- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- 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 - ------- 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 - -------- 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 - ------- 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 1 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)
3 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. 6 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 7 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. 8 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. 9 (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