SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22773
NETSOL TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
23901 Calabasas Road, Suite 2072,
Calabasas, CA 91302
(Address of principal executive offices) (Zip code)
(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
(None)
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B, is not contained in this form and no disclosure will be continued, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
the Form 10-KSB. [ ]
Registrant's net revenues for the fiscal year ended June 30, 2004 were
$5,749,062.
As of September 13, 2004, Registrant had 9,545,693 shares of its $.001 par value
Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(None)
Transitional Small Business Disclosure Format (Check one): Yes [ ]; No X
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
PART I
PAGE
Item 1 Business 1
Item 2 Properties 13
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 14
Item 6 Management's Discussion and Analysis and Plan of Operations 16
Item 7 Financial Statements 22
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
Item 8A Controls and Procedures 22
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 22
Item 10 Executive Compensation 25
Item 11 Security Ownership of Certain Beneficial Owners and
Management 28
Item 12 Certain Relationships and Related Transactions 28
PART IV
Item 13 Exhibits and Reports on Form 8-K 29
Item 14 Principal Accountant Fees and Services 30
PART I
This Form 10KSB contains forward looking statements relating to the development
of the Company's products and services and future operation results, including
statements regarding the Company that are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. The words "believe," "expect," "anticipate," "intend," variations of
such words, and similar expressions, identify forward looking statements, but
their absence does not mean that the statement is not forward looking. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Factors that
could affect the Company's actual results include the progress and costs of the
development of products and services and the timing of the market acceptance.
ITEM 1 - BUSINESS
GENERAL
NetSol Technologies, Inc. (F/K/A NetSol International, Inc. "NetSol" or the
"Company") is an end-to-end information technology ("I/T") and business
consulting services provider for the lease and finance, banking and financial
services industries. Since it was founded in 1997, the Company has developed
enterprise solutions that help clients use I/T more efficiently in order to
improve their operations and profitability and to achieve business results. The
Company's focus has remained the lease and finance, banking and financial
services industries. The Company operates on a global basis with locations in
the U.S., Europe, East Asia and Asia Pacific. By utilizing its worldwide
resources, the Company believes it has been able to deliver high quality,
cost-effective I/T services. NetSol Technologies Pvt. Ltd. ("NetSol PK")
develops the majority of the software for the Company. NetSol PK was the first
software company in Pakistan in 1998 to achieve the ISO 9001 accreditation and
was again the first software company in Pakistan to obtain Carnegie Mellon's
Software Engineering Institute ("SEI") Capable Maturity Model ("CMM") Level 3
assessment in 2003. CMM is a model for judging the maturity of the software
process of an organization and for identifying the key practices that are
required for the maturity of these processes. The CMM levels developed by SEI in
conjunction with the software industry are the highest levels of recognition for
quality and best practices for a software company.
COMPANY BUSINESS MODEL
NetSol offers a broad spectrum of I/T products and I/T services that deliver a
high return on investment for its customers. NetSol has perfected its delivery
capabilities by continuously investing in maturing its software development and
Quality Assurance ("QA") processes. NetSol's believes its key competitive
advantage is its ability to build high quality enterprise applications using its
offshore development facility in Lahore, Pakistan. In fact, about 80% of
NetSol's revenue is generated in US Dollars and 80% of its overhead is incurred
in Rupees, providing NetSol with a distinct cost arbitrage business model.
Achieving Software Maturity and Quality Assurance.
NetSol, from the outset, invested heavily in creating a state of the art,
world-class software development capability. A series of QA initiatives have
delivered to NetSol the ISO 9001 certification as well as the CMM level 3
assessment. In a continued pursuit of excellence, the company is now operating
on CMM Level 4 and is looking forward to a formal assessment in this regard in
near future. This assessment would further solidify NetSol's project delivery
ability as well permit the Company to target a new market segment. This segment
comprises of organizations and corporations who prefer to work with software
providers with a minimal of CMM Level 4 rating. Achieving these CMM targets
required dedication by all levels of the Company and evidenced at every echelon
in the company.
SEI's CMM, which is organized into five maturity levels, has become a de facto
standard for assessing and improving software processes. Through the CMM, SEI
and the software development community have established an effective means for
modeling, defining, and measuring the maturity of the processes used by software
professionals. The CMM for Software describes the principles and practices
underlying software process maturity and is intended to help software
organizations improve the maturity of their software processes in terms of an
evolutionary path from ad hoc, chaotic processes to mature, disciplined software
processes. Mature processes meet standardized software engineering methods and
integratable into a customer's system. Mature processes ensure enhanced product
quality resulting in faster project turn around and a shortened time-to-market.
In short, a mature process would, ideally, have fewer bugs and integrate better
into the customer's system.
The Company has always strived to improve quality in every aspect of its
business. This quality drive, based on the Company's vision, trickles from the
top to the lowest levels in the organization. The Company believes that it is
this quality focus that enabled the Company's software development facility to
become the first ISO 9001 certified software development facility in Pakistan in
1998. This accomplishment marked the beginning of the Company's continuing long
term program towards achieving the higher challenges of SW-CMM.
1
The first step of the program was to launch a dedicated "Quality Engineering"
team mandated with software process improvement and achieving CMM ratings. The
department was provided every facility, from overseas training to complete
commitment of higher management, to enable it to achieve the desired goals.
Company management also made sure that everybody in the Company is committed to
achieving CMM. The whole organization went through a comprehensive
transformation cycle. The process included, but was not limited to, the hiring
and training of key personnel in the U.S. and Pakistan, and following the
standards and processes designed and instituted by the SEI of Carnegie Mellon
University. The extreme focus and a major team effort resulted in a CMM level 2
assessment in March 2002. The Company was the first in Pakistan to achieve this
distinction. While proud of this accomplishment, all levels of the Company
continued to strive towards CMM level 3. The quality-engineering department in
specific, and the Company in general, started implementing Level 3 Key Processes
Areas ("KPAs") in a methodical and structured manner. There were Company-wide
training programs conducted by in-house personnel, local experts and foreign
consultants on various topics related to defining goals, processes, interpreting
KPAs and implementing them. This focus and commitment resulted in the Company
achieving the CMM Level 3 in a record 16 months compared to the world average of
21 months. Upon passing the rigorous, nearly two week final assessment,
conducted by Rayney Wong, SEI CMM Lead Assessor from Xerox Singapore Software
Centre, Fuji Xerox Asia Pacific Pte. Ltd., the Company's development facility
was granted the CMM Level 3.
Professional Services
The Company offers a broad array of professional services to clients in the
global commercial markets and specializes in the application of advanced and
complex I/T enterprise solutions to achieve its customers' strategic objectives.
Its service offerings include bespoke software development, software analysis
and design, testing services, off shore as well as onsite quality assurance
services, consultancy in quality engineering and process improvement including
assistance in implementation of ISO and CMM quality standards, Business Process
Reengineering, Business Process Outsourcing, System Reengineering, Maintenance
and support of existing systems, Technical Research and Development, Project
Management, Market Research and Project Feasibilities.
Outsourcing involves operating all or a portion of a customer's technology
infrastructure, including systems analysis, system design and architecture,
change management, enterprise applications development, network operations,
desktop computing and data center management.
Systems integration encompasses designing, developing, implementing and
integrating complete information systems.
I/T and management consulting services include advising clients on the strategic
acquisition and utilization of I/T and on business strategy, operations, change
management and business process reengineering.
The experience gained by the Company through its own software quality endeavors,
has enabled the Company to offer consultancy services in the areas of Software
Quality, Process Improvement, ISO Certification and SW-CMM Implementation. ISO
certification and CMM services include, but are not limited to GAP Analysis
against the standard ISO/CMM; Orientation Workshops; Guiding the Implementation
of the plan developed after the GAP Analysis; Training on Standard Processes;
Process implementation support off-site and on-site; assessment training; and
assistance through the final assessment (Certification Audit for ISO). NetSol
has already been chosen by the Pakistan Software Export Board under the
direction of the Ministry of Information Technology and Telecommunication to
provide consultancy to local software houses. The ministry plans to have 30
software houses achieve CMM level 3 compliance by the end of 2004. Management
believes this demonstrates that NetSol has not only led the way in setting
standards for the I/T industry in Pakistan but is now involved in facilitating
local companies to achieve quality standards.
LeaseSoft
The Company also develops advanced software systems for the lease and finance
industries. NetSol has developed "LeaseSoft" a complete integrated lease and
finance package,
LeaseSoft, a robust suite of four software applications, is an end-to-end
solution for the lease and finance industry. The four applications under
LeaseSoft have been designed and developed for a highly flexible setting and are
capable of dealing with multinational, multi-company, multi-asset,
multi-lingual, multi-distributor and multi-manufacturer environments.
LeaseSoft is a result of more than six years of effort resulting in over 60
modules grouped in four comprehensive applications. These four applications are
complete systems in themselves and can be used independently to exhaustively
address specific sub-domains of the leasing/financing cycle. And, if used
together, they fully automate the entire leasing / financing cycle.
2
The constituent software applications are:
o LeaseSoft Electronic Point of Sale (LeaseSoft.ePOS). LeaseSoft.ePOS is a
web-based point of sale system for the use of dealers, brokers, agents, and
sales officers to initiate credit applications. It is a web-based system and,
though it can be used with equal efficiently on an intranet, the real ability is
to harness the power of the Internet to book sales. LeaseSoft. ePOS users create
quotations and financing applications (Proposals) for their customers using
predefined financial products. The application is submitted to the back office
system [such as LeaseSoft.CAP] for approval. After analysis, the application is
sent back to the LeaseSoft. ePOS system with a final decision.
o Credit Application Processing System (CAP Formally known as Proposal
Management System, PMS) LeaseSoft.CAP provides companies in the financial sector
an environment to handle the incoming credit applications from dealers, agents,
brokers and the direct sales force. LeaseSoft.CAP automatically gathers
information from different interfaces like credit rating agencies, evaluation
guides, contract management systems and scores the applications against defined
scorecards. All of this is done in a very mechanized workflow culminating with
credit team members making their decisions more quickly and accurately.
Implementation of LeaseSoft.CAP dramatically reduces application-processing time
in turn resulting in greater revenue through higher number of applications
finalized in a given time. LeaseSoft.CAP is also an excellent tool to reduce
probability of a wrong decision thus again providing a concrete business value
through minimizing the bad debt portfolio.
o Contract Management System (CMS). LeaseSoft.CMS provides comprehensive
business functionality that enables its users to effectively and smoothly manage
and maintain a contract with the most comprehensive details throughout its life
cycle. It also provides interfaces with company banks and accounting systems.
LeaseSoft.CAM also effectively maintains details of all business partners that
do business with the company including, but not limited to, customers, dealers,
debtors, guarantors, insurance companies and banks. A number of leasing
consultants have provided their business knowledge to make this product a most
complete lease and finance product. NetSol's LeaseSoft.CMS provides business
functionality for all areas that are required to run an effective, efficient and
customer oriented lease and finance business.
o Wholesale Finance System (WFS). LeaseSoft.WFS automates and manages the
floor plan/bailment activities of dealerships through a finance company. The
design of the system is based on the concept of one asset/one loan to facilitate
asset tracking and costing. The system covers credit limit, payment of loan,
billing and settlement, stock auditing, online dealer & auditor access and
ultimately the pay-off functions.
LeaseSoft is a state of the art software product and is available on both
conventional 32 bit architecture hardware as well as the emerging new standard
of high performance 64 bit computers.
Typically, NetSol's sales cycle for these products ranges between two to five
months. NetSol derives its income both from selling the license to use the
products as well as from related software services. The related services include
requirement study/gap analysis, customization on the basis of gaps development,
testing, configuration, installation at the client site, data migration,
training, user acceptance testing, supporting initial live operations and,
finally, the long term maintenance of the system. Any changes or enhancement
done is also charged to the customer. In the requirements study/gaps analysis
the NetSol team of LeaseSoft goes at the client site to study client's business,
functional requirements and maps them against the existing functionality
available in LeaseSoft. LeaseSoft has now reached a stage where hardly, if any
gaps, are identified as a result of such a study. In the customization phase the
gaps are made part of LeaseSoft through a development cycle. This development
takes place in Lahore Pakistan. Then the new as per requirement system is
thoroughly tested. This phase also takes place in Pakistan. LeaseSoft is a
highly parameterized configurable application and hence it is then configured
according to the business of the customer. This phase can take place both onsite
as well as in Lahore and is usually is partially done in Lahore. Next, follows
the installation of the system at client site. In case the customer was already
using some other system and already has data in electronic form, then NetSol's
data migration team, through a very well defined set of procedures, migrates
this data from the old system to the LeaseSoft database. Data migration is a mix
of both client site and Lahore based work. The client is also imparted training
in the areas of business user training, functional business training and system
administration training. Training is followed by user acceptance testing (UAT)
where client nominated staff and NetSol consultants test the system against the
business requirements. After UAT the system is put in normal business use.
LeaseSoft is a mission critical software and the whole business operations from
the asset side of a finance / leasing company hinge upon the performance of the
system. Hence in the early days after going live, NetSol consultants remain at
the client site to assist the company in smooth operations. After this phase,
the regular maintenance and support services phase for the implemented software
begins. In addition to the daily rate paid by the customer for each consultant,
the customer also pays for all the transportation related expenses, boarding of
the consultants, and a living allowance. These practices enable NetSol to
increase marginal revenue in proportion larger than the marginal cost incurred.
3
License fees can vary generally between $100,000 up to $1,000,000 per license
depending upon the size and complexity of customers' businesses. There are
various attributes which determine the level of complexity a few of which are
number of contracts, size of the portfolio, business strategy of the company,
number of business users, and, branch network of the customer. The revenue for
the license and the customization flows in several phases and could take from
six months to two years before its is fully recognized as income in accordance
with generally accepted accounting principles. The annual maintenance fee, which
usually is an agreed upon percentage of overall monetary value of the
implementation, then becomes an ongoing revenue stream realized on a yearly
basis.
As a marketing strategy NetSol is preparing a lighter version of LeaseSoft to
target companies with simpler business models. LeaseSoft is highly modular.
Hence various sets of functionalities can be used against the restricted
requirements of the client. For example the colletions module of LeaseSoft can
be used for management of receivables and over due collection. Similarly,
business partner database can be used to manage all the information of
individuals and corporations interacting with the finance companies even if the
interaction is based on multiple roles. Litigation, repossession and remarketing
are a few of the many other modules which can be used in isolation.
NetSol manages this sale cycle by having two specialized pools of resources for
each of the four products under LeaseSoft. One group focuses on software
development required for customization and enhancements. The second group
comprises of LeaseSoft consultants concentrating on implementation and onsite
support. Both the groups are being continually trained in the domain of finance
and leasing, the system functionality, communication skills, organizational
behavior and Client Management.
The Asian continent from the perspective of marketing is targeted from NetSol
Technologies based in Lahore. NetSol Abraxas looks after the marketing
activities for Australia and New Zealand. However, NetSol Technologies' business
development team also assists NetSol Abraxas in the marketing endeavors. NetSol
UK, based out of London, the financial hub of Europe, looks after the European
market. NetSol UK has also appointed a representative in Denmark to further
focus on Denmark as well as the neighboring countries. The marketing for
LeaseSoft in USA and Canada is carried out by NetSol USA. As with NetSol
Abraxas, NetSol Technologies (Pvt.) Limited services NetSol UK and NetSol USA
whenever required.
NetSol has now established a very strong strategy to aggressively market
LeaseSoft in various regions of the world. As part of the strategy, NetSol is
forming alliances with reputable I/T companies and has already appointed
distributors in Japan and Indonesia. In Japan NetSol is front ended by gedas
Japan a subsidiary of Volkswagen Germany. Furthermore NetSol is looking forward
to developing partner networks all across the world with reputable companies.
Management believes that LeaseSoft has begun to be recognized as a unique,
world-class. This belief is based on the following instances:
o Intel has been recognized as a Solution Blueprint by Intel
Corporation. Intel has very stringent technical and market potential
criteria for designating a solution as a "solution blueprint".
o Frame Agreement with DaimlerChrysler Services AG (DCS)
NetSol's Frame Agreement with DCS short lists LeaseSoft as a preferred software
for managing the wholesale and retail side leasing and finance business of DCS.
DCS supports the sales of DC vehicles through financial services.
The current LeaseSoft client base includes DaimlerChrysler Services (Australia,
Japan, New Zealand, Singapore, South Korea, Thailand and Taiwan), Yamaha Motors
Finance Australia and Toyota Leasing Thailand.
NetSol also maintains a LeaseSoft specific product website www.leasesoft.biz
4
Status of New Products and Services
With the acquisition of Pearl Treasury System, the Company expands its menu of
software into the banking and other financial areas.
Pearl Treasury System (PTS)
In 2003, NetSol acquired the intellectual property rights ("IPR") of Pearl
Treasury System ("PTS"). PTS was developed to 70% completion in the late 1990s
by a group of banking and I/T visionaries in the UK, led by Noel Thurlow, the
system designer. Noel has 30 plus years in banking through his positions as
Trader and Head of Trading, Treasury, Risk, Operations and I/T for banks such as
Bankers Trust and Mitsubishi Trust & Banking. Along with the IPR, NetSol
retained Noel's domain knowledge and direct, full-time involvement as the
ongoing system designer and NetSol's VP and Global Head of Banking Products.
PTS was originally developed on two tier client server technologies and was
designed to provide full process automation and decision support in the front,
middle and back offices of treasury and capital markets operations. On internal
review of PTS by Noel and NetSol's already established I/T and banking
specialists post acquisition, it was decided to re-write the system within .NET
technologies, bringing the system into the leading edge n-tier/browser-based
environment. The project name for this program is Trapeze, and 70% of the Phase
One deliverable is complete. PTS and Trapeze have more than 70 person years of
development effort and $4 million already invested.
The tremendous flexibility enabled by the comprehensive data model and
multi-tier architectural design of Trapeze has been fully recognized,
identifying the potential to further develop Trapeze beyond treasury and capital
markets. Additionally, Trapeze is modular and can therefore be implemented as
best-of-breed solutions for, example, front-office trading, middle office credit
or market risk, or back office settlement. Trapeze can also be implemented to
support all these areas, plus others, as a single fully integrated solution.
Trapeze provides NetSol with the significant opportunity to gain a sizable share
of the treasury, capital markets and wholesale banking systems markets.
Following a lull in the banking solution purchase market, caused by Y2K and
disasters such as 9/11, market analysts, such as Celent and IBS Publishing, are
forecasting significant system replacement activity over the next few years,
particularly in the area of treasury management.
NetSol is currently and actively seeking a small number of banks and financial
institutions to be pilot development partners for the final stage of the Phase
One development program, implementing Trapeze to support their specific
requirements.
Growth Through Acquisition
In Mid-2004, NetSol management identified mergers and acquisitions as potential
methods of capitalizing on the demand of the Company's flagship product,
LeaseSoft and assisting the Company in launching its treasury banking software
systems. This, together with the visable turnaround in the services and
outsourcing sectors in global markets. it made perfect business sense to follow
a growth strategy that would encompass both organic growth and as well mergers
and acquisitions. As 2004 progressed, however, it became necessary to focus the
emphasis growth on capitalizing on organic growth and investing in building up
the Company's marketing and sales organization.
Given this, and after several rounds of due diligence and negotiations, the
proposed acquisition of a California based I/T company in early 2004, was
mutually and amicably abandoned by the parties in July 2004. Since this, the
Company has focused on aggressively implementing a marketing and sales plan.
While we are experiencing a solid traction for our core business, we will
continue to explore potential mergers or acquisitions with suitable IT companies
with synergy, strong management teams and the right valuation for acquisition.
Growth through Establishing Partners Network
NetSol is well aware that market reach is essential to effectively market I/T
products and services around the globe. For this purpose, the Company is looking
forward to establishing a network of partners worldwide. These companies will
represent NetSol in their respective countries and will develop business for
NetSol.
In May 2004, the Company entered into an agreement with gedas Japan, a
subsidiary of Berlin based gedas Group, a division of Volkswagen Germany,
whereby gedas Japan agreed to market and sell the Company's LeaseSoft product
line in the Asia Pacific markets including Japan.
5
Strategic Alliances
LeaseSoft is recognized as Solution Blueprint by Intel Corporation. Intel has
very stringent technical and market potential criteria for marking a solution as
solution blueprint. The document is also available online from Intel's website
http:/www.intel.com/business/bss/solutions/blueprints/industry/finance/index.htm
NetSol and Intel Corporation have a strategic relationship that would
potentially permit NetSol to market its core product, `LeaseSoft', through Intel
websites. In a joint press release made earlier in 2004, by both NetSol and
Intel, both companies would deliver a new Solution Blueprint for its core
leasing solution. With the collaboration to create a world-class blueprint for
the leasing and finance industry, deployment should become even faster and
smoother for our customers. Intel's website defines Intel's Solution Blueprints
as detailed technical documents that define pre-configured, repeatable solutions
based on successful real-world implementations. Built on Intel(R) architecture
and flexible building block components, these solutions help deliver increased
customer satisfaction, lower operating costs, and better productivity. Through
this strong relationship, NetSol has been invited by Intel in China and in San
Francisco to present and introduce the company's core product line to a global
market.
DaimlerChrysler Services Asia Pacific has established "Application Support
Center (ASC)" in Singapore to facilitate the regional companies in LeaseSoft
related matters. This support center is powered by highly qualified technical
and business personnel. ASC LeaseSoft in conjunction with NetSol Technologies
(Pvt.) Ltd. Lahore are supporting DCS companies in seven different countries in
Asia and this list can increase as other DCS companies from other countries may
also opt for LeaseSoft.
NetSol has appointed gedas Japan, a subsidiary of Berlin-based gedas Group, as
its Japanese distributor for the company's LeaseSoft suite of fully integrated
software solutions for the leasing and financial services industries. gedas
Group is a wholly-owned subsidiary of the Volkswagen Group and has a history of
success in the information technology (IT) market that spans some 20 years. In
the year 2003, gedas achieved global revenues totaling EUR 576 million, 80
percent of which were generated in the world's main automotive production
centers.
With the recent deregulation of Pakistan's telecommunications sector and the
government's desire to attract investors to the country, while experiencing an
unprecedented increase in exports, Pakistan is keen to build a solid technology
infrastructure to support the growth expected over the next several years. The
areas within Pakistan expected to receive major information technology
investments by the government are education, public sector automation, railways
and the country's armed forces.
NetSol Connect, Pvt. Ltd., a wholly owned IP backbone and broadband subsidiary
of the Company, has recently forged a partnership with UK based computer
company, Akhtar Computers of U.K. Pursuant to this agreement, NetSol has
retained control of the Company with ownership of 50.1% to Akhtar's 49.9%. This
alliance is designed to permit NetSol to benefit from the potentially high
growth of the telecommunications market by bringing in new technology, new
resources and capital while permitting NetSol to focus on its core competencies
of developing and marketing software. NetSol Akhtar acquired, for cash, another
small internet connectivity business named Raabta Online in Pakistan. This
acquisition expands the presence of NetSol Akhtar's connectivity business to at
least three major cities of Pakistan.
In June 2004, the Company entered into a Frame Agreement with DaimlerChrysler
AG. This agreement, which serves as a base line agreement for use of the
LeaseSoft products by DaimlerChrysler Services AG companies and affiliated
companies, represents an endorsement of the LeaseSoft product line and the
capabilities of NetSol to worldwide DaimlerChrysler entities. This endorsement
has had a tremendous impact on our perspective customers, it has helped our
sales and Business Development personnel to market and sell our LeaseSoft
solution to blue chip customers around the world.
Technical Affiliations
The Company currently has technical affiliations as: a MicroSoft Certified
Partner; a member of the Intel Early Access Program; and, an Oracle Certified
Partner.
Marketing and Selling
The Marketing Program
NetSol management is extremely optimistic that the Company will experience huge
opportunities for its products offerings in 2005. The Company is aggressively
growing the marketing and sales organizations in the United Kingdom, Australia,
Pakistan and the USA. Management believes that the year 2005 will be a year for
some landmark growth and launching footprints in new markets, while penetrating
in the established markets such as Asia Pacific and Europe.
6
While affiliations and partnering result in potential growth for the Company,
marketing and selling remain essential to building Company revenue. The
objective of the Company's marketing program is to create and sustain preference
and loyalty for NetSol as a leading provider of enterprise solutions, e-services
consulting and software solutions. Marketing is performed at the corporate and
business unit levels. The corporate marketing department has overall
responsibility for communications, advertising, public relations and the website
and also engineers and oversees central marketing and communications programs
for use by each of the business units.
Our dedicated marketing personnel within the business units undertake a variety
of marketing activities, including sponsoring focused client events to
demonstrate our skills and products, sponsoring and participating in targeted
conferences and holding private briefings with individual companies. We believe
that the industry focus of our sales professionals and our business unit
marketing personnel enhances their knowledge and expertise in these industries
and will generate additional client engagements. As the US technology market
gradually improving , NetSol marketing teams are concentrating on the markets
overseas with cautious entry into the US market.
The Company generally enters into written commitment letters with clients at or
around the time it commences work on a project. These commitment letters
typically contemplate that NetSol and the client will subsequently enter into a
more detailed agreement, although the client's obligations under the commitment
letter are not conditioned upon the execution of the latter agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and the Company does not generally believe it is appropriate to
characterize them as consisting of backlog. In addition, because these written
commitments and agreements often provide that the arrangement can be terminated
with limited advance notice or penalty, the Company does not believe the
projects in process at any one time are a reliable indicator or measure of
expected future revenues.
The Markets
NetSol provides its services primarily to clients in global commercial
industries. In the global commercial area, the Company's service offerings are
marketed to clients in a wide array of industries including, automotive:
chemical; textiles; Internet marketing; software; medical; banks; U.S. higher
education and telecommunication associations and, financial services.
Geographically, NetSol has operations on the West and East Coast of the United
States, Central Asia, Europe, and Asia Pacific regions.
During the last two fiscal years, the Company's revenue mix by major markets was
as follows:
2004 2003
---- ----
North American (NetSol USA) 12% 15%
Europe (NetSol Technologies, UK Ltd.) 6% 5%
Other International (Abraxas, NetSol Technologies Pvt. Ltd., 82% 80%
NetSol Pvt., Ltd., NetSolAkhtar)
Total Revenues 100% 100%
7
Fiscal Year 2003 Performance Overview
The Company has effectively expanded its development base and technical
capabilities by training its programmers to provide customized I/T solutions in
many other sectors and not limiting itself to the lease and finance industry.
The Company believes that the offshore development concept has been successful
as evidenced by several companies in India, which according to the recent
statistics by the Indian I/T agency, NASSCOM, showed software exports exceeding
$11 billion in the year 2003-2004 and $9.5 billion in the year 2002-2003 as
opposed to $7 billion in 2001.
NetSol Technologies PVT Ltd.
Our off shore development facility continues to perform strongly and has
enhanced its capabilities and expanded its sales and marketing activities. In
May 2004, NetSol inaugurated its newly built Technology Campus in Lahore,
Pakistan. This state of the art, purpose-built and fully dedicated I/T and
software development facility, is the first of its kind in Pakistan. NetSol also
signed a strategic alliance agreement with the IT ministry of Pakistan to
convert the technology campus into a technology park. By this agreement, the IT
ministry would invest nearly 10 million Rupees (approximately $150,000) to
install fiber optic lines and improve the bandwidth for the facility. NetSol has
relocated its entire staff of over 250 employees into this facility and it is
continuously growing. This facility is the backbone of NetSol business model and
it provides the world class I/T talents and cost arbitrage scale of 8:1 to
western customers.
The Lahore operation supports our worldwide customer base of the LeaseSoft suite
of products and all other product offerings. NetSol has continued to lend
support to the Lahore subsidiary to further develop its quality initiatives and
infrastructure. The major initiative in this area is the final stage of phase 1
of the development of the technology campus. The development facilities in
Pakistan, being the engine, which drives NetSol, continues to be the major
source of revenue generation. The Pakistan operation has contributed nearly 55%
of 2004 revenues, with $3,190,000 in revenues for the current year. This was
accomplished primarily through export of I/T Services and product licensed to
the overseas markets. The total revenue of NetSol Pakistan, including the
Pakistan domestic market, was $3.67 million with a record profit of $1.63
million.
NetSol has signed on new customers for LeaseSoft as well as for bespoke
development services. For LeaseSoft following new projects were earned by the
company;
DaimlerChrysler Leasing Thailand (DCLT) - Licensing and customization of
LeaseSoft.CMS This was the significant break since CMS is the largest of the
four applications from the LeaseSoft suit. DCLT till now had been using other
products under LeaseSoft but now with implementation of CMS, end to end assets
side business of DCLT will be on LeaseSoft.
Toyota Leasing Thailand (TLT) - Licensing, customization and implementation of
LeaseSoft.CAP TLT is a volume leader in captive finance companies in Thailand
and it has chosen NetSol's LeaseSoft.CAP to automate the credit evaluation
process. The project is currently under way and looking at the NetSol expertise
in Leasing and Finance TLT has also shown very keen interest in NetSol's
LeaseSoft.WFS to power its wholesale finance business. NetSol also considers it
a big strategic break as once delivering successfully in Thailand NetSol will be
in a very good position to target Toyota Finance companies around the world.
CMM Evaluation Consultancy Services for PSEB. As a part of Ministry of
Information Technology's efforts for the process improvements in the operations
of Pakistani software houses, NetSol, under the auspices of Pakistan Software
Export Board, would be undertaking an exercise for these consultancy services
for different software companies. The key aspects of these services would be CMM
introduction, gap analyses for ISO 9001:2000 compliant procedures, CMM Level 2
pre-assessments, evaluations and tracking/analyses of such improvements.
NetSol has been identified as a premium I/T company in Pakistan. With its
matured products and services, local demand is surging. A few of the recently
signed agreements in the private and public sectors are:
o Software Process Improvement Services for NADRA. (National Database
Registration Authority of Pakistan)
o MM Training Workshops as consultants for PSEB (Pakistan Software
Export Board ).
o Credit MIS & FIS for PRSP (Punjab Rural Support Program)
o Electronic Credit Information Bureau for State Bank of Pakistan
o Punjab Portal
o Consultancy & Automation of Pakistan Administrative Staff College
The growing domestic business in Pakistan, as stated above is valued over tens
of millions ruppees or hundreds of thousands of US dollars. NetSol has a very
strong pipeline to win many more and major new projects in the public and
private sectors. NetSol will continue to strive to become the most dominant IT
solutions providers in this explosive growth market.
8
NetSol Technologies UK Ltd
NetSol Technologies Limited, the United Kingdom ("UK") subsidiary, was formed in
Fiscal 2003. Located in the heart of the City of London, one of the world's
major banking and finance centers, the company is resourced with experts from
the financial services industry including its chairman Ed Holmes with experience
such as Group Executive Europe and chairman/CEO of Citibank International Plc.
In addition, the UK subsidiary boasts substantial management, banking and
solution sales experience through its high-caliber personnel. The UK subsidiary
is responsible for the Company's activities in the UK, Europe and Middle East
and include the spearheading of the sales and marketing efforts for Trapeze,
NetSol's new treasury and wholesale banking solution; plus ongoing marketing and
sales of the LeaseSoft portfolio of leasing solutions and NetSol's range of on
and off-shore I/T services.
Depending solely upon organic growth, the UK company produced $356,000 in
revenue for the current fiscal year or 6% of the Company's total revenues. The
main focus of this entity is to market the array of banking and leasing
solutions in the heart of the financial district in London and the rest of
Europe. In May 2004, NetSol announced the signing of an agreement to develop new
software programs for The Innovation Group ("TiG"), a provider of profit
improvement solutions to the insurance industry.
Most recently, the UK operations entered into agreements with DCD Group UK, TiG
and Habib Allied Bank in the UK. The revenue contribution for NetSol UK was
$357,000 or about 6.2% of the revenues of 2004.
NetSol-Abraxas
The Australian market continues to be vibrant as NetSol maintains its customers
such as Yamaha Motors, GMAC Australia, St. George Bank, DaimlerChrysler Finance
in New Zealand, and Volvo Australia. The Company continues to pursue new
customers and new business from its existing customers for its core product
lines. The Company signed a strategic partnership agreement with Australian
Motor Finance Pty. Limited ("AMF"), an Australia automotive lender. Under the
terms of this agreement, NetSol will design and implement a point of sale system
for AMF's wholesale funding initiatives. The terms of the agreement permit
NetSol to participate in transaction based revenue sharing with AMF. There are a
number of new prospects that are in varying degrees of the decision-making
process. The Australian subsidiary contributed 5% of revenues in fiscal year
2004., with $264,000 in revenues. A key senior person from LeaseSoft has been
made a permanent part of NetSol Abraxas to aggressively follow the Australian
and New Zealand market.
NetSolConnect-NetSol Akhtar
In August 2003, NetSol entered into an agreement with United Kingdom based
Akhtar Group PLC (Akhtar). Under the terms of the agreement, Akhtar Group
acquired 49.9 percent of the Company's subsidiary; Pakistan based NetSolConnect
Pvt Ltd., an Internet service provider (ISP) in Pakistan. As part of this
Agreement, NetSolCONNECT changed its name to NetSol Akhtar. A change in the
ownership structure in September 2003 and the consolidation and readjustment of
the revenue model caused revenue reduction in fiscal year 2004 from as compared
to the fiscal year 2003. However, of late, NetSol Connect has steadily grown its
presence in tri cities (Karachi, Lahore and Islamabad.) The company acquired a
small internet online company called Raabta Online in early 2004. This created a
national presence for wireless broadband business in key markets that have
experienced explosive growth. The telecom sector in Pakistan has a potential
market size exceeding $100Million. NetSol Connect with its new laser and
wireless technologies has a potential to become a major brand in Pakistan.
NetSol CONNECT was initially launched in early 2000 in Karachi, Pakistan's
largest city. Prior to NetSol CONNECT's technology being brought to Karachi, the
concept of high speed "ISP" backbone infrastructure was new in Pakistan. NetSol
was the first company to turn such concept into reality. In the past two years,
NetSol CONNECT became the second largest high speed and fast access ISP in
Karachi. NetSol believes the ISP space is still in its infancy and the growth
prospects are extremely good. By the end of Fiscal year 2002, the direct
membership was over 40,000 subscribers. The main competitor of NetSol Akhtar has
a subscriber base in the range of 40,000-50,000 in Karachi and has been in
business for over 7 years. The partnership with Akhtar Computers is designed to
rollout the services of connectivity and wireless to the Pakistani national
market. This subsidiary contributed 14% of the revenues in fiscal year 2004,
with $779,000 in revenues.
Akhtar, one of the oldest established computer companies in the UK, is well
recognized as a provider of managed Internet services, integrated networks, both
local area networks and wide area networks, as well as metropolitan area
networks within the UK. Akhtar owned proprietary broadband technologies and
solutions will provide NetSol CONNECT a technologically strong platform for
strengthening its telecommunications infrastructure within Pakistan with a goal
of becoming a leading provider of broadband Internet access to both residential
and commercial users.
The initial stage of the agreement provides NetSol with an investment of up to
$1 million in cash to launch a broadband infrastructure in Karachi, the largest
business hub in Pakistan. The initial infrastructure will provide a 155MB
backbone and a 5MB broadband to customer premises using a proprietary broadband
technology and an infrastructure consisting of 20 hubs. After the successful
launch of the initial six-month beta program to Karachi's residential and
commercial customers, additional rollouts of the hubs are scheduled in Lahore
and Islamabad within a 12-month period. The second investment into the program
could provide up to $20 million to create the first Terabit backbone in
Pakistan. This will allow NetSol to provide data, voice, video and other
multi-media services to major cities within Pakistan.
NetSol Akhtar Pvt Ltd. shall continue to aggressively seek revenues to growth.
The revenue contribution for NetSol Akhtar was $778,000 or about 14% of 2004
revenues.
9
NetSol USA
In May 2003, NetSol acquired the assets of Altvia Technologies, Inc. ("Altvia").
Altvia provided NetSol an experienced management team familiar with the offshore
software development model. From 2000-2003, Altvia maintained an offshore
development team in Islamabad, Pakistan. Altvia's clients included major
member-based higher education and telecommunications trade associations in the
Washington, D.C. and Baltimore area. The acquisition allows NetSol to extend its
business presence in the United States, specifically in the high-growth,
greater-Washington, D.C. market. NetSol USA functions as the service provider
for the US based customers both in the consulting services area as well as
project management. The office provides greater access to the emerging East
Coast markets.
In the last fiscal year, NetSol USA signed agreements with CapitalStream, a
Washington based software developer specializing in software to financial
sectors. The revenue generated in fiscal year 2004 from Capital Stream and other
US based customers was in excess of $ 675,000 with attractive profit margins.
NetSol USA represented 12% of total, or $677,000, of the 2004 revenues.
LeaseSoft Sales
LeaseSoft got a major recognition when DaimlerChrysler Services (DCS) AG,
Germany signed a global frame agreement with NetSol for LeaseSoft. Under terms
of the open-ended global frame contract, LeaseSoft is named as one of the
strategic, asset-based, finance software solutions for DCS. In addition to its
LeaseSoft product suite, NetSol could also provide DCS with a range of
fixed-rate, contractual professional and IT services, which are also covered by
the frame agreement.
NetSol's professional services will include product customization,
implementation, technical support, ongoing maintenance and upgrades. The
company's technology and consulting services will include project management,
systems analysis and business process reengineering. According to Naeem Ghauri,
NetSol's chief executive officer, the company is currently providing similar
services and a variety of LeaseSoft modules to DCS companies located in Taiwan,
Thailand, Japan, New Zealand, Australia, South Korea and Singapore.
LeaseSoft is establishing itself as a dependable and preferred system in the
niche market of asset based lease and finance. In 2003-2004, NetSol was able to
sell a number of LeaseSoft licenses in Asia Pacific, details of which are as
follows:
LeaseSoft.CMS DaimlerChrysler Leasing Thailand ("DCLT"). DCLT was already using
LeaseSoft.WFS for managing their wholesale finance business and as soon as they
decided to aggressively follow retail side leasing in Thailand they opted for
NetSol's Credit Application Processing System. LeaseSoft.CAP was successfully
implemented at DCLT and is enabling DCLT to process larger numbers of
applications per given period of time while simultaneously reducing probability
of a default per approved loan. After the successful implementation of
LeaseSoft.CAP, DCLT has opted for LeaseSoft.CMS to power their complete
operations on retail side financing. The project is in the implementation phase.
LeaseSoft.CAP at Toyota Leasing Thailand (TLT). Toyota Leasing Thailand opted
for LeaseSoft.CAP to automate the credit approval cycle through an objective
point score based approval system implemented through a highly intensive
workflow. TLT is a volume leader in Captive Finance companies in Thailand and
getting TLT as LeaseSoft customer means that NetSol has best of both worlds in
Thailand, i.e., DaimlerChrysler Leasing Thailand serving the Elite and prestige
class as well as TLT the volume leaders in the country. This implementation is
based on Oracle and Linux.
LeaseSoft.WFS Version upgrade at DaimlerChrysler Leasing Thailand (DCLT). .DCLT
was using LeaseSoft.WFS version 3.2. However, the new 4.1 version had enhanced
features and to make use of the new functionality set DCLT upgraded their
version to the latest one.
NetSol also completed the on going implementation of LeaseSoft.WFS at
DaimlerChysler Services Korea. A peculiar aspect of this implementation is that
it is an off site implementation where by the users sit and use the system in
Korea where as the system in reality is hosted in Singapore.
Technology Campus
The Company broke ground for its Technology Campus in January 2000 with a
three-phase plan of completion. Initially, the Company anticipated the
completion of Phase One by fall 2001, but due to the delay in financing, and
other challenges facing the Company, the completion was delayed. The Technology
Campus was completed in May 2004 and the Lahore operations relocated to the
facilities in May 2004. By relocating the entire Lahore operation from its
previously leased premises to the Campus, the Company would save approximately
$150,000 annually. Once fully operational and completed, the campus is expected
to house over 2,500 I/T professionals in approximately three acres of land. The
campus site is located in Pakistan's second largest city, Lahore, with
population of six million. An educational and cultural center, the city is home
to most of the leading technology oriented academia of Pakistan including names
like LUMS, NU-FAST & UET. These institutions are also the source of quality I/T
resources for the Company. Lahore is a modern city with very good communication
infrastructure and road network, The Technology campus is located at about a
5-minute drive from the newly constructed advanced and high-tech Lahore
International Airport. This campus will be the first purpose built software
building with state of the art technology and communications infrastructure in
Pakistan. The Company has made this investment to attract contracts and projects
from blue chip customers from all over the world.
10
People and Culture
The Company believes it has developed a strong corporate culture that is
critical to its success. Its key values are delivering world-class quality
software, client-focused timely delivery, leadership, long-term relationships,
creativity, openness and transparency and professional growth. The services
provided by NetSol require proficiency in many fields, such as computer
sciences, programming, mathematics, physics, engineering, and communication and
presentation skills. Almost every one of our software developers is proficient
in the English language. English is the second most spoken language in Pakistan
and is mandatory in middle and high schools.
To encourage all employees to build on our core values, we reward teamwork and
promote individuals who demonstrate these values. NetSol offers all of its
employees opportunity to participate in its stock option program. Also, the
Company has an intensive orientation program for new employees to introduce our
core values and a number of internal communications and training initiatives
defining and promoting these core values. We believe that our growth and success
are attributable in large part to the high caliber of our employees and our
commitment to maintain the values on which our success has been based. NetSol
worldwide is an equal opportunity employer. NetSol attracts professionals not
just from Pakistan, where it is very well known, but also I/T professionals
living overseas.
NetSol believes it has gathered, over the course of many years, a team of very
loyal, dedicated and committed employees. Their continuous support and belief in
the management has been demonstrated by their further investment of cash. Most
of these employees have exercised their millions of stock options during very
difficult times for the Company. Management believes that its employees are the
most invaluable asset of NetSol. The Company's survival in the most challenging
times is due, in part, to their dedication towards continuous achievement of
highest quality standards and customer satisfaction.
There is significant competition for employees with the skills required to
perform the services we offer. The Company believes that it has been successful
in its efforts to attract and retain the highest level of talent available, in
part because of the emphasis on core values, training and professional growth.
We intend to continue to recruit, hire and promote employees who share this
vision.
As of June 30, 2004, we had 294 full-time employees; comprised of 195 I/T
project personnel, 55 employees in general and administration and 44 employees
in sales and marketing. There are 8 employees in the United States, 270
employees in Pakistan, 6 in Australia and 10 in the United Kingdom. None of our
employees are subject to a collective bargaining agreement.
An interesting recent trend in Pakistan is that highly skilled and experienced
technical resources are coming back to the country for settling down
permanently. This phenomenon has virtually created a situation of reversal of
the brain drain Pakistan was going through for years. NetSol making use of this
situation has hired some very experienced and highly skilled resources in
Lahore. The improved relationship with neighbor India, the outsourcing trends
seems to be picking steam. As the borders are opened up there is a growing
access of human capital and It infrastructures in both sides. This has
positively affected NetSol business both local and international as we now can
openly compete with the IT markets of India.
Competition
Neither a single company nor a small number of companies dominate the I/T market
in the space in which the Company competes. A substantial number of companies
offer services that overlap and are competitive with those offered by NetSol.
Some of these are large industrial firms, including computer manufacturers and
computer consulting firms that have greater financial resources than NetSol and,
in some cases, may have greater capacity to perform services similar to those
provided by NetSol.
Some of the competitors of the Company are International Decisions Systems,
McCue Systems, EDW, Data Scan, KPMG, CresSoft, Kalsoft, Systems Limited,
Cybernet, SouthPac Australia and a few others. These companies are scattered
worldwide geographically. In terms of offshore development, we are in
competition with some of the Indian companies such as Wipro, HCL, TCS, InfoSys,
Satyam Infoway and others. Many of the competitors of NetSol have longer
operating history, larger client bases, and longer relationships with clients,
greater brand or name recognition and significantly greater financial,
technical, and public relations resources than NetSol. Existing or future
competitors may develop or offer services that are comparable or superior to
ours at a lower price, which could have a material adverse effect on our
business, financial condition and results of operations.
Customers
Some of the customers of NetSol include: DaimlerChrysler Services AG;
DaimlerChrysler Asia Pacific - Singapore; Mercedes Benz Finance - Japan; Yamaha
Motors Finance - Australia; Tung-Yang Leasing Company Taiwan; Debis Portfolio
Systems - UK; DaimlerChrysler Services - Australia; DaimlerChrysler Leasing -
Thailand; DaimlerChrysler Services - Korea; UMF Leasing Singapore; and,
DaimlerChrysler Services New Zealand. In addition, NetSol provides offshore
development and customized I/T solutions to blue chip customers such as Citibank
Pakistan, DCD Holding UK, Toyota Leasing Thailand, and Habib Allied Bank UK.
With the Altvia acquisition, NetsSol has acquired, as clients, some of the most
well known higher education and telecommunications associations based in the
United States East Coast. NetSol is also a strategic business partner for
DaimlerChrysler (which consists of a group of many companies), which accounts
for approximately 20% of our revenue. No other individual client represents more
than 10% of the revenue for the fiscal year ended June 30, 2004.
As compared to the previous year, NetSol (Pvt.) Ltd. was able to materialize a
number of services contracts within the local Pakistani public and defense
sectors. An important aspect of these contracts is that not all of them were
solely focusing on software development and engineering. This year, NetSol, has
gone a step further by providing Quality Assurance, Business Process
Re-engineering and CMM consultancy services to organizations so as to improve
their quality of operations and services. These clients include private as well
as public sector enterprises. Also, NetSol was successful in consolidating its
standing as one of the preferred solutions providers for the Military sector and
Defense organizations. The service offering portfolio of NetSol has now
diversified into a comprehensive supply chain of end to end services and
solutions catering to BPR, consultancies, applications development, engineering
as well as other supporting processes
11
New Local Customers are as follows:
o Pakistan Administrative Staff College
o Punjab Portal Government of Punjab
o Punjab Rural Support Program
o Pakistan Software Export Board
o NADRA
o Pakistan Air War College
o State Bank of Pakistan
The Internet
The Company is committed to regaining and extending the advantages of its direct
model approach by moving even greater volumes of product sales, service and
support to the Internet. The Internet provides greater convenience and
efficiency to customers and, in turn, to the Company. The Company receives
150,000 hits per month to www.NetSoltek.com. The Company also maintains a
product specific website for LeaseSoft at www.leasesoft.biz.
Through its Web sites, customers, potential customers and investors can access a
wide range of information about the Company's product offerings, can configure
and purchase systems on-line, and can access volumes of support and technical
information about the Company.
Operations
The Company's headquarters are in Calabasas, California. Nearly 90% of the
production and development is conducted at NetSol in Lahore, Pakistan. The other
10% of development is conducted in the Proximity Development Center or "PDC" in
Adelaide, Australia. The majority of the marketing is conducted through NetSol
USA, NetSol Abraxas Australia, and NetSol UK. These are the core operating
companies engaged in developing and marketing IT solutions and software
development and marketing.
NetSol UK services and supports the clients in the UK and Europe. NetSol PK
services and supports the customers in the Asia Pacific and South Asia regions.
A significant portion of the software is developed in Pakistan. Despite of the
global unrest, regional tension and downturn in the US markets, the economy of
Pakistan is bouncing back. For the first time in the history of Pakistan, the
foreign exchange reserve has exceeded $13.0 billion in comparison with just
below $2.0 billion in 2000. The stock market in Pakistan is the most bullish in
the Asia Pacific region with market growth over 300% year to date (Karachi Stock
Exchange on October 18, 2001 was at 1,103 points vs. about 5,500 in recent
times). Pakistan, now a close US ally, is recognized by the western world as
becoming very conducive and attractive for foreign collaboration and
investments. The Company is in an extremely strong position to continue to use
this offshore model, which includes competitive price advantage to serve its
customers. Just recently Moody's International assessed Pakistan as less
vulnerable than many countries in the Asia Pacific region. Also, Standard &
Poors rating on Pakistan has been improved to positive. The present government
has taken major bold steps to attract new foreign investment and bolster the
local economy. Foreign Direct Investment exceeded $900 million, a record high,
in 2004. The trend continues to grow steadily. The US dollar reserves of State
Bank of Pakistan has shot up over $13 billion from less than $1 billion in 2000.
Overall, the economy of Pakistan is experiencing substantial growth as
demonstrated by the record high 6.1% growth of the gross domestic product in
2004. The confidence of the local investors and foreign investors has been
undoubtedly enhanced resulting in stronger demand of new listing in the stock
markets. Most recently the telecom sector received a boost when the I/T ministry
was able to successfully auction two new mobile phones licenses for a total of
$592 million to two European Telecom conglomerates. This was a landmark
development and it simply underscores the confidence and growing interest of
foreign companies in investing in Pakistan.
NetSol USA functions as the service provider for the US based customers both in
the consulting services area as well as in the project management. In addition,
the Maryland office provides greater access to the emerging markets on the East
Coast. NetSol USA is exploring opportunities for marketing alliances with local
companies to further enhance its marketing capabilities.
Organization
NetSol Technologies, Inc. (formerly NetSol International, Inc.) was founded in
1997 and is organized as a Nevada corporation. The Company amended its Articles
of Incorporation on March 20, 2002 to change its name to NetSol Technologies,
Inc.
12
The success of the Company, in the near term, will depend, in large part, on the
Company's ability to: (a) minimize additional losses in its operations; (b)
raise funds for continued operations and growth; and, (c) enhance and streamline
sales and marketing efforts in the United States, Asia Pacific region, Pakistan,
Europe, Japan and Australia. However, management's outlook for the continuing
operations, which has been consolidated and has been streamlined, remains
optimistic and bullish. With continued emphasis on a shift in product mix
towards the higher margin consulting services, the Company anticipates to be
able to continue to improve operating results at its core by reducing costs and
improving gross margins.
Intellectual Property
The Company relies upon a combination of nondisclosure and other contractual
arrangements, as well as common law trade secret, copyright and trademark laws
to protect its proprietary rights. The Company enters into confidentiality
agreements with its employees, generally requires its consultants and clients
enter into these agreements, and limits access to and distribution of its
proprietary information. The NetSol logo and name, as well as the LeaseSoft logo
and product name have been copyrighted and trademark registered in Pakistan.
Governmental Approval and Regulation
Current Company operations do not require specific governmental approvals. Like
all companies, including those with multinational subsidiaries, we are subject
to the laws of the countries in which the Company maintains subsidiaries and
conducts operations. Pakistani law allows a 15-year tax holiday on exports of
I/T products and services. There are no State Bank restrictions on profits and
dividends repatriation. Accordingly, foreign-based companies are free to invest
safely in Pakistan and at the same time transfer their investment out of
Pakistan without any approvals or notices. The present Pakistani government has
effectively reformed the policies and regulations effecting foreign investors
and multinational companies thus, making Pakistan an attractive and friendly
country in which to do business.
ITEM 2 - PROPERTIES
Company Facilities
As of December 2003, the Company's headquarters were moved from its previous
facility to one with approximately 1,919 rentable square feet and a monthly rent
of $3,933 per month. The lease is a two-year and one-half month lease expiring
in December 2005. The Company's current facilities are located at 23901
Calabasas Road, Suite 2072, Calabasas, CA, 91302.
Other leased properties as of the date of this report are as follows:
Location/Approximate Square Feet Purpose/Use Monthly
Rental Expense
Australia..................... 1,140 Computer and General Office $1,380
United Kingdom................ 378 General Office $5,500
Maryland...................... 1,380 General Office $2,530
The Australia lease is a three-year lease that expires in September 2007 and
currently is rented at the rate of $1,380 per month. UK operations are currently
conducted in leased premises operating on a month-to-month basis with current
rental costs of approximately $3,000 per month. The facilities in Maryland are
leased for a three-year term that expires in June 2007. The monthly rent is
$2,530.
Upon expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space.
Lahore Technology Campus
The newly built Technology Campus was inaugurated in Lahore, Pakistan in May
2004. This facility consists of 40,000 square feet of computer and general
office space. This facility is state of the art, purpose-built and fully
dedicated for IT and software development; the first of its kind in Pakistan.
Title to this facility is held by NetSol Technologies Pvt. Ltd. And is not
subject to any mortgages. The Company also signed a strategic alliance agreement
with the IT ministry of Pakistan to convert the technology campus into a
technology park. By this agreement, the IT ministry would invest nearly 10
million Rupees (approximately $150,000) to install fiber optic lines and improve
the bandwidth for the facility. NetSol has relocated its over 250 employees into
this new facility.
13
ITEM 3 - LEGAL PROCEEDINGS
On July 26, 2002, the Company was served with a Request for Entry of default by
Surrey Design Partnership Ltd. ("Surrey"). Surrey's complaint for damages sought
$288,743.41 plus interest at the rate of 10% above the Bank of England base rate
from January 12, 2002 until payment in full is received, plus costs. The parties
agreed to entry of a Consent Order whereby NetSol agreed to make payments
according to a payment schedule. NetSol made payments up to May of 2002 but was
unable to make payments thereafter. On September 25, 2002, the parties signed an
Agreement to stay Enforcement of Judgment whereby NetSol will make further
payments to Surrey until the entire sum is paid. The current terms of the
payments schedule require the payment of 4,000 pounds sterling for a period of
24 months commencing March 31, 2003 and ending 24 months thereafter. During the
year ended June 30, 2004, we have paid 60,445 British pounds sterling on this
debt.
On July 31, 2002, Herbert Smith, a law firm in England, which represented NetSol
in the Surrey matter filed claim for the sum of approximately $248,871 USD
(which represents the original debt and interest thereon) in the High Court of
Justice Queen's Bench Division. On November 28, 2002, a Consent Order was filed
with the Court agreeing to a payment plan, whereby the Company paid $10,000 USD
on execution $4,000 USD a month for one year and $6,000 USD per month thereafter
until the debt is paid. During the year ended June 30, 2004 the Company has paid
$73,000 as part of this settlement.
On March 3, 2004 Uecker and Associates, Inc. as the assignee for the benefit of
the creditors of PGC Systems, Inc. formerly known as Potera Systems, Inc. filed
a request for arbitration demanding payment from NetSol for the amounts due
under a software agreement in the amount of $175,700. On March 31, 2004, we
filed an answering statement to the request of Uecker & Associates denying each
and every allegation contained in the Claim filed by Uecker & Associates and
stating NetSol's affirmative defenses. The claim is being settled by binding
arbitration before the American Arbitration Association (AAA). The parties
selected an arbitrator in April 2004; however, due to demands to her schedule,
in August 2004, AAA requested that the parties select another arbitrator. The
parties are currently in the process of selecting another arbitrator. Dates for
the arbitration hearing have been set for November 17 and 18. An arbitrator has
been selected and the parties are selecting dates for arbitration in this
matter. NetSol intends to vigorously defend this action.
On May 12, 2004, Merrill Corporation served an action against NetSol for account
stated, common counts, open book account and unjust enrichment alleging amounts
due of $90,415.33 together with interest thereon from August 23, 2001. On June
24, 2004, the parties reached a settlement agreement. Merrill Corporation agreed
to accept $75,540 as payment in full to be paid $10,450 at the time of
settlement and the balance in five monthly installments of $13,000 per month.
The action with be dismissed with prejudice upon receipt of the final payment.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
quarter ending June 30, 2004.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
(a) MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - Common stock of NetSol Technologies, Inc. is listed and
traded on NASDAQ Small Cap under the ticker symbol "NTWK."
The table shows the high and low intra-day prices of the Company's common stock
as reported on the composite tape of the NASDAQ for each quarter during the last
two fiscal years. Per share stock prices have been adjusted to reflect the 1 for
5 reverse stock split which occurred in August 2003.
2003-2004 2002-2003
Fiscal
Quarter High Low High Low
------- ---- --- ----- --
1st (ended September 30) 5.50 1.94 .80 .35
2nd (ended December 31) 3.16 2.05 1.30 .25
3rd (ended March 31) 3.15 2.07 1.24 .75
4th (ended June 30) 3.09 2.01 3.50 .95
RECORD HOLDERS - As of September 13, 2004, the number of holders of record of
the Company's common stock was 110. As of September 13, 2004, there were
9,545,693 shares of common stock issued and outstanding.
14
DIVIDENDS - The Company has not paid dividends on its Common Stock in the past
and does not anticipate doing so in the foreseeable future. The Company
currently intends to retain future earnings, if any, to fund the development and
growth of its business.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The table shows information related to our equity compensation plans as of June
30, 2004:
---------------------------------------------------------------------------------------------------------------------------
Number of Weighted-average Number of securities
securities to exercise price of remaining
be issued outstanding available for
upon options, warrants future issuance
exercise of and rights under equity
outstanding compensation
options, plans
warrants (excluding
and rights securities
reflected in
column (a))
---------------------------------------------------------------------------------------------------------------------------
Equity Compensation 1,762,277(1) $2.15(2) 1,977,252(3)
Plans approved by
Security holders
---------------------------------------------------------------------------------------------------------------------------
Equity Compensation None None None
Plans not approved by
Security holders
---------------------------------------------------------------------------------------------------------------------------
Total 1,762,277 $2.15 1,977,252
---------------------------------------------------------------------------------------------------------------------------
(1) Consists of 189,777 under the 2001 Incentive and Nonstatutory Stock Option
Plan; 1,122,500 under the 2002 Incentive and Nonstatutory Stock Option
Plan and 450,000 under the 2003 Incentive and Nonstatutory Stock Option
Plan.
(2) The weighted average of the options is $3,788,896.
(3) Represents 427,252 options available for future issuance under the 2002
Incentive and Nonstatutory Stock Option Plan and 1,550,000 available for
issuance under the 2003 Incentive and Nonstatutory Stock Option Plan .
(b) RECENT SALES OF UNREGISTERED SECURITIES
In August 2003, Mr. Hugh Duddy was issued options to acquire 160,000 shares of
NetSol Technologies, Inc. stock as compensation for consulting services provided
by Mr. Duddy. Mr. Duddy's options entitle him to acquire up to 40,000 shares of
common stock at the exercise price of $1.00 per share; 40,000 shares of common
stock at the exercise price of $2.50 per share; 40,000 shares at the exercise
price of $3.75 per share; and 40,000 shares at the exercise price of $5.00 per
share. Each option may be exercised from the date of grant until November 14,
2007 or as otherwise limited by NetSol's nonstatutory stock option plan.
In an offering closing prior to the reverse stock split in August 2003, we sold
809,999, post-reverse split, shares of restricted common stock to 12 accredited
investors for total consideration of $1,215,000 in reliance on an exemption from
registration available under Rule 506 of Regulation D of the Securities Act of
1933, as amended. This offering originally provided units consisting of shares
of common stock and warrants to acquire common stock but was amended to adjust
the number of shares consistent with NASDAQ compliance requirements. As part of
the placement agent agreement with Maxim Group LLC, NetSol issued warrants to
purchase 81,000 shares of common stock to Maxim Partners, nominee of Maxim Group
LLC.
On August 20, 2003, we entered into a loan agreement with an accredited non-U.S.
investor. Under the terms of the loan, NetSol borrowed $500,000 from the
investor. The note has an interest rate of 8% per annum. The note is due on a
date that is one hundred (120) days from the issuance date. On the due date of
the note, the note holder agreed to extend the term and compromise the debt with
stock rather than a cash payment. On December 16, 2003, the note holder
converted the note into 285,715 shares of the Company's common stock. The note
was issued in reliance on an exemption available from registration under
Regulation S of the Securities Act of 1933, as amended.
On October 14, 2003, NetSol executed an agreement to acquire Pearl Treasury
System Ltd, a United Kingdom company. This acquisition requires NetSol to issue
up to 60,000 shares of common stock to the shareholders of Pearl Treasury
System, Ltd. The shares used to acquire this asset were issued in reliance on an
exemption available from registration under Regulation S of the Securities Act
of 1933, as amended. On December 16, 2003, 41,700 shares were issued under this
agreement and the remaining 18,300 were issued on April 20, 2004 upon the
completion of the software delivery warranties.
On December 16, 2003, we issued 34,843 shares, valued at $100,000, to ACB, Ltd.,
formerly Arab Commerce Bank, as part of a settlement of an action instituted by
ACB Ltd. against NetSol. The shares were issued in reliance on an exemption
available from registration under Regulation S of the Securities Act of 1933, as
amended. On February 6, 2004, NetSol issued an additional 10,352 shares valued
at $35,135 for interest to ACB (formerly Arab Commerce Bank) pursuant to the
terms of the legal settlement dated November 3, 2003. These shares were issued
as part of the settlement agreement with ACB. The shares were issued in reliance
on an exemption available from registration under Regulation S of the Securities
Act of 1933, as amended.
15
On December 17, 2003, NetSol entered into a loan agreement with an accredited
non-U.S. investor, Noon Group. Under the terms of the loan, NetSol borrowed
$100,000 from the investor. The note has an interest rate of 6% per annum. The
note is due on a date that is six months from the issuance date. In the event of
default by NetSol only, the note is convertible into shares of common stock at
$1.95 per share, and 51,282 warrants at the exercise price of $3.25 per share
which expire one year from the conversion date. The note was issued in reliance
on an exemption available from registration under Regulation S of the Securities
Act of 1933, as amended. While the note was not automatically convertible except
in the case of a default, the company elected, prior to default and, with the
agreement of the note holder, to compromise the debt with stock rather than a
cash payment. In addition, the detachable warrants were cancelled at this time.
On March 24, 2004, the loan was converted into 51,282 shares of NetSol's common
stock. On June 10, 2004, an additional 5,861 shares of the Company's common
stock were issued for interest valued at $11,429.
On December 24, 2003, NetSol entered into a loan agreement with an accredited
non-U.S. investor, Akhtar Group. Under the terms of the loan, NetSol borrowed
$250,000 from the investor. The note has an interest rate of 6% per annum. The
note is due on a date that is one hundred and twenty (120) days from the
issuance date. In the event of default by NetSol only, the note is convertible
into shares of common stock at $1.85 per share, and 135,135 warrants at the
exercise price of $3.00 per share which expire six months from the conversion
date. The note was issued in reliance on an exemption available from
registration under Regulation S of the Securities Act of 1933, as amended. While
the note was not automatically convertible except in the case of a default, the
company elected, prior to default and, with the agreement of the note holder, to
compromise the debt with stock rather than a cash payment. In addition, the
detachable warrants were cancelled at this time. Effective March 8, 2004, the
loan was converted into 135,135 shares of NetSol's common stock.
On March 26, 2004, NetSol issued debentures to 23 accredited investors in a
principal amount of one million two hundred thousand dollars ($1,200,000). The
debentures mature two years from the date of the debenture, or March 26, 2006
and bear interest at the rate of 10% per annum payable in common stock or cash
at NetSol's option, on a quarterly basis. Pursuant to the terms of a supplement
agreement dated May 5, 2004, between NetSol and the debenture holders, the
conversion rate was set at one share for each $1.86 of principal. As part of
that amendment, each debenture holder is entitled to receive, at conversion,
warrants to purchase up to 50% of the shares issuable to the debenture holders
at conversion at the exercise price of $3.30 per share. These warrants expire in
June 2009. These debentures and warrants were issued in reliance on an exemption
from registration available under Regulation D of the Securities Act of 1933, as
amended.
On May 20, 2004, NetSol issued 386,363 shares of common stock and warrants to
acquire up to 163,182 shares of common stock at the exercise price of $3.30 per
share to nine accredited investors. These shares and warrants were issued in
reliance on an exemption from registration available under Regulation D of the
Securities Act of 1933, as amended.
In June 2004, NetSol issued a total of 45,000 shares of common stock, valued at
$39,240, to its directors as compensation for board service completed in January
2004. These shares were issued in reliance on an exemption from registration
available under Regulation D and S of the Securities Act of 1933, as amended.
Certain sales milestones were achieved for the NetSol Altvia subsidiary during
the current year. On February 5, 2004, NetSol issued 100,000 shares to Altvia as
agreed in the acquisition agreement. These shares were issued in reliance on an
exemption available under Regulation D of the Securities Act of 1933, as
amended.
During the year, a total of 123,350 shares of NetSol's common stock, valued at
$209,200, were issued to three investors as reimbursement for debts of NetSol
paid by the investors. These shares were issued in reliance on an exemption
available under Regulation S of the Securities Act of 1933, as amended.
During the fiscal year ended June 30, 2004 and 2003, employees exercised options
to acquire 1,067,309 and 954,983 shares of common stock in exchange for a total
exercise price of $1,370,551 and $850,816, respectively.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The following discussion is intended to assist in an understanding of NetSol's
financial position and results of operations for the year ended June 30, 2004.
Forward Looking Information
This report contains certain forward-looking statements and information relating
to NetSol that is based on the beliefs of management as well as assumptions made
by and information currently available to its management. When used in this
report, the words "anticipate", "believe", "estimate", "expect", "intend",
"plan", and similar expressions as they relate to NetSol or its management, are
intended to identify forward-looking statements. These statements reflect
management's current view of NetSol with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should any of these
risks or uncertainties materialize, or should underlying assumptions prove
inaccurate, actual results may vary materially from those described in this
report as anticipated, estimated or expected. NetSol's realization of its
business aims could be materially and adversely affected by any technical or
other problems in, or difficulties with, planned funding and technologies, third
party technologies which render NetSol's technologies obsolete, the
unavailability of required third party technology licenses on commercially
reasonable terms, the loss of key research and development personnel, the
inability or failure to recruit and retain qualified research and development
personnel, or the adoption of technology standards which are different from
technologies around which the Company's business is built. NetSol does not
intend to update these forward-looking statements.
16
PLAN OF OPERATIONS
Management has set the following new goals for NetSol's next 12 months.
Initiatives and Investment to Grow Capabilities
o Achieve CMM Level 4 Accreditation in 2004.
o Enhance Software Design, Engineering and Service Delivery
Capabilities by increasing investment in training.
o Enhance and invest in R&D or between 5-7% of yearly budgets in
financial, banking and various other domains within NetSol's core
competencies.
o Aggressively expand the sales and marketing organization in all key
locations by hiring senior and successful personnel.
o Recruit additional senior level Managers both in Lahore and
Bangalore facilities to be able to support potential new customers
from the North American, Asia Pacific and European markets.
o Embark on a program of recruiting the best available talent in
Project and Program Management.
o Increase Capex, to enhance Communications and Development
Infrastructure.
o Launch new business development initiatives in hyper growth
economies such as China.
o Create new technology partnership with Oracle and strengthen our
relationship with Intel in Asia Pacific and in the USA.
o Aggressively market LeaseSoft specially in Asia Pacific , Europe and
globally.
Top Line Growth through Investment in aggressively marketing organically and by
mergers and acquisition ("M&A") activities:
o Launch LeaseSoft into new markets by assigning new, well-established
companies as distributors in Europe, Asia Pacific
o Aggressive marketing in China for LeaseSoft and related services
o Expand relationships with key customers in the US, Europe and Asia
Pacific.
o Product Positioning through alliances and partnership.
o Joint Ventures
o Direct Marketing of Services.
o Embark on roll up strategy by broadening M&A activities broadly in
the software development domain.
o Enhance the sales and marketing organization by hiring new key
executives in the US, UK and Asia.
o Effectively position and marketing campaign for `Trapeze' or PTS.
This is a potentially big revenue generator in the banking domain
for which NetSol has already invested significant time and resources
towards completing the development of this application.
o Explore new diversified opportunities in the areas of Business
process Outsourcing.
With these goals in mind, we have entered in to the following arrangements:
LeaseSoft Distributors. NetSol appointed gedas Japan, a subsidiary of
Berlin-based gedas Group, as its Japanese distributor for the company's
LeaseSoft suite of fully integrated software solutions for the leasing and
financial services industries. gedas Group is a wholly-owned subsidiary of the
Volkswagen Group and has a history of success in the information technology (IT)
market that spans some 20 years. In the year 2003, gedas achieved global
revenues totaling EUR 576 million, 80 percent of which were generated in the
world's main automotive production centers.
Intel Corporation. NetSol forged what management believes to be a very important
and strategic alliance with Intel Corporation to develop a blueprint that would
give broader exposure and introduction to NetSol's LeaseSoft products to a
global market. NetSol recently attended major events in China and in San
Francisco through its Intel relationship, which was designed to connect and
introduce NetSol to Intel partners worldwide.
Launch of Indian Subsidiary. On March 17, 2004, NetSol announced that it had
launched a wholly owned subsidiary, NetSol International Pvt. Ltd., in
Bangalore, India. NetSol established this subsidiary as a service delivery base
for legacy systems migration, IT consultancy and certain software engineering
skills that are more readily available in India. The Indian IT-enabled services
business produces over $12 billion in export earnings and is growing at over 20%
annually. By establishing the Indian subsidiary, NetSol hopes to tap into the
growing Indian market.
Funding and Investor Relations.
o Raise new capital from emerging markets without or limited usage of
NetSol securities
o Attract long term institutional investors and partners both in the
US and in Asia.
o Infuse new capital from potential exercise of outstanding investors'
warrants and employees options for business development and
enhancement of infrastructures.
o Continuing to efficiently and prudently manage cash requirements and
raise capital from the markets only as it deems absolutely necessary
to execute the growth strategy.
o Enhance the visibility of company's stock to US based institutional
investors, funds and research analysts.
17
Improving the Bottom Line.
o Continue to review costs at every level.
o Grow process automation.
o Profit Centric Management Incentives.
o More local empowerment and P&L Ownership in each Country Office.
o Improve productivity at the development facility and business
development activities.
o Cost efficient management of every operation and continue further
consolidation to improve bottom line.
o Integrate and centralize the US headquarters operations and improve
the costs and bottom line
Management believes that NetSol is in a position to derive higher productivity
based on current capital employed.
Management continues to be focused on building its delivery capability and has
achieved key milestones in that respect. Key projects are being delivered on
time and on budget, quality initiatives are succeeding, especially in maturing
internal processes. Management believes that further leverage was provided by
the development `engine' of NetSol, which became CMM Level 2 in early 2002. In a
quest to continuously improve its quality standards, NetSol reached CMM Level 3
assessment in July 2003. According to the website of SEI of Carnegie Mellon
University, USA, only a few software companies in the world have announced their
assessment of level 3. As a result of achieving CMM level 3, NetSol is
experiencing a growing demand for its products and alliances from blue chip
companies worldwide. NetSol is now aiming for CMM level 4 in 2004 and
potentially CMM level 5, the highest CMM level, in 2005. NetSol plans to further
enhance its capabilities by creating similar development engines in other
Southeast Asian countries with CMM levels quality standards. This would make
NetSol much more competitive in the industry and provide the capabilities for
development in multiple locations. Increases in the number of development
locations with these CMM levels of quality standards will provide customers with
options and flexibility based on costs and broader access to skills and
technology.
MATERIAL TRENDS AFFECTING NETSOL
NetSol has identified the following material trends affecting NetSol
Positive trends:
o Outsourcing of services and software development is growing
worldwide.
o The Global IT budgets are estimated to exceed $1.2 trillion in 2004,
according to the internal estimates of Intel Corporation. About 50%
of this IT budget would be consumed in the US market alone primarily
on the people and processes.
o Overall economic expansion worldwide and explosive growth in the
merging markets specifically.
o Regional stability and improving political environment between
Pakistan and India.
o Economic turnaround in Pakistan including: a steady increase in
gross domestic product; much stronger dollar reserves, which is at
an all time high of over $13 billion; stabilizing reforms of
government and financial institutions; improved credit ratings in
the western markets, and elimination of corruption at the highest
level.
o Stronger ties between the US and Pakistan creating new investment
and trade opportunities
o Robust growth in outsourcing globally and investment of major US and
European corporations in the developing countries
Negative trends:
o The disturbance in Middle East and rising terrorist activities post
9/11 worldwide have resulted in issuance of travel advisory in some
of the most opportunistic markets. In addition, travel restrictions
and new immigration laws provide delays and limitations on business
travel.
o Negative perception and image created by extremism and terrorism in
the South Asian region
o US election uncertainty, not knowing what the new policy of the new
administration might be after January 2005
CRITICAL ACCOUNTING POLICIES
Our financial statements and related public financial information are based on
the application of accounting principles generally accepted in the United States
("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of NetSol
including information regarding contingencies, risk and financial condition.
Management believes our use of estimates and underlying accounting assumptions
adhere to GAAP and are consistently and conservatively applied. Valuations based
on estimates are reviewed for reasonableness and conservatism on a consistent
basis throughout NetSol. Primary areas where our financial information is
subject to the use of estimates, assumptions and the application of judgment
include our evaluation of impairments of intangible assets, and the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions. We
continue to monitor significant estimates made during the preparation of our
financial statements.
18
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
The recoverability of these assets requires considerable judgment and is
evaluated on an annual basis or more frequently if events or circumstances
indicate that the assets may be impaired. As it relates to definite life
intangible assets, we apply the impairment rules as required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
Of" which requires significant judgment and assumptions related to the expected
future cash flows attributable to the intangible asset. The impact of modifying
any of these assumptions can have a significant impact on the estimate of fair
value and, thus, the recoverability of the asset.
INCOME TAXES
We recognize deferred tax assets and liabilities based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets generated by the
Company or any of its subsidiaries are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Deferred tax assets resulting from the net operating losses
are reduced in part by a valuation allowance. We regularly review our deferred
tax assets for recoverability and establish a valuation allowance based upon
historical losses, projected future taxable income and the expected timing of
the reversals of existing temporary differences. During fiscal year 2003-2004,
we estimated the allowance on net deferred tax assets to be one hundred percent
of the net deferred tax assets.
CASH RESOURCES
We were successful in improving our cash position by the end of our fiscal year,
June 30, 2004. In addition, $957,892 was injected by the exercise of options by
several employees in 2004.
CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS
Board of Directors
At the 2004 Annual Shareholders Meeting an eight member board was elected. The
shareholders voted in an overwhelming majority for the new slate of directors.
The board now consists of Mr. Najeeb U. Ghauri, Mr. Jim Moody, Mr. Salim Ghauri,
Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki, Mr. Irfan Mustafa and,
Mr. Shabir Randeree.
Committees
The Audit committee is made up of Mr. Jim Moody as chair, Mr. Mustafa and Mr.
Beckert as members. The Compensation committee consists of Mr. Burki as its
chairman and Mr. Randeree and Mr. Mustafa as its members. The Nominating and
Corporate Governance Committee consists of Mr. Beckert as chairman, Mr. Randeree
and Mr. Moody as members.
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2004 COMPARED TO THE YEAR ENDED JUNE 30, 2003
Net revenues for the year ended June 30, 2004 were $5,749,062 as compared to
$3,745,386 for the year ended June 30, 2003. Net revenues are broken out among
the subsidiaries as follows:
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
NetSol USA $ 676,857 $ 508,868
--------------------------------------------------------------------------------
NetSol Tech(1) 3,190,049 1,351,413
--------------------------------------------------------------------------------
NetSol Private(2) 483,788 265,599
--------------------------------------------------------------------------------
NetSol CONNECT 778,598 1,185,162
--------------------------------------------------------------------------------
NetSol UK 356,215 83,737
--------------------------------------------------------------------------------
NetSol-Abraxas Australia 263,555 386,607
--------------------------------------------------------------------------------
Total Net Revenues $5,749,062 $3,745,386
========== ==========
--------------------------------------------------------------------------------
(1) Refers to NetSol Technologies (Pvt.) Limited
(2) Refers to NetSol (Private) Limited
The total consolidated net revenue for fiscal year 2004 was $5,749,062 compared
to $3,745,386 in fiscal year 2003. This is a nearly 53% increase in revenue. The
increase is attributable to new orders of licenses and an increase in services
business, including additional maintenance work.
NetSol has made significant progress in new customer acquisition. All of the
Company's owned subsidiaries have signed contracts with new customers. In the
current quarter, NetSol, as a group, has signed five new customers. All of the
new relationships would add to the top line over the next six months as well as
contributing to revenue growth. The Company added a few new customers such as,
Capital Stream in USA, Cal Portland Cement in USA, Habib Allied Bank, DCD Group,
enhancement in the Yamaha Motors project, DaimlerChrysler New Zealand and a few
local customers in the Pakistan region. NetSol continues to nurture and grow its
relationship with its existing customers, both in sales of new product licenses
and professional services.
19
Its U.S. subsidiary, NetSol USA, has created a growing niche in the
"not-for-profit" business space in the Washington D. C. area. The Washington
D.C. area office continues to sign new business for both its Knowledge Base
Product and Professional services.
NetSol UK continues its business development activities and has seen good
traction in its sales pipeline. The UK office recently signed a major new
customer in the insurance business. The relationship with this publicly traded
UK company has the potential to bring significant new recurring revenues to the
subsidiary. NetSol UK has ongoing relationships with Habib Allied Bank and DCD
Group. These relationships are bringing recurring revenues and are expected to
continue in the near term.
As a direct result of the successful implementations of some of our current
systems with DaimlerChrysler, we are noticing an increasing demand for
LeaseSoft. Although the sales cycle for LeaseSoft is rather long, we are
experiencing a 100% increase in product demonstration, evaluation and assessment
by blue chip companies in the UK, Australia, Japan, Europe and Pakistan. The
crown jewel of our product line "CMS' ("Contract Management System") which was
sold to three companies of DaimlerChrysler Asia Pacific Region in 2001 for a
combined value in excess of two million dollars was implemented and delivered to
customers in 2003. A number of large leasing companies will be looking to renew
legacy applications. This places NetSol in a very strong position to capitalize
on any upturn in I/T spending by these companies. NetSol is well positioned to
sell several new licenses in fiscal year 2004 that could potentially increase
the sales and bottom line. As the Company sells more of these licenses,
management believes it is possible that the margins could increase to upward of
70%. The license prices of these products vary from $100,000 to $500,000 with
additional charges for customization and maintenance of between 20%-30% each
year. The Company, in parallel, has developed banking applications software to
boost its product line and these systems were sold to Citibank and Askari Banks
in Pakistan in 2002. New customers in the banking sector are also growing and
the Company expects substantial growth in this area in the coming year.
The gross profit was $3,049,387 for year ended June 30, 2004 as compared with
$1,966,393 for the same period of the previous year. This is a 55% increase. The
gross profit percentage was 53% for the current fiscal year and the prior year.
While the cost of sales and the cost of delivery of projects have both been
reduced in the current year, the Company maintained all its delivery commitments
and has won new business from existing and new customers. While management is
striving to negotiate better pricing on new agreements, the Company has been
required to react to overall general economic factors in determining its present
pricing structure. The gross profit margin was also improved due to improved
quality standards such as achieving the assessment of CMM Level 3 in 2003.
Operating expenses were $5,757,405 for the year ended June 30, 2004 as compared
to $4,434,643 for the year ended June 30, 2003. During the years ended June 30,
2004 and 2003, the Company issued 48,613 and 93,400 restricted common shares in
exchange for services rendered, respectively. The Company recorded this non-cash
compensation expense of $48,240 and $39,200 for the years ended June 30, 2004
and 2003, respectively. Total professional service expense, including non-cash
compensation, was $464,332 and $272,447 for the years ended June 30, 2004 and
2003, respectively. During the years ended June 30, 2004 and 2003, the Company
recorded depreciation and amortization expense of $1,240,792 and $1,183,502,
included in this increase is the addition of the completed Lahore facility.
Salaries and wages expenses were $1,493,252 and $934,383 for the years ended
June 30, 2004 and 2003, respectively, or an increase of $558,869 or 60%. The
addition of new management level employees and consultants from the Altvia
acquisition and new employees at our UK subsidiary, as well as an increase in
sales and administration employees resulted in the increase. In addition, key
officers were given a pay raise effective January 1, 2004, the first in
company's history. Two of the officers have agreed to take the incremental
compensation against exercising options granted to them. General and
administrative expenses were $1,759,607 and $956,644 for the years ended June
30, 2004 and 2003, respectively, an increase of $802,963. In the current year,
the general and administrative expense includes non-recurring expenses for
moving both the headquarters office and the Pakistan companies into the new
facility, $105,608 in costs for placing the convertible debenture and $122,500
for settlement of legal disputes. Also, the Company had to incur extra costs for
executing the reverse split of its common stock through the proxy process,
annual shareholders meeting including proxies mailing and other administrative
related costs and travel expenses increased by approximately $105,934.
Selling and marketing expenses increased to $253,701 for the year ended June 30,
2004 as compared to $76,136 for the year ended June 30, 2003, reflecting the
growing sales activity of the Company. The Company wrote-off, as uncollectible,
bad debts of $219,909 and $415,384, during the years ended June 30, 2004 and
2003, respectively.
The loss from operations in fiscal year 2004 was $2,708,018 which is a 9.71%
increase from $2,468,250 in fiscal year 2003. Included in this amount is are
non-cash charges of depreciation and amortization of $1,240,792, settlement
expenses of $122,500 and bad debt expense of $219,909. Net losses from continued
operations in fiscal year 2004 was $2,850,217 compared to $2,615,851 in fiscal
year 2003 or 6.5% increase. The current fiscal year amount includes $273,159
add-back for the 49.9% minority interest in NetSol Connect owned by another
party. The Company also recognized non-recurring expenses including $137,230
expense for the beneficial conversion feature on notes payable and convertible
debenture, a gain of $104,088, from writing off a note payable in one of the
subsidiaries that had been paid through the issuance of stock by the parent in
the prior year and a gain of $216,230 from the settlement of a debt. The net
loss per share was $0.33 in 2004 compared to $0.47 in 2003. The total weighted
average of shares outstanding basic and diluted was 7.9 million against 4.5
million in 2003.
The Company's cash position was $871,161 at June 30, 2004 compared to $214,490
at June 30, 2003. In addition the Company had $391,403 in certificates of
deposit, of which $121,163 is being used as collateral for the financing of the
directors' and officers' liability insurance. The total cash position, including
the certificates of deposits, was $1,260,000 million as of June 30, 2004.
20
Management expects to continue to improve its cash position in the current and
future quarters due to the new business signed up in the last quarter. In
addition, the Company anticipates additional exercises of investor warrants and
employee stock options in the current and subsequent quarters. The Company has
consistently improved its cash position in last four quarters through investors'
exercise of warrants, employee options exercised, private placements and the
signing of new business. We anticipate this trend to continue in the current and
future quarters, further improving the cash resources and liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in December 2003. The company would continue
to inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities. However, management is committed to
ensuring the most efficient and cost effective means of raising capital and
utilization.
Going Concern Qualification
The Company's independent auditors have included an explanatory paragraph in
their report on the June 30, 2004 consolidated financial statements discussing
issues which raise substantial doubt about the Company's ability to continue as
a "going concern." The going concern qualification is attributable to the
Company's historical operating losses and the amount of capital which the
Company projects it needs to satisfy existing liabilities and achieve profitable
operations. In positive steps, the Company has closed down its loss generating
businesses, and continues to evaluate and implement cost cutting measures at
every entity level. The Company is optimistic that the remaining entities can
become profitable in fiscal 2005. For the year ended June 30, 2004, the Company
continued to experience a negative cash flow from consolidated operations, and
projects that it will need certain additional capital to enable it to continue
operations at its current level beyond the near term. The Company believes that
certain of this needed capital will result from the successful collection of its
accounts receivable balances as projects are completed during the coming fiscal
year. The Company believes it can raise additional funds though private
placements of its common stock.
Liquidity And Capital Resources
Net cash used for operating activities amounted to $1,540,178 for the year ended
June 30, 2004, as compared to $2,180,515 for the comparable period last fiscal
year. The decrease is mainly due to an increase in accounts receivable and a
decrease in accounts payable.
Net cash used by investing activities amounted to $3,406,964 for the year ended
June 30, 2004, as compared to providing $678,783 for the comparable period last
fiscal year. The difference lies primarily in the net purchase of $391,403 in
certificates of deposits in the current fiscal year compared to proceeds of
$714,334 in the prior year. During the current fiscal year, the Company had
proceeds of $210,000 from the sale of a minority interest in the Company's
subsidiary NetSol Connect. In addition, the Company had net purchases of
property and equipment of $2,861,754 compared to $127,822 for the comparable
period last fiscal year. The majority of this reflects the capitalized costs of
the Lahore facility of approximately $2.32 million. Also, the Company
capitalized $439,297 in software development costs.
Net cash provided by financing activities amounted to $5,543,843 and $1,429,681
for years ended June 30, 2004, and 2003, respectively. The current fiscal year
included the cash inflow of $1,618,337from issuance of equity and $1,445,392
from the exercising of stock options and warrants, compared to $365,219 and
$845,566 in the prior year, respectively. In the current fiscal year, the
Company had net proceeds from loans of $1,301,571 as compared to $218,896 in the
comparable period last year. The Company also obtained a $1,200,000 convertible
debenture during the current fiscal year.
As of June 30, 2004 the Company's working capital (current assets less current
liabilities) totaled $410,991, a decrease from a $1.2 million deficit, as of
June 30, 2003. In fiscal 2004, the Company raised capital from financing with
Maxim Group of $1.85 million, net of expenses. In addition, $1.2 million in
convertible debentures were issued during the current fiscal year and
approximately $487,000 from the exercising of warrants. The Company also secured
a line of credit for $1 million from DCD Group. This line of credit has not yet
been utilized. The Company has over $1.9 million in accounts receivable and
revenues in excess of billings. The Company will be pursuing various and
feasible means of raising new funding to expand its infrastructure, enhance
product offerings and beef up marketing and sales activities in strategic
markets.
The management expects to continue to improve its cash position in the current
and future quarters due to the new business signed up in the last quarter. In
addition, the Company anticipates additional exercises of investor warrants and
employee stock options in the current and subsequent quarters. The Company has
consistently improved its cash position in last four quarters through investors'
exercise of warrants, employee options exercised, private placements and the
signing of new business. We anticipate this trend to continue in the current and
future quarters, further improving the cash resources and liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in December 2003. The company would continue
to inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities. However, management is committed to
ensuring the most efficient and cost effective means of raising capital and
utilization.
NetSol's Technology Campus in Lahore was completed in May 2004 and the staff was
relocated into this new building. The Phase 1 will easily hold up to 500
programmers, engineers and other related staff. NetSol expects a positive
response to this move from the business community, our existing customers and
prospective new customers worldwide. The completion of technology campus is a
major milestone for NetSol, employees, customers and the shareholders.
Dividends and Redemption
It has been the Company's policy to invest earnings in the growth of the Company
rather than distribute earnings as dividends. This policy, under which dividends
have not been paid since the Company's inception and is expected to continue,
but is subject to regular review by the Board of Directors.
21
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 7 are included at the
end of this report on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In connection with the audit of the Company's financial statements for the
fiscal years ended June 30, 2003 and June 30, 2004, there were no disagreements,
disputes, or differences of opinion with Kabani & Company on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures, which, if not resolved to the satisfaction of Kabani &
Company would have caused Kabani & Company to make reference to the matter in
its report.
ITEM 8A. CONTROLS AND PROCEDURES
Management, under the supervision and with the participation of the chief
executive officer and chief financial officer, conducted an evaluation of the
disclosure controls and procedures as defined in Rule 13a-15(e) as of the fiscal
quarter ended on June 30, 2004. Based upon that evaluation, the Chairman, Chief
Financial Officer and Chief Executive Officer concluded that our disclosure
controls and procedures are effective.
There has been no change that has materially affected, or is reasonably likely
to materially affect, these internal controls over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that
the Company's directors and executive officers and persons owning more than 10%
of the outstanding Common Stock, file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Executive
officers, directors and beneficial owners of more than 10% of the Company's
Common Stock are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
Based solely on copies of such forms furnished as provided above, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended June 30, 2004, all Section 16(a) filing requirements
applicable to its executive officers, directors and beneficial owners of more
than 10% of its Common Stock were complied with, except as follows: Messieurs
Burki, Randeree and Moody did not file their Form 5s until the week of September
13, 2004.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The Board of Directors elects the executive
officers of the Company annually. Each year the stockholders elect the Board of
Directors. The executive officers serve terms of one year or until their death,
resignation or removal by the Board of Directors. In addition, there was no
arrangement or understanding between any executive officer and any other person
pursuant to which any person was selected as an executive officer.
22
The directors and executive officers of the Company are as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Name Year First Elected As an Age Position Held with the Registrant Family Relationship
Officer
Or Director
-----------------------------------------------------------------------------------------------------------------------------------
Najeeb Ghauri 1997 50 Chief Financial Officer, Director and Brother to Naeem and Salim
Chairman Ghauri
-----------------------------------------------------------------------------------------------------------------------------------
Salim Ghauri 1999 49 President and Director Brother to Naeem and Najeeb
Ghauri
-----------------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri 1999 47 Chief Executive Officer, Director Brother to Najeeb and Salim
Ghauri
-----------------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson 2004 39 Secretary, Corporate Counsel None
-----------------------------------------------------------------------------------------------------------------------------------
Irfan Mustafa 1997 53 Director None
-----------------------------------------------------------------------------------------------------------------------------------
Shahid Javed Burki 2000 65 Director None
-----------------------------------------------------------------------------------------------------------------------------------
Eugen Beckert 2001 58 Director None
-----------------------------------------------------------------------------------------------------------------------------------
Jim Moody 2001 68 Director None
-----------------------------------------------------------------------------------------------------------------------------------
Shabir Randeree 2003 43 Director None
-----------------------------------------------------------------------------------------------------------------------------------
Business Experience of Officers and Directors:
NAJEEB U. GHAURI has been a Director of the Company since 1997. Mr. Ghauri
served as the Company's CEO from 1999-2001. Currently, he is the Chief Financial
Officer and Chairman of the Company. During his tenure as CEO, Mr. Ghauri was
responsible for managing the day-to-day operations of the Company, as well as
the Company's overall growth and expansion plan. As the CFO of the Company, Mr.
Ghauri seeks financing for the Company as well as oversees the day-to-day
financial position of the Company. Prior to joining the Company, Mr. Ghauri was
part of the marketing team of Atlantic Richfield Company ("ARCO"), a Fortune 500
company, from 1987-1997. Mr. Ghauri received his Bachelor of Science degree in
Management/Economics from Eastern Illinois University in 1979, and his M.B.A. in
Marketing Management from Claremont Graduate School in California in 1983. Mr.
Ghauri is the Chairman of the Board of Directors. Mr. Ghauri serves on the
boards of the US Pakistan Business Council and Pakistan Human Development Fund,
a non-profit organization.
SALIM GHAURI has been with the Company since 1999 as the President and Director
of the Company. Mr. Ghauri is also the CEO of Network Technologies (Pvt.) Ltd.,
(F/K/A/ Network Solutions (Pvt.) Ltd.), a wholly owned subsidiary of the Company
located in Lahore, Pakistan. Mr. Ghauri received his Bachelor of Science degree
in Computer Science from University of Punjab in Lahore, Pakistan. Before
Network Technologies (Pvt.) Ltd., Mr. Ghauri was employed with BHP in Sydney,
Australia from 1987-1995, where he commenced his employment as a consultant. Mr.
Ghauri was the original founder of Network Solutions, Pvt. Ltd in Pakistan
founded in 1996. Built under Mr. Ghauri's leadership Network Solutions (Pvt)
Ltd. gradually built a strong team of I/T professionals and infrastructure in
Pakistan and became the first software house in Pakistan certified as ISO 9001
and CMM Level 3 assessed. In March 2004, Salim Ghauri, CEO NetSol Pvt. Ltd. was
awarded the 5th NCR IT Excellence Award for the year 2003-04 for undertaking a
pioneering effort in the development and nourishment of Pakistan's IT industry.
The major aspect of this appreciation was the industry wide recognition by noted
professionals and independent observers that under Salim Ghauri's visionary
leadership, These awards were conceived and distributed by NCR Pakistan and
adjudicated by Ford Rhodes Sidat Hyder, Pakistan's leading consultancy
organization.
NAEEM GHAURI has been the Company's CEO since August 2001. Mr. Ghauri has been a
Director of the Company since 1999. Mr. Ghauri serves as the Managing Director
of NetSol (UK) Ltd., a wholly owned subsidiary of the Company located in London,
England. Mr. Ghauri was responsible for the launch of NetSolConnect in Pakistan.
Prior to joining the Company, Mr. Ghauri was Project Director for Mercedes-Benz
Finance Ltd., a subsidiary of DaimlerChrysler, Germany from 1994-1999. Mr.
Ghauri supervised over 200 project managers, developers, analysis and users in
nine European Countries. Mr. Ghauri earned his degree in Computer Science from
Brighton University, England.
PATTI L. W. MCGLASSON joined NetSol as corporate counsel in January 2004 and was
elected to the position of Secretary in March 2004. Prior to joining NetSol, Ms.
McGlasson practiced at Vogt & Resnick, law corporations, where her practice
focused on corporate, securities and business transactions. Ms. McGlasson was
admitted to practice in California in 1991. She received her Bachelor of Arts in
Political Science in 1987 from the University of California, San Diego and, her
Juris Doctor and Masters in Law in Transnational Business from the University of
the Pacific, McGeorge School of Law, in 1991 and 1993, respectively.
IRFAN MUSTAFA has been a Director of NetSol since the inception of the Company
in April 1997. Mr. Mustafa has an M.B.A. from IMD (formerly Imede), Lausanne,
Switzerland (1975); an M.B.A. from the Institute of Business Administration,
Karachi, Pakistan (1974); and a B.S.C. in Economics, from Punjab University,
Lahore, Pakistan (1971). Mr. Mustafa began his 14-year career with Unilever, Plc
where he was one of the youngest senior management and board members. Later, he
was employed with Pepsi International from 1990 to 1997 as a CEO in Pakistan,
Bangladesh, Sri Lanka and Egypt. He spent two years in the US with Pepsi in
their Executive Development Program from 1996-97. Mr. Mustafa was relocated to
Dubai as head of TRICON (now YUM Restaurant Services Group, Inc.) Middle East
and North African regions. Pepsi International spun off TRICON in 1997. Mr.
Mustafa has been a strategic advisor to NetSol from the beginning and has played
a key role in every acquisition by the company. His active participation with
NetSol management has helped the Company to establish a stronger presence in
Pakistan. Mr. Mustafa is a member of the Audit and Compensation Committees.
23
EUGEN BECKERT was appointed to the Board of Directors in August 2001 to fill a
vacancy and continues to serve on the Board. A native of Germany, Mr. Beckert
has been with Mercedes-Benz AG/Daimler Benz AG since 1973, working in technology
and systems development. In 1992, he was appointed director of Global IT (CIO)
for Debis Financial Services, the services division of Daimler Benz. From 1996
to 2000, he acted as director of Processes and Systems (CIO) for Financial
Services of DaimlerChrysler Asia Pacific Services. From 2001 to 2004, he served
as Vice President in the Japanese company of DCS. Mr. Beckert is currently a
Director for DaimlerChrysler and his office is now based in Stuttgart, Germany.
Mr. Beckert is chairman of the Nominating and Corporate Governance Committee and
a member of the Audit Committee.
JIM MOODY was appointed to the Board of Directors in 2001. Mr. Moody served in
the United States Congress from 1983-1993 where he was a member of the Ways &
Means, Transportation and Public Woks committees. Former Congressman Moody also
served on the subcommittees of Health, Social Security, Infrastructure and Water
Resources. After his tenure with the U.S. Congress, he was appointed Vice
President and Chief Financial Officer of International Fund for Agriculture
Development in Rome, Italy from 1995-1998 where he was responsible for
formulating and administering $50 million operating budget in support of $500
million loan program as well as managing a $2.2 billion reserve fund investment
portfolio. From 1998-2000, former Congressman Moody served as the President and
CEO of InterAction, a coalition of 165 U.S. based non-profit organizations in
disaster relief, refugee assistance and economic development located in
Washington, D.C. From April 2000 to present, Former Congressman Moody serves as
a Financial Advisor to Morgan Stanley in Washington D.C. where he is responsible
for bringing institutional, business and high net-worth individual's assets
under management. Mr. Moody also represents Morgan Stanley on the ATC Executive
Board. Mr. Moody received his B.A. from Haverford College; his M.P.A. from
Harvard University and his Ph.D. in Economics from U.C. Berkeley. Mr. Moody is
the Chairman of the Audit Committee and a member of the Nominating and Corporate
Governance committee.
SHAHID JAVED BURKI was appointed to the Board of Directors in February 2003. He
had a distinguished career with World Bank at various high level positions from
1974 to 1999. He was a Director of Chief Policy Planning with World Bank from
1974-1981. He was also a Director of International Relations from 1981-1987. Mr.
Burki served as Director of China Development from 1987-1994 and Vice President
of Latin America with World Bank from 1994-1999. In between, he briefly served
as the Finance Minister of Pakistan from 1996-1997. Mr. Burki also served as the
CEO of the Washington based investment firm EMP Financial Advisiors from
1992-2002. Presently, he is the Chairman of Pak Investment & Finance
Corporation. He was awarded a Rhodes Scholarship in 1962 and M.A in Economics
from Oxford University in 1963. He also earned a Master of Public Administration
degree from Harvard University, Cambridge, MA in 1968. Most recently, he
attended Harvard University and completed an Executive Development Program in
1998. During his lifetime, Mr. Burki has authored many books and articles
including: China's Commerce (Published by Harvard in 1969) and Accelerated
Growth in Latin America (Published by World Bank in 1998). Mr. Burki is a member
of the Compensation Committee.
SHABIR RANDEREE, was appointed to the Board of Directors in February 2003. Mr.
Randeree is a Group Managing Director of DCD London and Mutual Plc, a position
he has held since 1990. DCD L&M is the UK arm of the DCD Group. The DCD Group,
with offices in the UK, United States, UAE, India and South Africa has core
businesses in finance, property and investments. From 1988 to 1990, Mr. Randeree
served as Managing Director of Warrenby Limited, a business initiated to provide
an alternate approach to international trade finance and real estate investments
in the U.K. From 1986 to 1988, Mr. Randeree was Sales and Financial Director of
Dominion Clothing Distributors Limited. Mr. Randeree received his B.A. in 1984
in Accounting and Finance from Kingston University in Surrey and his MBA in 1985
from Schiller International University in London. Mr. Randeree is a director of
various U.K. companies including: Brodensbury Park Hotel Ltd.; Collins Leisure
Ltd.; DCD Factors PLC; DCD Properties Ltd.; Pelham Incorporated Ltd.; Redbush
Tea Company Ltd.; Wimbledon Bear Company Ltd.; Tarhouse Management Ltd.;
Thornbury Estates Ltd.; and; the Support Store Ltd. He is a trustee and advisor
to various educational trusts and Director of Albaraka Bank Limited of South
Africa. Mr. Randeree is a member of the Compensation and Nominating and
Corporate Governance Committees.
24
ITEM 10-EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE AND OPTIONS
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the last three fiscal years
by the executive officers of the Company who received compensation of or in
excess of $100,000 during the fiscal year ended June 30, 2004. The following
information for the officers includes the dollar value of base salaries, bonus
awards, the number of stock options granted and certain other compensation, if
any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------------
Annual Long Term Compensation
Compensation(1)
----------------------------------------------------------------------------------------------------------------------------
Long Term Securities
Name and Principal Position Fiscal Year Salary Bonus Compensation Awards (2) Underlying Options/
Ended Restricted Stock SARs (4)
Awards(3)
----------------------------------------------------------------------------------------------------------------------------
Najeeb U. Ghauri, Chief Financial Officer, 2004 $200,000 -0- -0- 50,000(5)
Secretary, Chairman, Director 50,000(6)
25,000(7)
20,000(8)
30,000(9)
2003 $120,000 -0- -0- -0-
2002 $100,000 -0- -0- 85,000(10)
100,000(11)
20,000(12
----------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri, CEO, Director 2004 $207,900(13) -0- -0- 50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
2003 $125,000 -0- -0- -0-
2002 $100,000 -0- -0- 70,000(14)
100,000(11)
20,000(12)
----------------------------------------------------------------------------------------------------------------------------
Salim Ghauri, President, Director 2004 $110,000 -0- -0- 50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
2003 $100,000 -0- -0- -0-
2002 $100,000 -0- -0- 70,000(14)
100,000(11)
20,000(12)
----------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson, Secretary, 2004 $82,000 -0- 5,000(15) 5,000(16)
Corporate Counsel 5,000(17)
20,000(8)
30,000(9)
----------------------------------------------------------------------------------------------------------------------------
(1) No officers received or will receive any bonus or other annual compensation
other than salaries during fiscal 2004, nor any benefits other than those
available to all other employees that are required to be disclosed. These
amounts are not inclusive of automobile allowances, where applicable.
(2) No officers received or will receive any long-term incentive plan (LTIP)
payouts or other payouts during fiscal 2004.
(3) All stock awards are shares of Common Stock of the Company.
(4) All securities underlying options are shares of Common Stock of the Company.
The Company has not granted any stock appreciation rights. No options were
granted in the named executive officers in fiscal year 2003. Options are
reflected in post-reverse split numbers. All options are currently exercisable
or may be exercised within sixty (60) days of the date of this annual report.
(5) Includes options to purchase 50,000 shares of our common stock granted on
January 1, 2004 at the exercise price of $2.21 per share. These options must be
exercised within five years after the grant date.
(6) Includes options to purchase 50,000 shares of our common stock granted on
January 1, 2004 at the exercise price of $3.75 per share. These options must be
exercised within five years after the grant date.
(7) Includes options to purchase 12,500 shares of our common stock at $5.00 per
share. These options must be exercised within five years after the grant date.
(8) Includes options to purchase 20,000 shares of our common stock at $2.65 per
share. These options must be exercised within five years after the grant date.
(9) Includes options to purchase 30,000 shares of our common stock at $5.00 per
share. These options must be exercised within five years after the grant date.
25
(10) Includes options to purchase 85,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $.75 per share. Options must be
exercised within five years after the grant date.
(11) Includes options to purchase 100,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $1.25 per share.
(12) Includes options to purchase 200,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $2.50 per share.
(13) Mr. Ghauri salary is 110,000 British Pounds Sterling. The total in this
table reflects a conversion rate of 1.89 dollars per pound.
(14) Includes options to purchase 70,000 shares of our common stock granted on
February 16, 2002 at the exercise price of $.75 per share. Options must be
exercised within five years after the grant date.
(15) In May 2004, Ms. McGlasson received 5,000 shares of common stock as a
performance bonus arising out of her services as counsel for the Company.
(16) Includes options to purchase 5,000 shares of common stock at the exercise
price of the lesser of the $2.30 or the market price of the shares on the date
of exercise less $2.00.
(17) Includes options to purchase 5,000 shares of common stock at the exercise
price of $3.00 per share.
OPTIONS GRANTS IN LAST FISCAL YEAR(1)
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------------------------------------------
Name Number of Securities Percentage of Total Exercise or Base Expiration Date
Underlying Options Options Granted to Price ($/Sh)
Employees in Fiscal
Year
---------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri (i) 100,000(2) 18.66% $2.21 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(ii) 100,000(2) $3.75 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(iii) 50,000(2) $5.00 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(iv) 20,000 $2.65 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
(v) 30,000 $5.00 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
Najeeb Ghauri (i) 100,000(2) 18.66% $2.21 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(ii) 100,000(2) $3.75 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(iii) 50,000(2) $5.00 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(iv) 20,000 $2.65 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
(v) 30,000 $5.00 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
Salim Ghauri (i) 100,000(2) 18.66% $2.21 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(ii) 100,000(2) $3.75 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(iii) 50,000(2) $5.00 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(iv) 20,000 $2.65 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
(v) 30,000 $5.00 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson (i) 10,000(2) 4.35% $2.30(3) December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(ii) 10,000(2) $3.00 December 31, 2008
---------------------------------------------------------------------------------------------------------------------------
(iii) 20,000 $2.65 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
(iv) 30,000 $5.00 March 25, 2009
---------------------------------------------------------------------------------------------------------------------------
(1) There were no SAR grants in the last fiscal year.
(2) These options vest 25% per each quarter of service commencing March
31, 2004 and are fully vested on December 31, 2004.
(3) The exercise price is the lesser of $2.30 or the market price on the
date of the exercise less $2.00.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
-----------------------------------------------------------------------------------------------------------------
Name Shares Acquired On Value Realized (1) Number of Value f
Exercise (#) ($) Unexercised Unexercised
Options/SARs at In-The-Money at
FY-end (###) FY-end ($)
Exercisable(2)/ Exercisable/(2)
Unexercisable Unexercisable
-----------------------------------------------------------------------------------------------------------------
Najeeb Ghauri, CFO, 87,223 $0.00 150,000/150,000 $2,000/0.00
Chairman, Director
-----------------------------------------------------------------------------------------------------------------
Salim Ghauri, 67,777 $0.00 155,000/155,000 $2,000/0.00
President Director
-----------------------------------------------------------------------------------------------------------------
Naeem Ghauri, CEO, 51,557 $0.00 150,000/155,000 $2,000/0.00
Director
-----------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson 2,500 $0.00 60,000/10,000 $525/1,050
-----------------------------------------------------------------------------------------------------------------
(1) The closing price of the stock at the June 30, 2004, Fiscal Year End was
$2.21.
(2) All options are currently exercisable.
26
EMPLOYMENT AGREEMENTS
Effective January 1, 2004, we entered into an employment agreement with Naeem
Ghauri as our Chief Executive Officer. The agreement is for a base term of three
years, and continues thereafter on an at will basis until terminated by either
NetSol or Mr. Ghauri. The agreement provides for a yearly salary of 110,000
pounds sterling. The agreement also provides for such additional compensation as
the Board of Directors determines is proper in recognition of Mr. Ghauri's
contributions and services to us. In addition, the agreement provides Mr. Ghauri
with options to purchase up to 100,000 shares of common stock at an exercise
price of $2.21, 100,000 shares at an exercise price of $3.75 and 50,000 shares
at an exercise price of $5.00. These options vest at the rate of 25% per quarter
and are fully vested on December 31, 2004. These options expire on December 31,
2008. Mr. Ghauri also received options to purchase up to 20,000 shares at the
exercise price of $2.65 per share and options to purchase 30,000 shares at the
exercise price of $5.00 per share. These options vest immediately and are
exercisable until March 25, 2009.
Effective January 1, 2004, we entered into an employment agreement with Najeeb
Ghauri as Chief Financial Officer. The agreement is for a base term of three
years, and continues thereafter on an at will basis until terminated by either
NetSol or Mr. Ghauri. The agreement provides for a yearly salary of $200,000.
The agreement also provides for such additional compensation as the Board of
Directors determines is proper in recognition of Mr. Ghauri's contributions and
services to us. In addition, the agreement provides Mr. Ghauri with options to
purchase up to 100,000 shares of common stock at an exercise price of $2.21,
100,000 shares at an exercise price of $3.75 and 50,000 shares at an exercise
price of $5.00. These options vest at the rate of 25% per quarter and are fully
vested on December 31, 2004. These options expire on December 31, 2008. Mr.
Ghauri also received options to purchase up to 20,000 shares at the exercise
price of $2.65 per share and options to purchase 30,000 shares at the exercise
price of $5.00 per share. These options vest immediately and are exercisable
until March 25, 2009.
Effective January 1, 2004, we entered into an employment agreement with Salim
Ghauri as the President of NetSol and Chief Executive Officer of our Pakistan
subsidiary. The agreement is for a base term of three years, and continues
thereafter on an at will basis until terminated by either us or Mr. Ghauri. The
agreement provides for a yearly salary of $110,000. The agreement also provides
for such additional compensation as the Board of Directors determines is proper
in recognition of Mr. Ghauri's contributions and services to us. In addition,
the agreement provides Mr. Ghauri with options to purchase up to 100,000 shares
of common stock at an exercise price of $2.21, 100,000 shares at an exercise
price of $3.75 and 50,000 shares at an exercise price of $5.00. These options
vest at the rate of 25% per quarter and are fully vested on December 31, 2004.
These options expire on December 31, 2008. Mr. Ghauri also received options to
purchase up to 20,000 shares at the exercise price of $2.65 per share and
options to purchase 30,000 shares at the exercise price of $5.00 per share.
These options vest immediately and are exercisable until March 25, 2009.
Effective January 1, 2004, we entered into an employment agreement with Patti L.
W. McGlasson as legal counsel. The agreement provides for a yearly salary of
$82,000. Ms. McGlasson also received options to purchase up to 10,000 shares of
common stock at an exercise price equal to the lesser of $2.30 or the market
price of the shares on the date of exercise less $2.00. These options vest at
the rate of 25% per quarter and are exercisable until December 31, 2008.
Effective March 26, 2004, Ms. McGlasson was elected to the position of
Secretary. In connection with her role as Secretary, Ms. McGlasson received
options to purchase up to 10,000 shares of common stock at $3.00 per share.
These options vest at the rate of 25% per quarter and are exercisable until
December 31, 2008. Ms. McGlasson also received options to purchase up to 20,000
shares at the exercise price of $2.65 per share and options to purchase 30,000
shares at the exercise price of $5.00 per share. These options vest immediately
and are exercisable until March 25, 2009.
All of the above agreements provide for certain paid benefits such as employee
benefit plans and medical care plans at such times as we may adopt them. The
agreements also provide for reimbursement of reasonable business-related
expenses and for two weeks of paid vacation. The agreements also provide for
certain covenants concerning non-competition, non-disclosure, indemnity and
assignment of intellectual property rights. NetSol currently has three incentive
and nonstatutory stock option plans in force for 2001, 2002 and 2003 and two
other plans from 1997 and 1999. No options have been issued under the 1997 and
1999 plans in the past two fiscal years.
The 2001 plan authorizes the issuance of up to 2,000,000 options to purchase
common stock of which 2,000,000 have been granted. The grant prices range
between $.75 and $2.50.
The 2002 plan authorizes the issuance of up to 2,000,000 options to purchase
common stock of which 1,572,748 options have been granted. The grant prices
range between $.75 and $5.00.
In March 2004, our shareholders approved the 2003 stock option plan. This plan
authorizes up to 2,000,000 options to purchase common stock of which 450,000
have been granted. The grant prices range between $2.64 and $5.00.
COMPENSATION OF DIRECTORS
For the 2003 term, Directors of the Company receive any cash compensation of
$750 for attendance in person at a board meeting and are entitled to
reimbursement of their reasonable expenses incurred in attending Directors'
Meetings. Upon the full completion of the 2003 term, each director received
7,000 shares of restricted common stock. In addition, the Company granted each
of its directors the following S-8 registered options: (a) 10,000 stock options,
exercise price of $0.75, vested quarterly; and (b) 20,000 stock options,
exercise price of $2.50 vesting quarterly.
For the 2004 term, Non-Management members of the Board of Directors of the
Company receive cash compensation of $2,000 for each face to face meeting and
$1,000 for each board teleconference meeting with a minimum duration of two
hours. Each board member is to receive 2,000 shares of restricted common stock
upon completion of the 2004 term and options to purchase up to 20,000 shares at
the exercise price of $2.64 and options to acquire up to 30,000 shares at the
exercise price of $5.00 per share. The options vest and are exercisable
immediately.
27
For the 2004 term, Management members of the Board of Directors of the Company
receive no cash compensation for meeting attendance but are granted options to a
purchase up to 20,000 shares at the exercise price of $2.64 and options to
acquire up to 30,000 shares at the exercise price of $5.00 per share. The
options vest and are exercisable immediately.
All directors are entitled to reimbursement of approved business expenses.
The Audit Committee Chairman shall receive $1,100 per month, and 5,000 shares of
restricted common stock issuable upon completion of the 2004 term. The chairs of
the Nominating and Corporate Governance and Compensation Committee receives
5,000 shares of restricted common stock upon completion of service for the 2004
term. Each member of the Audit, Nominating and Corporate Governance and
Compensation Committee shall also receive 4,000 shares of common stock.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, its only class of outstanding voting
securities as of September 13, 2004, by (i) each person who is known to the
Company to own beneficially more than 5% of the outstanding common Stock with
the address of each such person, (ii) each of the Company's present directors
and officers, and (iii) all officers and directors as a group:
Percentage
Name and Number of Beneficially
Address Shares(1)(2) owned(3)
------------ -------------
Najeeb Ghauri (4) 647,650 6.78%
Naeem Ghauri (4) 421,090 4.41%
Irfan Mustafa (4) 188,703 1.98%
Salim Ghauri (4) 549,916 5.76%
Jim Moody (4) 17,000 *
Eugen Beckert (4) 39,000 *
Shahid Javed Burki(4) 39,000 *
Shabir Randeree (4)(5) 475,000 4.98%
Patti L. W. McGlasson(4) 46,000 *
All officers and directors
as a group (nine persons) 2,448,359 25.65%
* Less than one percent
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Common Stock relating to options currently exercisable or
exercisable within 60 days of September 15, 2002 are deemed outstanding for
computing the percentage of the person holding such securities but are not
deemed outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where applicable,
the persons named in the table above have sole voting and investment power with
respect to all shares shown as beneficially owned by them.
(3) Percentage ownership is based on 9,545,693 shares issued and outstanding as
of September 13, 2004.
(4) Address c/o NetSol Technologies, Inc. at 23901 Calabasas Road, Suite 2072,
Calabasas, CA 91302.
(5) As director of DCD Holdings Ltd.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In January 2004, we entered into employment agreements with Najeeb Ghauri, Naeem
Ghauri and Salim Ghauri. These agreements are discussed in the section entitled
"Executive Compensation" beginning on page 26.
In March 2004, the board of directors approved compensation for service on the
board. This compensation is discussed in the sections entitled "Executive
Compensation" and "Compensation of Directors" beginning on pages 26 and 28
respectively.
In July 2004, the board approved compensation for service on the Audit,
Compensation and Nominating and Corporate Governance Committees. This
compensation is discussed in the sections entitled "Compensation of Directors"
beginning on page 28.
The Company's management believes that the terms of these transactions are no
less favorable to the Company than would have been obtained from an unaffiliated
third party in similar transactions. All future transactions with affiliates
will be on terms no less favorable than could be obtained from unaffiliated
third parties, and will be approved by a majority of the disinterested
directors.
28
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of Mirage Holdings, Inc., a Nevada
corporation, dated March 18, 1997, incorporated by reference as Exhibit
3.1 to NetSol's Registration Statement No. 333-28861 filed on Form SB-2
filed June 10. 1997
3.2 Amendment to Articles of Incorporation dated May 21, 1999, incorporated
by reference as Exhibit 3.2 to NetSol's Annual Report for the fiscal
year ended June 30, 1999 on Form 10K-SB filed September 28, 1999.
3.3 Amendment to the Articles of Incorporation of NetSol International,
Inc. dated March 20, 2002 incorporated by reference as Exhibit 3.3 to
NetSol's Annual Report on Form 10-KSB/A filed on February 2, 2001.
3.4 Amendment to the Articles of Incorporation of NetSol Technologies, Inc.
dated August 20, 2003 filed as Exhibit A to NetSol's Definitive Proxy
Statement filed June 27, 2003.
3.5 Bylaws of Mirage Holdings, Inc., as amended and restated as of November
28, 2000 incorporated by reference as Exhibit 3.3 to NetSol's Annual
Report for the fiscal year ending in June 30, 2000 on Form 10K-SB/A
filed on February 2, 2001.
3.6 Amendment to the Bylaws of NetSol Technologies, Inc. dated February 16,
2002 incorporated by reference as Exhibit 3.5 to NetSol's Registration
Statement filed on Form S-8 filed on March 27, 2002.
4.1 Form of Common Stock Certificate.(*)
4.2 Form of Warrant.(*)
5.1 Opinion of Malea Farsai, counsel to NetSol, as to the legality of the
securities being registered.(1)
10.1 Lease Agreement for Calabasas executive offices dated December 3, 2003
incorporated by reference as Exhibit 99.1 to NetSol's Current Report
filed on Form 8-K filed on December 24, 2003.
10.2 Company Stock Option Plan dated May 18, 1999 incorporated by reference
as Exhibit 10.2 to the Company's Annual Report for the Fiscal Year
Ended June 30, 1999 on Form 10K-SB filed September 28, 1999.
10.2 Company Stock Option Plan dated April 1, 1997 incorporated by reference
as Exhibit 10.5 to NetSol's Registration Statement No. 333-28861 on
Form SB-2 filed June 10, 1997.
10.3 Company 2003 Incentive and Nonstatutory incorporated by reference as
Exhibit 99.1 to NetSol's Definitive Proxy Statement filed February 6,
2004.
10.4 Employment Agreement, dated January 1, 2004, by and between NetSol
Technologies, Inc. and Naeem Ghauri incorporated by reference as
Exhibit 10.1 to NetSol's Quarterly Report for the Quarter ended March
31, 2004 on Form 10Q-SB filed on May 12, 2004.
10.5 Employment Agreement, dated January 1, 2004, by and between NetSol
Technologies, Inc. and Najeeb Ghauri incorporated by reference as
Exhibit 10.2 to NetSol's Quarterly Report for the Quarter ended March
31, 2004 on Form 10Q-SB filed on May 12, 2004.
10.6 Employment Agreement, dated January 1, 2004, by and between NetSol
Technologies, Inc. and Salim Ghauri incorporated by reference as
Exhibit 10.3 to NetSol's Quarterly Report for the Quarter ended March
31, 2004 on Form 10Q-SB filed on May 12, 2004.
10.7 Company 2001 Stock Options Plan dated March 27, 2002 incorporated by
reference as Exhibit 5.1 to NetSol's Registration Statement on Form S-8
filed on March 27, 2002.
10.8 Consulting Contract, dated September 1, 1999 by and between Irfan
Mustafa and NetSol International, Inc. incorporated by reference as
Exhibit 10.10 to NetSol's Annual Report for the Fiscal Year Ended June
30, 2000 on Form 10K-SB filed on October 15, 2000.
10.9 Sublease Agreement between RPMC, Inc. and NetSol Technologies, Inc.
dated September 20, 2002 incorporated by reference as Exhibit 10.11 to
NetSol's Annual Report for the Fiscal Year Ended June 30, 2002 on Form
10K-SB filed on October 15, 2002.
10.10 Lease Agreement between Century National Insurance Company and NetSol
Technologies, Inc. dated December 15, 2003 incorporated by reference as
Exhibit 99.1 to Form 8-K filed on December 24, 2003.
10.11 Lease Agreement between Butera properties V, LLC and NetSol USA, Inc.
dated June 5, 2004 incorporated by reference as Exhibit 10.12 to
NetSol's amendment to registration statement 333-116512 filed on Form
SB-2 on July 22, 2004.
21.1 A list of all subsidiaries of the Company*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CEO)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CFO)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (CEO)
29
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley act of 2002 (CFO)
* Previously Filed
(b) Reports on Form 8-K
(i) On May 24, 2004 the Company filed an 8-K reporting the sale of
unregistered securities for a total raise of $2,050,000.
(ii) On May 14, 2004 the Company filed an 8-K reporting the contents of a
press release issued by the Company regarding its second quarter,
ending March 31, 2004 results of operations.
Item 14 Principal Accountant Fees and Services.
Audit Fees
Kabani & Co. audited the Company's financial statements for the fiscal years
ended June 30, 2003 and June 30, 2004. The aggregate fees billed by Kabani & Co.
for the annual audit and review of financial statements including in the
Company's Form 10-QSB or services that are normally provided by Kabani & Company
that are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for the year ended June 30, 2003 was $34,500
and for the year ended June 30, 2004 was $40,000. The Company's previous
auditor, Stonefield Josephson, conducted the audit of the financial statements
for the fiscal year 2002. The aggregate fees billed by Stonefield Josephson was
$93,914.45.
Audit Related Fees
The aggregate fees billed by Kabani & Co. during fiscal 2003 including assurance
and related audit services not covered in the preceding paragraph was $29,750.
These "Audit Related Fees" were primarily for services in connection with the
review of quarterly financial statements and the Company's filing of a
Registration Statement on Form SB-2. The aggregate fees billed by Kabani &
Company during fiscal 2004 including assurance and related audit services not
covered in the preceding paragraph was $37,750. These "Audit Related Fees" were
primarily for services in connection with the Company's filing of a Registration
Statement on Form SB-2.
Tax Fees
The Company incurred no fees for taxes for fiscal years 2003 and 2002. Tax fees
for fiscal year 2004 were $22,000 and consisted of the preparation of the
Company's federal and state tax returns for the fiscal years 2001 and 2002.
All Other Fees
There were no other fees billed by Kabani & Co. or services rendered to NetSol
during the fiscal years ended June 30, 2004 and 2003, other than as described
above.
Pre-Approval Procedures
The Audit Committee and the Board of Directors are responsible for the
engagement of the independent auditors and for approving, in advance, all
auditing services and permitted non-audit services to be provided by the
independent auditors. The Audit Committee maintains a policy for the engagement
of the independent auditors that is intended to maintain the independent
auditor's independence from NetSol. In adopting the policy, the Audit Committee
considered the various services that the independent auditors have historically
performed or may be needed to perform in the future. The policy, which is to be
reviewed and re-adopted at least annually by the Audit Committee:
(i) Approves the performance by the independent auditors of certain
types of service (principally audit-related and tax), subject to
restrictions in some cases, based on the Committee's determination
that this would not be likely to impair the independent auditors'
independence from NetSol;
(ii) Requires that management obtain the specific prior approval of the
Audit Committee for each engagement of the independent auditors to
perform other types of permitted services; and
(iii)Prohibits the performance by the independent auditors of certain
types of services due to the likelihood that their independence
would be impaired.
30
Any approval required under the policy must be given by the Audit Committee, by
the Chairman of the Committee in office at the time, or by any other Committee
member to whom the Committee has delegated that authority. The Audit Committee
does not delegate its responsibilities to approve services performed by the
independent auditors to any member of management.
The standard applied by the Audit Committee in determining whether to
grant approval of an engagement of the independent auditors is whether the
services to be performed, the compensation to be paid therefore and other
related factors are consistent with the independent auditors' independence under
guidelines of the Securities and Exchange Commission and applicable professional
standards. Relevant considerations include, but are not limited to, whether the
work product is likely to be subject to, or implicated in, audit procedures
during the audit of NetSol's financial statements; whether the independent
auditors would be functioning in the role of management or in an advocacy role;
whether performance of the service by the independent auditors would enhance
NetSol's ability to manage or control risk or improve audit quality; whether
performance of the service by the independent auditors would increase efficiency
because of their familiarity with NetSol's business, personnel, culture,
systems, risk profile and other factors; and whether the amount of fees
involved, or the proportion of the total fees payable to the independent
auditors in the period that is for tax and other non-audit services, would tend
to reduce the independent auditors' ability to exercise independent judgment in
performing the audit.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this amendment to the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NetSol Technologies, Inc.
Date: March 21, 2006 BY: /S/ NAEEM GHAURI
-------------------------------------
Naeem Ghauri
CEO
Date: March 21, 2006 BY: /S/ Najeeb Ghauri
-------------------------------------
Najeeb Ghauri
Chief Financial Officer
In accordance with the Exchange Act, this amendment to the report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: March 21, 2006 BY: /S/ NAJEEB U. GHAURI
-------------------------------------
Najeeb U. Ghauri
Director, Chairman
Chief Financial Officer
Date: March 21, 2006 BY: /S/ SALIM GHAURI
-------------------------------------
Salim Ghauri
President,
Director
Date: March 21, 2006 BY: /S/ NAEEM GHAURI
-------------------------------------
Naeem Ghauri
Director
Chief Executive Officer
Date: March 21, 2006 BY: /S/ JIM MOODY
-------------------------------------
Jim Moody
Director
Date: March 21, 2006 BY: /S/ EUGEN BECKERT
-------------------------------------
Eugen Beckert
Director
Date: March 21, 2006 BY: /S/ SHAHID JAVED BURKI
-------------------------------------
Shahid Javed Burki
Director
31
NETSOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Description Page
Report of Independent Registered Public Accounting Firm.........................................................F-2
Auditor's Report to the Members.................................................................................F-3
Consolidated Balance Sheet as of June 30, 2004 (restated).......................................................F-6
Consolidated Statements of Operations for the Years Ended June 30, 2004 (restated) and 2003.....................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2004 (restated) and 2003...............................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 2004 (restated) and 2003.....................F-7
Notes to Consolidated Financial Statements......................................................................F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the accompanying consolidated balance sheet of NetSol
Technologies, Inc. and subsidiaries as of June 30, 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 2004 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of NetSol Technologies (PVT) Limited, NetSol
(PVT) Limited and NetSol Connect (PVT) Limited,, whose statements reflect
combined total assets of approximately $7,173,282 as of June 30, 2004 and
combined total net revenues of $4,452,435and $2,766,174 for the years ended June
30, 2004 and 2003, respectively. Those statements were audited by other auditors
whose reports have been furnished to us, and in our opinion, insofar as it
relates to the amounts included for NetSol Technologies (PVT) Limited, NetSol
(PVT) Limited and NetSol Connect (PVT) Limited, for the years ended June 30,
2004 and 2003, is based solely on the report of the other auditors.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of NetSol Technologies,
Inc. and subsidiaries as of June 30, 2004 and the results of its consolidated
operations and its cash flows for the years ended June 30, 2004 and 2003 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements, the Company has an accumulated deficit, has negative cash flows from
operations, and has a net working capital deficit. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
As discussed in Note 16, the financial statements for the year ended June 30,
2004 have been restated.
/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Huntington Beach, California
August 2, 2004, except for Notes 8, 11, and 16 which are as of August 11, 2005
F-2
REPRESENTING SAEED KAMRAN PATEL & CO.
[LOGO] DFK
INTERNATIONAL CHARTERED ACCOUNTANTS
WORLDWIDE
INDEPENDENT AUDITOR'S REPORT-REVISED
For the year ended June 30, 2004
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the balance sheet of NetSol Connect (Pvt) Limited, a Pakistani
subsidiary of NetSol Technologies, Inc., as of June 30, 2004, and the related
statements of operations, and cash flows for the years ended June 30, 2004, and
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of the NetSol
Connect (Pvt) Limited, a Pakistani subsidiary of NetSol Technologies, Inc. as of
June 30, 2004 and the results of its operations and its cash flows for the years
ended June 30, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Saeed Kamran Patel & Co.
Lahore, Pakistan CHARTERED ACCOUNTANTS
July 31, 2004
Lahore
321 - Upper Mall, Lahore - Pakistan
Tel: 92-42-111-77-2060 Fax: 92-42-5666255
e-mail: info@skpserv.com
Islamabad
2nd Floor, Buland Markaz, 33 - West, Blue Area
Islamabad - Pakistan, Tel: 92-051-2270116, 2279658
Fax: 92-051-2279658 e-mail: info@skpserv.com
REPRESENTING SAEED KAMRAN PATEL & CO.
[LOGO] DFK
INTERNATIONAL CHARTERED ACCOUNTANTS
WORLDWIDE
INDEPENDENT AUDITOR'S REPORT-REVISED
For the year ended June 30, 2004
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the balance sheet of NetSol Technologies (Pvt) Limited, a
Pakistani subsidiary of NetSol Technologies, Inc., as of June 30, 2004, and the
related statements of operations, and cash flows for the years ended June 30,
2004 and 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit of these statements in accordance with the standards of
the Public company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of NetSol
Technologies (Pvt) Limited, a Pakistani subsidiary of NetSol Technologies, Inc.
as of June 30, 2004 and the results of its operations and its cash flows for the
years ended June 30, 2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
Lahore, Pakistan /s/ Saeed Kamran Patel
July 31, 2004 CHARTERED ACCOUNTANTS
Lahore
321 - Upper Mall, Lahore - Pakistan
Tel: 92-42-111-77-2060 Fax: 92-42-5666255
e-mail: info@skpserv.com
Islamabad
2nd Floor, Buland Markaz, 33 - West, Blue Area
Islamabad - Pakistan, Tel: 92-051-2270116, 2279658
Fax: 92-051-2279658 e-mail: info@skpserv.com
REPRESENTING SAEED KAMRAN PATEL & CO.
[LOGO] DFK
INTERNATIONAL CHARTERED ACCOUNTANTS
WORLDWIDE
INDEPENDENT AUDITOR'S REPORT-REVISED
For the year ended June 30, 2004
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the balance sheet of NetSol Technologies (Pvt) Limited, a
Pakistani subsidiary of NetSol Technologies, Inc., as of June 30, 2004, and the
related statements of operations, and cash flows for the years ended June 30,
2004 and 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit of these statements in accordance with the standards of
the Public company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of NetSol (Pvt)
Limited, a Pakistani subsidiary of NetSol Technologies, Inc. as of June 30, 2004
and the results of its consolidated operations and its cash flows for the years
ended June 30, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.
Lahore, Pakistan /s/ Saeed Kamran Patel
July 31, 2004 CHARTERED ACCOUNTANTS
Lahore
321 - Upper Mall, Lahore - Pakistan
Tel: 92-42-111-77-2060 Fax: 92-42-5666255
e-mail: info@skpserv.com
Islamabad
2nd Floor, Buland Markaz, 33 - West, Blue Area
Islamabad - Pakistan, Tel: 92-051-2270116, 2279658
Fax: 92-051-2279658 e-mail: info@skpserv.com
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
ASSETS
Current assets:
Cash and cash equivalents $ 871,161
Certificates of deposit 391,403
Accounts receivable, net of allowance for doubtful accounts of $80,000 951,994
Revenues in excess of billings 951,905
Other current assets (restated) 389,966
------------
Total current assets 3,556,429
Property and equipment, net of accumulated depreciation 4,203,580
Intangibles:
Product licenses, renewals, enhancedments, copyrights,
trademarks, and tradenames, net 2,409,859
Customer lists, net 641,569
Goodwill (restated) 1,166,611
------------
Total intangibles (restated) 4,218,039
------------
Total assets (restated) $ 11,978,048
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (restated) $ 2,172,822
Current portion of notes and obligations under capitalized leases 393,085
Due to officers 17,219
Billings in excess of revenues 103,451
Loans payable, bank 458,861
------------
Total current liabilities 3,145,438
Obligations under capitalized leases, less current maturities 27,604
Notes payable 89,656
Convertible debenture (restated) 985,243
------------
Total liabilities 4,247,941
Minority interest 410,728
Contingencies --
Stockholders' equity:
Common stock, $.001 par value; 25,000,000 share authorized;
9,482,822 issued and outstanding 9,483
Additional paid-in-capital (restated) 38,885,878
Treasury stock (21,457)
Accumulated deficit (restated) (30,982,313)
Stock subscription receivable (restated) (333,650)
Other comprehensive loss (238,562)
------------
Total stockholders' equity (restated) 7,319,379
------------
Total liabilities and stockholders' equity (restated) $ 11,978,048
============
See accompanying notes to these consolidated financial statements.
F-3
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year
Ended June,
2004 2003
----------- -----------
(Restated)
Net revenues $ 5,749,062 $ 3,745,386
Cost of revenues 2,699,675 1,778,993
----------- -----------
Gross profit 3,049,387 1,966,393
Operating expenses:
Selling and marketing 253,701 76,136
Depreciation and amortization 1,240,792 1,183,502
Impairment of assets 203,312 393,388
Settlement costs 122,500 202,759
Bad debt expense 219,909 415,384
Salaries and wages 1,493,252 934,383
Professional services, including non-cash
compensation 464,332 272,447
General and adminstrative 1,759,607 956,644
----------- -----------
Total operating expenses 5,757,405 4,434,643
----------- -----------
Loss from operations (2,708,018) (2,468,250)
Other income and (expenses)
Loss on sale of assets (35,173) (5,464)
Beneficial conversion feature (137,230) --
Gain on forgiveness of debt 320,318 --
Interest expense (229,877) (135,243)
Other income and (expenses) (60,237) (6,624)
----------- -----------
Loss from continuing operations (2,850,217) (2,615,581)
Minority interest in subsidiary 273,159 --
Gain from discontinuation of a subsidiary -- 478,075
----------- -----------
Net loss (2,577,058) (2,137,506)
Other comprehensive loss:
Translation adjustment (387,859) (380,978)
----------- -----------
Comprehensive loss $(2,964,917) $(2,518,484)
=========== ===========
Net loss per share - basic and diluted:
Continued operations $ (0.36) $ (0.58)
=========== ===========
Minority interest in subsidiary $ 0.03 $ --
=========== ===========
Discontinued operations $ -- $ 0.11
=========== ===========
Net loss $ (0.33) $ (0.47)
=========== ===========
Weighted average number
of shares outstanding - basic and diluted* 7,881,554 4,512,203
=========== ===========
*The basic and diluted net loss per share has been retroactively restated to
effect a 5:1 reverse stock split on August 18, 2003
See accompanying notes to these consolidated financial statements.
F-4
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2003 AND 2004
Common Stock* Additional Stock Other
-------------------------- Paid-in Subscriptions Comprehensive
Shares Amount Capital Receivable Income/(Loss)
------------------------------------------------------------------------------
Balance at June 30, 2002 3,865,593 3,865 31,807,110 (43,650) 530,275
Common stock sold through
private placements 471,853 472 371,997
Issuance of common stock in
exchange for services 90,400 90 50,776
Issuance of common stock in
exchange for accrued compensation 115,000 115 107,385
Excercise of common stock options 790,900 791 707,609
Excercise of common stock warrants 60,000 60 35,940
Issuance of common stock in
exchange for notes payable 111,429 111 40,889
Issuance of common stock in
exchange for settlement 40,000 40 49,960
Issuance of common stock in
exchange for purchase of Altiva 212,000 212 211,788
Common stock options granted
for services -- -- 26,500
Common stock receivable -- -- (41,250)
Foreign currency translation adjustments -- -- (380,978)
Net loss for the year -- --
-------------------------------------------------------------------------------
Balance at June 30, 2003 5,757,175 $ 5,756 $ 33,409,954 $ (84,900) $ 149,297
===============================================================================
Total
Accumulated Stockholders'
Deficit Equity
-------------------------------
Balance at June 30, 2002 (26,267,749) 6,029,851
Common stock sold through
private placements 372,469
Issuance of common stock in
exchange for services 50,866
Issuance of common stock in
exchange for accrued compensation 107,500
Excercise of common stock options 708,400
Excercise of common stock warrants 36,000
Issuance of common stock in
exchange for notes payable 41,000
Issuance of common stock in
exchange for settlement 50,000
Issuance of common stock in
exchange for purchase of Altiva 212,000
Common stock options granted
for services 26,500
Common stock receivable (41,250)
Foreign currency translation adjustments (380,978)
Net loss for the year (2,137,506) (2,137,506)
-------------------------------
Balance at June 30, 2003 $ (28,405,255) $ 5,074,852
===============================
See accompanying notes to these consolidated financial statements.
F-5
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Continued
FOR THE YEARS ENDED JUNE 30, 2003 AND 2004
Common Stock* Additional Stock
-------------------------- Paid-in Treasury Subscriptions
Shares Amount Capital Shares Receivable
-----------------------------------------------------------------------------
Balance at June 30, 2003 5,757,175 5,756 33,409,954 -- (84,900)
Issuance of common stock for cash (as restated) 1,413,187 1,414 1,616,923
Issuance of common stock for services 3,613 4 8,996
Excercise of common stock options 1,067,309 1,068 1,369,484 (248,750)
Excercise of common stock warrants 390,000 390 487,110
Issuance of common stock in
exchange for notes payable & interest 601,343 601 1,070,028
Issuance of common stock in
exchange for settlement 45,195 45 135,088
Issuance of common stock in
exchange for purchase of Altiva 100,000 100 (100)
Issuance of common stock in
exchange for purchase of Pearl 60,000 60 166,800
Issuance of common stock to directors
in exchange for services 45,000 45 39,195
Purchase of treasury shares (21,457)
Beneficial conversion feature (restated) -- -- 351,987
Fair market value of warrants issued -- -- 230,413
Foreign currency translation adjustments -- -- --
Net loss for the year (as restated) -- -- --
----------------------------------------------------------------------------
Balance at June 30, 2004 (restated) 9,482,822 $ 9,483 $ 38,885,878 $ (21,457) $ (333,650)
============================================================================
Other Total
Comprehensive Accumulated Stockholders'
Income/(Loss) Deficit Equity
------------------------------------------------
Balance at June 30, 2003 149,297 (28,405,255) 5,074,852
Issuance of common stock for cash (as restated) 1,618,337
Issuance of common stock for services 9,000
Excercise of common stock options 1,121,802
Excercise of common stock warrants 487,500
Issuance of common stock in
exchange for notes payable & interest 1,070,629
Issuance of common stock in
exchange for settlement 135,133
Issuance of common stock in
exchange for purchase of Altiva --
Issuance of common stock in
exchange for purchase of Pearl 166,860
Issuance of common stock to directors
in exchange for services 39,240
Purchase of treasury shares (21,457)
Beneficial conversion feature (restated) 351,987
Fair market value of warrants issued 230,413
Foreign currency translation adjustments (387,859) (387,859)
Net loss for the year (as restated) (2,577,058) (2,577,058)
------------------------------------------------
Balance at June 30, 2004 (restated) $ (238,562) $ (30,982,313) $ 7,319,379
================================================
See accompanying notes to these consolidated financial statements.
F-6
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year
Ended June 30,
2004 2003
----------- -----------
Cash flows from operating activities: (Restated)
Net loss from continuing operations $(2,577,058) $(2,137,506)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,640,044 1,183,502
Provision for uncollectible accounts -- 80,000
Impairment of assets 203,312 393,388
Gain on discontinued operations -- (478,075)
Gain on forgiveness of debt (320,318) --
Loss on sale of assets 35,173 5,464
Minority interest in subsidiary (273,159) --
Stock issued for settlement costs 135,133 50,000
Stock issued for services 9,000 39,200
Stock issued to directors for services 39,240 --
Fair market value of warrants and stock options granted 230,413 26,500
Beneficial conversion feature 137,230 --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (324,094) 464,634
Other current assets (409,708) (585,145)
Other assets -- (347,743)
Decrease in liabilities:
Accounts payable and accrued expenses (65,386) (874,734)
----------------------------
Net cash used in operating activities (1,540,178) (2,180,515)
Cash flows from investing activities:
Purchases of property and equipment (2,861,754) (127,822)
Sales of property and equipment 75,490 92,271
Purchases of certificates of deposit (3,241,403) --
Proceeds from sale of certificates of deposit 2,850,000 714,334
Increase in intangible assets - development costs (439,297) --
Proceeeds from sale of minority interest of subsidiary 210,000 --
----------------------------
Net cash (used in) provided by investing activities (3,406,964) 678,783
Cash flows from financing activities:
Proceeds from sale of common stock 1,618,337 365,219
Proceeds from the exercise of stock options 1,445,392 845,566
Purchase of treasury shares (21,457) --
Proceeds from loans 1,685,781 351,868
Proceeds from convertible debenture 1,200,000 --
Payments on capital lease obligations & loans (384,210) (132,972)
----------------------------
Net cash provided by financing activities 5,543,843 1,429,681
Effect of exchange rate changes in cash 59,970 199,627
----------------------------
Net increase in cash and cash equivalents 656,671 127,576
Cash and cash equivalents, beginning of year 214,490 86,914
----------------------------
Cash and cash equivalents, end of year $ 871,161 $ 214,490
============================
See accompanying notes to these consolidated financial statements.
F-7
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
For the Year
Ended June 30,
2004 2003
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 229,877 $135,243
========= ========
Taxes $ 76,638 $ 10,344
========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services and compensation $ 9,000 $ 39,200
========= ========
Common stock issued for conversion of note payable and interest $ 861,429 $ 25,000
========= ========
Common stock issued for legal settlement $ 135,133 $ 50,000
========= ========
Common stock issued for acquisition of product license $ 166,860 $ --
========= ========
Common stock issued for settlement of debt $ 209,200 $ --
========= ========
Common stock issued to directors for services $ 39,240 $ --
========= ========
Stock options granted in exchange for services received $ -- $ 26,500
========= ========
Common stock issued for acquisition of subsidiary $ -- $212,000
========= ========
See accompanying notes to these consolidated financial statements.
F-8
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND CONTINUED OPERATIONS
NetSol Technologies, Inc. and subsidiaries (the "Company"), formerly known as
NetSol International, Inc. and Mirage Holdings, Inc., was incorporated under the
laws of the State of Nevada on March 18, 1997. During November of 1998, Mirage
Collections, Inc., a wholly owned and non-operating subsidiary, was dissolved.
During April 1999, February 2000 and March 2000, the Company formed NetSol USA,
Inc., NetSol eR, Inc. and NetSol (PVT), Limited, respectively, as wholly owned
subsidiaries.
Business Combinations Accounted for Under the Purchase Method:
Network Solutions PVT, Ltd. and NetSol UK, Limited
On September 15, 1998 and April 17, 1999, the Company purchased from
related parties, 51% and 49%, respectively, of the outstanding common
stock of Network Solutions PVT, Ltd., a Pakistani Company, and 43% and 57%
of the outstanding common stock of NetSol UK, Limited, a United Kingdom
Company, for the issuance of 938,000 restricted common shares of the
Company and cash payments of $775,000, for an aggregate purchase price of
approximately $12.9 million. These acquisitions were accounted for using
the purchase method of accounting, and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon their
estimated fair values on the date of acquisition, which approximated
$300,000. Included in the accompanying consolidated financial statements
are other assets acquired at fair market value consisting of product
licenses, product renewals, product enhancements, copyrights, trademarks,
trade names and customer lists. At the date of acquisition, the management
of the Company allocated approximately $6.3 million to these assets, based
on independent valuation reports prepared for the Company. The excess of
the purchase prices over the estimated fair values of the net assets
acquired, was recorded as goodwill, and was being amortized by using the
straight-line method from the date of each purchase. Effective April 1,
2001, the management determined that the remaining useful life of all its
acquired intangible assets to be approximately five years, and
accordingly, accelerated the amortization of these intangibles. During
June 2001, the management decided to close its operations in the United
Kingdom, and accordingly, the Company recognized a loss from impairment of
various intangible assets related to NetSol UK, as recoverability of these
assets (measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset) seemed highly
unlikely. On March 18, 2002, the final Winding-up Order was made relating
to the liquidation of for NetSol UK on the petition of a creditor in
respect of services supplied presented to the Court.
Mindsources, Inc.
On August 13, 1999, the Company through its wholly owned subsidiary,
NetSol USA, Inc. acquired 100% of the outstanding capital stock of
Mindsources, Inc., a Virginia and US based Company, through the issuance
of 50,000 shares of Rule 144 restricted common shares of the Company for
an aggregate purchase price of approximately $1,260,000. This acquisition
was accounted for using the purchase method of accounting under APB
Opinion No. 16, and accordingly, the purchase price was allocated to the
assets purchased and liabilities assumed based upon their estimated fair
values as determined by management on the date of acquisition, which
approximated $900,000. The management of the Company allocated the entire
purchase price to customer lists acquired, and is being amortized by using
the straight-line method from the date of acquisition. The excess of the
purchase prices over the estimated fair values of the net assets acquired,
approximately $360,000, was recorded as goodwill and is being amortized
using the straight-line method from the date of purchase. Effective April
1, 2001, the management determined that the remaining useful life of all
its acquired intangible assets to be approximately five years, and
accordingly, accelerated the amortization of these intangibles.
F-9
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Network Solutions Group Limited and Subsidiaries
On August 18, 1999, the Company acquired 100% of the outstanding capital
stock of Network Solutions Group Limited and Subsidiaries, a United
Kingdom Company, through the issuance of 31,000 shares of Rule 144
restricted common shares of the Company for an aggregate purchase price of
approximately $940,000. This acquisition was accounted for using the
purchase method of accounting under APB Opinion No. 16, and accordingly,
the purchase price was allocated to the assets purchased and liabilities
assumed based upon their estimated fair values on the date of acquisition,
which approximated a deficit of $700,000. The management of the Company
allocated approximately $600,000 to customer lists, which are being
amortized by using the straight-line method from the date of acquisition.
The excess of the purchase price over the estimated fair values of the net
assets acquired, approximately $1,040,000, was recorded as goodwill, and
was being amortized by using the straight-line method over the estimated
useful life from the date of acquisition. Effective April 1, 2001, the
management determined that the remaining useful life of all its acquired
intangible assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles. During June 2001, the
management decided to close its operations in the United Kingdom, and
accordingly, the Company recognized a loss from impairment of various
intangible assets related to these entities, as recoverability of these
assets (measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset) seemed highly
unlikely.
Intereve Corporation
During March 2001, the Company acquired 100% of the outstanding capital
stock of Intereve Corporation for an aggregate purchase price of $245,000.
This acquisition was accounted for using the purchase method of accounting
under APB Opinion No. 16, and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon their
estimated fair values on the date of acquisition, which equaled to zero.
The management of the Company allocated the entire purchase price of
$245,000 to customer lists. During June 2001, the management ceased
operations of this entity and consequently, the Company recognized an
impairment loss of $245,000 to customer list, as recoverability of these
assets (measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset) seemed highly
unlikely.
Altvia Corporation
On May 20, 2003, the Company acquired 100% of the outstanding capital
stock of Altvia Technologies, Inc. for an aggregate purchase price of
$257,000. This acquisition was accounted for using the purchase method of
accounting under APB Opinion No. 16, and accordingly, the purchase price
was allocated to the assets purchased and liabilities assumed based upon
their estimated fair values on the date of acquisition, which equaled to
$257,000. The management of the Company allocated $30,000 of the purchase
price to customer lists & $23,688 to property and equipment. The excess of
the purchase price over the estimated fair values of the net assets
acquired of $203,312, was recorded as goodwill.
Pearl Treasury System Ltd
On October 14, 2003, the Company executed an agreement to acquire the
Pearl Treasury System Ltd, a United Kingdom company ("Pearl"). This
acquisition required the Company to issue up to 60,000 shares of common
stock to the shareholders of Pearl Treasury System, Ltd. The financial
statements of Pearl are insignificant to the consolidated financials, and
therefore, have not been presented. The total acquisition value of
$166,860 has been recorded as an intangible asset and is included in
"product licenses" on the accompanying consolidated financial statements.
F-10
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Raabta Online
During the quarter ended March 31, 2004, the Company's subsidiary,
NetSolCONNECT, purchased Raabta Online, a Pakistani company, for a cash
price of 10,000,000 rupees or $173,500 representing 100% of the value of
Raabta. This acquisition is expected to provide the Company with an
established customer base and strong technical expertise. The purchase
price has been allocated to property and equipment of the acquired entity.
The financial statements of Raabta are insignificant to the consolidated
financials, and therefore, have not been presented.
Business Combinations Accounted for Under the Pooling of Interest Method:
Abraxas Australia Pty, Limited
On January 3, 2000, the Company issued 30,000 Rule 144 restricted common
shares in exchange for 100% of the outstanding capital stock of Abraxas
Australia Pty, Limited, an Australian Company. This business combination
was accounted for using the pooling of interest method of accounting under
APB Opinion No. 16.
Formation of Subsidiary:
During the period ended December 31, 2002, the Company formed a subsidiary
in the UK, NetSol Technologies Ltd., as a wholly-owned subsidiary of
NetSol Technologies, Inc. This entity serves as the main marketing and
delivery arm for services and products sold and delivered in the UK and
mainland Europe.
During the period ended June 30, 2004, the Company formed a subsidiary in
India, NetSol Technology India, Limited, as a wholly-owned subsidiary of
NetSol Technologies, Inc. This entity is planned to serve as the main
marketing and delivery arm for services and products sold and delivered in
India. As of the date of this report, no operations have begun with this
entity.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, NetSol Technologies (Pvt),
Ltd., NetSol (Pvt), Limited, NetSol Technologies Limited, NetSol-Abraxas
Australia Pty Ltd., NetSol Altvia, Inc., and its majority-owned
subsidiary, NetSol Connect (Pvt), Ltd., All material inter-company
accounts have been eliminated in consolidation.
Company name change:
Effective February 8, 2002, the Company changed its name from NetSol
International, Inc. to NetSol Technologies, Inc. The name change was
approved by a majority of shareholders at the Company's annual
shareholders meeting held on January 25, 2002.
Business Activity:
The Company designs, develops, markets, and exports proprietary software
products to customers in the automobile finance and leasing industry
worldwide. The Company also provides consulting services in exchange for
fees from customers.
F-11
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Effective April 1, 2001, the management determined that the remaining
useful life of all its acquired intangible assets to be approximately five
years, and accordingly, accelerated the amortization of these intangibles.
This change in estimate increased the depreciation and amortization
expense by approximately $700,000 for the year ended June 30, 2002 and
$400,000 during the three months ended June 30, 2001. Due to impairment
losses recognized to intangibles, the remaining net intangible balance of
approximately $6,860,000 (including goodwill of $1,950,000) at the date of
change in estimation in 2001 has been amortized over the remaining life of
57 months. The Company evaluates, on on-going basis, the accounting effect
arising from the recently issued SFAS No. 142, "Goodwill and Other
Intangibles" which becomes effective to the Company's financial statements
beginning July 1, 2002.
Cash and Cash Equivalents:
Equivalents
For purposes of the statement of cash flows, cash equivalents include all
highly liquid debt instruments with original maturities of three months or
less which are not securing any corporate obligations.
Concentration
The Company maintains its cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Accounts Receivable:
The Company's customer base consists of a geographically dispersed
customer base. The Company maintains reserves for potential credit losses
on accounts receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations,
customer credit worthiness, current economic trends and changes in
customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis.
Revenues in excess of billings:
"Revenues in excess of billings" represent revenues recognized under the
percentage-of-completion method prior to billing the customer. "Billings
in excess of revenues" represent amounts billed to the customer pursuant
to the contract terms that occur prior to the Company's recognition of
revenues.
Property and Equipment:
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to earnings as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation is computed using various methods over the
estimated useful lives of the assets, ranging from three to seven years.
F-12
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for the costs of computer software developed or
obtained for internal use in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company capitalizes costs of materials, consultants,
and payroll and payroll-related costs for employees incurred in developing
internal-use computer software. These costs are included with "Computer
equipment and software." Costs incurred during the preliminary project and
post-implementation stages are charged to general and administrative
expense.
Intangible Assets:
Intangible assets consist of product licenses, renewals, enhancements,
copyrights, trademarks, trade names, customer lists and goodwill. The
Company evaluates intangible assets, goodwill and other long-lived assets
for impairment, at least on an annual basis and whenever events or changes
in circumstances indicate that the carrying value may not be recoverable
from its estimated future cash flows. Recoverability of intangible assets,
other long-lived assets and, goodwill is measured by comparing their net
book value to the related projected undiscounted cash flows from these
assets, considering a number of factors including past operating results,
budgets, economic projections, market trends and product development
cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second
test is performed to measure the amount of impairment loss. Potential
impairment of goodwill after July 1, 2002 is being evaluated in accordance
with SFAS No. 142. The SFAS No. 142 is applicable to the financial
statements of the Company beginning July 1, 2002.
As part of intangible assets, the Company capitalizes certain computer
software development costs in accordance with SFAS No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Costs incurred internally to create a computer software product or to
develop an enhancement to an existing product are charged to expense when
incurred as research and development expense until technological
feasibility for the respective product is established. Thereafter, all
software development costs are capitalized and reported at the lower of
unamortized cost or net realizable value. Capitalization ceases when the
product or enhancement is available for general release to customers.
The Company makes on-going evaluations of the recoverability of its
capitalized software projects by comparing the amount capitalized for each
product to the estimated net realizable value of the product. If such
evaluations indicate that the unamortized software development costs
exceed the net realizable value, the Company writes off the amount which
the unamortized software development costs exceed net realizable value.
Capitalized and purchased computer software development costs are being
amortized ratably based on the projected revenue associated with the
related software or on a straight-line basis over three years, whichever
method results in a higher level of amortization.
Going Concern:
The Company's consolidated financial statements are prepared using the
accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. As
of June 30, 2004, the Company had an accumulated deficit of $30,982,313
and a working capital deficit of approximately $410,991. Without
realization of additional capital, it would be unlikely for the Company to
continue as a going concern. This factor raises substantial doubt about
the Company's ability to continue as a going concern.
Management recognizes that the Company must generate additional resources
to enable it to continue operations. In the current year, the Company
realized a significant increase in net revenues of nearly 53%. Management
is taking steps to continue comparable revenue increases in the next
fiscal year. Management also continuing to pursue cost cutting measures at
every entity level. Additionally, management's plans also include the sale
of additional equity securities and debt financing from related parties
and outside third parties. However, of course, no assurance can be
guaranteed that the Company will be successful in raising additional
capital or continue the current growth trend in net revenues. Further,
there can be no assurance, assuming the Company successfully raises
additional equity, that the Company will achieve profitability or positive
cash flow. If management is unable to raise additional capital and
expected significant revenues do not result in positive cash flow, the
Company will not be able to meet its obligations and may have to cease
operations.
F-13
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Cash Flows:
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's operations are
calculated based upon the local currencies. As a result, amounts related
to assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the
balance sheet.
Revenue Recognition:
The Company recognizes its revenue in accordance with the Securities and
Exchange Commissions ("SEC") Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101") and The American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and
SOP 98-9, SOP 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts," and Accounting Research Bulletin 45
(ARB 45) "Long-Term Construction Type Contracts." The Company's revenue
recognition policy is as follows:
License Revenue. The Company recognizes revenue from license contracts
without major customization when a non-cancelable, non-contingent license
agreement has been signed, delivery of the software has occurred, the fee
is fixed or determinable, and collectibilty is probable. Revenue from the
sale of licenses with major customization, modification, and development
is recognized on a percentage of completion method, in conformity with ARB
45 and SOP 81-1. Revenue from the implementation of software is recognized
on a percentage of completion method, in conformity with Accounting
Research Bulletin ("ARB") No. 45 and SOP 81-1. Any revenues from software
arrangements with multiple elements are allocated to each element of the
arrangement based on the relative fair values using specific objective
evidence as defined in the SOPs. An output measure of "Unit of Work
Completed" is used to determine the percentage of completion which
measures the results achieved at a specific date. Units completed are
certified by the Project Manager and EVP IT/ Operations.
Services Revenue. Revenue from consulting services is recognized as the
services are performed for time-and-materials contracts. Revenue from
training and development services is recognized as the services are
performed. Revenue from maintenance agreements is recognized ratably over
the term of the maintenance agreement, which in most instances is one
year.
Fair Value:
Unless otherwise indicated, the fair values of all reported assets and
liabilities, which represent financial instruments, none of which are held
for trading purposes, approximate carrying values of such amounts.
Advertising Costs:
The Company expenses the cost of advertising as incurred. Advertising
costs for the years ended June 30, 2004 and 2003 were $253,701 and
$76,136, respectively.
F-14
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Loss Per Share:
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per
share." Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury
stock method. Under this method, options and warrants are assumed to be
exercised at the beginning of the period (or at the time of issuance, if
later), and as if funds obtained thereby were used to purchase common
stock at the average market price during the period.
The weighted average number of shares used to compute basic and diluted
loss per share is the same in these financial statements since the effect
of dilutive securities is anti-dilutive.
Reverse stock split:
On August 18, 2003, the Company affected a 1 for 5 reverse stock-split for
all the issued and outstanding shares of common stock. All historical
share and per share amounts in the accompanying consolidated financial
statements have been restated to reflect the 5:1 reverse stock split.
Other Comprehensive Income & Foreign Currency Translation:
SFAS 130 requires unrealized gains and losses on the Company's available
for sale securities, currency translation adjustments, and minimum pension
liability, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. The
accounts of NetSol UK, Limited use British Pounds, NetSol Technologies
(Pvt) Ltd., NetSol (Pvt), Ltd., and NetSol Connect Pvt, Ltd. use Pakistan
Rupees, NetSol Abraxas Australia Pty, Ltd. uses the Australian dollar as
the functional currencies. NetSol Technologies, Inc., and NetSol Altvia,
Inc., uses U.S. dollars as the functional currencies. Assets and
liabilities are translated at the exchange rate on the balance sheet date,
and operating results are translated at the average exchange rate
throughout the period. During the year ended June 30, 2004 and 2003,
comprehensive income included net translation loss of $387,859 and
$380,978, respectively. Other comprehensive loss, as presented on the
accompanying consolidated balance sheet in the stockholders' equity
section amounted to $238,562 of June 30, 2004.
Accounting for Stock-Based Compensation:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation,
which applies the fair-value method of accounting for stock-based
compensation plans. In accordance with this standard, the Company accounts
for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), "Accounting for Certain
Transactions Involving Stock Compensation." Interpretation 44 provides
criteria for the recognition of compensation expense in certain
stock-based compensation arrangements that are accounted for under APB
Opinion No. 25, Accounting for Stock-Based Compensation. Interpretation 44
became effective July 1, 2000, with certain provisions that were effective
retroactively to December 15, 1998 and January 12, 2000. Interpretation 44
did not have any material impact on the Company's financial statements.
Income Taxes:
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment.
F-15
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2004, the Company had net federal and state operating loss
carry forwards expiring in various years through 2024. During the year
ended June 30, 2004, the valuation allowance increased by $1,186,800;
primarily due to the net operating loss carry forward. Deferred tax assets
resulting from the net operating losses are reduced by a valuation
allowance, when in the opinion of management, utilization is not
reasonably assured.
A summary at June 30, 2004 is as follows:
Federal State Total
------------ ------------ ------------
Net operating loss carry forward $ 18,714,558 $ 11,789,558
Effective tax rate 32% 8%
------------ ------------
Deferred tax asset 5,988,659 943,165 6,931,823
Valuation allowance (4,428,659) (553,165) (4,981,824)
------------ ------------ ------------
Net deferred tax asset 1,560,000 390,000 1,949,999
Deferred tax liability arising from
non-taxable business combinations 1,560,000 390,000 1,950,000
------------ ------------ ------------
Net deferred tax liability $ (0) $ (0) $ (1)
============ ============ ============
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the
Consolidated Statements of Operations:
June 30, June 30,
2004 2003
---- ----
Tax expense (credit) at statutory rate-federal (32)% (32)%
State tax expense net of federal tax (8) (8)
Permanent differences 1 1
Valuation allowance 39 39
---- ----
Tax expense at actual rate -- --
==== ====
Derivative Instruments:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires the Company to
recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. It further provides criteria for
derivative instruments to be designated as fair value, cash flow and
foreign currency hedges and establishes respective accounting standards
for reporting changes in the fair value of the derivative instruments.
After adoption, the Company is required to adjust hedging instruments to
fair value in the balance sheet and recognize the offsetting gains or
losses as adjustments to be reported in net income or other comprehensive
income, as appropriate. The Company has complied with the requirements of
SFAS 133, the effect of which was not material to the Company's financial
position or results of operations as the Company does not participates in
such activities.
F-16
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting
and reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations for a Disposal of a Segment of a Business." The Company
periodically evaluates the carrying value of long-lived assets to be held
and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner,
except that fair market values are reduced for the cost of disposal.
For goodwill not identifiable with an impaired asset, the Company
establishes benchmarks at the lowest level (entity level) as its method of
assessing impairment. In measuring impairment, unidentifiable goodwill is
considered impaired if the fair value at the lowest level is less than its
carrying amount. The fair value of unidentifiable goodwill is determined
by subtracting the fair value of the recognized net assets at the lowest
level (excluding goodwill) from the value at the lowest level. The amount
of the impairment loss is equal to the difference between the carrying
amount of goodwill and the fair value of goodwill. In the event that
impairment is recognized, appropriate disclosures are made.
Goodwill of a reporting unit is reviewed for impairment if events or
changes in circumstances indicate that the carrying amount of its goodwill
or intangible assets may not be recoverable. Impairment of reporting unit
goodwill is evaluated based on a comparison of the reporting unit's
carrying value to the implied fair value of the reporting unit. Conditions
that indicate that impairment of goodwill includes a sustained decrease in
the market value of the reporting unit or an adverse change in business
climate.
On June 30, 2004 and 2003, the Company evaluated the valuation of goodwill
based upon the performance and market value of NetSol USA and NetSol UK,
respectively. The Company determined the goodwill is impaired and recorded
the impairment of $203,312 and 393,388 at June 30, 2004 and 2003,
respectively, in the accompanying consolidated financial statements.
Reporting segments:
Statement of financial accounting standards No. 131, Disclosures about
segments of an enterprise and related information (SFAS No. 131), which
superceded statement of financial accounting standards No. 14, Financial
reporting for segments of a business enterprise, establishes standards for
the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements
regarding products and services, geographic areas and major customers.
SFAS No. 131 defines operating segments as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performances. The Company allocates
its resources and assesses the performance of its sales activities based
upon geographic locations of its subsidiaries (Note 13).
F-17
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements:
In March 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The Company does not
expect to adopt SFAS No. 123. The proforma information regarding net loss
and loss per share, pursuant to the requirements of FASB 123 for the year
end June 30, 2004 has been presented in Note 9.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measurers in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity.
In accordance with SFAS No. 150, financial instruments that embody
obligations for the issuer are required to be classified as liabilities.
SFAS No. 150 shall be effective for financial instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 does not have a material effect on the earnings or
financial position of the Company.
In December 2003, the Financial Accounting Standards Board (FASB) issued a
revised Interpretation No. 46, "Consolidation of Variable Interest
Entities" (FIN 46R). FIN 46R addresses consolidation by business
enterprises of variable interest entities and significantly changes the
consolidation application of consolidation policies to variable interest
entities and, thus improves comparability between enterprises engaged in
similar activities when those activities are conducted through variable
interest entities. The Company does not hold any variable interest
entities
Reclassifications:
For comparative purposes, prior year's consolidated financial statements
have been reclassified to conform with report classifications of the
current year.
NOTE 3 - MAJOR CUSTOMERS
The Company is a strategic business partner for DaimlerChrysler (which
consists of a group of many companies), which accounts for approximately
20% of revenue for the fiscal years ended June 30, 2004 and 2003. No other
individual client represents more than 10% of the revenue for the fiscal
years ended June 30, 2004 and 2003.
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consist of the following as of June 30, 2004:
F-18
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepaid Expenses $228,479
Advance Income Tax 79,302
Employee Advances 21,759
Security Deposits 15,267
Other Receivables 35,025
Other Assets 10,134
--------
Total $389,966
========
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following at June 30, 2004:
Office furniture and equipment $ 491,397
Computer equipment 2,131,891
Web-site development 167,305
Assets under capital leases 535,142
Building 1,096,639
Construction in process 1,835,436
Land 178,578
Autos 61,712
Improvements 197,391
-----------
Subtotal 6,695,491
Accumulated depreciation and amortization (2,491,911)
-----------
$ 4,203,580
===========
For the years ended June 30, 2003 and 2002, fixed asset depreciation and
amortization expense totaled $520,750 and $474,596, respectively. Of these
amounts, $355,954 and $287,235, respectively, are reflected as part of
cost of goods sold. Accumulated depreciation and amortization for assets
under capital leases amounted to $335,156 and $372,623 at June 30, 2004
and 2003, respectively.
NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of the following at June 30, 2004:
F-19
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product Licenses Customer Lists Goodwill Total
-------------- -------------- -------------- --------------
Intangible asset - June 30, 2003 $ 4,894,838 $ 1,977,877 $ 1,369,923 $ 8,242,638
Additions 650,676 -- -- 650,676
Effect of translation adjustment (4,298) (4,298)
Accumulated amortization (3,131,357) (1,336,308) -- (4,467,665)
Impairment of goodwill (203,312) (203,312)
-------------- -------------- -------------- --------------
Net balance - June 30, 2004 $ 2,409,859 $ 641,569 $ 1,166,611 $ 4,218,039
============== ============== ============== ==============
Amortization expense:
Year ended June 30, 2004 $ 803,629 $ 315,665 $ -- $ 1,119,294
Year ended June 30, 2003 $ 726,630 $ 316,015 $ -- $ 1,042,645
Impairment of goodwill:
Year ended June 30, 2004 $ 203,312 $ 203,312
Year ended June 30, 2003 $ 393,388 $ 393,388
The above amortization expense includes amounts in Cost of Goods Sold for
capitalized software development costs.
At June 30, 2004 and 2003, product licenses, renewals, enhancements,
copyrights, trademarks, and tradenames, included unamortized software
development and enhancement costs of $908,508 and $562,659, respectively,
as the development and enhancement is yet to be completed. Software
development amortization expense was $97,744 and $46,504 for the years
ended June 30, 2004 and June 30, 2003, respectively.
NOTE 7 - CERTIFICATE OF DEPOSIT HELD AS COLLATERAL
In April 2004, the Company renewed its Directors and Officers Insurance
and as part of the financing agreement was required to purchase a
Certificate of Deposit ("CD") for $121,163 as collateral for the
financing. The CD is held until the loan for the insurance has been paid.
This amount is included in the Certificates of Deposit on the accompanying
balance sheet.
NOTE 8 - DEBTS
NOTES PAYABLE
Notes payable consist of the following at June 30, 2004:
F-20
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Balance at Current Long-Term
Name 6/30/04 Maturities Maturities
--------------------------------------------------------------------------------
A. Cowler Settlement $ 146,516 $ 65,160 $ 81,356
H. Smith Settlement 199,321 199,321 --
Barclay's Settlement 16,598 16,598 --
A. Zaman Settlement 26,300 18,000 8,300
D&O Insurance 58,942 58,942 --
Subsidiary capital leases 35,064 35,064 --
-------------------------------------------
$ 482,741 $ 393,085 $ 89,656
===========================================
On September 25, 2002 the Company signed a settlement agreement with
Adrian Cowler ("Cowler") and Surrey Design Partnership Ltd. The Company
agreed to pay Cowler (pound)218,000 pound sterling or approximately
$320,460 USD including interest, which the Company has recorded as a note
payable in the accompanying consolidated financial statements. The
agreement calls for monthly payments of (pound)3,000 until March 2004 and
then (pound)4,000 per month until paid. The balance as of June 30, 2003,
was $185,424. During the year ended June 30, 2004, the Company paid
(pound)60,445 or $86,857 and accrued $23,788 in interest. In addition, the
Company adjusted the amount due in USD to reflect the change in exchange
rates from when the settlement was reached in 2002. As a result $24,161
was recorded to translation loss. As of June 30, 2004, the balance was
$146,516. Of this amount, $65,160 has been classified as a current
liability and $81,356 as long-term liability in the accompanying financial
statements.
In November 2002, the Company signed a settlement agreement with Herbert
Smith for (pound)171,733 or approximately $248,871, including interest.
The Company agreed to pay $10,000 upon signing of the agreement, $4,000
per month for twelve months, and then $6,000 per month until paid. The
balance owing at June 30, 2003 was $164,871. During the year ended June
30, 2004, the Company paid (pound)41,044 or $73,000. In addition, the
Company adjusted the amount due in USD to reflect the change in exchange
rates from when the settlement was reached in 2002. As a result $107,450
was recorded to translation loss. As of June 30, 2004, the balance was
$199,321. The entire balance has been classified as current and is
included in "Current maturities of notes and obligations under capitalized
leases" in the accompanying consolidated financial statements.
In December 2001, as part of the winding up of Network Solutions Ltd. the
parent agreed to assume the note payable of one of the major creditors,
Barclay's Bank PLC of (pound)130,000 or $188,500 USD. In November 2002,
the parties agreed upon a settlement agreement whereby the Company would
pay (pound)1,000 per month for twelve months and (pound)2,000 per month
thereafter until paid. During the fiscal year ended June 30, 2003, the
Company paid approximately (pound)2,000 or $3,336. The balance owing at
June 30, 2003 was $185,164. During the year ended June 30, 2004, the
Company paid (pound)66,000 or $69,421. During the quarter ended March 31,
2004, the Company entered into a settlement agreement with Barclay's
whereby Barclay's agreed to accept (pound)69,000 or $79,098 as payment in
full. As a result the Company recorded a gain on the reduction of debt in
the amount of $99,146. As of June 30, 2004, (pound)60,000 or $62,500 has
been paid on the settlement amount with the balance of (pound)9,000 or
$16,598 due by July 2, 2004. The entire balance has been classified as
current and is included in "Current maturities of notes and obligations
under capitalized leases" in the accompanying consolidated financial
statements.
In June 2002, the Company signed a settlement agreement with a former
consultant for payment of past services rendered. The Company agreed to
pay the consultant a total of $75,000. The agreement calls for monthly
payments of $1,500 per month until paid. The balance owing at June 30,
2003 was $53,300. During the current fiscal year the Company paid $22,000.
As of June 30, 2004, the balance was $26,300, of this amount $18,000 has
been classified as a current liability in the accompanying consolidated
financial statements.
F-21
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2004, the Company renewed its director's and officer liability
insurance for which the annual premium is $167,000. In April 2004, the
Company arranged financing with AFCO Credit Corporation with a down
payment of $50,100 with the balance to be paid in monthly installments. As
part of this financing agreement, the Company is required to hold a
certificate of deposit in the amount of $121,163 as collateral, Note 7).
As part of the purchase of Altvia in May 2003, the Company was required to
pay $45,000 as a note payable. During the six months ended December 31,
2003, the Company paid the entire balance of $45,000.
On August 20, 2003, the Company entered into a loan agreement with an
accredited non-U.S. investor. Under the terms of the loan, the Company
borrowed $500,000 from the investor. The note has an interest rate of 8%
per annum. The note was due on a date that is one hundred (120) days from
the issuance date. In the event of default by the Company only, the
principal of the note is convertible into shares of common stock at $1.75
per share. As the conversion price per share was less than the20-day
average market value of the stock, the Company recorded an expense of
$96,207 for the beneficial conversion feature of the note. The convertible
debenture was issued in reliance on an exemption available from
registration under Regulation S of the Securities Act of 1933, as amended.
On the due date of the note, the note holder agreed to extend the term and
compromise the debt with stock rather than a cash payment. On December 16,
2003, the note holder converted the note into 285,715 shares of the
Company's common stock.
A former officer of NetSol USA loaned funds to the subsidiary totaling
$104,088. The loan was due-on-demand, carried no interest and was
unsecured. This amount was written-off from the Company's books and a gain
was recognized.
On December 24, 2003, the Company entered into a loan agreement with an
accredited non-U.S. investor. Under the terms of the loan, the Company
borrowed $250,000 from the investor. The note has an interest rate of 6%
per annum. The note is due six months from the issuance date. On January
1, 2004, the agreement was modified to include a conversion feature to the
note. In the event of default by the Company only, the principal of the
note is convertible into shares of common stock at $1.85 per share, and
100,000 warrants at the exercise price of $3.00 which expire one year from
the conversion date, and 100,000 warrants at an exercise price of $5.00
per share which expire six months from the conversion date. The
convertible debenture was issued in reliance on an exemption available
from registration under Regulation S of the Securities Act of 1933, as
amended. As the conversion price per share is more the than 20-day average
market price, no beneficial conversion feature expense will be recorded.
While the note was not automatically convertible except in the case of a
default, the company elected, prior to default and, with the agreement of
the note holder, to compromise the debt with stock rather than a cash
payment. In addition, the detachable warrants were cancelled at this time.
During the quarter ended March 31, 2004, the loan was converted into
135,135 shares of the Company's common stock.
On December 17, 2003, the Company entered into a loan agreement with an
accredited non-U.S. investor, Sovereign Holdings. Under the terms of the
loan, the Company borrowed $100,000 from the investor. The note has an
interest rate of 6% per annum. The note is due on a date that is six
months from the issuance date. In the event of default by the Company
only, the note is convertible into shares of common stock at $1.95 per
share, and 51,282 warrants at the exercise price of $3.25 per share which
expire one year from the conversion date. The note was issued in reliance
on an exemption available from registration under Regulation S of the
Securities Act of 1933, as amended. While the note was not automatically
convertible except in the case of a default, the company elected, prior to
default and, with the agreement of the note holder, to compromise the debt
with stock rather than a cash payment. In addition, the detachable
warrants were cancelled at this time. On March 24, 2004, the loan was
converted into 51,282 shares of the Company's common stock. In June 2004,
an addition 5,861 shares of the Company's common stock were issued for
interest valued at $11,429.
F-22
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the various subsidiaries had current capital leases of
$35,064 as of June 30, 2004.
The current maturity of notes payable, including capital lease
obligations, is as follows:
Year ending June 30, 2005 $393,085 (current)
Year ending June 30, 2006 73,460 (long-term)
Year ending June 30, 2007 16,196 (long-term)
--------
Total $482,741
========
LOANS PAYABLE - BANK
The Company's Pakistan subsidiary, NetSol Technologies (Private) Ltd., has
three loans with a bank, secured by the Company's assets. These notes
consist of the following as of June 30, 2004:
TYPE OF MATURITY INTEREST BALANCE
LOAN DATE RATE USD
-----------------------------------------------------------
Export Refinance Every 6 months 4% $ 334,190
Term Loan April 20, 2005 10% 38,989
Line of Credit On Demand 8% 85,682
----------
Total $ 458,861
==========
DUE TO OFFICERS
The officers of the Company from time to time loan funds to the Company. As of
June 30, 2004, the officers had loaned a total of $191,102, including $57,776 of
accrued interest and had accrued wages of $102,087. During the current fiscal
year, the officers exercised options against the amounts owing to them in the
amount of $275,973. The balance owing as of June 30, 2004 was $17,219.
NOTE 9 - STOCKHOLDERS' EQUITY
Initial Public Offering:
On September 15, 1998, the Company completed the sale of its minimum
offering of shares in its initial public offering which generated gross
proceeds of $1,385,647 from the sale of 50,200 shares of common stock and
929,825 warrants, each warrant to purchase one share of the Company's
common stock at an exercise price of $6.50 for a term of five years. The
remaining unexercised warrants of 51,890 expired on September 15, 2003.
F-23
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combinations:
Altvia Technologies, Inc.
On May 20, 2003, the Company issued 212,000 Rule 144 restricted common
shares in exchange for all the assets and certain liabilities of Altvia
Technologies, Inc., a Delaware corporation in an Asset Purchase Agreement.
The shares were valued at the time of the purchase at $212,000 or $1.00
per share. Proforma financial statements are not presented, as the net
assets and the operations of Altvia Technologies, Inc. were insignificant
prior to the merger.
An additional 100,000 shares were issued to Altvia in February 2004 as
part of the purchase agreement for sales milestones achieved.
Pearl Treasury System Ltd
In October 2003, the Company entered into an agreement to acquire the
Pearl Treasury System Ltd, a United Kingdom company ("Pearl"). This
acquisition required the Company to issue up to 60,000 shares of common
stock to the shareholders of Pearl Treasury System, Ltd. The shares were
valued at the time of the purchase at $166,860 or $2.78 per share. On
December 16, 2003, the initial shares of 41,700, valued at $115,968 due at
the signing of the agreement were issued by the Company. In April 2004,
the remaining 18,300 shares were issued upon the completion of the
software delivery warranties valued at $50,892. The shares used to acquire
this asset were issued in reliance on an exemption available from
registration under Regulation S of the Securities Act of 1933, as amended.
Proforma financial statements are not presented, as the net assets and the
operations of Pearl were insignificant prior to the merger.
Private Placements
In July 2003, the Company sold 1,026,824 shares of the Company's common
stock in a private placement transaction. Maxim Group, LLC in New York
acted as the placement agent for the transaction. The total funds raised
were $1,215,000 with approximately $102,950 in placement fees,
commissions, and other expenses paid from the escrow of the sale for a net
of $1,102,050. An SB-2 registration statement was filed on October 15,
2003 to register the shares for the selling shareholders in this
transaction. The investors included 12 individual accredited investors
with no prior ownership of the Company's common stock.
In May 2004, the Company sold 386,363 shares of the Company's common stock
in a private placement transaction. Maxim Group, LLC in New York acted as
the placement agent for the transaction. The total funds raised were
$850,000 with approximately $103,300 in placement fees, commissions, and
other expenses paid from the escrow of the sale. In addition, the Company
issued 243,182 warrants in connection with the sale. The warrants expire
in five years and have an exercise price of $3.30 per share. The warrants
were valued using the fair value method at $230,413 or $1.41 per share and
recorded it against the proceeds of the financing in the accompanying
consolidated financial statements. Net proceeds of the financing was
$516,287. The investors included 9 individual accredited investors with no
prior ownership of the Company's common stock. An SB-2 was filed on June
15, 2004 to register these shares.
During the year ended June 30, 2003, the Company sold 459,770 shares of
common stock for $365,219 through private placement offerings pursuant to
Rule 506 of Regulation D of the Securities and Exchange Act of 1933. The
private placements were intended to be exempt from the registration
provisions of the Securities and Exchange Commission Act of 1933 under
Regulation D.
Services
During the years ended June 30, 2004 and 2003, the Company issued 3,613
and 93,400 restricted Rule 144 common shares in exchange for accrued
compensation and services rendered, respectively. The Company recorded
compensation expense of $9,000 and $39,200 for the years ended June 30,
2004 and 2003, respectively. Compensation expense was calculated based
upon the fair market value of the freely trading shares as quoted on
NASDAQ through 2004 and 2004, over the service period.
F-24
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2003, the Board of Directors and officers were granted the
right to receive 5,000 shares of the Company's common stock if certain
conditions were met during their 2003 - 2004 term of office. These
conditions were met and a total of 45,000 restricted Rule 144 common
shares were issued in June 2004. The shares were valued at the fair market
value at the date of grant of $39,240 or $0.87 per share.
Issuance of shares for Conversion of Debt and Settlement of Litigation
During the year ended June 30, 2004, a total of 123,350 shares of the
Company's common stock, valued at $209,200, were issued to three investors
as reimbursement for debts of the Company paid by the investors. In
addition, three convertible notes payable of $850,000 plus $11,429 of
interest was converted into 477,993 shares of the Company's common stock
(see Note 8).
During the year ended June 30, 2003, the outstanding balance of $25,000 in
debt was converted into 71,429 restricted Rule 144 common shares.
During the year ended June 30, 2004 and 2003, the Company issued 45,195
and 40,000 shares of common stock in settlement of litigation,
respectively. The shares were valued at $135,135 and $50,000,
respectively.
Options and Warrants Exercised
During the years ended June 30, 2004 and 2003, the Company issued
1,067,309 and 954,983 shares of its common stock upon the exercise of
stock options valued at $957,892 and $809,566, respectively; of this
amount $290,000 is has not been received as of June 30, 2004 and is
included in Stock Subscription Receivable in the accompany consolidated
financial statements. The exercise price ranged from $0.75 and $1.50 per
share.
During the years ended June 30, 2004 and 2003, the Company issued 390,000
and 60,000 shares of its common stock upon the exercise of warrants valued
at $487,500 and $36,000, respectively.
Stock Subscription Receivable
Stock subscription receivable represents stock options exercised and
issued that the Company has not yet received the payment from the
purchaser as they were in processing when the quarter ended.
The balance at June 30, 2003 was $84,900, of this $41,250 was received in
the quarter ended September 30, 2003.
At June 30, 2004, the Company had receivables from three employees and one
investor for options exercised totally $290,000. The total receivable at
June 30, 2004, was $333,650.
Treasury Stock
During the year ended June 30, 2004, the Company purchased 10,000 shares
of its common stock on the open market for $21,457 as treasury shares.
F-25
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock Purchase Warrants and Options
From time to time, the Company issues options and warrants as incentives
to employees, officers and directors, as well as to non-employees.
Common stock purchase options and warrants consisted of the following as
of June 30, 2004:
Exercise Exercise
Options Price Warrants Price
------- ----- -------- -----
Outstanding and exercisable, June 30, 2003 1,132,898 $0.75 to $5.00 840,000 $0.50 to $5.00
Granted 2,337,578 $1.00 to $5.00 243,182 $2.20 to $3.30
Exercised (1,067,309) $0.75 to $2.50 (390,000) $0.50 to $1.75
Expired (640,890) $7.20 to $24.75 --
--------- -------
Outstanding and exercisable, June 30, 2004 1,762,277 693,182
During the year ended June 30, 2004, 2,087,578 options were granted to
employees and officers of the company and are fully vested and expire ten
years from the date of grant unless the employee terminates employment, in
which case the options expire within 30 days of their termination. In
addition, on March 26, 2004, 250,000 option shares were granted to the
members of the Board of Directors. These options vest over a period of two
years.
In compliance with FAS No. 148, the Company has elected to continue to
follow the intrinsic value method in accounting for its stock-based
employee compensation plan as defined by APB No. 25 and has made the
applicable disclosures below.
Had the Company determined employee stock based compensation cost based on
a fair value model at the grant date for its stock options under SFAS 123,
the Company's net earnings per share would have been adjusted to the pro
forma amounts for years ended June 30, 2004 and 2003 as follows:
2004 2003
----------- -----------
Net loss - as reported $(2,577,058) $(2,137,506)
Stock-based employee compensation expense,
included in reported net loss, net of tax -- --
Total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (3,158,130) (355,059)
----------- -----------
Pro forma net loss $(5,735,188) $(2,492,565)
=========== ===========
Earnings per share:
Basic and diluted, as reported (0.33) (0.47)
Basic and diluted, pro forma (0.73) (0.55)
Pro forma information regarding the effect on operations is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. Pro
forma information using the Black-Scholes method at the date of grant
based on the following assumptions:
F-26
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004 2003
Expected life (years) 10 years 5-10 years
Risk-free interest rate 3.25% 6.0%
Dividend yield - -
Volatility 100% 114%
In addition, the Company issued 243,182 warrants in connection with the
sale of stock under a private placement agreement. The warrants expire in
five years and have an exercise price of $3.30 per share. The warrants
were valued using the fair value method at $230,413 or $1.41 per share and
recorded the expense in the accompanying consolidated financial
statements. The Black-Scholes option pricing model used the following
assumptions:
Risk-free interest rate 3.25%
Expected life 5 years
Expected volatility 100%
Dividend yield 0%
NOTE 10 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
The 1997 Plan
On April 1, 1997, the Company adopted an Incentive and Non-statutory Stock
Option Plan (the "1997 Plan") for its employees and consultants under
which a maximum of 100,000 options may be granted to purchase common stock
of the Company. Two types of options may be granted under the Plan: (1)
Incentive Stock Options (also known as Qualified Stock Options) which may
only be issued to employees of the Company and whereby the exercise price
of the option is not less than the fair market value of the common stock
on the date it was reserved for issuance under the Plan; and (2)
Non-statutory Stock Options which may be issued to either employees or
consultants of the Company and whereby the exercise price of the option is
less than the fair market value of the common stock on the date it was
reserved for issuance under the plan. Grants of options may be made to
employees and consultants without regard to any performance measures. All
options listed in the summary compensation table ("Securities Underlying
Options") were issued pursuant to the Plan. An additional 4,000 Incentive
Stock Options were issued to a non-officer-stockholder of the Company. All
options issued pursuant to the Plan vest over an 18 month period from the
date of the grant per the following schedule: 33% of the options vest on
the date which is six months from the date of the grant; 33% of the
options vest on the date which is 12 months from the date of the grant;
and 34% of the options vest on the date which is 18 months from the date
of the grant. All options issued pursuant to the Plan are nontransferable
and subject to forfeiture.
The number and exercise prices of options granted under the 1997 Plan for
the years ended June 30, 2004 and 2003 are as follows:
F-27
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exercise Exercise
2004 Price 2003 Price
----------------------- ----------------------
Outstanding and exercisable, beginning of year 9,000 $ 7.20 9,000 $ 7.20
Granted -- -- -- --
Exercised -- -- -- --
Expired (9,000) $ 7.20 -- --
-------- --------
Outstanding and exercisable, end of year -- 9,000 $ 7.20
During the year ended June 30, 2004, all outstanding options in this plan
expired.
The 1999 Plan
On May 18, 1999, the Company enacted an Incentive and Non-statutory Stock
Option Plan (the "1999 Plan") for its employees, directors and consultants
under which a maximum of 1,000,000 options may be granted to purchase
common stock of the Company. Two types of options may be granted under the
Plan: (1) Incentive Stock Options (also known as Qualified Stock Options)
which may only be issued to employees of the Company and whereby the
exercise price of the option is not less than the fair market value of the
common stock on the date it was reserved for issuance under the Plan; and
(2) Non-statutory Stock Options which may be issued to either employees or
consultants of the Company and whereby the exercise price of the option is
less than the fair market value of the common stock on the date it was
reserved for issuance under the plan. Grants of options may be made to
employees, directors and consultants without regard to any performance
measures. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
Any Option granted to an Employee of the Corporation shall become
exercisable over a period of no longer than ten (10) years and no less
than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Incentive Stock Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted unless
the Board shall specifically determine otherwise, as provided herein. In
no event shall any Option be exercisable after the expiration of ten (10)
years from the date it is granted, and no Incentive Stock Option granted
to a Ten Percent Holder shall, by its terms, be exercisable after the
expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which the Board or the Committee authorizes the granting of such Option.
The number and exercise prices of options granted under the 1999 Plan for
the year ended June 30, 2004 and 2003 are as follows:
Exercise Exercise
2004 Price 2003 Price
-------------------------- ------------ -------------
Outstanding and exercisable, beginning of year 631,890 $ 24.75 631,890 $ 24.75
Granted -- -- -- --
Exercised -- -- -- --
Expired (631,890) $ 24.75 -- --
-------- -----------
Outstanding and exercisable, end of year -- 631,890 $ 24.75
During the year ended June 30, 2004, all outstanding options in this plan
expired.
F-28
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2001 Plan
On March 27, 2002, the Company enacted an Incentive and Non-statutory
Stock Option Plan (the "2001 Plan") for its employees and consultants
under which a maximum of 2,000,000 options may be granted to purchase
common stock of the Company. Two types of options may be granted under the
Plan: (1) Incentive Stock Options (also known as Qualified Stock Options)
which may only be issued to employees of the Company and whereby the
exercise price of the option is not less than the fair market value of the
common stock on the date it was reserved for issuance under the Plan; and
(2) Non-statutory Stock Options which may be issued to either employees or
consultants of the Company and whereby the exercise price of the option is
less than the fair market value of the common stock on the date it was
reserved for issuance under the plan. Grants of options may be made to
employees and consultants without regard to any performance measures. All
options issued pursuant to the Plan are nontransferable and subject to
forfeiture.
Any Option granted to an Employee of the Corporation shall become
exercisable over a period of no longer than ten (10) years and no less
than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Incentive Stock Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted unless
the Board shall specifically determine otherwise, as provided herein. In
no event shall any Option be exercisable after the expiration of ten (10)
years from the date it is granted, and no Incentive Stock Option granted
to a Ten Percent Holder shall, by its terms, be exercisable after the
expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which the Board or the Committee authorizes the granting of such Option.
The number and exercise prices of options granted under the 2001 Plan for
the years ended June 30, 2004 and 2003 are as follows:
Exercise Exercise
2004 Price 2003 Price
------------------------- --------------------------
Outstanding and exercisable, beginning of year 398,408 $0.75 to $2.50 887,908 $0.25 to $1.25
Granted 555,913 $0.75 to $2.50 389,083 $0.75 to $2.50
Exercised (764,544) $0.75 to $2.50 (878,583) $0.25 to $1.25
Expired -- -- -- --
-------- --------
Outstanding and exercisable, end of year 189,777 $0.75 to $2.50 398,408 $0.75 to $2.50
The 2002 Plan
In January 2003, the Company enacted an Incentive and Non-statutory Stock
Option Plan (the "2002 Plan") for its employees and consultants under
which a maximum of 2,000,000 options may be granted to purchase restricted
Rule 144 common stock of the Company. Two types of options may be granted
under the Plan: (1) Incentive Stock Options (also known as Qualified Stock
Options) which may only be issued to employees of the Company and whereby
the exercise price of the option is not less than the fair market value of
the common stock on the date it was reserved for issuance under the Plan;
and (2) Non-statutory Stock Options which may be issued to either
employees or consultants of the Company and whereby the exercise price of
the option is less than the fair market value of the common stock on the
date it was reserved for issuance under the plan. Grants of options may be
made to employees and consultants without regard to any performance
measures. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
Any Option granted to an Employee of the Corporation shall become
exercisable over a period of no longer than ten (10) years and no less
than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Incentive Stock Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted unless
the Board shall specifically determine otherwise, as provided herein. In
no event shall any Option be exercisable after the expiration of ten (10)
years from the date it is granted, and no Incentive Stock Option granted
to a Ten Percent Holder shall, by its terms, be exercisable after the
expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which the Board or the Committee authorizes the granting of such Option.
F-29
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number and weighted average exercise prices of options granted under
the 2002 Plan for the year ended June 30, 2004 and 2003 are as follows:
Exercise Exercise
2004 Price 2003 Price
------------------------- --------------------------
Outstanding and exercisable, beginning of year 93,600 $0.75 to $2.50 -- --
Granted 1,331,665 $1.00 to $5.00 170,000 $0.75 to $2.50
Exercised (302,765) $0.75 to $2.50 (76,400) $0.25 to $1.25
Expired -- -- -- --
-------- --------
Outstanding and exercisable, end of year 1,122,500 $0.75 to $5.00 93,600 $0.75 to $2.50
The 2003 Plan
In March 2004, the Company enacted an Incentive and Non-statutory Stock
Option Plan (the "2002 Plan") for its employees and consultants under
which a maximum of 2,000,000 options may be granted to purchase restricted
Rule 144 common stock of the Company. Two types of options may be granted
under the Plan: (1) Incentive Stock Options (also known as Qualified Stock
Options) which may only be issued to employees of the Company and whereby
the exercise price of the option is not less than the fair market value of
the common stock on the date it was reserved for issuance under the Plan;
and (2) Non-statutory Stock Options which may be issued to either
employees or consultants of the Company and whereby the exercise price of
the option is less than the fair market value of the common stock on the
date it was reserved for issuance under the plan. Grants of options may be
made to employees and consultants without regard to any performance
measures. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
Any Option granted to an Employee of the Corporation shall become
exercisable over a period of no longer than ten (10) years and no less
than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Incentive Stock Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted unless
the Board shall specifically determine otherwise, as provided herein. In
no event shall any Option be exercisable after the expiration of ten (10)
years from the date it is granted, and no Incentive Stock Option granted
to a Ten Percent Holder shall, by its terms, be exercisable after the
expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which the Board or the Committee authorizes the granting of such Option.
The number and weighted average exercise prices of options granted under
the 2003 Plan for the year ended June 30, 2004 are as follows:
Exercise
2004 Price
-------------------------------
Outstanding and exercisable, beginning of year -- --
Granted 450,000 $2.64 to $5.00
Exercised -- --
Expired -- --
-----------
Outstanding and exercisable, end of year 450,000 $2.64 to $5.00
F-30
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CONVERTIBLE DEBENTURE
On March 24, 2004, the Company entered into an agreement with several
investors for a Series A Convertible Debenture (the "Bridge Loan") whereby
a total of $1,200,000 in debentures were procured through Maxim Group,
LLC. The Company received a net of $1,049,946 after placement expenses.
The beneficial conversion feature of the debenture was valued at $252,257.
The Company has recorded this as a contra-account against the loan balance
and is amortizing the beneficial conversion feature over the life of the
loan. The net balance at June 30, 2004, is $985,243.
Under the terms of the Bridge Loan agreements, and supplements thereto,
the debentures bear interest at the rate of 10% per annum, payable on a
quarterly basis in common stock or cash at the election of the Company.
The maturity date is 24 months from the date of signing, or March 26,
2006. Pursuant to the terms of a supplemental agreement dated May 5, 2004
between NetSol and the debenture holders, the conversion rate was set at
one share for each $1.86 of principal.
In addition, each debenture holder is entitled to receive at the time of
conversion warrants equal to one-half of the total number of shares
issued. The total number of warrants that may be granted is 322,582. The
warrants expire in five years and have an exercise price of $3.30 per
share. The fair value of the warrants will be calculated and recorded
using the Black-Scholes method at the time of granting, when the debenture
is converted.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
The Company entered in to a lease agreement for its corporate office in
the US beginning September 23, 2002. The term of the lease is on
month-to-month basis with either party entitled to terminate it after
February 20, 2003. In December 2003, the moved its headquarters from its
previous facility to one with approximately 1,919 rentable square feet and
a monthly rent of $3,934 per month, the previous location had a monthly
rent of $2,993 per month. The term of the lease is for two years and
expires on December 31, 2005. A security deposit of $3,934 was made and is
included in other current assets in the accompanying consolidated
financial statements.
The facilities in Maryland were on a month-to-month basis rented at the
rate of $1,200 per month. In July 2004 the Maryland office moved to a new
location to one with approximately 1,380 rentable square feet and a
monthly rent of $2,530. The term of the lease is for three years and
expires on June 30, 2007. A security deposit of $2,530 was made and is
included in other current assets in the accompanying consolidated
financial statements.
The Australia lease is a three-year lease that expires in September 2007
and currently is rented at the rate of $1,380 per month. UK operations are
currently conducted in leased premises operating on a month-to-month basis
with current rental costs of approximately $3,000 per month.
Upon expiration of its leases, the Company does not anticipate any
difficulty in obtaining renewals or alternative space. Rent expense
amounted to $220,261 and $215,000 for the years ended June 30, 2004 and
2003, respectively.
Lahore Technology Campus
The newly built Technology Campus was inaugurated in Lahore, Pakistan in
May 2004. This facility consists of 40,000 square feet of computer and
general office space. This facility is state of the art, purpose-built and
fully dedicated for IT and software development; the first of its kind in
Pakistan. Title to this facility is held by NetSol Technologies Pvt. Ltd.,
and is not subject to any mortgages. The Company also signed a strategic
alliance agreement with the IT ministry of Pakistan to convert the
technology campus into a technology park. By this agreement, the IT
ministry would invest nearly 10 million Rupees (approximately $150,000) to
install fiber optic lines and improve the bandwidth for the facility.
NetSol has relocated its over 250 employees into this new facility.
F-31
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements
Effective January 1, 2004, the Company entered into an employment
agreement with Naeem Ghauri as Chief Executive Officer. The agreement is
for a base term of three years, and continues thereafter on an at will
basis until terminated by either NetSol or Mr. Ghauri. The agreement
provides for a yearly salary of 110,000 pounds sterling. The agreement
also provides for such additional compensation as the Board of Directors
determines is proper in recognition of Mr. Ghauri's contributions and
services to the Company. In addition, the agreement provides Mr. Ghauri
with options to purchase up to 100,000 shares of common stock at an
exercise price of $2.21, 100,000 shares at an exercise price of $3.75 and
50,000 shares at an exercise price of $5.00. These options vest at the
rate of 25% per quarter and are fully vested on December 31, 2004. These
options expire on December 31, 2008. Mr. Ghauri also received options to
purchase up to 20,000 shares at the exercise price of $2.65 per share and
options to purchase 30,000 shares at the exercise price of $5.00 per
share. These options vest immediately and are exercisable until March 25,
2009.
Effective January 1, 2004, the Company entered into an employment
agreement with Najeeb Ghauri as Chief Financial Officer. The agreement is
for a base term of three years, and continues thereafter on an at will
basis until terminated by either NetSol or Mr. Ghauri. The agreement
provides for a yearly salary of $200,000. The agreement also provides for
such additional compensation as the Board of Directors determines is
proper in recognition of Mr. Ghauri's contributions and services to the
Company. In addition, the agreement provides Mr. Ghauri with options to
purchase up to 100,000 shares of common stock at an exercise price of
$2.21, 100,000 shares at an exercise price of $3.75 and 50,000 shares at
an exercise price of $5.00. These options vest at the rate of 25% per
quarter and are fully vested on December 31, 2004. These options expire on
December 31, 2008. Mr. Ghauri also received options to purchase up to
20,000 shares at the exercise price of $2.65 per share and options to
purchase 30,000 shares at the exercise price of $5.00 per share. These
options vest immediately and are exercisable until March 25, 2009.
Effective January 1, 2004, the Company entered into an employment
agreement with Salim Ghauri as the President and Chief Executive Officer
the Company's Pakistan subsidiary. The agreement is for a base term of
three years, and continues thereafter on an at will basis until terminated
by either the Company or Mr. Ghauri. The agreement provides for a yearly
salary of $110,000. The agreement also provides for such additional
compensation as the Board of Directors determines is proper in recognition
of Mr. Ghauri's contributions and services to the Company. In addition,
the agreement provides Mr. Ghauri with options to purchase up to 100,000
shares of common stock at an exercise price of $2.21, 100,000 shares at an
exercise price of $3.75 and 50,000 shares at an exercise price of $5.00.
These options vest at the rate of 25% per quarter and are fully vested on
December 31, 2004. These options expire on December 31, 2008. Mr. Ghauri
also received options to purchase up to 20,000 shares at the exercise
price of $2.65 per share and options to purchase 30,000 shares at the
exercise price of $5.00 per share. These options vest immediately and are
exercisable until March 25, 2009.
Effective January 1, 2004, the Company entered into an employment
agreement with Patti L. W. McGlasson as legal counsel. The agreement
provides for a yearly salary of $82,000. Ms. McGlasson also received
options to purchase up to 10,000 shares of common stock at an exercise
price equal to the lesser of $2.30 or the market price of the shares on
the date of exercise less $2.00. These options vest at the rate of 25% per
quarter and are exercisable until December 31, 2008. Effective March 26,
2004, Ms. McGlasson was elected to the position of Secretary. In
connection with her role as Secretary, Ms. McGlasson received options to
purchase up to 10,000 shares of common stock at $3.00 per share. These
options vest at the rate of 25% per quarter and are exercisable until
December 31, 2008. Ms. McGlasson also received options to purchase up to
20,000 shares at the exercise price of $2.65 per share and options to
purchase 30,000 shares at the exercise price of $5.00 per share. These
options vest immediately and are exercisable until March 25, 2009.
F-32
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All of the above agreements provide for certain Company-paid benefits such
as employee benefit plans and medical care plans at such times as the
Company may adopt them. The agreements also provide for reimbursement of
reasonable business-related expenses and for two weeks of paid vacation.
The agreements also provide for certain covenants concerning
non-competition, non-disclosure, indemnity and assignment of intellectual
property rights.
Litigation
Herbert Smith, a former attorney representing the Company, commenced a
collection proceeding against the Company in the High Court of Justice,
Queen's Bench Division, on July 31, 2002, claiming the Company owed a sum
certain to it. The Company had signed an engagement letter dated October
18, 2000. Herbert Smith ("HS") was hired to proceed against Surrey Design
Partnership Ltd. HS claimed the Company owed 171,733 pounds sterling or
approximately $248,871 USD. This sum includes interest in the amount of 8%
per annum and has been recorded as a note payable on the accompanying
consolidated financial statements (see note 8). On November 28, 2002, a
Consent Order was filed with the Court agreeing to a payment plan, whereby
the Company is to pay $10,000 USD upon signing of the agreement, $4,000
USD a month for one year and $6,000 USD, per month thereafter until the
debt is paid. During the years ended June 30, 2004 and 2003 the Company
paid $73,000 and $26,000, respectively on this note.
On May 23, 2002, Allied Interstate Inc. filed a lawsuit for breach of
contract, open book account, account stated, and reasonable value against
the Company. Allied was assigned the claim from SuperNet AG, a subsidiary
of NetSol which was acquired from Florian Zgunea and Leonard Metcsh in
Frankfurt Germany in May 2000. After almost two years, SuperNet failed to
produce any revenues and the Company's board of directors agreed with the
management to sell back SuperNet to Florian and Leonard and divest itself
from the ISP business in Germany. The price of $120,000 was agreed upon
and $40,000 was wired to Florian and Leo. Subsequently, the proxy battle
with Shareholders Group LLC ensued whereby a Receiver was in place until
August 2001. Once the Company's management was placed back in control,
discussion with Florian and Leo commenced. Again, the Company agreed to
make four payments of $80,000 and a promise to cooperate by providing all
the books and records of SuperNet to the Company. In August 2001, the
Company sent another payment of $20,000 as agreed upon. However, soon
thereafter, the Company received an electronic correspondence from Florian
that if the Company wanted all the books and records full payment was to
be made. The Company did not make full payment and obtained books and
records from alternate sources. Allied's position is that the Company
breached its agreement with Florian and Leo, the Company's position is
that because they refused to provided access to the books and records,
they breached a covenant of the Agreement. The parties agreed on a
settlement and on May 5, 2003, Florian and Leo were issued 160,000 and
40,000, respectively, shares of the Company's restricted Rule 144 stock,
with a total value of $50,000 in settlement of this claim.
On January 29, 2002, the Company reached a settlement with Adrian Cowler
and The Surrey Design Partnership Limited, the former owners of Network
Solutions Group Limited ("NSGL"). The settlement had the following terms;
I) NetSol to pay 50,000 pounds sterling; II) 3,000 pounds sterling to be
paid for 24 months beginning 31, March 2002; III) 4,000 pounds sterling to
be paid for 24 months beginning March 31, 2004; IV) NetSol to release
155,000 shares in escrow; V) 650,000 144 shares to be issued to Surrey
Design. NetSol made some of the payments and issued all the shares. On
June 11, 2002, Plaintiff filed an enforcement of judgment in California
Superior Court of Los Angeles to enforce the judgment. A request for Entry
of Default was filed on July 30, 2002. On September 10, 2002 NetSol filed
its Opposition to Plaintiff's request for Entry of Judgment and on
September 16, 2002, Plaintiff filed its Motion to Strike NetSol's
Opposition. On September 25, 2002, the Company and Surrey Design entered
into an Agreement to Stay Enforcement of Judgment. The terms of the
Agreement included (i) NetSol to pay 25,000 pounds sterling upon execution
of this Agreement; (ii) By February 20, 2003, NetSol to pay an addition
25,000 pounds sterling; (iii) From October 31, 2002 to February 28, 2003,
NetSol to pay 3,000 pounds sterling; and (iv) from March 31, 2003 for a
period of 24 months, NetSol to pay 4,000 pounds sterling. The settlement
amount has been recorded in the accompanying consolidated financial
statements as a note payable (see Note 8). During the years ended June 30,
2004 and 2003, the Company paid $86,857 and $76,248.
F-33
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 27, 2003, Arab Commerce Bank ("ACB") filed a complaint in the
Supreme Court of the State of New York (Index No. 600709/03) seeking
damages for breach of a Note Purchase Agreement and Note. ACB alleged that
NetSol did not issue stock in a timely manner in December 2000 resulting
in compensatory damages in the amount of $146,466.72. The litigation
arises out of a transaction from late 1999 in which Arab Commerce Bank
invested $100,000 in the Company's securities through a private placement.
ACB claimed that the removal of the legend on its shares of common stock
longer than contractually required. During this purported delay, the
market value of the Company's common shares decreased. Essentially, the
ACB complaint sought the lost value of its shares. In the event ACB was
unable to collect the amount sought, the complaint requested that NetSol
repay the principal sum of the Note of $100,000 and interest at the rate
of 9% per annum based on the maturity date of December 10, 2000. This
matter has been settled pursuant to the terms of a settlement agreement
whereby NetSol agreed to issue to ACB shares of common stock of the
Company equal in value to $100,000 plus $39,178 of interest as of the
effective date of the agreement. On December 16, 2003, the Company issued
34,843 shares of its common stock in satisfaction of the principal amount
due. On February 6, 2004, the Company issued 10,352 shares of its common
stock for the accrued interest.
On March 3, 2004, Uecker and Associates, Inc. as the assignee for the
benefit of the creditors of PGC SYSTEMS, INC. f.k.a. Portera Systems Inc.
filed a request for arbitration demanding payment from the Company for the
amounts due under the agreement in the amount of $175,700. On March 31,
2004, the Company filed an Answering Statement to the Request of Uecker &
Associates denying each and every allegation contained in the Claim filed
by Uecker & Associates and stating NetSol's affirmative defenses. There
was an administrative conference scheduled with the case manager of the
American Arbitration Association on March 17, 2004. An arbitrator has been
selected and the parties are selecting dates for arbitration in this
matter. The Company intends to vigorously defend itself in this matter and
reach a favorable resolution.
On June 24, 2004, the Company reached a settlement agreement with,
Brobeck, Phelger, et al, a vendor, for amounts in dispute. The vendor
agreed to accept $108,500 as payment in full to be paid in three
installments totaling $54,250 and one payment of $54,250 to be paid either
in cash or in the Company's common stock. The Company recorded a gain of
$102,119 from the settlement of this debt in the accompanying consolidated
financial statements.
On May 12, 2004, Merrill Corporation served an action against NetSol for
account stated, common counts, open book account and unjust enrichment
alleging amounts due of $90,415.33 together with interest thereon from
August 23, 2001. On June 24, 2004, the parties reached a settlement
agreement. The vendor agreed to accept $75,450 as payment in full to be
paid $10,450 at the time of signing the agreement and the balance in five
monthly installments of $13,000. The Company recorded a gain of $14,965
from the settlement of this debt in the accompanying consolidated
financial statements.
F-34
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company and its subsidiaries have been named as a
defendant in legal actions arising from its normal operations, and from
time-to-time, are presented with claims for damages arising out of its
actions. The Company anticipates that any damages or expenses it may incur
in connection with these actions, individually and collectively, will not
have a material adverse effect on the Company.
NOTE 13 - SEGMENT AND GEOGRAPHIC AREAS
The following table presents a summary of operating information and
certain year-end balance sheet information for the years ended June 30,
2004 and 2003:
2004 2003
(Restated)
Revenues from unaffiliated customers:
North America $ 676,857 $ 508,868
International 5,072,205 3,236,518
------------ ------------
Consolidated $ 5,749,062 $ 3,745,386
============ ============
Operating loss:
North America $ (3,452,920) $ (2,644,712)
International 744,902 176,462
------------ ------------
Consolidated $ (2,708,018) $ (2,468,250)
============ ============
Identifiable assets:
North America $ 4,309,332 $ 4,689,560
International 7,668,716 4,052,691
------------ ------------
Consolidated $ 11,978,048 $ 8,742,251
============ ============
Depreciation and amortization:
North America $ 1,080,498 $ 1,047,298
International 160,294 136,204
------------ ------------
Consolidated $ 1,240,792 $ 1,183,502
============ ============
Capital expenditures:
North America $ 55,986 $ 23,688
International 2,805,768 104,134
------------ ------------
Consolidated $ 2,861,754 $ 127,822
============ ============
NOTE 14 - MINORITY INTEREST IN SUBSIDIARY
In August 2003, the Company entered into an agreement with United Kingdom
based Akhtar Group PLC ("Akhtar"). Under the terms of the agreement,
Akhtar Group acquired 49.9 percent of the Company's subsidiary; Pakistan
based NetSol Connect PVT Ltd. ("NC"), an Internet service provider
("ISP"), in Pakistan through the issuance of additional NC shares. As part
of this Agreement, NC changed its name to NetSol Akhtar. The new
partnership with Akhtar Computers is designed to rollout connectivity and
wireless services to the Pakistani national market. On signing of this
Agreement, the Shareholders agreed to make the following investment in the
Company against issuance of shares of NC.
F-35
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Akhtar US$ 200,000
The Company US$ 50,000
During the quarter ended September 30, 2003, the funds were received by NC
and a minority interest of $200,000 was recorded for Akhtar's portion of
the subsidiary. During the quarter ended December 31, 2003, Akhtar paid an
additional $10,000 to the Company for this purchase. During the quarter
ended June 30, 2004, an additional $473,887 was invested into the
subsidiary. For the year ended June 30, 2004, the subsidiary had net
losses of $689,000, of which $273,159 was recorded against the minority
interest. The balance of the minority interest at June 30, 2004 was
$410,728.
Per the agreement, it was envisaged that NC would require a maximum
$500,000 for expansion of its business. Akhtar was to meet the initial
financial requirements of the Company until November 1, 2003. As of June
30, both NetSol and Akhtar had injected the majority of their committed
cash to meet the expansion requirement of the company.
The following is the proforma financial information of the Company
assuming as if the transaction was consummated from the beginning of the
fiscal year ended June 30, 2003:
2003
Statements of operations:
Net loss before allocation of minority shareholders (2,116,818)
Minority allocation (8,041)
-----------
Net Loss ($2,124,859)
===========
Basic and diluted loss per share ($ 0.09)
===========
Balance Sheet items as of June 30, 2003:
Total assets $ 8,932,251
Shareholders' equity $ 5,264,852
NOTE 15 - SUBSEQUENT EVENTS
On August 18, 2004, two holders of the convertible debenture gave the
Company notice they were converting their notes into the Company's common
stock. A total of $100,000 in notes were converted into 53,764 shares of
the Company's common stock and 26,882 warrants were issued.
F-36
NOTE 16 - RESTATEMENT
Subsequent to the issuance of the Company's financial statements for the
year ended June 30, 2004, the Company determined that certain transactions
and presentation in the financial statements had not been accounted for
properly in the Company's financial statements. Specifically, the amount
of impairment of goodwill was over-recorded and classified as amortization
expense, the expense due to issuance of warrants in connection with the
PIPE financing was recorded as finance charges instead of charging it
against the gross proceeds of the private placement, and the beneficial
conversion feature of the convertible debenture was overstated, and loans
to officers hadn't been properly reflected on the financial statements and
the exercise of options against these loans had been recorded as
receivables.
The Company has restated its financial statements for these adjustments as
of June 30, 2004.
The effect of the correction of the error is as follows:
F-37
AS PREVIOUSLY AS
REPORTED RESTATED
------------ ------------
BALANCE SHEET
AS OF JUNE 30, 2004
Assets:
Other current assets $ 397,038 $ 389,966
Total current assets $ 3,563,501 $ 3,556,429
Goodwill $ 939,260 $ 1,166,611
Total intangibles $ 3,990,688 $ 4,218,039
Total assets $ 11,757,769 $ 11,978,048
Liabilities:
Accounts payable and accrued expenses $ 2,207,823 $ 2,172,822
Due to officers $ -- $ 17,219
Convertible debenture payable $ 937,500 $ 985,243
Total liabilities $ 4,628,708 $ 4,658,669
Stockholder's Equity:
Additional paid-in capital $ 39,164,034 $ 38,885,878
Common stock subscription receivable $ (497,559) $ (333,650)
Accumulated deficit $(31,375,230) $(30,982,313)
Other comprehensive loss $ (150,210) $ (238,562)
Total stockholder's equity $ 7,129,061 $ 7,319,379
STATEMENT OF OPERATIONS:
FOR THE YEAR ENDED JUNE 30, 2004
Cost of revenues $ 2,656,377 $ 2,699,675
Gross profit $ 3,092,685 $ 3,049,387
Depreciation and amortization $ 1,714,754 $ 1,240,792
Impairment of assets $ -- $ 203,312
Total operating expenses $ 6,028,055 $ 5,757,405
Loss from operations $ (2,935,370) $ (2,708,018)
Warrants issued in connection with financing $ (230,413) $ --
Interest expense $ (172,101) $ (229,877)
Other income and (expense) $ (53,165) $ (60,237)
Loss from continuing operations $ (3,243,134) $ (2,850,217)
Net loss $ (2,969,975) $ (2,577,058)
Net loss per share - basic and diluted:
Continued operations $ (0.41) $ (0.35)
Net loss $ (0.38) $ (0.32)
F-38