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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
or
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-28861
NETSOL INTERNATIONAL, INC.
(Name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
233 WILSHIRE BLVD., SUITE 510,
SANTA MONICA, CA 90401
(Address of principal executive offices) (Zip code)
(310) 395-4073 / (310) 395-0891
(Issuer's telephone/facsimile numbers, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(None)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B, is not contained in this form and no disclosure will be continued, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
the Form 10-KSB. [ ]
As of September 17, 1999, Registrant had 7,632,065 shares of its $.001 par value
Common Stock issued and outstanding with an aggregate market value of the common
stock held by non-affiliates of $17,530,335. This calculation is based upon the
closing sales price of $5 per share on September 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: (1) Form
10-KSB for the fiscal year ended June 30, 1998, filed with the SEC on October
13, 1998 (File No. 000-28861), is incorporated in Part III, Item 13(A); and (2)
Registration Statement on Form SB-2, effective with the SEC on April 27, 1998,
(Registration No. 333-28861), is incorporated in Part III, Item 13(A).
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
PART I PAGE
- ------ ----
Item 1 Description of Business 1
Item 2 Description of Property 2
Item 3 Legal Proceedings 2
Item 4 Submission of Matters to a Vote of Security Holders 2
PART II
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Item 5 Market for Common Equity and Related Stockholder
Matters 3
Item 6 Management's Discussion and Analysis 3
Item 7 Financial Statements 6
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 6
PART III
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Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 7
Item 10 Executive Compensation 8
Item 11 Security Ownership of Certain Beneficial Owners and
Management 10
Item 12 Certain Relationships and Related Transactions 11
PART IV
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Item 13 Exhibits and Reports on Form 8-K 12
PART I
ITEM 1 - BUSINESS
GENERAL
Mirage Holdings, Inc. ("Company") was incorporated under the laws of
the state of Nevada on March 18, 1997.
Effective September 15, 1998, the Company acquired 51% of Network PVT
Solutions Limited ("NetSol PVT"), a software development company in Lahore,
Pakistan, outstanding capital stock. In addition, the Company also purchased 43%
of the outstanding capital stock of NetSol (U.K.) Limited, a corporation
organized under the laws of the United Kingdom ("NetSol UK"), which is a sister
company to NetSol PVT. The Company paid a purchase price for the increased
interest in NetSol and the interest in NetSol UK of $500,000 plus 490,000 shares
of common stock of the Company.
On April 17, 1999, the Company entered into an agreement with NetSol
PVT and NetSol UK to acquire the remaining 49% of NetSol PVT and 57% of NetSol
UK in exchange for 4.2 million shares of restricted common stock of the Company.
Mirage Holdings, Inc., changed its name to NetSol International, Inc., ("NetSol"
or the "Company"), after completing this acquisition. Unless the context
requires otherwise, references to NetSol are intended to include NetSol
International, Inc., and all of its consolidated subsidiaries.
The Company's principal executive and administrative facility is
currently located at 233 Wilshire Blvd., Suite 510, Santa Monica, California
90401 and its telephone number is (310) 395-4073.
NetSol PVT was incorporated in Pakistan on August 22, 1996, under the
companies ordinance of 1984, as a private company limited by shares. NetSol
PVT's principle business is the design and development of software. NetSol PVT
also conducts research and development on new software applications and designs.
NetSol PVT has developed several leasing and finance products creating
a market within the finance industry. Currently, NetSol PVT has developed a
fully integrated leasing and finance package which is a series of seven products
that can be marketed in an integrated system. Mercedes Benz Finance - Singapore,
Mercedes Benz Leasing - Thailand, Mercedes Benz Finance Ltd. - United Kingdom
and Mercedes Benz Finance - Australia are some of NetSol PVT's customers which
account for a majority of its revenues. In addition, NetSol provides off shore
development and customized Information Technology ("IT") solutions and has blue
chip customers like ICI of UK, Fuzzy Informatik of Germany and 1st net
Technologies, Inc., USA. NetSol PVT has 85 employees, 75 of which specialize in
IT.
NetSol PVT is the first company in Pakistan to achieve the ISO9001
accreditation.
NetSol UK was incorporated in December 1997 under the laws of the
United Kingdom. NetSol UK was established for service and support of customers
in the European markets. In addition, NetSol UK was established to function as a
marketing arm of the Company in Europe.
The Internet
The Company is committed to regaining and extending the advantages of
its direct model approach by moving even greater volumes of product sales,
service and support to the Internet. The Internet, perhaps the purest and most
efficient form of direct model, provides greater convenience and efficiency to
customers
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and, in turn, to the Company. As of March 31, 1999, the Company was receiving in
excess of 10,000 visits per month to www.netsol-Intl.com.
Through its Web site, customers, potential customers and investors can
access a wide range of information about the Company's product offerings, can
configure and purchase systems on-line and can access volumes of support and
technical information about the Company.
OPERATIONS
The Company's headquarters are in Santa Monica, California. Nearly all
of the production and manufacturing is conducted at NetSol PVT in Lahore,
Pakistan. The majority of the marketing is conducted through NetSol UK. NetSol
UK services and supports the clients in Europe, while NetSol PVT services and
supports the customers in the Asia Pacific and North American regions.
ADMINISTRATION
OFFICE FACILITIES - The Company currently leases approximately 1,200
square feet office facility in Santa Monica, California.
EMPLOYEES - The Company currently employs four full time employees and
one consultant on an "as needed" basis. In the near future, the Company plans on
hiring additional employees as needed based on the Company's growth rate. The
Company's subsidiaries have the following number of employees: NetSol PVT - 85;
NetSol UK - 25; and NetSol USA - 2.
COMPETITION
The computer software industry is highly competitive. Some of the
competitors of the Company are Research Machines, Ltd.; Viglen Computers, Ltd.;
and Akhtar, Ltd.; all based in the United Kingdom. The Company does not believe
it has any competition in Pakistan as it only caters and bids for the offshore
or overseas customers.
ITEM 2 - PROPERTIES
The Company currently leases approximately 1,200 square feet office
facility in Santa Monica, California. The month-to-month lease requires monthly
payments of approximately $1,500.
ITEM 3 - LEGAL PROCEEDINGS
To the knowledge of management, there is no material litigation pending
or threatened against the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 17, 1999 the Company's securityholders via proxy elected
additional members to the Board of Directors and approved the acquisition of
NetSol UK Ltd. and Network Solutions Pvt. Ltd. by the Company. Naeem Ghauri,
Shahab Ghauri and Salim Ghauri were elected to the Board of Directors until the
next annual meeting of the Shareholders. The acquisition and the additional
Board of Directors members were elected with the approval of over 51% of the
shareholders. The Company's securityholders approved a change in the name of the
Company form Mirage Holdings, Inc. to NetSol International, Inc. Accordingly,
the Company changed its symbol from MGHI for its common shares to NTWK and MGHIW
for its warrants to NTWKW.
2
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION - The Company's Common Stock has been quoted on
the over-the-counter bulletin board ("OTC/BB"), under the symbol NTWK, with
prices ranging from $5 to $5 1/2 in September 1, 1999 to September 17, 1999. The
Company's Warrants have been quoted on the OTC/BB under the symbol NTWKW, since
September 24, 1999 at prices ranging from $1 to $1 1/8. Prior to May 15, 1999,
the Company's common stock traded under the symbol "MGHI" and the Company's
warrants traded under the symbol "MGHIW."
(b) STOCKHOLDERS - As of September 22, 1999, the Company had 91 holders
of record of the Company's Common Stock and two holders of record of the
Company's Warrants. This does not include the holders that have their shares
held in a depository trust in "street" name. As of September 22, 1999, 7,632,065
shares have been issued and outstanding.
(c) DIVIDENDS - The Company has not paid cash dividends on its Common
Stock in the past and does not anticipate doing so in the foreseeable future.
The Company currently intends to retain future earnings, if any, to fund the
development and growth of its business.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's objective is to maximize stockholder value by executing a
strategy that focuses on a balance of three priorities: growth, profitability
and liquidity. The following discussion highlights the Company's performance in
the context of these priorities. This discussion should be read in conjunction
with the Consolidated Financial Statements, including the related notes.
RESULTS OF OPERATIONS
The following table summarizes the results of the Company's operations
for each of the past two fiscal years.
OVERVIEW
Year Ended Year Ended
June 30, 1999 June 30, 1998
Net sales $ 3,002,107 $ 168,835
Cost of goods sold 1,662,259 133,860
Gross profit 1,339,848 34,975
Selling, general & administrative expenses 2,872,953 620,454
Other Income/(expense) 82,487 -0-
Net Loss $(1,626,734) $ (585,479)
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YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Net Sales. Net sales include service and maintenance revenues. Net
sales increased by $2,833,272 (1678%) in fiscal year end June 30, 1999
("fiscal 1999") compared to fiscal year end June 30, 1998 ("fiscal 1998").
This increase is due to the 100% acquisition of NetSol UK and NetSol Pvt. The
sales from NetSol UK for fiscal 1999 were $2,899,688. Similarly, sales from
NetSol Pvt. were at $765,988 in fiscal 1999. The international operating
revenues are the sole factor in the increase in sales for fiscal 1999.
Cost of Goods Sold. Costs of goods consists primarily of research and
development, consultants and network operating costs. In fiscal 1999, cost of
goods increased by $1,528,399 (1142%) as sales and revenues increased.
Selling, General and Administrative Expenses. The increase in
selling, general and administrative expenses for fiscal 1999 over fiscal 1998
consisted of increase in staffing and infrastructure expenses, including
information systems, to support the Company's continued growth. In fiscal
1999, the selling, general and administration expenses increased by
$2,252,499 (363%) from fiscal 1998. Although majority of the cost of goods is
controlled in the cheaper overseas production facilities in Pakistan, the
increase in fiscal year 1999 encompasses increases in sales, marketing, cost
of production, as well as research and development and costs of acquisition
and related expenses. The Company had a one time, non-cash event of over
$450,000 upon the termination of one of its Directors and Chief Financial
Officer in the second quarter. This is a non-recurring expense. Additionally,
there was an increase in administrative expenses at each subsidiary and
parent company relating to due-diligence.
The Company continues to invest in research, development and software
engineering activities to support its continued goal of improving and developing
efficient procurement, production and distribution processes, and to develop and
introduce new products and services. As a result, the Company's acquisition of
NetSol Pvt., as the center for research, development and engineering, expenses
increased the staffing levels and product development costs. The Company expects
to continue to increase its research, development and software engineering
spending to support its growth, profitability and liquidity. The Company has
invested in training developers and programmers that are certified as Microsoft
Certified Service Providers (MCSP). These MCSP certified developers and
programmers assist the Company in its growth and development into new markets.
Other Income. The Company has no other material income in fiscal
1999 similar to fiscal 1998.
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the net loss
applicable to common stockholders by the weighted average number of common
shares outstanding during the year. In fiscal 1999 net loss per share was at
$0.44 per share.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL EXPENDITURES
LIQUIDITY AND CAPITAL RESOURCES
The Company had a net increase in cash of $37,231 for fiscal 1999 as
opposed to a loss of $38,597 for fiscal 1998. The Company does not believe that
inflation has had a significant impact on its operations since inception of the
Company.
4
FACTORS AFFECTING THE COMPANY'S BUSINESS AND PROSPECTS
There are numerous factors that affect the Company's business and the
results of its operations. These factors include general economic and business
conditions; the level of demand for personal computers and software; lease and
finance industry; schools' software program interests; the level and intensity
of competition in the computer software industry and the pricing pressures that
may result; the ability of the Company to timely and effectively manage periodic
product transitions as well as component availability; the availability of the
Company to develop upgrades to its current products; the ability of the Company
to develop new products; the ability of the Company to continue to improve its
infrastructure (including personnel and systems) to keep pace with the growth in
its overall business facilities; and the Company's ability to ensure its
products and internal systems and devices will be Year 2000 ready and to assess
the Year 2000 readiness and risk to Company of its third party providers, and
implement effective contingency plans where needed. Finally, the Company is
cognizant that it needs to continually and systematically provide well trained,
qualified consultants and developers to manage and service projects at all of
its customers' sites.
YEAR 2000
As is the case with most other businesses using computers in their
operations, NetSol is in the final process of evaluating and addressing Year
2000 readiness of its own computer systems as well as those of the companies it
has acquired. The year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. Such Year 2000 readiness efforts are designed to
identify, address and resolve issues that may be created by computer programs
begin written using two digits rather than four to define the applicable year.
1. STATE OF READINESS. NetSol has had a program in place since
August 1, 1998 to address Year 2000 readiness issues in its critical business
areas related to products, networks, information management systems,
non-information systems with embedded technology, suppliers and customers.
NetSol has taken and will continue to take actions designed to advance its
progress toward becoming Year 2000 ready by the end of November 30, 1999.
NetSol's Year 2000 readiness goal focuses on the ability of NetSol to perform
its business functions and to process information in an unambiguous manner under
various date conditions.
2. THE COSTS TO ADDRESS NETSOL'S YEAR 2000 READINESS CHALLENGES.
Based on information developed to date, as result of NetSol's assessment
efforts, NetSol believes that the costs of modifying, upgrading or replacing its
systems and equipment will not have material effect on NetSol's liquidity, its
financial condition or results of operations. To date NetSol has expended
approximately $100,000 relating to year 2000 readiness.
3. THE RISKS OF NETSOL'S YEAR 2000 READINESS CHALLENGES. In light
of the progress made to date, NetSol does not anticipate delays or postponements
in finalizing and implementing Year 2000 readiness solutions by the end of the
first quarter September 30, 1999. Until NetSol's renovations and validation
phases are substantially complete, however, NetSol cannot fully and accurately
estimate any uncertainty in timely resolving its Year 2000 readiness challenges
or in finalizing and implementing related Year 2000 readiness resolutions.
Additionally, any failure by third parties which have a material relationship
with NetSol to achieve full Year 2000 readiness may be a potential risk if such
failure were to adversely impact the ability of such third parties to provide
any products or services that are critical to NetSol's operations. Finally,
where NetSol cannot validate or certify that technology provided by material
third parties is fully Year 2000 ready, NetSol is seeking to obtain assurances
from these material third parties that their systems are or will be Year 2000
ready no later than the end of the first quarter, September 30, 1999. If these
material third parties fail to
5
appropriately address their own Year 2000 readiness challenges , there could be
a materially adverse effect on NetSol's financial condition and results of
operations. These risks include, but are not limited to:
- implementing commercial launches in new markets or introducing
new services in existing markets;
- pursuing acquisitions, alliances and joint ventures that
provide synergy and business fit;
- pursuing additional business opportunities; and
- obtaining equity or debt financing.
4. CONTINGENCY PLANS. NetSol is at the final stages of testing
the systems and software testing in its critical systems by third party
providers of its critical products and services. As a result, NetSol will
assess the development of appropriate alternative solutions presented by any
relevant third party to determine its effectiveness and likely impact on
NetSol's Year 2000 readiness risk profile.
INFLATION AND FOREIGN CURRENCY EXCHANGE
Inflation is not a material factor affecting NetSol's business.
General operating expenses such as salaries, employee benefits and lease
costs are, however, subject to normal inflationary pressures. From time to
time NetSol may experience price changes in connection with the purchase of
certain system infrastructure and equipment, but the Company does not
currently believe that any of such price changes will be material to its
business.
The net assets of the foreign operations of the Company's subsidiaries
are subject to foreign currency exchange risks since they are primarily
maintained in local currency. Additionally, the long-term debt of the Company
and its subsidiaries is almost in US dollar denominated form, which also exposes
such entities to local foreign exchange risks. Certain subsidiaries conduct
business in countries in which the rate of inflation is significantly higher
than that of the United States. NetSol will attempt to protect its earnings from
inflation and possible currency devaluation by striving to consummate all of its
transactions in U.S. dollars.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement does not have a
significant effect on the Company's financial position or results of operations.
Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities." - The American Institute of Certified Public Accountants issued a
Statement of Position 98-5 which will be effective in 1999 and will require
costs of start-up activities and organization costs to be expensed as incurred.
This statement does not have a significant effect on the Company's financial
position or results of operations.
PART II - OTHER INFORMATION
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 7 are
included at the end of this report beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current
directors and executive officers of the Company, the principal offices and
positions with the Company held by each person and the date such person became a
director or executive officer of the Company. The executive officers of the
Company are elected annually by the Board of Directors. 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 AGE POSITION
---- --- --------
Najeeb U. Ghauri 44 President, Chief Financial Officer, Secretary, and Director
Salim Ghauri 42 Chief Executive Officer, and Director
Naeem Ghauri 41 Chief Operations Officer, and Director
Earl Shannon 32 Director
Irfan Mustafa 48 Director
Shahab Ghauri 48 Director
NAJEEB U. GHAURI is the President, Secretary, and Director of the
Company since 1997 and Chief Financial Officer since 1998. Mr. Ghauri is
responsible for the Company's corporate finance, managing the day-to-day
operations of the Company, as well as the Company's overall growth and expansion
plan. Prior to joining the Company, Mr. Ghauri was part of the marketing team of
Atlantic Richfield Company ("ARCO"), a Fortune 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.
SALIM GHAURI is the Chief Executive Officer and Director of the Company
since 1998. Mr. Ghauri is also the CEO of Network Solutions (Pvt.) Ltd. a wholly
owned subsidiary of the Company located in Lahore, Pakistan. Before starting
that Company, Mr. Ghauri was employed with BHP in Sydney, Australia from
1987-1995 where he commenced his employment as a consultant and was promoted to
senior project manager. Mr. Ghauri received his Bachelor of Science degree in
computer science from University of Punjab in Lahore, Pakistan, in 1980.
NAEEM GHAURI is the Chief Operations Officer and Director of the
Company since 1999. Mr. Ghauri is also the managing Director of NetSol UK Ltd.,
a wholly owned subsidiary of the Company located in Milton Keyes, England. Prior
to joining the NetSol team, Mr. Ghauri was Project Director for Mercedes-Benz
Finance Ltd., a subsidiary of Daimler-Chrysler, Germany from 1994-1999. Mr.
Ghauri supervised over 200 project managers, developers analysts and users in
nine European countries. Mr. Ghauri has his B.S. in computer
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science from Brighton University, United Kingdom, and a diploma in programming
and maintenance from Computer Learning Center in Los Angeles, California.
EARL SHANNON is a Director of the Company. Mr. Shannon is currently the
President and Director of Winthrop Venture Management, Inc., an investment
management company based in Fort Lauderdale, Florida. The company manages the
portfolios of select private individuals and is the General Partner of The
Winthrop Venture Fund, Ltd., a private, invitation only investment fund. Mr.
Shannon is also the sole consultant to The Silas Offshore Funds, Ltd., a
Bahamian based private mutual fund.
IRFAN MUSTAFA is a Director of the Company since 1997. Mr. Mustafa is
currently a senior executive with TRICON International, Inc., based in Dubi.
Prior to TRICON, Mr. Mustafa was an Executive Designate Program with Pepsi-Cola
Company from 1990 to 1997. Mr. Mustafa received his M.B.A. from IMD in Lousanne,
Switzerland in 1975; his second M.B.A. from Institute of Business Administration
in Karachi, Pakistan and a B.S.C. in Economics from Pinajab University in
Lahore, Pakistan in 1975.
SHAHAB GHAURI is a Director of the Company since 1999. Mr. Ghauri is
currently the Managing Director of SG Sports Ltd., in London, England. Mr.
Ghauri received his Bachelor of Arts from the University of Punjab in economics
in 1971.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the Company's Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
The following disclosure is based solely upon a review of the Forms 3
and 5 and any amendments thereto furnished to the Company during the Company's
fiscal year ended June 30, 1998. Based on this review, no individuals who
were directors, officers and beneficial owners of more than 10% of the Company's
outstanding Common Stock during such fiscal year filed late reports on Forms 3
and 5.
ITEM 10-EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE AND OPTIONS
The Summary Compensation Table shows certain compensation information
for services rendered in all capacities during each of the last two fiscal years
by the Officers of the Company. The following information for the Officers and
Directors include the dollar value of base salaries, bonus awards, the number of
stock options granted and certain other compensation, if any, whether paid or
deferred.
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SUMMARY COMPENSATION TABLE
------------------------- ---------- ------------------- ------------ --------------------------------------
Name and Principal Year Annual Awards(2)
Position Ended Compensation(1) ----------------- ----------------
June Bonus Restricted Securities
30 Stock Awards(3) Underlying
Options(4)
------------------------- ---------- ------------------- ------------ ----------------- ----------------------
Najeeb U. Ghauri, 1999 $100,000 -0- 490,000 220,000(5)
President and 1998 91,150 250,000 25,000(6)
Secretary,
Chief Financial
Officer,
Director
------------------------- ---------- ------------------- ------------- ------------------ --------------------
Naeem Ghauri, Chief 1999 150,000 30,000(11) 1,157,666 150,000(7)
Operations Officer, 1998 N/A N/A N/A N/A
Director
------------------------- ---------- ------------------- ------------- ------------------ --------------------
Irfan Mustafa, Director 1999 -0- -0- -0- 20,000(8)
1998 -0- -0- 100,000 45,000(9)
------------------------- ---------- ------------------- ------------- ------------------ --------------------
Earl Shannon, Director 1999 -0- -0- -0- 20,000(10)
1998 N/A -0- N/A N/A
------------------------- ---------- ------------------- ------------- ------------------ --------------------
Salim Ghauri, Chief 1999 100,000 -0- 1,320,666 150,000(7)
Executive Officer, 1998 N/A N/A N/A N/A
Director
------------------------- ---------- ------------------- ------------- ------------------ ---------------------
Shahab Ghauri, Director 1999 -0- -0- 1,157,666 -0-
1998 N/A N/A N/A N/A
------------------------- ---------- ------------------- ------------- ------------------ ---------------------
All Officers and 1999 $350,000 $30,000 4,125,998 560,000
Directors, as a Group 1998 182,300 -0- 350,000 70,000
(6 persons)
------------------------- ---------- ------------------- ------------- ------------------ ---------------------
- ------------------------------------
(1) No officers received or will receive any bonus or other annual compensation
other than salaries during fiscal 1998-1999. The table does not include any
amounts for personal benefits extended to officers of the Company, such as
the cost of automobiles, life insurance and supplemental medical insurance,
because the specific dollar amounts of such personal benefits, if any,
cannot be ascertained.
(2) No officers received or will receive any long term incentive plan (LTIP)
payouts or other payouts during fiscal 1999.
(3) All stock awards are shares of Common Stock of the Company.
(4) All securities underlying options are shares of Common Stock of the Company.
(5) Includes 150,000 options granted under Employment Contract between the
Company and Employee at an exercise price of $1.58; includes 20,000
options granted to each Director at an exercise price of $1.44 for five
years from May 18, 1999; includes 50,000 options granted under 1997
Incentive and Non-Statutory Stock Option Plan issued in May 1999 at an
exercise price of $1.44 for five years from May 18, 1999.
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(6) Includes 25,000 options issued under the Company's 1997 Incentive and
Non-Statutory Stock Option Plan for five years from May 12, 1997.
(7) Includes 150,000 options granted under the Employment Contract between the
Company and Employee at an exercise price of $1.58.
(8) Includes 20,000 options granted to each Director for the term 1997-1998
at an exercise price of $.01 for five years from May 12, 1997;
(9) Includes 20,000 options granted to each Director for the term 1998-1999
at an exercise price of $1.44 for five years from May 18, 1999; includes
25,000 options granted as Chairman of the Board at an exercise price of
$1.44 for five years from May 18, 1999;
(10) Includes 20,000 options granted to each Director for the term 1998-1999 at
an exercise price of $1.44 for five years from May 18, 1999.
(11) Naeem Ghauri received a signing bonus upon the execution of his employment
agreement dated April, 17, 1999.
EMPLOYMENT AGREEMENTS
On April 17, 1999, Messrs. Najeeb Ghauri, Salim Ghauri and Naeem Ghauri
each executed employment agreements with the Company for a term of three (3)
years.
COMPENSATION OF DIRECTORS
Directors of the Company do not receive any cash compensation, but
are entitled to reimbursement of their reasonable expenses incurred in
attending Directors' Meetings. In addition, the Company has granted to each
of its three directors 20,000 options to purchase common stock of the Company
under the Company's Incentive and Nonstatutory Stock Option Plan. The
three directors appointed subsequent to the acquisition of NetSol Pvt and
NetSol UK, were not entitled to the 20,000 options granted to each director
of the Company as they did not serve an entire year on the board.
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 August 28, 1999, by (i) each person who is
known to the Company to own beneficially more than 10% of the outstanding Common
Stock with the address of each such person, (ii) each of the Company's directors
and officers, and (iii) all officers and directors as a group:
- ---------------------------- ------------- ------------------------
Percentage
Number of Beneficially
Name Shares(1) owned
- ---------------------------- ------------- ------------------------
Najeeb Ghauri 985,000(2) 12.9%
- ---------------------------- --------------- ------------------------
Naeem Ghauri 1,307,666(3) 17%
- ---------------------------- --------------- ------------------------
Irfan Mustafa 165,000(4) 2.2%
- ---------------------------- --------------- ------------------------
Salim Ghauri 1,470,666(3) 19.3%
- ---------------------------- --------------- ------------------------
Shahab Ghauri 1,157,666 17%
- ---------------------------- --------------- ------------------------
Earl Shannon 20,000(5) *
- ---------------------------- --------------- ------------------------
10
- ---------------------------- --------------- ------------------------
Percentage
Number of Beneficially
Name Shares(1) Owned
- ---------------------------- --------------- ------------------------
All officers and directors
as a group (6 persons) 5,105,998 68.4%
- ---------------------------- --------------- ------------------------
- -----------------
* 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. Shares of Common Stock subject to options or
warrants currently exercisable, or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage of the person holding
such options or warrants, but are not deemed outstanding for purposes of
computing the percentage of any other person.
(2) Includes 150,000 options granted under Employment Contract between the
Company and Employee at an exercise price of $1.58; includes 20,000
options granted to each Director at an exercise price of $1.44 for five
years from May 18, 1999; includes 50,000 options granted under 1997
Incentive and Non-Statutory Stock Option Plan issued in May 1999 at an
exercise price of $1.44 for five years from May 18, 1999. Includes 25,000
options issued under the Company's 1997 Incentive and Non-Statutory Stock
Option Plan for five years from May 12, 1997.
(3) Includes 150,000 options granted under the Employment Contract between the
Company and Employee at an exercise price of $1.58.
(4) Includes 20,000 options granted to each Director for the term 1997-1998 at
an exercise price of $.01 for five years from May 12, 1997; Includes
20,000 options granted to each Director for the term 1998- 1999 at an
exercise price of $1.44 for five years from May 18, 1999; includes 25,000
options granted as Chairman of the Board at an exercise price of $1.44
for five years from May 18, 1999.
(5) Includes 20,000 options granted to each Director for the term 1998-1999
at an exercise price of $1.44 for five years from May 18, 1999.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On April 17, 1999, the Company increased its ownership interest in
NetSol Pvt and NetSol UK to 100% of the outstanding capital stock. See
"Business of the Company" for a full description of this transaction. The
Chief Executive Officer, President, and Director of NetSol Pvt is Salim
Ghauri; a Director of NetSol Pvt is Shahab Ghauri; and another Director of
NetSol UK is Naeem Ghauri; all brothers of Najeeb U. Ghauri, President,
Secretary, Chief Financial Officer and a Director of the Company. The Company
believes that its acquisition of NetSol Pvt and NetSol Uk was on terms at
least as favorable to the Company as would be obtainable in arm's length
dealings with unrelated third persons. It is further the Company's intention
that all future transactions between the Company and NetSol will be on terms
at least as favorable to the Company as would be obtainable in arm's-length
dealings with unrelated third persons. However, the ongoing familial
relationship between management of the Company could result in conflicts of
interest, which could result in actions taken by the Company that do not
fully reflect the interests of all shareholders of the Company.
The Company's management believes that the terms of these transactions are
no less favorable to the Company than would have been obtained from an
unaffiliated third party in similar transactions. All future transactions with
affiliates will be on terms no less favorable than could be obtained from
unaffiliated third parties, and will be approved by a majority of the
disinterested directors.
11
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
3.1 Articles of Incorporation of Mirage Holdings, Inc., a Nevada
corporation, dated March 18, 1997(1)
3.2 Bylaws of Mirage Holdings, Inc., dated March 18, 1997(1)
3.3 Amendment to Articles of Incorporation dated May 21, 1999
10.1 Lease Agreement, dated September 7, 1998 for Santa Monica
executive offices(2)
10.2 Company Stock Option Plan dated May 18, 1999
10.3 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Najeeb U. Ghauri
10.4 Employment Agreement, dated April 17, 1999 by and between Mirage
Holdings, Inc. and Salim Ghauri
10.5 Employment Agreement, dated April 17, 1999 by and between
Mirage Holdings, Inc. and Naeem Ghauri
10.6 Acquisition Agreement, dated April 3, 1999 by and between NetSol
PVT and NetSol UK and SGO
21.1 A list of all subsidiaries of the Company
24.1 Consent of Stonefield Josephson & Company
- ---------------------
(1) Incorporated by reference to Registration Statement No. 333-28861 on
Form SB-2.
(2) Incorporated by reference to 10K-SB filed October 13, 1998.
12
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NetSol International, Inc.
Date: SEPTEMBER 24 , 1999 BY:/S/ NAJEEB U. GHAURI
------------------------ ----------------------------------
Najeeb U. Ghauri
President, Chief Financial Officer
and Secretary
Date: SEPTEMBER 24 , 1999 BY:/S/ SALIM GHAURI
------------------------ -----------------------------------
Salim Ghauri
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: SEPTEMBER 24 , 1999 BY:/S/ NAJEEB U. GHAURI
---------------------- ------------------------------------
Najeeb U. Ghauri
President, Chief Financial Officer
Secretary and Director
Date: SEPTEMBER 24 , 1999 BY:/S/ SALIM GHAURI
-------------------------- ------------------------------------
Salim Ghauri
Chief Executive Officer, Director
Date: SEPTEMBER 24 , 1999 BY:/S/ NAEEM GHAURI
-------------------------- ------------------------------------
Naeem Ghauri
Chief Operating Officer, Director
Date: SEPTEMBER 24 , 1999 BY:/S/ SHAHAB GHAURI
-------------------------- ------------------------------------
Shahab Ghauri
Director
Date: SEPTEMBER 24 , 1999 BY:/S/ IRFAN MUSTAFA
-------------------------- ------------------------------------
Irfan Mustafa
Director
Date: SEPTEMBER 24 , 1999 BY:/S/ EARL SHANNON
-------------------------- ------------------------------------
Earl Shannon
Director
13
NETSOL INTERNATIONAL, INC.
(FORMERLY MIRAGE HOLDINGS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F5-F6
Notes to Consolidated Financial Statements F7-F15
14
Board of Directors
Netsol International, Inc. (formerly
Mirage Holdings, Inc.)
Santa Monica, California
We have audited the accompanying consolidated balance sheet of Netsol
International, Inc. (formerly Mirage Holdings, Inc.) as of June 30, 1999, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended June 30, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
Network Solutions PVT, Ltd. and Netsol UK, Limited, wholly owned
subsidiaries, whose statements reflect combined total assets of $1,194,000 as
of June 30, 1999 and combined total net revenues of $3,002,107 for the year
then ended. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Network Solutions PVT, Ltd., and Netsol UK, Limited, is based
solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Netsol
International, Inc. and subsidiaries as of June 30, 1999, and the results of
its consolidated operations and its cash flows for the years ended June 30,
1999 and 1998 in conformity with generally accepted accounting principles.
/s/ Stonefield Josephson, Inc
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
September 8, 1999
F-1
NETSOL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET - JUNE 30, 1999
ASSETS
CURRENT ASSETS:
Cash $ 31,713
Accounts receivable 519,106
Other current assets 167,070
---------------
Total current assets $ 717,889
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 244,638
OTHER ASSETS:
Deposits 4,415
Product licenses, renewals, enhancements, copyrights,
trademarks and tradenames, net 5,006,222
Customer lists, net 1,173,333
Goodwill, net 3,525,872
---------------
Total other assets 9,709,842
----------------
$ 10,672,369
----------------
----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 652,750
Current maturities of obligations under capitalized lease 23,281
Loans payable, stockholders 51,746
---------------
Total current liabilities $ 727,777
OBLIGATIONS UNDER CAPITALIZED LEASES,
less current maturities 38,601
STOCKHOLDERS' EQUITY:
Common stock; $.001 par value, 25,000,000 shares
authorized, 7,452,065 shares issued and outstanding 7,452
Additional paid-in capital 12,400,643
Accumulated deficiency (2,502,104)
---------------
Total stockholders' equity 9,905,991
----------------
$ 10,672,369
----------------
----------------
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-2
NETSOL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended
June 30, 1999 June 30, 1998
--------------- ---------------
NET REVENUES $ 3,002,107 $ 168,835
COST OF REVENUES 1,662,259 133,860
--------------- ---------------
GROSS PROFIT 1,339,848 34,975
OPERATING EXPENSES 2,790,466 620,454
--------------- ---------------
NET LOSS BEFORE INCOME ALLOCATED TO
MINORITY INTEREST (1,450,618) (585,479)
MINORITY INTEREST IN SUBSIDIARIES' EARNINGS (305,616) -
NET LOSS BEFORE EXTRAORDINARY ITEM (1,756,234) (585,479)
GAIN ON FORGIVENESS OF DEBT, net of tax 129,500 -
--------------- ---------------
NET LOSS $ (1,626,734) $ (585,479)
--------------- ---------------
--------------- ---------------
NET LOSS PER SHARE -
basic and diluted $ (0.44) $ (0.33)
--------------- ---------------
--------------- ---------------
WEIGHTED AVERAGE SHARES OUTSTANDING -
basic and diluted 3,733,606 1,774,065
--------------- ---------------
--------------- ---------------
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-3
NETSOL INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1999
Total
Common stock Additional stockholders'
------------ paid-in Accumulated equity/
Shares Amount capital Deficit (deficiency)
------ ------ ------- ------- ------------
Balance at July 1, 1997 1,814,065 $ 1,814 $ 562,021 $ (289,891) $ 273,944
Redemption of common stock
issued through private offering (40,000) (40) (19,960) - (20,000)
Net loss for the year ended
June 30, 1998 (585,479) (585,479)
----------- ----------- ------------- ------------- --------------
Balance at June 30, 1998 1,774,065 1,774 542,061 (875,370) (331,535)
Common stock and warrants sold
through initial public offering, net 251,000 251 987,733 987,984
Issuance of common stock in
exchange for services rendered 235,000 235 710,631 710,866
Common stock options granted
for services 199,844 199,844
Exercise of common stock options 105,000 105 945 1,050
Sale of common stock warrants 5,667 5,667
Exercise of warrants to convert to
common stock 397,000 397 294,952 295,349
Issuance of common stock relating
to acquisition of subsidiaries 4,690,000 4,690 9,658,810 9,663,500
Net loss for the year ended
June 30, 1999 (1,626,734) (1,626,734)
----------- ----------- ------------- ------------- --------------
Balance at June 30, 1999 7,452,065 $ 7,452 $ 12,400,643 $ (2,502,104) $ 9,905,991
----------- ----------- ------------- ------------- --------------
----------- ----------- ------------- ------------- --------------
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-4
NETSOL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
Year ended Year ended
June 30, 1999 June 30, 1998
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (1,626,734) $ (585,479)
--------------- --------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Depreciation and amortization 359,018 1,814
Gain (loss) on sale of marketable securities - 13,587
Non-cash compensation expense 910,710 -
Minority interest income (305,616) -
Forgiveness of debt 129,500 -
Bad debts - 46,051
Loss on impairment of property and equipment - 43,867
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS:
Accounts receivable (519,106) 4,009
Other current assets (16,507) -
Inventory - 46,891
Deposits (4,415) -
INCREASE (DECREASE) IN LIABILITIES -
accounts payable and accrued expenses 305,531 316,058
--------------- --------------
Total adjustments 859,115 472,277
--------------- --------------
Net cash used for operating activities (767,619) (113,202)
---------------- --------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Proceeds from note receivable - 113,104
Purchase (sale) of investments (184,618) (75,000)
Purchase of property, plant and equipment (224,791) (3,736)
--------------- --------------
Net cash provided by (used for) investing activities (409,409) 34,368
--------------- --------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of common stock and warrants, net 1,687,713 -
Redemption of common stock - (20,000)
Proceeds from loans payable, stockholders 51,746 224,050
Payments on loans payable, related party (328,110) -
Deferred offering costs (193,850) (163,813)
Payments on capital lease obligations (3,240) -
--------------- --------------
Net cash provided by financing activities 1,214,259 40,237
--------------- --------------
NET INCREASE (DECREASE) IN CASH 37,231 (38,597)
CASH AND CASH EQUIVALENTS, beginning of period (5,518) 33,079
--------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 31,713 $ (5,518)
--------------- --------------
--------------- --------------
(Continued)
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-5
NETSOL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH
Year ended Year ended
June 30, 1999 June 30, 1998
--------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 22,218 $ 33,918
--------------- --------------
--------------- --------------
Income taxes paid $ 2,400 $ -
--------------- --------------
--------------- --------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 4,690,000 shares of common stock per
stock purchase agreement $ 9,663,500 $ -
--------------- --------------
--------------- --------------
Granting of common stock options in exchange for
services received $ 199,844 $ -
--------------- --------------
--------------- --------------
Issuance of common stock shares for services received $ 710,631 $ -
--------------- --------------
--------------- --------------
Forgiveness of debt $ 129,500 $ -
--------------- --------------
--------------- --------------
Deferred offering costs offset against gross proceeds from
initial public offering $ 203,813
---------------
---------------
See accompanying independent auditors' report and notes to consolidated
financial statements.
F-6
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
(1) GENERAL:
Netsol International, Inc. (the "Company"), formerly known as Mirage
Holdings, Inc., was incorporated under the laws of the State of Nevada
on March 18, 1997. During November of 1998, Mirage Collections, Inc., a
wholly owned and non-operating subsidiary, was dissolved.
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 issuance of 4,690,000 restricted common shares of the
Company and cash payments of $775,000, for an aggregate purchase price
of approximately $10.4 million. These acquisitions were accounted for
using the purchase method of accounting, and accordingly, the purchase
price was allocated to the assets purchased and liabilities assumed
based upon their estimated fair values on the date of acquisition,
which approximated $300,000. Included in the accompanying consolidated
financial statements are other assets acquired at fair market value
consisting of product licenses, product renewals, product enhancements,
copyrights, trademarks, tradenames and customer lists. The management
of the Company allocated approximately $6.3 million to these assets,
which is being amortized straight line over 15 years, based on
independent valuation reports prepared for the Company. The excess of
the purchase prices over the estimated fair values of the net assets
acquired, approximately $3.8 million, was recorded as goodwill, and is
being amortized straight line over 15 years from the date of each
purchase.
During April 1999, the Company formed Netsol USA, Inc. as a wholly
owned subsidiary. There were no material activities during the period
from inception to June 30, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries,
Network Solutions PVT, Ltd., Netsol UK, Limited, and Netsol USA,
Inc. All material intercompany accounts have been eliminated in
consolidation.
BUSINESS ACTIVITY:
The Company designs, develops, markets, and exports proprietary
software products to customers in the automobile finance and
leasing industry worldwide. The Company also provides consulting
services in exchange for fees from customers.
See accompanying independent auditors' report.
F-7
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE:
Unless otherwise indicated, the fair values of all reported
assets and liabilities which represent financial instruments,
none of which are held for trading purposes, approximate
carrying values of such amounts.
CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original
maturities of three months or less which are not securing any
corporate obligations.
NET INCOME (LOSS) PER SHARE:
The Company has adopted Statement of Financial Accounting
Standard No. 128, Earnings per Share ("SFAS No. 128"), which is
effective for annual and interim financial statements issued
for periods ending after December 15, 1997. SFAS No. 128 was
issued to simplify the standards for calculating earnings per
share ("EPS") previously in APB No. 15, Earnings Per Share.
SFAS No. 128 replaces the presentation of primary EPS with a
presentation of basic EPS. The new rules also require dual
presentation of basic and diluted EPS on the face of the
statement of operations. Common stock equivalents have been
excluded from the net loss per share calculation because their
effect would reduce loss per share.
FOREIGN CURRENCY:
The accounts of Netsol UK, Limited and Network Solutions PK,
Ltd. use British Pounds and Pakistan Rupees as the functional
currencies, respectively. 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. Any future translation gains and losses (not
material at June 30, 1999) will be classified as an item of
other comprehensive income in the stockholders' equity section
of the consolidated balance sheet.
See accompanying independent auditors' report.
F-8
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 recently issued standard, the Company expects to
continue to account for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. Proforma information regarding net
income and earnings per share under the fair-value method has
not been presented as the amounts are immaterial.
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, 1999, the Company had net federal and state
operating loss carryforwards totaling approximately $1,450,00
and $1,600,000, respectively, expiring in various years through
2019. Deferred tax assets resulting for the net operating
losses are reduced in full by a valuation allowance.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF:
The Company adopted the provision of FASB No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. This statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amounts of the
assets exceed the fair values of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this statement did not
have a material impact on the Company's financial position,
results of operations or liquidity.
NEW ACCOUNTING PRONOUNCEMENTS:
The Company has adopted Statements of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" and 131
"Disclosures About Segments of an Enterprise and Related
Information". Adoption of these pronouncements did not
materially affect the financial statements.
See accompanying independent auditors' report.
F-9
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(3) MAJOR CUSTOMERS:
During the year ended June 30, 1999, one customer accounted for
approximately 55% of total sales. This customer owed
approximately $158,000 as of June 30, 1999.
(4) OTHER CURRENT ASSETS:
A summary is as follows:
Prepaid consultants fees $ 125,463
Prepaid expenses 25,100
Other 16,507
--------------
$ 167,070
--------------
--------------
(5) PROPERTY AND EQUIPMENT:
A summary is as follows:
Office furniture and equipment $ 164,180
Assets under capital leases 104,588
Automobiles 42,372
Building improvements 8,685
--------------
319,825
Less accumulated depreciation and amortization 75,187
--------------
$ 244,638
--------------
--------------
Depreciation and amortization expenses related to property and
equipment amounted to $42,035 and $1,814 for the years ended
June 30, 1999 and 1998, respectively.
(6) PRODUCT LICENSES, RENEWALS, ENHANCEMENTS, COPYRIGHTS, TRADEMARKS
AND TRADENAMES:
A summary is as follows:
Product licenses, renewals, enhancements,
copyrights, trademarks and tradenames $ 5,120,000
Less accumulated amortization 113,778
--------------
$ 5,006,222
--------------
--------------
Amortization expense related to product licenses, renewals,
enhancements, copyrights, trademarks and tradenames amounted
to $113,778 and $0 for the years ended June 30, 1999 and 1998,
respectively.
See accompanying independent auditors' report.
F-10
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(7) CUSTOMER LISTS:
A summary is as follows:
Customer lists $ 1,200,000
Less accumulated amortization 26,667
--------------
$ 1,173,333
--------------
--------------
Amortization expense related to customer lists amounted to $26,667 and
$0 for the years ended June 30, 1999 and 1998, respectively.
(8) GOODWILL:
A summary is as follows:
Goodwill $ 3,702,410
Less accumulated amortization 176,538
--------------
$ 3,525,872
--------------
--------------
Amortization expense related to goodwill amounted to $176,538 and $0
for the years ended June 30, 1999 and 1998, respectively.
(9) FORGIVENESS OF DEBT:
During the year, the Company recognized an extraordinary gain of
$129,500, net of tax effect. Basic and diluted earnings per share, net
of tax effect, amounted to $0.03.
Total interest expense amounted to $22,218 and $33,918 for the years
ended June 30, 1999 and 1998, respectively.
(10) STOCKHOLDERS' EQUITY:
Initial Public Offering
On September 15, 1998, the Parent completed the sale of its minimum
offering of shares in its initial public offering which generated gross
proceeds of $1,385,647 from the sale of 251,000 shares of common stock
and 929,825 warrants, each warrant to purchase one share of the
Parent's common stock at an exercise price of $6.50 for a term of five
years. During December of 1998, the Company sold an additional 56,667
warrants for gross proceeds of $5,667. As of June 30, 1999, 986,492
warrants were outstanding.
See accompanying independent auditors' report.
F-11
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(10) STOCKHOLDERS' EQUITY, CONTINUED:
INITIAL PUBLIC OFFERING, CONTINUED
Deferred offering costs of $397,663 have been netted against gross
proceeds of $1,385,647 and are presented in the accompanying statement
of stockholders' equity.
ACQUISITIONS OF NETWORK SOLUTIONS PVT, LTD. AND NETSOL UK, LIMITED
On September 15, 1998, the Company purchased 51% of the outstanding
common stock of Network Solutions PVT, Ltd., a Pakistani Company, and
43% of the outstanding common stock of Netsol UK, Limited, a United
Kingdom Company, in exchange for cash payment of $775,000 and issuance
of 490,000 restricted common shares of Netsol International, Inc. On
April 17, 1999, the Company acquired an additional 49% of the
outstanding common stock of Network Solutions PVT, Ltd., and 57% of the
outstanding common stock of Netsol UK, Limited through the issuance of
4,200,000 restricted common shares of Netsol International, Inc.
UNAUDITED PROFORMA DISCLOSURES
The following unaudited proforma results of operations and net loss per
share assume that the acquisitions of Network Solutions PVT, Ltd. and
Netsol UK, Limited occurred as of the beginning of each period
presented, after giving effect to proforma adjustments. The proforma
adjustment represents amortization of goodwill, product licenses,
renewals, enhancements, copyrights, trademarks and tradenames, and
customer lists. The proforma adjustment also includes adjustments to
common stock shares issued and outstanding, that relate to the
acquisition of subsidiaries, as if they had occurred as of the
beginning of each period presented. The proforma financial information
is presented for informational purposes only and may not necessarily be
indicative of the operating results that would have occurred had these
acquisitions been consummated as of the beginning of each period
presented, nor is it indicative of future operating results.
June 30, June 30,
1999 1998
-------------- --------------
Net sales $ 3,002,107 $ 2,083,476
-------------- --------------
-------------- --------------
Cost of sales $ 1,662,259 $ 1,327,125
-------------- --------------
-------------- --------------
Operating expenses $ 3,152,588 $ 2,022,760
-------------- --------------
-------------- --------------
Net loss $ (2,118,356) $ (1,266,409)
-------------- --------------
-------------- --------------
Net loss per share:
Basic $ (0.30) $ (0.20)
-------------- --------------
-------------- --------------
Diluted $ (0.26) $ (0.18)
-------------- --------------
-------------- --------------
See accompanying independent auditors' report.
F-12
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(11) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN:
On April 1, 1997, the Company adopted an Incentive and Nonstatutory
Stock Option Plan (the "Plan") for its employees and consultants under
which a maximum of 500,000 options may be granted to purchase common
stock of the Company. Two types of options may be granted under the
Plan: (1) Incentive Stock Options (also known as Qualified Stock
Options) which may only be issued to employees of the Company and
whereby the exercise price of the option is not less than the fair
market value of the common stock on the date it was reserved for
issuance under the Plan; and (2) Nonstatutory Stock Options which may
be issued to either employees or consultants of the Company and whereby
the exercise price of the option is less than the fair market value of
the common stock on the date it was reserved for issuance under the
plan. Grants of options may be made to employees and consultants
without regard to any performance measures. All options listed in the
summary compensation table ("Securities Underlying Options") were
issued pursuant to the Plan. An additional 20,000 Incentive Stock
Options were issued to a non-officer-stockholder of the Company. All
options issued pursuant to the Plan vest over an 18 month period from
the date of the grant per the following schedule: 33% of the options
vest on the date which is six months from the date of the grant; 33% of
the options vest on the date which is 12 months from the date of the
grant; and 34% of the options vest on the date which is 18 months from
the date of the grant. All options issued pursuant to the Plan are
nontransferable and subject to forfeiture.
The number and weighted average exercise prices of options granted
under the 1997 Plan for the years ended June 30, 1999 and 1998 are as
follows:
1999 1998
--------------------- ----------------------
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
Outstanding at the beginning of the year 120,000 $ 0.01 - $ -
Outstanding at the end of the year 230,000 $ 0.77 120,000 $ 0.01
Granted during the year 215,000 $ 0.82 120,000 $ 0.01
Exercised during the year 105,000 $ 0.01 - $ -
Exercisable at the end of the year 186,250 $ 0.71 120,000 $ 0.01
Weighted average remaining life (years) 4.2 5.0
See accompanying independent auditors' report.
F-13
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(11) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN, CONTINUED:
On May 18, 1999, the Company enacted an Incentive and Nonstatutory
Stock Option Plan (the "Plan") for its employees, directors and
consultants under which a maximum of 5,000,000 options may be granted
to purchase common stock of the Company. Two types of options may be
granted under the Plan: (1) Incentive Stock Options (also known as
Qualified Stock Options) which may only be issued to employees of the
Company and whereby the exercise price of the option is not less than
the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Nonstatutory Stock Options which
may be issued to either employees or consultants of the Company and
whereby the exercise price of the option is less than the fair market
value of the common stock on the date it was reserved for issuance
under the plan. Grants of options may be made to employees, directors
and consultants without regard to any performance measures. All options
issued pursuant to the Plan are nontransferable and subject to
forfeiture.
Any Option granted to an Employee of the Corporation shall become
exercisable over a period of no longer than ten (10) years and no less
than twenty percent (20%) of the shares covered thereby shall become
exercisable annually. No Incentive Stock Option shall be exercisable,
in whole or in part, prior to one (1) year from the date it is granted
unless the Board shall specifically determine otherwise, as provided
herein. In no event shall any Option be exercisable after the
expiration of ten (10) years from the date it is granted, and no
Incentive Stock Option granted to a Ten Percent Holder shall, by its
terms, be exercisable after the expiration of ten (10) years from the
date of the Option. Unless otherwise specified by the Board or the
Committee in the resolution authorizing such option, the date of grant
of an Option shall be deemed to be the date upon which the Board or the
Committee authorizes the granting of such Option.
The number and weighted average exercise prices of options granted
under the 1999 Plan for the year ended June 30, 1999 is as follows:
Average
Exercise
Number Price
------ -----
Outstanding at the beginning of the year - $ -
Outstanding at the end of the year 1,350,000 $ 1.58
Granted during the year 1,350,000 $ 1.58
Exercised during the year - -
Exercisable at the end of the year 18,750 $ 1.58
Weighted average remaining life (years) 5.0
Proforma net income and earnings per share, as if the fair value method
of accounting were used, has not been presented because the amounts are
immaterial for the periods presented.
See accompanying independent auditors' report.
F-14
NETSOL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1999 AND 1998
(12) COMMITMENTS:
LEASES
The following is a schedule by years of future minimum rental payments
required under operating leases that have noncancellable lease terms in
excess of one year as of June 30, 1999:
Year ending June 30,
2000 $ 38,360
2001 49,505
2002 20,590
--------------
$ 108,455
--------------
--------------
Rent expense amounted to $47,462 and $65,916 for the years ended June
30, 1999 and 1998, respectively.
EMPLOYMENT AGREEMENTS
Effective May 18, 1999, the Company entered into employment agreements
with 3 officers for a period of three years. Pursuant to this
agreement, these officers will be compensated at salaries ranging from
$100,000 to $150,000 annually. In addition, these officers have also
been granted 450,000 stock options each, which will vest over the 3
years and are exercisable at prices ranging from $1.58 to $3.50.
(13) SUBSEQUENT EVENTS:
ACQUISITION OF NETWORK SOLUTIONS LIMITED
Subsequent to June 30, 1999, Netsol UK, Limited (buyer), wholly owned
subsidiary of the Company, acquired 100% of the outstanding capital
stock of Network Solutions Limited and subsidiaries, a United Kingdom
Company (seller), in exchange for 155,000 shares of Rule 144 restricted
common shares of the Company.
JOINT VENTURE
The Company entered into a joint venture agreement with 1st Net
Technologies, Inc. to share profits from an online business of
providing electronic commerce. Pursuant to this agreement, both parties
will also share the costs related to maintaining and operating this
joint venture. In the event this joint venture is subject to lawsuits
or loss contingencies, the Company maybe responsible for the entire
loss and will have a right to be indemnified by 1st Net Technologies,
Inc. for their share of the losses.
See accompanying independent auditors' report.
F-15