UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
( ) 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 11,731,440 shares of its $.001 par value Common Stock
issued and outstanding as of May 11, 2001.
Transitional Small Business Disclosure Format (check one)
Yes No X
------- -------
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2001
ASSETS
Current Assets:
Cash $ 1,013,559
Accounts receivable, less allowance for doubtful accounts of $645,228 3,652,305
Revenue recognized in excess of billings 195,150
Other current assets 331,471
----------------
Total Current Assets $ 5,192,485
----------------
Property and Equipment, net of accumulated
Depreciation and amortization $ 3,341,335
----------------
Other Assets $ 1,452,837
----------------
Intangibles:
Product license, renewals, enhancements and copyrights, net $ 4,408,890
Customer lists, net 2,235,205
Goodwill, net 5,841,706
----------------
Total Intangible Assets $ 12,485,801
----------------
$ 22,472,458
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 2,569,415
Current maturities of obligations under capital lease 209,011
----------------
Total Current Liabilities $ 2,778,426
Deferred Tax Liability 2,700,000
----------------
Obligations under capitalized leases, less current maturities $ 299,144
----------------
Stockholders' Equity:
Common stock; $.001 par value, 25,000,000 shares authorized,
11,621,669 shares issued and outstanding $ 11,622
Common stock receivable (68,650)
Additional paid-in capital 29,652,181
Other comprehensive loss (1,422,648)
Accumulated deficiency (11,477,617)
----------------
Total Stockholders' Equity $ 16,694,888
----------------
$ 22,472,458
================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Forthe Three Months Ended March 31, 2001 & 2000 and For the Nine
Months Ended March 31, 2001 & 2000
Three Months Ended Nine Months Ended
March 31 March 31
-----------------------------------------------------------------------------
2001* 2000* 2001* 2000*
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Services and other $ 1,520,725 $ 1,555,892 $ 4,628,738 $ 4,064,248
Licenses $ 329,524 $ 302,456 $ 1,132,496 $ 987,345
----------------- ----------------- ----------------- -----------------
$ 1,850,249 $ 1,858,348 $ 5,761,234 $ 5,051,593
Cost of Revenues $ 908,230 $ 725,484 $ 2,724,842 $ 1,700,406
----------------- ----------------- ----------------- -----------------
Gross profit $ 942,019 $ 1,132,864 $ 3,036,392 $ 3,351,188
Operating expenses:
Depreciation and amortization $ 277,733 $ 287,360 $ 916,097 $ 1,056,655
Professional Services 362,728 266,047 969,309 761.311
Provision for bad debts 235,228 -0- 660,630 24,750
Impairment loss of intangible assets 1,236,593 -0- 1,236,593 -0-
General and administrative 1,305,855 1,366,218 3,465,022 3,474,086
----------------- ----------------- ----------------- -----------------
Total Operating Expenses $ 3,418,137 $ 1,919,625 $ 7,247,651 $ 5,316,802
Other income/(expense) $ 100,849 $ (10,842) $ 225,082 $ (45,963)
----------------- ----------------- ----------------- -----------------
Loss from continuing operations $ (2,375,269) (797,603) $ (3,986,177) $ (2,011,576)
Discontinued Operations:
Loss from operations of discontinued division $ 266,479 $ 436,028 $ 657,965 $ 590,898
Loss on disposal of division 614,532 -0- 614,532 -0-
----------------- ----------------- ----------------- -----------------
$ (881,011) $ (436,028) $ (1,272,497) $ (590,898)
----------------- ----------------- ----------------- -----------------
Net loss $ (3,256,280) $ (1,233,631) $ (5,258,674) $ (2,602,474)
================= ================= ================= =================
Net loss per share - continuing operations
Basic and diluted $ (0.21) $ (0.08) $ (0.36) $ (0.21)
================= ================= ================= =================
Net loss per share - discontinued operations
Basic and diluted $ (0.08) $ (0.05) $ (0.11) $ (0.06)
================= ================= ================= =================
Net loss per share - Total
Basic and diluted $ (0.29) $ (0.13) $ (0.47) $ (0.27)
================= ================= ================= =================
Weighted average shares outstanding: 11,341,948 9,600,865 11,083,012 9,389,398
================= ================= ================= =================
* Restated for business combinations accounted for under Pooling of Interest
method and for discontinued operations.
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 Nine Months Ended March 31, 2001 & 2000
NINE MONTHS ENDED
MARCH 31
-------------------------------------
2001* 2000*
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (3,986,177) $ (2,011,576)
----------------- -----------------
ADJUSTMENTS TO RECONCILE INCOME
TO NET CASH PROVIDED BY OPERATIONS
Depreciation and amortization $ 916,097 $ 1,056,655
Impairment loss 1,236,593 -0-
Non-cash compensation expense 64,800 777,500
Bad debts 660,630 -0-
Foreign currency translation (1,445,495) -0-
(Increase) decrease in A/R and revenues recognized in excess of billings (1,824,828) (1,320,821)
(Increase) decrease in other current assets (184,718) (1,137,099)
(Increase) decrease in other assets (619,834) (306,654)
(Increase) decrease in A/P 751,668 (1,161,724)
----------------- -----------------
Net cash (used) provided by continuing operations $ (4,431,264) $ (1,780,271)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment $ (1,078,784) $ (319,455)
Proceeds from certificates of deposits 1,000,000 -0-
----------------- -----------------
Net cash provided by (used) in investing activities $ (78,784) $ (319,455)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and warrants, net $ 3,394,167 $ 7,696,121
Principal payment on loan payable (75,000) -0-
Exercise of stock options, net 33,000 -0-
Proceeds from loans payable, stockholders -0- (44,750)
Proceeds from note payable -0- 141,788
Contribution of capital -0- 260,349
Principal payments on capital lease obligations (116,141) (36,662)
Stock subscription receivable -0- (25,000)
----------------- -----------------
Net cash provided by financing activities $ 3,236,026 $ 7,991,846
----------------- -----------------
Net (decrease) increase in cash from continuing operations $ (1,274,022) $ 5,892,120
Cash used for discontinued operations (424,539) (1,521,337)
----------------- -----------------
Cash and equivalents, beginning of period, restated 2,712,120 31.714
----------------- -----------------
Cash and equivalents, end of period $ 1,013,559 $ 4,402,497
================= =================
* Restated for business combinations accounted for under Pooling of Interest
method and for discontinued operations.
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 Nine Months Ended March 31, 2001 & 2000
NINE MONTHS ENDED
MARCH 31
-------------------------------------
2001* 2000*
----------------- -----------------
Supplemental Cash Flow Information:
Cash paid during the period for interest: $ 93,148 $ 38,585
================= =================
Cash paid during the period for income taxes: $ 1,700 $ -0-
================= =================
Supplemental disclosure of non-cash investing and financing activities:
Issuance of 4,200,000 shares of common stock
per stock purchase agreements $ -- $ 1,071,855
================= =================
Issuance of 115,420 shares for conversion of note payable,
Related party, to equity $ 425,611 $ --
================= =================
Issuance of common stock shares
for services rendered $ 64,800 $ 777,500
================= =================
Conversion of note payable to stock $ 100,000 $ --
================= =================
* Restated for business combinations accounted for under Pooling of Interest
method and for discontinued operations.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
NETSOL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (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 $1,422,648 at March 31, 2001 are classified as an item of other
comprehensive loss in the stockholders' equity section of the consolidated
balance sheet.
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.
5
PRIVATE PLACEMENTS: 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.
On January 8, 2001, the Company entered into an agreement for equity
financing with Deephaven Capital Management ("Deephaven"). Deephaven acquired
their shares of common stock in a private placement transaction which closed
in two traunches. Under the terms of our securities purchase agreement with
Deephaven, we issued 183,150 shares of common stock to Deephaven in
connection with a first closing which occurred on January 8, 2001 for gross
proceeds of $1 million. We also issued warrants to purchase an aggregate of
up to 54,945 shares of common stock to Deephaven in the first closing at an
exercise price of $6.83 per share. We issued 279,720 shares of common stock
to Deephaven in connection with a second closing which occurred on February
20, 2001 for gross proceeds of $1 million. We also issued warrants to
purchase an aggregate of up to 83,916 shares of common stock to Deephaven in
the second closing at an exercise price of $4.47 per share. All warrants are
exercisable for a period of five years from the date of issuance and have
adjustment provisions for dilution events in connection with issuances of our
common stock and other equivalents below the applicable warrant exercise
price and for stock splits, stock dividends and similar transactions. Under
the Deephaven securities purchase agreement, if we have a primary shelf
registration statement declared effective, we are obligated to offer to
Deephaven up to $6 million of our common stock (and warrants covering
$1,800,000 worth of common stock) subject to the terms of the purchase
agreement. We have filed a registration statement for a proposed offering
which covers $30 million of our securities which was not effective as of the
date of this propsectus which we may use to offer such additional shares and
warrants to Deephaven. In addition, we will be required to issue additional
shares of common stock to Deephaven if we issue common stock at a price below
the price Deephaven paid for their shares in the first and second closings,
respectively, prior to the 180th trading day following February 20, 2001. The
Deephaven securities purchase agreement also provides that we will reimburse
Deephaven for legal and other expenses if Deephaven becomes involved in any
action, proceeding or investigation arising solely as a result of Deephaven
acquiring our common stock under the purchase agreement.
Subject to certain exceptions, the purchase agreement restricts us from offering
or selling any of our equity securities or similar instruments prior to November
17, 2001 without Deephaven's consent. Until the 180th day following the
effective date of the registration statement, Deephaven has a right of first
refusal on future issuances of our equity securities or similar instruments as
described in the purchase agreement.
In connection with our sale of common stock pursuant to the Deephaven securities
purchase agreement, we entered into a registration rights agreement pursuant to
which, among other things, we agreed to use our best efforts to file a
registration statement to register for resale the shares of common stock,
including the shares of common stock issuable upon exercise of the warrants, by
March 14, 2001 and have such registration statement declared effective by May
28, 2001. If the registration statement is not declared effective by May 28,
2001 or certain other events of default occur as described in the registration
statement, we will have to pay to Deephaven liquidated damages in a monthly
amount equal to 4% (2% in the event the registration statement is not declared
effective by May 28, 2001) of the purchase price paid by Deephaven for the
shares of common stock purchased pursuant to the purchase agreement up to an
aggregate maximum of $400,000. The liquidated damages apply on a pro-rata basis
for any portion of a month prior to the registration statement being declared
effective or the curing of other events of default, as applicable. For some
events of defaults, such as the sale of substantially all the assets of Netsol,
a one-time payment of $400,000 is required. In addition, we agreed to indemnify
Deephaven against certain liabilities, including liabilities arising under the
Securities Act and Deephaven agreed to indemnify us against certain liabilities,
including liabilities arising under the Securities Act.
In connection with our sale of common stock pursuant to the Deephaven securities
purchase agreement, we paid an aggregate of $100,000 to Jesup & Lamont and
issued warrants to purchase up to 9,158 shares of common stock at an exercise
price of 6.83 per share in the first closing and up to 13,986 shares of common
stock at an exercise price of $4.47 per share in the second closing. These
warrants have the same terms as the warrants issued to Deephaven pursuant to the
Deephaven securities purchase agreement. The shares of common stock issuable
upon exercise of these warrants are being registered in this registration
statement.
6
LOAN PAYABLE, STOCKHOLDER: A principal stockholder of the Company advanced
funds for working capital during the quarter ended September 30, 2000. Effective
March 1, 2001, the unpaid outstanding loan balance of $425,611 was paid in full
by the issuance of 115,420 restricted shares of the Company's common stock.
INTANGIBLES ASSETS: Accumulated depreciation at March 31, 2001 was $711,112
for products licenses, renewals, enhancements, copyrights, trademarks and
tradenames, $272,579 for customer lists and $955,487 for goodwill. The Company
has recorded an impairment loss of $1,236,593 in the current quarter. This is
comprised of $541,588 for customer lists and $695,005 for goodwill. These
purchased intangible assets were recorded resulting from the acquisition of
Network Solutions Group in August 1999.
BUSINESS COMBINATIONS:
SUPERNET AG
On May 2, 2000, the Company issued 425,600 Rule 144 restricted common shares in
exchange for 100% of the outstanding capital stock of SuperNet AG, a German
Company. This business combination was accounted for using the pooling of
interest method of accounting under APB 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. These results are presented as a discontinued operation as discussed
in the subsequent event footnote.
Effective March 1, 2001, the Company acquired Intereve Corporation, a Silicon
Valley IT company with senior level architects and developers recruited from
India. This acquisition was accounted for using the purchase method of
accounting under APB Opinion No. 16, and accordingly, the purchase price was
allocated to the assets purchased and liabilities assumed based upon their
estimated fair values as determined by management on the date of acquisition,
which approximated $410,000. The management of the Company allocated the entire
purchase price to customer lists and is being amortized by use of the
straight-line method over its estimated useful life from the date of
acquisition. The purchase price is comprised of cash payouts over several months
as certain deliverables are met. Since the acquisition did not constitute a
significant acquisition and the proforma adjustments related to the acquisition
are immaterial to the financial statement presentation as a whole, proforma
financial information is not 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.
In the fourth quarter, the Company expects to incur costs in connection with
a proxy contest instigated by a group of four dissident shareholders led by
Blue Water Master Fund, L.P.
SUBSEQUENT EVENT: On May 1, 2001, management of the Company committed to a
formal plan to dispose of Supernet AG, a division or segment of the Company,
through a sale of all the issued and outstanding shares of Supernet AG. The
expected closing date is May 21, 2001. The Company is following the guidance of
APB No. 30 and Emerging Issues Task Force Abstract ("EITF") 95-18 in the
accounting for and disclosure of this disposal. The losses from operations of
this discontinued division and the loss on the disposal of the division is
presented on the face on the Statement of Operations for all periods presented.
There are no applicable corresponding income tax effects which apply to this
disposal. Revenues applicable to this discontinued division were $543,534 for
the nine months ended March 31, 2001 and $309,389 for the nine months ended
March 31, 2000. The net assets as of March 31, 2001 have been adjusted for in
the current quarter in accordance with the terms of the disposition.
Net Assets of Discontinued Operations: March 31, 2001 March 31, 2000
-------------- --------------
Current Assets $1,002,047 $932,214
Property and equipment, net $135,140 $170,973
Total Assets $1,137,787 $1,103,187
Current Liabilities $683,255 $255,229
Total Liabilities $683,255 $255,229
-------- --------
Net assets of discontinued operation $454,532 $847,958
========= ========
7
RECLASSIFICATIONS: Certain accounts balances from prior quarters have been
reclassified to conform with present quarter and year to date presentation.
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. Since it was founded in 1997, the
Company has helped clients use I/T more efficiently in order to improve their
operations and profitability and to achieve business results. Network Solutions
Pvt. Ltd. ("NetSol PK") develops the majority of the software for the Company.
NetSol PK was the first company in Pakistan to achieve the ISO 9001
accreditation. The Company is in the process of attaining SEI CMM Level 3
accreditation. This is one of the highest level of recognition for quality and
best practices a software house can achieve.
The Company offers a broad array of professional services to clients in the
global commercial markets and specializes in the application of advanced and
complex I/T to achieve its customers' strategic objectives. Its service
offerings include outsourcing, systems integration, and I/T and management
consulting and other professional services, including e-business solutions.
Outsourcing involves operating all or a portion of a customer's technology
infrastructure, including systems analysis, applications development, network
operations, desktop computing and data center management.
Systems integration encompasses designing, developing, implementing and
integrating complete information systems.
I/T and management consulting services include advising clients on the strategic
acquisition and utilization of I/T and on business strategy, operations, change
management and business process reengineering.
The Company also develops sophisticated software systems for the lease and
finance industry. NetSol has developed a fully integrated leasing and finance
package which is a series of five products that can be marketed in an integrated
system. These products are ePOS, PMS, SMS, CMS, and WFS. These five applications
form the full suite of asset based lending Enterprise Resource Planning
applications. These applications can run almost the entire operations of a
captive leasing company.
NetSol ePOS is a browser-based Point of Sale system that is used by the
dealership and other outlets. ePOS users create quotations and financing
applications for the customers using predefined Financial Products. The proposal
is submitted to Back Office (PMS) for approval. After analysis, the proposal is
sent back to ePOS system with a final decision.
Proposal Management System (PMS) provides Finance/Leasing Companies with the
ability to quickly assess the worthiness of an applicant applying for a loan or
a lease. The System is equipped with strong workflow management, integrated link
to Credit Rating Agencies, and automated point scoring strategy for automatic
approval/rejection/referral; can be customized to link to any Point of Sale
System; and has the ability to integrate any vehicle data provider such as
Glass's Guide in Europe and Australia.
The NetSol Wholesale Finance System (WFS) is developed to automate and manage
the Whole Sale Finance (Floor Plan) activities of a Finance Company. The design
of the system is based on the concept of One Loan One Asset to facilitate Asset
Tracking and Costing of an asset. The system covers 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 and disbursement of funds to
dealers, insurance companies 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.
8
The Contract Management System (CMS) manages lease contracts for financing of
vehicles from inception until completion. The leasing company is able to
establish, maintain and terminate such financial contracts. Contracts may
include added value services such as vehicle maintenance and/or insurance
premiums. It furthermore incorporates functional extensions such as litigation,
remarketing of vehicles, securitization of a portfolio and post dated check
management.
These are traditionally complex business applications and require a great deal
of industry experience both in the development as well as implementation stages.
NetSol, over the years, has developed core competencies in the asset based
lending software space. These are extremely sought after skills shared in a team
of approximately 30 business consultants. NetSol is able to demand a premium for
these consultants and leverages this competency when bidding for new business.
Typically, the sales cycle for these products is anywhere between six to twelve
months and NetSol derives its income both from selling the license to use the
products as well as customization. License fees can vary between $75,000 to up
to $1,000,000 per license depending upon the size of the customer and the
complexity of the customization. The revenue for the license and the
customization flows in several phases as certain deliverables are met and can
take from six months to two years before a project is fully completed.
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.
CHANGES IN FINANCIAL CONDITION
Net sales were $1,850,249 for the third quarter of fiscal 2001, which ended
March 31, 2001, and were comparable to the sales of the same quarter for the
previous year of $1,858,348(restated due to pooling of interest accounting).
Current year to date sales are $5,761,234, a 14% increase from year to date
sales for the comparable period of fiscal 2000. The Company's software house in
Lahore, Pakistan continued to provide strong sales numbers in the current
quarter. The Company's subsidiary, NetSol USA, also reported a strong third
quarter in sales. 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 for these two subsidiaries due to product maturity
and market demand with several existing customers, Voicestream Wireless,
Daimler-Chrysler Financial Services and Citibank (Pakistan). Effective March 1,
2001, the Company acquired Intereve Corporation, a Silicon Valley IT company
with senior level architects and developers recruited from India. The purchase
price is comprised of cash payouts over several months as certain deliverables
are met. The Company has recognized the sales for the month of March 2001 in the
third quarter as they pertain to Intereve.
The gross profit has remained strong and was $942,019 in the quarter ending
March 31, 2001 and $3,036,392 for the current fiscal year to date. Cost of
revenues for the quarter ending March 31, 2001 was $908,230 and $2,724,842 for
the current fiscal year to date. Gross profit for the current quarter of
%approximately 51% is in line with the current fiscal year to date percentage.
The Company has seen its gross profit percentage decline from approximately 66%
in the comparable nine month period of last year due to market competition and
an increase of direct labor costs. The
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Company is continuing to negotiate better pricing on its new agreements which
provides for higher margins.
Operating expenses were $3,418,137 for the quarter ending March 31, 2001.
This compares with $1,919,625(restated) for the quarter ending March 31,
2000. The Company has divested itself of its German subsidiary, Supernet AG.
The terms of the divestiture call for the Company to pay a one-time fee of
approximately $160,000. The Company has recorded one-time charge to earnings
of approximately $615,000, which includes the one-time fee as well as a
write-off of net assets. As a result of this action, the Company was able to
divest itself of more than $600,000 of liabilities. The formal agreement was
signed on May 1, 2001, and will be closed on May 21. The Company, in
following professional accounting literature, has recorded this divestiture
in the third quarter ended March 31, 2001 as a discontinued operation. The
Company is moving forward on its previoulsy announed intentions to
significantly scale down its Network Solutions Group operations, a subsidiary
in the U.K. This was an acquisition made by NetSol in August 1999, and the
terms and representations surrounding this acquisition are presently being
litigated as disclosed in previous filings. As a result of this scaling down,
the Company is recording a one time non-cash charge to earnings in the third
quarter ended March 31, 2001 of $1,236,593 for impairment losses on purchased
intangible assets. This impairement loss is included in operating expenses
for the quarter and year to date totals. The Company's customer base has
continued to be negatively impacted from the overall economic downturn which
has resulted in making continuing provisions for potential uncollectable
accounts. Operating results for the March 31, 2000 quarter were impacted as
the Company applied pooling of interest accounting rules to its acquisition
of Supernet AG of Germany and Abraxas. Its consolidated statement of
operations includes the operations of both Abraxas and SuperNet AG for
quarters ended March 31, 2001 and March 31, 2000(restated).
Net loss from continuing operations was $2,375,269 for the quarter ended March
31, 2001 as compared to $797,603 (restated) for the quarter ended March 31,
2000. The current year loss from continuing oprations includes a one time
non-cash charge for impairment losses related to purchased intangible assets.
This resulted in a net loss per share from continuing operations, basic and
diluted, of $0.21 for the quarter ended March 31, 2001 as compared with $0.08
(restated) for the quarter ended March 31, 2000. Net loss per share from
discontinued operations was ($.08) for the quarter ended March 31, 2001 and
($.11) for the nine months ended March 31, 2001. Discontinued operations losses
is presented as required for all periods presented.
The Company's cash position was $1,763,559 at March 31, 2001. This is presented
on the financial statements as $1,013,559 as cash and cash equivalents, and a
total $750,000 as certificates of deposit which is included in other assets.
In the fourth quarter, the Company expects to incur costs in connection with
a proxy contest instigated by a group of four dissident shareholders led by
Blue Water Master Fund, L.P.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001 the Company's working capital (current assets less
current liabilities) totaled $2.41 million, a increase from 2.26 million at
December 31, 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, are continuing to expand their
revenue base both by means of IT outsourcing and software development
projects. The Company completed on March 1, 2001, its acquisition of Intereve
Corporation, based in the Silicon Valley. Intereve 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 from Intereve. The majority of the contracts for NetSol eR and
NetSol 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 continues to estimate 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 completed in this quarter a $2 million round of financing
with Deephaven Capital Management ("Deephaven"). 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 continuing to pursue
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. In the opinion of management, the Company believes that the impact
from certain software sales contracts will have a negative 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, along with the financing options
being pursued, cash flows will be sufficient for the foreseeable future to
manage the short term liquidity impact from these specific software
contracts, finance anticipated working capital requirements and fund limited
capital expenditures.
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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.
The Claimants filed its Particulars of Claim on October 2, 2000 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 approximately $27,000
from 4,500 warrants exercised from the IPO in the quarter ended March 31, 2001.
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: May 15, 2001 /s/ Najeeb U. Ghauri
-------------------------------------
NAJEEB U. GHAURI
CEO
/s/ Syed Husain
-------------------------------------
SYED HUSAIN
Chief Financial Officer
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