UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Amendment No. 1)
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2000
( ) For the transition period from __________ to __________
Commission file number: 0-22773
NETSOL INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4627685
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
24025 Park Sorrento, Suite 220, Calabasas, CA 91302
(Address of principal executive offices) (Zip Code)
(818) 222-9195 / (818) 222-9197
(Issuer's telephone/facsimile numbers, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
------- -------
The issuer had 11,592,997 shares of its $.001 par value Common Stock
issued and outstanding as of April 10, 2001.
Transitional Small Business Disclosure Format (check one)
Yes No X
------- -------
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000
ASSETS
Current Assets:
Cash $ 1,258,744
Accounts receivable, less allowance for doubtful accounts of $420,000 3,262,105
Costs and recognized income not yet billed 159,100
Other current assets 360,127
----------------
Total Current Assets 5,040.076
----------------
Property and Equipment, net of accumulated
Depreciation and amortization 3,250,958
----------------
Other Assets 2,448,255
----------------
Intangibles:
Product license, renewals, enhancements and copyrights, net 4,494,223
Customer lists, net 2,411,952
Goodwill, net 6,661,288
----------------
Total Intangible Assets 13,567,463
----------------
$ 24,306,752
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,257,817
Loan payable, stockholder 437,419
Current maturities of obligations under capital lease 89,335
----------------
Total Current Liabilities 2,784,571
Deferred Tax Liability 2,750,000
----------------
Obligations under capitalized leases, less current maturities 467,964
----------------
Stockholders' Equity:
Common stock; $.001 par value, 25,000,000 shares authorized,
11,051,385 shares issued and outstanding 11,051
Common stock receivable (68,650)
Additional paid-in capital 27,350,185
Other comprehensive loss (767,032)
Accumulated deficiency (8,221,337)
----------------
Total Stockholders' Equity $ 18,304,217
----------------
$ 24,306,752
================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 2000 & 1999 and
For the Six Months Ended December 31, 2000 & 1999
Three Months Ended Six Months Ended
December 31 December 31
--------------------------- ------------------------------
2000 1999* 2000 1999*
----------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $ 2,140,449 $ 2,106,660 $ 4,258,355 $ 3,501,204
Cost of revenues 1,102,601 949,505 2,163,069 1,506,044
------------ ------------ ------------- ------------
Gross profit $ 1,037,848 $ 1,157,155 2,095,286 $ 1,995,160
Operating expenses:
Depreciation and amortization $ 304,575 $ 254,439 $ 638,364 $ 558,878
Professional Services 395,268 165,171 606,581 585,435
Provision for bad debts 395,402 10,500 425,402 12,750
General and administrative 1,318,757 1,546,710 2,552,353 2,494,971
------------ ------------ ------------- ------------
Total Operating Expenses $ 2,414,002 $ 1,976,820 $ 4,222,700 $ 3,652,034
Other income/(expense) $ 81,853 $ 288,029 125,020 288,029
------------ ------------ ------------- ------------
Net loss $ (1,294,301) $ (531,636) $ (2,002,394) $ (1,368,845)
============ ============ ============= ============
Net loss per share:
Basic and diluted ($0.12) ($0.06) ($0.18) ($0.15)
Weighted average shares outstanding:
Basic and diluted 11,026,111 9,133,482 10,998,607 8,983,482
============ ============ ============= ============
* Restated for business combinations accounted for under Pooling of Interest
method.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
For the Three Months Ended December 31, 2000 & 1999 and
For the Six Months Ended December 31, 2000 & 1999
Three Months Ended Six Months Ended
December 31 December 31
--------------------------- --------------------------
2000 1999 2000 1999
----------- ------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(1,294,301) $ (531,636) $(2,002,394) $(1,368,845)
----------- ----------- ----------- -----------
ADJUSTMENTS TO RECONCILE INCOME
TO NET CASH PROVIDED BY OPERATIONS
Depreciation and amortization 349,850 438,936 683,639 649,436
Non-cash compensation expense 64,800 365,625 64,800 440,625
Bad debts 395,402 -0- 425,402 -0-
Foreign currency translation (380,914) -0- (789,879) -0-
(Increase) decrease in accounts receivable
and costs and recognized income not yet
billed (40,205) (1,393,969) (1,078,571) (2,067,226)
(Increase) decrease in other current assets (78,697) (961,014) 629,105 (1,225,337)
(Increase) decrease in other assets (762,908) (165,632) (1,615,252) (308,989)
(Increase) decrease in A/P 317,715 1,766,635 184,841 2,771,281
----------- ----------- ----------- -----------
Net cash (used) provided by operating
activities $(1,429,258) (481,055) (3,498,309) (1,109,055)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (127,395) (126,187) (654,015) (283,720)
Proceeds from certificates of deposits -0- -0- 1,000,000 -0-
----------- ----------- ----------- -----------
Net cash (used) provided in investing
activities $ (127,395) (126,187) 345,985 (283,720)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and warrants, net 84,600 900,782 1,091,600 1,890,786
Principal payment on loan payable -0- -0- (75,000) -0-
Exercise of stock options, net 4,000 (100,000) 33,000 -0-
Proceeds from loans payable, stockholders (67,093) -0- 437,419 (44,750)
Proceeds from note payable (250,000) 102,327 -0- 102,327
Contribution of capital -0- 260,349 -0- 260,349
Principal payments on capital lease
obligations (31,447) (10,415) (56,997) (15,200)
Stock subscription receivable -0- (25,000) -0- (25,000)
----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities $ (259,940) 1,128,043 1,430,022 2,168,512
----------- ----------- ----------- -----------
Net increase (decrease) in cash (1,816,593) 520,801 (1,722,302) 775,737
Cash and equivalents, beginning of period,
restated 3,075,337 340,521 2,981,046 85,585
----------- ----------- ----------- -----------
Cash and equivalents, end of period $ 1,258,744 $ 861,322 $ 1,258,744 $ 861,322
=========== =========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENT
3
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Increase (Decrease) in Cash and Cash Equivalents
For the Three Months Ended December 31, 2000 & 1999 and
For the Six Months Ended December 31, 2000 & 1999
Three Months Ended Six Months Ended
December 31 December 31
--------------------------- --------------------------
2000 1999* 2000 1999*
----------- ------------ ------------ ------------
Supplemental Cash Flow Information:
Cash paid during the period for interest: $ 36,945 $ 21,531 $ 68,588 $ 26,031
========== ========== ========== ============
Cash paid during the period for income taxes: $ -0- $ -0- $ -0- $ -0-
========== ========== ========== ============
Supplemental disclosure of non-cash
investing and financing activities:
Issuance of 405,000 shares of common stock
per stock purchase agreements -- -- -- $ 1,453,698
========== ========== ========== ============
Issuance of common stock shares
for services rendered $ 64,800 $ 365,625 $ 64,800 $ 440,625
========== ========== ========== ============
Conversion of note payable to stock $ 100,000 -- $ 100,000 --
========== ========== ========== ============
* Restated for business combinations accounted for under the Pooling of Interest
method.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (UNAUDITED)
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, Ltd., Network Solutions Group Ltd. and
subsidiaries, NetSol Abraxas Australia Pty Ltd., NetSol Connect PVT, Ltd.,
NetSol eR, Inc., Supernet AG and NetSol USA. All material intercompany accounts
have been eliminated in consolidation.
BUSINESS ACTIVITY: The Company designs, develops, markets, and exports
proprietary software products to customers in the automobile finance and leasing
industry worldwide. The Company also provides consulting services in exchange
for fees from customers.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BASIS OF PRESENTATION: The consolidated condensed interim financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-KSB for the year ended June 30, 2000. The Company follows the same
accounting policies in preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
FOREIGN CURRENCY: The accounts of Network Solutions Group Ltd. and Subsidiaries
and NetSol UK, Limited use the British Pounds, Network Solutions PK, Ltd. and
NetSol Connect PVT, Ltd. use Pakistan Rupees, Netsol Abraxas Australia Pty, Ltd.
uses the Australian dollar, Supernet AG uses the German Mark, Netsol
International, Inc. and subsidiaries NetSol USA, Inc. and NetSol eR, Inc. use
the U.S. dollars 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. Translation
losses of $767,032 at December 31, 2000 are classified as an item of other
comprehensive income in the stockholders' equity section of the consolidated
balance sheet.
5
PRIVATE PLACEMENT: The Company sold 63,666 shares of its restricted Rule 144
common stock in the amount of $955,000 through a private placement offering
during the quarter ended September 30, 2000 pursuant to Rule 506 of Regulation D
of the Securities and Exchange Act of 1933.
LOAN PAYABLE, STOCKHOLDER: A principal stockholder of the Company advanced funds
for working capital during the quarter ended September 30, 2000. The loan is due
on September 30, 2001. The loan bears no interest as the Stockholder has waived
any interest payments.
INTANGIBLES ASSETS: Accumulated depreciation at December 31, 2000 was $625,778
for products licenses, renewals, enhancements, copyrights, trademarks and
tradenames, $297,625 for customer lists and $974,002 for goodwill.
BUSINESS COMBINATIONS ACCOUNTED FOR UNDER THE POOLING OF INTEREST METHOD:
ABRAXAS AUSTRALIA PTY, LIMITED
On January 3, 2000, the Company issued 150,000 Rule 144 restricted common shares
in exchange for 100% of the outstanding capital stock of Abraxas Australia Pty,
Limited, an Australian Company. This business combination was accounted for
using the pooling of interest method of accounting under APB Opinion No. 16, and
accordingly, the accompanying financial statements have been restated to show
the results of operations as if the combination had occurred at the beginning of
all periods presented.
SUPERNET AKTIENGESELLSCHAFT
On May 2, 2000, the Company issued 425,600 Rule 144 restricted common shares in
exchange for 100% of the outstanding capital stock of SuperNet AG, a German
Company. This business combination was accounted for using the pooling of
interest method of accounting under APB Opinion No. 16, and accordingly, the
accompanying financial statements have been restated to show the results of
operations as if the combination had occurred at the beginning of all periods
presented.
OTHER EVENTS: Effective October 1, 2000, the Company entered into a rental lease
agreement to occupy office space. Pursuant to this agreement, the Company will
pay rent of approximately $12,500 per month through July 31, 2007. The Company
was required to secure an Irrevocable Stand-By Letter of Credit for the benefit
of the Landlord in the amount of $250,000, which is included in other assets on
the accompanying balance sheet. In the event the Company fails to renew the
Letter of Credit as set forth in the Letter of Credit Agreement, the Landlord
shall be entitled to draw on the Letter of Credit in full. The renewal of each
annual Letter of Credit will be reduced by $35,714 per annum.
During September 2000, the Company opened a certificate of deposit with Merrill
Lynch Bank USA in the amount of $500,000, as security for an Irrevocable Standby
Letter of Credit for the benefit of one of its customers. This letter of credit
expires by December 31, 2003 and is included in other assets on the accompanying
balance sheet.
On or about January 8, 2001, NetSol International, Inc. (the "Company")entered
into an agreement for equity financing with Knight Trading Group Inc.'s
subsidiary, Deephaven Capital Management ("Deephaven"). The initial investment
by Deephaven was
6
for two million dollars paid in two traunchs. The first traunch consists of
Deephaven purchasing 186,372 shares of common stock of the Company for one
million dollars at an approximate price of $5.46 per share and 55,912
warrants with an approximate exercise price of $6.83 for a period of five
years. The second traunch (including true up shares and warrants) consists of
Deephaven purchasing 276,498 shares of common stock of the Company for one
million dollars at an approximate price of 3.58 and 92,396 warrants with an
approximate exercise price of 4.47 for a period of five years. Jesup and
Lamont Securities, an investment-banking firm based in New York, led the
financing. The Company will use the money received to accelerate growth
through strengthening and expanding its technology infrastructure and
business development.
REVENUE RECOGNITION: Revenue is recognized when earned. The Company's revenue
recognition policies are in compliance with all applicable accounting
regulations, including American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97 2, Software Revenue Recognition, as
amended by SOP 98-4 and 98-9. Any revenues from software arrangements with
multiple elements are allocated to each element of the arrangement based on the
relative fair values using specific objective evidence as defined in the SOPs.
If no such objective evidence exists, revenues from the arrangements are not
recognized until the entire arrangement is completed and accepted by the
customer. Once the amount of the revenue for each element is determined, the
Company recognizes revenue as each element is completed and accepted by the
customer. For arrangements that require significant production, modification or
customization of software, the entire arrangement is accounted for by the
percentage of completion method, in conformity with Accounting Research Bulletin
("ARB") No. 45 and SOP 81 1.
RECLASSIFICATIONS: Certain accounts balances from prior quarters have been
reclassified to conform with present quarter and year to date presentation.
7
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
NetSol International, Inc. ("NetSol" or the "Company") is in the
business of information technology ("I/T") services. The Company has helped
clients use I/T more efficiently in order to improve their operations and
profitability and to achieve business results. Network Solutions Pvt.
Ltd. ("NetSol PK") develops the majority of the software for the Company. NetSol
PK was the first company in Pakistan to achieve the ISO 9001 accreditation. The
Company is in the process of attaining SEI CMM Level 3 accreditation. This is
one of the highest level of recognition for quality and best practices a
software house can achieve.
The Company offers a broad array of professional services to clients in the
global commercial markets and specializes in the application of advanced and
complex I/T to achieve its customers' strategic objectives. Its service
offerings include outsourcing, systems integration, and I/T and management
consulting and other professional services.
Outsourcing involves operating all or a portion of a customer's technology
infrastructure, including systems analysis, applications development, network
operations, desktop computing and data center management.
Systems integration encompasses designing, developing, implementing and
integrating complete information systems.
I/T and management consulting services include advising clients on the strategic
acquisition and utilization of I/T and on business strategy, operations, change
management and business process reengineering.
The Company also develops sophisticated software systems for the lease and
finance industry. NetSol has developed a fully integrated leasing and finance
package which is a series of five products that can be marketed in an integrated
system. These products are ePOS, PMS, SMS, CMS, and WFS. These five applications
form the full suite of asset based lending Enterprise Resource Planning
applications. These applications can run almost the entire operations of a
captive leasing company.
NetSol ePOS is a browser-based Point of Sale system that is used by the
dealership and other outlets. ePOS users create quotations and financing
applications for the customers using predefined Financial Products. The proposal
is submitted to Back Office (PMS) for approval. After analysis, the proposal is
sent back to ePOS system with a final decision.
Proposal Management System (PMS) provides Finance/Leasing Companies with the
ability to quickly assess the worthiness of an applicant applying for a loan or
a lease. The System is equipped with strong workflow management, integrated link
to Credit Rating Agencies, automated point scoring strategy for automatic
approval / rejection / referral, can be customized to link to any Point of Sale
System, ability to integrate any vehicle data provider such as Glass's Guide in
Europe and Australia.
8
The NetSol Wholesale Finance System (WFS) is developed to automate and manage
the Whole Sale Finance (Floor Plan) activities of a Finance Company. The design
of the system is based on the concept of One Loan One Asset to facilitate Asset
Tracking and Costing of an asset. The system covers from Credit Limit Request,
Payment of Loan, Billing, and Settlement, Auditing of Stocks, Dealer Information
and ultimately the pay-off functions.
Settlement Management System (SMS) verifies the signed document sent by the
dealer / broker / third party against the information stored in the Proposal
Management System database. Settlement Management System verifies all
calculations before loading the contract into the Contract Management System.
Other main features are collection of first rental, disbursement of funds to
dealers, Insurance Company and other third parties. Workflow software is part of
Settlement Management System and it enables the users of Settlement Management
System to communicate with Proposal Management workflow or within its own
workgroup.
The Contract Management System (CMS) manages lease contracts for financing of
vehicles from inception till completion. The leasing company is able to
establish, maintain and terminate such financial contracts. Contracts may
include added value services such as vehicle maintenance and/or insurance
premiums. It furthermore incorporates functional extensions such as litigation,
remarketing of vehicles, securitization of a portfolio and post dated check
management.
These are traditionally complex business applications and require a great deal
of industry experience both in the development as well as implementation stages.
NetSol, over the years, has developed core competencies in the asset based
lending software space. These are extremely sought after skills shared in a team
of approximately 30 business consultants. NetSol is able to demand a premium for
these consultants and leverages this competency when bidding for new business.
Typically, the sales cycle for these products is anywhere between six to twelve
months and NetSol derives its income both from selling the license to use the
products as well as through customization of the products. License fees can vary
between $75,000 to up to $1,000,000 per license depending upon the size of the
customer and the complexity of the customization.
MARKETING AND SELLING
The objective of the Company's marketing program is to create and sustain
preference and loyalty for NetSol as a leading e-services consulting and
software solutions provider. Marketing is performed at the corporate and
business unit levels. The corporate marketing department has overall
responsibility for communications, advertising, public relations and our website
and also engineer and oversees central marketing and communications programs for
use by each of our business units.
Our dedicated marketing personnel within the business units undertake a variety
of marketing activities, including sponsoring focused client events to
demonstrate our skills and products, sponsoring and participating in targeted
conferences and holding private briefings with individual companies. We believe
that the industry focus of our sales professionals and our business unit
marketing personnel enhances their knowledge and expertise in these industries
and will generate additional client engagements.
9
The Company generally enters into written commitment letters with clients at or
around the time it commences work on a project. These commitment letters
typically contemplate that NetSol and the client will subsequently enter into a
more detailed agreement, although the client's obligations under the commitment
letter are not conditioned upon the execution of the later agreement. These
written commitments and subsequent agreements contain varying terms and
conditions and the Company does not generally believe it is appropriate to
characterize them as consisting of backlog. In addition, because these written
commitments and agreements often provide that the arrangement can be terminated
with limited advance notice or penalty, the Company does not believe the
projects in process at any one time are a reliable indicator or measure of
expected future revenues.
NetSol provides its services primarily to clients in global commercial
industries. In the global commercial area, the Company's service offerings are
marketed to clients in a wide array of industries including schools; automotive;
chemical; tiles/ceramics; Internet marketing; software; banks and financial
services.
Geographically, NetSol continues to have operations throughout North America,
Europe and Asia Pacific region.
CHANGES IN FINANCIAL CONDITION
Net sales of $2,140,449 for the second quarter of fiscal 2001, which ended
December 31, 2000, were both comparable to the sales of the same quarter for the
previous year of $2,106,660 (restated due to pooling of interest accounting) and
for sales in the preceding quarter of $2,117,906. Due to the maturity of the
lease and finance products, the Company is further positioning itself to market
these licenses to the North American and other global markets through NetSol
Professional Services. The Company anticipates that solid growth will occur in
the remainder of fiscal 2001 due to product maturity and market demand with
several existing customers, among them IDS Group, Inc., Daimler-Chrysler and
other leasing and finance companies.
The gross profit has remained strong and was $1,037,848 in the quarter ending
December 31, 2000 in comparison with $1,157,155 (restated) for the same quarter
the previous year. Cost of revenues for the quarter ending December 31, 2000 was
$1,102,601, in comparison with $949,505 (restated) for the same quarter in the
previous year. The Company is continuing to negotiate better pricing on its new
agreements which provides for higher margins. The decrease in the margins is
attributable to an increase of direct labor costs amongst certain subsidiaries.
Operating expenses were $2,414,002 for the quarter ending December 31, 2000.
This compares with $1,976,820 (restated) for the quarter ending December 31,
1999. The increase in the current fiscal year is attributable to the
amortization of goodwill and other intangible assets, for an increase in
professional fees surrounding regulatory compliance matters and for a bad debt
provision. The Company's customer base has been negatively impacted from the
overall economic downturn which has resulted in making certain provisions for
potential uncollectable accounts. Operating results for the December 31, 1999
quarter were impacted as the Company applied pooling of interest accounting
rules to two of its four acquisitions - Abraxas in Australia and SuperNet AG of
Germany. Its consolidated statement of operations includes the operations of
both Abraxas and SuperNet AG for quarters ended December 31, 2000 and December
31, 1999 (restated).
10
Net loss was $1,294,301 for the quarter ended December 31, 2000 as compared to
$531,636 (restated) for the quarter ended December 31, 1999. This resulted in a
net loss per share, basic and diluted, of $0.12 for the quarter ended December
31, 2000 as compared with $0.06 (restated) for the quarter ended December 31,
1999. That is an increase of $0.06 loss per share on a quarter to quarter
comparative basis.
The Company's cash position was $2,008,744 at December 31, 2000. This is
presented on the financial statements as $1,258,744 cash and cash equivalents,
and a total $750,000 as certificates of deposit which is included in other
assets.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company's working capital (current assets
less current liabilities) totaled $2.26 million, a decrease of $2.47 million
since June 30, 2000. The Company has taken recent action to re-focus on its
profitable operations and scale back on loss making operations and
anticipated capital expenditures. Two of the Company's profitable operating
subsidiaries, NetSol eR and NetSol USA, will continue to expand their revenue
base both by means of IT outsourcing and software development projects. The
Company's very recent acquisition of Intereve Corporation, based in the
Silicon Valley, has a history of generating positive cash flows. The Company
anticipates that its revenue base will be enhanced through the leveraging of
the contracts and resources that were acquired. The majority of the contracts
for eR and USA are time and materials contracts which provides ample
liquidity to fund specific working capital requirements. In generating this
revenue growth, the Company anticipates that capital expenditures
requirements can be kept at low levels. The Company estimates that it will be
able to reduce its current monthly rate of using working capital beginning in
its fiscal 4th quarter and into its 1st quarter of fiscal 2002 by as much as
half. The Company has recently completed a $2 million round of financing with
Deephaven Private Placement Trading Ltd. ("Deephaven"), provided that until
Deephaven has sold the common stock it purchased from us in such financing,
the Company may be obligated to repurchase such common stock from Deephaven
upon the occurrence of certain conditions as set forth in the purchase
agreement with Deephaven at a purchase price equal to the greater of the
closing price of the stock at the time of the occurrence of the applicable
condition or the original purchase price. In addition, the Company filed a
Registration Statement on Form S-3/A with the Securities and Exchange
Commission on February 2, 2001 for a proposed offering of $30 million from
the sale of its securities. These securities are proposed to be offered and
sold from time to time on behalf of the Company in the form of common stock
and warrants to purchase common stock. The Company is pursuing the
establishment of a $1 million revolving credit facility with two separate
financial institutions and also currently negotiating various additional
forms of debt financing surrounding the completion of the Company's IT campus
in Lahore. The Company also has a history of raising capital through private
placements and will consider this if and when it meets the capital
requirements of the Company. In the opinion of management, the Company
believes that the impact from certain software sales contracts will have a
material impact upon its liquidity in the short term; however, management
does believe that its anticipated positive cash flows from re-focusing on its
profitable operations, a reduction in the Company's projected capital
expenditure requirements for the next twelve months, and the numerous
financing options being pursued, cash flows will be sufficient for the
foreseeable future to manage the short term liquidity impact from certain
software contracts, finance anticipated working capital requirements and fund
limited capital expenditures.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently party to one dispute filed by a former
Officer, which involves litigation. The plaintiff filed a Complaint for
Declaratory Relief on May 9, 2000 in the Los Angeles Superior Court (Case No.
BC229642). The Plaintiff contends that, on or about May 29, 1998, he was granted
120,000 options at a $0.01 per share exercise price. The Company has responded
that options were originally granted by the Board to all board members but later
all of the directors agreed to forego such grant, and none of the directors
received such options as the Plaintiff claims were granted to him. The parties
are in the discovery stage of the proceeding. The Company denies the allegations
and is currently defending the action.
The Company is currently involved in proceedings with Adrian Cowler and The
Surrey Design Partnership Limited, the former owners of Network Solutions Group
Limited ("NSGL"). By a written agreement dated 13th August 1999 the Claimants
agreed to sell the entire issued share capital of NSGL to the Company. The
consideration for the sale was specified newly issued shares in the Company. It
was agreed that the Company's lawyers would hold these shares in escrow for one
year and within seven days of the end of the one-year period the Company would
deliver shares to the Claimants' solicitors. If the Company were to make any
written claim (within the one year period) then the Company's lawyers were to
withhold delivery of the consideration shares pending final adjudication of the
claim.
On August 11, 2000 NetSol delivered a written claim to the Claimants based on
misrepresentation as to the financial information provided to the Company upon
the acquisition and since that date the Company's lawyers have withheld delivery
of the consideration shares. The Claimants have now commenced proceedings to
seek delivery of the consideration shares and/or damages. The Company has
counterclaimed and alleges that it was induced to enter into the agreement by
pre-contractual misrepresentations as to financial information, customer base
and goodwill. The Company's primary claim is for rescission of the agreement
and, in the alternative, alleges that the Claimants were in breach of a series
of warranties and failed to deliver draft figures for inclusion in the
Completion Accounts (i.e., financial statements).
The Claimants filed its Particulars of Claim on October 2, 2000 in the High
Court of Justice, Queen bench Commercial Division, Commercial Court and the
Company served its Defense and Counterclaim on December 13, 2000. The parties
are currently in the disclosure stage of proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company did not receive any additional proceeds from its Public
Offering since its Annual Report. The Company has received $84,600 from 14,100
warrants exercised from the IPO in this quarter.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
None.
(b) REPORT ON FORM 8-K dated January 23, 2001.
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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NETSOL INTERNATIONAL, INC.
(Registrant)
Date: April 16, 2001 /s/ Najeeb U. Ghauri
-------------------------------------
NAJEEB U. GHAURI
CEO
/s/ Syed Husain
-------------------------------------
SYED HUSAIN
Chief Financial Officer
13