft ("SuperNet AG"), a German
Company. Shares issued under this business combination have been
presented as a restatement to the earliest period presented in
the accompanying Statement of Stockholders' Equity.
For periods preceding the merger, there were no material intercompany
transactions which required elimination from the combined consolidated
results of operations and there were no adjustments necessary to conform
the accounting practices of the combining companies.
Selected financial information for the combining entities included in
the consolidated statements of operations for the years ended June 30,
2000 and 1999 are as follows:
YEAR ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
Supernet Netsol
Ag Abraxas International Consolidated
-------- ------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 24,100 $ 519,714 $ 3,002,107 $ 3,545,921
============== =============== =========== ===========
Operating expenses $ 220,820 $ 259,134 $ 2,872,953 $ 3,352,907
============== =============== =========== ===========
Net income (loss) before extraordinary
item $ (286,106) $ 48,561 $(1,756,234) $(1,993,779)
============== =============== =========== ===========
Extraordinary item - gain on
forgiveness of debt $ -- $ -- $ 129,500 $ 129,500
============== =============== =========== ===========
Net income (loss) $ (286,106) $ 48,561 $(1,626,734) $(1,864,279)
============== =============== =========== ===========
Net loss per share before extraordinary
item - basic and diluted $ (0.47) $ (0.46)
=========== ===========
Net loss per share - basic and diluted $ (0.44) $ (0.43)
=========== ===========
</TABLE>
See accompanying independent auditors' report.
18
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(12) STOCKHOLDERS' EQUITY, CONTINUED:
BUSINESS COMBINATIONS, CONTINUED:
<TABLE>
<CAPTION>
Year Ended June 30, 2000:
-------------------------
<S> <C> <C> <C> <C>
Net revenues $ 309,389 $ 355,693 $ 6,319,457 $ 6,984,539
============== =========== =========== ===========
Operating expenses $ 353,347 $ 429,614 $ 6,510,032 $ 7,292,993
============== =========== =========== ===========
Net loss $ (436,028) $ (73,921) $(2,891,127) $(3,401,076)
============== =========== =========== ===========
Net loss per share - basic and diluted $ (0.32) $ (0.35)
=========== ===========
</TABLE>
PRIVATE PLACEMENT
During the year ended June 30, 2000, the Company sold 633,366 restricted
Rule 144 common shares through private placement offerings for gross
proceeds of $1,553,661, which is net of stock subscriptions receivable
of $25,000. The private placements were exempt from the registration
provisions of the Securities and Exchange Commission Act of 1933 under
Regulation D.
SERVICES
During the years ended June 30, 2000 and 1999, the Company issued
252,500 and 235,000 restricted Rule 144 common shares in exchange for
services rendered, respectively. The Company recorded compensation
expense of $1,017,575 and $710,866 for the years ended June 30, 2000 and
1999, respectively. Compensation expense was calculated based upon the
fair market value of the freely trading shares as quoted on OTCBB
through December 1999 and effective January 2000, on NASDAQ over the
service period less an average discount of 30% for the restriction
feature or the fair value of services received, whichever was more
clearly determinable.
SHORT SWING PROFITS
During the second and third quarters of the year ending June 30, 2000,
Blue Water, a hedge fund and principal stockholder, purchased and sold
shares of the Company's common stock on the public market within a six
month period and failed to make adequate disclosures, which constituted
a violation of the federal securities statute. Profits of $1,427,145
arising from the sale of these shares of common stock were contributed
to the Company in June 2000.
See accompanying independent auditors' report.
19
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(13) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN:
THE 1997 PLAN
On April 1, 1997, the Company adopted an Incentive and Nonstatutory
Stock Option Plan (the "1997 Plan") for its employees and consultants
under which a maximum of 500,000 options may be granted to purchase
common stock of the Company. Two types of options may be granted under
the Plan: (1) Incentive Stock Options (also known as Qualified Stock
Options) which may only be issued to employees of the Company and
whereby the exercise price of the option is not less than the fair
market value of the common stock on the date it was reserved for
issuance under the Plan; and (2) Nonstatutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is less than the fair market value of the
common stock on the date it was reserved for issuance under the plan.
Grants of options may be made to employees and consultants without
regard to any performance measures. All options listed in the summary
compensation table ("Securities Underlying Options") were issued
pursuant to the Plan. An additional 20,000 Incentive Stock Options were
issued to a non-officer-stockholder of the Company. All options issued
pursuant to the Plan vest over an 18 month period from the date of the
grant per the following schedule: 33% of the options vest on the date
which is six months from the date of the grant; 33% of the options vest
on the date which is 12 months from the date of the grant; and 34% of
the options vest on the date which is 18 months from the date of the
grant. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
The number and weighted average exercise prices of options granted under
the 1997 Plan for the years ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
Average Average
Exercise Exercise
Number Price Number Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year 230,000 $ 0.77 120,000 $ 0.01
Outstanding at the end of the year 85,000 $ 1.10 230,000 $ 0.77
Granted during the year - - 215,000 $ 0.82
Exercised during the year 145,000 $ 0.57 105,000 $ 0.01
Exercisable at the end of the year 85,000 $ 1.10 186,250 $ 0.71
Weighted average remaining life (years) 3.5 4.2
</TABLE>
During the year ended June 30, 1999, the Company recorded compensation
expense of $199,844 in relation to stock options granted.
Under the 1997 Plan, during the year ended June 30, 2000, 145,000
options were exercised into 145,000 shares of common stock for total
consideration of $82,650, of which, 95,000 options were exercised by an
officer-stockholder for $32,650, all of which is presented on the
accompanying balance sheet in stock subscriptions receivable in the
stockholders' equity section. The remaining 50,000 options were
exercised by an unrelated party at $1.00 per share, for cash.
See accompanying independent auditors' report.
20
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(13) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, CONTINUED:
THE 1999 PLAN
On May 18, 1999, the Company enacted an Incentive and Nonstatutory Stock
Option Plan (the "1999 Plan") for its employees, directors and
consultants under which a maximum of 5,000,000 options may be granted to
purchase common stock of the Company. Two types of options may be
granted under the Plan: (1) Incentive Stock Options (also known as
Qualified Stock Options) which may only be issued to employees of the
Company and whereby the exercise price of the option is not less than
the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which
may be issued to either employees or consultants of the Company and
whereby the exercise price of the option is less than the fair market
value of the common stock on the date it was reserved for issuance under
the plan. Grants of options may be made to employees, directors and
consultants without regard to any performance measures. All options
issued pursuant to the Plan are nontransferable and subject to
forfeiture.
Any Option granted to an Employee of the Corporation shall become
exercisable over a period of no longer than ten (10) years and no less
than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Incentive Stock Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted
unless the Board shall specifically determine otherwise, as provided
herein. In no event shall any Option be exercisable after the expiration
of ten (10) years from the date it is granted, and no Incentive Stock
Option granted to a Ten Percent Holder shall, by its terms, be
exercisable after the expiration of ten (10) years from the date of the
Option. Unless otherwise specified by the Board or the Committee in the
resolution authorizing such option, the date of grant of an Option shall
be deemed to be the date upon which the Board or the Committee
authorizes the granting of such Option.
The number and weighted average exercise prices of options granted under
the 1999 Plan for the year ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
Average Average
Exercise Exercise
Number Price Number Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year 1,350,000 $ 1.58 - $ -
Outstanding at the end of the year 1,982,250 $ 6.77 1,350,000 $ 1.58
Granted during the year 1,107,250 $ 9.75 1,350,000 $ 1.58
Exercised during the year 475,000 $ 1.65 - -
Exercisable at the end of the year 842,146 $ 7.55 18,750 $ 1.58
Weighted average remaining life (years) 4.2 5.0
</TABLE>
Under the 1999 Plan, during the year ended June 30, 2000, 475,000
options were exercised into 475,000 shares of common stock for total
consideration of $786,000, of which, 450,000 options were exercised by
officer-stockholders for $711,000 at an exercise price of $1.58 per
share. These officer-stockholders paid $500,000 in cash, conveyed land
with original cost basis of $200,000 and the remaining balance of
$11,000 is presented on the accompanying balance sheet as a contra
equity balance in the stockholders' equity section. The remaining 25,000
options were exercised by an unrelated party at $3.00 per share, for
cash.
See accompanying independent auditors' report.
21
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(13) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, CONTINUED:
Pro forma information regarding the effect on operations is required by
SFAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that
statement. Pro forma information using the Black-Scholes method at the
date of grant based on the following assumptions:
<TABLE>
<CAPTION>
<S> <C>
Expected life (years) 5-10 years
Risk-free interest rate 8.0%
Dividend yield -
Volatility 1.19
</TABLE>
Proforma information regarding net loss and loss per share, pursuant to
the requirements of FASB 123 for the years ended June 30, 2000 and 1999
are as follows:
<TABLE>
<CAPTION>
2000 1999
-------------------------- --------------------------
Historical Proforma Historical Proforma
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Net loss $ 3,401,076 $ 6,016,293 $ 1,864,279 $ 1,984,280
=========== =========== =========== ===========
Net loss per share -
basic and diluted $ 0.35 $ 0.62 $ 0.43 $ 0.46
=========== =========== =========== ===========
</TABLE>
(14) COMMITMENTS:
LEASES
The Company leases its facilities under leases that expire at various
times through July 31, 2007. The following is a schedule by years of
future minimum rental payments (including subsequent event) required
under operating leases that have noncancellable lease terms in excess of
one year as of June 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
Year ending June 30,
2001 $ 178,360
2002 193,505
2003 164,590
2004 144,000
2005 144,000
Beyond five years 228,000
-----------
$ 1,052,455
===========
</TABLE>
Rent expense amounted to $273,759 and $124,500 for the years ended June
30, 2000 and 1999, respectively.
See accompanying independent auditors' report.
22
<PAGE>
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 2000 AND 1999
(14) COMMITMENTS, CONTINUED:
EMPLOYMENT AGREEMENTS
Effective May 18, 1999, the Company entered into employment agreements
with 3 officers for a period of three years. Pursuant to the agreements,
these officers will be compensated at salaries ranging from $100,000 to
$150,000 annually. In addition, these officers have also been granted
450,000 stock options each, which will vest over the 3 years and are
exercisable at prices ranging from $1.58 to $3.50.
JOINT VENTURE
During September 1999, the Company entered into a joint venture
agreement with 1st Net Technologies, Inc. to share profits from an
online business of providing electronic commerce. Pursuant to this
agreement, both parties will also share the costs related to maintaining
and operating this joint venture. In the event this joint venture is
subject to lawsuits or loss contingencies, the Company maybe responsible
for the entire loss and will have a right to be indemnified by 1st Net
Technologies, Inc. for its share of the losses. There were no material
activities during the year ended June 30, 2000.
(15) RELATED PARTY TRANSACTIONS
The Company acquired land from officer-stockholders with an original
cost basis of $200,000.
(16) SUBSEQUENT EVENTS:
LEASE AGREEMENT
Effective October 1, 2000, the Company entered into a rental lease
agreement to occupy office space. Pursuant to this agreement, the
Company will pay rent of approximately $12,500 per month through July
31, 2007 (See Note 14). The Company was required to secure an
Irrevocable Stand-By Letter of Credit for the benefit of the Landlord in
the amount of $250,000 (see Note 6), which is included in other assets
on the accompanying balance sheet. In the event the Company fails to
renew the Letter of Credit as set forth in the Letter of Credit
Agreement, the Landlord shall be entitled to draw on the Letter of
Credit in full. The renewal of each annual Letter of Credit will be
reduced by $35,714 per annum.
LETTER OF CREDIT
During September 2000, the Company opened a certificate of deposit with
Merrill Lynch Bank USA in the amount of $500,000 (see Note 6), as
security for an Irrevocable Standby Letter of Credit for the benefit of
one of its customers. This letter of credit expires by December 31,
2003. Consequently, $500,000 is included in other assets on the
accompanying balance sheet.
OTHER
The Company has requested the Office of the Chief Accountant of the
Securities and Exchange Commission to provide guidance on accounting
matters related to the acquisition of Netsol UK, Limited and Network
Solutions PVT, Ltd. As of October 12, 2000, no responses have been
received by the Company.
See accompanying independent auditors' report.
23
