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, 2005
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, 2005 were $663,325.
As of September 9, 2005, Registrant had 14,162,373 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 16
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 17
Item 6 Management's Discussion and Analysis and Plan of Operations 18
Item 7 Financial Statements 25
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
Item 8A Controls and Procedures 26
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 26
Item 10 Executive Compensation 29
Item 11 Security Ownership of Certain Beneficial Owners and
Management 33
Item 12 Certain Relationships and Related Transactions 33
PART IV
Item 13 Exhibits and Reports on Form 8-K 34
Item 14 Principal Accountant Fees and Services 35
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 ("IT") 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 IT 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, and East Asia. By utilizing its worldwide resources, the
Company believes it has been able to deliver high quality, cost-effective IT
products and IT services. The Company's subsidiary, 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 4 assessment in 2004.
COMPANY BUSINESS MODEL
NetSol offers a broad spectrum of IT products and IT services which management
believes deliver a high return on investment for its customers. NetSol has
nearly perfected its delivery capabilities by continuously investing in maturing
its software development and Quality Assurance ("QA") processes. NetSol believes
its key competitive advantage is its ability to build high quality enterprise
applications using its offshore development facility in Lahore, Pakistan. A
major portion of NetSol's revenues are derived from exports in general and
LeaseSoft in particular. The use of the facility in Pakistan as the basis for
software development, configuration and professional services represents a
cost-effective and economical cost arbitrage model that is based on the globally
acclaimed advantages of outsourcing and offshore development. NetSol management
believes that the use of this model will only further benefit the Company in its
penetration of European, developed and developing country markets.
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 resulted
in both ISO 9001 certification as well as CMM level 4 assessment. These
assessments solidify NetSol's project delivery ability as well as permit the
Company to target market segments consisting 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.
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
are 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.
1
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. Thanks to the
dedication of the Company's employees, it was the first to reach CMM level 4 in
Pakistan.
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 IT 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.
IT and management consulting services include advising clients on the strategic
acquisition and utilization of IT 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
was 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. Management believes this demonstrates that NetSol has
not only led the way in setting standards for the IT industry in Pakistan, but
is instrumental in assisting local companies to achieve quality standards.
LeaseSoft
The Company 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. Although a web-based system, it
can be used with equal efficiently on an intranet. Its 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, and contract management systems and scores the applications against
defined scorecards. This mechanized workflow permits the credit team members to
make 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 reduces the 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 provides interfaces with company banks and accounting systems.
LeaseSoft.CAM 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. Developed with the input of
a number of leasing consultants, this product represents a 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 and 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 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 LeaseSoft team goes to the client site to study the
client's business and 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 able to be configured according to the business of the customer. This
phase can take place both onsite as well as in Lahore but is usually at least
partially done in Lahore. Next, follows the installation of the system at client
site. If the customer was using some other system and already has data in
electronic form, then NetSol's data migration team 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 customer
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 a 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 customer's business. 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 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 collectibility
is probable. However, revenue from sale of licenses with major customization,
modification, and development is recognized on percent of completion basis.
Revenue from software services includes fixed price contracts and is recognized
in accordance with the percentage of completion method using the output measure
of "Unit of Work Completed." 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. The first deployment of this lighter version is
currently being carried out in Maritius for Mauritius Commercial Bank.
Acquisition of CQ Systems Ltd., UK.
In February 2005, NetSol acquired 100% of CQ Systems Ltd., an IT products and
service company based in the UK. As a result of this acquisition, NetSol has
access to a broad European customer base using IT solutions complementary to
NetSol's LeaseSoft product. NetSol plans to leverage CQ Systems' knowledge base
and strong presence in the Asset Finance market to launch LeaseSoft in the UK
and continental Europe. CQ's strong sales and marketing capability would further
help NetSol gain immediate recognition and positioning for the LeaseSoft suite
of products.
NetSol has an active plan to gradually move some of the software production
activities at CQ Systems to its offshore development center in Lahore. This
transition is expected to last about twelve months, during which time most of
the quality assurance, documentation and some of the CQ products core software
development activities would transition to Lahore. While it is expected that a
gradual reduction in costs on a like for like basis at CQ Systems will occur
during the twelve month transition period, the expected growth in CQ Systems
business over the next eighteen months, may result in a personnel growth at CQ
Systems during that same period.
NetSol will continue to manage LeaseSoft pre-sales support and deliveries 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 groups are being
continually trained in the domain of finance and leasing, system functionality,
communication skills, organizational behavior and client management.
The Asian continent, Australia and New Zealand, from the perspective of
LeaseSoft marketing, are targeted by NetSol Technologies from its Lahore
subsidiary and its newly opened offices in Beijing. NetSol UK, both through its
base in London and its CQ Systems Ltd. offices located in Horsham, United
Kingdom, focuses on 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 directly
by the Company. NetSol Technologies (Pvt.) Limited services and NetSol UK market
whenever and wherever required.
NetSol has established a strategy to aggressively market LeaseSoft in various
regions of the world. As part of the strategy, NetSol is forming alliances with
reputable IT companies and has already appointed distributors in Singapore and
Japan. NetSol has entered into a mutually non-exclusive agreement with Singapore
Computer Systems (SCS) that allows SCS to market LeaseSoft in the entire Asia
Pacific Region. Furthermore, NetSol is looking forward to developing partner
networks all across the world with reputable companies.
4
Launch of NetSol CQ office in Beijing, China
As part of the same strategy and focus on marketing LeaseSoft, NetSol has
recently established a new sales office in Beijing, China, which will act not
only as the sales and marketing front for NetSol in the People's Republic of
China but also act as the liaison office for its ongoing operations and
implementation services for DaimlerChrysler Services and other clients in the
country. The new Asia Pacific office is jointly managed by NetSol Technologies,
Inc. and its wholly owned U.K. subsidiary, CQ Systems Ltd.
Management believes that LeaseSoft has begun to be recognized as a unique,
world-class product offering. This belief is based on the following instances:
o Breakthrough with Toyota in Thailand and China
o Breakthrough in non-captive finance as evidenced by agreement with
Mauritius Commercial Bank in Mauritius
o It 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
provider for managing the wholesale and retail side of leasing and finance
business of DCS. DCS supports the sales of DaimlerChrysler vehicles through
financial services.
The current LeaseSoft client base includes DaimlerChrysler Services (Australia,
Japan, New Zealand, Singapore, South Korea, Thailand, China and Taiwan), Yamaha
Motors Finance Australia, Toyota Motors Finance China, Mercedes Benz Finance
Japan, Toyota Leasing Thailand and Mauritius Commercial Bank.
NetSol also maintains a LeaseSoft specific product website www.leasesoft.biz
Status of New Products and Services
InBanking(TM)
With the acquisition of Pearl Treasury System, whose product offering is now
referred to as InBanking(TM), the Company expands its menu of software into the
banking and other financial areas. In 2003, NetSol acquired the intellectual
property rights ("IPR") of Pearl Treasury System ("PTS"). PTS was developed to
70% completion in the late 1990s, led by its system designer who had 30 plus
years in banking through positions as Trader and Head of Trading, Treasury,
Risk, Operations and IT for banks such as Bankers' Trust and Mitsubishi Trust &
Banking.
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 an
internal review of PTS 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
InBanking(TM), and the Phase One deliverables are nearing completion.
InBanking(TM) has 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 InBanking(TM) has been fully recognized,
identifying the potential to further develop InBanking(TM) beyond treasury and
capital markets. Additionally, InBanking(TM) is modular and can therefore be
implemented as best-of-breed solutions for, as an example, front-office trading,
middle office credit or market risk, or back office settlement. InBanking(TM)
can also be implemented to support all these areas, plus others, as a single
fully integrated solution.
InBanking(TM) 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.
5
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 InBanking(TM) to support their specific
requirements.
TiG-NetSol
In November 2004, the Company entered into a joint venture agreement with The
Innovation Group ("TiG") whereby the TIG-NetSol (Pvt) Ltd., a Pakistani company,
now called Extended Innovation, provides support services enabling TiG to scale
solution delivery operations in key growth markets. TiG-NetSol operations are
centered in NetSol's IT Village in Lahore, Pakistan, with a back up facility in
Bangalore, India. NetSol owns 50.5 percent of the new venture, with TiG owning
the remaining 49.5 percent. The entities share equally in the revenues of the
joint venture. The outsourcing model between TiG and NetSol involves services
pertaining to business analyses, configuration, testing, software quality
assurance (SQA), as well as, technical communication for TiG software. Initiated
with a 10 person outsourcing team in Lahore in February 2005, this arrangement
has extended to a 35 person team in July 2005 with the additional resources
catering to the increased influx of outsourcing of configuration and testing
assignments from TiG. Backed up by a dedicated 4Mbps fiber optic link for
communication and teleconferencing, this arrangement will allow NetSol's human
resources to efficiently and effectively respond to additional outsourcing and
offshore configuration work.
Growth Through Acquisition and Alliances
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 visible turnaround in the services and
outsourcing sectors in global markets, led to a growth strategy encompassing
both organic growth and mergers and acquisitions. While the calendar year 2004,
focused on capitalizing on organic growth and investing in building up the
Company's marketing and sales organization, the early part of 2005 saw a renewed
focus on mergers and acquisitions. In February 2005, the Company closed the
acquisition of CQ Systems Ltd., a UK based company. With a client network
reaching across Europe, CQ Systems provides a platform for the Company's
LeaseSoft products in the UK and continental Europe.
The Company continues to explore mergers and acquisition opportunities, both in
the USA and Europe. Management believes that great value can be added to the
Company by completing a series of acquisitions over the next five years. The
model of targeting well established, profitable product companies, within
NetSol's domain, management believes, has proven successful with the CQ
acquisition. Management believes this model can be replicated over the next five
years.
Growth through Establishing Partners Network
NetSol is well aware that market reach is essential to effectively market IT
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. Keeping these strategic objectives in view, NetSol has entered into a
mutually non-exclusive agreement with Singapore Computer Systems (SCS) that
allows SCS to market LeaseSoft in the entire Asia Pacific region.
Strategic Alliances
LeaseSoft is recognized as a 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.
6
DaimlerChrysler Services Asia Pacific has established an "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. 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 Financial Services
(DCFS) 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. This
relationship has resulted in new agreements with DCFS and has served as a
marketing source which has resulted in agreements with companies such as Toyota.
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 expects to receive major information technology
investments by the government are education, public sector automation, railways
and the country's armed forces.
As compared to the previous year, NetSol (Pvt) Ltd. was able to materialize a
number of service contracts within the local Pakistani public and defense
sectors. An important aspect of these contracts is that not all of them focused
solely on software development and engineering. This year, NetSol has gone a
step further by providing both consultancy services to organizations so as to
improve their quality of operations and services and, wining strategically
important assignments with the E-Governance domains for organizations of
national significance in Pakistan including, but not limited to, the Prime
Minister's office and the lower and upper houses of Parliament. 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
offerings of NetSol has now diversified into a comprehensive supply chain of end
to end services and solutions catering to private and public sectors,
consultancies, applications development, systems engineering integration as well
as other supporting processes for turnkey projects.
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.
NetSol Akhter Pvt. Ltd., a subsidiary of the Company with ownership of 50.1% by
the Company and 49.9% by Akhter Group, is a company capitalizing on the high
growth of the telecommunications market in Pakistan. NetSol Akhter provides ISP
services to clients in the three major cities of Pakistan and is looking to
expand its service offerings. NetSol management took this strategic step to
maintain its focus in the core business of software development and IT services.
As a direct result of a delay in the PTCL privatization, the state owned
telecommunications monopoly, NetSol-Akhter has faced delays in finalizing cross
network pricing and infrastructure rollout. However, the recent completion of
the PTCL privatization process would provide some much needed impetus to the
rollout plans. A giant UAE based telecom group (Eitesalat) has acquired 26% of
PTCL for $2.6MN and will be taking over the management control of this state
owned telecom giant of Pakistan.
7
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 optimistic that the Company will experience ever increasing
opportunities for its products offerings in 2006. The Company is aggressively
growing the marketing and sales organizations in the United Kingdom, in
conjunction with CQ Systems, Ltd., in Pakistan and the USA. Management believes
that the year 2006 will follow 2005 as a year for continued growth, the
launching of footprints in new markets, and penetration of established markets
such as Asia Pacific and Europe.
While affiliations and partnering resulted 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 improves, NetSol marketing teams are concentrating on the markets
overseas with cautious entry into the US market.
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, higher
education and telecommunication associations, and, financial services.
Geographically, NetSol has operations on the West 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:
2005 2004
---- ----
North American (NetSol USA) 2% 12%
Europe (CQ Systems, UK Ltd.) 24% 6%
Other International (Abraxas, NetSol Technologies Ltd., 74% 82%
NetSol (Pvt.), Ltd., NetSol Connect (Pvt) Ltd.)
Total Revenues 100% 100%
8
Fiscal Year 2004-2005 Performance Overview
The Company has effectively expanded its development base and technical
capabilities by training its programmers to provide customized IT solutions in
many other sectors and not limiting itself to the lease and finance industry.
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 was followed by a formal inauguration on March 4, 2005, by the
Prime Minister of Pakistan, Shaukat Aziz. This state-of-the-art, purpose-built
and fully dedicated IT 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 has invested nearly 10 million Rupees
(approximately $150,000) to install fiber optic lines and improve the bandwidth
for the facility. This facility currently houses 400 employees and thus has
become the backbone of NetSol business model providing world class IT talent and
a cost arbitrage that is attractive to western customers.
The Lahore operation supports the 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 development facility in Pakistan, being the engine which
drives NetSol, continues to be the major source of revenue generation. The
Pakistan operation contributed 53% of the 2005 revenues with $6.6 million in
revenues for the current year. This was accomplished primarily through export of
IT services and product licensed to the overseas markets. The total revenue of
NetSol Pakistan, including the Pakistan domestic market, was $6.55 million with
a record profit of $3.3 million.
Seeking to take further advantage of the bourgeoning Pakistani markets,
including the capital markets, the Company listed NetSol Technologies Ltd. on
the Karachi Stock Exchange ("KSE") in August 2005. The initial public offering
of stock, of NetSol Technologies Ltd., together with the pre-initial public
offering private placement, raised over $5.83 million. NetSol Technologies Ltd.
is listed on the KSE under the symbol "NETSOL". Trading of `NETSOL' on the KSE
commenced on August 26, 2005. The successful listing of the subsidiary in this
emerging capital markets, has increased visibility in Pakistan capturing the
interest of both public and private sectors for new business opportunities.
Furthermore, NetSol expects to leverage its position as one of the most reputed
software developer's in Pakistan with a much improved balance sheet to attract
major new projects and customers.
While available to support its product and services base on a world-wide basis,
NetSol Tecnologies PVT Ltd.'s selling and marketing efforts are focused on Asia.
Using the distribution channels in Lahore, Beijing and many client sites, we are
consolidating the Australian office and merging it with the Lahore facility. The
existing senior management from Australia will now be directed by the Lahore
operation which will serve the Australian-New Zealand markets. The Company
expects to save nearly $250,000 by this initiative.
NetSol has signed on new customers for LeaseSoft as well as for bespoke
development services. For LeaseSoft the following new projects were earned by
the Company:
o DaimlerChrysler Auto Finance China- Licensing and customization of
LeaseSoft CAP, CMS & WFS.
o Toyota Leasing Thailand (TLT) - Licensing, customization and
implementation of LeaseSoft CAP (formerly PMS), CMS & WFS.
o TLT is a volume leader in captive finance companies in Thailand.
NetSol considers it a big strategic break as delivering successfully
in Thailand will position NetSol to target Toyota Finance companies
around the world.
o Mercedes Benz Finance Japan-Licensing and implementation of
LeaseSoft WFS.
o Toyota Motor Finance China- Licensing and implementation of
LeaseSoft WFS.
o Mauritius Commercial Bank, Mauritius- Licensing and implementation
of LeaseSoft CMS and LeaseSoft CAP.
o CMM Evaluation Consultancy Services for the Pakistan Software Export
Board (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 PSEB, is actively undertaking exercises for these consultancy
services for different software companies. The key aspects of these services
would be CMM1 introduction, gap analyses for ISO 9001:2000 compliant procedures,
CMM Level 2/3 pre-assessments, consultancies, evaluations and tracking/analyses
of such improvements. The clientele for these NetSol professional services
includes: DPS Islamabad, Shaukat Khanum Memorial Trust (SKMT) Lahore, ProSol
Islamabad, GeoPac Islamabad, yEvolve Karachi, and Avanza Solutions, Karachi.
9
Management believes that NetSol has been identified as a premium IT company in
Pakistan and 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 Pakistan Administrative Staff College
o Government of Punjab (Motor Transport Management)
o Pakistan Software Export Board
o Ministry of Defense (multiple projects)
o All Pakistan Textiles Processing Mills Association (APTPMA)
o National Assembly and Senate of Pakistan (Electronic Government
Directorate)
o Prime Minister of Pakistan's Secretariat (Electronic Government
Directorate)
o Armed Forces Institute of Dentistry
There is a growing domestic business in Pakistan for the IT and IT enabled
services, as stated above, and NetSol is strategically positioned to support a
very stable and economically beneficial pipeline to win many more and major new
projects in the public and private sectors. NetSol will continue to strengthen
its position as a dominant IT solutions provider in this explosive growth
market.
NetSol IT Matrix (NITM) for Information Security and related services.
NetSol has entered into a joint venture agreement with IT Matrix, Saudi Arabia,
for the provision of information security and related consultancy services for
the growing IT services market in Pakistan. Realizing the already established
potential of information security strength of NetSol in Pakistan and the
capability/experience of IT Matrix Saudi Arabia, the organizations agreed to
form a new business entity in Pakistan (NITM) to jointly pursue the information
security business. IT Matrix is among the few companies in the region which has
built its Information Security solutions integrating hardware, software and
services. It is currently the leading Information Security solutions provider in
the Kingdom of Saudi Arabia, with corporate offices in Riyadh and one branch
office in Al-Khobar (Easter Province). The company has partnerships with a
number of leading information security vendors in the world and is the first
company in the region to have built its IT security technologies with 100% local
development in Saudi Arabia.
The business objectives of the joint venture will be to: develop intellectual
capital in the form of information security technologies; information security
professional consultancy services; methodologies for implementation and
maintenance; information security training and educational material with
delivery mechanism and sales of information security consulting services; NITM
developed information security technologies; support services for information
security technology (people and processes); information security training and
education; and, 24x7 security surveillance centers.
NetSol Technologies UK Ltd
NetSol Technologies Limited, the Company's 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..
The UK subsidiary is responsible for the Company's activities in the UK, Europe
and Middle East and includes the spearheading of the sales and marketing efforts
for InBanking(TM), NetSol's 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 IT services.
With the acquisition of CQ Systems, Ltd., which is managed by NetSol UK, the
Company has added a complimentary suite of leasing products. CQ Systems Ltd. was
established in 1986 and provides robust, powerful, scalable and safe contract
management and accounting solutions for the installment credit, motor finance
and asset finance markets. The modules provide an end-to-end contractual
solution - from underwriting, contract administration and accounting through to
asset disposal and re-marketing. Today CQ has more than 55 banking, independent
and captive finance house clients in the UK, Europe, Africa and Asia. The
revenue generated by CQ Systems from the date of acquisition (Feb 21 to June 30,
2005) was $2.3 million, or 18% of the Company's total revenues. The net income
before tax reported for the same period was about $432,000. In terms of CQ
Systems stand alone revenues for year 2004-2005, the revenues exceeded $6
million.
10
Subsequent to the CQ Systems acquisition, it was decided to use NetSol UK as a
marketing arm of the Lahore subsidiary and mergers and acquisition arm of the
Company.
Depending solely upon organic growth, the UK company produced $688,000 in
revenue for the current fiscal year or 5.53% of the Company's total revenues.
The net income was reported approximately $159,900. 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.
NetSol TIG, Joint Venture
As disclosed before, the newly formed outsourcing joint ventures of NetSol with
a UK based IT solutions provider TIG, Plc. contributed approximately $448,000 in
revenue in just five months or 3.6% of the Company's revenues. The total net
profit was $250,000 before adjusting the minority interest; NetSol owns 51%
while TIG owns 49% of the JV.
NetSol Connect
In August 2003, NetSol entered into an agreement with United Kingdom based
Akhter Group PLC (Akhter). Under the terms of the agreement, Akhter Group
acquired 49.9% of the Company's subsidiary; Pakistan based NetSol Connect Pvt
Ltd., an Internet service provider (ISP) in Pakistan. As part of this Agreement,
NetSol Connect changed its name to NetSol Akhter. 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 as compared to the
fiscal year 2003. During the current fiscal year, NetSol Connect steadily grew
its presence in three cities (Karachi, Lahore and Islamabad) by acquiring 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. NetSol Akhter with its new laser and wireless
technologies has a potential to become a major brand in Pakistan. The
partnership with Akhter Computers is designed to rollout the services of
connectivity and wireless to the Pakistani national market.
Akhter, 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. Akhter 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.
NetSolConnect Pvt Ltd. will continue to aggressively seek revenues to growth.
The revenue contribution for NetSolConnect was $1.14 million or about 9.2% of
2005 revenues. The total net loss was $27,422 before adjusting the minority
interest;
NetSol USA
In February 2005, NetSol USA operations were merged with the parent company.
NetSol USA managed the successful completion and implementation of projects for
a Seattle based software company, Capital Stream. This contract was awarded at
the end of 2003 and was completed in the middle of fiscal year 2005. With NetSol
USA focusing on consulting services in areas not necessarily compatible with the
NetSol products and services base, and the completion of the Capital Stream
project the Company elected to consolidate the Maryland office into the
Company's headquarters in Calabasas, California. NetSol USA was responsible for
$295,000 in revenues or 2.4% of total revenues to the Company. The downsizing of
NetSol USA office would contribute to over $250,000 of annual savings.
11
LeaseSoft Sales
LeaseSoft received a major recognition when DaimlerChrysler Services (DCS) AG,
Germany signed a global frame agreement with NetSol for LeaseSoft. Under the
terms of the open-ended global frame contract, LeaseSoft is named as one of the
strategic, asset-based, finance software solutions for DCS.
Within the DCS locations, the Global Frame Agreement was responsible for the
following additional sales of LeaseSoft in the year ended June 30, 2005:
licensing and implementation of LeaseSoft PMS, CMS and WFS for DaimlerChrysler
Auto Finance China; and, Licensing and Implementation of LeaseSoft WFS for
Mercedes Benz Finance Japan.
Other than DCS, NetSol was also successful in entering into agreements with new
customers in the region. A major breakthrough was Toyota Leasing Thailand
allowing NetSol to offer and provides services to another leader in the region's
automotive markets. This arrangement was later extended to a second Toyota
client in China (Toyota Motors Finance China (TMFCN)). New customers included:
licensing and implementation of WFS, CMS and PMS for Toyota Leasing Thailand;
licensing and implementation of LeaseSoft for Toyota Motors Finance China; and,
licensing and implementation of LeaseSoft PMS and CMS for Mauritius Commercial
Bank, Mauritius.
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 macro and micro 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 saves
approximately $150,000 annually. The campus is currently capable of housing over
2,500 IT 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 IT 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 is 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.
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. Every one of our software developers is proficient in the
English language. English is the second most spoken language in Pakistan and is
mandatory in middle and high schools.
To encourage all employees to build on our core values, we reward teamwork and
promote individuals who demonstrate these values. NetSol offers all of its
employees the opportunity to participate in its stock option program. Also, 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 IT professionals
living overseas.
Management believes it has been successful in capitalizing on the "Reverse Brain
Drain" phenomenon whereby it has been able to attract and retain highly
qualified and suitably experienced IT and management professionals working
overseas and returning to Pakistan. These include senior management as well as
software development professionals that shall directly contribute to the
organization improvement of various engineering processes and procedures at
NetSol.
12
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. With each acquisition,
NetSol is able to combine both work forces. For example, NetSol and CQ Systems
have effectively and swiftly integrated the culture, systems and processes
creating an environment satisfactory for its employees.
Overall, NetSol as a global IT company has over 25% female employees with the
biggest concentration in our development facility in Lahore. The Company is an
equal opportunity employer. Being a successful company with a well respected
name in the business community, NetSol encourages its employees to actively
participate and contribute to charitable contributions for catastrophic
tragedies such as Tsunami disaster and the Gulf Coast disaster caused by Katrina
Hurricane in the US.
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, 2005, we had 530 full-time employees; comprised of 410 IT project
personnel in Pakistan, UK and Australia and 125 non-IT personnel in Pakistan,
UK, Australia and US. This includes 40 employees in sales and marketing and 85
in general and administration. There are a total of five part-time employees and
the rest are full-time employees. None of our employees are subject to a
collective bargaining agreement. Our telecom subsidiary NetSolConnect has over
99 full time employees based in Karachi, Pakistan.
Competition
Neither a single company nor a small number of companies dominate the IT 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, AIPAC, CHP, KPMG, LMK Resources, Systems
Innovation (Si3), Bearing Point, Kalsoft, Systems Limited, Oratech Pakistan,
TechAccess Pakistan 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; DaimlerChrysler Services-Taiwan; Debis Portfolio
Systems - UK; DaimlerChrysler Services - Australia; DaimlerChrysler Leasing -
Thailand; DaimlerChrysler Services - Korea; UMF Leasing Singapore; MCB
Mauritius; Toyota Leasing Thailand; Toyota Motors Finance China; and,
DaimlerChrysler Services New Zealand. In addition, NetSol provides offshore
development and customized IT solutions to blue chip customers such as Citibank
Pakistan, DCD Holding UK, Toyota Leasing Thailand, and Habib Allied Bank UK.
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, 2005.
As compared to the previous year, NetSol Technologies (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 consultancy services to organizations so as
to improve their quality of operations and services in addition to winning
strategically important assignments within the E-Governance domain for
organizations of national significance in Pakistan, including, Prime Minister's
office and the lower and upper houses of Parliament. These clients include
private as well as public sector enterprises. Also, NetSol was successful in
consolidating its standing as one of the preferred solutions provider for the
Military sector and Defense organizations. The NetSol service portfolio has now
diversified into a comprehensive supply chain of end to end services and
solutions catering to BPR, consultancies, applications development, and systems
engineering integration as well as other supporting processes for turnkey
projects.
13
New Local Customers are as follows:
o Pakistan Administrative Staff College
o Government of Punjab (Motor Transport Management)
o Pakistan Software Export Board
o Ministry of Defense (multiple projects)
o All Pakistan Textiles Processing Mills Association (APTPMA)
o Prime Minister of Pakistan's Secretariat (Electronic Government
Directorate)
o National Assembly and Senate of Pakistan (Electronic Government
Directorate)
o Armed Forces Institute of Dentistry
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. The website for CQ
Systems is www.CQSystems.com
NetSol's software development and SQA team as well as its clients use its web
based customer relationship management solution (HelpDesk) for timely and direct
communication during the support and maintenance phases of 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. More details can be found on http://www.netsolhelp.com.
Operations
The Company's headquarters are in Calabasas, California. Nearly 80% of the
production and development is conducted at NetSol in Lahore, Pakistan. The other
20% of development is conducted in the Proximity Development Center or "PDC" in
Horsham, UK to cater to the UK and European customers. The majority of the
marketing is conducted through NetSol Technologies, Pvt Ltd in Lahore, Pakistan,
NetSol UK, CQ Systems in the UK, and NetSol CQ in Beijing, China These are the
core operating companies engaged in developing and marketing IT solutions and
software development and marketing.
NetSol UK, together with CQ Systems, 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 due to the Iraq war and international terrorism, as well as
economic pressure due to skyrocketing oil prices, the economy of Pakistan has
made a positive turn around. The economy of Pakistan has grown to over 8.6% in
2005 and it is expected to sustain the same trend for years. 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. There has been a
massive surge in FDI or foreign direct investments in Pakistan by foreigners.
These investments have been in many sectors, to name a few: industrial
infrastructure, telecom, oil & gas, stock market and real estate. The stock
market in Pakistan is the most bullish in the Asia Pacific region with market
growth over 600% year to date (Karachi Stock Exchange on October 18, 2001 was at
1,103 points vs. about 7,700 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 breakthrough `thawing' of
relationships between Pakistan and its biggest democratic neighbor, India, has
stabilized the South East Asia region. This environment has raised the comfort
and confidence of foreign investors and major US and European corporations to
enhance their businesses in Pakistan. Due to many strategic measures and
decisions by the government of Pakistan, the telecom sector has been privatized.
Several new foreign telecom giants have made some serious investments in
Pakistan. The biggest example is an U.A.E. based Telecom giant `EITESALAAT'
which acquired 26% or management control of `PTCL' a government owned telecom
company. This reflects a true potential and tremendous growth opportunities in
Pakistan.
14
The Company is in an extremely strong position to continue to use this offshore
model, which includes competitive price advantage to serve its customers. Due to
all major improvements economically, politically and regionally, Pakistan's
perception is improving drastically in recent months. A few major names such as
Microsoft, Oracle, Cisco, Tata Consulting Services (India) and many other major
names have recently signed agreements for collaboration and alliances with
Pakistani companies. NetSol's few major successes achieved in 2005 were:
* A successful acquisition of CQ systems of UK
* A successful JV of NetSol and TIG to use offshore development model
* A global frame agreement with Daimler Credit Services
* Adding blue chip customers such as Toyota Leasing Thailand.
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. The
confidence of the local investors and foreign investors has been undoubtedly
enhanced resulting in stronger demand of new listing in the stock markets. Also
recently the telecom sector received a boost when the IT 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.
Organization
NetSol Technologies, Inc. (formerly NetSol International, Inc.) was founded in
1997 and is organized as a Nevada corporation. The Company amended its Articles
of Incorporation on March 20, 2002 to change its name to NetSol Technologies,
Inc.
The success of the Company, in the near term, will depend, in large part, on the
Company's ability to: (a) continue to grow revenues and improve profits, (b)
raise funds for continued operations and growth; (c) make a major entry in the
US market and, (d) streamline sales and marketing efforts in the Asia Pacific
region, 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. Management is very excited and positive about a
seamless transition and integration of CQ Systems with NetSol front end and back
end operations.
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 to
enter into these agreements, and limits access to and distribution of its
proprietary information. The NetSol logo and name, as well as the LeaseSoft logo
and product name have been copyrighted and trademark registered in Pakistan. The
Company intends to trademark and copyright its intellectual property as
necessary and in the appropriate jurisdictions.
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 tax exemption on income from exports
of IT services and products up to 2016. While foreign based companies may invest
in Pakistan, repatriation of their investment, in the form of dividends or other
methods, requires approval of the State Bank of Pakistan. 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.
15
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
Beijing.............................. 188 General Office $ 1,900
London (United Kingdom).............. 378 General Office $ 5,500
Horsham (CQ Systems)................. 6,570 Computer and General Office $10,989
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. The Beijing lease is a one
year lease that expires in June 2006. The monthly rent is $2,280 per month with
the first two months free bringing the average monthly rent to $1,900 per month.
Our London, UK operations are currently conducted in leased premises operating
on a month-to-month basis with current rental costs of approximately $5,500 per
month. The CQ System facilities, located in Horsham, United Kingdom, are leased
until June 23, 2011 for an annual rent of (pound)75,000 (approximately
$131,871.15) with an early termination option in June 2006.
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 has invested early 10
million Rupees (approximately $150,000) to install fiber optic lines and improve
the bandwidth for the facility. NetSol has currently over 400 employees in this
new facility.
ITEM 3 - LEGAL PROCEEDINGS
On July 26, 2002, NetSol 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 Company entered
into a settlement agreement with Adrian Cowler ("Cowler"), a principal of
Surrey, and Surrey. The Company agreed to pay Cowler (pound)218,000 or
approximately $320,460 including interest, which the Company has recorded as a
note payable in the consolidated financial statements. The agreement called for
monthly payments of (pound)3,000 per month until March 2004 and then
(pound)4,000 per month until paid. As of June 30, 2004, the balance was
$146,516. During the six months ended December 31, 2004, we paid (pound)12,000
or $21,997. In December 2004, the Company reached an agreement to pay the
balance in one lump-sum payment. Cowler agreed to accept (pound)52,000 or
$103,371 as payment in full. This amount was paid in December 2004.
16
On July 31, 2002, Herbert Smith, a law firm in England, which represented NetSol
in the Surrey matter filed claim for the sum of approximately $248,871 (which
represents the original debt and interest thereon) in the High Court of Justice
Queen's Bench Division. On November 28, 2002, a Consent Order was filed with the
Court agreeing to a payment plan, whereby we paid $10,000 on execution, $4,000 a
month for one year and $6,000 per month thereafter until the debt is paid. The
balance owing at March 31, 2005 was $143,321. In April 2005, an agreement was
reached with Herbert Smith whereby they accepted $135,000 as payment in full.
This final installment of this compromised amount was paid in May 2005.
On March 3, 2004 Uecker and Associates, Inc. as the assignee for the benefit of
the creditors of PGC Systems, Inc. formerly known as Portera 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. A settlement was reached
by and between the Company and Portera on November 11, 2004 whereby Portera
agreed to a settlement of any and all issues related to the claim in exchange
for one time payment of $75,000 which was paid by December 3, 2004.
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, 2005.
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.
2004-2005 2003-2004
Fiscal
Quarter High Low High Low
-------- ------ ------ ------ ------
1st (ended September 30) 1.99 1.09 5.50 1.94
2nd (ended December 31) 2.71 1.14 3.16 2.05
3rd (ended March 31) 2.67 1.82 3.15 2.07
4th (ended June 30) 2.15 1.84 3.09 2.01
RECORD HOLDERS - As of September 9, 2005, the number of holders of record of the
Company's common stock was 168. As of September 9, 2005, there were 14,162,373
shares of common stock issued and outstanding.
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.
17
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The table shows information related to our equity compensation plans as of June
30, 2005:
-------------------------------------------------------------------------- ------------------------------------
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 5,038,000(1) $2.60(2) 3,013,667(3)
Plans approved by
Security holders
---------------------------------------------------------------------------------------------------------------
Equity Compensation None None None
Plans not approved by
Security holders
---------------------------------------------------------------------------------------------------------------
Total 5,038,000 $2.60 3,013,667
---------------------------------------------------------------------------------------------------------------
(1) Consists of 111,000 under the 2001 Incentive and Nonstatutory Stock
Option Plan; 1,139,500 under the 2002 Incentive and Nonstatutory
Stock Option Plan; 787,500 under the 2003 Incentive and Nonstatutory
Stock Option Plan; and 3,000,000 under the 2004 Incentive and
Nonstatutory Stock Option Plan.
(2) The weighted average of the options is $2.60.
(3) Represents 1,123,500 available for issuance under the 2003 Incentive
and Nonstatutory Stock Option Plan; and, 1,890,167 available for
issuance under the 2004 Incentive and Nonstatutory Stock Option
Plan.
(b) RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal years ended June 30, 2005 and 2004, employees exercised
options to acquire 890,110 and 1,067,309 shares of common stock in exchange for
a total exercise price of $1,114,733and $957,892, 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, 2005.
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.
18
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 5 Accreditation in 2005-2006.
o Enhance Software Design, Engineering and Service Delivery
Capabilities by increasing investment in training and development.
o Enhance and invest in R&D or between 7-10 % 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, China and
UK to be able to support potential new customers from the North
American, Asia Pacific and European markets.
o Aggressively exploit the booming Chinese market by strengthening
NetSol's presence in China.
o Launch its marketing presence in the US markets through M&A
activities in the domain of our core competencies.
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 and Eastern Europe.
o Create new technology partnership with Oracle and strengthen our
relationship with Intel in Asia Pacific and in the USA.
o Aggressively market LeaseSoft especially in Asia Pacific, Europe and
globally.
o Forge a partnership with a US based telecom company for its telecom
division to fully exploit the explosive market potential in
Pakistan.
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 and North America.
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 `Inbanking' 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.
Funding and Investor Relations:
o Raise new capital from emerging markets without or limited usage of
NetSol securities to further strengthen the balance sheet and
capital resources.
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.
19
Improving the Bottom Line:
o Continue to review costs at every level to consolidate and enhance
operating efficiencies.
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 and Australian
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 4, NetSol is
experiencing a growing demand for its products and alliances from blue chip
companies worldwide. NetSol is now aiming for CMM level 5, the highest CMM level
in the next year. 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
and beyond, 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 Cost arbitrage, labor costs still very competitive and attractive
when compared with India.
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.
o Chinese economic boom leading to new market opportunities.
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 Skyrocketing oil prices and unfortunate affects of Hurricane Katrina
on US economy.
o Continuous impact of Iraq war on US and global economy.
20
CRITICAL ACCOUNTING POLICIES
Our financial statements and related public financial information are based on
the application of accounting principles generally accepted in the United States
("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of NetSol
including information regarding contingencies, risk and financial condition.
Management believes our use of estimates and underlying accounting assumptions
adhere to GAAP and are consistently and conservatively applied. Valuations based
on estimates are reviewed for reasonableness and conservatism on a consistent
basis throughout NetSol. Primary areas where our financial information is
subject to the use of estimates, assumptions and the application of judgment
include our evaluation of impairments of intangible assets, and the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions. We
continue to monitor significant estimates made during the preparation of our
financial statements.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
The recoverability of these assets requires considerable judgment and is
evaluated on an annual basis or more frequently if events or circumstances
indicate that the assets may be impaired. As it relates to definite life
intangible assets, we apply the impairment rules as required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed
Of" which requires significant judgment and assumptions related to the expected
future cash flows attributable to the intangible asset. The impact of modifying
any of these assumptions can have a significant impact on the estimate of fair
value and, thus, the recoverability of the asset.
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 the fiscal years ended
June 30, 2005 and 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, 2005 with $1,371,727 in cash worldwide and $205,480 in certificates of
deposit. In addition, $1,114,733 was injected by the exercise of options by
several employees in 2005.
CHANGE IN MANAGEMENT AND BOARD OF DIRECTORS
Chief Financial Officer
In July 2005, Mr. Najeeb Ghauri resigned from his position of Chief Financial
Officer of the Company retaining his position as Chairman of the Board under an
Executive capacity. Ms. Tina Gilger a CPA and formerly the Company's controller
was appointed by the board of directors to replace Mr. Ghauri.
21
Board of Directors
At the 2005 Annual Shareholders Meeting a seven member board was elected. The
shareholders voted for the following slate of directors: Mr. Najeeb U. Ghauri,
Mr. Jim Moody, Mr. Salim Ghauri, Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr.
Shahid Burki and Mr. Irfan Mustafa. Mr. Mustafa resigned from the board in June
2005. Mr. Derek Soper was appointed by the board to replace Mr. Shabir Randeree
who did not stand for re-election.
Committees
The Audit committee is made up of Mr. Jim Moody as chairman, Mr. Burki and Mr.
Beckert as members. The Compensation committee consists of Mr. Burki as its
chairman and Mr. Soper and Mr. Beckert as its members. The Nominating and
Corporate Governance Committee consists of Mr. Beckert as chairman and Mr. Moody
and Mr. Burki as members.
22
RESULTS OF OPERATIONS
THE YEAR ENDED JUNE 30, 2005 COMPARED TO THE YEAR ENDED JUNE 30, 2004
Net revenues for the year ended June 30, 2005 were $12,437,653 as compared to
$5,749,062 for the year ended June 30, 2004. Net revenues are broken out among
the subsidiaries as follows:
2005 % 2004 %
----------- -----------
Netsol USA $ 295,725 2.38% $ 676,857 11.77%
Netsol Tech (1) 6,557,031 52.73% 3,190,049 55.49%
Netsol Private (2) 776,572 6.24% 483,788 8.42%
Netsol Connect 1,143,616 9.19% 778,598 13.54%
Netsol UK 687,620 5.53% 356,215 6.20%
Netsol-Abraxas Australia 217,470 1.75% 263,555 4.58%
CQ Systems 2,311,345 18.58% -- 0.00%
Netsol-TiG 448,274 3.60% -- 0.00%
----------- ----------- ----------- -----------
Total Net Revenues $12,437,653 100.00% $ 5,749,062 100.00%
=========== =========== =========== ===========
(1) Refers to NetSol Technologies (Pvt.) Limited
(2) Refers to NetSol (Private) Limited
The total consolidated net revenue for fiscal year 2005 was $12,437,653 compared
to $5,749,062 in fiscal year 2004. This is a nearly 116% increase in revenue.
The increase is attributable to increased sales, the acquisition of CQ Systems
and the forming of the joint-venture with TiG.
The fiscal year ended June 30, 2005 was a very busy and exciting period for
NetSol worldwide. The Company added a few major new customers such as
DaimlerChrysler in China, Japan, and New Zealand and Toyota Leasing Thailand and
China. In addition, many new customers were added in Pakistan in both the public
and private sectors. NetSol signed many new alliances and partnerships in fiscal
year 2005. The most significant of all was the joint venture with a UK based
company, The Innovation Group ("TiG"). NetSol owns 51% of this new entity while
TIG owns 49%. The partnership is designed to outsource the global IT projects of
TiG to NetSol in Pakistan.
NetSol made a significant move by acquiring 100% of a UK based software company
CQ Systems Ltd. in February 2005. The acquisition of CQ Systems has provided
NetSol a very strong and seasoned management team with a mature, profitable,
business.
NetSol's global frame agreement with DaimlerChrysler Services ("DCS") qualifies
NetSol as a preferred vendor to DCS in 40 plus countries where DCS operates. As
a direct result of the successful implementations of some of our current systems
with DaimlerChrysler and the signing of the global frame agreement, we are
noticing a significant increase in 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, North America and Pakistan. In fiscal year 2005,
NetSol raised the pricing of its LeaseSoft licenses significantly due primarily
to a surge in demand. In spring of 2005, one complete system was sold to Toyota
Leasing Thailand ("TLT") for nearly $2.3 million that includes over $1.2 million
for license fees.
A number of large leasing companies will be looking to renew legacy
applications. This places NetSol in a very strong position to capitalize on any
upturn in IT spending by these companies. NetSol is well positioned to sell
several new licenses in fiscal year 2006 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 an excess of $1,000,000
with additional charges for customization and maintenance of between 20%-30%
each year.
The gross profit was $7,682,904 for year ended June 30, 2005 as compared with
$3,049,387 for the same period of the previous year. This is a 152% increase.
The gross profit percentage was 62% for the current fiscal year and 53% in 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 4 in 2004.
23
Operating expenses were $6,618,199 for the year ended June 30, 2005 as compared
to $5,757,405 for the year ended June 30, 2004. During the years ended June 30,
2005 and 2004, the Company issued 188,972 and 48,613 restricted common shares in
exchange for services rendered, respectively. The Company recorded this non-cash
compensation expense of $246,650 and $48,240 for the years ended June 30, 2005
and 2004, respectively. Total professional service expense, including non-cash
compensation, was $604,192 and $464,332 for the years ended June 30, 2005 and
2004, respectively. During the years ended June 30, 2005 and 2004, the Company
recorded depreciation and amortization expense of $1,564,562 and $1,240,792,
included in this increase is the addition of the completion of the Lahore
facility. Salaries and wages expenses were $2,022,183 and $1,493,252 for the
years ended June 30, 2005 and 2004, respectively, or an increase of $528,931 or
35%. The addition of the new subsidiary, CQ Systems and the forming of the
joint-venture with TiG, as well as an increase in development, sales and
administration employees resulted in the increase. Approximately 250 new
employees were added throughout the Company during the current fiscal year.
General and administrative expenses were $1,588,456 and $1,759,607 for the years
ended June 30, 2005 and 2004, respectively, a decrease of $171,151. This
decrease is due to consolidation of US offices, streamlining of corporate
overheads and reduction of operating expenses in the Lahore facility due to
elimination of building rent. In the prior year, the general and administrative
expense included 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 the annual shareholders meeting
including proxies mailing and other administrative related costs and travel
expenses.
Selling and marketing expenses increased to $782,488 for the year ended June 30,
2005 as compared to $253,701 for the year ended June 30, 2004, reflecting the
growing sales activity of the Company and the addition of the new subsidiary, CQ
Systems and the joint-venture, NetSol-TIG. The Company wrote-off, as
uncollectible, bad debts of $13,118 and $219,909, during the years ended June
30, 2005 and 2004, respectively.
The income from operations in fiscal year 2005 was $1,064,705 compared to a net
loss from operations of $2,708,018 in fiscal year 2004. Included in these
amounts are non-cash charges of depreciation and amortization of $1,564,562 and
$1,240,792, settlement expenses of $43,200 and $122,500 and bad debt expense of
$13,118 and $219,909, respectively. Net income in fiscal year 2005 was $663,325
compared to a net loss of $2,577,058 in fiscal year 2004 or 125.74% decrease.
The current fiscal year amount includes a net reduction of $111,073 compared to
an add-back of $273,159 in the prior year for the 49.9% minority interest in
NetSol Connect and NetSol-TiG owned by another party. The Company also
recognized non-recurring expenses including $209,848 and $137,230 expense for
the beneficial conversion feature on notes payable and convertible debenture, a
gain of $0 and $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 $404,136 and $216,230 from the settlement of a
debt, respectively. In addition, during the current fiscal year, the Company
recorded an expense of $255,130 for the fair market value of options and
warrants granted. The net income per share was $0.06 in 2005 compared to a loss
of $0.33 in 2004. The total weighted average of shares outstanding basic was
11.6 million and diluted was 14.8 million against basic and diluted 7.9 million
in 2004.
The net EBITDA income for fiscal 2005 was $2,454,164 compared to loss for fiscal
2004 of $1,029,751 after amortization and depreciation charges of $1,564,562 and
$1,240,792, income taxes of $10,416 and $76,638, and interest expense of
$215,861 and 229,877, respectively. Although the net EBITDA income is a non-GAAP
measure of performance we are providing it for the benefit of our investors and
shareholders to assist them in their decision-making process.
Liquidity And Capital Resources
The Company's cash position was $1,371,727 at June 30, 2005 compared to $871,161
at June 30, 2004. In addition the Company had $205,480 compared to $391,403 in
certificates of deposit. The total cash position, including the certificates of
deposits, was $1,577,207 as of June 30, 2005 compared to $1,262,564 million as
of June 30, 2004.
Net cash provided by operating activities amounted to $243,872 for the year
ended June 30, 2005, as compared to used for $1,770,591 for the comparable
period last fiscal year. The decrease is mainly due to an increase in accounts
receivable and other assets offset by an increase in accounts payable.
Net cash used by investing activities amounted to $4,697,488 for the year ended
June 30, 2005, as compared to providing $3,406,964 for the comparable period
last fiscal year. The difference lies primarily in the purchase of CQ Systems
and the related increase in intangible assets acquired. During the prior fiscal
year, the Company had proceeds of $210,000 from the sale of a minority interest
in the Company's subsidiary NetSol Connect, whereas in the current fiscal year
the Company received $178,521 of additional capital from the minority interests.
In addition, the Company had net purchases of property and equipment of
$1,468,499 compared to $2,861,754 for the comparable period last fiscal year.
The majority of this reflects the capitalized costs of the Lahore facility of
approximately $1.37 million and $2.32 million, respectively.
24
Net cash provided by financing activities amounted to $4,826,927 and $5,774,256
for years ended June 30, 2005, and 2004, respectively. The current fiscal year
included the cash inflow of $1,512,000 from the sale of common stock and
$1,260,057 from the exercising of stock options and warrants, compared to
$1,848,750 and $1,445,392 in the prior year, respectively. In the current fiscal
year, the Company had net proceeds from loans of $1,247,351 as compared to
$1,301,571 in the comparable period last year. The Company also obtained a
$1,200,000 convertible debenture during the prior fiscal year. The short term
notes acquired during the current fiscal year were utilized to execute the
acquisition of CQ Systems.
As of June 30, 2005 the Company's working capital (current assets less current
liabilities) totaled $3,458,302 compared to $410,991 as of June 30, 2004, a
increase of $3,047,311. In the current fiscal year, the Company sold a total of
$1,512,000 of its common stock in private placements. 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 prior fiscal year and approximately $487,000 from the exercising of
warrants. The Company has over $3.9 million in accounts receivable and $1.96
million in revenues in excess of billings. The Company plans on 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 strong growth in earnings and the signing of larger contracts with
Fortune 500 customers, largely depends on the financial strength of NetSol.
Generally, the bigger name clients and new prospects diligently analyze and take
into consideration a stronger balance sheet before awarding big projects to
vendors. Therefore, NetSol would continue its effort to further enhance its
financial resources in order to continue to attract large name customers and big
value contracts.
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 July 2005. The company would continue to
inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities.
NetSol's Technology Campus in Lahore was completed in May 2004 and the staff was
relocated into this new building. The Phase One will easily hold up to 500
programmers, engineers and other related staff. NetSol has already experienced a
very 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. Due to its recent growth, management has already started the
planning of constructing a new phase by erecting another structure behind the
current building.
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.
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
Kabani & Company's report on NetSol's financial statements for the fiscal years
ended June 30, 2004 and June 30, 2005, did not contain an adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles, except for a going concern uncertainty
for June 30, 2004.
In connection with the audit of NetSol's financial statements for the fiscal
years ended June 30, 2004 and June 30, 2005 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.
25
Saeed Kamran Patel & Co.'s report on NetSol's Pakistan subsidiaries financial
statements for the fiscal years ended June 30, 2004 and June 30, 2005, did not
contain an adverse opinion or disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
In connection with the audit of NetSol's Pakistan subsidiaries financial
statements for the fiscal years ended June 30, 2004 and June 30, 2005 there were
no disagreements, disputes, or differences of opinion with Saeed Kamran Patel &
Co. on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures, which, if not resolved to the
satisfaction of Saeed Kamran Patel & Co. would have caused it 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, 2005. 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, 2005, 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: Eugen
Beckert who filed on September 1, 2005; and, Shahid Javed Burki who filed on
August 19, 2005.
26
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. The Board of Directors elects the executive
officers of the Company annually. Each year the stockholders elect the Board of
Directors. The executive officers serve terms of one year or until their death,
resignation or removal by the Board of Directors. In addition, there was no
arrangement or understanding between any executive officer and any other person
pursuant to which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
----------------------------------------------------------------------------------------------------------------------------------
Name Year First Elected Age Position Held with the Registrant Family Relationship
As an Officer
Or Director
----------------------------------------------------------------------------------------------------------------------------------
Najeeb Ghauri 1997 51 Director and Chairman Brother to Naeem and Salim Ghauri
----------------------------------------------------------------------------------------------------------------------------------
Salim Ghauri 1999 50 President and Director Brother to Naeem and Najeeb
Ghauri
----------------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri 1999 48 Chief Executive Officer, Director Brother to Najeeb and Salim
Ghauri
----------------------------------------------------------------------------------------------------------------------------------
Tina Gilger 2005 43 Chief Financial Officer None
----------------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson 2004 40 Secretary, Corporate Counsel None
----------------------------------------------------------------------------------------------------------------------------------
Shahid Javed Burki 2000 65 Director None
----------------------------------------------------------------------------------------------------------------------------------
Eugen Beckert 2001 58 Director None
----------------------------------------------------------------------------------------------------------------------------------
Jim Moody 2001 68 Director None
----------------------------------------------------------------------------------------------------------------------------------
Derek Soper 2005 67 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 Chief Executive Officer from 1999 to 2001 and as the
Chief Financial officer of the Company from 2001 to 2005. Currently, he is the
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 sought
financing for the Company as well as oversaw the day-to-day financial position
of the Company. Prior to joining the Company, Mr. Ghauri was part of the
marketing team of Atlantic Richfield Company ("ARCO"), a Fortune 500 company,
from 1987-1997. Mr. Ghauri received his Bachelor of Science degree in
Management/Economics from Eastern Illinois University in 1979, and his M.B.A. in
Marketing Management from Claremont Graduate School in California in 1983. Mr.
Ghauri serves on the boards of the US Pakistan Business Council and Pakistan
Human Development Fund, a non-profit organization.
SALIM GHAURI has been with the Company since 1999 as the President and Director
of the Company. Mr. Ghauri is also the CEO of NetSol Technologies (Pvt.) Ltd.,
(F/K/A Network Solutions (Pvt.) Ltd.), a 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 NetSol
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
4 assessed.
NAEEM GHAURI has been the Company's Chief Executive Officer 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. Mr. Ghauri serves
on the board of CQ Systems Ltd., a subsidiary of the Company.
TINA GILGER jointed NetSol as Chief Financial Officer in July 2005. Ms. Gilger
has acted as a consultant to the Company in the past two years in the capacity
of controller. During the last three years, Ms. Gilger has acted as an audit
liaison for six reporting public companies, of which one was NetSol. From 2000
to 2002, Ms. Gilger acted as audit liaison for a public company specializing in
reverse mergers for public companies listed on the OTC:BB. Ms. Gilger received
her degree in Accounting, with an emphasis in Business Management from the
University of Utah in 1990. Ms. Gilger was licensed as a Certified Public
Accountant by the State of California in 1992, passing all four parts of the
exam on the first attempt.
27
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 corporation, 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.
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 Advisors from
1992-2002. Presently, he is the Chairman of Pak Investment & Finance
Corporation. He was awarded a Rhodes scholarship in 1962 and M.A in Economics
from Oxford University in 1963. He also earned a Master of Public Administration
degree from Harvard University, Cambridge, MA in 1968. Most recently, he
attended Harvard University and completed an Executive Development Program in
1998. During his lifetime, Mr. Burki has authored many books and articles
including: China's Commerce (Published by Harvard in 1969) and Accelerated
Growth in Latin America (Published by World Bank in 1998). Mr. Burki is a
chairman of the Compensation Committee and a member of the Audit Committee.
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 and Compensation 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.
DEREK SOPER was appointed to the Board of Directors in April 2005 to fill a
vacancy left by the departure of Mr. Shabir Randeree. Mr. Soper has both
established and managed many finance and leasing companies around the world
including Barclays Export and Finance Company in 1971 followed, over the next
ten years, by the acquisition and management of various entities as part of
Barclays' establishment of subsidiaries through Europe, North America and South
Africa. From 1981 to 1991, he was the director responsible for leasing, tax
based products and structured finance with Kleinwort Benson. In 1991, he founded
AT&T Capital's Europe, acting as its Chairman until 1995. During that time,
thirteen subsidiary companies were established across Europe. Following the
establishment of the European business of AT&T Capital, he moved to Hong Kong,
as Chairman of the Asia Pacific Region, to establish the company presence in
that region of the world. Following retirement from AT&T Capital in 1998, and
after returning to the UK, he joined the Alta Group to establish their presence
in Europe. Mr. Soper sits on the Business Code of Conduct Committee of the
Finance and Leasing Association and is a past chairman of the association. He is
a fellow of the Institute of Directors and member of the Equipment Leasing
Association of the USA and Leaseurope in Brussels. He is the author of the
leasing textbook "The Leasing Handbook" published by McGraw Hill. Mr. Soper
attended Scarborough College in England. He is a member of the Compensation
Committee.
28
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, 2005. The following
information for the officers includes the dollar value of base salaries, bonus
awards, the number of stock options granted and certain other compensation, if
any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------------
Annual Compensation(1) Long Term Compensation
----------------------------------------------------------------------------------------------------------------------------
Long Term Securities
Name and Principal Position Fiscal Year Salary Bonus Compensation Underlying Options/
Ended Awards (2) SARs (4)
Restricted
Stock Awards(3)
----------------------------------------------------------------------------------------------------------------------------
Najeeb U. Ghauri, Chairman,,CFO (16), 2005 $250,000 -0- -0- 500,000(10)
Director 500,000(11)
2004 $200,000 -0- -0- 50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
2003 $120,000 -0- -0- -0-
----------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri, CEO, Director 2005 $280,000(12) -0- -0- 500,000(10)
500,000(11)
2004 $207,900 -0- -0- 50,000(5)
50,000(6)
25,000(7)
20,000(8)
30,000(9)
2003 $125,000 -0- -0- -0-
----------------------------------------------------------------------------------------------------------------------------
Salim Ghauri, President, Director 2005 $150,000 -0- -0- 500,000(10)
500,000(11)
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-
----------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson, Secretary, 2005 $100,000 $10,000
Corporate Counsel 2004 $ 82,000 5,000(13) 5,000(14)
5,000(15)
20,000(8)
30,000(9)
----------------------------------------------------------------------------------------------------------------------------
29
(1) Other than as stated, no officers received any bonus or other annual
compensation other than salaries during fiscal 2005 or any benefits
other than those available to all other employees that are required
to be disclosed. These amounts are not inclusive of automobile
allowances, where applicable.
(2) No officers received any long-term incentive plan (LTIP) payouts or
other payouts during fiscal years 2004, 2003 or 2002.
(3) All stock awards are shares of our Common Stock.
(4) All securities underlying options are shares of our Common Stock. We
have not granted any stock appreciation rights. No options were
granted to the named executive officers in fiscal year 2003. Options
are reflected in post-reverse split numbers. All options are
currently exercisable or may be exercised within sixty (60) days of
the date of this prospectus and are fully vested.
(5) Includes options to purchase 50,000 shares of our common stock
granted on January 1, 2004 at the exercise price of $2.21 per share.
These options must be exercised within five years after the grant
date.
(6) Includes options to purchase 50,000 shares of our common stock
granted on January 1, 2004 at the exercise price of $3.75 per share.
These options must be exercised within five years after the grant
date.
(7) Includes options to purchase 12,500 shares of our common stock at
$5.00 per share. These options must be exercised within five years
after the grant date.
(8) Includes options to purchase 20,000 shares of our common stock at
$2.65 per share. These options must be exercised within five years
after the grant date.
(9) Includes options to purchase 30,000 shares of our common stock at
$5.00 per share. These options must be exercised within five years
after the grant date.
(10) Includes options to purchase 500,000 shares of our common stock
granted on April 1, 2005 at the exercise price of $1.94 per share.
25% of these options vest each quarter beginning on the quarter
ended June 30, 2005. Options must be exercised within five years
after the grant date.
(11) Includes options to purchase 500,000 shares of our common stock
granted on April 1, 2005 at the exercise price of $2.91 per share.
25% of these options vest each quarter beginning on the quarter
ended June 30, 2005.
(12) Mr. Ghauri salary is 160,000 British Pounds Sterling. The total in
this table reflects a conversion rate of $1.75 per pound sterling.
(13) 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.
(14) 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.
(15) Includes options to purchase 5,000 shares of common stock at the
exercise price of $3.00 per share.
(16) Mr. Ghauri served the Company as Chief Financial Officer until July
2005 whereby Ms. Tina Gilger was then appointed to the position.
OPTIONS GRANTS IN LAST FISCAL YEAR(1)
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------------------------------------------
Name Number of Securities Percentage of Total Exercise or Base Price Expiration Date
Underlying Options Options Granted to ($/Sh)
Employees in Fiscal Year
-----------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri (i) 500,000(2) 25% $1.94 March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
(ii) 500,000(2) $2.91 March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
Najeeb Ghauri (i) 500,000(2) 25% $1.94 March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
(ii) 500,000(2) $2.91 March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
Salim Ghauri (i) 500,000(2) 25% $1.94 March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
(ii) 500,000(2) $2.91 March 31, 2010
-----------------------------------------------------------------------------------------------------------------------------
(1) There were no SAR grants in the last fiscal year.
(2) These options vest 25% per each quarter of service commencing June
30, 2005 and are fully vested on March 31, 2006.
30
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
----------------------------------------------------------------------------------------------------------------------------------
Name Shares Acquired On Value Realized (1) ($) Number of Unexercised Value of Unexercised
Exercise (#) Options/SARs at FY-end In-The-Money atFY-end
(###) Exercisable(2)/ ($) Exercisable/(2)
Unexercisable Unexercisable
----------------------------------------------------------------------------------------------------------------------------------
Najeeb Ghauri, Chairman, 20,000 $0.00 650,000/750,000 $0.00/$0.00
CFO (3), Director
----------------------------------------------------------------------------------------------------------------------------------
Salim Ghauri, President 7,500 $0.00 650,000/750,000 $0.00/$0.00
Director
----------------------------------------------------------------------------------------------------------------------------------
Naeem Ghauri, CEO, Director 2,770 $0.00 610,000/750,000 $0.00/$0.00
----------------------------------------------------------------------------------------------------------------------------------
Patti L. W. McGlasson 10,000 $0.00 60,000/0.00 $0.00/$0.00
----------------------------------------------------------------------------------------------------------------------------------
(1) The closing price of the stock at the June 30, 2005, Fiscal Year End
was $1.879.
(2) All options are currently exercisable.
(3) Mr. Ghauri served the Company as Chief Financial Officer until July
2005 whereby Ms. Tina Gilger was then appointed to the position.
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 April 1, 2005, Mr. Ghauri's
employment agreement was amended to increase his salary to (pound)160,000 per
annum (approximately $280,000 per annum based on an exchange rate of 1.75) and,
to grant him options to purchase up to 500,000 shares at the exercise price of
$1.94 per share and options to purchase up to 500,000 shares at the exercise
price of $2.91 per share. These options vest 25% per quarter commencing with the
quarter ending June 30, 2005.
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 April 1, 2005, Mr. Ghauri's employment agreement
was amended to increase his salary to $250,000 per annum and, to grant him
options to purchase up to 500,000 shares at the exercise price of $1.94 per
share and optins to purchase up to 500,000 shares at the exercise price of $2.91
per share. These options vest 25% per quarter commencing with the quarter ending
June 30, 2005.
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.
31
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 April 1, 2005, Mr. Ghauri's employment agreement was amended to
increase his salary to $150,000 per annum and, to grant him options to purchase
up to 500,000 shares at the exercise price of $1.94 per share and options to
purchase up to 500,000 shares at the exercise price of $2.91 per share. These
options vest 25% per quarter commencing with the quarter ending June 30, 2005.
Effective January 1, 2004, we entered into an employment agreement with Patti L.
W. McGlasson as legal counsel. The agreement was amended effective May 1, 2005
to provide for a yearly salary of $100,000. As part of Ms. McGlasson's initial
employment agreement, she 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 four incentive
and nonstatutory stock option plans in force for 2001, 2002, 2003 and 2004. All
options under the 1997 and 1999 plans have either been exercised or expired as
of June 30, 2004.
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 2,000,000 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 876,500
have been granted. The grant prices range between $1.00 and $5.00.
In March 2005, our shareholders approved the 2004 stock option plan. This plan
authorizes up to 5,000,000 options to purchase common stock of which 3,109,833
have been granted. The grant prices range between $1.50 and $2.91.
COMPENSATION OF DIRECTORS
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.
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.
For the 2005 term, Management members of the Board of Directors of the Company,
which includes Mr. Najeeb Ghauri, receive no compensation for meeting
attendance. However, non-management members of the Board receive cash
compensation of $5,000 and options to purchase 25,000 shares of common stock at
the exercise price of $1.93 and options to acquire up to 25,000 shares at the
exercise price of $2.89. The options vest and are exercisable immediately.
All directors are entitled to reimbursement of approved business expenses.
32
The Audit Committee Chairman receives $5,000 per quarter as earned, and 5,000
shares of restricted common stock issuable upon completion of the 2005 term. The
Compensation Committee Chairman receives $4,000 per quarter as earned, and 5,000
shares of restricted common stock issuable upon completion of the 2005 term. The
Nominating and Corporate Governance Chairman receives $3,000 per quarter as
earned, and 5,000 shares of restricted common stock issuable upon completion of
the 2005 term. Each member of the Audit, Nominating and Corporate Governance and
Compensation Committee shall also receive $1,250 per meeting.
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 9, 2005, 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) 1,162,650 8.21%
Naeem Ghauri(4) 1,011,367 7.14%
Salim Ghauri(4) 1,127,416 7.96%
Jim Moody(4) 98,000 *
Eugen Beckert(4) 89,000 *
Shahid Javed Burki(4) 100,000 *
Derek Soper 100,000 *
Tina Gilger 11,731 *
Patti L. W. McGlasson(4) 77,500 *
Aqeel Karim Dhedhi(4) 1,000,000 7.06%
All officers and directors 3,777,664 26.67%
as a group (nine persons)
* 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 9, 2005 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 14,162,373 shares issued and
outstanding as of September 9, 2005.
(4) Address c/o NetSol Technologies, Inc. at 23901 Calabasas Road, Suite
2072, Calabasas, CA 91302.
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 31.
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 31 and 32
respectively.
In July 2005, 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 32.
33
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 Amendment to the Articles of Incorporation of NetSol Technologies,
Inc. dated March 14, 2005 filed as Exhibit 3.0 to NetSol's quarterly
report filed on Form 10-QSB for the period ended March 31, 2005.*
3.6 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.*
3.7 Amendment to the Bylaws of NetSol Technologies, Inc. dated February
16, 2002 incorporated by reference as Exhibit 3.5 to NetSol's
Registration Statement filed on Form S-8 filed on March 27, 2002.*
4.1 Form of Common Stock Certificate.*
4.2 Form of Warrant.*
10.1 Lease Agreement for Calabasas executive offices dated December 3,
2003 incorporated by reference as Exhibit 99.1 to NetSol's Current
Report filed on Form 8-K filed on December 24, 2003.*
10.2 Company Stock Option Plan dated May 18, 1999 incorporated by
reference as Exhibit 10.2 to the Company's Annual Report for the
Fiscal Year Ended June 30, 1999 on Form 10K-SB filed September 28,
1999.*
10.3 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*
10.4 Company 2003 Incentive and Nonstatutory incorporated by reference as
Exhibit 99.1 to NetSol's Definitive Proxy Statement filed February
6, 2004.*
10.5 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. *
10.6 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.*
10.7 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.*
10.8 Amendment to Employment Agreement, dated April 1 ,2005, by and
between NetSol Technologies, Inc. and Naeem Ghauri.*
10.9 Amendment to Employment Agreement, dated April 1, 2005, by and
between NetSol Technologies, Inc. and Najeeb Ghauri.*
10.10 Amendment to Employment Agreement, dated April 1, 2005, by and
between NetSol Technologies, Inc. and Salim Ghauri.*
10.11 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.*
10.12 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.*
10.13 Frame Agreement by and between DaimlerChrysler Services AG and
NetSol Technologies dated June 4, 2004*
10.14 Share Purchase Agreement dated as of January 19, 2005 by and between
the Company and the shareholders of CQ Systems Ltd. incorporated by
reference as Exhibit 2.1 to NetSol's Current Report filed on form
8-K on January 25, 2005.*
10.18 Lease Agreement with Regus Business Services (Shanghai) Ltd.*
21.1 A list of all subsidiaries of the Company*
34
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (CEO)(1)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (CFO)(1)
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)(1)
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)(1)
* Previously Filed
(1) Filed Herewith
(b) Reports on Form 8-K
1) On April 1, 2005, the Company filed an amended current report
amending its previous filing regarding the aqcquisition of CQ
Systems, Ltd. This amendment was made to attach required pro forma
and audited financial statements.
2) On April 21, 2005, the company filed a current report including its
press release issued April 26, 2005 which announced the results of
the quarter ended March 31, 2005.
3) On April 27, 2005, the Company filed a current report reporting the
appointment of Derek Soper to the board of directors and the
departure of Mr. Irfan Mustafa from the board.
4) On May 2, 2005, the Company filed an amendment to the current report
filed April 21, 2005 indicating that Mr. Soper was replacing Mr.
Randeree on the board of directors and not Mr. Mustafa and
indicating that Mr. Mustafa's resignation would be effective the
earlier of his replacement or June 30, 2005.
5) On May 6, 2005, the Company filed a current report including its
press release issued May 6, 2005 which announced the results of
March 31, 2005 and revised guidance for the year ended June 30,
2005.
Item 14 Principal Accountant Fees and Services
Audit Fees
Kabani & Co. audited the Company's financial statements for the fiscal years
ended June 30, 2005 and June 30, 2004. The aggregate fees billed by Kabani & Co.
for the annual audit and review of financial statements included in the
Company's Form 10-KSB 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, 2004 was $40,000,
and for the year ended June 30, 2005 was $41,500.
Audit Related Fees
The aggregate fees billed by Kabani & Co. during fiscal 2005 including assurance
and related audit services not covered in the preceding paragraph was $46,500.
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 and amendments thereto 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
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, 2002, and
2003. Tax fees for fiscal year 2005 were $14,000 and consisted of preparation of
the Company's federal and state tax returns for the fiscal years 2004.
All Other Fees
There were no other fees billed by Kabani & Co. or services rendered to NetSol
during the fiscal years ended June 30, 2005 and 2004, other than as described
above.
35
Pre-Approval Procedures
The Audit Committee and the Board of Directors are responsible for the
engagement of the independent auditors and for approving, in advance, all
auditing services and permitted non-audit services to be provided by the
independent auditors. The Audit Committee maintains a policy for the engagement
of the independent auditors that is intended to maintain the independent
auditor's independence from NetSol. In adopting the policy, the Audit Committee
considered the various services that the independent auditors have historically
performed or may be needed to perform in the future. The policy, which is to be
reviewed and re-adopted at least annually by the Audit Committee:
(i) Approves the performance by the independent auditors of certain
types of service (principally audit-related and tax), subject to
restrictions in some cases, based on the Committee's determination
that this would not be likely to impair the independent auditors'
independence from NetSol;
(ii) Requires that management obtain the specific prior approval of the
Audit Committee for each engagement of the independent auditors to
perform other types of permitted services; and,
(iii) Prohibits the performance by the independent auditors of certain
types of services due to the likelihood that their independence
would be impaired.
Any approval required under the policy must be given by the Audit Committee, by
the Chairman of the Committee in office at the time, or by any other Committee
member to whom the Committee has delegated that authority. The Audit Committee
does not delegate its responsibilities to approve services performed by the
independent auditors to any member of management.
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 amended 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/ Tina Gilger
---------------------------------
Tina Gilger
Chief Financial Officer
36
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: March 21, 2006 BY: /S/ NAJEEB U. GHAURI
---------------------------------
Najeeb U. Ghauri
Director, Chairman
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
Date: March 21, 2006 BY: /S/ DEREK SOPER
---------------------------------
Derek Soper
Director
37
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, 2005...............................F-6
Consolidated Statements of Operations for the Years
Ended June 30, 2005 and 2004.................................................F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2005 and 2004.................................................F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2005 and 2004.......................................................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, 2005, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended June 30, 2005 and 2004. 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, NetSol Connect (PVT) Limited and TiG-NetSol (PVT) Limited, whose
statements reflect combined total assets of approximately $11,669,359 as of June
30, 2005 and combined total net revenues of $8,925,493 and $4,452,435 for the
years ended June 30, 2005 and 2004, 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, NetSol Connect (PVT) Limited, and TiG-NetSol (PV)
Limited, for the years ended June 30, 2005 and 2004, 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, 2005 and the results of its consolidated
operations and its cash flows for the years ended June 30, 2005 and 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
August 18, 2005
F-2
INDEPENDENT AUDITOR'S REPORT
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the balance sheet of TIG-NetSol (Private) Limited, a Pakistan
subsidiary of NetSol Technologies, Inc., as of June 30, 2005, and the related
statements of operations, and cash flows for the years ended June 30, 2005 and
2004. 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 TIG-NetSol
(Private) Limited, a Pakistan subsidiaries of NetSol Technologies, Inc. as of
June 30, 2005 and the results of its consolidated operations and its cash flows
for the years ended June 30, 2005 and 2004 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS
Lahore, Pakistan
August 15, 2005
INDEPENDENT AUDITOR'S REPORT
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the balance sheet of NetSol Connect (PVT) Limited, a Pakistan
subsidiary of NetSol Technologies, Inc., as of June 30, 2005, and the related
statements of operations, and cash flows for the years ended June 30, 2005 and
2004. 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 the NetSol
Connect (PVT) Limited, a Pakistan subsidiaries of NetSol Technologies, Inc. as
of June 30, 2005 and the results of its operations and its cash flows for the
years ended June 30, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS
Lahore, Pakistan
August 15, 2005
INDEPENDENT AUDITOR'S REPORT
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the balance sheet of NetSol (PVT) Limited, a Pakistan subsidiary
of NetSol Technologies, Inc., as of June 30, 2005, and the related statements of
operations, and cash flows for the years ended June 30, 2005 and 2004. 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 Pakistan subsidiaries of NetSol Technologies, Inc. as of June 30,
2005 and the results of its consolidated operations and its cash flows for the
years ended June 30, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS
Lahore, Pakistan
August 15, 2005
INDEPENDENT AUDITOR'S REPORT
Board of Directors
NetSol Technologies, Inc. and subsidiaries
Calabasas, California
We have audited the balance sheet of NetSol Technologies (PVT) Limited, a
Pakistan subsidiary of NetSol Technologies, Inc., as of June 30, 2005, and the
related statements of operations, and cash flows for the years ended June 30,
2005 and 2004. 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 Pakistan subsidiaries of NetSol Technologies, Inc.
as of June 30, 2005 and the results of its operations and its cash flows for the
years ended June 30, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Saeed Kamran Patel & Co.
CHARTERED ACCOUNTANTS
Lahore, Pakistan
August 15, 2005
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2005
ASSETS
Current assets:
Cash and cash equivalents $ 1,371,727
Certificates of deposit 205,480
Accounts receivable, net of allowance for doubtful accounts of $80,000 3,906,360
Revenues in excess of billings 1,958,950
Other current assets 931,344
------------
Total current assets 8,373,861
Property and equipment, net of accumulated depreciation 5,114,776
Intangibles:
Product licenses, renewals, enhancedments, copyrights,
trademarks, and tradenames, net 4,915,794
Customer lists, net 1,554,992
Goodwill 1,166,611
------------
Total intangibles 7,637,397
------------
Total assets $ 21,126,034
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,927,233
Current portion of notes and obligations under capitalized leases 1,089,192
Billings in excess of revenues 149,014
Due to officers 47,636
Deferred liability 313,397
Loans payable, bank 389,089
------------
Total current liabilities 4,915,561
Obligations under capitalized leases, less current maturities 122,426
Convertible debenture 138,175
------------
Total liabilities 5,176,162
Minority interest 700,320
Commitments and contingencies --
Stockholders' equity:
Common stock, $.001 par value; 25,000,000 share authorized;
13,830,884 issued and outstanding 13,831
Additional paid-in-capital 46,610,747
Treasury stock (27,197)
Accumulated deficit (30,318,988)
Stock subscription receivable (616,650)
Common stock to be issued 108,500
Other comprehensive loss (520,691)
------------
Total stockholders' equity 15,249,552
------------
Total liabilities and stockholders' equity $ 21,126,034
============
See accompanying notes to these consolidated financial statements.
F-3
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years
Ended June 30,
2005 2004
------------ ------------
Net revenues $ 12,437,653 $ 5,749,062
Cost of revenues 4,754,749 2,699,675
------------ ------------
Gross profit 7,682,904 3,049,387
Operating expenses:
Selling and marketing 782,488 253,701
Depreciation and amortization 1,564,562 1,240,792
Impairment of assets -- 203,312
Settlement costs 43,200 122,500
Bad debt expense 13,118 219,909
Salaries and wages 2,022,183 1,493,252
Professional services, including non-cash
compensation 604,192 464,332
General and adminstrative 1,588,456 1,759,607
------------ ------------
Total operating expenses 6,618,199 5,757,405
------------ ------------
Income (loss) from operations 1,064,705 (2,708,018)
Other income and (expenses)
Loss on sale of assets (2,082) (35,173)
Beneficial conversion feature (209,848) (137,230)
Fair market value of options and warrants (255,130) --
Gain on forgiveness of debt 404,136 320,318
Interest expense (215,861) (229,877)
Other income and (expenses) (1,106) 16,401
Income taxes (10,416) (76,638)
------------ ------------
Income (loss) before minority interest in subsidiary 774,398 (2,850,217)
Minority interest in subsidiary (income)/loss (111,073) 273,159
------------ ------------
Net income (loss) 663,325 (2,577,058)
Other comprehensive loss:
Translation adjustment (282,129) (387,859)
------------ ------------
Comprehensive income (loss) $ 381,196 $ (2,964,917)
============ ============
Net income (loss) per share:
Basic $ 0.06 $ (0.33)
============ ============
Diluted $ 0.04 $ (0.33)
============ ============
Weighted average number of shares outstanding:
Basic 11,597,625 7,881,554
============ ============
Diluted 14,776,323 7,881,554
============ ============
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, 2004 AND 2005
Common Stock Additional
------------- Paid-in Treasury
Shares Amount Capital Shares
----------------------------- ------------ -------------
Balance at June 30, 2003 5,757,175 $ 5,756 $ 33,409,954 $ --
Issuance of common stock for cash 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
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 -- -- 351,987
Fair market value of warrants issued -- -- 230,413
Foreign currency translation adjustments -- -- --
Net loss for the year -- -- --
------------ ------------ ------------ -------------
Balance at June 30, 2004 9,482,822 $ 9,483 $ 38,885,878 $ (21,457)
============ ============ ============ =============
Other
Compre-
Stock hensive Total
Subscriptions Income/ Accumulated Stockholders'
Receivable (Loss) Deficit Equity
------------- ------------- ------------- ------------
Balance at June 30, 2003 $ (84,900) $ 149,297 $ (28,405,255) $ 5,074,852
Issuance of common stock for cash 1,618,337
Issuance of common stock for services 9,000
Excercise of common stock options (248,750) 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 351,987
Fair market value of warrants issued 230,413
Foreign currency translation adjustments (387,859) (387,859)
Net loss for the year (2,577,058) (2,577,058)
------------- ------------- ------------- ------------
Balance at June 30, 2004 $ (333,650) $ (238,562) $ (30,982,313) $ 7,319,379
============= ============= ============= ============
Continued
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, 2004 AND 2005
Common Stock Additional
---------------------------- Paid-in Treasury
Shares Amount Capital Shares
------------ ------------ ------------ -------------
Balance at June 30, 2004 9,482,822 9,483 $ 38,885,878 $ (21,457)
Issuance of common stock for cash 1,477,619 1,478 1,540,022
Issuance of common stock for services 188,972 189 246,461
Excercise of common stock options 1,210,110 1,210 1,806,523
Excercise of common stock warrants 145,162 145 290,179
Issuance of common stock in
exchange for notes payable & interest 247,684 248 413,540
Issuance of common stock for
conversion of convertible debentures 564,519 564 1,049,436
Additional shares issued for the
purchase of PTS acquisition 40,000 40 91,560
Issuance of common stock in
exchange for purchase of CQ Systems 759,468 760 1,815,541
Issuance of common stock in
exchange for accrued expenses 34,528 34 49,934
Purchase of treasury shares (51,704)
Issuance of treasury shares for debt 45,964
Capital contribution from issuance of
subsidiary stock on foreign exchange 859,223
Fair market value of warrants issued -- -- 249,638
Fair market value of options issued 5,492
Cancellation of shares (320,000) (320) (692,680)
Foreign currency translation adjustments -- -- --
Net income for the year -- -- --
------------ ------------ ------------ -------------
Balance at June 30, 2005 13,830,884 $ 13,831 $ 46,610,747 $ (27,197)
============ ============ ============ =============
Other
Compre-
Stock hensive Total
Subscriptions Shares to Income/ Accumulated Stockholders'
Receivable be Issued (Loss) Deficit Equity
------------- ------------- ------------- ------------- ------------
Balance at June 30, 2004 $ (333,650) $ -- $ (238,562) $ (30,982,313) $ 7,319,379
Issuance of common stock for cash (138,000) 108,500 1,512,000
Issuance of common stock for services 246,650
Excercise of common stock options (838,000) 969,733
Excercise of common stock warrants 290,324
Issuance of common stock in
exchange for notes payable & interest 413,788
Issuance of common stock for
conversion of convertible debentures 1,050,000
Additional shares issued for the
purchase of PTS acquisition 91,600
Issuance of common stock in
exchange for purchase of CQ Systems 1,816,301
Issuance of common stock in
exchange for accrued expenses 49,968
Purchase of treasury shares (51,704)
Issuance of treasury shares for debt 45,964
Capital contribution from issuance of
subsidiary stock on foreign exchange 859,223
Fair market value of warrants issued 249,638
Fair market value of options issued 5,492
Cancellation of shares 693,000 --
Foreign currency translation adjustments (282,129) (282,129)
Net income for the year 663,325 663,325
------------- ------------- ------------- ------------- ------------
Balance at June 30, 2005 $ (616,650) $ 108,500 $ (520,691) $ (30,318,988) $ 15,249,552
============= ============= ============= ============= ============
See accompanying notes to these consolidated financial statements.
F-6
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years
Ended June 30,
2005 2004
----------- -----------
Cash flows from operating activities:
Net income (loss) from continuing operations $ 663,325 $(2,577,058)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization 1,979,603 1,640,044
Impairment of assets -- 203,312
Gain on forgiveness of debt (404,136) (320,318)
Loss on sale of assets 2,082 35,173
Minority interest in subsidiary 111,073 (273,159)
Stock issued for settlement costs -- 135,133
Stock issued for services 183,695 9,000
Stock issued to directors for services -- 39,240
Fair market value of warrants and stock options granted 255,130 --
Beneficial conversion feature 209,848 137,230
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (3,644,646) (324,094)
Other current assets (1,587,132) (409,708)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 2,161,633 (65,386)
Deferred liabilities 313,397 --
----------- -----------
Net cash provided by (used in) operating activities 243,872 (1,770,591)
Cash flows from investing activities:
Purchases of property and equipment (1,468,499) (2,861,754)
Sales of property and equipment 88,736 75,490
Purchases of certificates of deposit (1,517,640) (3,241,403)
Proceeds from sale of certificates of deposit 1,703,563 2,850,000
Increase in intangible assets (3,827,466) (439,297)
Proceeeds from sale of minority interest of subsidiary -- 200,000
Capital investments in minority interest of subsidiary 178,521 10,000
Cash brought in at acquisition 145,297 --
----------- -----------
Net cash used in investing activities (4,697,488) (3,406,964)
Cash flows from financing activities:
Proceeds from sale of common stock 1,512,000 1,848,750
Proceeds from the exercise of stock options and warrants 1,260,057 1,445,392
Capital contributed from sale of subsidiary stock 859,223 --
Purchase of treasury shares (51,704) (21,457)
Proceeds from loans 1,533,690 1,685,781
Proceeds from convertible debenture -- 1,200,000
Payments on capital lease obligations & loans (286,339) (384,210)
----------- -----------
Net cash provided by financing activities 4,826,927 5,774,256
Effect of exchange rate changes in cash 127,255 59,970
----------- -----------
Net increase in cash and cash equivalents 500,566 656,671
Cash and cash equivalents, beginning of year 871,161 214,490
----------- -----------
Cash and cash equivalents, end of year $ 1,371,727 $ 871,161
=========== ===========
See accompanying notes to these consolidated financial statements.
F-7
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Continued
For the Years
Ended June 30,
2005 2004
------------- -------------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 127,055 $ 229,877
============= =============
Taxes $ 41,182 $ 76,638
============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services and compensation $ 246,650 $ 9,000
============= =============
Common stock issued for conversion of note payable and interest $ 413,788 $ 861,429
============= =============
Common stock issued for legal settlement $ -- $ 135,133
============= =============
Common stock issued for acquisition of product license $ 91,600 $ 166,860
============= =============
Common stock issued for settlement of debt $ 45,965 $ 209,200
============= =============
Common stock issued to directors for services $ -- $ 39,240
============= =============
Common stock issued for acquisition of subsidiary $ 1,816,301 $ --
============= =============
Common stock issued for conversion of debentures $ 1,050,000 $ --
============= =============
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. During the year
ended June 30, 2004, the goodwill was impaired.
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. In addition, during the year ended
June 30, 2005, an additional 40,000 shares valued at $91,600 was issued to the
shareholders of Pearl for milestones reached in the development of the software.
After acquisition, all development activities of Pearl Treasury System, now
called InBanking were transferred to NetSol UK; therefore, there are no separate
financial statements for Pearl. The total acquisition value of $258,460 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, NetSol
Connect, 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. All activity of the acquired
entity was absorbed by NetSol Connect after the acquisition.
CQ Systems
On January 19, 2005, the Company entered into an agreement to acquire 100% of
the issued and outstanding shares of common stock of CQ Systems Ltd., a company
organized under the laws of England and Wales. The acquisition closed on
February 22, 2005. The initial purchase price was (pound)3,576,335 or
$6,730,382, of which one-half was due at closing payable in cash and stock and
the other half is due when the audited March 31, 2006 financial statements are
completed. On the closing date, $1.7 million was paid and 681,965 shares were
issued to the shareholders of CQ, valued at $1,676,795 at an average share price
of $2.46 was recorded. In addition, the agreement called for the accumulated
retained earnings amounting to (pound)423,711 or $801,915 of CQ Systems as of
the closing date to be paid to the shareholders in cash and stock. In April
2005, the additional cash of (pound)350,000 or $662,410 was paid and 77,503
shares of the Company's common stock valued at $139,505 were issued. The total
amount paid at closing was $4,178,710.
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.
Joint Venture:
In January 2005, the Company formed TiG-NetSol (Pvt) Limited ("TiG-Netsol") as a
joint venture with a UK based public company TIG Plc., with 50.1% ownership by
NetSol Technologies, Inc. and 49.9% ownership by TiG. TiG-NetSol was
incorporated in Pakistan on January 12, 2005 under the Companies Ordinance, 1984
as a private company limited by shares. The business of the Company is export of
computer software and its related services developed in Pakistan.
F-11
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.("PK
Tech"), NetSol (Pvt), Limited ("PK Private"), NetSol Technologies Limited
("UK"), NetSol-Abraxas Australia Pty Ltd. ("Abraxas"), NetSol Altvia, Inc.
("USA"), CQ Systems Limited ("CQ"), and its majority-owned subsidiaries, NetSol
Connect (Pvt), Ltd. ("Connect"), and TIG-NetSol (Pvt) Limited ("TIG"). 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.
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 became 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.
F-12
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-13
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, 2005 and 2004 were $127,602 and $37,801, 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 following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
------------------------------------------------------------------------------------
For the year ended June 30, 2005 Net Income Shares Per Share
------------------------------------------------------------------------------------
Basic earnings per share: $ 663,325 11,597,625 $0.06
Net income available to common shareholders
Effect of dilutive securities
Stock options 2,515,114
Warrants 663,584
---------- ---------- -----
Diluted earnings per share $ 663,325 14,776,323 $0.04
========== ========== =====
The weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements for the year ended June 30, 2004
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
and CQ Systems use British Pounds; NetSol Technologies (Pvt) Ltd., NetSol
Private, NetSol Connect, and TiG-Netsol use Pakistan Rupees; NetSol Abraxas 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, 2005 and 2004, comprehensive income
included net translation loss of $282,129 and $387,859, respectively. Other
comprehensive loss, as presented on the accompanying consolidated balance sheet
in the stockholders' equity section amounted to $520,691 as of June 30, 2005.
Accounting for Stock-Based Compensation:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, which
applies the fair-value method of accounting for stock-based compensation plans.
In accordance with this standard, the Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), "Accounting for Certain Transactions
Involving Stock Compensation." Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under APB Opinion No. 25, Accounting for
Stock-Based Compensation. Interpretation 44 became effective July 1, 2000, with
certain provisions that were effective retroactively to December 15, 1998 and
January 12, 2000. Interpretation 44 did not have any material impact on the
Company's financial statements.
F-15
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes:
Deferred income taxes are reported using the liability method. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
As of June 30, 2005, the Company had net federal and state operating loss carry
forwards expiring in various years through 2025. During the year ended June 30,
2005, the valuation allowance increased by $651,617; primarily due to the
application of the current year net loss for the US companies 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, 2005 is as follows:
Federal State Total
------------ ------------ ------------
Net operating loss carry forward - June 30, 2004 $ 22,479,286 $ 9,503,419
Net loss 3,245,957 3,245,957
------------ ------------
Net operating loss carry forward - June 30, 2005 25,725,243 12,749,376
Effective tax rate 32% 8%
------------ ------------
Deferred tax asset 8,232,078 1,019,950 9,252,028
Valuation allowance (6,672,078) (629,950) (7,302,028)
------------ ------------ ------------
Net deferred tax asset 1,560,000 390,000 1,950,000
Deferred tax liability arising from
non-taxable business combinations 1,560,000 390,000 1,950,000
------------ ------------ ------------
Net deferred tax liability $ (0) $ 0 $ (0)
============ ============ ============
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:
For the years
ended June 30,
2005 2004
% %
Tax expense (credit) at statutory rate - federal 34 (34)
State tax expenses, net of federal tax (6) (6)
Valuation allowance - 16
Foreign tax rate differences (34) 18
Other 7 6
---------- ----------
Tax expense at actual rate 1 --
========== ==========
F-16
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 an
impairment of goodwill exists include a sustained decrease in the market value
of the reporting unit or an adverse change in business climate.
On June 30, 2004, the Company evaluated the valuation of goodwill based upon the
performance and market value of NetSol USA. The Company determined the goodwill
was impaired and recorded the impairment of $203,312 at June 30, 2004, 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 (see note 12).
F-17
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements:
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The EITF reached a consensus about the
criteria that should be used to determine when an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss and how that criteria should be applied to investments
accounted for under SFAS No. 115, "Accounting in Certain Investments in Debt and
Equity Securities." EITF 03-01 also included accounting considerations
subsequent to the recognition of other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. Additionally, EITF 03-01 includes new
disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the Financial Accounting Standards Board (FASB)
delayed the accounting provisions of EITF 03-01; however, the disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company believes that the adoption of this standard will have no material impact
on its financial statements.
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
The Company is evaluating the effects adoption of SFAS 123R will have on its
financial statements.
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior period's financial
statements of changes in accounting principle, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company believes that the adoption of this standard
will have no material impact on its financial statements.
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, 2005 and 2004 and Toyota Motors (which
consists of a group of many companies) accounts for approximately 35% of revenue
for the fiscal year ended June 30, 2005. Accounts receivable at June 30, 2005
for these companies was $539,761 and $1,165,183. No other individual client
represents more than 10% of the revenue for the fiscal years ended June 30, 2005
and 2004.
F-18
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consist of the following as of June 30, 2005:
Prepaid Expenses $ 494,315
Advance Income Tax 162,682
Employee Advances 11,342
Security Deposits 56,472
Other Receivables 187,613
Other Asset 18,920
----------------
Total $ 931,344
================
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following at June 30, 2005:
Office furniture and equipment $ 858,273
Computer equipment 3,804,496
Assets under capital leases 623,008
Building 2,930,258
Construction in process 424,991
Land 185,760
Autos 138,226
Improvements 270,929
-----------------
Subtotal 9,235,941
Accumulated depreciation (4,121,165)
-----------------
$ 5,114,776
=================
For the years ended June 30, 2005 and 2004, fixed asset depreciation expense
totaled $654,584 and $520,750, respectively. Of these amounts, $415,042 and
$355,954, respectively, are reflected as part of cost of goods sold. Accumulated
depreciation and amortization for assets under capital leases amounted to
$363,433 and $335,156 at June 30, 2005 and 2004, respectively.
NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of the following at June 30, 2005:
F-19
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product Customer
Licenses Lists Total
----------- ----------- -----------
Intangible asset - June 30, 2004 $ 5,450,357 $ 1,977,877 $ 7,428,234
Additions 3,376,728 1,316,880 4,693,608
Effect of translation adjustment (27,762) (27,762)
Accumulated amortization (3,883,529) (1,739,765) (5,623,294)
----------- ----------- -----------
Net balance - June 30, 2005 $ 4,915,794 $ 1,554,992 $ 6,470,786
=========== =========== ===========
Amortization expense:
Year ended June 30, 2005 $ 980,524 $ 403,457 $ 1,383,981
Year ended June 30, 2004 $ 803,629 $ 315,665 $ 1,119,294
The above amortization expense includes amounts in "Cost of Goods Sold" for
capitalized software development costs of $58,961 and $43,298 for the fiscal
years ended June 30, 2005 and 2004, respectively.
At June 30, 2005 and 2004, product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, included unamortized software development and
enhancement costs of $1,507,792 and $908,508, respectively, as the development
and enhancement is yet to be completed. Software development amortization
expense was $94,682 and $97,744 for the years ended June 30, 2005 and June 30,
2004, respectively.
Amortization expense of intangible assets over the next five years is as
follows:
----------------------------------------------------------------------------------------------------
FISCAL YEAR ENDING
Asset 6/30/06 6/30/07 6/30/08 6/30/09 6/30/10 TOTAL
----------------------------------------------------------------------------------------------------
Product Licences $1,271,996 $ 591,872 $ 591,872 $ 576,799 $ 375,463 $3,408,002
Customer Lists 551,204 301,454 263,376 263,376 175,583 1,554,993
---------- ---------- ---------- ---------- ---------- ----------
$1,823,200 $ 893,326 $ 855,248 $ 840,175 $ 551,046 $4,962,995
========== ========== ========== ========== ========== ==========
NOTE 7 - DEBTS
NOTES PAYABLE
Notes payable consist of the following at June 30, 2005:
-------------------------------------------------------------------------
Balance at Current Long-Term
Name 6/30/05 Maturities Maturities
-------------------------------------------------------------------------
A. Zaman Settlement $ 16,300 $ 16,300 $ --
First Funding 475 475 --
D&O Insurance 49,688 49,688 --
Noon Group 518,794 518,794 --
Gulf Crown 259,397 259,397 --
Maxim Group 100,000 100,000 --
Subsidiary Capital Leases 144,538 144,538 --
---------- ---------- ----------
$1,089,192 $1,089,192 $ --
========== ========== ==========
F-20
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 recorded as a note payable. The agreement called for
monthly payments of (pound)3,000 until March 2004 and then (pound)4,000 per
month until paid. As of June 30, 2004, the balance was $146,516. During the six
months ended December 31, 2004, the Company paid (pound)12,000 or $21,997. In
December 2004, the Company reached an agreement with Cowler to pay the balance
of the loan in one lump-sum payment. Cowler agreed to accept (pound)52,000 or
$103,371 as payment in full. As a result, the Company recorded a gain on
forgiveness of debt of $21,148 in the accompanying consolidated 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. During the nine months ended March 31, 2005, the
Company paid $56,000. In April 2005, an agreement was reached with Herbert Smith
whereby they accepted $110,000 as payment in full. As a result, the Company
recorded a gain on forgiveness of debt of $33,321 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 and the balance of (pound)9,000 or $16,598 was paid in
July, 2004.
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, 2004 was $26,300. During the current
fiscal year the Company paid $10,000. As of June 30, 2005, the balance was
$16,300. The entire balance has been classified as a current liability in the
accompanying consolidated financial statements.
In January 2005, the Company renewed its director's and officer liability
insurance for which the annual premium is $138,050. In February 2005, the
Company arranged financing with AFCO Credit Corporation with a down payment of
$27,610 with the balance to be paid in monthly installments. The balance owing
as of June 30, 2005 was $49,688 and is classified as a current liability in the
accompanying consolidated financials statements.
In October 2004, the Company renewed its professional liability insurance for
which the annual premium is $5,944. The Company has arranged for financing with
the insurance company with a down payment of $1,853 and nine monthly payment of
$480 each. During the six months ended March 31, 2005, the Company paid $4,529.
The balance owing at June 30, 2005 was $475 and is classified as a current
liability in the accompanying consolidated financials statements.
In February 2005, the Company received a loan from a current shareholder Sir
Gulam Noon in the amount of $500,000. The note carries an interest rate of 9.75%
per annum and is due in one year. The maturity date of the loan may be extended
at the option of the holder for an additional year. During the fiscal year ended
June 30, 2005, $18,794 of accrued interest was recorded for this loan.
F-21
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2005, the Company received a loan from Gulf Crown Investments in the
amount of $250,000. The note carries an interest rate of 9.75% per annum and is
due in one year. The maturity date of the loan may be extended at the option of
the holder for an additional year. During the fiscal year ended June 30, 2005,
$9,397 of accrued interest was recorded for this loan.
In February 2005, the Company received a loan from a current shareholder Dr.
Omar Atiq in the amount of $300,000. The note carries an interest rate of 12%
per annum and is due on April 4, 2005. The maturity date of the loan may be
extended at the option of the holder. During the quarter ended June 30, 2005,
$150,000 cash was paid on the loan and 100,000 shares of the Company's common
stock was issued valued at $156,160 to pay the debt in full, including $7,453 of
accrued interest (see note 8). As a result, the Company recorded a gain on
forgiveness of debt of $1,293 in the accompanying consolidated financial
statements.
In May 2005, the Company received a loan from Maxim Group, LLC in the amount of
$250,000. The note carries an interest rate of 12% and is due July 25, 2005. The
note called for $150,000 to be paid with 80,214 shares the Company's common
stock and the balance of $100,000 to be paid in cash. The market value of the
shares issued was $152,968 (see Note 8). As a result, the Company recorded a
loss on forgiveness of debt of $2,968 in the accompanying consolidated financial
statements.
In addition, the various subsidiaries had current capital leases of $144,537 as
of June 30, 2005.
LOANS PAYABLE - BANK
The Company's Pakistan subsidiary, NetSol Technologies (Private) Ltd., has two
loans with a bank, secured by the Company's assets. These notes consist of the
following as of June 30, 2005:
TYPE OF MATURITY INTEREST BALANCE
LOAN DATE RATE USD
-------------------------------------------------------------------
Export Refinance Every 6 months 4% $ 367,401
Line of Credit On Demand 8% 21,688
----------
Total $ 389,089
==========
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 fiscal year ended
June 30, 2004, 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.
During the current fiscal year, two officers deferred the increase in their
wages for a total of $32,500. In addition, one officer exercised options against
the amounts owing in the amount of $2,083. The balance owing as of June 30, 2005
was $47,636.
NOTE 8 - STOCKHOLDERS' EQUITY
Initial Public Offering:
F-22
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 15, 1998, the Company completed the sale of its minimum offering of
shares in its initial public offering which generated gross proceeds of
$1,385,647 from the sale of 50,200 shares of common stock and 929,825 warrants,
each warrant to purchase one share of the Company's common stock at an exercise
price of $6.50 for a term of five years. The remaining unexercised warrants of
51,890 expired on September 15, 2003.
Business Combinations:
Altvia Technologies, Inc.
On May 20, 2003, the Company issued 212,000 Rule 144 restricted common shares in
exchange for all the assets and certain liabilities of Altvia Technologies,
Inc., a Delaware corporation in an Asset Purchase Agreement. The shares were
valued at the time of the purchase at $212,000 or $1.00 per share.
In February 2004, an additional 100,000 shares were issued to Altvia 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.
In January 2005, certain milestones, set forth in the purchase and sale
agreement by and between the Company and the former owners, were met in the
development of the Pearl. As such, the former owners of the product license were
due an additional 40,000 shares of the Company's common stock. The Company
recorded an addition to the product licenses in the amount of $91,600.
CQ Systems, Inc.
In February 2005, the Company completed the acquisition of CQ Systems, (see note
15). As part of this agreement, the Company issued 759,468 shares of its common
stock valued at $1,816,301 to the shareholders of CQ Systems.
Private Placements
In August 2004, the Company sold 190,476 shares of the Company's common stock
for $200,000 in a private placement. Of this amount $91,500 had been received
during the year and a total of 87,143 shares were issued to the purchaser. The
remaining balance of $108,500 or 103,333 shares are shown as "Shares to Be
Issued" on the accompanying financial statements.
During the quarter ended December 31, 2004, the Company sold 1,390,476 shares of
its common stock for $1,250,000 in private placement agreements.
In addition, the Company received $170,500 as payment on stock subscriptions
receivable during the fiscal year ended June 30, 2005.
F-23
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 were recorded against the proceeds of the
financing in the accompanying consolidated financial statements. Net proceeds of
the financing were $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.
Services, Accrued Expenses and Payables
During the years ended June 30, 2005 and 2004, the Company issued 188,972 and
3,613 restricted Rule 144 common shares in exchange for services rendered,
respectively. The Company recorded an expense of $246,650 and $9,000 for the
years ended June 30, 2005 and 2004, respectively. Compensation expense was
calculated based upon the fair market value of the freely trading shares as
quoted on NASDAQ through 2005 and 2004, over the service period.
In November 2004, the Company entered into an agreement with a vendor whereby
the Company issued the vendor 20,000 shares valued at $22,968 for the payment of
outstanding invoices in the amount of $16,052. As a result, the Company recorded
a gain on settlement of debt in the amount of $6,916.
During the year ended June 30, 2005, the Company issued 14,528 shares of the
Company's common stock for accrued expenses valued at $27,000.
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, 2005, nineteen of the convertible debenture
holders elected to convert their notes into common stock. The total of the notes
converted was $1,050,000 and the Company issued 564,519 shares of its common
stock to the note holders.
During the year ended June 30, 2005, a total of 180,214 shares of the Company's
common stock valued at $309,128 were issued for the payment of two notes payable
of $300,000 plus $7,453 (see Note 7). In addition, 67,470 shares valued at
$104,660 were issued to pay the debts of a subsidiary.
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.
F-24
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 2004, the Company issued 45,195 shares of common
stock valued at $135,135 in settlement of litigation.
Options and Warrants Exercised
During the year ended June 30, 2005, the Company issued 1,210,110 shares of its
common stock for the exercise of options valued at $1,807,733. Of these shares,
320,000 shares valued at $693,000 were cancelled. The Company received $969,733
in cash from the exercise of these options and recorded "Stock Subscription
Receivable" in the amount of $145,000.
During the year ended June 30, 2004, the Company issued 1,067,309 shares of its
common stock upon the exercise of stock options valued at $957,892; of this
amount $290,000 was included in "Stock Subscription Receivable" in the accompany
consolidated financial statements.
During the years ended June 30, 2005 and 2004, the Company issued 145,162 and
390,000 shares of its common stock upon the exercise of warrants valued at
$290,324and $487,500, 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.
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.
During the year ended June 30, 2005, the Company recorded $874,500 in receivable
and collected $561,500. In addition, a purchaser (consultant) decided not to
complete the agreed purchase and therefore 20,000 shares were cancelled and the
related value of $30,000 was reversed from the receivable account. The balance
of the receivable at June 30, 2005 was $616,650.
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.
During the year ended June 30, 2005, the Company purchased 30,000 shares of its
common stock on the open market for $51,704. The Company issued 24,004 of its
treasury shares valued at $45,964 in settlement of a debt. The balance at June
30, 2005 was $27,197.
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, 2005:
F-25
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exercise Exercise
Options Price Warrants Price
-------------- -------------- -------------- --------------
Outstanding and exercisable, June 30, 2004 1,862,277 $0.75 to $5.00 693,182 $0.50 to $5.00
Granted 3,994,833 $0.75 to $5.00 282,260 $ 3.30
Exercised (809,110) $0.75 to $2.21 (145,162) $ 2.00
Expired (10,000) $ 1.00 (175,000)
-------------- --------------
Outstanding and exercisable, June 30, 2005 5,038,000 655,280
During the year ended June 30, 2005, 3,596,333 options were granted to employees
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. An expense of $5,492 was recorded for the
granting of these options.
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, 2005 and 2004 as follows:
2005 2004
------------- -------------
Net income (loss) - as reported $ 663,325 $ (2,577,058)
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 (4,533,825) (3,158,130)
------------- -------------
Pro forma net loss $ (3,870,500) $ (5,735,188)
============= =============
Earnings per share:
Basic, as reported 0.06 (0.33)
Diluted, as reported 0.04 (0.33)
Basic, pro forma (0.33) (0.73)
Diluted, pro forma (0.03) (0.73)
F-26
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
2003 2004
Expected life (years) 10 years 10 years
Risk-free interest rate 3.25% 3.25%
Dividend yield - -
Volatility 100% 114%
During the year ended June 30, 2005, nineteen debenture holders converted their
notes into common stock. As part of the conversion, warrants to purchase a total
of 282,260 common shares were issued to the note holders. 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 $249,638 and ranged between $0.69 and
$0.92 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 82%
Dividend yield 0%
During the year ended June 30, 2004, 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 were recorded against the proceeds of the financing 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 9 - 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.
F-27
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During the year ended June 30, 2004, all outstanding options in this plan
expired.
The 2001 Plan
On March 27, 2002, the Company enacted an Incentive and Non-statutory Stock
Option Plan (the "2001 Plan") for its employees and consultants under which a
maximum of 2,000,000 options may be granted to purchase common stock of the
Company. Two types of options may be granted under the Plan: (1) Incentive Stock
Options (also known as Qualified Stock Options) which may only be issued to
employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Non-statutory Stock Options which may be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is less than the fair market value of the common
stock on the date it was reserved for issuance under the plan. Grants of options
may be made to employees and consultants without regard to any performance
measures. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
Any Option granted to an Employee of the Corporation shall become exercisable
over a period of no longer than ten (10) years and no less than twenty percent
(20%) of the shares covered thereby shall become exercisable annually. No
Incentive Stock Option shall be exercisable, in whole or in part, prior to one
(1) year from the date it is granted unless the Board shall specifically
determine otherwise, as provided herein. In no event shall any Option be
exercisable after the expiration of ten (10) years from the date it is granted,
and no Incentive Stock Option granted to a Ten Percent Holder shall, by its
terms, be exercisable after the expiration of ten (10) years from the date of
the Option. Unless otherwise specified by the Board or the Committee in the
resolution authorizing such option, the date of grant of an Option shall be
deemed to be the date upon which the Board or the Committee authorizes the
granting of such Option.
The number and exercise prices of options granted under the 2001 Plan for the
years ended June 30, 2005 and 2004 are as follows:
F-28
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exercise Exercise
2005 Price 2004 Price
---------------------------- ---------------------------
Outstanding and exercisable, beginning of year 269,777 $0.75 to $2.50 398,408 $0.25 to $1.25
Granted 484,000 $0.75 to $2.50 635,913 $0.75 to $2.50
Exercised (632,777) $0.75 to $2.50 (764,544) $0.25 to $1.25
Expired (10,000) - - -
------------ -----------
Outstanding and exercisable, end of year 111,000 $0.75 to $2.50 269,777 $0.75 to $2.50
The 2002 Plan
In January 2003, the Company enacted an Incentive and Non-statutory Stock Option
Plan (the "2002 Plan") for its employees and consultants under which a maximum
of 2,000,000 options may be granted to purchase restricted Rule 144 common stock
of the Company. Two types of options may be granted under the Plan: (1)
Incentive Stock Options (also known as Qualified Stock Options) which may only
be issued to employees of the Company and whereby the exercise price of the
option is not less than the fair market value of the common stock on the date it
was reserved for issuance under the Plan; and (2) Non-statutory Stock Options
which may be issued to either employees or consultants of the Company and
whereby the exercise price of the option is less than the fair market value of
the common stock on the date it was reserved for issuance under the plan. Grants
of options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan are
nontransferable and subject to forfeiture.
Any Option granted to an Employee of the Corporation shall become exercisable
over a period of no longer than ten (10) years and no less than twenty percent
(20%) of the shares covered thereby shall become exercisable annually. No
Incentive Stock Option shall be exercisable, in whole or in part, prior to one
(1) year from the date it is granted unless the Board shall specifically
determine otherwise, as provided herein. In no event shall any Option be
exercisable after the expiration of ten (10) years from the date it is granted,
and no Incentive Stock Option granted to a Ten Percent Holder shall, by its
terms, be exercisable after the expiration of ten (10) years from the date of
the Option. Unless otherwise specified by the Board or the Committee in the
resolution authorizing such option, the date of grant of an Option shall be
deemed to be the date upon which the Board or the Committee authorizes the
granting of such Option.
The number and weighted average exercise prices of options granted under the
2002 Plan for the year ended June 30, 2005 and 2004 are as follows:
Exercise Exercise
2005 Price 2004 Price
---------------------------- ---------------------------
Outstanding and exercisable, beginning of year 1,142,500 $0.75 to $2.50 93,600 -
Granted 14,500 $1.00 to $5.00 1,351,665 $0.75 to $2.50
Exercised (17,500) $0.75 to $2.50 (302,765) $0.25 to $1.25
Expired - - - -
---------- ----------
Outstanding and exercisable, end of year 1,139,500 $0.75 to $5.00 1,142,500 $0.75 to $2.50
F-29
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2003 Plan
In March 2004, the Company enacted an Incentive and Non-statutory Stock Option
Plan (the "2003 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, 2005 and 2004 are as follows:
Exercise Exercise
2005 Price 2004 Price
---------------------------- ---------------------------
Outstanding and exercisable, beginning of year 450,000 - - -
Granted 386,500 $1.00 to $5.00 450,000 $2.64 to $5.00
Exercised (49,000) $1.00 to $1.35 - -
Expired - - - -
------------ ----------
Outstanding and exercisable, end of year 787,500 $1.00 to $5.00 450,000 $2.64 to $5.00
The 2004 Plan
In March 2005, the Company enacted an Incentive and Non-statutory Stock Option
Plan (the "2004 Plan") for its employees and consultants under which a maximum
of 5,000,000 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-30
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number and weighted average exercise prices of options granted under the
2004 Plan for the year ended June 30, 2005 are as follows:
Exercise
2005 Price
-------------------------------
Outstanding and exercisable, beginning of year - -
Granted 3,109,833 $1.50 to $2.91
Exercised (109,833) $1.50
Expired - -
--------------
Outstanding and exercisable, end of year 3,000,000 $1.50 to $2.91
NOTE 10 - 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. During the years ended June 30,
2005 and 2004, the Company amortized $37,500 and $202,932, respectively. The
unamortized balance at June 30, 2005 was $11,825.
During the year ended June 30, 2005, nineteen of the convertible debenture
holders elected to convert their notes into common stock. The total of the notes
converted was $1,050,000 and the Company issued 564,519 shares of its common
stock to the note holders. The net balance at June 30, 2005, was $138,175.
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. During the year ended June
30, 2005, nineteen debenture holders converted their notes into common stock. As
part of the conversion, warrants to purchase a total of 282,260 common shares
were issued to the note holders. The warrants were valued using the fair value
method at $249,638. The expense was recorded in the accompanying consolidated
financial statements.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Leases
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 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.
F-31
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO 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 $5,500 per month. Our London, UK operations are
currently conducted in leased premises operating on a month-to-month basis with
current rental costs of approximately $5,500 per month. The CQ System
facilities, located in Horsham, United Kingdom, are leased until June 23, 2011
for an annual rent of (pound)75,000 (approximately $131,871.15) with an early
termination option in June 2006. In June 2005, the Company opened a sales office
in Beijing, China. The Beijing lease is a one year lease that expires in June
2006. The monthly rent is $2,280 per month with the first two months free
bringing the average monthly rent to $1,900 per month.
Upon expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Rent expense amounted to $290,610 and
$220,261 for the years ended June 30, 2005 and 2004, 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 over 250 employees into
this new facility.
Employment Agreements
Effective January 1, 2004, the Company entered into an employment agreement with
Naeem Ghauri as Chief Executive Officer. The agreement is for a base term of
three years, and continues thereafter on an at will basis until terminated by
either NetSol or Mr. Ghauri. The agreement provides for a yearly salary of
110,000 pounds sterling. The agreement also provides for such additional
compensation as the Board of Directors determines is proper in recognition of
Mr. Ghauri's contributions and services to the Company. In addition, the
agreement provides Mr. Ghauri with options to purchase up to 100,000 shares of
common stock at an exercise price of $2.21, 100,000 shares at an exercise price
of $3.75 and 50,000 shares at an exercise price of $5.00. These options vest at
the rate of 25% per quarter and are fully vested on December 31, 2004. These
options expire on December 31, 2008. Mr. Ghauri also received options to
purchase up to 20,000 shares at the exercise price of $2.65 per share and
options to purchase 30,000 shares at the exercise price of $5.00 per share.
These options vest immediately and are exercisable until March 25, 2009.
Effective April 1, 2005, Mr. Ghauri's employment agreement was amended to
increase his salary to (pound)160,000 per annum (approximately $280,000 per
annum based on an exchange rate of 1.75) and, to grant him options to purchase
up to 500,000 shares at the exercise price of $1.94 per share and options to
purchase up to 500,000 shares at the exercise price of $2.91 per share. These
options vest 25% per quarter commencing with the quarter ending June 30, 2005.
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 April 1, 2005, Mr. Ghauri's
employment agreement was amended to increase his salary to $250,000 per annum
and, to grant him options to purchase up to 500,000 shares at the exercise price
of $1.94 per share and options to purchase up to 500,000 shares at the exercise
price of $2.91 per share. These options vest 25% per quarter commencing with the
quarter ending June 30, 2005.
F-32
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 April 1, 2005, Mr. Ghauri's employment agreement
was amended to increase his salary to $150,000 per annum and, to grant him
options to purchase up to 500,000 shares at the exercise price of $1.94 per
share and optins to purchase up to 500,000 shares at the exercise price of $2.91
per share. These options vest 25% per quarter commencing with the quarter ending
June 30, 2005.
Effective January 1, 2004, the Company entered into an employment agreement with
Patti L. W. McGlasson as legal counsel. The agreement provides for a yearly
salary of $82,000. Ms. McGlasson also received options to purchase up to 10,000
shares of common stock at an exercise price equal to the lesser of $2.30 or the
market price of the shares on the date of exercise less $2.00. These options
vest at the rate of 25% per quarter and are exercisable until December 31, 2008.
Effective March 26, 2004, Ms. McGlasson was elected to the position of
Secretary. In connection with her role as Secretary, Ms. McGlasson received
options to purchase up to 10,000 shares of common stock at $3.00 per share.
These options vest at the rate of 25% per quarter and are exercisable until
December 31, 2008. Ms. McGlasson also received options to purchase up to 20,000
shares at the exercise price of $2.65 per share and options to purchase 30,000
shares at the exercise price of $5.00 per share. These options vest immediately
and are exercisable until March 25, 2009.
All of the above agreements provide for certain Company-paid benefits such as
employee benefit plans and medical care plans at such times as the Company may
adopt them. The agreements also provide for reimbursement of reasonable
business-related expenses and for two weeks of paid vacation. The agreements
also provide for certain covenants concerning non-competition, non-disclosure,
indemnity and assignment of intellectual property rights.
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 had been recorded
as a note payable on the accompanying consolidated financial statements (see
note 7). 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, 2005 and 2004, the
Company paid $166,000 and $73,000. In April 2005, an agreement was reached with
Herbert Smith whereby they accepted $110,000 as payment in full. As a result,
the Company recorded a gain on forgiveness of debt of $33,321 in the
accompanying consolidated financial statements.
F-33
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 had been recorded in
the accompanying consolidated financial statements as a note payable (see note
7). During the years ended June 30, 2005 and 2004, the Company paid $125,368 and
$86,857. In December 2004, the Company reached an agreement with Cowler to pay
the balance of the loan in one lump-sum payment. Cowler agreed to accept
(pound)52,000 or $103,371 as payment in full. As a result, the Company recorded
a gain on forgiveness of debt of $21,148 in the accompanying 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. A settlement was reached by and between the Company
and Portera on November 11, 2004 whereby Portera agreed to a settlement of any
and all issues related to the claim in exchange for one time payment of $75,000
which was paid by December 3, 2004.
F-34
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As of June 30, 2004, the Company recorded a gain of $102,119 from the
settlement of this debt in the accompanying consolidated financial statements.
In September 2004, the Company issued 24,004 of Treasury Shares valued at
$45,965 (see Note 8), as a result the Company recorded a gain of $8,285 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. During the fiscal year ended June 30, 2005,
the monthly installments were paid as agreed.
NOTE 12 - SEGMENT AND GEOGRAPHIC AREAS
The following table presents a summary of operating information and certain
year-end balance sheet information for the years ended June 30, 2005 and 2004:
F-35
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2005 2004
Revenues from unaffiliated customers:
North America $ 295,725 $ 676,857
International 12,141,928 5,072,205
------------ ------------
Consolidated $ 12,437,653 $ 5,749,062
============ ============
Operating income (loss):
North America $ (2,810,508) $ (3,452,920)
International 3,875,213 744,902
------------ ------------
Consolidated $ 1,064,705 $ (2,708,018)
============ ============
Identifiable assets:
North America $ 6,373,169 $ 4,309,332
International 14,752,865 7,668,716
------------ ------------
Consolidated $ 21,126,034 $ 11,978,048
============ ============
Depreciation and amortization:
North America $ 1,324,098 $ 1,080,498
International 240,464 160,294
------------ ------------
Consolidated $ 1,564,562 $ 1,240,792
============ ============
Capital expenditures:
North America $ -- $ 55,986
International 1,468,499 2,805,768
------------ ------------
Consolidated $ 1,468,499 $ 2,861,754
============ ============
NOTE 13 - MINORITY INTEREST IN SUBSIDIARY
NetSol Connect:
In August 2003, the Company entered into an agreement with United Kingdom based
Akhter Group PLC ("Akhter"). Under the terms of the agreement, Akhter Group
acquired 49.9 percent of the Company's subsidiary; Pakistan based NetSol Connect
PVT Ltd. ("Connect"), an Internet service provider ("ISP"), in Pakistan through
the issuance of additional Connect shares. As part of this Agreement, Connect
changed its name to NetSol Akhter. The partnership with Akhter 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 Connect.
Akhter US$ 200,000
The Company US$ 50,000
During the quarter ended September 30, 2003, the funds were received by Connect
and a minority interest of $200,000 was recorded for Akhter's portion of the
subsidiary. During the quarter ended December 31, 2003, Akhter paid an
additional $10,000 to the Company for this purchase. Per the agreement, it was
anticipated that Connect would require a maximum of $500,000 for expansion of
its business from each partner. Akhter was to meet the initial financial
requirements of the Connect until November 1, 2003. As of December 31, 2004,
both NetSol and Akhter had injected the majority of their committed cash to meet
the expansion requirement of the company. As of June 30, 2005, a total of
$751,356 had been transferred to Connect, of which $410,781 was from Akhter.
F-36
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2005 and 2004, the subsidiary had net losses of
$27,422 and $689,000, respectively, of which $13,684 and $273,159 respectively,
was recorded against the minority interest. The balance of the minority interest
at June 30, 2005 was $323,938.
NetSol-TiG:
In December 2004, NetSol forged a new and a strategic relationship with a UK
based public company TIG Plc. A new Joint Venture was signed by the two
companies to create a new company, TiG NetSol Pvt Ltd. ("NetSol-TiG"), with
50.1% ownership by NetSol Technologies, Inc. and 49.9% ownership by TiG. The
agreement anticipates TiG's technology business to be outsourced to NetSol's
offshore development facility. Both companies, according to this agreement,
would invest a total of $1 million or $500,000 each in next few months for
infrastructure, dedicated personnel and systems in the NetSol IT campus in
Lahore.
During year ended June 30, 2005, the Company invested $253,635 and TiG invested
$251,626 and the new subsidiary began operations.
For the year ended June 30, 2005, the subsidiary had net income of $250,013, of
which $124,756 was recorded against the minority interest. The balance of the
minority interest at June 30, 2005 was $376,382.
NOTE 14 - GAIN ON SETTLEMENT OF DEBT
In September 2004, the Company transferred 24,004 of its treasury shares valued
at $45,965 to Brobeck Phleger & Harrison, LLP, in exchange of debt, as part of a
settlement agreement. The Company recorded a gain of $8,285 on the settlement.
During the quarter ended September 30, 2004, the Company evaluated the
liabilities of its discontinued operations and determined that $41,989 was no
longer payable. The Company recorded a gain of $41,989 as a result of the
write-off of these liabilities from its financial statements.
In October 2004, the Company reached an agreement with a vendor to settle the
amounts owing. The vendor agreed to accept $29,642 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of $11,029.
In December 2004, the Company reached an agreement with Cowler to pay the
balance owing on the loan in one lump-sum payment (see note 7). Cowler agreed to
accept (pound)52,000 or $103,371 as payment in full. As a result, the Company
recorded a gain on forgiveness of debt of $21,148.
During the quarter ended December 31, 2004, a former officer of Abraxas, the
Company's Australian subsidiary, agreed to forgive amounts accrued to him for
long-term service leave prior to the Company's acquisition in 1999. The amounts
accrued were during the period of 1984 to 1999. As a result, the Company
recorded a gain on forgiveness of debt of $139,549.
In February 2005, the Company reached an agreement with a former vendor to
settle amounts owing. The vendor agreed to accept $27,580 as payment in full. As
a result, the Company recorded a gain on forgiveness of debt of $27,581.
In April 2005, the Company reached an agreement with Herbert Smith to pay the
balance owing on the loan in one lump-sum payment (see note 7). Smith agreed to
accept $135,000 as payment in full. As a result, the Company recorded a gain on
forgiveness of debt of $33,321.
F-37
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2005, the Company reached an agreement with a former vendor to settle
amounts owing. The vendor agreed to accept $3,000 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of $1,958.
In May 2005, the Company issued shares of its common stock as payment for two
notes payable and accrued interest (see note 7). As a result, the Company
recorded a net loss on forgiveness of debt of $1,675.
During the year ended June 30, 2005, the Company wrote-off old invoices for
services under the statute of limitations. The vendors had not contacted the
Company in over four years and the original services were in dispute at the time
they were rendered. As a result, the Company recorded a gain on forgiveness of
debt of $120,951.
NOTE 15 - ACQUISITION OF CQ SYSTEMS
On January 19, 2005, the Company entered into an agreement to acquire 100% of
the issued and outstanding shares of common stock of CQ Systems Ltd., a company
organized under the laws of England and Wales. The acquisition closed on
February 22, 2005.
According to the terms of the Share Purchase Agreement, the Company acquired
100% of the issued and outstanding shares of CQ from CQ's current shareholders,
whose identity is set forth in the Share Purchase Agreement (the "CQ
Shareholders") at the completion date in exchange for a purchase price
consisting of: a) 50.1% of CQ's total gross revenue for the twelve month period
ending March 31, 2005 after an adjustment for any extraordinary revenue, i.e.
non-trading revenue ("LTM Revenue") multiplied by 1.3 payable: (i) 50% in shares
of restricted common stock of the Company at a per share cost basis of $2.313
and as adjusted by the exchange rate of U.S. Dollar to British Pound (at the
spot rate for the purchase of sterling with U.S. dollars certified by NatWest
Bank plc as prevailing at or about 11:00 a.m.) on January 19, 2005 and, (ii) 50%
in cash; and b) 49.9% of CQ's LTM Revenue for the period ending March 31, 2006
multiplied by 1.3 payable, at the Company's discretion: (i) wholly in cash; or
(ii) on the same basis and on the same terms as the initial payment provided,
however that the cost basis of the Company's common stock shall be based on the
20 day volume weighted average of the Company's shares of common stock as traded
on NASDAQ 20 days prior to March 31, 2005 and, provided that under no
circumstances shall the total number of shares of common stock issued to the CQ
Shareholders exceed 19% of the issued and outstanding shares of common stock,
less treasury shares, of the Company at January 19, 2005.
The initial purchase price was (pound)3,576,335 or $6,730,382, of which one-half
was due at closing payable in cash and stock and the other half is due when the
audited March 31, 2006 financial statements are completed. On the closing date,
$1.7 million was paid and 681,965 shares were issued to the shareholders of CQ,
valued at $1,676,795 at an average share price of $2.46 (see note 8) was
recorded. In addition, the agreement called for the accumulated retained
earnings amounting to (pound)423,711 or $801,915 of CQ Systems as of the closing
date to be paid to the shareholders in cash and stock. In April 2005, the
additional cash of (pound)350,000 or $662,410 was paid and 77,503 shares of the
Company's common stock valued at $139,505 were issued. The total amount paid at
closing was $4,178,710.
In accordance with SFAS 141, the Company has recognized the lesser of the
maximum amount of the contingent consideration based on earnings or the excess
of the fair market value of assets acquired over the purchase price as a
deferred liability. The deferred liability balance at June 30, 2005 was
$313,397. The purchase price has been allocated as follows:
F-38
NETSOL TECHNOLOGIES INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Price Allocation:
Purchase Price $ 7,532,297
Less contingent consideration (3,353,587)
--------------
Net purchase price $ 4,178,710
==============
Net tangible assets $ 984,420
Intangible Assets:
Product License 2,190,807
Customer Lists 1,316,880
Deferred liability (313,397)
--------------
Net purchase price $ 4,178,710
==============
The following is the proforma financial information of the Company assuming the
transaction had been consummated at the beginning of the fiscal years ended June
30, 2004 and 2005:
For the years
Ended June 30,
2005 2004
Statement of Operations:
Revenues $ 15,910,061 $ 10,389,715
Cost of Sales 6,684,419 4,533,669
-------------- --------------
Gross Profit 9,225,642 5,856,046
Operating Expenses 7,974,393 8,354,927
-------------- --------------
Income (loss) from operations 1,251,249 (2,498,881)
Other income and (expenses) (337,346) (357,018)
-------------- --------------
Income (loss) before minority interest 913,903 (2,855,899)
Minority interest in subsidiary (111,073) 273,159
-------------- --------------
Net Income (loss) $ 802,830 $ (2,582,740)
============== ==============
Earnings Per Share:
Basic $ 0.07 $ (0.30)
Diluted $ 0.05 $ (0.30)
NOTE 16 - SUBSEQUENT EVENTS
On July 31, 2005, the Company entered into an agreement with Butura Properties
to terminate the lease on the Maryland office space before the lease expiration.
The Company was required to pay $23,000 for accrued rent of $7,590 and $15,410
in early termination fees. In addition, the security deposit of $2,530 was
forfeited.
In August 2005, the Company listed its wholly-owned subsidiary, NetSol
Technologies Ltd. on the Karachi Stock Exchange ("KSE"). The initial public
offering of stock, of NetSol Technologies Ltd., together with the pre-initial
public offering private placement, raised over $5.83 million. NetSol
Technologies Ltd. is listed on the KSE under the symbol "NETSOL". Trading of
`NETSOL' on the KSE commenced on August 26, 2005.
F-39