UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
SCHEDULE
14A
(Rule 14a-101)
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities
Exchange
Act of 1934 (Amendment No.)
Filed
by the Registrant þ
Filed
by a Party other than the Registrant o
Check
the appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only
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Definitive
Proxy Statement
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(as
permitted by Rule 14a-6(e)(2))
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Definitive
Additional Materials
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Soliciting
Material Under Rule 14a-12
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NetSol
Technologies, Inc.
(Name
of
Registrant as Specified In Its Charter)
(Name
of
Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
þ
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No
fee required.
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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1)
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Title
of each class of securities to which transaction
applies:
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2)
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Aggregate
number of securities to which transaction applies:
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3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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4)
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Proposed
maximum aggregate value of transaction:
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5)
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Total
fee paid:
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Fee
paid previously with preliminary materials:
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its
filing.
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1)
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Amount
previously paid:
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2)
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Form,
Schedule or Registration Statement No.:
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3)
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Filing
Party:
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4)
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Date
Filed:
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NetSol
Technologies, Inc.
23901
Calabasas Road, Suite 2072
Calabasas,
CA 91302
Phone:
(818) 222-9195
Fax:
(818) 222-9197
September
15, 2006
To
Our
Stockholders:
We
cordially invite you to attend a special meeting of stockholders to be held
at
10:00 a.m. on October 18, 2006 at the offices of NetSol Technologies, Inc.,
23901 Calabasas Road, Suite 2072, Calabasas, CA 91302. The office phone number
is 818-222-9195.
At
the
special meeting, you will be asked to consider and vote upon a proposal, to
approve the full issuance and exercise of: (i) shares of common stock
underlying convertible notes; (ii) shares of common stock underlying shares
of
preferred stock; (iii) shares of common stock as a dividend payable or
redemption under the terms of the preferred stock; (iv) upon exercise of the
warrants granted to Maxim Group, LLC as part of their compensation as placement
agent; and, (v) upon exercise of the warrants all issued as part of a financing
in the amount of $5.5 million (the “Financing”). The financing, consisting of
convertible notes, which are in an aggregate principal amount of $5.5 million
and bear interest at the rate of 12%, were issued on June 15, 2006 and are
due
on June 15, 2007. A detailed discussion of this proposal starts on page 20
of
this proxy.
You
will
also be asked to approve the amendment of the articles of incorporation of
the
Company to permit the board of directors to designate the rights and privileges
of the Company’s preferred stock by resolution as permitted by Nevada Revised
Statutes 78.1955. A detailed discussion of this proposal starts on page 58
of
this proxy.
Additionally,
you will be asked to act on such other business as may properly come before
the
special meeting.
This
is
your opportunity as a shareholder to exercise your vote in the best interests
of
your Company.
Whether
or not you attend the Special meeting, it is important that your shares be
represented and voted at the meeting. Therefore, I urge you to promptly vote
and
submit your proxy card in the postage paid envelope as soon as possible.
Your
participation in the special meeting, via proxy or in person, is important
and
allows you a voice in determining the future of your Company.
Enclosed
is a notice of special meeting and proxy statement containing detailed
information concerning the business to be conducted at the meeting. Whether
or
not you plan to attend the special meeting, we urge you to read this material
carefully. On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the Company. We look forward to
seeing you at the meeting.
Sincerely,
Najeeb
U.
Ghauri Naeem
U.
Ghauri
Chairman
of the
Board
Chief Executive Officer
NOTICE
OF
SPECIAL MEETING OF STOCKHOLDERS
To
be
held October 18, 2006
TO
THE
STOCKHOLDERS OF NETSOL TECHNOLOGIES, INC.
NOTICE
IS
HEREBY GIVEN that a Special Meeting of Stockholders, including any adjournments
or postponements thereof, of NetSol Technologies, Inc. (the "Company"), will
be
held on October 18, 2006 at 10:00 a.m. local time at the offices of the Company
located at 23901 Calabasas Road, Suite 2072, Calabasas, CA 91302 for the
following purposes:
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1. |
To
consider and vote upon a proposal, to approve the full issuance and
exercise of: (i) shares of common stock underlying convertible notes;
(ii) shares of common stock underlying shares of preferred stock;
(iii)
shares of common stock as a dividend payable or redemption under
the terms
of the preferred stock; (iv) shares of common stock upon exercise
of
warrants granted to Maxim Group, LLC as part of their compensation
as
placement agent and, (v) shares of common stock upon exercise of
the
warrants in full without any limitations on the number of shares
to be
issued, all issued as part of a financing in the amount of $5.5 million
(the “Financing”). The financing, consisting of convertible notes, which
are in an aggregate principal amount of $5.5 million and bear interest
at
the rate of 12%, were issued on June 15, 2006 and are due on June
15,
2007;
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2. |
To
consider and vote on the amendment of our articles of incorporation
to
permit the board of directors to designate the rights and privileges
of
the Company’s authorized preferred stock by resolution;
and
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3. |
To
consider such other matters as may properly come before the Special
Meeting.
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The
proceeds of the Financing were used to fund the initial payment of the McCue
Systems, Inc. acquisition; to fund the final cash portion of the payment to
former CQ Systems, Ltd. shareholders as part of the acquisition of CQ Systems,
Ltd. (now NetSol-CQ) by the Company; and, for working capital. The Company
is
not seeking approval of either the McCue Systems, Inc. or CQ Systems, Ltd.
acquisition in this proxy. However, a detailed discussion of McCue Systems,
Inc.
and NetSol-CQ is contained in the proxy beginning on pages 42 and 50
respectively.
In
connection with the Financing, we seek approval from the shareholders of an
issuance of common stock which exceeds 20% of our issued and outstanding common
stock as of May 5, 2006. Should stockholder approval of the issuance of the
shares of common stock upon conversion of the notes and preferred stock and
exercise of the warrants not be obtained, the convertible notes would only
be
converted into and the exercise of warrants would only be permitted to the
extent that such conversion and exercise would not, when aggregated with the
McCue Systems, Inc. transaction, result in an issuance of 20% or more of the
issued and outstanding shares, excluding treasury shares, of common stock as
of
May 5, 2006.
Only
stockholders of record as shown on the books of the Company at the close of
business on September 15, 2006, the record date and time fixed by the Board
of
Directors, will be entitled to vote at the meeting and any adjournment
thereof.
By
order
of the Board of Directors
NetSol
Technologies, Inc.
Naeem
Ghauri
Chief
Executive Officer
September
15, 2006
Calabasas,
California
TO
ASSURE
YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND RETURN YOUR PROXY
IN
THE ENCLOSED ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND IN PERSON.
STOCKHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON
IF THEY DESIRE.
NetSol
Technologies, Inc.
23901
Calabasas Road Suite 2072
Calabasas,
CA 91302
TABLE
OF CONTENTS
PROXY
STATEMENT GENERAL INFORMATION
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8
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Solicitation
of Proxies
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8
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Voting
and Revocation of Proxies
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8
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Voting
Securities and Principal Holders Thereof
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9
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Interests
of Persons in Matters to be Acted Upon
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10
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Voting
at the Meeting
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10
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Returned
Proxy Cards Which Do Not Provide Voting Instructions
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10
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Shares
Held in Street Name
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10
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Changing
Your Vote
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11
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QUESTIONS
AND ANSWERS ABOUT THE MATTERS SUBJECT TO VOTE
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12
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SELECTED
HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
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14
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APPROVAL
TO ISSUE THE AMOUNT OF SHARES OF COMMON STOCK UPON CONVERSION OF
THE PREFERRED
SHARES; AS DIVIDENDS OR REDEMPTION UNDER THE TERMS OF THE PREFERRED
SHARES;
ON EXERCISE OF WARRANTS |
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20
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Introduction
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20
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Description
of the Financing
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20
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Description
of Securities
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22
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The
McCue Acquisition
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23
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The
CQ Acquisition
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25
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Nasdaq
Listing Requirements and the Necessity of Stockholder
Approval
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25
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Required
Vote
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26
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Recommendation
of the Board of Directors
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26
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INFORMATION
ABOUT NETSOL TECHNOLOGIES, INC.
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27
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The
Business
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27
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Legal
Proceedings
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28
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Market
for Registrant’s Common Equity and Related Stockholder
Matters
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28
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Management’s
Discussion and Analysis or Plan of Operations
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29
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Change
in Financial Condition
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33
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Quarter
Ended March 31, 2006 as Compared to Quarter Ended March 31,
2005
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33
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Nine
Month Period Ended March 31, 2006 as Compared to Nine Month Period
ended
March 31, 2005
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36
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Liquidity
and Capital Resources
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38
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The
Year Ended June 30, 2005 as Compared to the Year Ended June 30,
2004
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40
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Liquidity
and Capital Resources
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42
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Dividends
and Redemption
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43
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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43
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INFORMATION
ABOUT MCCUE SYSTEMS, INC.
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43
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The
Business
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43
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Selected
Historical Financial Data
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44
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Management’s
Discussion and Analysis or Plan of Operations
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45
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Change
in Financial Condition
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48
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Three
Months Ended March 31, 2006 as Compared to the Three Months Ended
March
31, 2005
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48
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Liquidity
and Capital Resources
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49
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The
Year Ended December 31, 2005 as Compared to the Year Ended December
31,
2004
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49
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Liquidity
and Capital Resources
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50
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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51
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INFORMATION
ABOUT CQ SYSTEMS, LTD.
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51
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The
Business
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51
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Selected
Historical Financial Data
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51
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Management’s
Discussion and Analysis or Plan of Operations
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53
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Change
in Financial Condition
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56
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Nine
Months Ended December 31, 2004 as Compared to the Nine Months Ended
December 31, 2003 56
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Liquidity
and Capital Resources
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57
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The
Year Ended March 31, 2004 as Compared to the Year Ended March 31,
2003
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57
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Liquidity
and Capital Resources
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58
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
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58
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APPROVAL
TO AMEND THE ARTICLES OF INCORPORATION OF THE COMPANY TO PERMIT
THE
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BOARD
OF DIRECTORS TO DESIGNATE BY RESOLUTION ACCORDING TO NEVADA REVISED
STATUTES
78.1955 THE POWERS, PREFERENCES AND RELATIVE RIGHTS OF PREFERRED
STOCK
AND
QUALITIFCATIONS, LIMITATIONS AND RESTRICTIONS
THEREOF
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59
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INDEX
TO FINANCIAL STATEMENTS
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62
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ANNEXES
A CONVERTIBLE
NOTE AND WARRANT PURCHASE AGREEMENT
B 12%
CONVERTIBLE NOTE
C COMMON
STOCK PURCHASE WARRANT
D INVESTORS
RIGHTS AGREEMENT
E FORM
OF
7% CUMULATIVE CONVERTIBLE PREFERRED STOCK
F
PLACEMENT
AGENT WARRANT
PROXY
STATEMENT GENERAL INFORMATION
SOLICITATION
OF PROXIES
This
Proxy Statement is furnished to holders of the common stock, par value $.001
per
share, of NetSol Technologies, Inc., a Nevada corporation (the "Company"),
in
connection with the solicitation by the Company's Board of Directors of proxies
for use at the Company's Special Meeting of Stockholders (the "Special Meeting")
to be held on October 18,, 2006 at 10:00 a.m. local time at the offices of
the
Company located at 23901 Calabasas Road, Suite 2072, Calabasas, CA 91302. The
purpose of the Special Meeting and the matters to be acted on there are set
forth in the accompanying Notice of Special Meeting of
Stockholders.
The
Special Meeting has been called for the purpose of the following:
1.
To
consider and vote upon a proposal, to the extent required by and for purposes
of
NASD Marketplace Rule 4350(i), to approve the full issuance and exercise of:
(i) shares of common stock underlying convertible notes; (ii) shares of
common stock underlying shares of preferred stock; (iii) shares of common stock
as a dividend payable or redemption under the terms of the preferred stock;
(iv)
shares of common stock upon exercise of the warrants granted to Maxim Group,
LLC
(the “placement agent”) as part of their compensation for acting as the
placement agent and, (v) shares of common stock upon exercise of the warrants
in
full without any limitations on the number of shares to be issued, all issued
as
part of a financing in the amount of $5.5 million (the “Financing”). The
financing, consisting of convertible notes, which are in an aggregate principal
amount of $5.5 million and bear interest at the rate of 12%, were issued on
June
15, 2006 and are due on June 15, 2007.
2.
To
amend the articles of incorporation to permit the board of directors to
designate the rights and privileges of the Company’s authorized preferred stock
pursuant to Nevada Revised Statutes Section 78.1955.
3.
To
consider such other matters as may properly come before the Special
Meeting.
The
board
of directors solicits the accompanying proxy to those stockholders of record
as
of the close of business on September 15, 2006. These materials are expected
to
be first mailed to stockholders on or about September 15, 2006. The cost of
making the solicitation includes the cost of preparing and mailing the Notice
of
Special Meeting, Proxy Statement, proxy card and the payment of charges made
by
brokerage houses and other custodians, nominees and fiduciaries for forwarding
documents to stockholders. In certain instances, directors and officers of
the
Company may make special solicitations of proxies either in person, telephone
or
by mail. Expenses incurred in connection with special solicitations are expected
to be nominal. The Company will bear all expenses incurred in connection with
the solicitation of proxies for the Special Meeting.
VOTING
AND REVOCATION OF PROXIES
A
stockholder giving a proxy on the enclosed form may revoke it at any time prior
to the actual voting at the Special Meeting by filing written notice of the
termination of the appointment with an officer of the Company, by attending
the
Special Meeting and voting in person or by filing a new written appointment
of a
proxy with an officer of the Company. The revocation of a proxy will not affect
any vote taken prior to the revocation. Unless a proxy is revoked or there
is a
direction to abstain on one or more proposals, it will be voted on each proposal
and, if a choice is made with respect to any matter to be acted upon, in
accordance with such choice. If no choice is specified, the proxies intend
to
vote the shares represented thereby to approve Proposals No. 1 and 2 as set
forth in the accompanying Notice of Special Meeting of Stockholders, and in
accordance with their best judgment on any other matters that may properly
come
before the Special Meeting.
VOTING
SECURITIES AND PRINCIPAL HOLDERS THEREOF
As
of
July 6, 2006, there were 16,169,982 shares of common stock issued and
outstanding. Common stock is the only class of outstanding voting securities
as
of that date. Each share of common stock is entitled to one vote.
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 July 6, 2006, by (i) each person who is known to the Company
to
own beneficially more than 5% of the outstanding Common Stock with the address
of each such person, (ii) each of the Company's present directors and officers,
and (iii) all officers and directors as a group:
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Najeeb
Ghauri (3)
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2,412,650
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14.92
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%
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Naeem
Ghauri (3)
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2,261,367
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13.98
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%
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Salim
Ghauri (3)
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2,377,416
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14.70
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%
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Jim
Moody (3)
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183,000
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*
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Eugen
Beckert (3)
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178,900
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*
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Shahid
Javed Burki (3)
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204,000
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*
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Derek
Soper (3)
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243,000
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*
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Patti
McGlasson (3)
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125,000
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*
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Tina
Gilger(3)
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61,731
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*
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Aqeel
Karim Dhedhi (4)
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870,067
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5.38
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%
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The
Tail Wind Fund Ltd.(6)(7)
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1,600,828
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9.90
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%
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All
officers and directors
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as
a group (nine persons)
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8,047,064
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49.76
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%
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*
Less
than one percent
(1)
Except as otherwise indicated, the Company believes that the beneficial owners
of the common stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to
community property laws where applicable. Beneficial ownership is determined
in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
(2)
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of common stock relating to options currently exercisable
or
exercisable within 60 days of July 6, 2006 are
deemed outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of any
other person. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table above have sole voting
and
investment power with respect to all shares shown as beneficially owned by
them.
Includes shares issuable upon exercise of options exercisable within 60 days
as
follows: Mr. Najeeb Ghauri, 1,900,000; Mr. Naeem Ghauri, 1,910,000; Mr. Salim
Ghauri, 1,900,000; Mr. Jim Moody, 150,000; Mr. Eugen Beckert, 135,000; Mr.
Shahid Burki, 150,000; Mr. Derek Soper, 200,000; Ms. Tina Gilger, 60,000; and
Ms. Patti McGlasson, 100,000.
(3)
Address c/o NetSol Technologies, Inc. at 23901 Calabasas Road, Suite 2072,
Calabasas, CA 91302.
(4)
Address: 605 Continental Trade Center, Khaybran-E-Iqbal, Karachi, Pakistan.
(5)
Shares issued and outstanding as of July 6, 2006 were 16,169,982.
(6)
Address: The Bank of Nova Scotia Trust Company (Bahamas) Ltd., Windermere House,
404 East Bay Street, P.O. Box SS-5539, Nassau, Bahamas. Tail Wind Advisory
&
Management Ltd., a UK corporation authorized and regulated by the Financial
Services Authority of Great Britain (“TWAM”), is the investment manager for The
Tail Wind Fund Ltd., and David Crook is the CEO and controlling shareholder
of
TWAM. Each of TWAM and David Crook expressly disclaims any equitable or
beneficial ownership of the shares being referred to hereunder and held by
The
Tail Wind Fund Ltd
(7)
Subject to the Ownership Limitation (defined below), The Tail Wind Fund Ltd.
(“Tail Wind”) would own a total of 2,500,001 shares of Common Stock, including
1,666,667 shares of Common Stock issuable upon conversion of $2,750,000 in
principal amount of the issuer’s 12% Convertible Notes due June 15, 2007
(“Notes”) issued to Tail Wind on June 21, 2006, and (ii) 833,334 shares of
Common Stock issuable upon exercise of Warrants issued to Tail Wind on such
date
(“Warrants”). In accordance with Rule 13d-4 under the Securities Exchange Act of
1934, as amended, because the number of shares of Common Stock into which the
Reporting Person's Notes and Warrants are convertible and exercisable is
limited, pursuant to the terms of such instruments, to that number of shares
of
Common Stock which would result in the Reporting Person having beneficial
ownership of 9.9% of the total issued and outstanding shares of Common Stock
(the "Ownership Limitation"), Tail Wind Fund Ltd. disclaims beneficial ownership
of any and all shares of Common Stock that would cause the Reporting Person's
beneficial ownership to exceed the Ownership Limitation. In accordance with
the
Ownership Limitation, Tail Wind, based upon 16,169,982 shares of common stock
outstanding, beneficially owns 2,500,001 shares of Common Stock and disclaims
beneficial ownership of 899,173 shares
of
Common Stock.
INTERESTS
OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
No
director of executive officer holds a substantial interest, either directly
or
indirectly, in any matter to be acted upon.
VOTING
AT THE MEETING
Only
stockholders of record at the close of business on July 7, 2006 are entitled
to
notice of and to vote at the Special Meeting or any adjournments thereof. Each
share of Common Stock is entitled to one vote on the matters to be presented
at
the Special Meeting.
A
majority of the votes entitled to be cast on matters to be considered at the
Special Meeting, present in person or by proxy, will constitute a quorum at
the
Special Meeting. If a share is represented for any purpose at the Special
Meeting, it is deemed to be present for all other matters. Abstentions and
broker nonvotes will be counted for purposes of determining the presence or
absence of a quorum. "Broker nonvotes" are shares held by brokers or nominees
which are present in person or represented by proxy, but which are not voted
on
a particular matter because instructions have not been received from the
beneficial owner. Under applicable Nevada law, the effect of broker nonvotes
on
a particular matter depends on whether the matter is one as to which the broker
or nominee has discretionary voting authority. Under applicable Nevada law,
as
it applies to the proposals presented to stockholders at this special meeting,
Broker non-votes shall be treated as an abstention and such Broker non-votes
shall be included in the total shares voted for the purpose of quorum
requirements and determining whether a majority of stockholders have approved
the transactions. Treatment of Broker non-votes as an abstentions results in
these votes being treated as “no” votes in so far as a majority of all votes
cast, including broker non-votes must be voted in favor for a proposal to be
approved. A majority of votes in favor must be acquired in order for the
proposals to be approved.
RETURNED
PROXY CARDS WHICH DO NOT PROVIDE VOTING INSTRUCTIONS
Proxies
that are signed and returned will be voted in the manner instructed by a
stockholder. If you sign and return your proxy card with no instructions, the
proxy will be voted "For" with respect to the item set forth in the
Proposal.
SHARES
HELD IN “STREET NAME”
If
your
shares are held in “street name”, your broker can vote your shares only if you
provide instructions on how to vote. You should instruct your broker to vote
your shares in accordance with directions provided by your broker.
CHANGING
YOUR VOTE
You
may
revoke your proxy at any time before the proxy is voted at the Special Meeting.
In order to do this, you must:
-
send us
written notice, stating your desire to revoke your proxy, or
-
send us
a signed proxy that bears a later date than the one you intend to revoke,
or
-
attend
the Special Meeting and vote in person. In this case, you must notify the
Inspector of Elections or Secretary of the Company that you intend to vote
in
person.
A
list of
those stockholders entitled to vote at the Special Meeting will be available
for
a period of ten days prior to the Special Meeting for examination by any
stockholder at the Company's principal executive offices, 23901 Calabasas Road,
Suite 2072, Calabasas, CA 91302, and at the Special Meeting.
QUESTIONS
AND ANSWERS ABOUT THE MATTERS SUBJECT TO VOTE
What
is being voted on?
The
issuance of shares of common stock of the Company upon the conversion notes,
and
upon the conversion of preferred stock into which the convertible notes may
convert, to investors in the Financing; the issuance of shares of common stock
as payment of dividends, at the Company’s discretion, and on redemption under
the anticipated terms of the convertible preferred shares; and, to approve
the
issuance of shares of common stock upon the exercise of warrants in full without
any limitations on the number of shares to be issued, issued to these same
investors. Assuming the stockholders approve this proposal, the Company would
be
required to issue 5,500 shares of Series A 7% Cumulative Convertible Preferred
Stock which, upon issuance, would represent 100% of the issued and outstanding
Preferred Stock of the Company. The Convertible Preferred Stock may be
converted, based on an initial conversion price, into approximately 3,333,333
shares of common stock, which, based on the issued and outstanding shares of
common stock on July 6, 2006, when issued would represent 17.09% of the issued
and outstanding shares of common stock of the Company. Assuming the cumulative
dividend is paid entirely in shares of common stock and that the preferred
shares are converted within one year, the Company estimates that it could issue
251,249 shares of common stock of the Company, representing 1.27% of the issued
and outstanding shares of common stock of the company at July 6, 2006, to the
investors in the Financing as payment of the 7% cumulative dividend. The
Company has also issued warrants to the investors in the Financing to acquire
up
to 1,666,668 shares of common stock, representing, upon issuance and based
on
the issued and outstanding shares of common stock at July 6, 2006 and the
issuance of the common stock into which the preferred stock is convertible,
7.87% of the issued and outstanding shares of common stock of the Company.
The
Company has also issued to the Placement Agent, warrants to acquire up to
266,666 shares of common stock, representing 1.649% of the issued and
outstanding shares of common stock of the company at July 6, 2006. Taking into
account all of the above issuances, the Company would be required to issue
shares of common stock totaling 34.12% of the issued and outstanding shares
of
common stock at July 6, 2006.
The
amendment of our articles of incorporation to permit the board of directors
to
designate the rights and privileges of the Company’s authorized preferred stock
pursuant to Nevada Revised Statutes Section 78.1955.
Why
are we seeking approval for the issuance of the shares of common
stock?
As
a
result of being listed on the Nasdaq Capital Market, issuances of our common
stock are subject to the NASD Marketplace Rules, such as Rule 4350. For example,
under rule 4350(i)(1)(D) stockholder approval must be sought when in connection
with a transaction other than a public offering involving the sale, issuance
or
potential issuance by the issuer of common stock (or securities convertible
into
or exercisable into common stock) equal to 20% or more of the common stock
or
20% or more of the voting power outstanding before the issuance for less than
the greater of book or market value of the stock.
The
terms
of the Financing provide anti-dilution protection to the investors which may
result in common stock being issued to the investors at less than the market
value of the stock on the Financing issuance date. Additionally, the common
stock which would be issued if the Convertible Notes were to be converted into
convertible preferred stock and such preferred stock was converted into common
stock, dividends owed to the preferred stockholders were paid in common stock,
the preferred stock were redeemed by the issuance of common stock and the
warrants were exercised would constitute the issuance of more than 20% of the
common stock issued and outstanding on the Financing date. Further the
percentage of the Financing used to fund the purchase of McCue Systems, Inc.
aggregated using Nasdaq rules with the shares of common stock issued to the
McCue Systems, Inc. shareholders in the acquisition exceeds 20% of the issued
and outstanding shares, excluding treasury stock, on the date in which we
entered into the stock purchase agreement with the McCue Systems, Inc.
shareholders. Accordingly, stockholder approval is required for the issuance
of
shares of common stock contemplated by the Financing. However, the Convertible
Notes are due in one year and bear interest at the rate of 12% per annum. Should
stockholder approval of the common stock issuance not be obtained, we will
pay
the principal and interest on the note per their terms.
Why
are we seeking to amend our articles of incorporation?
Our
articles of incorporation authorize the issuance of up to 5 million shares
of
preferred stock.
In
a
Certificate of Amendment of the Articles of Incorporation of the Company filed
with the Nevada Secretary of State on March 20, 2002, the articles of
incorporation were amended to permit the board of directors to designate by
resolution the voting powers, designations, preferences, limitations,
restrictions and relative rights of the preferred stock.
In
a
Certificate of Amendment of the Articles of Incorporation of the Company filed
with the Nevada Secretary of State on August 12, 2003, filed for the purpose
of
accomplishing a reverse stock split, the provision of Article III of the
Articles of Incorporation providing such powers to the board of directors was
inadvertently omitted.
We
propose to amend the articles of incorporation to return these powers back
to
the board of directors thus permitting the board of directors to designate
by
resolution the voting powers, designations, preferences, limitations,
restrictions and relative rights of the Series A 7% Cumulative Convertible
Preferred Stock contemplated to be issued if shareholder approval of proposal
number one and two is acquired.
SELECTED
HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
We
are
providing the following selected financial information to assist you in
understanding the use of proceeds from the Financing. We derived the historical
information from the audited consolidated financial statements of NetSol
Technologies, Inc and Subsidiaries as of and for the years ended June 30, 2004
and 2005, and from the unaudited consolidated financial statements as of and
for
each of the nine months ended March 31, 2005 and 2006.
The
information is only a summary and should be read in conjunction with each
company’s historical financial statements and related notes contained elsewhere
herein. The historical results included below and elsewhere in this document
are
not indicative of the future performance of NetSol Technologies, Inc. or the
combined company.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
SELECTED
CONDENSED BALANCE SHEET DATA
|
|
|
|
|
|
|
|
(Audited)
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
8,373,861
|
|
$
|
15,783,378
|
|
Property
& equipment, net
|
|
|
5,114,776
|
|
|
6,425,581
|
|
Intangible
assets, net
|
|
|
7,637,397
|
|
|
6,873,237
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
21,126,034
|
|
$
|
29,082,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
4,915,561
|
|
$
|
5,550,884
|
|
Obligations
under capitalized leases,
|
|
|
|
|
|
|
|
less
current maturities
|
|
|
122,426
|
|
|
118,079
|
|
Convertible
debenture
|
|
|
138,175
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,176,162
|
|
|
5,668,963
|
|
Minority
interest
|
|
|
700,320
|
|
|
1,385,010
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
15,249,552
|
|
|
22,028,223
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
21,126,034
|
|
$
|
29,082,196
|
|
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
SELECTED
CONDENSED STATEMENTS OF OPERATION
DATA
|
|
For
the years
|
|
For
the nine months
|
|
|
|
Ended
June 30,
|
|
Ended
March 31,
|
|
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
|
|
(Audited)
|
|
(Unaudited)
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,437,653
|
|
$
|
5,749,062
|
|
$
|
14,040,185
|
|
$
|
7,972,450
|
|
Cost
of Sales
|
|
|
4,754,749
|
|
|
2,699,675
|
|
|
5,962,913
|
|
|
2,943,871
|
|
Gross
Profit
|
|
|
7,682,904
|
|
|
3,049,387
|
|
|
8,077,272
|
|
|
5,028,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
6,618,199
|
|
|
5,757,405
|
|
|
6,848,682
|
|
|
4,153,323
|
|
Income
(loss) from operations
|
|
|
1,064,705
|
|
|
(2,708,018
|
)
|
|
1,228,590
|
|
|
875,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(290,307
|
)
|
|
(142,199
|
)
|
|
(178,117
|
)
|
|
(414,283
|
)
|
Income
(loss) before minority interest
|
|
|
774,398
|
|
|
(2,850,217
|
)
|
|
1,050,473
|
|
|
460,973
|
|
Minority
interest in subsidiary
|
|
|
(111,073
|
)
|
|
273,159
|
|
|
(699,872
|
)
|
|
(15,735
|
)
|
Net
Income (loss)
|
|
$
|
663,325
|
|
$
|
(2,577,058
|
)
|
$
|
350,601
|
|
$
|
445,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
(0.30
|
)
|
$
|
0.02
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
(0.30
|
)
|
$
|
0.02
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,597,625
|
|
|
7,881,554
|
|
|
14,267,690
|
|
|
10,937,910
|
|
Diluted
|
|
|
14,776,323
|
|
|
7,881,554
|
|
|
14,692,917
|
|
|
13,750,981
|
|
SELECTED
PRO-FORMA COMBINED INFORMATION:
The
following selected unaudited Pro-Forma condensed combined Balance Sheet and
Statement of Operations have been derived from the audited consolidated
financial statements of NetSol Technologies, Inc. (“NetSol”) as of and for the
year ending June 30, 2005 and the unaudited consolidated statements of NetSol
Technologies, Inc. (“NetSol”) as of and for the nine months ending March 31,
2006, and the unaudited financial statements of McCue Systems, Incorporated
(a
California corporation) (“McCue Systems”) as of June 30, 2005 and March 31,
2006. The pro-forma Statement of Financial Conditions and the pro-forma
Statements of Operations assumes the acquisition was consummated as of July
1,
the beginning of NetSol Technologies fiscal year.
NETSOL
TECHNOLOGIES, INC. AND MCCUE SYSTEMS, INC.
UNUAUDITED
PRO-FORMA CONDENSED COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
10,133,595
|
|
|
17,673,259
|
|
Property
& equipment, net
|
|
|
5,165,584
|
|
|
6,490,287
|
|
Intangible
assets, net
|
|
|
12,139,573
|
|
|
11,083,978
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
27,438,752
|
|
$
|
35,247,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
7,625,089
|
|
|
7,876,544
|
|
Obligations
under capitalized leases,
|
|
|
|
|
|
|
|
less
current maturities
|
|
|
122,426
|
|
|
118,079
|
|
Notes
payable
|
|
|
2,117,864
|
|
|
2,117,864
|
|
Deferred
liability
|
|
|
313,397
|
|
|
313,397
|
|
Convertible
debenture
|
|
|
138,175
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
10,316,951
|
|
|
10,425,884
|
|
Minority
interest
|
|
|
700,320
|
|
|
1,385,010
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
16,421,481
|
|
|
23,436,631
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
27,438,752
|
|
$
|
35,247,524
|
|
NETSOL
TECHNOLOGIES, INC. AND MCCUE SYSTEMS, INC.
UNUAUDITED
PRO-FORMA CONDENSED
COMBINED
STATEMENTS OF OPERATION
|
|
For
the year
|
|
For
the nine
|
|
|
|
ended
|
|
months
ended
|
|
|
|
June
30, 2005
|
|
March
31, 2006
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
16,853,333
|
|
$
|
18,548,596
|
|
Cost
of revenue
|
|
|
7,063,482
|
|
|
7,862,072
|
|
Gross
profit
|
|
|
9,789,851
|
|
|
10,686,524
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
9,911,339
|
|
|
9,658,121
|
|
Income
(loss) from operations
|
|
|
(121,488
|
)
|
|
1,028,403
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(284,236
|
)
|
|
(120,952
|
)
|
Income
(loss) from continuing operations
|
|
|
(405,724
|
)
|
|
907,451
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
(111,073
|
)
|
|
(699,872
|
)
|
Net
income (loss)
|
|
|
(516,797
|
)
|
|
207,579
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(282,129
|
)
|
|
201,100
|
|
Comprehensive
income (loss)
|
|
$
|
(798,926
|
)
|
$
|
408,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
Weighted
-average number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
13,225,377
|
|
|
15,895,442
|
|
Diluted
|
|
|
16,404,075
|
|
|
16,381,144
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
$
|
0.01
|
|
Diluted
|
|
$
|
(0.03
|
)
|
$
|
0.01
|
|
The
following selected unaudited Pro-Forma condensed combined Balance Sheet and
Statement of Operations have been derived from the audited consolidated
financial statements of NetSol Technologies, Inc. (“NetSol”) as of and for the
year ending June 30, 2004 and the unaudited consolidated statements of NetSol
as
of and for the six months ending December 31, 2004 and the audited financial
statements of CQ Systems Limited (a UK corporation) (“CQ Systems”) as of and for
the year ended March 31, 2004 and the unaudited financial statements of CQ
Systems as of and for the nine months ending December 31, 2004. The unaudited
Pro Forma Statement of Financial Conditions and Statement of Operations reflect
the 100% acquisition of CQ Systems by NetSol under a stock purchase agreement.
The Company has accounted for the acquisition under the purchase method of
accounting for business combinations. The pro-forma Statement of Financial
Conditions assumes the acquisition was consummated as of December 31, 2004,
and
the pro-forma Statements of Operations assumes the acquisition was consummated
as of July 1, 2003, the beginning of NetSol Technologies fiscal
year.
NETSOL
TECHNOLOGIES, INC. AND CQ SYSTEMS LIMITED
UNUAUDITED
PRO-FORMA CONDENSED COMBINED BALANCE SHEETS
|
|
As
of
|
|
As
of
|
|
|
|
June
30, 2004
|
|
December
31, 2004
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
5,193,978
|
|
$
|
6,855,422
|
|
Property
& equipment, net
|
|
|
4,464,097
|
|
|
4,615,834
|
|
Intangible
assets, net
|
|
|
7,725,726
|
|
|
7,510,838
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
17,383,801
|
|
$
|
18,982,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
4,751,718
|
|
$
|
4,040,534
|
|
Obligations
under capitalized leases,
|
|
|
|
|
|
|
|
less
current maturities
|
|
|
98,028
|
|
|
181,713
|
|
Notes
payable
|
|
|
89,656
|
|
|
-
|
|
Deferred
liability
|
|
|
2,052,254
|
|
|
1,886,587
|
|
Convertible
debenture
|
|
|
985,243
|
|
|
130,292
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
7,976,899
|
|
|
6,239,126
|
|
Minority
interest
|
|
|
410,728
|
|
|
99,752
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
8,996,174
|
|
|
12,643,216
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
17,383,801
|
|
$
|
18,982,094
|
|
NETSOL
TECHNOLOGIES, INC. AND CQ SYSTEMS LIMITED
UNUAUDITED
PRO-FORMA CONDENSED
COMBINED
STATEMENTS OF OPERATION
|
|
For
the year
|
|
For
the six
|
|
|
|
ended
|
|
months
ended
|
|
|
|
June
30, 2004
|
|
December
31, 2004
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
10,389,715
|
|
$
|
7,266,798
|
|
Cost
of revenue
|
|
|
4,533,669
|
|
|
3,151,661
|
|
Gross
profit
|
|
|
5,856,046
|
|
|
4,115,137
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
8,354,927
|
|
|
3,705,427
|
|
Income
(loss) from operations
|
|
|
(2,498,881
|
)
|
|
409,710
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(357,018
|
)
|
|
(348,176
|
)
|
Income
(loss) from continuing operations
|
|
|
(2,855,899
|
)
|
|
61,534
|
|
Minority
interest in subsidiary
|
|
|
273,159
|
|
|
14,259
|
|
Net
income (loss)
|
|
|
(2,582,740
|
)
|
|
75,793
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(277,022
|
)
|
|
(269,044
|
)
|
Comprehensive
income (loss)
|
|
$
|
(2,859,762
|
)
|
$
|
(193,251
|
)
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
-average number of
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
8,663,518
|
|
|
10,855,918
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share
|
|
$
|
(0.30
|
)
|
$
|
0.01
|
|
(Proposal
No. One)
APPROVAL
TO ISSUE THE AMOUNT OF SHARES OF COMMON STOCK UPON CONVERSION OF THE PREFERRED
SHARES; AS DIVIDENDS OR REDEMPTION UNDER THE TERMS OF THE PREFERRED SHARES;
ON
EXERCISE OF WARRANTS.
The
discussion in this proxy statement of the terms of the financing dated June
15,
2006, by and between the Company and the investors is contained in the stock
purchase agreement, the convertible note, the warrant, the investor rights
agreement and the certificate of designation (collectively referred to as the
“Financing Documents”). A copy of the form of the Financing Documents is
attached as Annex A-E to this proxy statement and is incorporated in this proxy
statement by reference. To assist you with your understanding of the Financing’s
affects on the Company, we have included, after the Description of the
Financing, a discussion of NetSol’s business including but not limited to
NetSol’s financial statements for the year ended June 30, 2005 and the quarter
ended March 31, 2006, a discussion of McCue’s business and financial statements,
including pro forma financial information and a discussion of NetSol-CQ’s
business and financial statements, including pro forma financial
information.
Introduction
The
purpose of Proposal 1 is to obtain the stockholder approval necessary under
applicable Nasdaq Stock Market rules to allow for the full issuance and exercise
of: (i) shares of Common Stock underlying Convertible Notes; (ii)
underlying shares of preferred stock; (iii) as dividends and/or redemption
under
the terms of the preferred shares; and, (iv) upon exercise of the Warrants
issued by the Company to the investors in the Financing. In the event
that stockholder approval of this proposal is not acquired, the investors in
the
Financing may convert that portion of the Convertible Note and exercise that
portion of the Warrants that when issued will not result in a violation of
NASD
Marketplace rules. Additionally, if stockholder approval of this proposal is
not
acquired, the Company will pay the principal and interest due under the
Convertible Notes according to its terms.
Description
of the Financing
On
June
15, 2006, the Company entered into an agreement with 5 accredited investors
whereby the Company issued 5 convertible notes for an aggregate principal value
of $5,500,000. These notes bear interest at the rate of 12% per annum and are
due in full one year from the issuance date or on June 15, 2007 (the
“Financing”). In connection with the Financing, the Company entered into the
following documents: A Convertible Note and Warrant Purchase Agreement (the
“SPA”)(Attached to this proxy statement as Annex A), 12% Convertible Notes (the
“Convertible Notes”)(Attached to this proxy statement as Annex B), Common Stock
Purchase Warrant (the “Warrants”)(Attached to this proxy statement as Annex C),
Investor Rights Agreement (the “IRA”)(Attached to this proxy statement as Annex
D) and agreed to a form of 7% Cumulative Convertible Preferred Stock (the
“Preferred Stock”)(Attached to this proxy statement as Annex E) and, the
Placement Agent Warrant Agreement (the “Placement Agent Warrant)(Attached to
this proxy statement as Annex F).
The
proceeds of the Financing are being used by the Company to: (i) pay the initial
cash consideration due to McCue shareholders as part of the acquisition of
McCue
Systems, Inc. by the Company; (ii) pay the final cash consideration due to
former CQ Systems Inc. shareholders as part of the acquisition of CQ Systems,
Ltd. (now NetSol-CQ); and, (iii) as working capital. The initial cash
consideration due to McCue shareholders is $2,117,864 and represents 38.51%
of
the total proceeds raised. The final cash consideration due to former CQ
Systems, Inc. shareholders is £1,064,369 (which represents $1,936,200.17 at the
exchange rate of British pounds sterling into U.S. Dollars at June 28, 2006).
The CQ payment represents 35.20% of the total funds raised in the Financing.
The
remaining funds are being used to pay fees due under the terms of the Financing
and as working capital.
Pursuant
to the terms of the SPA, each purchaser received a Convertible Note in the
amount of their investment and a Warrant in an amount equal to 50% of the
aggregate principal value of the Notes divided by the conversion value
(currently $1.65 per share). Based on an aggregate principal value of
$5,500,000, the investors were entitled to Warrants to acquire up to 1,666,667
shares of common stock at an exercise price per warrant of $2.00. The Warrants
may be exercised at any time, to the extent that such conversion does not
violate Nasdaq Market Place rules, and in full at such time after our
stockholders approve the issuance of shares underlying such warrants until
five
years from the issuance date of the warrants, or June 15, 2011.
As
part
of the consideration paid for its services in facilitating the Financing, Maxim
Group, LLC (the “Placement Agent”) received warrants to acquire up to 266,666
shares of common stock of the Company at the exercise price of $1.65 per share.
Such warrants do not contain anti-dilution protection. However, the warrants
may
be exercised at any time, to the extent that such conversion does not violate
Nasdaq Market Place rules, and in full at such time after our stockholders
approve the issuance of shares underlying such warrants until two years from
the
issuance date of the warrants or June 20, 2008.
The
Convertible Notes may immediately convert into shares of common stock of the
Company at the conversion value (initially set at one share per $1.65 of
principal dollar) to the extent that such conversion does not violate Nasdaq
Market Place rules. To date, no shares of common stock have been issued to
the
investors in the Financing. Also, under the terms of the Financing, the
Convertible Notes will convert into shares of Preferred Stock upon the approval
of this proposal by the stockholders.
If
stockholder approval is not acquired, quarterly interest payments of $166,665
would be due with a final principal payment of $5,500,000 on June 15, 2007.
If
quarterly interest payments were not made, and instead was compounded until
the
principal due date, a payment of $6,197,538 would be due on June 15, 2007.
The
Company has issued guidance assuming revenues of $30,000,000 for the fiscal
year
ending June 30, 2007. Assuming this guidance is realized and that expenses
and
other costs remain consistent, we would anticipate having sufficient cash on
hand to meet the principal and interest obligation according to the terms at
June 30, 2007. Should there by any short fall, we would be able to meet the
obligation by using available credit facilities in the United Kingdom and
Pakistan without any liquidity concerns for the Company.
The
Preferred Stock (which certificate of designation is attached to Annex E and
which will be filed with the Nevada Secretary of State only upon approval of
the
Proposals set forth in this Proxy) are convertible into shares of common stock
at such time and at such value as is set forth in the Certificate of
Designation. The initial conversion value shall be $1.65. The conversion value
is subject to adjustment as set forth in the Certificate of Designation. The
holders of the Preferred Stock are entitled to receive cumulative dividends
at
the rate of 7% per annum from the date of issuance of each share of preferred
stock until paid. The dividends may be paid, at the Company’s option, in cash or
in shares of common stock in arrears on the first business day of each calendar
quarter of each year. The Company may force a conversion of the Preferred Stock
in the event that the market price of the Company’s common stock is greater than
200% of the conversion value. If any shares of the Preferred Stock remain
outstanding on June 15, 2009, the Company shall redeem such shares for an amount
in cash equal to the liquidation preference plus all accrued but unpaid
dividends. Anti-dilution protection is afforded to the holders by providing
for
an adjustment of the conversion price in certain circumstances. The conversion
price is adjusted for dividends subdivisions, combinations, distributions and
issuances of shares, or securities convertible into shares, of common stock
of
the Company issued at an effective
per share selling price which is the less than the greater of the fair market
price or the conversion value as of the issuance date. If the issued value
is
less than the greater of the fair market price or the conversion value, then
a
new conversion value is reached by multiplying the conversion value then in
effect by a fraction of the number of shares of common stock outstanding
immediately prior to the issuance plus the number of shares issued at the new
issuance price and the number of shares issued and outstanding immediately
after
such date. By way of example only, let’s say that the Company issues 100,000
shares at $1.50, a number which is less than the initial conversion value of
$1.65. Let’s also say for purposes of this example only that prior to this
issuance there were 16,100,000 shares of common stock of the Company issued
and
outstanding. The initial conversion value would be adjusted by multiplying
$1.65
by .997568 (the fraction 16,100,000 plus 60,606 (the number of shares that
$100,000 would purchase at the initial conversion price of $1.65), or 16,60,606,
divided by 16,200,000 (the number of shares issued and outstanding after the
issuance). This example results in a reduction of the conversion value to
$1.6459. No adjustment occurs for any issuance or sales outstanding prior to
the
Financing, or to any officer, director or employee of the Company pursuant
to a
bona fide option or equity incentive plan duly adopted by the Company.
The
Preferred Stock bears voting rights in an amount equal to the conversion value
of the preferred stock into common stock, without giving effect to any
anti-dilution provisions of the Preferred Stock. Conversion of the Preferred
Stock is subject to beneficial ownership caps of from 4.9% to 9.9% of the total
number of shares of common stock of the Company then issued and outstanding.
The
IRA
requires the Company to register, on a registration statement to be filed with
the SEC within 8 business days of the special shareholders’ meeting, such number
of shares of common stock into which the Preferred Stock is convertible, such
number of shares of that represent 150% of the shares of common stock for
issuance upon the conversion of the preferred stock or notes, as the case may
be
and 100% of the shares of common stock for issuance upon the exercise of the
warrants. The IRA requires the registration statement to be effective within
120
days of the closing of the Financing. Should the registration statement not
be
effective by that date or should the registration statement not be filed within
8 business days of the special shareholders’ meeting, each holder shall be
entitled to cash compensation equal to 1% of principal value of the note for
every 30 days of non-compliance (or a proportionally smaller amount if less
than
30 days).
The
issuance of shares of common stock of the Company upon the conversion notes,
and
upon the conversion of preferred stock into which the convertible notes may
convert, to investors in the Financing; the issuance of shares of common stock
as payment of dividends, at the Company’s discretion, and on redemption under
the anticipated terms of the convertible preferred shares; and, to approve
the
issuance of shares of common stock upon the exercise of warrants in full without
any limitations on the number of shares to be issued, issued to these same
investors. Assuming the stockholders approve this proposal, the Company would
be
required to issue 5,500 shares of Series A 7% Cumulative Convertible Preferred
Stock which, upon issuance, would represent 100% of the issued and outstanding
Preferred Stock of the Company. The Convertible Preferred Stock may be
converted, based on an initial conversion price, into approximately 3,333,333
shares of common stock, which, based on the issued and outstanding shares of
common stock on July 6, 2006, when issued would represent 17.09% of the issued
and outstanding shares of common stock of the Company. Assuming the cumulative
dividend is paid entirely in shares of common stock and that the preferred
shares are converted within one year, the Company estimates that it could issue
251,249 shares of common stock of the Company, representing 1.27% of the issued
and outstanding shares of common stock of the company at July 6, 2006, to the
investors in the Financing as payment of the 7% cumulative dividend. The
Company has also issued warrants to the investors in the Financing to acquire
up
to 1,666,668 shares of common stock, representing, upon issuance and based
on
the issued and outstanding shares of common stock at July 6, 2006 and the
issuance of the common stock into which the preferred stock is convertible,
7.87% of the issued and outstanding shares of common stock of the Company.
The
Company has also issued to the Placement Agent, warrants to acquire up to
266,666 shares of common stock, representing 1.649% of the issued and
outstanding shares of common stock of the company at July 6, 2006. Taking into
account all of the above issuances, the Company would be required to issue
shares of common stock totaling 34.12% of the issued and outstanding shares
of
common stock at July 6, 2006.
Description
of Securities
The
Convertible Notes may convert into our common stock, par value $0.001 per share.
We only have one class of common stock. Our capital stock consists of 45,000,000
shares of common stock, par value $.001 per share and 5,000,000 shares of
preferred stock, $.001 par value. Each share of common stock is entitled to
one
vote at annual or special stockholders meetings.
The
Convertible Notes will convert into the Preferred Stock following stockholder
approval. No shares of preferred stock have been issued. We are seeking your
approval to amend the articles of incorporation to permit the board of directors
to designate the rights and privileges of the Preferred Stock. The Preferred
Stock (which certificate of designation is attached to Annex E and which will
be
filed with the Nevada Secretary of State only upon approval of the proposals
set
forth in this Proxy) are convertible into shares of common stock at such time
and at such value as is set forth in the Certificate of Designation. The initial
conversion value shall be $1.65. The conversion value is subject to adjustment
as set forth in the Certificate of Designation. The holders of the Preferred
Stock are entitled to receive cumulative dividends at the rate of 7% per annum
from the date of issuance of each share until paid. The dividends may be paid,
at the Company’s option, in cash or in shares of common stock in arrears on the
first business day of each calendar quarter of each year. The Company may force
a conversion of the Preferred Stock in the event that the market price of the
Company’s common stock is greater than 200% of the conversion value. If any
shares of the Preferred Stock remain outstanding on June 15, 2009, the Company
shall redeem such shares for an amount in cash equal to the liquidation
preference plus all accrued but unpaid dividends. Anti-dilution protection
is
afforded to the holders by providing for an adjustment of the conversion price
in certain circumstances as is set forth in the Certificate of Designation.
The
conversion price is adjusted for dividends subdivisions, combinations,
distributions and issuances of shares, or securities convertible into shares,
of
common stock of the Company issued at an effective
per share selling price which is the less than the greater of the fair market
price or the conversion value as of the issuance date. If the issued value
is
less than the greater of the fair market price or the conversion value, then
a
new conversion value is reached by multiplying the conversion value then in
effect by a fraction of the number of shares of common stock outstanding
immediately prior to the issuance plus the number of shares issued at the new
issuance price and the number of shares issued and outstanding immediately
after
such date. By way of example only, let’s say that the Company issues 100,000
shares at $1.50, a number which is less than the initial conversion value of
$1.65. Let’s also say for purposes of this example only that prior to this
issuance there were 16,100,000 shares of common stock of the Company issued
and
outstanding. The initial conversion value would be adjusted by multiplying
$1.65
by .997568 (the fraction 16,100,000 plus 60,606 (the number of shares that
$100,000 would purchase at the initial conversion price of $1.65), or
16,160,606, divided by 16,200,000 (the number of shares issued and outstanding
after the issuance). This example results in a reduction of the conversion
value
to $1.6459. No adjustment occurs for any issuance or sales outstanding prior
to
the Financing, or to any officer, director or employee of the Company pursuant
to a bona fide option or equity incentive plan duly adopted by the Company.
The
Preferred Stock bears voting rights in an amount equal to the conversion value
of the preferred stock into common stock, without giving effect to any
anti-dilution provisions of the Preferred Stock. Conversion of the Preferred
Stock is subject to beneficial ownership caps of from 4.9% to 9.9% of the total
number of shares of common stock of the Company then issued and
outstanding.
The
terms
of the warrant agreements permit exercise for a period of five years and contain
standard weighted average anti-dilution protections. The anti-dilution
protections contained in the warrant mirror those provided in the Preferred
Stock. The terms of the IRA requires that shares of common stock underlying
the
warrants be registered for resale with the SEC. Should the Company fail to
register the shares of common stock by November 1, 2006, the investors in the
Financing may require the Company to redeem the warrants which can not be
exercised because of Nasdaq Marketplace rules. The redemption price is equal
to
the value of such warrants being redeemed as determined by using the
Black-Scholes option pricing formula on Bloomberg. As the exercise price is $2.00 per share, the Black-Scholes option pricing
formula would have to exceed $2.00 in order to require any cash outlay for
redemption by the Company. Even at our highest per share market price in recent
days of $2.11 the Black-Scholes pricing formula results in an option pricing of
$1.94. At $1.94, the warrants have no value and accordingly, the Company would
have no obligations to pay any cash if redemption is requested.
The
terms
of the Placement Agent warrant agreement permit exercise for a period of two
years, and does not contain standard weighted average anti-dilution protections.
As with the other securities issued in the Financing, the Placement Agent may
only exercise such portion of the warrants which would not result in a violation
of Nasdaq Market Place Rules. The exercise price is $1.65 per
share.
On
May 6,
2006, the Company entered into an agreement to acquire all of the issued and
outstanding shares of common stock of McCue Systems, Inc., a California
corporation located at 111 Anza Blvd., Suite 310, Burlingame, California 94010;
telephone number is (650) 348-0650. McCue Systems, Inc. has over 30 years of
experience in developing business solutions for the equipment and vehicle
leasing industry as a provider of lease/loan portfolio management software
for
banks, leasing companies and manufacturers. Its flagship product, LeasePak,
simplifies lease/loan administration and asset management by accurately tracking
leases, loans and equipment from origination through end-of-term and
disposition.
McCue
Systems provides the leasing technology industry in the development of
Web-enabled and Web-based tools to deliver superior customer service, reduce
operating costs, streamline the lease management lifecycle, and support
collaboration with origination channel and asset partners. LeasePak can be
configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and
Sybase users. And for scalability, McCue Systems offers the LeasePak Bronze,
Silver and Gold Editions for systems and portfolios of virtually all sizes
and
complexities. McCue Systems’ solutions provide the equipment and vehicle leasing
infrastructure at leading Fortune 500 banks and manufacturers, as well as for
some of the industry’s leading independent lessors, including Cisco, Hyundai, JP
Morgan/Chase, ORIX, and Volkswagen Credit.
With
common customers and common goals, we believe the acquisition of McCue provides
a complimentary North American presence to our global offering of software
and
services to the lease and finance industry.
The
stock
purchase agreement was filed as part of our current report on form 8-K filed
on
May 9, 2006. Pursuant to the terms of the stock purchase agreement, as
consideration for the shares of McCue Systems, Inc., we shall pay the
following:
(a)
an
amount equal to 50% of McCue’s total revenue for the twelve months ending
December 31, 2005, after an adjustment, if necessary, for any revenue occurring
outside McCue’s ordinary scope of operations, multiplied by 1.5 of which 50%
shall be paid in shares of restricted common stock of NetSol at the 30 day
volume weighted average price (“VWAP”) for each of the 30 trading days prior to
the execution of the Stock Purchase Agreement or at the VWAP for each of the
30
trading days prior to November 30, 2005 whichever is greater. VWAP shall be
calculated by taking the closing price of NetSol’s common stock as traded on the
NASDAQ Small Cap Market under the symbol NTWK (“NetSol Shares”) for each of the
30 trading days used in the VWAP calculation multiplied by the daily volume
for
each of the 30 trading days used in the VWAP calculation, the product of the
preceding calculation is divided by 30 and then divided by the average of the
daily volume for each of the 30 trading days used in the VWAP calculation and
50% payable in U.S. Dollars payable at Closing;
(b)
an
amount equal to 25% of McCue’s total revenue for the twelve months ending
December 31, 2006 after an adjustment for Extraordinary Revenue multiplied
by
1.5 of which 50% is payable in cash and 50% is payable in shares of restricted
common stock of NetSol payable by June 30, 2007; and,
(c)
an
amount equal to 25% of McCue’s total revenue for the twelve months ending
December 31, 2007 after an adjustment for Extraordinary Revenue multiplied
by
1.5 of which 50% is payable in cash and 50% is payable in shares of restricted
common stock of NetSol payable by June 30, 2008.
Under
no
circumstances shall the total number of shares of common stock issued to the
McCue Shareholders or to others as part of the cash portion of the consideration
exceed 19.9% of the issued and outstanding shares of common stock, less treasury
shares, of the Company at May 6, 2006.
McCue’s
total revenues for December 31, 2005 were $5,647,637. Multiplying that total
by
the multiple of 1.5 results in total consideration of $8,471,456 of which 50%
was paid at closing on June 30, 2006, or $4,235,728. Of this consideration,
$2,117,864 is payable in cash and $2,117,864 is payable in restricted shares
of
common stock of the Company. The price per share was determined based on the
VWAP calculations set forth above to be $2.21 per share, resulting in a total
of
958,213.5 shares being due at closing.
The
next
payment is due on June 30, 2007 and is based on the McCue revenue for the year
ending December 31, 2006. The final payment is due on June 30, 2008 and is
based
on the McCue revenue for the year ending December 31, 2007. Assuming that the
revenues remain constant over the next two years, the Company would issue as
consideration an additional 958,213.5 shares for a total shares issuance of
1,916,427. While the number of shares issuable to McCue may increase or decrease
over the pay-out schedule, the stock purchase agreement contains a provision
which prohibits the issuance of any shares in excess of 19.9% of the issued
and
outstanding shares as of May 5, 2006. Excess consideration will be paid in
cash.
As
of May
5, 2006, there were 15,148,292 shares of common stock of the Company issued
and
outstanding, less treasury shares. Accordingly, the current calculation of
shares to be issued to McCue shareholders constitute 12.65% of the issued and
outstanding shares at that date.
In
accordance with Nasdaq Stock Market rules, the aggregate number of shares of
Common Stock issued or issuable by the Company: (i) in the McCue
transaction and (ii) upon conversion of that portion of the Financing
attributable to the McCue transaction (collectively, the “Aggregated Shares”),
shall not exceed 19.99% of the outstanding shares of Common Stock as of
May 5, 2006 (the “Maximum Common Stock Issuance”), unless the issuance of
that number of Aggregated Shares that would result in the issuance of an amount
in excess of the Maximum Common Stock Issuance (the “Overage Amount”) shall
first be approved by the Company’s stockholders.
The
CQ Systems Ltd. Acquisition
On
January 19, 2005, the Company entered into a Share Purchase Agreement whereby
the Company agreed to acquire 100% of the issued and outstanding shares of
CQ
Systems Ltd., a company organized under the laws of England and Wales (“CQ”),
now NetSolCQ Ltd. (the “CQ SPA”). Established in 1986 as CQ Systems Ltd., and
now part of the NetSol Technologies, Inc. group, NetSolCQ provides software
and
services to the financial services industry. NetSolCQ is a provider of software
solutions to the asset, motor, consumer, wholesale and premium finance sectors
with 75 banking, independent and captive finance house clients in the UK,
Europe, Africa and Asia.
According
to the terms of the Share Purchase Agreement, the Company acquired 100% of
the
issued and outstanding shares of CQ from CQ’s former shareholders, whose
identity is set forth in the CQ SPA (the “CQ Shareholders”) at the completion
date in exchange for a purchase price consisting of: a) 50.1% of CQ’s total
gross revenue for the twelve month period ending 31st
of
March, 2005 after an adjustment for any extraordinary revenue, i.e. non-trading
revenue (“LTM Revenue”) multiplied by 1.3 payable: (i) 50% in shares of
restricted common stock of the Company at a per share cost basis of $2.313
and
as adjusted by the exchange rate of U.S. Dollar to British Pound (at the spot
rate for the purchase of sterling with U.S. dollars certified by NatWest Bank
plc as prevailing at or about 11:00 a.m.) on January 19, 2005 and, (ii) 50%
in
cash; and b) 49.9% of CQ’s LTM Revenue for the period ending 31st
March
2006 multiplied by 1.3 payable, at the Company’s discretion: (i) wholly in cash;
or (ii) on the same basis and on the same terms as the initial payment provided,
however that the cost basis of the Company’s common stock shall be based on the
20 day volume weighted average of the Company’s shares of common stock as traded
on NASDAQ 20 days prior to March 31, 2006 and, provided that under no
circumstances shall the total number of shares of common stock issued to the
CQ
Shareholders exceed 19% of the issued and outstanding shares of common stock,
less treasury shares, of the Company at January 19, 2005. It was the intention
of the Company, when executing the CQ SPA to pay the cash portion of the
consideration by incurring short term debt. Short term debt was used to finance
the initial cash payment. When the final cash consideration was due in June
2006, approximately 15 months after the initial closing, the Company determined
that the terms of the Convertible Notes were better terms to finance the final
cash payment.
The
acquisition closed on February 21, 2005 based on March 31, 2004 financial
statements of CQ Systems Ltd. with the payment of approximately $1.7 million
in
cash and 675,292 shares of Company common stock based on a $2.46 per share
cost
basis. The final share consideration of 884,536 shares of common stock of NetSol
was issued on June 2, 2006. The final cash consideration due to former CQ
Systems, Inc. shareholders was £1,064,369 (which represents $1,966,954 at the
exchange rate of $1.848). The CQ payment represents 35.20% of the total funds
raised in the Financing.
With
common customers and common goals, we believe the acquisition of CQ Systems
has
provided a complimentary European presence to our global offering of software
and services to the lease and finance industry.
The
CQ
SPA and related financial information was filed as part of our current report
and amendments thereto on form 8-K filed on October 3, 2005 and January 25,
2005.
Nasdaq
Listing Requirements and the Necessity of Stockholder Approval
The
terms
of the Financing provide anti-dilution protection to the investors which may
result common stock being issued to the investors at less than the market value
of the stock on the Financing issuance date. Additionally, the common stock
which would be issued if the Convertible Notes were to be converted into the
Preferred Stock and the Preferred Stock was converted into common stock,
dividends owed to the preferred stockholders were paid in common stock, the
preferred stock were redeemed by the issuance of common stock and the Warrants
were exercised would constitute the issuance of more than 20% of the common
stock issued and outstanding on the Financing date. Further the percentage
of
the Financing used to fund the purchase of McCue Systems, Inc. aggregated using
Nasdaq rules with the shares of common stock issued to the McCue Systems, Inc.
shareholders in the acquisition exceeds 20% of the issued and outstanding
shares, excluding treasury stock, on the date in which we entered into the
stock
purchase agreement with the McCue Systems, Inc. shareholders. Accordingly,
stockholder approval is required for the issuance of shares of common stock
contemplated by the Financing. However, the Convertible Notes are due in one
year and bear interest at the rate of 12% per annum. Should stockholder approval
of the common stock issuance not be obtained, we will pay the principal and
interest on the note per their terms.
As
of May
5, 2006, there were 15,148,292 shares of common stock of the Company issued
and
outstanding, less treasury shares. Accordingly, the current estimate of the
number of shares to be issued to McCue shareholders constitutes 12.65% of the
issued and outstanding shares at May 5, 2006.
Approximately
38.51% of the funds raised in the Financing, specifically $2,117,864, are being
used to pay the initial cash portion of the McCue acquisition. The notes are
convertible into preferred shares which convert into common stock at the per
share price of $1.65 per share. The certificate of designation of the Preferred
Stock provides a 7% dividend. If the entire cash portion of the McCue
acquisition were to be converted into common stock, the number of shares being
issued at $1.65 per share would be equal to 1,283,554 shares. As part of the
financing, warrants to acquire shares of common stock at an exercise price
of
$2.00 per share were issued. 38.51% of the warrants could be exercised to
acquire 641,833 shares of common stock. Assuming that the stockholders approval
of the common stock related to the Convertible Notes, we would issue
approximately 3,841,814 shares of common stock related to the McCue acquisition.
This number represents 25.36% of the issued and outstanding shares, less
treasury stock, as of May 5, 2006. Assuming that the Nasdaq Stock Market Staff
will aggregate the shares of common stock to be issued to former McCue Systems,
Inc. shareholders together with the common stock to be issued upon conversion
of
that portion of the Convertible Notes and Warrants attributable to the McCue
transaction, (a total potential of 3,841,814) as having been issued as part
of
the same transaction, such amount is in excess of 20% of the outstanding shares
of Common Stock on May 5, 2006.
We
are
also assuming that the Nasdaq Staff shall further take the position that, as
a
result of the weighted average anti-dilution protection afforded to the
investors under the Financing, there is a potential that shares of common stock
into which the Convertible Notes could convert and the Warrants could be
exercised could be issued at less than the market value of the Common Stock
on
June 15, 2006 and, therefore, the Nasdaq 20% Financing Rule is implicated.
The
Company’s stockholders are being asked to approve the issuance to the investors
in the Financing of the allow for the full issuance and exercise of:
(i) shares of Common Stock underlying Convertible Notes; (ii) of shares of
common stock underlying shares of Preferred Stock; (iii) as dividends and/or
redemption under the terms of the Preferred Stock; and, (iv) upon exercise
of
the Warrants issued by the Company to the investors in the Financing.
Required
Vote
The
affirmative vote of a majority of the issued and outstanding shares of the
Common Stock entitled to vote thereon is necessary for approval of the issuance
of: (i) shares of Common Stock underlying Convertible Notes; (ii) shares of
Common Stock underlying shares of Preferred Stock; (iii) as dividends and/or
redemption under the terms of the preferred shares; and, (iv) upon exercise
of
the Warrants issued by the Company to the investors in the Financing.
Recommendation
of the Board of Directors
THE
BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE ISSUANCE
OF SHARES OF COMMON STOCK UPON CONVERSION OF THE PREFERRED SHARES; AS DIVIDENDS
OR REDEMPTION UNDER THE TERMS OF THE PREFERRED SHARES; AND, ON EXERCISE OF
THE
WARRANTS.
INFORMATION
ABOUT NETSOL TECHNOLOGIES, INC.
NetSol
Technologies, Inc. ("NetSol" or the "Company") is an end-to-end information
technology ("IT") and business consulting services provider for the lease and
finance, banking and financial services industries. Since it was founded in
1997, the Company has developed enterprise solutions that help clients use
IT
more efficiently in order to improve their operations and profitability and
to
achieve business results. The Company’s focus has remained the lease and
finance, banking and financial services industries. The Company operates on
a
global basis with locations in China, Europe, East Asia and the U.S. By
utilizing its worldwide resources, the Company believes it has been able to
deliver high quality, cost-effective IT products and IT services. The Company’s
subsidiary, NetSol Technologies Pvt. Ltd. ("NetSol PK") develops the majority
of
the software for the Company. NetSol PK was the first software company in
Pakistan in 1998 to achieve the ISO 9001 accreditation and was again the first
software company in Pakistan to obtain Carnegie Mellon’s Software Engineering
Institute (“SEI”) Capable Maturity Model (“CMM”) Level 4 assessment in 2004
Level 5 assessment in 2006.
NetSol
offers a broad spectrum of IT products and IT services which management believes
deliver a high return on investment for its customers. NetSol has nearly
perfected its delivery capabilities by continuously investing in maturing its
software development and Quality Assurance (“QA”) processes. NetSol believes its
key competitive advantage is its ability to build high quality enterprise
applications using its offshore development facility in Lahore, Pakistan. A
major portion of NetSol’s revenues are derived from exports in general and
LeaseSoft in particular. The use of the facility in Pakistan as the basis for
software development, configuration and professional services represents a
cost-effective and economical cost arbitrage model that is based on the globally
acclaimed advantages of outsourcing and offshore development. NetSol management
believes that the use of this model will only further benefit the Company in
its
penetration of European, developed and developing country markets.
NetSol
Properties
The
Company’s headquarters have been located at 23901 Calabasas Road, Suite 2072,
Calabasas, CA 91302 since 2003. Located in approximately 1,919 rentable square
feet, with a monthly rent of $4,317. The lease is a one-year lease expiring
in
December 2006.
Other
leased properties as of the date of this report are as follows:
Location
|
|
Approximate
Square Feet
|
|
Purpose/Use
|
|
Monthly
Rental Expense
|
Australia
|
|
1,140
|
|
Computer
and General Office
|
|
$1,380
|
Beijing
|
|
188
|
|
General
Office
|
|
$1,900
|
Burlingame(McCue
Systems)
|
|
9,554
|
|
Computer
and General Office
|
|
$20,552
|
Horsham
(NetSol-CQ)
|
|
6,570
|
|
Computer
and General Office
|
|
$10,989
|
London
(NetSol UK)
|
|
378
|
|
General
Office
|
|
$5,500
|
The
Australia lease is a three-year lease that expires in September 2007 and
currently is rented at the rate of $1,380 per month. The Beijing lease is a
one
year lease that expires in July 2007. The monthly rent is $2,280 per month
with
the first two months free bringing the average monthly rent to $1,900 per month.
Our London, UK operations are currently conducted in leased premises operating
on a month-to-month basis with current rental costs of approximately 3,700
British pounds plus VAT of 17.5% per month. The NetSol-CQ System facilities,
located in Horsham, United Kingdom, are leased until June 23, 2011 for an annual
rent of £75,000 (approximately $131,871.15). McCue Systems, located in
Burlingame, California are leased until June 30, 2007 with a monthly rent of
$20,552.
Upon
expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space.
The
newly
built Technology Campus was inaugurated in Lahore, Pakistan in May 2004. This
facility consists of 40,000 square feet of computer and general office space.
This facility is state of the art, purpose-built and fully dedicated for IT
and
software development; the first of its kind in Pakistan. Title to this facility
is held by NetSol Technologies Pvt. Ltd. and is not subject to any mortgages.
LEGAL
PROCEEDINGS.
To
the
best knowledge of Company’s management and counsel, there is no material
litigation pending or threatened against the Company.
MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a)
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
INFORMATION - Common stock of NetSol Technologies, Inc. is listed and traded
on
NASDAQ Capital Market under the ticker symbol "NTWK."
The
table
shows the high and low intra-day prices of the Company's common stock as
reported on the composite tape of the NASDAQ for each quarter during the last
two fiscal years.
|
|
2005-2006
|
|
2004-2005
|
|
Fiscal
Quarter
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
1st
(ended September 30)
|
|
|
2.36
|
|
|
1.65
|
|
|
1.99
|
|
|
1.09
|
|
2nd
(ended December 31)
|
|
|
2.39
|
|
|
1.70
|
|
|
2.71
|
|
|
1.14
|
|
3rd
(ended March 31)
|
|
|
2.19
|
|
|
1.75
|
|
|
2.67
|
|
|
1.82
|
|
4th
(ended June 30)
|
|
|
2.40
|
|
|
1.63
|
|
|
2.15
|
|
|
1.84
|
|
RECORD
HOLDERS - As of August 1, 2006, the number of holders of record of the Company's
common stock was 215. As of August 1, 2006, there were 17,153,475 shares
of
common stock issued and outstanding.
DIVIDENDS
- The Company has not paid dividends on its Common Stock in the past two fiscal
years.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The
table
shows information related to our equity compensation plans as of June 30, 2005:
|
|
Number
of
securities
to
be
issued
upon
exercise
of
outstanding
options,
warrants
and
rights
|
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and
rights
|
|
Number
of securities
remaining
available
for
future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
column
(a))
|
|
Equity
Compensation Plans
approved by Security
holders
|
|
|
5,038,000(1
|
)
|
$
|
2.60(2
|
)
|
|
3,013,667(3
|
)
|
Equity
Compensation Plans
not approved by Security
holders
|
|
|
None
|
|
|
None
|
|
|
None
|
|
Total
|
|
|
5,038,000
|
|
$
|
2.60
|
|
|
3,013,667
|
|
(1) |
Consists
of 111,000 under the 2001 Incentive and Nonstatutory Stock Option
Plan;
1,139,500 under the 2002 Incentive and Nonstatutory Stock Option
Plan;
787,500 under the 2003 Incentive and Nonstatutory Stock Option Plan;
and
3,000,000 under the 2004 Incentive and Nonstatutory Stock Option
Plan.
|
(2) |
The
weighted average of the options is $2.60.
|
(3) |
Represents
1,123,500 available for issuance under the 2003 Incentive and Nonstatutory
Stock Option Plan; and, 1,890,167 available for issuance under the
2004
Incentive and Nonstatutory Stock Option Plan.
|
Management's
Discussion and Analysis Or Plan Of Operation
The
following discussion is intended to assist in an understanding of the Company's
financial position and results of operations for the quarter and nine months
ending March 31, 2006.
Forward-Looking
Information.
This
report contains certain forward-looking statements and information relating
to
the Company that is based on the beliefs of its management as well as
assumptions made by and information currently available to its management.
When
used in this report, the words "anticipate", "believe", "estimate", "expect",
"intend", "plan", and similar expressions as they relate to the Company or
its
management, are intended to identify forward-looking statements. These
statements reflect management's current view of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected. The Company's
realization of its business aims could be materially and adversely affected
by
any technical or other problems in, or difficulties with, planned funding and
technologies, third party technologies which render the Company's technologies
obsolete, the unavailability of required third party technology licenses on
commercially reasonable terms, the loss of key research and development
personnel, the inability or failure to recruit and retain qualified research
and
development personnel, or the adoption of technology standards which are
different from technologies around which the Company's business ultimately
is
built. The Company does not intend to update these forward-looking
statements.
INTRODUCTION
NetSol
is
an end-to-end information technology (“IT”) and business consulting services
provider for the lease and finance, banking and financial services sectors.
We
operate on a global basis with locations in the U.S., Europe, East Asia and
Asia
Pacific. We help our clients identify, evaluate, and implement technology
solutions to meet their most critical business challenges and maximize their
bottom line. Our products include sophisticated software applications for the
asset-based lease and financial institutions. By utilizing our worldwide
resources, we believe we are able to deliver high quality, cost-effective IT
services, ranging from consulting and application development to systems
integration and outsourcing. We have achieved the ISO 9001 and SEI (Software
Engineering Model (“CMM”) Level 4 certification in 2004 and CMMi Level 5 was
achieved in August 2006. We have achieved the ISO 9001 and SEI (Software
Engineering Institute) Capable Maturity Model (“CMM”) Level 4 certifications in
2005 and CMMI Level 5 was achieved in August 2006. Additionally, through our
Internet Service Provider (“ISP”) Backbone, located in Karachi, Pakistan, we
offer a package of wireless broadband services, which include high-speed
Internet access, support and maintenance.
Our
subsidiary, NetSol Technologies Pvt. Ltd., a Pakistan Limited Company, (“NetSol
PK”), develops the majority of our software. NetSol PK was the first company in
Pakistan to achieve the ISO 9001 and SEI CMM Level 4 software development
assessment. As maintained by the SEI, maturity levels measure the maturity
of a
software company’s methodology that in turn ensures enhanced product quality
resulting in faster project turn-a-round and a shortened time to market. In
August 2005, NetSol PK completed a listing of its shares on the Karachi Stock
Exchange.
During
recent years, we have focused on developing software applications for the
leasing and financial service sectors. In late 2002, we launched a suite of
software products under the name LeaseSoft. The LeaseSoft suite is comprised
of
four major integrated asset-based leasing/financing software applications.
The
suite, consisting of a Credit Application Creation System (LeaseSoft.CAC),
a
Credit Application Processing System (LeaseSoft.CAP), a Contract Activation
& Management System (LeaseSoft.CAM) and a Wholesale Finance System
(LeaseSoft.WFS), whether used alone or together, provides the user with an
opportunity to address specific sub-domains of the leasing/financing cycle
from
the credit approval process through the tracking of the finance contract and
asset.
In
February 2005, we acquired 100% of CQ Systems Ltd., an IT products and service
company based in the UK. As a result of this acquisition, we have access to
a
broad European customer base using IT solutions complementary to NetSol’s
LeaseSoft product. We plan to leverage CQ Systems’ knowledge base and strong
presence in the Asset Finance market to launch LeaseSoft in the UK and
continental Europe. CQ’s strong sales and marketing capability would further
help us gain immediate recognition and positioning for the LeaseSoft suite
of
products. CQ provides sophisticated accounting and administrative software,
along with associated services, to leasing and finance companies located in
Europe, Asia and Africa. The products include software modules for asset
finance, consumer finance, motor finance, general finance and insurance premium
finance. The modules provide an end-to-end contractual solution - from
underwriting, contract administration and accounting, through asset disposal
and
remarketing. Customers include notable European companies such as Scania Finance
GB, DaimlerChrysler Services, Broadcastle PLC, Bank of Scotland Equipment
Finance and Deutsche Leasing Ltd.
Together
with this focus on providing an outsourcing, off-shore solution to existing
and
new customers, NetSol has also adopted a dynamic growth strategy through
aggressive acquisitions. In October 2005, NetSol-CQ as a combined company
launched an aggressive marketing campaign under the banner of LeaseSoft for
the
European market. Just recently NetSol-CQ signed a multi million dollar new
contract with a major banking institution in London.
PLAN
OF OPERATIONS
Management
has set the following new goals for NetSol’s next 12 months.
Initiatives
and Investment to Grow Capabilities
· |
Enhance
Software Design, Engineering and Service Delivery Capabilities by
increasing investment in training and
development.
|
· |
Enhance
and invest in R&D or between 7-10% of yearly budgets in financial,
banking and various other domains within NetSol’s core
competencies.
|
· |
Aggressively
expand the sales and marketing organization in all key locations
by hiring
senior and successful personnel.
|
· |
Recruit
additional senior level managers both in Lahore, China and UK to
be able
to support potential new customers from the North American, Asia
Pacific
and European markets.
|
· |
Aggressively
exploit the booming Chinese market by strengthening NetSol’s presence in
China.
|
· |
Launch
its marketing presence in the US markets through M&A activities in the
domain of our core competencies.
|
· |
Replicate
the successful acquisition model and integration of CQ Systems in
the
USA.
|
· |
Re-brand
NetSol and CQ product line with new marketing packaging and branding
for
global marketing.
|
· |
Increase
Capex to enhance Communications and Development
Infrastructure.
|
Top
Line
Growth through Investment in aggressively marketing organically and by mergers
and acquisition (“M&A”) activities:
· |
Launch
LeaseSoft into new markets by assigning new, well-established companies
as
distributors in Europe, Asia Pacific and North
America.
|
· |
Expand
aggressively in China for LeaseSoft and related
services.
|
· |
Expand
relationships with key customers in the US, Europe and Asia
Pacific.
|
· |
Product
positioning through alliances, joint ventures and
partnerships.
|
· |
Focus
on key new fortune 1000 customers globally and grow within existing
key
customers.
|
· |
Aggressively
bid and participate in $5MN plus projects in UK and Asia Pacific
by
leveraging NetSol CQ as combined
asset.
|
· |
Embark
on roll up strategy by broadening M&A activities broadly in the
software development domain.
|
Funding
and Investor Relations:
· |
Successfully
raise new capital from institutional investors and emerging markets
to
position NetSol for growth and
visibility.
|
· |
Launched
an aggressive marketing campaign with institutional investors and
micro
cap funds in April 2006.
|
· |
Infuse
new capital from the potential exercise of employee options for business
development, to enhance balance sheet and further investment in
infrastructures.
|
· |
Continue
to efficiently and prudently manage cash requirements.
|
· |
Public
relations campaign to attract long term institutional
holdings.
|
Improving
the Bottom Line:
· |
Continue
to review costs at every level to consolidate and enhance operating
efficiencies.
|
· |
Grow
process automation.
|
· |
Profit
Centric Management Incentives.
|
· |
More
local empowerment and P&L Ownership in each Country
Office.
|
· |
Improve
productivity at the development facility and business development
activities.
|
· |
Cost
efficient management of every operation and continue further consolidation
to improve bottom line.
|
· |
Integrate
and centralize the US, UK and Australian operations and improve the
costs
and bottom line.
|
Management
believes that NetSol is in a position to derive higher productivity based on
current capital employed.
Management
continues to be focused on building its delivery capability and has achieved
key
milestones in that respect. Key projects are being delivered on time and on
budget, quality initiatives are succeeding, especially in maturing internal
processes. Management believes that further leverage was provided by the
development ‘engine’ of NetSol, which became CMM Level 2 in early 2002. In a
quest to continuously improve its quality standards, NetSol reached CMM Level
3
assessment in July 2003. According to the website of SEI of Carnegie Mellon
University, USA, only a few software companies in the world have announced
their
assessment of level 3. As a result of achieving CMM level 4, NetSol is
experiencing a growing demand for its products and alliances from blue chip
companies worldwide. NetSol is now aiming for CMM level 5, the highest CMM
level
in the next year. NetSol plans to further enhance its capabilities by creating
similar development engines in other Southeast Asian countries with CMM levels
quality standards. This would make NetSol much more competitive in the industry
and provide the capabilities for development in multiple locations. Increases
in
the number of development locations with these CMM levels of quality standards
will provide customers with options and flexibility based on costs and broader
access to skills and technology.
MATERIAL
TRENDS AFFECTING THE COMPANY
NetSol
has identified the following material trends affecting the Company.
Positive
trends:
· |
Continued
positive EBITDA trends of NetSol attracting funds and institutions
globally.
|
· |
Outsourcing
of services and software development is growing
worldwide.
|
· |
The
Global IT budgets are estimated to exceed $1.2 trillion in 2004 and
beyond, according to the internal estimates of Intel Corporation.
About
50% of this IT budget would be consumed in the US market alone primarily
on the people and processes.
|
· |
Cost
arbitrage, labor costs still very competitive and attractive when
compared
with India.
|
· |
Regional
stability and improving political environment between Pakistan and
India.
|
· |
Economic
turnaround in Pakistan including: a steady increase in gross domestic
product; much stronger dollar reserves, which is at an all time high
of
over $13 billion; stabilizing reforms of government and financial
institutions; improved credit ratings in the western markets, and
elimination of corruption at the highest
level.
|
· |
Stronger
ties between the US and Pakistan creating new investment and trade
opportunities.
|
· |
Robust
growth in outsourcing globally and investment of major US and European
corporations in the developing countries.
|
· |
Chinese
economic boom leading to new market
opportunities.
|
· |
Improved
perception of Pakistan economy in the western media casting positive
impact on NetSol future outlook.
|
.
Negative
trends:
· |
Continued
political and geographical conflicts in the Middle East and South-East
Asia are creating challenging times for economic development. In
addition,
the existence of religious, extremism, and radical elements are causing
tensions in the region.
|
· |
The
disturbance in Middle East and rising terrorist activities post 9/11
worldwide have resulted in issuance of travel advisory in some of
the most
opportunistic markets. In addition, travel restrictions and new
immigration laws provide delays and limitations on business travel.
|
· |
The
devastating earthquake in northern parts of Pakistan may slow growth
for
local business in the short run.
|
· |
Skyrocketing
oil prices caused by the unfortunate hurricanes, tensions in the
Middle
East and Iran, and the surge in global demand for oil could affect
the US
and global economy.
|
· |
Continuous
impact of Iraq war on US and global economy and potential threats
surrounding US and Iran tensions.
|
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and related public financial information are based on
the
application of accounting principles generally accepted in the United States
(“GAAP”). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on
the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of the
Company including information regarding contingencies, risk and financial
condition. Management believes our use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently and conservatively applied.
Valuations based on estimates are reviewed for reasonableness and conservatism
on a consistent basis throughout the Company. Primary areas where our financial
information is subject to the use of estimates, assumptions and the application
of judgment include our evaluation of impairments of intangible assets, and
the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We
base
our estimates on historical experience and on various other assumptions that
we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions.
We
continue to monitor significant estimates made during the preparation of our
financial statements.
VALUATION
OF LONG-LIVED AND INTANGIBLE ASSETS
The
recoverability of these assets requires considerable judgment and is evaluated
on an annual basis or more frequently if events or circumstances indicate that
the assets may be impaired. As it relates to definite life intangible assets,
we
apply the impairment rules as required by SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” which requires significant judgment
and assumptions related to the expected future cash flows attributable to the
intangible asset. The impact of modifying any of these assumptions can have
a
significant impact on the estimate of fair value and, thus, the recoverability
of the asset.
INCOME
TAXES
We
recognize deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability
and
establish a valuation allowance based upon historical losses, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. During fiscal year 2005-2006, we estimated the allowance on net
deferred tax assets to be one hundred percent of the net deferred tax
assets.
CHANGES
IN FINANCIAL CONDITION
Quarter Ended
March 31, 2006 as compared to the Quarter Ended March 31,
2005:
Net
revenues for the quarters ended March 31, 2006 and 2005 were $5,045,827 and
$3,190,918, respectively. Net revenues are broken out among the subsidiaries
as
follows:
|
|
2006
|
|
|
|
2005
|
|
|
|
Netsol
USA
|
|
$
|
41,500
|
|
|
0.82
|
%
|
$
|
21,606
|
|
|
0.68
|
%
|
Netsol
Tech
|
|
|
1,677,884
|
|
|
33.25
|
%
|
|
1,623,307
|
|
|
50.87
|
%
|
Netsol
Private
|
|
|
449,465
|
|
|
8.91
|
%
|
|
95,367
|
|
|
2.99
|
%
|
Netsol
Connect
|
|
|
201,375
|
|
|
3.99
|
%
|
|
294,420
|
|
|
9.23
|
%
|
Netsol-TiG
|
|
|
431,046
|
|
|
8.54
|
%
|
|
154,046
|
|
|
4.83
|
%
|
Netsol
UK
|
|
|
720,514
|
|
|
14.28
|
%
|
|
125,782
|
|
|
3.94
|
%
|
Netsol-CQ
|
|
|
1,480,169
|
|
|
29.33
|
%
|
|
799,761
|
|
|
25.06
|
%
|
Netsol-Abraxas
Australia
|
|
|
35,225
|
|
|
0.70
|
%
|
|
76,629
|
|
|
2.40
|
%
|
Talk
Trainers
|
|
|
8,649
|
|
|
0.17
|
%
|
|
-
|
|
|
0.00
|
%
|
Total
Net Revenues
|
|
$
|
5,045,827
|
|
|
100.00
|
%
|
$
|
3,190,918
|
|
|
100.00
|
%
|
This
reflects an increase of $1,854,909 or 58.13% in the current quarter as compared
to the quarter ended March 31, 2005. The increase is attributable to new orders
of licenses, an increase in services business, the integration of the revenues
contributed by the subsidiary CQ Systems in UK acquired February 2005, the
growing outsourcing business of NetSol-TiG (JV) and additional maintenance
work.
The Company’s biggest revenue growth was achieved in the two UK operations and
the new joint-venture with TiG, which generated sales both domestically and
internationally. The Company experienced a modest increase in domestic business
in Pakistan as the country began recovering from the earthquake on October
8,
2005. The demand for the Company’s IT services in Asia Pacific and Europe is
consistent and solid.
During
the quarter ended March 31, 2006, the parent company managed several projects
with Seattle based Capital Stream generating modest revenues. The projects
call
for outsourcing of software development services taking advantage of our
off-shore development facility in Lahore. In addition, in February 2006, the
Parent company signed a master consulting agreement with McCue Systems, Inc.
(“McCue”), a California corporation to assist in customer implementations,
quality assurance and off-shore software development. To date, no revenues
have
been generated from this agreement as the programmers are in the process of
becoming familiar with McCue’s LeasePak system.
NetSol
made a significant move by acquiring 100% of a UK based software company, CQ
Systems Ltd., in February 2005. The acquisition of CQ Systems has provided
NetSol a very strong and seasoned management team with a mature, profitable,
business. The acquisition of CQ Systems provided tremendous new business
opportunities for NetSol in the European markets. We have experienced a seamless
integration at every level of both companies. In November 2005, we launched
the
combined company as NetSol-CQ and the LeaseSoft brand in European market. Just
recently NetSol-CQ signed off a multi-million dollar LeaseSoft agreement with
a
major financial institution. Due to confidentiality agreement with our new
client we are not able to disclose the name of the client.
NetSol
has been actively pursuing a few target companies in USA and in Europe for
acquisitions. A lot of effort has been made in pursuing the US based IT products
based company, McCue Systems, Inc., in Burlingame, California. With both
external and internal due diligence and with the assistance of our management
and our mergers and acquisitions professionals, Maxim Group, we entered into
a
definitive agreement to acquire 100% of McCue Systems. This agreement was signed
May 6, 2006. The company expects to complete the transaction by June 30, 2006.
This acquisition would effectively launch NetSol in the US leasing and finance
markets and will provide a solid footprint in North America. This will be all
accretive revenue for NetSol that will be reported and consolidated from July
2006. The company will continue to explore new M&A opportunities that are
synergistic and grow our business exponentially and accretively.
During
the quarter ended March 31, 2006, our Asia Pacific region signed off new
implementations of LeaseSoft at ORIX Leasing Singapore, a new implementation
of
LeaseSoft at Daimler Chrysler Auto Finance, China, Mercedes - Benz Finance
Co,
Japan and in Daimler Chrysler Leasing Thailand. In addition, NetSol completed
several implementations of LeaseSoft with our major customers in Asia Pacific
markets. NetSolCQ signed a new contract with a large banking institution in
the
UK that was valued at over $1 million. The UK operations since the acquisition
of CQ Systems in 2005, continues to enhance market penetration in UK markets
and
generate new business. As a result, several new customers were signed up as
the
awareness and brand acceptance of NetSolCQ as combined company gains
momentum.
Our
majority owned subsidiary, NetSol Technologies Ltd., in Lahore has experienced
major new business development activities in both the Pakistani public and
private sectors. While we have signed several new contracts in the public
sector, these agreements are confidential and are not allowed to be disclosed
as
these contracts involve some sensitive IT solutions and project managements
within the government ministries. NetSol sees a very robust and high volume
new
business environment in Pakistan as the economy continues to grow over 8% each
year. NetSol is an extremely enviable position to leverage from its name and
reputation.
NetSol’s
Global Frame Agreement signed in early 2005 with DaimlerChrysler Services
(“DCS”) qualifies NetSol as a preferred vendor to DCS in 40 plus countries where
DCS operates. As a direct result of the successful implementations of some
of
our current systems with DaimlerChrysler and the signing of the global frame
agreement, we are noticing a significant increase in demand for LeaseSoft.
Although the sales cycle for LeaseSoft is rather long, we are experiencing
a
100% increase in product demonstration, evaluation and assessment by blue chip
companies in the UK, Australia, Japan, Europe, North America and Pakistan.
In
fiscal year 2005, NetSol raised the pricing of its LeaseSoft licenses
significantly due primarily to a surge in demand. In spring of 2005, one
complete system was sold to Toyota Leasing Thailand (“TLT”) for nearly $2.3
million that includes over $1.2 million for license fees.
A
number
of large leasing companies will be looking to renew legacy applications. This
places NetSol in a very strong position to capitalize on any upturn in IT
spending by these companies. NetSol is well positioned to sell several new
licenses in fiscal year 2006-2007 that could potentially increase the sales
and
bottom line. As the Company continues to sell more of these licenses, management
believes it is possible that the margins could increase to upward of 70%. The
license prices of these products vary from $300,000 to an excess of $1,000,000
with additional charges for customization and maintenance of between 20%-30%
each year.
The
gross
profit was $2,727,298 in the quarter ending March 31, 2006 as compared with
$1,848,702 for the same quarter of the previous year for an increase of
$878,596. The gross profit percentage decreased slightly to approximately 54%
in
the quarter ended March 31, 2006 compared to approximately 58% for the quarter
ended March 31, 2006. This is mainly due to the increase in direct costs of
hiring new technology personnel as the Company gears up for the increased demand
in its products and services. Our main technology campus in Lahore hired over
90
new developers and programmers in the last four months. In comparison to the
prior quarter ended December 31, 2005, the cost of sales increased approximately
$341,495, revenues increased $521,454, and an overall increase of 3% in gross
profit.
Operating
expenses were $2,458,199 for the quarter ending March 31, 2006 as compared
to
$1,632,525, for the corresponding period last year. The increase is mainly
attributable to increased selling and marketing activities, additional employees
and an increase in overall activities due to our increased marketing efforts.
Also contributing to the higher costs was the full integration of CQ Systems
and
the joint-venture NetSol-TiG. Depreciation and amortization expense amounted
to
$594,385 and $384,649 for the quarter ended March 31, 2006 and, 2005,
respectively, reflecting the intangible assets purchased from the CQ Systems
acquisition in February 2005, the addition of the new building in Lahore in
the
prior year and new computer equipment purchased to gear up for the increased
demand in our products and services. Combined salaries and wages costs were
$597,636 and $453,226 for the comparable periods, respectively, or an increase
of $144,410 from the corresponding period last year. Salaries, as a percentage
of sales, were 12% for the current quarter as compared to 14% in the prior
period. The addition of the subsidiary, CQ Systems and the forming of the
joint-venture with TiG, as well as an increase in development, sales and
administration employees resulted in the increase.
Selling
and marketing expenses were $444,472 and $219,399, in the quarter ended March
31, 2006 and 2005, respectively, an increase of $225,073 reflecting the growing
sales activity of the Company, including the launch of NetSol-CQ as a combined
entity to the European market. Advertising expense was $144,163 for the current
quarter. The Company is in a growth phase and is increasing its overall sales
and marketing activities. Sales and marketing was 9% of sales for the current
quarter as compared to 7% in the corresponding period last year. The Company
wrote-off as uncollectible bad debts of $19,561 in the current quarter compared
to $0 for the comparable prior period in the prior year. Professional services
expense increased slightly to $126,806 in the quarter ended March 31, 2006,
from
$112,830 in the corresponding period last year.
Income
from operations was $269,099 compared to a loss of $216,177 for the quarters
ended March 31, 2006 and 2005, respectively. This represents an increase of
$52,922 or 24.48% for the quarter compared with the comparable period in the
prior year.
Net
income was $21,819 compared to $126,858 for the quarters ended March 31, 2006
and 2005, respectively. This is a decrease of $105,039 or 82.8% compared to
the
prior year. The current fiscal quarter amount includes a net reduction of
$187,127 compared to $29,994 in the prior period for the 49.9% minority interest
in NetSol Connect, NetSol-TiG, and Talk Trainers owned by another party, and
the
28.13% minority interest in NetSol PK. For the quarters ended March 31, 2006
and
2005, respectively, the Company recognized an expense of $2,628 and $3,941
for
the beneficial conversion feature on convertible debentures and a gain of $1,318
and $49,865 from the settlement of debts and $12,016 and $0 expense for the
fair
value of options and warrants issued. Net income per share, basic and diluted,
was $0.00 for the quarter ended March 31, 2006 as compared to $0.01 for the
corresponding period last year.
The
net
earnings before interest, taxes, depreciation and amortization, ( “EBITDA”)
income was $715,299 compared to $617,650 or an increase of 15.81% after
amortization and depreciation charges of $594,385 and $384,649, income taxes
of
$24,080 and $58,787, and interest expense of $75,015 and $47,356, respectively.
Although the net EBITDA income is a non-GAAP measure of performance we are
providing it for the benefit of our investors and shareholders to assist them
in
their decision-making process.
Nine
Month Period Ended March 31, 2006 as compared to the Nine Month Period
Ended March 31, 2005:
Net
revenues for the nine months ended March 31, 2006 and 2005 were $14,040,185
and
$7,972,450, respectively. Net revenues are broken out among the subsidiaries
as
follows:
|
|
2006
|
|
|
|
2005
|
|
|
|
Netsol
USA
|
|
$
|
45,250
|
|
|
0.32
|
%
|
$
|
295,725
|
|
|
3.71
|
%
|
Netsol
Tech
|
|
|
4,692,344
|
|
|
33.42
|
%
|
|
4,564,167
|
|
|
57.25
|
%
|
Netsol
Private
|
|
|
1,196,098
|
|
|
8.52
|
%
|
|
562,872
|
|
|
7.06
|
%
|
Netsol
Connect
|
|
|
676,956
|
|
|
4.82
|
%
|
|
852,640
|
|
|
10.69
|
%
|
Netsol-TiG
|
|
|
1,122,787
|
|
|
8.00
|
%
|
|
154,046
|
|
|
1.93
|
%
|
Netsol
UK
|
|
|
1,929,666
|
|
|
13.74
|
%
|
|
574,849
|
|
|
7.21
|
%
|
Netsol-CQ
|
|
|
4,176,299
|
|
|
29.75
|
%
|
|
799,761
|
|
|
10.03
|
%
|
Netsol-Abraxas
Australia
|
|
|
192,136
|
|
|
1.37
|
%
|
|
168,390
|
|
|
2.11
|
%
|
Talk
Trainers
|
|
|
8,649
|
|
|
0.06
|
%
|
|
-
|
|
|
0.00
|
%
|
Total
Net Revenues
|
|
$
|
14,040,185
|
|
|
100.00
|
%
|
$
|
7,972,450
|
|
|
100.00
|
%
|
This
reflects an increase of $6,067,735 or 76.11% in the current nine months as
compared to the nine months ended March 31, 2005. The increase is attributable
to new orders of licenses and an increase in services business, including
additional maintenance work, and the addition of two new subsidiaries. The
Company’s biggest revenue growth was achieved in the two UK operations and the
new joint-venture with TiG, which generated sales both domestically and
internationally. The Company experienced a modest increase in domestic business
in Pakistan as the country began recovering from the earthquake on October
8,
2005. The demand for the Company’s IT services in Asia Pacific and Europe is
consistent and solid.
During
the quarter ended March 31, 2006, the parent company managed several projects
with Seattle based Capital Stream generating modest revenues. The projects
call
for outsourcing of software development services taking advantage of our
off-shore development facility in Lahore. In addition, in February 2006, the
Parent company signed a master consulting agreement with McCue Systems, Inc.
(“McCue”), a California corporation to assist in customer implementations,
quality assurance and off-shore software development. To date, no revenues
have
been generated from this agreement as the programmers are in the process of
becoming familiar with McCue’s LeasePak system.
NetSol
made a significant move by acquiring 100% of a UK based software company, CQ
Systems Ltd., in February 2005. The acquisition of CQ Systems has provided
NetSol a very strong and seasoned management team with a mature, profitable,
business. The acquisition of CQ Systems provided tremendous new business
opportunities for NetSol in the European markets. We have experienced a seamless
integration at every level of both companies. In November 2005, we launched
the
combined company as NetSol-CQ and the LeaseSoft brand in European market. Just
recently NetSol-CQ signed off a multi-million dollar LeaseSoft agreement with
a
major financial institution. Due to confidentiality agreement with our new
client we are not able to disclose the name of the client.
NetSol
has been actively pursuing a few target companies in USA and in Europe for
acquisitions. A lot of effort has been made in pursuing the US based IT products
based company, McCue Systems, Inc., in Burlingame, California. With both
external and internal due diligence and with the assistance of our management
and our mergers and acquisitions professionals, Maxim Group, we entered into
a
definitive agreement to acquire 100% of McCue Systems. This agreement was signed
May 6, 2006. The company expects to complete the transaction by June 30, 2006.
This acquisition would effectively launch NetSol in the US leasing and finance
markets and will provide a solid footprint in North America. This will be all
accretive revenue for NetSol that will be reported and consolidated from July
2006. The company will continue to explore new M&A opportunities that are
synergistic and grow our business exponentially and accretively.
During
the quarter ended March 31, 2006, our Asia Pacific region signed off new
implementations of LeaseSoft at ORIX Leasing Singapore, a new implementation
of
LeaseSoft at Daimler Chrysler Auto Finance, China, Mercedes - Benz Finance
Co,
Japan and in Daimler Chrysler Leasing Thailand. In addition, NetSol completed
several implementations of LeaseSoft with our major customers in Asia Pacific
markets. NetSolCQ signed a new contract with a large banking institution in
the
UK that was valued at over $1 million. The UK operations since the acquisition
of CQ Systems in 2005, continues to enhance market penetration in UK markets
and
generate new business. As a result, several new customers were signed up as
the
awareness and brand acceptance of NetSolCQ as combined company gains
momentum.
Our
majority owned subsidiary, NetSol Technologies Ltd., in Lahore has experienced
major new business development activities in both the Pakistani public and
private sectors. While we have signed several new contracts in the public
sector, these agreements are confidential and are not allowed to be disclosed
as
these contracts involve some sensitive IT solutions and project managements
within the government ministries. NetSol sees a very robust and high volume
new
business environment in Pakistan as the economy continues to grow over 8% each
year. NetSol is an extremely enviable position to leverage from its name and
reputation.
NetSol’s
Global Frame Agreement signed in early 2005 with DaimlerChrysler Services
(“DCS”) qualifies NetSol as a preferred vendor to DCS in 40 plus countries where
DCS operates. As a direct result of the successful implementations of some
of
our current systems with DaimlerChrysler and the signing of the global frame
agreement, we are noticing a significant increase in demand for LeaseSoft.
Although the sales cycle for LeaseSoft is rather long, we are experiencing
a
100% increase in product demonstration, evaluation and assessment by blue chip
companies in the UK, Australia, Japan, Europe, North America and Pakistan.
In
fiscal year 2005, NetSol raised the pricing of its LeaseSoft licenses
significantly due primarily to a surge in demand. In spring of 2005, one
complete system was sold to Toyota Leasing Thailand (“TLT”) for nearly $2.3
million that includes over $1.2 million for license fees.
A
number
of large leasing companies will be looking to renew legacy applications. This
places NetSol in a very strong position to capitalize on any upturn in IT
spending by these companies. NetSol is well positioned to sell several new
licenses in fiscal year 2006-2007 that could potentially increase the sales
and
bottom line. As the Company continues to sell more of these licenses, management
believes it is possible that the margins could increase to upward of 70%. The
license prices of these products vary from $300,000 to an excess of $1,000,000
with additional charges for customization and maintenance of between 20%-30%
each year.
The
gross
profit was $8,077,272 for the nine months ending March 31, 2006 as compared
with $5,028,579 for the same period of the previous year. The gross profit
percentage has decreased 5.54% to 57.53% in the current fiscal year from 63.07%
for the nine months ended March 31, 2005. This is mainly due to the
increase in direct costs of hiring new technology personnel as the Company
gears
up for the increased demand in its products and services. Our main technology
campus in Lahore hired over 90 new developers and programmers in the last four
months.
Operating
expenses were $6,848,682 for the nine months ending March 31, 2006 as
compared to $4,153,323, for the corresponding period last fiscal year for an
increase of $2,695,359. The increase is mainly attributable to increased selling
and marketing activities, additional employees and an increase in overall
activities due to our increased marketing efforts. Also contributing to the
higher costs was the full integration of CQ Systems and the joint-venture
NetSol-TiG. In addition, the Company as a whole contributed over $92,000 to
charity organizations for the Earthquake Relief for Northern Pakistan. As a
percentage of sales, operating expenses decreased 3% to 49% from 52% in the
prior nine-month period. Depreciation and amortization expense amounted to
$1,711,771 and $1,007,789 for the nine months ended March 31, 2006 and 2005,
respectively, reflecting the intangible assets purchased from the CQ Systems
acquisition in February 2005, the addition of the new building in Lahore in
the
prior year and new computer equipment purchased to gear up for the increased
demand in our products and services. Combined salaries and wage costs were
$1,686,726 and $1,248,447 for the nine months ended March 31, 2006 and 2005,
respectively, or an increase of $438,279 from the corresponding period last
year. As a percentage of sales, salaries was 12% as compared to 16% for the
corresponding period last year. The addition of the new subsidiary, CQ Systems
and the forming of the joint-venture with TiG, as well as an increase in
development, sales and administration employees resulted in the increase.
Selling
and marketing expenses were $1,190,906 and $474,099 for the nine months ended
March 31, 2006 and 2005, respectively, an increase of $716,807 reflecting the
growing sales activity of the Company, including the launch of NetSol-CQ as
a
combined entity to the European market. Advertising expense was $270,508 for
the
current nine-month period. The Company is in a growth phase and is increasing
its overall sales and marketing activities. Sales and marketing was 9% of sales
for the current quarter as compared to 6% in the corresponding period last
year.
The Company wrote-off as uncollectible bad debts of $27,289 and $0 for the
nine
months ended March 31, 2006 and 2005, respectively. Professional services
expense decreased to $365,152 in the nine months ended March 31, 2006, from
$368,135 in the corresponding period last year.
Income
from continued operations was $1,228,590 compared to $875,256 for the nine
months ended March 31, 2006 and 2005, respectively. This represents an increase
of $353,334 or 40.37% for the nine-month period compared to the prior year.
This
is directly due to increased sales, reduction of operational expenses, improved
gross margins, and the addition of two new subsidiaries.
Net
income was $350,601 for the nine months ended March 31, 2006 compared to
$445,238 for the nine months ended March 31, 2005. This is a decrease of $94,637
or 21.26% compared to the prior year. The current nine-month period amount
includes a net reduction of $699,872 compared to $15,735 in the prior period
for
the 49.9% minority interest in NetSol Connect, NetSol-TiG, and Talk Trainers
owned by another party, and the 28.13% minority interest in NetSol PK. For
the
nine months ended March 31, 2006 and 2005, respectively, the Company recognized
an expense of $14,389 and $205,906 for the beneficial conversion feature on
convertible debentures and a gain of $8,294 and $239,506 from the settlement
of
debts and $21,505 and $249,638 expense for the fair value of options and
warrants issued. Net income per share was $0.02, basic and diluted, for the
nine
months ended March 31, 2006 as compared to $0.04, basic and $0.03 diluted for
the corresponding period last year.
The
net
earnings before interest, taxes, depreciation and amortization, ( “EBITDA”)
income was $2,394,163 compared to $1,691,643 or an increase of 41.53% after
amortization and depreciation charges of $1,711,771 and $1,008,789, income
taxes
of $90,891 and $61,260, and interest expense of $240,900 and $177,356,
respectively. Although the net EBITDA income is a non-GAAP measure of
performance we are providing it for the benefit of our investors and
shareholders to assist them in their decision-making process.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company's cash position was $2,390,245 at March 31, 2006 compared to $1,596,031
at March 31, 2005. In addition the Company had $2,098,003 as compared to
$1,083,450 in certificates of deposit, respectively. The total cash position,
including the certificates of deposits, was $4,488,248 and $2,679,481 as of
March 31, 2006 and 2005.
The
Company’s current assets as of March 31, 2006 were 54.27% of total assets, an
increase of 10.82% from 43.45% as of March 31, 2005. In addition, our working
capital (current assets minus current liabilities) was $10,232,494.
Net
cash
used for operating activities amounted to $737,357 for the nine months ended
March 31, 2006, as compared to $733,409 for the comparable period last fiscal
year. The decrease is mainly due to an increase in net income as well as an
increase in prepaid expenses and accounts receivable.
Net
cash
used by investing activities amounted to $4,568,666 for the nine months ended
March 31, 2006, as compared to $3,764,574 for the comparable period last fiscal
year. The difference lies primarily in the purchase of subsidiary which
increased intangible assets and the purchase property and equipment during
the
current fiscal year. The Company had purchases of property and equipment of
$2,063,284 compared to $804,115 for the comparable period last fiscal year.
During the prior fiscal year, an additional $287,797 and $250,006 was infused
into the Company’s minority interest in the Company’s subsidiaries NetSol
Connect and NetSol-TiG.
Net
cash
provided by financing activities amounted to $6,232,741 and $5,186,675 for
the
nine months ended March 31, 2006, and 2005, respectively. The current fiscal
period included the cash inflow of $1,400,000 compared to $1,512,000 from
issuance of equity and $384,062 compared to $999,224 from the exercising of
stock options and warrants. In addition, the Company received net proceeds
of
$4,031,001 from the sale of a subsidiary’s common stock in an IPO on the Karachi
Stock Exchange as compared to $1,589,974 in the prior year. In addition the
Company and had net proceeds on loans and capital leases of $417,678 as compared
to $1,137,181 in the comparable period last year.
The
Company plans on pursuing various and feasible means of raising new funding
to
expand its infrastructure, enhance product offerings and beef up marketing
and
sales activities in strategic markets. The strong growth in earnings and the
signing of larger contracts with Fortune 500 customers largely depends on the
financial strength of NetSol. Generally, the bigger name clients and new
prospects diligently analyze and take into consideration a stronger balance
sheet before awarding big projects to vendors. Therefore, NetSol would continue
its effort to further enhance its financial resources in order to continue
to
attract large name customers and big value contracts. Management feels that
a
major requirement of institutional investors is a much stronger balance sheet
and a healthy cash position.
Management
expects to continue to improve its cash position in the current and future
quarters due to the new business signed up in the last quarter. Since our newly
listed subsidiary on the Karachi Stock Exchange (“KSE”) has performed much
better than our own expectation i.e. the stock has more than doubled from its
IPO price, we have another vehicle to meet the growing needs of new capital.
Any
new capital raise would depend on future M&A initiatives. Management would
exercise its best judgment in choosing the most viable option for financing.
In
addition, the Company anticipates additional exercises of employee stock options
in the current and subsequent quarters. The Company has consistently improved
its cash position in last four quarters through employees’ exercise of options,
the IPO of the Pakistani subsidiary, private placements, and the signing of
new
business. We anticipate this trend to continue in the current and future
quarters, further improving the cash resources and liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in July 2005. The company would continue
to
inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities.
As
a
growing company, we have on-going capital expenditure needs based on our short
term and long term business plans. Although our requirements for capital
expenses vary from time to time, for the next 12 months, we have the following
capital needs:
· |
In
next three months the final payment of CQ Systems would be due based
on
the formula of ‘earn out’. This could be in the range of $1.0MN to $3.6MN.
|
· |
Notes
payable for approximately $800,000.
|
· |
Working
capital of $1.0 million for US business expansion, new business
development activities and infrastructure
enhancements.
|
· |
In
the next three months the first installment for the purchase of McCue
Systems would be due of approximately $2.0
MN.
|
While
there is no guarantee that any of these methods will result in raising
sufficient funds to meet our capital needs or that even if available will be
on
terms acceptable to the Company, we will consider raising capital through equity
based financing and, warrant and option exercises. We would, however, use some
of our internal cash flow to meet certain obligations as mentioned
above.
The
methods of raising funds for capital needs may differ based on the following:
· |
Stock
volatility due to market conditions in general and NetSol stock
performance in particular. This may cause a shift in our approach
to
raising new capital through other sources such as secured long term
debt.
|
· |
Analysis
of the cost of raising capital in the U.S., Europe or emerging markets.
By
way of example only, if the cost of raising capital is high in one
market
and it may negatively affect the company’s stock performance, we may
explore options available in other markets.
|
Should
global or other general macro economic factors cause an adverse climate, we
would defer new financing and use internal cash flow for capital
expenditures.
RESULTS
OF OPERATIONS
THE
YEAR ENDED JUNE 30, 2005 COMPARED TO THE YEAR ENDED JUNE 30, 2004
Net
revenues for the year ended June 30, 2005 were $12,437,653 as compared to
$5,749,062 for the year ended June 30, 2004. Net revenues are broken out among
the subsidiaries as follows:
|
|
|
2005
|
|
|
%
|
|
|
2004
|
|
|
%
|
|
Netsol
USA
|
|
$
|
295,725
|
|
|
2.38
|
%
|
$
|
676,857
|
|
|
11.77
|
%
|
Netsol
Tech (1)
|
|
|
6,557,031
|
|
|
52.73
|
%
|
|
3,190,049
|
|
|
55.49
|
%
|
Netsol
Private (2)
|
|
|
776,572
|
|
|
6.24
|
%
|
|
483,788
|
|
|
8.42
|
%
|
Netsol
Connect
|
|
|
1,143,616
|
|
|
9.19
|
%
|
|
778,598
|
|
|
13.54
|
%
|
Netsol
UK
|
|
|
687,620
|
|
|
5.53
|
%
|
|
356,215
|
|
|
6.20
|
%
|
Netsol-Abraxas
Australia
|
|
|
217,470
|
|
|
1.75
|
%
|
|
263,555
|
|
|
4.58
|
%
|
CQ
Systems
|
|
|
2,311,345
|
|
|
18.58
|
%
|
|
-
|
|
|
0.00
|
%
|
Netsol-TiG
|
|
|
448,274
|
|
|
3.60
|
%
|
|
-
|
|
|
0.00
|
%
|
Total
Net Revenues
|
|
$
|
12,437,653
|
|
|
100.00
|
%
|
$
|
5,749,062
|
|
|
100.00
|
%
|
(1) Refers
to
NetSol Technologies (Pvt.) Limited
(2) Refers
to
NetSol (Private) Limited
The
total
consolidated net revenue for fiscal year 2005 was $12,437,653 compared to
$5,749,062 in fiscal year 2004. This is a nearly 116% increase in revenue.
The
increase is attributable to increased sales, the acquisition of CQ Systems
and
the forming of the joint-venture with TiG.
The
fiscal year ended June 30, 2005 was a very busy and exciting period for NetSol
worldwide. The Company added a few major new customers such as DaimlerChrysler
in China, Japan, and New Zealand and Toyota Leasing Thailand and China. In
addition, many new customers were added in Pakistan in both the public and
private sectors. NetSol signed many new alliances and partnerships in fiscal
year 2005. The most significant of all was the joint venture with a UK based
company, The Innovation Group (“TiG”). NetSol owns 51% of this new entity while
TIG owns 49%. The partnership is designed to outsource the global IT projects
of
TiG to NetSol in Pakistan.
NetSol
made a significant move by acquiring 100% of a UK based software company CQ
Systems Ltd. in February 2005. The acquisition of CQ Systems has provided NetSol
a very strong and seasoned management team with a mature, profitable, business.
NetSol’s global frame agreement with DaimlerChrysler Services (“DCS”) qualifies
NetSol as a preferred vendor to DCS in 40 plus countries where DCS
operates.
As
a
direct result of the successful implementations of some of our current systems
with DaimlerChrysler and the signing of the global frame agreement, we are
noticing a significant increase in demand for LeaseSoft. Although the sales
cycle for LeaseSoft is rather long, we are experiencing a 100% increase in
product demonstration, evaluation and assessment by blue chip companies in
the
UK, Australia, Japan, Europe, North America and Pakistan. In fiscal year 2005,
NetSol raised the pricing of its LeaseSoft licenses significantly due primarily
to a surge in demand. In spring of 2005, one complete system was sold to Toyota
Leasing Thailand (“TLT”) for nearly $2.3 million that includes over $1.2 million
for license fees.
A
number
of large leasing companies will be looking to renew legacy applications. This
places NetSol in a very strong position to capitalize on any upturn in IT
spending by these companies. NetSol is well positioned to sell several new
licenses in fiscal year 2006 that could potentially increase the sales and
bottom line. As the Company sells more of these licenses, management believes
it
is possible that the margins could increase to upward of 70%. The license prices
of these products vary from $100,000 to an excess of $1,000,000 with additional
charges for customization and maintenance of between 20%-30% each
year.
The
gross
profit was $7,682,904 for year ended June 30, 2005 as compared with $3,049,387
for the same period of the previous year. This is a 152% increase. The gross
profit percentage was 62% for the current fiscal year and 53% in the prior
year.
While the cost of sales and the cost of delivery of projects have both been
reduced in the current year, the Company maintained all its delivery commitments
and has won new business from existing and new customers. While management
is
striving to negotiate better pricing on new agreements, the Company has been
required to react to overall general economic factors in determining its present
pricing structure. The gross profit margin was also improved due to improved
quality standards such as achieving the assessment of CMM Level 4 in
2004.
Operating
expenses were $6,618,199 for the year ended June 30, 2005 as compared to
$5,757,405 for the year ended June 30, 2004. During the years ended June 30,
2005 and 2004, the Company issued 188,972 and 48,613 restricted common shares
in
exchange for services rendered, respectively. The Company recorded this non-cash
compensation expense of $246,650 and $48,240 for the years ended June 30, 2005
and 2004, respectively. Total professional service expense, including non-cash
compensation, was $604,192 and $464,332 for the years ended June 30, 2005 and
2004, respectively. During the years ended June 30, 2005 and 2004, the Company
recorded depreciation and amortization expense of $1,564,562 and $1,240,792,
included in this increase is the addition of the completion of the Lahore
facility. Salaries and wages expenses were $2,022,183 and $1,493,252 for the
years ended June 30, 2005 and 2004, respectively, or an increase of $528,931
or
35%. The addition of the new subsidiary, CQ Systems and the forming of the
joint-venture with TiG, as well as an increase in development, sales and
administration employees resulted in the increase. Approximately 250 new
employees were added throughout the Company during the current fiscal year.
General and administrative expenses were $1,588,456 and $1,759,607 for the
years
ended June 30, 2005 and 2004, respectively, a decrease of $171,151. This
decrease is due to consolidation of US offices, streamlining of corporate
overheads and reduction of operating expenses in the Lahore facility due to
elimination of building rent. In the prior year, the general and administrative
expense included non-recurring expenses for moving both the headquarters office
and the Pakistan companies into the new facility, $105,608 in costs for placing
the convertible debenture and $122,500 for settlement of legal disputes. Also,
the Company had to incur extra costs for the annual shareholders meeting
including proxies mailing and other administrative related costs and travel
expenses.
Selling
and marketing expenses increased to $782,488 for the year ended June 30, 2005
as
compared to $253,701 for the year ended June 30, 2004, reflecting the growing
sales activity of the Company and the addition of the new subsidiary, CQ Systems
and the joint-venture, NetSol-TIG. The Company wrote-off, as uncollectible,
bad
debts of $13,118 and $219,909, during the years ended June 30, 2005 and 2004,
respectively.
The
income from operations in fiscal year 2005 was $1,064,705 compared to a net
loss
from operations of $2,708,018 in fiscal year 2004. Included in these amounts
are
non-cash charges of depreciation and amortization of $1,564,562 and $1,240,792,
settlement expenses of $43,200 and $122,500 and bad debt expense of $13,118
and
$219,909, respectively. Net income in fiscal year 2005 was $663,325 compared
to
a net loss of $2,577,058 in fiscal year 2004 or 125.74% decrease.
The
current fiscal year amount includes a net reduction of $111,073 compared to
an
add-back of $273,159 in the prior year for the 49.9% minority interest in NetSol
Connect and NetSol-TiG owned by another party. The Company also recognized
non-recurring expenses including $209,848 and $137,230 expense for the
beneficial conversion feature on notes payable and convertible debenture, a
gain
of $0 and $104,088, from writing off a note payable in one of the subsidiaries
that had been paid through the issuance of stock by the parent in the prior
year
and, a gain of $404,136 and $216,230 from the settlement of a debt,
respectively. In addition, during the current fiscal year, the Company recorded
an expense of $255,130 for the fair market value of options and warrants
granted. The net income per share was $0.06 in 2005 compared to a loss of $0.33
in 2004. The total weighted average of shares outstanding basic was 11.6 million
and diluted was 14.8 million against basic and diluted 7.9 million in
2004.
The
net
EBITDA income for fiscal 2005 was $2,454,164 compared to loss of $1,029,751
in
fiscal 2004 after amortization and depreciation charges of $1,564,562 and
$1,240,792, income taxes of $10,416 and $76,638, and interest expense of
$215,861 and 229,877, respectively. Although the net EBITDA income is a non-GAAP
measure of performance we are providing it for the benefit of our investors
and
shareholders to assist them in their decision-making process.
Liquidity
And Capital Resources
The
Company's cash position was $1,371,727 at June 30, 2005 compared to $871,161
at
June 30, 2004. In addition the Company had $205,480 compared to $391,403 in
certificates of deposit. The total cash position, including the certificates
of
deposits, was $1,577,207as of June 30, 2005 compared to $1,262,564 million
as of
June 30, 2004.
Net
cash
provided by operating activities amounted to $243,872 for the year ended June
30, 2005, as compared to used for $1,770,591 for the comparable period last
fiscal year. The decrease is mainly due to an increase in accounts receivable
and other assets offset by an increase in accounts payable.
Net
cash
used by investing activities amounted to $4,697,488 for the year ended June
30,
2005, as compared to providing $3,406,964 for the comparable period last fiscal
year. The difference lies primarily in the purchase of CQ Systems and the
related increase in intangible assets acquired. During the prior fiscal year,
the Company had proceeds of $210,000 from the sale of a minority interest in
the
Company’s subsidiary NetSol Connect, whereas in the current fiscal year the
Company received $178,521 of additional capital from the minority interests.
In
addition, the Company had net purchases of property and equipment of $1,468,499
compared to $2,861,754 for the comparable period last fiscal year. The majority
of this reflects the capitalized costs of the Lahore facility of approximately
$1.37 million and $2.32 million, respectively.
Net
cash
provided by financing activities amounted to $4,826,927 and $5,774,256 for
years
ended June 30, 2005, and 2004, respectively. The current fiscal year included
the cash inflow of $1,512,000 from the sale of common stock and $1,260,057
from
the exercising of stock options and warrants, compared to $1,848,750 and
$1,445,392 in the prior year, respectively. In the current fiscal year, the
Company had net proceeds from loans of $1,247,351 as compared to $1,301,571
in
the comparable period last year. The Company also obtained a $1,200,000
convertible debenture during the prior fiscal year. The short term notes
acquired during the current fiscal year were utilized to execute the acquisition
of CQ Systems.
As
of
June 30, 2005 the Company's working capital (current assets less current
liabilities) totaled $3,458,302 compared to $410,991
as of June 30, 2004,
an
increase of $3,047,311. In the current fiscal year, the Company sold a total
of
$1,512,000 of its common stock in private placements. In fiscal 2004, the
Company raised capital from financing with Maxim Group of $1.85 million, net
of
expenses. In addition, $1.2 million in convertible debentures were issued during
the prior fiscal year and approximately $487,000 from the exercising of
warrants. The Company has over $3.9 million in accounts receivable and $1.96
million in revenues in excess of billings. The Company plans on pursuing various
and feasible means of raising new funding to expand its infrastructure, enhance
product offerings and beef up marketing and sales activities in strategic
markets. The strong growth in earnings and the signing of larger contracts
with
Fortune 500 customers, largely depends on the financial strength of NetSol.
Generally, the bigger name clients and new prospects diligently analyze and
take
into consideration a stronger balance sheet before awarding big projects to
vendors. Therefore, NetSol would continue its effort to further enhance its
financial resources in order to continue to attract large name customers and
big
value contracts.
Management
expects to continue to improve its cash position in the current and future
quarters due to the new business signed up in the last quarter. In addition,
the
Company anticipates additional exercises of investor warrants and employee
stock
options in the current and subsequent quarters. The Company has consistently
improved its cash position in last four quarters through investors’ exercise of
warrants, employee options exercised, private placements and the signing of
new
business. We anticipate this trend to continue in the current and future
quarters, further improving the cash resources and liquidity position.
Management is committed to implementing the growth business strategy that was
ratified by the board of directors in July 2005. The company would continue
to
inject new capital towards expansion, grow sales and marketing and further
enhancement of delivery capabilities.
NetSol’s
Technology Campus in Lahore was completed in May 2004 and the staff was
relocated into this new building. The Phase One will easily hold up to 500
programmers, engineers and other related staff. NetSol has already experienced
a
very positive response to this move from the business community, our existing
customers and prospective new customers worldwide. The completion of technology
campus is a major milestone for NetSol, employees, customers and the
shareholders. Due to its recent growth, management has already started the
planning of constructing a new phase by erecting another structure behind the
current building.
Dividends
and Redemption
It
has
been the Company's policy to invest earnings in the growth of the Company rather
than distribute earnings as dividends. This policy, under which dividends have
not been paid since the Company's inception and is expected to continue, but
is
subject to regular review by the Board of Directors.
Changes
In And Disagreements With Accountants On Accounting And Financial
Disclosure
Kabani
& Company’s report on NetSol’s financial statements for the fiscal years
ended June 30, 2004 and June 30, 2005, did not contain an adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles, except for a going concern uncertainty
for June 30, 2004.
In
connection with the audit of NetSol's financial statements for the fiscal years
ended June 30, 2004 and June 30, 2005 there were no disagreements, disputes,
or
differences of opinion with Kabani & Company on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope
and
procedures, which, if not resolved to the satisfaction of Kabani & Company
would have caused Kabani & Company to make reference to the matter in its
report.
Saeed
Kamran Patel & Co.’s report on NetSol’s Pakistan subsidiaries financial
statements for the fiscal years ended June 30, 2004 and June 30, 2005, did
not
contain an adverse opinion or disclaimer of opinion, and was not qualified
or
modified as to uncertainty, audit scope, or accounting principles.
In
connection with the audit of NetSol's Pakistan subsidiaries financial statements
for the fiscal years ended June 30, 2004 and June 30, 2005 there were no
disagreements, disputes, or differences of opinion with Saeed Kamran Patel
&
Co. on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures, which, if not resolved to the
satisfaction of Saeed Kamran Patel & Co. would have caused it to make
reference to the matter in its report.
INFORMATION
ABOUT MCCUE SYSTEMS, INC.
Located
at 111 Anza Blvd., Suite 310, Burlingame, California 94010; telephone number
is
(650) 348-0650, McCue Systems, Inc. has over 30 years of experience in
developing business solutions for the equipment and vehicle leasing industry
as
a provider of lease/loan portfolio management software for banks, leasing
companies and manufacturers. Its flagship product, LeasePak, simplifies
lease/loan administration and asset management by accurately tracking leases,
loans and equipment from origination through end-of-term and disposition.
McCue
Systems provides the leasing technology industry in the development of
Web-enabled and Web-based tools to deliver superior customer service, reduce
operating costs, streamline the lease management lifecycle, and support
collaboration with origination channel and asset partners. LeasePak can be
configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and
Sybase users. And for scalability, McCue Systems offers the LeasePak Bronze,
Silver and Gold Editions for systems and portfolios of virtually all sizes
and
complexities. McCue Systems’ solutions provide the equipment and vehicle leasing
infrastructure at leading Fortune 500 banks and manufacturers, as well as for
some of the industry’s leading independent lessors, including Cisco, Hyundai, JP
Morgan/Chase, ORIX, and Volkswagen Credit.
McCue
Systems, Inc. leases 9,554 square feet of office space in Burlingame,
California. The monthly lease cost is $20,552. The lease expires on June 30,
2007. McCue Systems, Inc. does not anticipate any difficulty in either renewing
its lease or acquiring substitute premises upon expiration of the current term.
McCue Systems, Inc. is not aware of any threatened or outstanding legal
proceedings.
SELECTED
HISTORICAL FINANCIAL DATA
We
derived the historical information from the audited financial statements as
of
and for the years ended December 31, 2004 and 2005 and from the unaudited
financial statements as of and for each of the three months ended March 31,
2005
and 2006.
The
information is only a summary and should be read in conjunction with each
company’s historical financial statements and related notes contained elsewhere
herein. The historical results included below and elsewhere in this document
are
not indicative of the future performance of McCue Systems, Inc., NetSol
Technologies, Inc. or the combined company.
MCCUE
SYSTEMS, INCORPORATED
SELECTED
CONDENSED BALANCE SHEET DATA
|
|
As
of
|
|
As
of
|
|
As
of
|
|
As
of
|
|
|
|
December
31, 2004
|
|
December
31, 2005
|
|
March
31, 2005
|
|
March
31, 2006
|
|
|
|
(Audited)
|
|
(Audited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
1,647,533
|
|
|
1,946,322
|
|
$
|
1,786,688
|
|
$
|
1,848,876
|
|
Property
& equipment, net
|
|
|
57,638
|
|
|
59,261
|
|
|
47,852
|
|
|
64,706
|
|
Intangible
assets, net
|
|
|
139,200
|
|
|
232,781
|
|
|
139,200
|
|
|
211,312
|
|
Rent
deposits
|
|
|
41,005
|
|
|
41,005
|
|
|
41,005
|
|
|
41,005
|
|
Total
assets
|
|
$
|
1,885,376
|
|
$
|
2,279,369
|
|
$
|
2,014,745
|
|
$
|
2,165,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
2,667,785
|
|
|
2,443,233
|
|
$
|
2,711,215
|
|
$
|
2,448,449
|
|
Stockholders'
deficit
|
|
|
(782,409
|
)
|
|
(163,864
|
)
|
|
(696,470
|
)
|
|
(282,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' deficit
|
|
$
|
1,885,376
|
|
$
|
2,279,369
|
|
$
|
2,014,745
|
|
$
|
2,165,899
|
|
MCCUE
SYSTEMS, INCORPORATED
SELECTED
CONDENSED STATEMENTS OF OPERATION DATA
|
|
For
the years
|
|
For
the three months
|
|
|
|
Ended
December 31,
|
|
Ended
March 31,
|
|
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
|
|
(Audited)
|
|
(Unaudited)
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,527,814
|
|
$
|
5,647,637
|
|
$
|
1,206,183
|
|
$
|
1,133,862
|
|
Cost
of Sales
|
|
|
2,208,560
|
|
|
2,494,269
|
|
|
612,860
|
|
|
620,209
|
|
Gross
Profit
|
|
|
2,319,254
|
|
|
3,153,368
|
|
|
593,323
|
|
|
513,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
2,416,743
|
|
|
2,553,477
|
|
|
509,499
|
|
|
642,819
|
|
Income
(loss) from operations
|
|
|
(97,489
|
)
|
|
599,891
|
|
|
83,824
|
|
|
(129,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
25,695
|
|
|
46,327
|
|
|
2,115
|
|
|
10,480
|
|
Net
Income (loss)
|
|
$
|
(71,794
|
)
|
$
|
646,218
|
|
$
|
85,939
|
|
$
|
(118,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
$
|
0.97
|
|
$
|
0.13
|
|
$
|
(0.18
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
$
|
0.90
|
|
$
|
0.12
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
669,539
|
|
|
669,539
|
|
|
669,539
|
|
|
669,539
|
|
Diluted
|
|
|
669,539
|
|
|
716,260
|
|
|
698,075
|
|
|
669,539
|
|
Management's
Discussion and Analysis Or Plan of Operation
The
following discussion is intended to assist in an understanding of the Company's
financial position and results of operations for the three months ended March
31, 2006.
Forward-Looking
Information.
This
report contains certain forward-looking statements and information relating
to
the Company that is based on the beliefs of its management as well as
assumptions made by and information currently available to its management.
When
used in this report, the words "anticipate", "believe", "estimate", "expect",
"intend", "plan", and similar expressions as they relate to the Company or
its
management, are intended to identify forward-looking statements. These
statements reflect management's current view of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected. The Company's
realization of its business aims could be materially and adversely affected
by
any technical or other problems in, or difficulties with, planned funding and
technologies, third party technologies which render the Company's technologies
obsolete, the unavailability of required third party technology licenses on
commercially reasonable terms, the loss of key research and development
personnel, the inability or failure to recruit and retain qualified research
and
development personnel, or the adoption of technology standards which are
different from technologies around which the Company's business ultimately
is
built. The Company does not intend to update these forward-looking
statements.
INTRODUCTION
With
over
30 years of experience in developing business solutions for the equipment and
vehicle leasing industry, McCue Systems Inc. is the leading provider of
lease/loan portfolio management software for banks, leasing companies, and
manufacturers. Its flagship product, LeasePak, simplifies lease/loan
administration and asset management by accurately tracking leases, loans, and
equipment from origination through end-of-term and disposition.
McCue
Systems has developed network and Web-based tools to provide lessors with
superior customer service, reduced operating costs, streamlined lease operations
and enhanced collaboration with origination channel and asset partners.
By
harnessing the most advanced technologies, McCue Systems offers the right
operating platform for almost any enterprise. McCue Systems offers the LeasePak
Bronze, Silver, and Gold Editions for systems and portfolios of virtually all
sizes and complexities. McCue Systems’ solutions has a high standard for
reliability, providing the equipment and vehicle leasing infrastructure at
leading Fortune 500 banks and manufacturers, as well as for the industry’s
leading bank, independent and manufacturing captive lessors, including Cisco
Capital, Hyundai Motor Finance, JP Morgan/Chase, ORIX, and Volkswagen Credit
US.
The
leasing experts at McCue Systems work closely with lessors to put the company’s
leasing expertise to work to streamline lease operations and enhance customer
retention at every stage of the lease lifecycle.
Management
is performing due diligence and is seriously considering joining forces with
a
company that would allow McCue to take advantage of the global markets. McCue
is
considering public as well as financially strong private candidates which would
provide a level of assurance to our existing and future customers as to the
long
term viability of the combined organization.
PLAN
OF OPERATIONS
Management
has set the following new goals for McCue Systems’ next 12 months.
· |
Improve
Financial Performance
|
Effective Business Plan Overhead
Implement Strategy for focusing on Medium to Small Accounts
· |
Stronger
Product Presentation
|
Improved LeasePak demo scripts
Show operational benefits
Align demos with strategic branding messages
· |
Active
Marketplace Involvement
|
Grow Outbound Telemarketing
Gather more Competitive Intelligence
Enhanced
Pipeline Management
· |
Account
Management Strategy
|
Defined Key Account strategies
Specific assigned senior managers for key accounts
Added outbound C-level communications from marketing
· |
Improved
Responsiveness
|
Better Product Reliability out the Door
Reporting
and Tracing Discrepancies from the Field
Broader Development and Support Bandwidth
Support
Implementation
Development
· |
Improved
Support for Productivity for End
Users
|
Rollout
LeasePak Productivity Suite
Better
LeasePak User Interface
Improve
LeasePak Asset Level Accounting / Billing
MATERIAL
TRENDS AFFECTING THE COMPANY
McCue
Systems has identified the following material trends affecting the
Company.
Positive
trends:
· |
Continued
recovery of the equipment leasing
industry.
|
· |
Continued
growth in capital equipment sales across industries.
|
· |
We
anticipate that our biggest competitors (IDS / Oracle / SAP) will
continue
to face serious challenges in this vertical.
|
· |
A
number of large leasing companies, manufacturers, and bank equipment
leasing operations will be looking to replace legacy and aging systems.
This places McCue Systems in a very strong position to capitalize
on any
upturn in IT spending by these companies.
|
· |
McCue
Systems will continue to enjoy the benefits of its highly effective
marketing efforts and industry presence. The presence of CEO John
McCue on
the Board of Directors of the dominant equipment leasing trade association
in the US, the Equipment Leasing Association, and his anticipated
election
to the Board of Trustees of The Equipment Leasing and Finance Foundation
will continue to bolster the dominance of the McCue Systems
brand.
|
Negative
trends:
· |
McCue
Systems will continue to face challenges in expanding the delivery
capacity of its Development Department, as a result of the expense
of
qualified software engineers and the expense of training of new technical
resources.
|
· |
McCue
Systems will continue to be capital-restrained, as a result of its
policy
to limit it capital spending to self-generated capital
funds.
|
CRITICAL
ACCOUNTING POLICIES
Our
financial statements and related public financial information are based on
the
application of accounting principles generally accepted in the United States
(“GAAP”). GAAP requires the use of estimates, assumptions, judgments and
subjective interpretations of accounting principles that have an impact on
the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of the
Company including information regarding contingencies, risk and financial
condition. Management believes our use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently and conservatively applied.
Valuations based on estimates are reviewed for reasonableness and conservatism
on a consistent basis throughout the Company. Primary areas where our financial
information is subject to the use of estimates, assumptions and the application
of judgment include our evaluation of impairments of intangible assets, and
the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We
base
our estimates on historical experience and on various other assumptions that
we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions.
We
continue to monitor significant estimates made during the preparation of our
financial statements.
VALUATION
OF LONG-LIVED AND INTANGIBLE ASSETS
The
recoverability of these assets requires considerable judgment and is evaluated
on an annual basis or more frequently if events or circumstances indicate that
the assets may be impaired. As it relates to definite life intangible assets,
we
apply the impairment rules as required by SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” which requires significant judgment
and assumptions related to the expected future cash flows attributable to the
intangible asset. The impact of modifying any of these assumptions can have
a
significant impact on the estimate of fair value and, thus, the recoverability
of the asset.
INCOME
TAXES
We
recognize deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability
and
establish a valuation allowance based upon historical losses, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. During fiscal year 2005-2006, we estimated the allowance on net
deferred tax assets to be one hundred percent of the net deferred tax
assets.
CHANGES
IN FINANCIAL CONDITION
Three
Months Ended March 31, 2006 as compared to the Three Months Ended March 31,
2005:
Net
revenues for the three months ended March 31, 2006 and 2005 were $1,133,862
and
$1,206,183, respectively. This reflects a decrease of $72,321 or 6% in the
current year as compared to the three months ended March 31, 2005. The decrease
is mainly attributable to the lower license fees and consulting fees. License
fees decreased $77,834 or 32% and consulting fees decreased $182,374 or 39%.
However, maintenance fees increased $113,885 or 242% and we added a new model
during the prior year for using our leasing software, the application provider
service (“ASP”) which contributed $76,011 and $0, respectively. Designed
for entry-level customers, the solution can be deployed in under 60 days, with
cost structures scaling commensurately with the customers operational needs.
The
ASP offering provides monthly hosting fees along with an initial implementation
fee. The ASP solution is co-managed with Lease Dimensions of Portland
Oregon.
During
the quarter ended March 31, 2006, McCue Systems achieved the following sales
objectives:
Key
Equipment Finance - Significant Add-on Business
Chase
Equipment Leasing - Significant Add-on Business
McCue
Systems’ gross profit was $513,653 for the three months ended March 31, 2006 as
compared with $593,323 for the previous year for a decrease of $79,670 or a
13.43%. The gross profit percentage decreased to approximately 45% for the
three
months ended March 31, 2006 compared to approximately 49% for the comparable
period in the prior year. The total cost of revenues only increased $7,349
or
1.2%. The lower gross profit is a result of lower revenues.
Operating
expenses were $642,819 and $509,499 for the three months ended March 31, 2006
and 2005, respectively. This reflects an increase of $133,320 or 26%. The
increase is mainly attributable to increased selling and marketing expenses
and
professional fees. Selling and marketing expenses were $156,271 and $112,801,
for the three months ended March 31, 2006 and 2005, respectively, an increase
of
$43,470. Professional services expense increased $80,826 to $85,296 in the
three
months ended March 31, 2006, from $4,470 in the comparable period in the prior
year, included in the current year expense is $15,000 for audit fees not
previously incurred.
Loss
from
operations was $129,166, compared to an income of $83,824 for the three months
ended March 31, 2006 and 2005, respectively. This represents a decrease of
$212,990.
Net
loss
was $118,686 compared to income of $85,939 for the three months ended March
31,
2006 and 2005, respectively. This is a decrease of $204,625.
The
net
earnings before interest, taxes, depreciation and amortization, (“EBITDA”) was a
loss of $89,318 compared to income of $97,006 or a decrease of $186,324 after
amortization and depreciation charges of $29,360 and $9,785, interest expense
of
$0 and $1,282, respectively. Although the net EBITDA income is a non-GAAP
measure of performance we are providing it for the benefit of our investors
and
shareholders to assist them in their decision-making process.
LIQUIDITY
AND CAPITAL RESOURCES
McCue
Systems’ cash position was $886,714 at March 31, 2006 compared to $542,415 at
March 31, 2005.
The
Company’s current assets as of March 31, 2006 were 85.36% of total assets, a 3%
decrease from 88.68% as of March 31, 2005.
Net
cash
provided by operating activities amounted to $85,190 for the three months ended
March 31, 2006, as compared to $47,558 for the comparable period in the prior
year. The increase is mainly due to increased accounts receivable. Net cash
used
in investing activities for the purchase of property and equipment was $13,344
and $0 for the three months ended March 31, 2006 and 2005, respectively.
For
the
short term, McCue Systems continues to pursue its strategy of self-funding
growth through its own retained earnings and cash reserves. This has been the
company’s operating philosophy since 1989 and we have been able to operate
within these constraints through a variety of economic conditions. This
philosophy, while limiting growth, appears to management to be the most viable
considering that there are limited funding alternatives for a private company
of
our size in our focused vertical market.
Management
expects to continue to improve its cash position in the current and future
quarters due to both closely managing expenses as well as generating ongoing
revenues from its maintenance agreements, backlog of revenue to be delivered,
Application Service Provider revenues as well as new license sales.
CHANGES
IN FINANCIAL CONDITION
Year
Ended December 31, 2005 as compared to the Year Ended December 31,
2004:
Net
revenues for the years ended December 31, 2005 and 2004 were $5,647,637 and
$4,527,814, respectively. This reflects an increase of $1,119,823 or 24.73%
in
the current year as compared to the year ended December 31, 2004. The increase
is mainly attributable to new orders of licenses. License fees increased
$661,752 or 91.48%. In addition, maintenance fees increased 11.72%. During
the
year, MSI undertook the development and deployment of its first customers under
an Application Service Provider (ASP) model. Designed for entry-level customers,
the solution deployed in under 60 days each with cost structures scaling
commensurately with the customers operational needs. The ASP offering provides
monthly hosting fees along with an initial implementation fee. The ASP solution
is co-managed with LeaseDimensions of Portland Oregon.
During
the year ended December 31, 2005, McCue Systems achieved the following revenue
objectives:
License:
|
|
$
|
1,385,103
|
|
Maintenance:
|
|
|
2,082,868
|
|
Consulting
& Services:
|
|
|
1,694,357
|
|
Hardware
Sales:
|
|
|
331,276
|
|
Application
Service Provider:
|
|
|
154,033
|
|
Total
Revenue
|
|
$
|
5,647,637
|
|
During
the year ended December 31, 2005, McCue Systems achieved the following sales
objectives:
· |
Hyundai
Motor Finance Company - New Client
|
· |
Continental
Servicing - New Client
|
· |
City
National Bank - New Client
|
· |
Provident
Inventory Finance - New Client
|
· |
National
City Commercial Capital Corp - Significant User
Addition
|
· |
Key
Equipment Finance - Significant User Addition
|
McCue
Systems’ gross profit was $3,153,368 for the year ended December 31, 2005 as
compared with $2,319,254 for the previous year for an increase of $834,114
or a
35.96% increase. The gross profit percentage increased to approximately 56%
for
the year ended December 31, 2005 compared to approximately 51% for previous
year. Although our salaries, source code escrow fees, and travel increased,
the
pricing of our licensing and services and greater sales offset these increases.
Operating
expenses were $2,553,477 for the year ended December 31, 2005 as compared to
$2,416,743 for the previous year. This reflects an increase of $136,734 or
5.66&. The increase is mainly attributable to the one-time charge of
$350,000 for settlement costs of litigation occurring over the past several
years. Selling and marketing expenses were $523,053 and $764,032, for the year
ended December 31, 2005 and 2004, respectively, a decrease of $240,979. The
Company wrote-off as uncollectible bad debts of $20 in the current year compared
to $27,044 for the prior year. Professional services expense increased $36,959
to $94,774 in the year ended December 31, 2005, from $57,815 in the previous
year.
Income
from operations was $599,891 compared to a loss of $97,489 for the years ended
December 31, 2005 and 2004, respectively. This represents an increase of
$697,380.
Net
income was $646,218 compared to a loss of $71,794 for the years ended December
31, 2005 and 20054, respectively. This is an increase of $718,012.
The
net
earnings before interest, taxes, depreciation and amortization, ( “EBITDA”)
income was $1,058,784 compared to $23,844 or an increase of $1,034,940 after
amortization and depreciation charges of $58,005 and $87,516, interest expense
of $4,561 and $8,122, and the non-recurring expense of $350,000 and $0,
respectively. Although the net EBITDA income is a non-GAAP measure of
performance we are providing it for the benefit of our investors and
shareholders to assist them in their decision-making process.
LIQUIDITY
AND CAPITAL RESOURCES
McCue
Systems’ cash position was $814,868 at December 31, 2005 compared to $494,857 at
December 31, 2004.
The
Company’s current assets as of December 31, 2005 were 85.39% of total assets, a
2% decrease from 87.38% as of December 31, 2004.
Net
cash
provided by operating activities amounted to $537,342 for the year ended
December 31, 2005, as compared to $550,097 for the previous year. The decrease
is mainly due to an increase in net income as well as decrease in unearned
revenues and the one-time settlement charge for litigation of $350,000.
Net
cash
used in investing activities amounted to $153,210 for the year ended December
31, 2005, as compared to $194,579 for the previous year. The difference lies
primarily in purchasing less property and equipment and capitalizing less
development costs as intangible assets. The Company had purchases of property
and equipment of $34,785 compared to $55,379 for the prior year.
Net
cash
used by financing activities amounted to $64,121 and $128,722 for the years
ended December 31, 2005 and 2004, respectively, for the payment on loans.
McCue
Systems continues to pursue its strategy of self-funding growth through its
own
retained earnings and cash reserves. This has been the company’s operating
philosophy since 1989and we have been able to operate within these constraints
through a variety of economic conditions. The Company’s Cash, Accounts
Receivable (net of uncollectible accounts of $44,067) and Accounts Payable
balances as of December 31, 2005 are $814,868, $1,050,570 and $633,656
respectively. The Company has accrued $350,000 at year-end as a reserve for
the
potential settlement of on-going litigation.
Management
expects to continue to improve its cash position in the current and future
quarters due to both closely managing expenses as well as generating ongoing
revenues from its maintenance agreements, backlog of revenue to be delivered,
Application Service Provider revenues as well as new license sales and sales
of
additional seats and modules to existing customers.
Changes
In And Disagreements With Accountants On Accounting And Financial
Disclosure
Kabani
& Company’s report on McCue’s financial statements for the fiscal years
ended December 31, 2005 and December 31,2004 did not contain an adverse opinion
or disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles.
In
connection with the audit of McCue's financial statements for the fiscal years
ended December 31, 2005 and December 31, 2004 there were no disagreements,
disputes, or differences of opinion with Kabani & Company on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures, which, if not resolved to the satisfaction of Kabani
&
Company would have caused Kabani & Company to make reference to the matter
in its report.
INFORMATION
ABOUT CQ SYSTEMS LTD. (NOW NETSOLCQ LTD.)
On
January 19, 2005, the Company entered into a Share Purchase Agreement whereby
the Company agreed to acquire 100% of the issued and outstanding shares of
CQ
Systems Ltd., a company organized under the laws of England and Wales (“CQ”),
now NetSolCQ Ltd. (the “CQ SPA”). Established in 1986 as CQ Systems Ltd., and
now part of the NetSol Technologies, Inc. group, NetSolCQ provides software
and
services to the financial services industry. NetSolCQ is a provider of software
solutions to the asset, motor, consumer, wholesale and premium finance sectors
with 75 banking, independent and captive finance house clients in the UK,
Europe, Africa and Asia. NetSolCQ is located at Planet House North Heath Lane,
Horsham West Sussex, RH 125QE, United Kingdom. Telephone number is
44-0-1403-282300. NetSol CQ leases approximately 6,570 square feet of office
and
computer space at the monthly rent of $10,989. The lease expires on June 23,
2011. NetSolCQ does not anticipate any difficulty in renewing this lease or
acquiring substitute premises at the conclusion of the term.
SELECTED
HISTORICAL FINANCIAL INFORMATION
We
derived the historical information from the audited financial statements as
of
and for the years ended March 31, 2003 and 2004 and from the unaudited financial
statements as of and for each of the nine months ended December 31, 2004 and
2003.
The
information is only a summary and should be read in conjunction with each
company’s historical financial statements and related notes contained elsewhere
herein. The historical results included below and elsewhere in this document
are
not indicative of the future performance of NetSolCQ Ltd., NetSol Technologies,
Inc. or the combined company.
SELECTED
CONDENSED BALANCE SHEET DATA
|
|
As
of
|
|
As
of
|
|
As
of
|
|
As
of
|
|
|
|
March
31, 2004
|
|
March
31, 2003
|
|
Dec.
31, 2004
|
|
Dec.
31, 2003
|
|
|
|
(Audited)
|
|
(Audited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
£
|
1,270,269
|
|
£
|
931,158
|
|
£
|
1,058,989
|
|
£
|
1,237,982
|
|
Property
& equipment, net
|
|
|
141,570
|
|
|
125,051
|
|
|
181,922
|
|
|
155,136
|
|
Total
assets
|
|
£
|
1,411,839
|
|
£
|
1,056,209
|
|
£
|
1,240,911
|
|
£
|
1,393,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
£
|
869,967
|
|
£
|
721,739
|
|
£
|
766,214
|
|
£
|
746,980
|
|
Long-term
liabilities
|
|
|
41,186
|
|
|
6,473
|
|
|
69,787
|
|
|
42,808
|
|
Stockholders'
equity
|
|
|
500,686
|
|
|
327,997
|
|
|
404,910
|
|
|
603,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
£
|
1,411,839
|
|
£
|
1,056,209
|
|
£
|
1,240,911
|
|
£
|
1,393,118
|
|
CQ
SYSTEMS LIMITED
SELECTED
CONDENSED STATEMENTS OF OPERATION DATA
|
|
For
the years
|
|
For
the nine months
|
|
|
|
Ended
March 31,
|
|
Ended
December 31,
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
|
|
(Audited)
|
|
(Unaudited)
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
£
|
2,739,303
|
|
£
|
2,471,477
|
|
£
|
1,813,546
|
|
£
|
2,014,630
|
|
Cost
of Sales
|
|
|
1,082,577
|
|
|
1,069,974
|
|
|
99,572
|
|
|
954,969
|
|
Gross
Profit
|
|
|
1,656,726
|
|
|
1,401,503
|
|
|
1,713,974
|
|
|
1,059,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
1,119,171
|
|
|
1,302,176
|
|
|
1,675,748
|
|
|
605,361
|
|
Income
(loss) from operations
|
|
|
537,555
|
|
|
99,327
|
|
|
38,226
|
|
|
454,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
14,245
|
|
|
6,727
|
|
|
14,827
|
|
|
9,580
|
|
Income
taxes
|
|
|
(141,049
|
)
|
|
(29,076
|
)
|
|
(10,080
|
)
|
|
(82,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss)
|
|
£
|
410,751
|
|
£
|
76,978
|
|
£
|
42,973
|
|
£
|
381,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.82
|
|
$
|
0.15
|
|
$
|
0.09
|
|
$
|
0.76
|
|
Diluted
|
|
$
|
0.82
|
|
$
|
0.15
|
|
$
|
0.09
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
500,000
|
|
|
500,000
|
|
|
500,000
|
|
|
500,000
|
|
Diluted
|
|
|
500,000
|
|
|
500,000
|
|
|
500,000
|
|
|
500,000
|
|
We
have
included CQ Systems financial information for the fiscal years preceding the
acquisition of CQ Systems, Ltd. by NetSol Technologies. The acquisition closed
in February 2005. All periods commencing with the period ending March 31, 2005
have been reported on a consolidated basis with the financial statements of
NetSol Technologies, Inc.
Management's
Discussion and Analysis Or Plan Of Operation
The
following discussion is intended to assist in an understanding of the Company's
financial position and results of operations for the nine months ending December
31, 2004. All amounts are presented in the local currency, British Pound
Sterling.
Forward-Looking
Information.
This
report contains certain forward-looking statements and information relating
to
the Company that is based on the beliefs of its management as well as
assumptions made by and information currently available to its management.
When
used in this report, the words "anticipate", "believe", "estimate", "expect",
"intend", "plan", and similar expressions as they relate to the Company or
its
management, are intended to identify forward-looking statements. These
statements reflect management's current view of the Company with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected. The Company's
realization of its business aims could be materially and adversely affected
by
any technical or other problems in, or difficulties with, planned funding and
technologies, third party technologies which render the Company's technologies
obsolete, the unavailability of required third party technology licenses on
commercially reasonable terms, the loss of key research and development
personnel, the inability or failure to recruit and retain qualified research
and
development personnel, or the adoption of technology standards which are
different from technologies around which the Company's business ultimately
is
built. The Company does not intend to update these forward-looking
statements.
INTRODUCTION
CQ
provides sophisticated accounting and administrative software, along with
associated services, to leasing and finance companies located in Europe, Asia
and Africa. The products include software modules for asset finance, consumer
finance, motor finance, general finance and insurance premium finance. The
modules provide an end-to-end contractual solution - from underwriting, contract
administration and accounting, through asset disposal and remarketing. Customers
include notable European companies such as Scania Finance GB, Close Consumer
Finance Ltd, Broadcastle PLC, Bank of Scotland Equipment Finance and Deutsche
Leasing Ltd.
CQ
operates on a global basis helping our clients identify, evaluate, and implement
technology solutions to meet their most critical business challenges and
maximize their bottom line. The products include sophisticated software
applications for the asset-based lease and financial institutions and through
the company’s industry expertise, it is able to deliver high quality,
cost-effective IT services, ranging from consulting and application development
to systems integration.
The
primary product offering ‘Enterprise Solution’ is the cornerstone of our forward
product strategy and we have continued to enhance the product with both generic
and customer-specific enhancements.
In
recent
periods we have delivered systems to DaimlerChrysler Capital Services across
Europe, building on our presence within the European market. In the next year
we
intend to build on our strong client base by further penetrating the UK market
and extending our sales efforts into Asia. Additionally, during the current
year
we have successfully implemented a new variant of our ‘Enterprise Systems’
within the Insurance Premium Finance sector and will be seeking further
opportunities for this product.
In
February 2005, we were acquired by NetSol Technologies, Inc., an IT products
and
service company based in the USA with Pakistan and Australia operations.
PLAN
OF OPERATIONS
.
Management
has set the following new goals for CQ Systems over the next twelve
months:
· |
Continue
with the Product Roadmap project
|
· |
Expand
sales within Insurance Premium Finance market, building on success
of
recent major installations
|
· |
Promote
and achieve opportunities for data migration
services
|
· |
Expand
presence within South Asia building on successful relationships achieved
in Sri Lanka and Singapore
|
· |
Build
on sales opportunities in Barbados following first installation at
Simpson
Finance
|
MATERIAL
TRENDS AFFECTING THE COMPANY
CQ
Systems has identified the following material trends affecting the Company.
Positive
trends:
· |
CQ
Systems position within the specialized UK market continues to build
and
improve. The company is recognized as a leading supplier of quality-driven
software solutions and respected for its deliver capabilities.
|
· |
Multiple
Country installations in DaimlerChrysler have proven our ability
to
deliver on a broad geographic basis with integrity and on
schedule.
|
· |
Although
the UK market continues to consolidate and would be considered mature,
the
company’s position within it is well received and
recognized.
|
· |
CQ
Systems manpower base consists of experienced staff with specific
leasing
expertise and enjoys minimal wastage allowing us to maximize skills
and
efficiency leverage.
|
· |
CQ
Systems can expand into rapidly growing Asian markets by building
on
existing customer links and experience. This is not an unknown market
for
us.
|
Negative
trends:
· |
Wages
costs for IT staff within the UK continues to be demand driven and
expensive, impacting our profitability. Focus has to concentrate
on
maximizing efficiencies and skills available to provide differentiated
and
leading product.
|
· |
Although
CQ Systems is perceived as an experienced and integrity driven provider,
the market views the company as a small company with lesser access
to
funding and expansion capability.
|
· |
Shifts
in UK leasing market trends through larger company consolidations
may
diminish the overall market size.
|
CRITICAL
ACCOUNTING POLICIES
The
consolidated US GAAP financial information contained in CQ Systems audited
statements represent historical information, which previously was reported
in
accordance with United Kingdom GAAP and has been restated in accordance with
US
GAAP. The restatement to US GAAP has been performed at the request of the
Directors of the company.
Our
financial statements and related public financial information are based on
the
application of accounting principles generally accepted in the United States
(“GAAP”). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on
the
assets, liabilities, and expense amounts reported. These estimates can also
affect supplemental information contained in the external disclosures of the
Company including information regarding contingencies, risk and financial
condition. Management believes our use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently and conservatively applied.
Valuations based on estimates are reviewed for reasonableness and conservatism
on a consistent basis throughout the Company. Primary areas where our financial
information is subject to the use of estimates, assumptions and the application
of judgment include our evaluation of impairments of intangible assets, and
the
recoverability of deferred tax assets, which must be assessed as to whether
these assets are likely to be recovered by us through future operations. We
base
our estimates on historical experience and on various other assumptions that
we
believe to be reasonable under the circumstances. Actual results may differ
materially from these estimates under different assumptions or conditions.
We
continue to monitor significant estimates made during the preparation of our
financial statements.
VALUATION
OF LONG-LIVED AND INTANGIBLE ASSETS
The
recoverability of these assets requires considerable judgment and is evaluated
on an annual basis or more frequently if events or circumstances indicate that
the assets may be impaired. As it relates to definite life intangible assets,
we
apply the impairment rules as required by SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” which requires significant judgment
and assumptions related to the expected future cash flows attributable to the
intangible asset. The impact of modifying any of these assumptions can have
a
significant impact on the estimate of fair value and, thus, the recoverability
of the asset.
INCOME
TAXES
We
recognize deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities. We regularly review our deferred tax assets for recoverability
and
establish a valuation allowance based upon historical losses, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. During fiscal year 2005-2006, we estimated the allowance on net
deferred tax assets to be one hundred percent of the net deferred tax
assets.
CHANGES
IN FINANCIAL CONDITION
Nine
Month Period Ended December 31, 2004 as compared to the Nine Month Period Ended
December 31, 2003:
Net
revenues for the nine months ended December 31, 2004 and 2003 were £1,813,546
and £2,014,630, respectively. This reflects a decrease of £201,084 or 9.98% in
the current nine months as compared to the nine months ended December 31, 2003.
During the nine months ended December 31, 2003 CQ Systems Limited secured a
substantial contract with Cattles Commercial Finance to deliver a £0.5million
solution which was delivered during the year. This project was complemented
by
the completion of a major installation at Singer and Friedlander Insurance
Finance.
The
first
nine months of fiscal 2004 the Company secured several installation contracts
with CHS, Aascent Finance, Orix Leasing and Kenya Commercial Bank. The phasing
of these projects, some of which are expected to continue through fiscal 2005,
has resulted in a decrease in revenue for the period, compared to the same
period in fiscal 2003. CQ Systems Ltd expects the next quarter to supply higher
revenues as installations are substantially progressed and that the annual
revenue for the year ended March 31, 2005 should exceed the previous
year.
The
gross
profit was £1,713,974 for the nine months ending December 31, 2004 as compared
with £1,059,661 for the same period of the previous year. The gross profit
percentage increased to 94.51% in the current fiscal year from 52.60% for the
nine months ended December 31, 2003. This is mainly due to decreases in
revenue and cost of sales.
The
first
nine months of 2004 the Company secured several installation contracts with
CHS,
Aascent Finance, Orix Leasing and Kenya Commercial Bank. The phasing of these
projects, some of which are expected to continue through 2005, has resulted
in a
decrease in revenue for the period, compared to the same period in 2004. CQ
Systems Ltd expects the next quarter to supply higher revenues as installations
are substantially progressed and that the annual revenue to 31 March 2005 should
exceed the previous year.
The
decrease in cost of revenue is attributable to the accounting policy of CQ
Systems at this time. At December 31, 2004 cost of revenue was comprised of
purchases directly on the customers’ behalf and third party suppliers. Staff
remuneration and benefits were defined as operating expenses, pending year
end
analysis of direct costs.
Operating
expenses were £1,675,748 for the nine months ending December 31, 2004 as
compared to £605,361, for the corresponding period last fiscal year for an
increase of £1,070,387. The increase in operating costs is attributable to the
accounting policy of CQ Systems at this time. At December 31, 2004 cost of
revenue comprises purchases directly on the customers’ behalf and third party
suppliers. Staff remuneration and benefits are defined as operating expenses,
pending year end analysis of direct costs.
Income
from operations was £38,225 compared to £454,300 for the nine months ended
December 31, 2004 and 2003, respectively. This represents a decrease of £416,075
or 92% for the nine-month period compared to the prior year. This is directly
due to a decrease in revenue over the two periods and is a reflection of the
project phasing during the year. It is anticipated that by the end of next
quarter (March 31, 2005) net revenue should exceed the previous year if projects
remain on schedule. Also, third party supplier costs in relation to Aascent
Finance installation were a significant additional cost above those of the
previous period.
Net
income was £42,972 for the nine months ended December 31, 2004 compared to
£381,047 for the nine months ended March 31, 2003. This is a decrease of
£338,075 or 89% compared to the prior year.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company's cash position was £540,732 at December 31, 2004 compared to £562,326
at December 31, 2003.
Net
cash
provided by operating activities amounted to £14,993 for the nine months ended
December 31, 2004, as compared to £291,331 for the comparable period last fiscal
year. The decrease is mainly due to a decrease in net income as well as an
increase in accounts receivable and accounts payable.
Net
cash
used by investing activities for the purchase of equipment amounted to £144,999
for the nine months ended December 31, 2004, as compared to £71,427 for the
comparable period last fiscal year.
Net
cash
used by financing activities for the distribution of dividends amounted to
£138,750 and £105,714 for the nine months ended December 31, 2004 and 2003,
respectively.
CQ
Systems Limited will make use of a loan facility with its bank should further
funds be required, but does not anticipate requiring working capital beyond
that
provided by its bank balances and debtors for its plans for the financial year
ending 31 March 2005.
CHANGES
IN FINANCIAL CONDITION
Year
Ended March 31, 2004 as compared to the Year Ended March 31,
2003:
Net
revenues for the fiscal years ended March 31, 2004 and 2003 were £2,739,303 and
£2,471,477, respectively. This reflects an increase of £267,826 or 10.84% in the
current year as compared to the year ended March 31, 2003. The increase is
attributable to increases in license and maintenance revenues of £143,000
and £174,000 respectively.
CQ
Systems Limited has been successful in delivering a major installation at
Insurance Premium Finance provider Singer and Friedlander Insurance Finance
over
the two years, representing a total £ 1.4 million in revenue in equal
proportions across the periods in question.
During
fiscal 2003 the company also completed the final installation in a major
multi-country installation with DaimlerChrysler Capital Services as well as
implementing two further Enterprise systems at Broadcastle PLC and Hanover
Finance.
During
fiscal 2004 CQ Systems secured a major contract with Cattles Commercial Finance
to deliver a £0.5million solution which was delivered within the
year.
Additionally,
the company saw a significant increase of 25% in maintenance revenue (£ 175,000)
for all products in the fiscal year ended March 31, 2004. This reflected an
increase in the number of major installations and upgrades in the two
years.
The
gross
profit was £1,656,726 for the fiscal year ended March 31, 2004 as compared with
£1,401,503 for the fiscal year ended March 31, 2003. The gross profit percentage
increased 3.77 % to 60.48% in the current fiscal year from 56.71% for the fiscal
year ended March 31, 2003. The increase in gross profit over the two years
is comprised of increases in license and maintenance revenues while the cost
of
sales has increased only marginally over the two years.
Operating
expenses were £1,119,171 for the fiscal year ended March 31, 2004 as compared to
£1,302,176, for the corresponding period last fiscal year for a decrease of
£183,005. Operating expenses were comprised of the following for the years ended
March 31, 2004 and 2003:
·
|
Directors
salaries and fees
|
|
2004:
£
271,826
|
|
2003:
£ 391,587
|
·
|
Operating
salaries and pensions
|
|
2004:
£
209,809
|
|
2003:
£ 258,448
|
·
|
Advertising
and Marketing
|
|
2004:
£
52,754
|
|
2003:
£ 26,532
|
·
|
Depreciation
|
|
2004:
£
70,992
|
|
2003:
£ 98,513
|
·
|
Other
operating
costs
|
|
2004:
£
248,230
|
|
2003:
£ 250,618
|
The
decrease in directors’ salaries and fees and operating salaries of £168,400 is
mainly attributable to a change in remuneration policy for shareholders to
a
performance related dividend basis.
Income
from operations was £537,554 compared to £99,326 for the fiscal years ended
March 31, 2004 and 2003, respectively. This represents an increase of £438,228.
This is directly due to an increase in gross profit over the two years
comprising increased in license and maintenance together with a decrease in
directors salaries and fees and operating salaries of £168,400, mainly
attributable to a change in remuneration policy for shareholders to a
performance related dividend basis.
Net
income was £410,750 for the fiscal year ended March 31, 2004 compared to £76,977
for the fiscal year ended March 31, 2003. This is an increase of £333,773
compared to the prior year.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company's cash position was £809,488 at March 31, 2004 compared to £448,136 at
March 31, 2003.
Net
cash
provided by operating activities amounted to £673,458 for the fiscal year ended
March 31, 2004, as compared to £105,959 for the fiscal year ended March 31,
2003. The increase is mainly due to an increase in net income as well as a
decrease in accounts receivable and accounts payable.
Net
cash
used by investing activities for the purchase of equipment amounted to £97,106
and £27,462 for the fiscal years ended March 31, 2004 and 2003, respectively.
Net
cash
used by financing activities for the distribution of dividends amounted to
£215,000 and £0 for the fiscal years ended March 31, 2004 and 2003,
respectively.
CQ
Systems Limited will make use of a loan facility with its bank should further
funds be required, but does not anticipate requiring working capital beyond
that
provided by its bank balances and debtors for its plans for the financial year
ending 31 March 2005.
Changes
In And Disagreements With Accountants On Accounting And Financial
Disclosure
CMB
Parntership’s report on CQ Systems, Ltd.’s financial statements for the fiscal
years ended March 31, 2005 and March 31, 2004 did not contain an adverse opinion
or disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles.
In
connection with the audit of CQ Systems, Ltd’s financial statements for the
fiscal years ended March 31, 2005 and March 31, 2004 there were no
disagreements, disputes, or differences of opinion with CMB Partnership on
any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures, which, if not resolved to the satisfaction
of
CMB Partnership would have caused CMB Partnership to make reference to the
matter in its report.
(Proposal
No. Two)
APPROVAL
TO AMEND THE ARTICLES OF INCORPORATION OF THE COMPANY TO PERMIT
THE BOARD OF
DIRECTORS TO DESIGNATE BY RESOLUTION ACCORDING TO NEVADA
REVISED STATUTES
78.1955 THE POWERS, PREFERENCES AND RELATIVE RIGHTS OF
PREFERRED STOCK AND
QUALITIFCATIONS, LIMITATIONS
AND
RESTRICTIONS THEREOF
The
articles of incorporation of the Company authorize the issuance of up to 5
million shares of preferred stock.
Nevada
Revised Statutes section 78.1955 states in pertinent part that “. . .If the
voting powers, designations, preferences, limitations, restrictions and relative
rights of any class or series of stock have been established by a resolution
of
the board of directors pursuant to a provision in the articles of incorporation,
a certificate of designation setting forth the resolution and stating the number
of shares for each designation must be signed by an officer of the corporation
and filed with the Secretary of State. A certificate of designation signed
and
filed pursuant to this section must become effective before the issuance of
any
shares of the class or series. . .”
In
a
Certificate of Amendment of the Articles of Incorporation of the Company filed
with the Nevada Secretary of State on March 20, 2002, the articles of
incorporation were amended to permit the board of directors to designate by
resolution the voting powers, designations, preferences, limitations,
restrictions and relative rights of the preferred stock.
In
a
Certificate of Amendment of the Articles of Incorporation of the Company filed
with the Nevada Secretary of State on August 12, 2003, the provision of Article
III of the Articles of Incorporation providing such powers to the board of
directors was inadvertently omitted.
The
grant
of such powers is necessary to permit the board of directors to by resolution
assign the voting powers, designations, preferences, limitations, restrictions
and relative rights of the Series A 7% Cumulative Convertible Preferred Stock
contemplated to be issued if shareholder approval of proposal number one is
acquired.
The
Convertible Notes will convert into the preferred stock following stockholder
approval (the “Preferred Stock”). To date, no shares of the Company’s preferred
stock have been issued. We are seeking your approval to amend the articles
of
incorporation to permit the board of directors to designate the rights and
privileges of the preferred stock. The Preferred Stock contemplated to be issued
in the Financing (which certificate of designation is attached to Annex E and
which will be filed with the Nevada Secretary of State only upon approval of
the
proposals set forth in this Proxy) are convertible into shares of common stock
at such time and at such value as is set forth in the Certificate of
Designation. The initial conversion value shall be $1.65. The conversion value
is subject to adjustment as set forth in the Certificate of Designation. The
conversion price is adjusted for dividends subdivisions, combinations,
distributions and issuances of shares, or securities convertible into shares,
of
common stock of the Company issued at an effective
per share selling price which is the less than the greater of the fair market
price or the conversion value as of the issuance date. If the issued value
is
less than the greater of the fair market price or the conversion value, then
a
new conversion value is reached by multiplying the conversion value then in
effect by a fraction of the number of shares of common stock outstanding
immediately prior to the issuance plus the number of shares issued at the new
issuance price and, the number of shares issued and outstanding immediately
after such date. By way of example only, let’s say that the Company issues
100,000 shares at $1.50, a number which is less than the initial conversion
value of $1.65. Let’s also say for purposes of this example only that prior to
this issuance there were 16,100,000 shares of common stock of the Company issued
and outstanding. The initial conversion value would be adjusted by multiplying
$1.65 by .997568 (the fraction 16,100,000 plus 60,606 (the number of shares
that
$100,000 would purchase at the initial conversion price of $1.65), or 16,60,606,
divided by 16,200,000 (the number of shares issued and outstanding after the
issuance). This example results in a reduction of the conversion value to
$1.6459. No adjustment occurs for any issuance or sales outstanding prior to
the
Financing, or to any officer, director or employee of the Company pursuant
to a
bona fide option or equity incentive plan duly adopted by the Company.
The
holders of the Preferred Stock are entitled to receive cumulative dividends
at
the rate of 7% per annum from the date of issuance of each share until paid.
The
dividends may be paid, at the Company’s option, in cash or in shares of common
stock in arrears on the first business day of each calendar quarter of each
year. The Company may force a conversion of the Preferred Stock in the event
that the market price of the Company’s common stock is greater than 200% of the
conversion value. If any shares of the Preferred Stock remain outstanding on
June 15, 2009, the Company shall redeem such shares for an amount in cash equal
to the liquidation preference plus all accrued but unpaid dividends.
Anti-dilution protection is afforded to the holders by providing for an
adjustment of the conversion price in certain circumstances. The conversion
price is adjusted for dividends subdivisions, combinations, distributions and
issuances of shares, or securities convertible into shares, of common stock
of
the Company issued at an effective
per share selling price (as defined below) which is less than the greater of
(I)
the closing sale price per share of the Common Stock on the principal market
on
which the Common Stock is traded the trading day next preceding such issue
or
sale or, in the case of issuances to holders of its Common Stock, the date
fixed
for the determination of stockholders entitled to receive such warrants, rights,
or options (“Fair Market Price”), or (II) the conversion value, then in each
such case the conversion value in effect immediately prior to such issue or
sale
or record date, as applicable, shall be automatically reduced effective
concurrently with such issue or sale to an amount determined by multiplying
the
conversion value then in effect by a fraction, (x) the numerator of which shall
be the sum of (1) the number of shares of Common Stock outstanding immediately
prior to such issue or sale, plus (2) the number of shares of Common Stock
which
the aggregate consideration received by the Corporation for such additional
shares would purchase at such Fair Market Price or conversion value, as the
case
may be, and (y) the denominator of which shall be the number of shares of Common
Stock of the Corporation outstanding immediately after such issue or sale.
The
foregoing provision shall not apply to any issuances or sales of Common Stock
or
Convertible Securities (i) pursuant to any Convertible Securities currently
outstanding on the date hereof in accordance with the terms of such Convertible
Securities in effect on June 15, 2006, or (ii) to any officer, director or
employee of the Company pursuant to a bona fide option or equity incentive
plan
duly adopted by the Company. The
Preferred Stock bears voting rights in an amount equal to the conversion value
of the preferred stock into common stock, without giving effect to any
anti-dilution provisions of the Preferred Stock. Conversion of the Preferred
Stock is subject to beneficial ownership caps of from 4.9% to 9.9% of the total
number of shares of common stock of the Company then issued and
outstanding
The
Company proposes to amend Article III of the Articles of Incorporation to add
the following provisions:
“The
board of directors of the Corporation (the “Board of Directors”) is expressly
authorized to provide for issuance of all or any shares of the Preferred Stock
in one or more series, and to fix for each such series such voting powers,
full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors providing for the
issuance of such series and as may be permitted by the Nevada Revised Statutes
(as amended from time to time, the “NRS”), including, without limitation, the
authority to provide that any such class or series may be (i) subject to
redemption at any time or times and at such price or prices: (ii) entitled
to
receive dividends (which may be cumulative or non-cumulative) at such rates,
on
such conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; (vi) entitled to vote separately
or together with any other series or class of stock of the Corporation; or
(v)
convertible into, or exchangeable for, shares of any other class or classes
of
stock, or of any other series of the same or any other class or classes of
stock, of the Corporation at such price or prices or at such rates of exchange
and with such adjustments; all as may be stated in such resolution or
resolutions.”
The
amendment of the articles requires the affirmative vote of a majority of shares
represented and voting, in person or by proxy, at the Annual
Meeting.
THE
BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE AMENDMENT
OF
ARTICLES OF INCORPORATION TO INCLUDE THE POWER OF THE BOARD OF DIRECTORS BY
RESOLUTION TO DESIGNATE THE RIGHTS AND PRIVILEGES OF THE PREFERRED STOCK AS
PROVIDED FOR BY NEVADA REVISED STATUTES 78.1955.
Other
Matters
The
Board
of Directors of the Company does not intend to present any business at the
Special Meeting other than the matters specifically set forth in this Proxy
Statement and knows of no other business to come before the Special Meeting.
However, on all matters properly brought before the Special Meeting by the
Board
or by others, the persons named as proxies in the accompanying proxy will vote
in accordance with their best judgment.
It
is
important that your shares are represented and voted at the Special Meeting,
whether or not you plan to attend. Accordingly, we respectfully request that
you
sign, date and mail your Proxy in the enclosed envelope as promptly as
possible.
Dated:
September 15, 2006
Calabasas,
California
|
|
|
|
BY
ORDER OF THE
BOARD OF DIRECTORS |
|
|
|
|
|
Najeeb
Ghauri |
|
Chairman |
|
|
Index
to
Financial Statements
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES FOR THE PERIOD ENDED MARCH
31,
2006
|
|
|
|
|
(UNAUDITED)
|
|
|
64
|
|
|
|
|
|
|
Consolidated
Balance Sheet
|
|
|
64
|
|
Consolidated
Statement Of Operations
|
|
|
65
|
|
Consolidated
Statement Of Cash Flows
|
|
|
66
|
|
Notes
To Consolidated Financial Statements
|
|
|
68
|
|
|
|
|
|
|
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES FOR THE YEAR ENDED JUNE 30,
2005
|
|
|
83
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
83
|
|
Consolidated
Balance Sheet as of June 30, 2005
|
|
|
84
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2005 and
2004
|
|
|
85
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended
|
|
|
|
|
June
30, 2005 and 2004
|
|
|
87
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2005 and
2004
|
|
|
88
|
|
Notes
to Consolidated Financial Statements
|
|
|
90
|
|
|
|
|
|
|
MCCUE
SYSTEMS, INC. FOR THE QUARTER ENDED MARCH 31, 2006
(UNAUDITED)
|
|
|
119
|
|
Balance
Sheet
|
|
|
119
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
119
|
|
Statement
of Operations
|
|
|
120
|
|
Statement
of Cash Flows
|
|
|
121
|
|
Notes
to Financial Statements
|
|
|
123
|
|
|
|
|
|
|
MCCUE
SYSTEMS, INC. FOR THE YEAR ENDED DECEMBER 31,
2005
|
|
|
134
|
|
Report
of Independent Registered and Public Accounting Firm
|
|
|
134
|
|
Balance
Sheet
|
|
|
135
|
|
Liabilities
and Stockholders’ Deficit
|
|
|
135
|
|
Statement
of Operations
|
|
|
136
|
|
Statement
of Stockholders’ Deficit
|
|
|
137
|
|
Statement
of Cash Flows
|
|
|
138
|
|
Notes
to Financial Statements
|
|
|
140
|
|
|
|
|
|
|
NETSOL
TECHNOLOGIES, INC. PRO FORMAS WITH MCCUE SYSTEMS,
INC.
|
|
|
151
|
|
FOR
THE PERIOD ENDED MARCH 31, 2006 (UNAUDITED)
|
|
|
|
|
Statement
of Financial Conditions
|
|
|
152
|
|
Statement
of Operations
|
|
|
154
|
|
|
|
|
|
|
NETSOL
TECHNOLOGIES, INC. PRO FORMAS WITH MCCUE SYSTEMS,
INC.
|
|
|
|
|
FOR
THE YEAR ENDED JUNE 30, 2005 (UNAUDITED)
|
|
|
155
|
|
Statement
of Financial Conditions
|
|
|
156
|
|
Statement
of Operations
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
CQ
SYSTEMS, LTD. FOR THE NINE MONTHS ENDED DECEMBER 31, 2004
(UNAUDITED)
|
|
|
159
|
|
Consolidated
Balance Sheet
|
|
|
159
|
|
Consolidated
Statement of Shareholders’ Equity
|
|
|
159
|
|
Consolidated
Statement of Income and Retained Earnings
|
|
|
160
|
|
Consolidated
Statement of Comprehensive Income
|
|
|
160
|
|
Consolidated
Statement of Cash Flows
|
|
|
161
|
|
Notes
to Consolidated Financial Statements
|
|
|
163
|
|
|
|
|
|
|
CQ
SYSTEMS, LTD. FOR THE YEAR ENDED MARCH 31, 2004
|
|
|
167
|
|
Report
of Board of Directors
|
|
|
167
|
|
Auditor’s
Report
|
|
|
168
|
|
Consolidated
Balance Sheet
|
|
|
169
|
|
Consolidated
Statement of Shareholders’ Equity
|
|
|
169
|
|
Consolidated
Statement of Income and Retained Earnings
|
|
|
170
|
|
Consolidated
Statement of Comprehensive Income
|
|
|
170
|
|
Consolidated
Statement of Cash Flows
|
|
|
171
|
|
Notes
to Consolidated Financial Statements
|
|
|
173
|
|
|
|
|
|
|
NETSOL
TECHNOLOGIES, INC. PRO FORMAS WITH CQ SYSTEMS,
LTD.
|
|
|
|
|
FOR
THE PERIOD ENDED DECEMBER 31, 2004 (UNAUDITED)
|
|
|
178
|
|
Statement
of Financial Condition
|
|
|
179
|
|
Statement
of Operations
|
|
|
181
|
|
|
|
|
|
|
NETSOL
TECHNOLOGIES, INC. PRO FORMAS WITH CQ SYSTEMS,
LTD.
|
|
|
|
|
FOR
THE YEAR ENDED JUNE 30, 2004 (UNAUDITED)
|
|
|
182
|
|
Statement
of Financial Condition
|
|
|
183
|
|
Statement
of Operations
|
|
|
185
|
|
|
|
|
|
|
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET — MARCH 31, 2006
(UNAUDITED)
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,390,245
|
|
|
|
|
Certificates
of deposit
|
|
|
2,098,003
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$80,000
|
|
|
5,810,972
|
|
|
|
|
Revenues
in excess of billings
|
|
|
3,416,762
|
|
|
|
|
Other
current assets
|
|
|
2,067,396
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
15,783,378
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
|
|
|
6,425,581
|
|
Intangibles:
|
|
|
|
|
|
|
|
Product
licenses, renewals, enhancements, copyrights,
|
|
|
|
|
|
|
|
trademarks,
and tradenames, net
|
|
|
4,623,098
|
|
|
|
|
Customer
lists, net
|
|
|
1,083,528
|
|
|
|
|
Goodwill
|
|
|
1,166,611
|
|
|
|
|
Total
intangibles
|
|
|
|
|
|
6,873,237
|
|
Total
assets
|
|
|
|
|
$
|
29,082,196
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,022,585
|
|
|
|
|
Current
portion of notes and obligations under capitalized
leases
|
|
|
1,076,757
|
|
|
|
|
Billings
in excess of revenues
|
|
|
300,029
|
|
|
|
|
Due
to officers
|
|
|
83,021
|
|
|
|
|
Deferred
liability
|
|
|
313,397
|
|
|
|
|
Loans
payable, bank
|
|
|
755,095
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
5,550,884
|
|
Obligations
under capitalized leases, less
current maturities
|
|
|
|
|
|
118,079
|
|
Total
liabilities
|
|
|
|
|
|
5,668,963
|
|
Minority
interest
|
|
|
|
|
|
1,385,010
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 45,000,000 share authorized;
|
|
|
|
|
|
|
|
15,142,185
issued and outstanding
|
|
|
15,142
|
|
|
|
|
Additional
paid-in-capital
|
|
|
52,584,940
|
|
|
|
|
Treasury
stock
|
|
|
(27,197
|
)
|
|
|
|
Accumulated
deficit
|
|
|
(29,968,384
|
)
|
|
|
|
Stock
subscription receivable
|
|
|
(372,688
|
)
|
|
|
|
Common
stock to be issued
|
|
|
116,000
|
|
|
|
|
Other
comprehensive loss
|
|
|
(319,590
|
)
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
22,028,223
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
$
|
29,082,196
|
|
See
accompanying notes to consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
the Three Month Periods
|
|
For
the Nine Month Periods
|
|
|
|
Ended
March 31,
|
|
Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(restated)
|
|
(restated)
|
|
Net
revenues
|
|
$
|
5,045,827
|
|
$
|
3,190,918
|
|
$
|
14,040,185
|
|
$
|
7,972,450
|
|
Cost
of revenues
|
|
|
2,318,529
|
|
|
1,342,216
|
|
|
5,962,913
|
|
|
2,943,871
|
|
Gross
profit
|
|
|
2,727,298
|
|
|
1,848,702
|
|
|
8,077,272
|
|
|
5,028,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
444,472
|
|
|
219,399
|
|
|
1,190,906
|
|
|
474,099
|
|
Depreciation
and amortization
|
|
|
594,385
|
|
|
384,649
|
|
|
1,711,771
|
|
|
1,007,789
|
|
Settlement
costs
|
|
|
-
|
|
|
-
|
|
|
15,953
|
|
|
43,200
|
|
Bad
debt expense
|
|
|
19,561
|
|
|
-
|
|
|
27,289
|
|
|
-
|
|
Salaries
and wages
|
|
|
597,636
|
|
|
453,226
|
|
|
1,686,726
|
|
|
1,248,447
|
|
Professional
services, including non-cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
|
126,806
|
|
|
112,830
|
|
|
365,152
|
|
|
368,135
|
|
General
and adminstrative
|
|
|
675,339
|
|
|
462,421
|
|
|
1,850,885
|
|
|
1,011,653
|
|
Total
operating expenses
|
|
|
2,458,199
|
|
|
1,632,525
|
|
|
6,848,682
|
|
|
4,153,323
|
|
Income
from operations
|
|
|
269,099
|
|
|
216,177
|
|
|
1,228,590
|
|
|
875,256
|
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(Loss) on sale of assets
|
|
|
(38,624
|
)
|
|
-
|
|
|
(34,014
|
)
|
|
(620
|
)
|
Beneficial
conversion feature
|
|
|
(2,628
|
)
|
|
(3,941
|
)
|
|
(14,389
|
)
|
|
(205,906
|
)
|
Fair
market value of warrants issued
|
|
|
(12,016
|
)
|
|
-
|
|
|
(21,505
|
)
|
|
(249,638
|
)
|
Gain
on forgiveness of debt
|
|
|
1,318
|
|
|
49,865
|
|
|
8,294
|
|
|
239,506
|
|
Interest
expense
|
|
|
(75,015
|
)
|
|
(47,356
|
)
|
|
(240,900
|
)
|
|
(177,356
|
)
|
Interest
income
|
|
|
93,376
|
|
|
11,181
|
|
|
272,417
|
|
|
12,978
|
|
Other
income and (expenses)
|
|
|
(2,484
|
)
|
|
(10,287
|
)
|
|
(57,129
|
)
|
|
28,013
|
|
Income
taxes
|
|
|
(24,080
|
)
|
|
(58,787
|
)
|
|
(90,891
|
)
|
|
(61,260
|
)
|
Total
other expenses
|
|
|
(60,153
|
)
|
|
(59,325
|
)
|
|
(178,117
|
)
|
|
(414,283
|
)
|
Net
income before minority interest in sub subsidiary
|
|
|
208,946
|
|
|
156,852
|
|
|
1,050,473
|
|
|
460,973
|
|
Minority
interest in subsidiary
|
|
|
(187,127
|
)
|
|
(29,994
|
)
|
|
(699,872
|
)
|
|
(15,735
|
)
|
Net
income
|
|
|
21,819
|
|
|
126,858
|
|
|
350,601
|
|
|
445,238
|
|
Other
comprehensive (loss)/gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(115,740
|
)
|
|
(11,252
|
)
|
|
201,100
|
|
|
(219,660
|
)
|
Comprehensive
income (loss)
|
|
$
|
(93,921
|
)
|
$
|
115,606
|
|
$
|
551,701
|
|
$
|
225,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.00
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,852,941
|
|
|
12,704,226
|
|
|
14,267,690
|
|
|
10,937,910
|
|
Diluted
|
|
|
15,278,168
|
|
|
15,642,431
|
|
|
14,692,917
|
|
|
13,750,981
|
|
See
accompanying notes to consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For
the Nine Month Periods
|
|
|
|
Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Restated)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income from continuing operations
|
|
$
|
350,601
|
|
$
|
445,238
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,988,501
|
|
|
1,258,891
|
|
Provision
for uncollectible accounts
|
|
|
27,289
|
|
|
-
|
|
Gain
on settlement of debt
|
|
|
(8,294
|
)
|
|
(239,506
|
)
|
Loss
on sale of assets
|
|
|
34,014
|
|
|
620
|
|
Minority
interest in subsidiary
|
|
|
699,872
|
|
|
15,735
|
|
Stock
issued for services
|
|
|
165,270
|
|
|
89,065
|
|
Fair
market value of options and warrants granted
|
|
|
25,618
|
|
|
249,638
|
|
Beneficial
conversion feature
|
|
|
14,389
|
|
|
205,906
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,931,901
|
)
|
|
(2,568,139
|
)
|
Other
current assets
|
|
|
(2,593,864
|
)
|
|
(1,701,031
|
)
|
Decrease
in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
491,148
|
|
|
394,862
|
|
Deferred
Liability
|
|
|
-
|
|
|
1,115,312
|
|
Net
cash used in operating activities
|
|
|
(737,357
|
)
|
|
(733,409
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,063,284
|
)
|
|
(804,115
|
)
|
Sales
of property and equipment
|
|
|
111,417
|
|
|
86,988
|
|
Proceeds/(Purchases)
of certificates of deposit - net
|
|
|
(1,892,523
|
)
|
|
341,403
|
|
Increase
in intangible assets - development costs
|
|
|
(726,408
|
)
|
|
(4,071,950
|
)
|
Capital
investments in minority interest of subsidiary
|
|
|
-
|
|
|
537,803
|
|
Cash
brought in at acquisition
|
|
|
2,132
|
|
|
145,297
|
|
Net
cash used in investing activities
|
|
|
(4,568,666
|
)
|
|
(3,764,574
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
1,400,000
|
|
|
1,512,000
|
|
Proceeds
from the exercise of stock options
|
|
|
384,062
|
|
|
999,224
|
|
Capital
contributed from sale of subsidary stock
|
|
|
4,031,001
|
|
|
1,589,974
|
|
Purchase
of treasury shares
|
|
|
-
|
|
|
(51,704
|
)
|
Proceeds
from loans
|
|
|
-
|
|
|
1,503,273
|
|
Capital
lease obligations & loans (net)
|
|
|
417,678
|
|
|
(366,092
|
)
|
Net
cash provided by financing activities
|
|
|
6,232,741
|
|
|
5,186,675
|
|
Effect
of exchange rate changes in cash
|
|
|
91,800
|
|
|
36,175
|
|
Net
increase in cash and cash equivalents
|
|
|
1,018,518
|
|
|
724,867
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,371,727
|
|
|
871,161
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,390,245
|
|
$
|
1,596,028
|
|
See
accompanying notes to consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
|
|
For
the Nine Month Periods
|
|
|
|
Ended
March 31,
|
|
|
|
2006
|
|
2005
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
206,141
|
|
$
|
92,631
|
|
Taxes
|
|
$
|
12,454
|
|
$
|
72,870
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Common
stock issued for services and compensation
|
|
$
|
101,190
|
|
$
|
141,010
|
|
Common
stock issued for accrued expenses and accounts payable
|
|
$
|
64,078
|
|
$
|
31,968
|
|
Common
stock issued for conversion of convertible debenture
|
|
$
|
150,000
|
|
$
|
1,050,000
|
|
Common
stock issued for settlement of debt
|
|
$
|
-
|
|
$
|
45,965
|
|
Common
stock issued for payment of note payable and related
interest
|
|
$
|
71,018
|
|
$
|
-
|
|
Common
stock issued for acquisition of product license
|
|
$
|
-
|
|
$
|
91,600
|
|
Common
stock issued for acquisition of subsidiary
|
|
$
|
-
|
|
$
|
1,676,795
|
|
See
accompanying notes to consolidated financial statements.
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The
Company designs, develops, markets, and exports proprietary software products
to
customers in the automobile finance and leasing, banking and financial services
industries worldwide. The Company also provides consulting services in exchange
for fees from customers.
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 amended annual report on
Form 10-KSB/A for the year ended June 30, 2005. 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.
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, NetSol Technologies (PVT), Ltd.
(“PK
Tech”), NetSol (PVT), Limited (“PK Private”), NetSol Abraxas Australia Pty Ltd.
(“NetSol Abraxas”), NetSol Technologies UK, Ltd. (“NetSol UK”), and CQ Systems
Ltd.(“CQ Systems”), as well as the subsidiaries in which the Company owns a
controlling percentage, NetSol CONNECT (PVT), Ltd. (now, NetSol Akhter Pvt.
Ltd.) (“Connect”), TiG-NetSol (Pvt) Ltd. (“NetSol-TiG”), and Talk Trainers
(Private) Limited (“Talk Trainers”). All material inter-company accounts have
been eliminated in consolidation.
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform to report classifications of the current
year.
NOTE
2 - USE OF ESTIMATES:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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.
NOTE
3 - NEW ACCOUNTING PRONOUNCEMENTS:
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
This statement applies to all voluntary changes in accounting principle and
requires retrospective application to prior period’s financial statements of
changes in accounting principle, unless this would be impracticable. This
statement also makes a distinction between "retrospective application" of an
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company believes that the adoption of this standard will have no
material impact on its financial statements.
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. SFAS No. 155 is not expected to have a material effect
on the consolidated financial position or results of operations of the
Company.
In
March
2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
This Statement:
1. |
Requires
an entity to recognize a servicing asset or servicing liability each
time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
2. |
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if practicable.
|
3. |
Permits
an entity to choose ‘Amortization method’ or ‘Fair value measurement
method’ for each class of separately recognized servicing assets and
servicing liabilities.
|
4. |
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
5. |
Requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial
position
and additional disclosures for all separately recognized servicing
assets
and servicing liabilities.
|
This
Statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Management believes that this statement
will not have a significant impact on the consolidated financial
statements.
NOTE
4 - NET INCOME PER SHARE:
Net
income per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), “Earnings per share”.
Basic net income per share is based upon the weighted average number of common
shares outstanding. Diluted net income per share is based on the assumption
that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
For
the nine months ended March 31, 2006
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
350,601
|
|
|
14,267,690
|
|
$
|
0.02
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
423,865
|
|
|
|
|
Warrants
|
|
|
|
|
|
1,362
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
350,601
|
|
|
14,692,917
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended March 31, 2005
|
|
|
Net
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
445,238
|
|
|
10,937,910
|
|
$
|
0.04
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
1,981,309
|
|
|
|
|
Warrants
|
|
|
|
|
|
831,761
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
445,238
|
|
|
13,750,980
|
|
$
|
0.03
|
|
NOTE
5 - FOREIGN CURRENCY:
The
accounts of NetSol Technologies UK, Ltd., and CQ Systems use the British Pound;
NetSol Technologies, (PVT), Ltd, NetSol (Pvt), Limited, NetSol Connect PVT,
Ltd., NetSol-TiG, and Talk Trainers use Pakistan Rupees; and NetSol Abraxas
Australia Pty, Ltd. uses the Australian dollar as the functional currencies.
NetSol Technologies, Inc., and subsidiary NetSol USA, 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. Accumulated translation losses
of $319,590 at March 31, 2006 are classified as an item of accumulated other
comprehensive loss in the stockholders’ equity section of the consolidated
balance sheet. During the nine months ended March 31, 2006 and 2005,
comprehensive income (loss) in the consolidated statements of operation included
translation income of $201,100 and loss of $219,660, respectively.
NOTE
6 - RESTRICTED CASH
During
the quarter ended December 31, 2005 the Company established a Letter of Credit
with its bank in the amount of $206,900 for the purpose of purchasing a
third-party software package to be used in a project for one of its customers.
The funds were transferred into a separate bank account and were to be released
to the vendor when certain criteria were met. During the quarter ended March
31,
2006, the conditions were met and the funds were released to the
vendor.
NOTE
7 - OTHER CURRENT ASSETS
Other
current assets consist of the following at March 31, 2006:
Prepaid
Expenses
|
|
|
$
1,054,961
|
|
Advance
Income Tax
|
|
|
191,343
|
|
Employee
Advances
|
|
|
52,044
|
|
Security
Deposits
|
|
|
82,496
|
|
Other
Receivables
|
|
|
595,037
|
|
Other
Assets
|
|
|
91,515
|
|
|
|
|
|
|
Total
|
|
|
$
2,067,396
|
|
In
August
2004, the Company entered into a two-year consulting agreement with a
non-related third party whereby the Company agreed to pay the consultant a
total
of 100,000 shares of its common stock valued at $111,920. This has been recorded
as a prepaid expense and is being amortized over the life of the service
agreement. During the nine months ended March 31, 2006 and 2005, $41,700 and
$34,975 was expensed respectively.
NOTE
8 - DEBTS
NOTES
PAYABLE
Notes
payable as of March 31, 2006 consist of the following:
|
|
Balance
at
|
|
Current
|
|
Long-Term
|
|
Name
|
|
3/31/06
|
|
Maturities
|
|
Maturities
|
|
A.
Zaman Settlement
|
|
$
|
16,300
|
|
$
|
16,300
|
|
$
|
-
|
|
D&O
Insurance
|
|
|
129,882
|
|
|
129,882
|
|
|
-
|
|
Professional
Liability Insurance
|
|
|
2,640
|
|
|
2,640
|
|
|
-
|
|
Noon
Group
|
|
|
555,390
|
|
|
555,390
|
|
|
-
|
|
Gulf
Crown
|
|
|
250,000
|
|
|
250,000
|
|
|
-
|
|
Subsidiary
Capital Leases
|
|
|
122,545
|
|
|
122,545
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,076,757
|
|
$
|
1,076,757
|
|
$
|
-
|
|
In
June
2002, the Company signed a settlement agreement with a former employee for
payment of past services rendered. The Company agreed to pay the employee a
total of $75,000. The agreement calls for monthly payments of $1,500 per month
until paid. The balance owing at June 30, 2005 and March 31, 2006 was $16,300.
The entire balance has been classified as a current liability in the
accompanying consolidated financials statements.
In
February 2005, the Company received a loan from Noon Group in the amount of
$500,000. The note carries an interest rate of 9.75% per annum and is due in
one
year. The maturity date of the loan may be extended at the option of the holder
for an additional year. During the nine months ended March 31, 2006, $36,596
of
accrued interest was recorded for this loan. Total accrued interest added to
the
loan at March 31, 2006 was $55,390. In March, 2006, the note was extended for
another year.
In
February 2005, the Company received a loan from Gulf Crown Investments in the
amount of $250,000. The note carries an interest rate of 9.75% per annum and
is
due in one year. The maturity date of the loan may be extended at the option
of
the holder for an additional year. During the nine months ended March 31, 2006,
$18,298 of accrued interest was recorded for this loan. On March 31, 2006,
the
total accrued interest of $27,695 was paid to the note holder. On April 12,
2006, the principle of the note was paid to the note holder.
In
May
2005, the Company executed a note in favor of Maxim Group, LLC (“Maxim”) in the
amount of $250,000. The funds were due as compensation for mergers and
acquisition related services provided by Maxim Group, LLC, in connection with
the CQ Systems Ltd. transaction. The note was due on July 25, 2005 and carries
an interest rate of 12% starting on the due date and increases 1.5% per month
thereafter. The note called for $150,000 to be paid with 80,214 shares the
Company’s common stock and the balance of $100,000 to be paid in cash. In May
2005, the shares were issued. In addition, the loan called for $3,000 worth
of
additional shares for each month that the shares are not registered after the
120 day maturity date and a $10,000 penalty for late payment. On October 3,
2005, the Company paid Maxim $50,000 cash, and issued a total of 36,606 shares
valued at $71,018 for the balance of the note of $50,000, accrued interest
of
$2,453 and penalties of $16,000.
In
October 2005, the Company renewed its professional liability insurance for
which
the annual premium is $8,050. The Company has arranged for financing with the
insurance company with a down payment of $1,610 and ten monthly payments of
$674
each. During the nine months ended March 31, 2006, the Company paid $3,800.
The
balance owing at March 31, 2006 was $2,640 and is classified as a current
liability in the accompanying consolidated financials statements.
In
January 2006, the Company renewed its directors and officers’ liability
insurance for which the annual premium is $185,000. In January 2006, the Company
arranged financing with AFCO Credit Corporation with a down payment of $19,007
with the balance to be paid in nine monthly installments of $19,007 each. The
balance owing as of March 31, 2006 was $129,881.
In
addition, the various subsidiaries had current maturities of capital leases
of
$122,545 as of March 31, 2006.
BANK
NOTE
The
Company’s Pakistan subsidiaries, NetSol Technologies (Private) Ltd., and NetSol
(Private) Ltd., each have one loan with a bank, secured by the Company’s assets.
These notes consist of the following as of March 31, 2006:
TYPE
OF
|
|
MATURITY
|
|
INTEREST
|
|
BALANCE
|
|
LOAN
|
|
DATE
|
|
RATE
|
|
USD
|
|
|
|
|
|
|
|
|
|
Export
Refinance
|
|
|
Every
6 months
|
|
|
8
|
%
|
$
|
665,779
|
|
Line
of Credit
|
|
|
December
31, 2006
|
|
|
11
|
%
|
|
89,316
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
755,095
|
|
DUE
TO OFFICERS
The
officers of the Company from time to time loan funds to the Company. As of
June
30, 2005, the officers had a balance owing to them of $47,636. One of the
officers has deferred the increase in his wages. During the nine months ended
March 31, 2006, $37,500 of accrued wages was added to the balance due to
officers and $30,464 was remitted to one officer against the amounts owing
to
him. The balance owing as of March 31, 2006 was $47,172. In addition, an officer
of Talk Trainers had $35,849 owed to him as of March 31, 2006.
NOTE
9 - STOCKHOLDERS’ EQUITY:
EQUITY
TRANSACTIONS
Private
Placements
In
August
2004, the Company sold 190,476 shares of the Company’s common stock for $200,000
in a private placement. Of this amount $91,500 had been received during the
fiscal year ended June 30, 2005 and a total of 87,143 shares were issued to
the
purchaser. The remaining balance of $108,500 or 103,333 shares are shown as
“Shares to Be Issued” on the accompanying financial statements.
In
January 2006, the Company sold 933,334 shares of the Company’s common stock for
$1,400,000 in a private placement.
Services,
Accrued Expenses and Payables
During
the nine months ended March 31, 2006, the Company issued 5,500 restricted Rule
144 common shares in exchange for services rendered valued at $9,957.
Compensation expense was calculated based upon the fair market value of the
freely trading shares as quoted on NASDAQ over the service period.
In
July
2004, the Board of Directors and officers were granted the right to receive
shares of the Company’s common stock if certain conditions were met during their
2004 - 2005 term of office. These conditions were met and a total of 28,000
restricted Rule 144 common shares were issued in August 2005 and 11,000 shares
were issued in March 2006. The shares were valued at the fair market value
at
the date of grant of $57,034 or $1.46 per share.
In
October 2005, the Company issued 36,607 restricted Rule 144 common shares valued
at $71,018 in payment of $50,000 in principal, $16,000 in penalties and $2,453
in accrued interest on a note payable (see Note 7).
In
October 2005, the Company entered into an agreement with a vendor whereby the
Company issued the vendor 27,231 shares valued at $52,828 for the payment of
outstanding invoices in the amount of $50,923. As a result, the Company recorded
a loss on settlement of debt in the amount of $1,905.
In
October 2005, the Company entered into an agreement with a vendor whereby the
Company agreed to issue $2,500 worth of stock per month as payment for services
rendered. The stock is to be issued after the end of each quarter. The Company
issued 3,983 shares of its common stock during the quarter ended March 31,
2006
for the previous quarter services and recorded 3,772 shares of common stock
valued at $7,500 to “Stock to Be Issued” under this agreement during the quarter
ended March 31, 2006.
In
March
2006, the Company entered into an agreement with a former consultant whereby
the
Company agreed to issue the consultant 10,000 restricted Rule 144 shares of
its
common stock valued at $19,200 for past services.
Stock
Options and Warrants Exercised
During
the nine months ended March 31, 2006, the Company issued 175,000 shares of
its
common stock for the exercise of options valued at $195,000. Of these, $52,500
has been recorded as “Stock Subscription Receivable”.
Issuance
of Shares for Conversion of Debt
During
the quarter ended September 30, 2005, one of the convertible debenture holders
elected to convert their note into common stock. The total of the note converted
was $50,000 and the Company issued 26,882 shares of its common stock to the
note
holder.
During
the quarter ended March 31, 2005, two of the convertible debenture holders
elected to convert their notes into common stock. The total of the notes
converted was $100,000 and the Company issued 53,764 shares of its common stock
to the note holders.
STOCK
SUBSCRIPTION RECEIVABLE
Stock
subscription receivable represents stock options exercised and issued that
the
Company has not yet received the payment from the purchaser as they were in
process when the quarter ended.
The
balance at June 30, 2005 was $616,650. During the nine months ended March 31,
2006, the Company received a total of $252,812 as payment on the receivable
and
recorded $52,500 as receivable. The Company also recorded the cancellation
of
$43,650 due as a charge to additional paid-in capital as a result of a review
of
the records when the amount was recorded in 2000. It was determined the amount
was not due and therefore was cancelled. The balance at March 31, 2006 was
$372,688.
COMMON
STOCK PURCHASE WARRANTS AND OPTIONS
From
time
to time, the Company issues options and warrants as incentives to employees,
officers and directors, as well as to non-employees.
Common
stock purchase options and warrants consisted of the following during the nine
months ended March 31, 2006:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Options
|
|
Price
|
|
Warrants
|
|
Price
|
|
Outstanding
and exercisable, June 30, 2005
|
|
|
5,038,000
|
|
|
$0.75
to $5.00
|
|
|
655,280
|
|
|
$1.75
to $5.00
|
|
Granted
|
|
|
1,322,250
|
|
|
$1.65
to $2.89
|
|
|
40,323
|
|
|
$3.30
|
|
Exercised
|
|
|
(175,000
|
)
|
|
$0.75
to $1.75
|
|
|
-
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Outstanding
and exercisable, March 31, 2006
|
|
|
6,185,250
|
|
|
|
|
|
695,603
|
|
|
|
|
During
the nine months ended March 31, 2006, a total of 1,320,000 options were granted
to employees of the Company and are fully vested and expire ten years from
the
date of grant unless the employee terminates employment, in which case the
options expire within 30 days of their termination. The exercise price of the
options ranges from $1.65 to $2.89. No expense was recorded for the granting
of
these options.
During
the nine months ended March 31, 2006, a total of 2,500 options were granted
to a
consultant and are fully vested from the date of grant. The options expire
in
ten years and have an exercise price of $1.98 per share. The options were valued
using the fair value method at $4,113 or $1.65 per share and recorded the
expense in the accompanying consolidated financial statements. The Black-Scholes
option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
10
years
|
|
Expected
volatility
|
|
|
82
|
%
|
Dividend
yield
|
|
|
0
|
%
|
During
the nine months ended March 31, 2005, 714,000 options were granted to employees
of the company and are fully vested and expire ten years from the date of grant
unless the employee terminates employment, in which case the options expire
within 30 days of their termination. No expense was recorded for the granting
of
these options.
In
compliance with FAS No. 148, the Company has elected to continue to follow
the
intrinsic value method in accounting for its stock-based employee compensation
plan as defined by APB No. 25 and has made the applicable disclosures
below.
Had
the
Company determined employee stock based compensation cost based on a fair
value
model at the grant date for its stock options under SFAS 123, the Company's
net
earnings per share would have been adjusted to the pro forma amounts for
nine
months ended March 31, 2006 and 2005 as follows:
|
|
2006
|
|
2005
|
|
Net
income - as reported
|
|
$
|
350,601
|
|
$
|
445,238
|
|
Stock-based
employee compensation expense,
|
|
|
|
|
|
|
|
included
in reported net loss, net of tax
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation
|
|
|
|
|
|
|
|
expense
determined under fair-value-based
|
|
|
|
|
|
|
|
method
for all rewards, net of tax
|
|
|
(1,496,750
|
)
|
|
(313,195
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(1,146,149
|
)
|
$
|
132,043
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
|
0.02
|
|
|
0.04
|
|
Diluted,
as reported
|
|
|
0.02
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
Basic,
pro forma
|
|
|
(0.08
|
)
|
|
0.01
|
|
Diluted,
pro forma
|
|
|
(0.08
|
)
|
|
0.01
|
|
Pro
forma
information regarding the effect on operations is required by SFAS 123, and
has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. Pro forma information using
the
Black-Scholes method at the date of grant based on the following
assumptions:
Risk-free
interest rate |
|
|
3.25 |
% |
Expected
life
|
|
|
10
years
|
|
Expected
volatility
|
|
|
54%
- 57
|
%
|
Dividend
yield
|
|
|
0
|
%
|
During
the quarter ended September 30, 2005, one debenture holder converted their
note
into common stock. As part of the conversion, warrants to purchase a total
of
13,441 common shares were issued to the note holder. The warrants expire in
five
years and have an exercise price of $3.30 per share. The warrants were valued
using the fair value method at $9,489 or $0.71 per share and recorded the
expense in the accompanying consolidated financial statements. The Black-Scholes
option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
56
|
%
|
Dividend
yield
|
|
|
0
|
%
|
During
the quarter ended March 31, 2006, two debenture holders converted their notes
into common stock. As part of the conversion, warrants to purchase a total
of
26,882 common shares were issued to the note holders. The warrants expire in
five years and have an exercise price of $3.30 per share. The warrants were
valued using the fair value method at $12,016 or $0.45 per share and recorded
the expense in the accompanying consolidated financial statements. The
Black-Scholes option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
44
|
%
|
Dividend
yield
|
|
|
0
|
%
|
NOTE
10 - INTANGIBLE ASSETS:
Intangible
assets consist of product licenses, renewals, enhancements, copyrights,
trademarks, trade names, customer lists and goodwill. The Company evaluates
intangible assets, goodwill and other long-lived assets for impairment, at
least
on an annual basis and whenever events or changes in circumstances indicate
that
the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill
is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test
is
performed to measure the amount of impairment loss. Potential impairment of
goodwill after July 1, 2002 has been evaluated in accordance with SFAS
No. 142. The SFAS No. 142 is applicable to the financial statements of
the Company beginning July 1, 2002.
As
part
of intangible assets, the Company capitalizes certain computer software
development costs in accordance with SFAS No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred
internally to create a computer software product or to develop an enhancement
to
an existing product are charged to expense when incurred as research and
development expense until technological feasibility for the respective product
is established. Thereafter, all software development costs are capitalized
and
reported at the lower of unamortized cost or net realizable value.
Capitalization ceases when the product or enhancement is available for general
release to customers.
The
Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate
that
the unamortized software development costs exceed the net realizable value,
the
Company writes off the amount by which the unamortized software development
costs exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight-line basis over three
years, whichever method results in a higher level of amortization.
Product
licenses and customer lists were comprised of the following as of March 31,
2006:
|
|
Product
Licenses
|
|
Customer
Lists
|
|
Total
|
|
Intangible
asset - June 30, 2005
|
|
$
|
8,799,323
|
|
$
|
3,294,758
|
|
$
|
12,094,081
|
|
Additions
|
|
|
688,341
|
|
|
-
|
|
|
688,341
|
|
Effect
of translation adjustment
|
|
|
(27,040
|
)
|
|
-
|
|
|
(27,040
|
)
|
Accumulated
amortization
|
|
|
(4,837,526
|
)
|
|
(2,211,230
|
)
|
|
(7,048,756
|
)
|
Net
balance - March 31, 2006
|
|
$
|
4,623,098
|
|
$
|
1,083,528
|
|
$
|
5,706,626
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense:
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended March 31, 2006
|
|
$
|
1,048,591
|
|
$
|
471,465
|
|
$
|
1,520,056
|
|
Nine
months ended March 31, 2005
|
|
$
|
645,942
|
|
$
|
258,696
|
|
$
|
904,638
|
|
The
above
amortization expense includes amounts in “Cost of Goods Sold” for capitalized
software development costs of $56,528 and $40,014 for the nine months ended
March 31, 2006 and 2005, respectively.
Amortization
expense of intangible assets over the next five years is as
follows:
|
|
FISCAL
PERIOD ENDING
|
|
Asset
|
|
3/31/06
|
|
3/31/07
|
|
3/31/08
|
|
3/31/09
|
|
3/31/10
|
|
TOTAL
|
|
Product
Licences
|
|
$
|
761,903
|
|
$
|
591,872
|
|
$
|
589,722
|
|
$
|
510,507
|
|
$
|
-
|
|
$
|
2,454,004
|
|
Customer
Lists
|
|
|
315,348
|
|
|
263,376
|
|
|
263,376
|
|
|
241,428
|
|
|
-
|
|
|
1,083,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,077,251
|
|
$
|
855,248
|
|
$
|
853,098
|
|
$
|
751,935
|
|
$
|
-
|
|
$
|
3,537,532
|
|
There
were no impairments of the goodwill asset in the nine months ended March 31,
2006 and 2005.
NOTE
12 - LITIGATION:
To
the
best knowledge of Company’s management and counsel, there is no material
litigation pending or threatened against the Company.
NOTE
13 - SEGMENT INFORMATION
The
following table presents a summary of operating information and certain year-end
balance sheet information for the nine months ended March 31:
|
|
2006
|
|
2005
|
|
Revenues
from unaffiliated customers:
|
|
|
(restated)
|
|
North
America
|
|
$
|
45,250
|
|
$
|
295,725
|
|
International
|
|
|
13,994,935
|
|
|
7,676,725
|
|
Consolidated
|
|
$
|
14,040,185
|
|
$
|
7,972,450
|
|
|
|
|
|
|
|
|
|
Operating
loss:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
(2,623,075
|
)
|
$
|
(1,932,368
|
)
|
International
|
|
|
3,851,665
|
|
|
2,807,624
|
|
Consolidated
|
|
$
|
1,228,590
|
|
$
|
875,256
|
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
5,679,763
|
|
$
|
6,568,062
|
|
International
|
|
|
23,402,433
|
|
|
15,241,710
|
|
Consolidated
|
|
$
|
29,082,196
|
|
$
|
21,809,772
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
1,445,977
|
|
$
|
860,330
|
|
International
|
|
|
542,524
|
|
|
147,460
|
|
Consolidated
|
|
$
|
1,988,501
|
|
$
|
1,007,790
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
-
|
|
$
|
-
|
|
International
|
|
|
2,177,827
|
|
|
624,703
|
|
Consolidated
|
|
$
|
2,177,827
|
|
$
|
624,703
|
|
NOTE
14 - MINORITY INTEREST IN SUBSIDIARY
NetSol
Connect:
In
August
2003, the Company entered into an agreement with United Kingdom based Akhter
Group PLC (“Akhter”). Under the terms of the agreement, Akhter Group acquired
49.9 percent of the Company’s subsidiary; Pakistan based NetSol Connect PVT Ltd.
(“Connect”), an Internet service provider (“ISP”), in Pakistan through the
issuance of additional Connect shares. As part of this Agreement, Connect
changed its name to NetSol Akhter. The partnership with Akhter Computers is
designed to rollout connectivity and wireless services to the Pakistani national
market. On signing of this Agreement, the Shareholders agreed to make the
following investment in the Company against issuance of shares of
Connect.
Akhter
|
|
US$
200,000
|
|
The
Company
|
|
US$
50,000
|
|
During
the quarter ended September 30, 2003, the funds were received by Connect and
a
minority interest of $200,000 was recorded for Akhter’s portion of the
subsidiary. During the quarter ended December 31, 2003, Akhter paid an
additional $10,000 to the Company for this purchase. Per the agreement, it
was
envisaged that Connect would require a maximum $500,000 for expansion of its
business from each partner. Akhter was to meet the initial financial
requirements of the Connect until November 1, 2003. As of December 31, 2004,
both NetSol and Akhter had injected the majority of their committed cash to
meet
the expansion requirement of the company. As of December 31, 2004, a total
of
$751,356 had been transferred to Connect.
For
the
nine months ended March 31, 2006 and 2005, the subsidiary had net income of
$48,838 and net losses of $23,576, respectively, of which $24,370 and ($14,259)
respectively, was recorded against the minority interest. The balance of the
minority interest at March 31, 2006 was $348,308.
NetSol-TiG:
In
December 2004, NetSol forged a relationship with a UK based public company
TiG
Plc. A joint venture agreement was signed by the two companies to create a
new
company, TiG NetSol Pvt Ltd. (“NetSol-TiG”), with 50.1% ownership by NetSol
Technologies, Inc. and 49.9% ownership by TiG. The agreement anticipates TiG’s
technology business to be outsourced to NetSol’s offshore development facility.
Both companies, according to this agreement, would invest a total of $1 million
or $500,000 each for infrastructure, dedicated personnel and systems in the
NetSol IT campus in Lahore.
During
the year ended June 30, 2005, the Company invested $253,635 and TiG invested
$251,626. The new subsidiary began operations during the quarter ended March
31,
2005.
For
the
nine months ended March 31, 2006, the subsidiary had net income of $622,684,
of
which $310,719 was recorded against the minority interest. For the three months
ended March 31, 2005, (the first quarter of activity) the subsidiary had net
income of $55,110, of which $27,500 was recorded against the minority interest.
The balance of the minority interest at March 31, 2006 was
$687,808.
NetSol
Technologies, Limited (“PK Tech”)
In
August
2005, the Company’s wholly-owned subsidiary, NetSol
Technologies (Pvt), Ltd. (“PK Tech”) became listed on the Karachi Stock Exchange
in Pakistan. The Initial Public Offering (“IPO”) sold 9,982,000 shares of the
subsidiary to the public thus reducing the Company’s ownership by 28.13%. Net
proceeds of the IPO were $4,890,224. As a result of the IPO, the Company is
required to show the minority interest of the subsidiary on the accompanying
consolidated financial statements.
For
the
nine months ended March 31, 2006, the subsidiary had net income of $1,300,277,
of which $365,768 was recorded against the minority interest. The balance of
the
minority interest at March 31, 2006 was $365,768.
Talk
Trainers (Private) Limited (“Talk Trainers”)
In
February 2006, the Company purchased for $60,012 50.1% of the outstanding shares
in Talk Trainers (Private) Limited, (“Talk Trainers”), a Pakistan corporation
which provides educational, professional courses, training and Human Resource
services to the corporate sector. The major stockholder of Talk Trainers was
Mr.
Ayub Ghuari, brother to the executive officers of the Company, and therefore
the
acquisition was recorded at historical cost as the entities are under common
control. As the effects of this transaction are immaterial to the Company
overall, no pro forma information is provided.
For
the
three months ended March 31, 2006, the subsidiary had a net loss of $1,974,
of
which $985 was recorded against the minority interest. The balance of the
minority interest at March 31, 2006 was ($16,874).
NOTE
15 - CONVERTIBLE DEBENTURE
On
March
24, 2004, the Company entered into an agreement with several investors to
acquire Series A Convertible Debentures (the “Bridge Loan”) whereby a total of
$1,200,000 in debentures were procured through Maxim Group, LLC. The Company
received a net of $1,049,946 after placement expenses. In addition, the
beneficial conversion feature of the debenture was valued at $252,257. The
Company has recorded this as a contra-account against the loan balance and
is
amortizing the beneficial conversion feature over the life of the loan. During
the nine months ended March 31, 2006, the Company amortized $11,825. The
unamortized balance at March 31, 2006 was $0.
During
the nine months ended March 31, 2006, three of the convertible debenture holders
elected to convert their notes into common stock. The total of the notes
converted was $150,000 and the Company issued 80,646 shares of its common stock
to the note holders. The net balance at March 31, 2006, was $0.
Under
the
terms of the Bridge Loan agreements, and supplements thereto, the debentures
bear interest at the rate of 10% per annum, payable on a quarterly basis in
common stock or cash at the election of the Company. The maturity date is 24
months from the date of signing, or March 26, 2006. Pursuant to the terms of
a
supplemental agreement dated May 5, 2004 between NetSol and the debenture
holders, the conversion rate was set at one share for each $1.86 of principal.
During the nine months ended March 31, 2006, the Company recorded interest
expense on the debentures in the amount of $5,440.
In
addition, each debenture holder is entitled to receive at the time of conversion
warrants equal to one-half of the total number of shares issued. The total
number of warrants that may be granted is 322,582. The warrants expire in five
years and have an exercise price of $3.30 per share. The fair value of the
warrants will be calculated and recorded using the Black-Scholes method at
the
time of granting, when the debenture is converted. During the nine months ended
March 31, 2006, three debenture holders converted their notes into common stock.
As part of the conversion, warrants to purchase a total of 40,323 common shares
were issued to the note holders, (see note 9). The warrants were valued using
the fair value method at $21,505. The expense was recorded in the accompanying
consolidated financial statements.
NOTE
16 - GAIN ON SETTLEMENT OF DEBT
During
the nine months ended March 31, 2006, the Company entered into agreements with
several vendors whereby the vendors agreed to accept as payment in full amounts
less than the invoiced amount. As a result of these settlements, the Company
recorded a net gain on settlement of debt of $8,294.
In
September 2004, the Company transferred 24,004 of its treasury shares valued
at
$45,965 to Brobeck Phleger & Harrison, Llp, in exchange of debt, as part of
a settlement agreement. The Company recorded a gain of $8,285 on the settlement.
During
the quarter ended September 30, 2004, the Company evaluated the liabilities
of
its discontinued operations and determined that $41,989 was no longer payable.
The Company recorded a gain of $41,989 as a result of the write-off of these
liabilities from its financial statements.
In
October 2004, the Company reached an agreement with a vendor to settle the
amounts owing. The vendor agreed to accept $29,642 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of
$11,029.
In
December 2004, the Company reached an agreement with Cowler to pay the balance
owing on the loan in one lump-sum payment (see Note 7). Cowler agreed to accept
£52,000 or $103,371 as payment in full. As a result, the Company recorded a
gain
on forgiveness of debt of $21,148.
During
the quarter ended December 31, 2004, a former officer of Abraxas, the Company’s
Australian subsidiary, agreed to forgive amounts accrued to him for long-term
service leave prior to the Company’s acquisition in 1999. The amounts accrued
were during the period of 1984 to 1999. As a result, the Company recorded a
gain
on forgiveness of debt of $107,190.
In
February 2005, the Company reached an agreement with a former vendor to settle
amounts owing. The vendor agreed to accept $27,580 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of
$27,581.
During
the quarter ended March 31, 2005, the Company wrote-off old invoices for
services under the statute of limitations. The vendor has not contacted the
Company in over four years and the original services were in dispute at the
time
they were rendered. As a result, the Company recorded a gain on forgiveness
of
debt of $22,562.
NOTE
17 - ACQUISITION OF CQ SYSTEMS
On
January 19, 2005, the Company entered into an agreement to acquire 100% of
the
issued and outstanding shares of common stock of CQ Systems Ltd., a company
organized under the laws of England and Wales. The acquisition closed on
February 22, 2005.
NOTE
18 - RESTATEMENT
Subsequent
to the issuance of the Company's financial statements for the nine months ended
March 31, 2005 and 2004, the Company determined that certain transactions and
presentation in the financial statements had not been accounted for properly
in
the Company's financial statements. Specifically, the amount of impairment
of
goodwill was over-recorded and classified as amortization expense, and the
beneficial conversion feature of the convertible debenture was overstated and
loans to officers hadn’t been properly reflected on the financial statements and
the exercise of options against these loans had been recorded as receivables
as
of June 30, 2004. In addition for the period ended March 31, 2005, the amount
of
deferred liability in connection with the acquisition of CQ Systems was
over-stated.
The
Company has restated its financial statements for these adjustments as of March
31, 2005.
The
effect of the correction of the error is as follows:
|
|
AS
|
|
|
|
|
|
PREVIOUSLY
|
|
AS
|
|
|
|
REPORTED
|
|
RESTATED
|
|
|
|
|
|
|
|
BALANCE
SHEET
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2005
|
|
Assets:
|
|
|
|
|
|
|
|
Other
current assets
|
|
$
|
1,207,016
|
|
$
|
1,182,456
|
|
Goodwill
|
|
$
|
3,404,886
|
|
$
|
1,166,611
|
|
Total
intangibles
|
|
$
|
9,762,937
|
|
$
|
7,524,662
|
|
Total
assets
|
|
$
|
24,072,607
|
|
$
|
21,809,772
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Current
portion of notes
|
|
$
|
4,814,463
|
|
$
|
1,460,876
|
|
Due
to officers
|
|
$
|
-
|
|
$
|
40,136
|
|
Deferred
liability
|
|
$
|
-
|
|
$
|
1,115,312
|
|
Convertible
debenture payable
|
|
$
|
120,000
|
|
$
|
134,234
|
|
Total
liabilities
|
|
$
|
8,506,805
|
|
$
|
6,322,899
|
|
|
|
|
|
|
|
|
|
Stockholder's
Equity:
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
$
|
46,817,522
|
|
$
|
46,769,779
|
|
Accumulated
deficit
|
|
$
|
(30,488,248
|
)
|
$
|
(30,537,075
|
)
|
Subscription
receivable
|
|
$
|
1,328,142
|
|
$
|
(1,187,150
|
)
|
Total
stockholder's equity
|
|
$
|
15,186,050
|
|
$
|
15,107,121
|
|
|
|
|
|
|
|
|
|
STATEMENT
OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended
|
|
|
|
|
March
31, 2005
|
|
Depreciation
and amortization
|
|
$
|
986,755
|
|
$
|
1,007,789
|
|
General
and adminstrative
|
|
$
|
1,032,687
|
|
$
|
1,011,653
|
|
Total
operating expenses
|
|
$
|
4,153,323
|
|
$
|
4,153,323
|
|
Income
from operations
|
|
$
|
875,256
|
|
$
|
875,256
|
|
Beneficial
conversion feature exp
|
|
$
|
(239,416
|
)
|
$
|
(206,906
|
)
|
Other
income (expense)
|
|
$
|
(2,779
|
)
|
$
|
(20,269
|
)
|
Net
income
|
|
$
|
429,218
|
|
$
|
445,238
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.03
|
|
NOTE
19 - SUBSEQUENT EVENTS
On
May 6,
2006, the Company entered into an agreement to acquire 100% of the issued and
outstanding stock of with McCue Systems, Inc. (“McCue”), a California
corporation. The agreement calls for a closing date on or around June 30, 2006.
According
to the terms of the Share Purchase Agreement, the Company is to acquire 100%
of
the issued and outstanding shares of McCue from McCue’s current shareholders,
whose identity is set forth in the Share Purchase Agreement (the “McCue
Shareholders”) at the completion date in exchange for a purchase price
consisting of: a) 50% of McCue’s total gross revenue for the audited twelve
month period ending December 31, 2005 after an adjustment for any revenue
occurring outside of the company’s ordinary scope of operations as defined by US
GAAP multiplied by 1.5 payable: (i) 50% in shares of restricted common stock
of
the Company at the 30 day volume weighted average price (“VWAP) for each of the
30 trading days prior to the execution date of this agreement or at the VWAP
for
each of the 30 trading days prior to November 30, 2005 whichever is the greater
VWAP; and, (ii) 50% in cash; b) 25% of McCue’s total gross revenue for the
twelve months ending December 31, 2006 multiplied by 1.5 payable, at the
Company’s discretion: (i) wholly in cash; or (ii) on the same basis and on the
same terms as the initial payment provided that under no circumstances shall
the
total number of shares of common stock issued to the McCue Shareholders exceed
19% of the issued and outstanding shares of common stock, less treasury shares,
of the Company at May 6, 2006; and c) 25% of McCue’s total gross revenue for the
twelve months ending December 31, 2007 multiplied by 1.5 payable, at the
Company’s discretion: (i) wholly in cash; or (ii) on the same basis and on the
same terms as the initial payment provided that under no circumstances shall
the
total number of shares of common stock issued to the McCue Shareholders exceed
19% of the issued and outstanding shares of common stock, less treasury shares,
of the Company at May 6, 2006.
At
the
time of this report, the audit of McCue’s financial statements for the year
ended December 31, 2005 are still underway and the final purchase price is
to be
determined based on the audited December 31, 2005 revenues. The estimated
purchase price is approximately $8.6 million.
In
April
2006, the Company paid $250,000 cash to settle the note payable due to Gulf
Crown Investments.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
NetSol
Technologies, Inc. and subsidiaries
Calabasas,
California
We
have
audited the accompanying consolidated balance sheet of NetSol Technologies,
Inc.
and subsidiaries as of June 30, 2005, and the related consolidated statements
of
operations, stockholders’ equity and cash flows for the years ended June 30,
2005 and 2004. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of NetSol Technologies (PVT) Limited, NetSol (PVT) Limited
and NetSol Connect (PVT) Limited, whose statements reflect combined total assets
of approximately $10,904,416as of June 30, 2005 and combined total net revenues
of $8,477,219 and $4,452,435 for the years ended June 30, 2005 and 2004,
respectively. Those statements were audited by other auditors whose reports
have
been furnished to us, and in our opinion, insofar as it relates to the amounts
included for NetSol Technologies (PVT) Limited, NetSol (PVT) Limited and NetSol
Connect (PVT) Limited, for the years ended June 30, 2005 and 2004, is based
solely on the report of the other auditors.
We
conducted our audit of these statements in accordance with the standards of
the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We believe that
our
audit and the report of the other auditors provide a reasonable basis for our
opinion.
In
our
opinion, based on our audits and the reports of other auditors, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of NetSol Technologies, Inc. and
subsidiaries as of June 30, 2005 and the results of its consolidated operations
and its cash flows for the years ended June 30, 2005 and 2004 in conformity
with
accounting principles generally accepted in the United States of
America.
/s/
Kabani & Company, Inc.
CERTIFIED
PUBLIC ACCOUNTANTS
Los
Angeles, California
August
18, 2005
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
JUNE
30,
2005
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,371,727
|
|
|
|
|
Certificates
of deposit
|
|
|
205,480
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$80,000
|
|
|
3,906,360
|
|
|
|
|
Revenues
in excess of billings
|
|
|
1,958,950
|
|
|
|
|
Other
current assets
|
|
|
931,344
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
8,373,861
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
|
|
|
5,114,776
|
|
Intangibles:
|
|
|
|
|
|
|
|
Product
licenses, renewals, enhancedments, copyrights,
|
|
|
|
|
|
|
|
trademarks,
and tradenames, net
|
|
|
4,915,794
|
|
|
|
|
Customer
lists, net
|
|
|
1,554,992
|
|
|
|
|
Goodwill
|
|
|
1,166,611
|
|
|
|
|
Total
intangibles
|
|
|
|
|
|
7,637,397
|
|
Total
assets
|
|
|
|
|
$
|
21,126,034
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,927,233
|
|
|
|
|
Current
portion of notes and obligations under capitalized
leases
|
|
|
1,089,192
|
|
|
|
|
Billings
in excess of revenues
|
|
|
149,014
|
|
|
|
|
Due
to officers
|
|
|
47,636
|
|
|
|
|
Deferred
liability
|
|
|
313,397
|
|
|
|
|
Loans
payable, bank
|
|
|
389,089
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
4,915,561
|
|
Obligations
under capitalized leases, less
current maturities
|
|
|
|
|
|
122,426
|
|
Convertible
debenture
|
|
|
|
|
|
138,175
|
|
Total
liabilities
|
|
|
|
|
|
5,176,162
|
|
Minority
interest
|
|
|
|
|
|
700,320
|
|
Commitments
and contingencies
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; 25,000,000 share authorized;
|
|
|
|
|
|
|
|
13,830,884
issued and outstanding
|
|
|
13,831
|
|
|
|
|
Additional
paid-in-capital
|
|
|
46,610,747
|
|
|
|
|
Treasury
stock
|
|
|
(27,197
|
)
|
|
|
|
Accumulated
deficit
|
|
|
(30,318,988
|
)
|
|
|
|
Stock
subscription receivable
|
|
|
(616,650
|
)
|
|
|
|
Common
stock to be issued
|
|
|
108,500
|
|
|
|
|
Other
comprehensive loss
|
|
|
(520,691
|
)
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
15,249,552
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
$
|
21,126,034
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to these consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Years
|
|
|
|
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
12,437,653
|
|
$
|
5,749,062
|
|
Cost
of revenues
|
|
|
4,754,749
|
|
|
2,699,675
|
|
Gross
profit
|
|
|
7,682,904
|
|
|
3,049,387
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
782,488
|
|
|
253,701
|
|
Depreciation
and amortization
|
|
|
1,564,562
|
|
|
1,240,792
|
|
Impairment
of assets
|
|
|
-
|
|
|
203,312
|
|
Settlement
costs
|
|
|
43,200
|
|
|
122,500
|
|
Bad
debt expense
|
|
|
13,118
|
|
|
219,909
|
|
Salaries
and wages
|
|
|
2,022,183
|
|
|
1,493,252
|
|
Professional
services, including non-cash
|
|
|
|
|
|
|
|
compensation
|
|
|
604,192
|
|
|
464,332
|
|
General
and adminstrative
|
|
|
1,588,456
|
|
|
1,759,607
|
|
Total
operating expenses
|
|
|
6,618,199
|
|
|
5,757,405
|
|
Income
(loss) from operations
|
|
|
1,064,705
|
|
|
(2,708,018
|
)
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
Loss
on sale of assets
|
|
|
(2,082
|
)
|
|
(35,173
|
)
|
Beneficial
conversion feature
|
|
|
(209,848
|
)
|
|
(137,230
|
)
|
Fair
market value of options and warrants
|
|
|
(255,130
|
)
|
|
-
|
|
Gain
on forgiveness of debt
|
|
|
404,136
|
|
|
320,318
|
|
Interest
expense
|
|
|
(215,861
|
)
|
|
(229,877
|
)
|
Other
income and (expenses)
|
|
|
(1,106
|
)
|
|
16,401
|
|
Income
taxes
|
|
|
(10,416
|
)
|
|
(76,638
|
)
|
Income
(loss) before minority interest in subsidiary
|
|
|
774,398
|
|
|
(2,850,217
|
)
|
Minority
interest in subsidiary (income)/loss
|
|
|
(111,073
|
)
|
|
273,159
|
|
Net
income (loss)
|
|
|
663,325
|
|
|
(2,577,058
|
)
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(282,129
|
)
|
|
(387,859
|
)
|
Comprehensive
income (loss)
|
|
$
|
381,196
|
|
$
|
(2,964,917
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
$
|
(0.33
|
)
|
Diluted
|
|
$
|
0.04
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
11,597,625
|
|
|
7,881,554
|
|
Diluted
|
|
|
14,776,323
|
|
|
7,881,554
|
|
See
accompanying notes to these consolidated financial statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE
YEARS ENDED JUNE 30, 2004 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Stock
|
|
hensive
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Treasury
|
|
Subscriptions
|
|
Income/
|
|
Accumulated
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Receivable
|
|
(Loss)
|
|
Deficit
|
|
Equity
|
|
Balance
at June 30, 2003
|
|
|
5,757,175
|
|
$
|
5,756
|
|
$
|
33,409,954
|
|
$
|
-
|
|
$
|
(84,900
|
)
|
$
|
149,297
|
|
$
|
(28,405,255
|
)
|
$
|
5,074,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
1,413,187
|
|
|
1,414
|
|
|
1,616,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,618,337
|
|
Issuance
of common stock for services
|
|
|
3,613
|
|
|
4
|
|
|
8,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
Excercise
of common stock options
|
|
|
1,067,309
|
|
|
1,068
|
|
|
1,369,484
|
|
|
|
|
|
(248,750
|
)
|
|
|
|
|
|
|
|
1,121,802
|
|
Excercise
of common stock warrants
|
|
|
390,000
|
|
|
390
|
|
|
487,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,500
|
|
Issuance
of common stock in exchange for notes payable & interest
|
|
|
601,343
|
|
|
601
|
|
|
1,070,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,070,629
|
|
Issuance
of common stock in exchange for settlement
|
|
|
45,195
|
|
|
45
|
|
|
135,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,133
|
|
Issuance
of common stock in exchange for purchase of Altiva
|
|
|
100,000
|
|
|
100
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Issuance
of common stock in exchange for purchase of Pearl
|
|
|
60,000
|
|
|
60
|
|
|
166,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,860
|
|
Issuance
of common stock to directors in exchange for services
|
|
|
45,000
|
|
|
45
|
|
|
39,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,240
|
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
(21,457
|
)
|
|
|
|
|
|
|
|
|
|
|
(21,457
|
)
|
Beneficial
conversion feature
|
|
|
-
|
|
|
-
|
|
|
351,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
351,987
|
|
Fair
market value of warrants issued
|
|
|
-
|
|
|
-
|
|
|
230,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,413
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
(387,859
|
)
|
|
|
|
|
(387,859
|
)
|
Net
loss for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(2,577,058
|
)
|
|
(2,577,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2004
|
|
|
9,482,822
|
|
$
|
9,483
|
|
$
|
38,885,878
|
|
$
|
(21,457
|
)
|
$
|
(333,650
|
)
|
$
|
(238,562
|
)
|
$
|
(30,982,313
|
)
|
$
|
7,319,379
|
|
See
accompanying notes to these consolidated financial statements.
Continued
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
Additional
|
|
|
|
Stock
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Treasury
|
|
Subscriptions
|
|
Shares
to
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Receivable
|
|
be
Issued
|
|
Balance
at June 30, 2004
|
|
|
9,482,822
|
|
|
9,483
|
|
$
|
38,885,878
|
|
$
|
(21,457
|
)
|
$
|
(333,650
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
1,477,619
|
|
|
1,478
|
|
|
1,540,022
|
|
|
|
|
|
(138,000
|
)
|
|
108,500
|
|
Issuance
of common stock for services
|
|
|
188,972
|
|
|
189
|
|
|
246,461
|
|
|
|
|
|
|
|
|
|
|
Excercise
of common stock options
|
|
|
1,210,110
|
|
|
1,210
|
|
|
1,806,523
|
|
|
|
|
|
(838,000
|
)
|
|
|
|
Excercise
of common stock warrants
|
|
|
145,162
|
|
|
145
|
|
|
290,179
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for notes payable & interest
|
|
|
247,684
|
|
|
248
|
|
|
413,540
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
of convertible debentures
|
|
|
564,519
|
|
|
564
|
|
|
1,049,436
|
|
|
|
|
|
|
|
|
|
|
Additional
shares issued for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase
of PTS acquisition
|
|
|
40,000
|
|
|
40
|
|
|
91,560
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for purchase of CQ Systems
|
|
|
759,468
|
|
|
760
|
|
|
1,815,541
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for accrued expenses
|
|
|
34,528
|
|
|
34
|
|
|
49,934
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
|
|
|
(51,704
|
)
|
|
|
|
|
|
|
Issuance
of treasury shares for debt
|
|
|
|
|
|
|
|
|
|
|
|
45,964
|
|
|
|
|
|
|
|
Capital
contribution from issuance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiary
stock on foreign exchange
|
|
|
|
|
|
|
|
|
859,223
|
|
|
|
|
|
|
|
|
|
|
Fair
market value of warrants issued
|
|
|
-
|
|
|
-
|
|
|
249,638
|
|
|
|
|
|
|
|
|
|
|
Fair
market value of options issued
|
|
|
|
|
|
|
|
|
5,492
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of shares
|
|
|
(320,000
|
)
|
|
(320
|
)
|
|
(692,680
|
)
|
|
|
|
|
693,000
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2005
|
|
|
13,830,884
|
|
$
|
13,831
|
|
$
|
46,610,747
|
|
$
|
(27,197
|
)
|
$
|
(616,650
|
)
|
$
|
108,500
|
|
See
accompanying notes to these consolidated financial statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years
|
|
|
|
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$
|
663,325
|
|
$
|
(2,577,058
|
)
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
Provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,979,603
|
|
|
1,640,044
|
|
Impairment
of assets
|
|
|
-
|
|
|
203,312
|
|
Gain
on forgiveness of debt
|
|
|
(404,136
|
)
|
|
(320,318
|
)
|
Loss
on sale of assets
|
|
|
2,082
|
|
|
35,173
|
|
Minority
interest in subsidiary
|
|
|
111,073
|
|
|
(273,159
|
)
|
Stock
issued for settlement costs
|
|
|
-
|
|
|
135,133
|
|
Stock
issued for services
|
|
|
183,695
|
|
|
9,000
|
|
Stock
issued to directors for services
|
|
|
-
|
|
|
39,240
|
|
Fair
market value of warrants and stock options granted
|
|
|
255,130
|
|
|
-
|
|
Beneficial
conversion feature
|
|
|
209,848
|
|
|
137,230
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(3,644,646
|
)
|
|
(324,094
|
)
|
Other
current assets
|
|
|
(1,587,132
|
)
|
|
(409,708
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
2,161,633
|
|
|
(65,386
|
)
|
Deferred
liabilities
|
|
|
313,397
|
|
|
-
|
|
Net
cash provided by (used in) operating activities
|
|
|
243,872
|
|
|
(1,770,591
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(1,468,499
|
)
|
|
(2,861,754
|
)
|
Sales
of property and equipment
|
|
|
88,736
|
|
|
75,490
|
|
Purchases
of certificates of deposit
|
|
|
(1,517,640
|
)
|
|
(3,241,403
|
)
|
Proceeds
from sale of certificates of deposit
|
|
|
1,703,563
|
|
|
2,850,000
|
|
Increase
in intangible assets
|
|
|
(3,827,466
|
)
|
|
(439,297
|
)
|
Proceeeds
from sale of minority interest of subsidiary
|
|
|
-
|
|
|
200,000
|
|
Capital
investments in minority interest of subsidiary
|
|
|
178,521
|
|
|
10,000
|
|
Cash
brought in at acquisition
|
|
|
145,297
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(4,697,488
|
)
|
|
(3,406,964
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
1,512,000
|
|
|
1,848,750
|
|
Proceeds
from the exercise of stock options and warrants
|
|
|
1,260,057
|
|
|
1,445,392
|
|
Capital
contributed from sale of subsidiary stock
|
|
|
859,223
|
|
|
-
|
|
Purchase
of treasury shares
|
|
|
(51,704
|
)
|
|
(21,457
|
)
|
Proceeds
from loans
|
|
|
1,533,690
|
|
|
1,685,781
|
|
Proceeds
from convertible debenture
|
|
|
-
|
|
|
1,200,000
|
|
Payments
on capital lease obligations & loans
|
|
|
(286,339
|
)
|
|
(384,210
|
)
|
Net
cash provided by financing activities
|
|
|
4,826,927
|
|
|
5,774,256
|
|
Effect
of exchange rate changes in cash
|
|
|
127,255
|
|
|
59,970
|
|
Net
increase in cash and cash equivalents
|
|
|
500,566
|
|
|
656,671
|
|
Cash
and cash equivalents, beginning of year
|
|
|
871,161
|
|
|
214,490
|
|
Cash
and cash equivalents, end of year
|
|
$
|
1,371,727
|
|
$
|
871,161
|
|
See
accompanying notes to these consolidated financial statements.
|
|
For
the Years Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
127,055
|
|
$
|
229,877
|
|
Taxes
|
|
$
|
41,182
|
|
$
|
76,638
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Common
stock issued for services and compensation
|
|
$
|
246,650
|
|
$
|
9,000
|
|
Common
stock issued for conversion of note payable and interest
|
|
$
|
413,788
|
|
$
|
861,429
|
|
Common
stock issued for legal settlement
|
|
$
|
-
|
|
$
|
135,133
|
|
Common
stock issued for acquisition of product license
|
|
$
|
91,600
|
|
$
|
166,860
|
|
Common
stock issued for settlement of debt
|
|
$
|
45,965
|
|
$
|
209,200
|
|
Common
stock issued to directors for services
|
|
$
|
-
|
|
$
|
39,240
|
|
Common
stock issued for acquisition of subsidiary
|
|
$
|
1,816,301
|
|
$
|
-
|
|
Common
stock issued for conversion of debentures
|
|
$
|
1,050,000
|
|
$
|
-
|
|
See
accompanying notes to these consolidated financial
statements.
NOTE
1 - BUSINESS AND CONTINUED OPERATIONS
NetSol
Technologies, Inc. and subsidiaries (the “Company”), formerly known as NetSol
International, Inc. and Mirage Holdings, Inc., was incorporated under the laws
of the State of Nevada on March 18, 1997. During November of 1998, Mirage
Collections, Inc., a wholly owned and non-operating subsidiary, was dissolved.
During
April 1999, February 2000 and March 2000, the Company formed NetSol USA, Inc.,
NetSol eR, Inc. and NetSol (PVT), Limited, respectively, as wholly owned
subsidiaries.
Business
Combinations Accounted for Under the Purchase Method:
Network
Solutions PVT, Ltd. and NetSol UK, Limited
On
September 15, 1998 and April 17, 1999, the Company purchased from related
parties, 51% and 49%, respectively, of the outstanding common stock of Network
Solutions PVT, Ltd., a Pakistani Company, and 43% and 57% of the outstanding
common stock of NetSol UK, Limited, a United Kingdom Company, for the issuance
of 938,000 restricted common shares of the Company and cash payments of
$775,000, for an aggregate purchase price of approximately $12.9 million. These
acquisitions were accounted for using the purchase method of accounting, and
accordingly, the purchase price was allocated to the assets purchased and
liabilities assumed based upon their estimated fair values on the date of
acquisition, which approximated $300,000. Included in the accompanying
consolidated financial statements are other assets acquired at fair market
value
consisting of product licenses, product renewals, product enhancements,
copyrights, trademarks, trade names and customer lists. At the date of
acquisition, the management of the Company allocated approximately $6.3 million
to these assets, based on independent valuation reports prepared for the
Company. The excess of the purchase prices over the estimated fair values of
the
net assets acquired, was recorded as goodwill, and was being amortized by using
the straight-line method from the date of each purchase. Effective April 1,
2001, the management determined that the remaining useful life of all its
acquired intangible assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles. During June 2001, the
management decided to close its operations in the United Kingdom, and
accordingly, the Company recognized a loss from impairment of various intangible
assets related to NetSol UK, as recoverability of these assets (measured by
a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset) seemed highly unlikely. On March 18, 2002, the
final Winding-up Order was made relating to the liquidation of for NetSol UK
on
the petition of a creditor in respect of services supplied presented to the
Court.
Mindsources,
Inc.
On
August
13, 1999, the Company through its wholly owned subsidiary, NetSol USA, Inc.
acquired 100% of the outstanding capital stock of Mindsources, Inc., a Virginia
and US based Company, through the issuance of 50,000 shares of Rule 144
restricted common shares of the Company for an aggregate purchase price of
approximately $1,260,000. This acquisition was accounted for using the purchase
method of accounting under APB Opinion No. 16, and accordingly, the purchase
price was allocated to the assets purchased and liabilities assumed based upon
their estimated fair values as determined by management on the date of
acquisition, which approximated $900,000. The management of the Company
allocated the entire purchase price to customer lists acquired, and is being
amortized by using the straight-line method from the date of acquisition. The
excess of the purchase prices over the estimated fair values of the net assets
acquired, approximately $360,000, was recorded as goodwill and is being
amortized using the straight-line method from the date of purchase. Effective
April 1, 2001, the management determined that the remaining useful life of
all
its acquired intangible assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles.
Network
Solutions Group Limited and Subsidiaries
On
August
18, 1999, the Company acquired 100% of the outstanding capital stock of Network
Solutions Group Limited and Subsidiaries, a United Kingdom Company, through
the
issuance of 31,000 shares of Rule 144 restricted common shares of the Company
for an aggregate purchase price of approximately $940,000. This acquisition
was
accounted for using the purchase method of accounting under APB Opinion No.
16,
and accordingly, the purchase price was allocated to the assets purchased and
liabilities assumed based upon their estimated fair values on the date of
acquisition, which approximated a deficit of $700,000. The management of the
Company allocated approximately $600,000 to customer lists, which are being
amortized by using the straight-line method from the date of acquisition. The
excess of the purchase price over the estimated fair values of the net assets
acquired, approximately $1,040,000, was recorded as goodwill, and was being
amortized by using the straight-line method over the estimated useful life
from
the date of acquisition. Effective
April 1, 2001, the management determined that the remaining useful life of
all
its acquired intangible assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles. During June 2001, the
management decided to close its operations in the United Kingdom, and
accordingly, the Company recognized a loss from impairment of various intangible
assets related to these entities, as recoverability
of
these
assets
(measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset)
seemed
highly unlikely.
Intereve
Corporation
During
March 2001, the Company acquired 100% of the outstanding capital stock of
Intereve Corporation for an aggregate purchase price of $245,000. This
acquisition was accounted for using the purchase method of accounting under
APB
Opinion No. 16, and accordingly, the purchase price was allocated to the assets
purchased and liabilities assumed based upon their estimated fair values on
the
date of acquisition, which equaled to zero. The management of the Company
allocated the entire purchase price of $245,000 to customer lists. During June
2001, the management ceased operations of this entity and consequently, the
Company recognized an impairment loss of $245,000 to customer list, as
recoverability of these assets (measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset)
seemed highly unlikely.
Altvia
Corporation
On
May
20, 2003, the Company acquired 100% of the outstanding capital stock of Altvia
Technologies, Inc. for an aggregate purchase price of $257,000. This acquisition
was accounted for using the purchase method of accounting under APB Opinion
No.
16, and accordingly, the purchase price was allocated to the assets purchased
and liabilities assumed based upon their estimated fair values on the date
of
acquisition, which equaled to $257,000. The management of the Company allocated
$30,000 of the purchase price to customer lists & $23,688 to property and
equipment. The
excess of the purchase price over the estimated fair values of the net assets
acquired of $203,312 was recorded as goodwill. During the year ended June 30,
2004, the goodwill was impaired.
Pearl
Treasury System Ltd
On
October 14, 2003, the Company executed an agreement to acquire the Pearl
Treasury System Ltd, a United Kingdom company (“Pearl”). This acquisition
required the Company to issue up to 60,000 shares of common stock to the
shareholders of Pearl Treasury System, Ltd. In addition, during the year ended
June 30, 2005, an additional 40,000 shares valued at $91,600 was issued to
the
shareholders of Pearl for milestones reached in the development of the software.
After acquisition, all development activities of Pearl Treasury System, now
called InBanking were transferred to NetSol UK; therefore, there are no separate
financial statements for Pearl. The total acquisition value of $258,460 has
been
recorded as an intangible asset and is included in “product licenses” on the
accompanying consolidated financial statements.
Raabta
Online
During
the quarter ended March 31, 2004, the Company’s subsidiary, NetSol Connect,
purchased Raabta Online, a Pakistani company, for a cash price of 10,000,000
rupees or $173,500 representing 100% of the value of Raabta. This acquisition
is
expected to provide the Company with an established customer base and strong
technical expertise. The purchase price has been allocated to property and
equipment of the acquired entity. All activity of the acquired entity was
absorbed by NetSol Connect after the acquisition.
CQ
Systems
On
January 19, 2005, the Company entered into an agreement to acquire 100% of
the
issued and outstanding shares of common stock of CQ Systems Ltd., a company
organized under the laws of England and Wales. The acquisition closed on
February 22, 2005. The
initial purchase price was £3,576,335 or $6,730,382, of which one-half was due
at closing payable in cash and stock and the other half is due when the audited
March 31, 2006 financial statements are completed. On the closing date, $1.7
million was paid and 681,965 shares were issued to the shareholders of CQ,
valued at $1,676,795 at an average share price of $2.46 was recorded. In
addition, the agreement called for the accumulated retained earnings amounting
to £423,711 or $801,915 of CQ Systems as of the closing date to be paid to the
shareholders in cash and stock. In April 2005, the additional cash of £350,000
or $662,410 was paid and 77,503 shares of the Company’s common stock valued at
$139,505 were issued. The total amount paid at closing was $4,178,710.
Business
Combinations Accounted for Under the Pooling of Interest
Method:
Abraxas
Australia Pty, Limited
On
January 3, 2000, the Company issued 30,000 Rule 144 restricted common shares
in
exchange for 100% of the outstanding capital stock of Abraxas Australia Pty,
Limited, an Australian Company. This business combination was accounted for
using the pooling of interest method of accounting under APB Opinion No. 16.
Formation
of Subsidiary:
During
the period ended December 31, 2002, the Company formed a subsidiary in the
UK,
NetSol Technologies Ltd., as a wholly-owned subsidiary of NetSol Technologies,
Inc. This entity serves as the main marketing and delivery arm for services
and
products sold and delivered in the UK and mainland Europe.
During
the period ended June 30, 2004, the Company formed a subsidiary in India, NetSol
Technology India, Limited, as a wholly-owned subsidiary of NetSol Technologies,
Inc. This entity is planned to serve as the main marketing and delivery arm
for
services and products sold and delivered in India. As of the date of this
report, no operations have begun with this entity.
Joint
Venture:
In
January 2005, the Company formed TiG-NetSol (Pvt) Limited (“TiG-Netsol”) as a
joint venture with a UK based public company TIG Plc., with 50.1% ownership
by
NetSol Technologies, Inc. and 49.9% ownership by TiG. TiG-NetSol was
incorporated in Pakistan on January 12, 2005 under the Companies Ordinance,
1984
as a private company limited by shares. The business of the Company is export
of
computer software and its related services developed in Pakistan.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, NetSol Technologies (Pvt), Ltd.(“PK
Tech”), NetSol (Pvt), Limited (“PK Private”), NetSol Technologies Limited
(“UK”), NetSol-Abraxas Australia Pty Ltd. (“Abraxas”), NetSol Altvia, Inc.
(“USA”), CQ Systems Limited (“CQ”), and its majority-owned subsidiaries, NetSol
Connect (Pvt), Ltd. (“Connect”), and TIG-NetSol (Pvt) Limited (“TIG”). All
material inter-company accounts have been eliminated in consolidation.
Company
name change:
Effective
February 8, 2002, the Company changed its name from NetSol International,
Inc. to NetSol Technologies, Inc. The name change was approved by a majority
of
shareholders at the Company’s annual shareholders meeting held on
January 25, 2002.
Business
Activity:
The
Company designs, develops, markets, and exports proprietary software products
to
customers in the automobile finance and leasing industry worldwide. The Company
also provides consulting services in exchange for fees from
customers.
Use
of Estimates:
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective
April 1, 2001, the management determined that the remaining useful life of
all
its acquired intangible assets to be approximately five years, and accordingly,
accelerated the amortization of these intangibles. This change in estimate
increased the depreciation and amortization expense by approximately $700,000
for the year ended June 30, 2002 and $400,000 during the three months ended
June
30, 2001. Due to impairment losses recognized to intangibles, the remaining
net
intangible balance of approximately $6,860,000 (including goodwill of
$1,950,000) at the date of change in estimation in 2001 has been amortized
over
the remaining life of 57 months. The Company evaluates, on on-going basis,
the
accounting effect arising from the recently issued SFAS No. 142, “Goodwill and
Other Intangibles” which became effective to the Company’s financial statements
beginning July 1, 2002.
Cash
and Cash Equivalents:
Equivalents
For
purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
Concentration
The
Company maintains its cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
Accounts
Receivable:
The
Company’s customer base consists of a geographically dispersed customer base.
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Reserves are recorded primarily on
a
specific identification basis.
Revenues
in excess of billings:
“Revenues
in excess of billings” represent the total of the project to be billed to the
customer over the life of the project. As each phase is completed and billed
to
the customer, the corresponding percentage of completion amount is transferred
from this account to “Accounts Receivable.”
Property
and Equipment:
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation is
computed using various methods over the estimated useful lives of the assets,
ranging from three to seven years.
The
Company accounts for the costs of computer software developed or obtained for
internal use in accordance with Statement of Position 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.” The
Company capitalizes costs of materials, consultants, and payroll and
payroll-related costs for employees incurred in developing internal-use computer
software. These costs are included with “Computer equipment and software.” Costs
incurred during the preliminary project and post-implementation stages are
charged to general and administrative expense.
Intangible
Assets:
Intangible
assets consist of product licenses, renewals, enhancements, copyrights,
trademarks, trade names, customer lists and goodwill. The Company evaluates
intangible assets, goodwill and other long-lived assets for impairment, at
least
on an annual basis and whenever events or changes in circumstances indicate
that
the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill
is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test
is
performed to measure the amount of impairment loss. Potential impairment of
goodwill after July 1, 2002 is being evaluated in accordance with SFAS No.
142.
The SFAS No. 142 is applicable to the financial statements of the Company
beginning July 1, 2002.
As
part
of intangible assets, the Company capitalizes certain computer software
development costs in accordance with SFAS No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.” Costs incurred
internally to create a computer software product or to develop an enhancement
to
an existing product are charged to expense when incurred as research and
development expense until technological feasibility for the respective product
is established. Thereafter, all software development costs are capitalized
and
reported at the lower of unamortized cost or net realizable value.
Capitalization ceases when the product or enhancement is available for general
release to customers.
The
Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate
that
the unamortized software development costs exceed the net realizable value,
the
Company writes off the amount which the unamortized software development costs
exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight-line basis over three
years, whichever method results in a higher level of amortization.
Statement
of Cash Flows:
In
accordance with Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows," cash flows from the Company's operations are calculated based
upon the local currencies. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
Revenue
Recognition:
The
Company recognizes its revenue in accordance with the Securities and Exchange
Commissions (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition
in Financial Statements” (“SAB 101”) and The American Institute of
Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended by
SOP
98-4 and SOP 98-9, SOP 81-1, “Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts,”
and
Accounting Research Bulletin 45 (ARB 45) “Long-Term Construction Type
Contracts.” The
Company’s revenue recognition policy is as follows:
License
Revenue: The
Company recognizes revenue from license contracts without major customization
when a non-cancelable, non-contingent license agreement has been signed,
delivery of the software has occurred, the fee is fixed or determinable, and
collectibilty is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage
of
completion method,
in conformity with ARB 45 and SOP 81-1.
Revenue
from the implementation of software is recognized on a percentage of completion
method,
in conformity with Accounting Research Bulletin (“ARB”) No. 45 and SOP 81-1. Any
revenues from software arrangements with multiple elements are allocated to
each
element of the arrangement based on the relative fair values using specific
objective evidence as defined in the SOPs. An
output
measure of “Unit of Work Completed” is used to determine the percentage of
completion which measures the results achieved at a specific date. Units
completed are certified by the Project Manager and EVP IT/
Operations.
Services
Revenue:
Revenue
from consulting services is recognized as the services are performed for
time-and-materials contracts. Revenue from training and development services
is
recognized as the services are performed. Revenue from maintenance agreements
is
recognized ratably over the term of the maintenance agreement, which in most
instances is one year.
Fair
Value:
Unless
otherwise indicated, the fair values of all reported assets and liabilities,
which represent financial instruments, none of which are held for trading
purposes, approximate carrying values of such amounts.
Advertising
Costs:
The
Company expenses the cost of advertising as incurred. Advertising costs for
the
years ended June 30, 2005 and 2004 were $127,602 and $37,801,
respectively.
Net
Loss Per Share:
Net
loss
per share is calculated in accordance with the Statement of financial accounting
standards No. 128 (SFAS No. 128), “Earnings per share.” Basic net loss per share
is based upon the weighted average number of common shares outstanding. Diluted
net loss per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed
by
applying the treasury stock method. Under this method, options and warrants
are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
For
the year ended June 30, 2005
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
$
|
663,325
|
|
|
11,597,625
|
|
$
|
0.06
|
|
Net
income available to common shareholders
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
2,515,114
|
|
|
|
|
Warrants
|
|
|
|
|
|
663,584
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
663,325
|
|
|
14,776,323
|
|
$
|
0.04
|
|
The
weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements for the year ended June 30,
2004
since the effect of dilutive securities is anti-dilutive.
Reverse
stock split:
On
August
18, 2003, the Company affected a 1 for 5 reverse stock-split for all the issued
and outstanding shares of common stock. All historical share and per share
amounts in the accompanying consolidated financial statements have been restated
to reflect the 5:1 reverse stock split.
Other
Comprehensive Income & Foreign Currency Translation:
SFAS
130
requires unrealized gains and losses on the Company’s available for sale
securities, currency translation adjustments, and minimum pension liability,
which prior to adoption were reported separately in stockholders’ equity, to be
included in other comprehensive income. The accounts of NetSol UK and CQ Systems
use British Pounds; NetSol Technologies (Pvt) Ltd., NetSol Private, NetSol
Connect, and TiG-Netsol use Pakistan Rupees; NetSol Abraxas uses the Australian
dollar as the functional currencies. NetSol Technologies, Inc., and NetSol
Altvia, Inc., uses U.S. dollars as the functional currencies. Assets and
liabilities are translated at the exchange rate on the balance sheet date,
and
operating results are translated at the average exchange rate throughout the
period. During the year ended June 30, 2005 and 2004, comprehensive income
included net translation loss of $282,129 and $387,859, respectively. Other
comprehensive loss, as presented on the accompanying consolidated balance sheet
in the stockholders’ equity section amounted to $520,691 as of June 30,
2005.
Accounting
for Stock-Based Compensation:
The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which applies the
fair-value method of accounting for stock-based compensation plans. In
accordance with this standard, the Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
In
March
2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 44 (Interpretation 44), “Accounting for Certain Transactions Involving Stock
Compensation.” Interpretation 44 provides criteria for the recognition of
compensation expense in certain stock-based compensation arrangements that
are
accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 became effective July 1, 2000, with certain provisions that
were effective retroactively to December 15, 1998 and January 12, 2000.
Interpretation 44 did not have any material impact on the Company’s financial
statements.
Income
Taxes:
Deferred
income taxes are reported using the liability method. Deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities
are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the
date of enactment.
As
of
June 30, 2005, the Company had net federal and state operating loss carry
forwards expiring in various years through 2025. During the year ended June
30,
2005, the valuation allowance increased by $651,617; primarily due to the
application of the current year net loss for the US companies to the net
operating loss carry forward. Deferred tax assets resulting from the net
operating losses are reduced by a valuation allowance, when in the opinion
of
management, utilization is not reasonably assured.
A
summary
at June 30, 2005 is as follows:
|
|
Federal
|
|
State
|
|
Total
|
|
Net
operating loss carry forward - June 30, 2004
|
|
$
|
22,479,286
|
|
$
|
9,503,419
|
|
|
|
|
Net
loss
|
|
|
3,245,957
|
|
|
3,245,957
|
|
|
|
|
Net
operating loss carry forward - June 30, 2005
|
|
|
25,725,243
|
|
|
12,749,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
32
|
%
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax asset
|
|
|
8,232,078
|
|
|
1,019,950
|
|
|
9,252,028
|
|
Valuation
allowance
|
|
|
(6,672,078
|
)
|
|
(629,950
|
)
|
|
(7,302,028
|
)
|
Net
deferred tax asset
|
|
|
1,560,000
|
|
|
390,000
|
|
|
1,950,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability arising from
|
|
|
|
|
|
|
|
|
|
|
non-taxable
business combinations
|
|
|
1,560,000
|
|
|
390,000
|
|
|
1,950,000
|
|
Net
deferred tax liability
|
|
$
|
(0
|
)
|
$
|
0
|
|
$
|
(0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Consolidated
Statements of Operations:
|
|
For
the years
|
|
|
|
ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
%
|
|
%
|
|
Tax
expense (credit) at statutory rate - federal
|
|
|
34
|
|
|
(34
|
)
|
State
tax expenses, net of federal tax
|
|
|
(6
|
)
|
|
(6
|
)
|
Valuation
allowance
|
|
|
-
|
|
|
16
|
|
Foreign
tax rate differences
|
|
|
(34
|
)
|
|
18
|
|
Other
|
|
|
7
|
|
|
6
|
|
Tax
expense at actual rate
|
|
|
1
|
|
|
-
|
|
Derivative
Instruments:
In
June
1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000.
SFAS
No. 133 requires the Company to recognize all derivatives as either assets
or
liabilities and measure those instruments at fair value. It further provides
criteria for derivative instruments to be designated as fair value, cash flow
and foreign currency hedges and establishes respective accounting standards
for
reporting changes in the fair value of the derivative instruments. After
adoption, the Company is required to adjust hedging instruments to fair value
in
the balance sheet and recognize the offsetting gains or losses as adjustments
to
be reported in net income or other comprehensive income, as appropriate. The
Company has complied with the requirements of SFAS 133, the effect of which
was
not material to the Company’s financial position or results of operations as the
Company does not participates in such activities.
Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed
of:
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment
or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations for a Disposal of a Segment of a Business." The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. In that event,
a
loss is recognized based on the amount by which the carrying amount exceeds
the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal.
For
goodwill not identifiable with an impaired asset, the Company establishes
benchmarks at the lowest level (entity level) as its method of assessing
impairment. In measuring impairment, unidentifiable goodwill is considered
impaired if the fair value at the lowest level is less than its carrying amount.
The fair value of unidentifiable goodwill is determined by subtracting the
fair
value of the recognized net assets at the lowest level (excluding goodwill)
from
the value at the lowest level. The amount of the impairment loss is equal to
the
difference between the carrying amount of goodwill and the fair value of
goodwill. In the event that impairment is recognized, appropriate disclosures
are made.
Goodwill
of a reporting unit is reviewed for impairment if events or changes in
circumstances indicate that the carrying amount of its goodwill or intangible
assets may not be recoverable. Impairment of reporting unit goodwill is
evaluated based on a comparison of the reporting unit’s carrying value to the
implied fair value of the reporting unit. Conditions that indicate that an
impairment of goodwill exists include a sustained decrease in the market value
of the reporting unit or an adverse change in business climate.
On
June
30, 2004, the Company evaluated the valuation of goodwill based upon the
performance and market value of NetSol USA. The Company determined the goodwill
was impaired and recorded the impairment of $203,312 at June 30, 2004, in the
accompanying consolidated financial statements.
Reporting
segments:
Statement
of financial accounting standards No. 131, Disclosures about segments of an
enterprise and related information (SFAS No. 131), which superceded statement
of
financial accounting standards No. 14, Financial reporting for segments of
a
business enterprise, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements
and
requires reporting of selected information about operating segments in interim
financial statements regarding products and services, geographic areas and
major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performances. The Company allocates its
resources and assesses the performance of its sales activities based upon
geographic locations of its subsidiaries (see note 12).
New
Accounting Pronouncements:
In
March
2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments.” The EITF reached a consensus about the criteria that
should be used to determine when an investment is considered impaired, whether
that impairment is other-than-temporary, and the measurement of an impairment
loss and how that criteria should be applied to investments accounted for under
SFAS No. 115, “Accounting in Certain Investments in Debt and Equity Securities.”
EITF 03-01 also included accounting considerations subsequent to the recognition
of other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. Additionally, EITF 03-01 includes new disclosure requirements
for
investments that are deemed to be temporarily impaired. In September 2004,
the
Financial Accounting Standards Board (FASB) delayed the accounting provisions
of
EITF 03-01; however, the disclosure requirements remain effective for annual
reports ending after June 15, 2004. The Company believes that the adoption
of
this standard will have no material impact on its financial
statements.
In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair
value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
The Company is evaluating the effects adoption of SFAS 123R will have on its
financial statements.
In
December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. The Company believes that the adoption
of
this standard will have no material impact on its financial
statements.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
This statement applies to all voluntary changes in accounting principle and
requires retrospective application to prior period’s financial statements of
changes in accounting principle, unless this would be impracticable. This
statement also makes a distinction between "retrospective application" of an
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company believes that the adoption of this standard will have no
material impact on its financial statements.
Reclassifications:
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform with report classifications of the current
year.
NOTE
3 - MAJOR CUSTOMERS
The
Company is a strategic business partner for DaimlerChrysler (which consists
of a
group of many companies), which accounts for approximately 20% of revenue for
the fiscal years ended June 30, 2005 and 2004 and Toyota Motors (which consists
of a group of many companies) accounts for approximately 35% of revenue for
the
fiscal year ended June 30, 2005. Accounts receivable at June 30, 2005 for these
companies was $539,761 and $1,165,183. No other individual client represents
more than 10% of the revenue for the fiscal years ended June 30, 2005 and
2004.
NOTE
4 - OTHER CURRENT ASSETS
Other
current assets consist of the following as of June 30, 2005:
Prepaid
Expenses
|
|
$
|
494,315
|
|
Advance
Income Tax
|
|
|
162,682
|
|
Employee
Advances
|
|
|
11,342
|
|
Security
Deposits
|
|
|
56,472
|
|
Other
Receivables
|
|
|
187,613
|
|
Other
Asset
|
|
|
18,920
|
|
|
|
|
|
|
Total
|
|
$
|
931,344
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net, consist of the following at June 30, 2005:
Office
furniture and equipment
|
|
$
|
858,273
|
|
Computer
equipment
|
|
|
3,804,496
|
|
Assets
under capital leases
|
|
|
623,008
|
|
Building
|
|
|
2,930,258
|
|
Construction
in process
|
|
|
424,991
|
|
Land
|
|
|
185,760
|
|
Autos
|
|
|
138,226
|
|
Improvements
|
|
|
270,929
|
|
Subtotal
|
|
|
9,235,941
|
|
Accumulated
depreciation
|
|
|
(4,121,165
|
)
|
|
|
$
|
5,114,776
|
|
For
the
years ended June 30, 2005 and 2004, fixed asset depreciation expense totaled
$654,584 and $520,750, respectively. Of these amounts, $415,042 and $355,954,
respectively, are reflected as part of cost of goods sold. Accumulated
depreciation and amortization for assets under capital leases amounted to
$363,433 and $335,156 at June 30, 2005 and 2004, respectively.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consist of the following at June 30, 2005:
|
|
Product
Licenses
|
|
Customer
Lists
|
|
Total
|
|
Intangible
asset - June 30, 2004
|
|
$
|
5,450,357
|
|
$
|
1,977,877
|
|
$
|
7,428,234
|
|
Additions
|
|
|
3,376,728
|
|
|
1,316,880
|
|
|
4,693,608
|
|
Effect
of translation adjustment
|
|
|
(27,762
|
)
|
|
|
|
|
(27,762
|
)
|
Accumulated
amortization
|
|
|
(3,883,529
|
)
|
|
(1,739,765
|
)
|
|
(5,623,294
|
)
|
Net
balance - June 30, 2005
|
|
$
|
4,915,794
|
|
$
|
1,554,992
|
|
$
|
6,470,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense:
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2005
|
|
$
|
980,524
|
|
$
|
403,457
|
|
$
|
1,383,981
|
|
Year
ended June 30, 2004
|
|
$
|
803,629
|
|
$
|
315,665
|
|
$
|
1,119,294
|
|
The
above
amortization expense includes amounts in “Cost of Goods Sold” for capitalized
software development costs of $58,961 and $43,298 for the fiscal years ended
June 30, 2005 and 2004, respectively.
At
June
30, 2005 and 2004, product licenses, renewals, enhancements, copyrights,
trademarks, and tradenames, included unamortized software development and
enhancement costs of $1,507,792 and $908,508, respectively, as the development
and enhancement is yet to be completed. Software development amortization
expense was $94,682 and $97,744 for the years ended June 30, 2005 and June
30,
2004, respectively.
Amortization
expense of intangible assets over the next five years is as
follows:
|
|
FISCAL
YEAR ENDING
|
|
Asset
|
|
6/30/06
|
|
6/30/07
|
|
6/30/08
|
|
6/30/09
|
|
6/30/10
|
|
TOTAL
|
|
Product
Licences
|
|
$
|
1,271,996
|
|
$
|
591,872
|
|
$
|
591,872
|
|
$
|
576,799
|
|
$
|
375,463
|
|
$
|
3,408,002
|
|
Customer
Lists
|
|
|
551,204
|
|
|
301,454
|
|
|
263,376
|
|
|
263,376
|
|
|
175,583
|
|
|
1,554,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,823,200
|
|
$
|
893,326
|
|
$
|
855,248
|
|
$
|
840,175
|
|
$
|
551,046
|
|
$
|
4,962,995
|
|
NOTE
7 - DEBTS
NOTES
PAYABLE
Notes
payable consist of the following at June 30, 2005:
|
|
Balance
at
|
|
Current
|
|
Long-Term
|
|
Name
|
|
6/30/05
|
|
Maturities
|
|
Maturities
|
|
A.
Zaman Settlement
|
|
$
|
16,300
|
|
$
|
16,300
|
|
$
|
-
|
|
First
Funding
|
|
|
475
|
|
|
475
|
|
|
-
|
|
D&O
Insurance
|
|
|
49,688
|
|
|
49,688
|
|
|
-
|
|
Noon
Group
|
|
|
518,794
|
|
|
518,794
|
|
|
-
|
|
Gulf
Crown
|
|
|
259,397
|
|
|
259,397
|
|
|
-
|
|
Maxim
Group
|
|
|
100,000
|
|
|
100,000
|
|
|
-
|
|
Subsidiary
Capital Leases
|
|
|
144,538
|
|
|
144,538
|
|
|
-
|
|
|
|
$
|
1,089,192
|
|
$
|
1,089,192
|
|
$
|
-
|
|
On
September 25, 2002 the Company signed a settlement agreement with Adrian Cowler
(“Cowler”) and Surrey Design Partnership Ltd. The Company agreed to pay Cowler
£218,000 pound sterling or approximately $320,460 USD including interest, which
the Company recorded as a note payable. The agreement called for monthly
payments of £3,000 until March 2004 and then £4,000 per month until paid. As of
June 30, 2004, the balance was $146,516. During the six months ended December
31, 2004, the Company paid £12,000 or $21,997. In December 2004, the Company
reached an agreement with Cowler to pay the balance of the loan in one lump-sum
payment. Cowler agreed to accept £52,000 or $103,371 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of $21,148 in the
accompanying consolidated financial statements.
In
November 2002, the Company signed a settlement agreement with Herbert Smith
for
₤171,733 or approximately $248,871, including interest. The Company agreed to
pay $10,000 upon signing of the agreement, $4,000 per month for twelve months,
and then $6,000 per month until paid. The balance owing at June 30, 2003 was
$164,871. During the year ended June 30, 2004, the Company paid ₤41,044 or
$73,000. In addition, the Company adjusted the amount due in USD to reflect
the
change in exchange rates from when the settlement was reached in 2002. As a
result $107,450 was recorded to translation loss. As of June 30, 2004, the
balance was $199,321. During the nine months ended March 31, 2005, the Company
paid $56,000. In April 2005, an agreement was reached with Herbert Smith whereby
they accepted $110,000 as payment in full. As a result, the Company recorded
a
gain on forgiveness of debt of $33,321 in the accompanying consolidated
financial statements.
In
December 2001, as part of the winding up of Network Solutions Ltd. the parent
agreed to assume the note payable of one of the major creditors, Barclay’s Bank
PLC of ₤130,000 or $188,500 USD. In November 2002, the parties agreed upon a
settlement agreement whereby the Company would pay ₤1,000 per month for twelve
months and ₤2,000 per month thereafter until paid. During the fiscal year ended
June 30, 2003, the Company paid approximately ₤2,000 or $3,336. The balance
owing at June 30, 2003 was $185,164. During the year ended June 30, 2004, the
Company paid ₤66,000 or $69,421. During the quarter ended March 31, 2004, the
Company entered into a settlement agreement with Barclay’s whereby Barclay’s
agreed to accept ₤69,000 or $79,098 as payment in full. As a result the Company
recorded a gain on the reduction of debt in the amount of $99,146. As of June
30, 2004, ₤60,000 or $62,500 has been paid on the settlement amount and the
balance of ₤9,000 or $16,598 was paid in July, 2004.
In
June
2002, the Company signed a settlement agreement with a former consultant for
payment of past services rendered. The Company agreed to pay the consultant
a
total of $75,000. The agreement calls for monthly payments of $1,500 per month
until paid. The balance owing at June 30, 2004 was $26,300. During the current
fiscal year the Company paid $10,000. As of June 30, 2005, the balance was
$16,300. The entire balance has been classified as a current liability in the
accompanying consolidated financial statements.
In
January 2005, the Company renewed its director’s and officer liability insurance
for which the annual premium is $138,050. In February 2005, the Company arranged
financing with AFCO Credit Corporation with a down payment of $27,610 with
the
balance to be paid in monthly installments. The balance owing as of June 30,
2005 was $49,688 and is classified as a current liability in the accompanying
consolidated financials statements.
In
October 2004, the Company renewed its professional liability insurance for
which
the annual premium is $5,944. The Company has arranged for financing with the
insurance company with a down payment of $1,853 and nine monthly payment of
$480
each. During the six months ended March 31, 2005, the Company paid $4,529.
The
balance owing at June 30, 2005 was $475 and is classified as a current liability
in the accompanying consolidated financials statements.
In
February 2005, the Company received a loan from a current shareholder Sir Gulam
Noon in the amount of $500,000. The note carries an interest rate of 9.75%
per
annum and is due in one year. The maturity date of the loan may be extended
at
the option of the holder for an additional year. During the fiscal year ended
June 30, 2005, $18,794 of accrued interest was recorded for this
loan.
In
February 2005, the Company received a loan from Gulf Crown Investments in the
amount of $250,000. The note carries an interest rate of 9.75% per annum and
is
due in one year. The maturity date of the loan may be extended at the option
of
the holder for an additional year. During the fiscal year ended June 30, 2005,
$9,397 of accrued interest was recorded for this loan.
In
February 2005, the Company received a loan from a current shareholder Dr. Omar
Atiq in the amount of $300,000. The note carries an interest rate of 12% per
annum and is due on April 4, 2005. The maturity date of the loan may be extended
at the option of the holder. During the quarter ended June 30, 2005, $150,000
cash was paid on the loan and 100,000 shares of the Company’s common stock was
issued valued at $156,160 to pay the debt in full, including $7,453 of accrued
interest (see note 8). As a result, the Company recorded a gain on forgiveness
of debt of $1,293 in the accompanying consolidated financial
statements.
In
May
2005, the Company received a loan from Maxim Group, LLC in the amount of
$250,000. The note carries an interest rate of 12% and is due July 25, 2005.
The
note called for $150,000 to be paid with 80,214 shares the Company’s common
stock and the balance of $100,000 to be paid in cash. The market value of the
shares issued was $152,968 (see Note 8). As a result, the Company recorded
a
loss on forgiveness of debt of $2,968 in the accompanying consolidated financial
statements.
In
addition, the various subsidiaries had current capital leases of $144,537 as
of
June 30, 2005.
LOANS
PAYABLE - BANK
The
Company’s Pakistan subsidiary, NetSol Technologies (Private) Ltd., has two loans
with a bank, secured by the Company’s assets. These notes consist of the
following as of June 30, 2005:
TYPE
OF
|
|
MATURITY
|
|
INTEREST
|
|
BALANCE
|
|
LOAN
|
|
DATE
|
|
RATE
|
|
USD
|
|
|
|
|
|
|
|
|
|
|
|
|
Export
Refinance
|
|
|
Every
6 months
|
|
|
4
|
%
|
$
|
367,401
|
|
Line
of Credit
|
|
|
On
Demand
|
|
|
8
|
%
|
|
21,688
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
389,089
|
|
DUE
TO OFFICERS
The
officers of the Company from time to time loan funds to the Company. As of
June
30, 2004, the officers had loaned a total of $191,102, including $57,776 of
accrued interest and had accrued wages of $102,087. During the fiscal year
ended
June 30, 2004, the officers exercised options against the amounts owing to
them
in the amount of $275,973. The balance owing as of June 30, 2004 was $17,219.
During the current fiscal year, two officers deferred the increase in their
wages for a total of $32,500. In addition, one officer exercised options against
the amounts owing in the amount of $2,083. The balance owing as of June 30,
2005
was $47,636.
NOTE
8 - STOCKHOLDERS’ EQUITY
Initial
Public Offering:
On
September 15, 1998, the Company completed the sale of its minimum offering
of
shares in its initial public offering which generated gross proceeds of
$1,385,647 from the sale of 50,200 shares of common stock and 929,825 warrants,
each warrant to purchase one share of the Company’s common stock at an exercise
price of $6.50 for a term of five years. The remaining unexercised warrants
of
51,890 expired on September 15, 2003.
Business
Combinations:
Altvia
Technologies, Inc.
On
May
20, 2003, the Company issued 212,000 Rule 144 restricted common shares in
exchange for all the assets and certain liabilities of Altvia Technologies,
Inc., a Delaware corporation in an Asset Purchase Agreement. The shares were
valued at the time of the purchase at $212,000 or $1.00 per share.
In
February 2004, an additional 100,000 shares were issued to Altvia as part of
the
purchase agreement for sales milestones achieved.
Pearl
Treasury System Ltd
In
October 2003, the Company entered into an agreement to acquire the Pearl
Treasury System Ltd, a United Kingdom company (“Pearl”). This acquisition
required the Company to issue up to 60,000 shares of common stock to the
shareholders of Pearl Treasury System, Ltd. The shares were valued at the time
of the purchase at $166,860 or $2.78 per share. On December 16, 2003, the
initial shares of 41,700, valued at $115,968 due at the signing of the agreement
were issued by the Company. In April 2004, the remaining 18,300 shares were
issued upon the completion of the software delivery warranties valued at
$50,892. The shares used to acquire this asset were issued in reliance on an
exemption available from registration under Regulation S of the Securities
Act
of 1933, as amended.
In
January 2005, certain milestones, set forth in the purchase and sale agreement
by and between the Company and the former owners, were met in the development
of
the Pearl. As such, the former owners of the product license were due an
additional 40,000 shares of the Company’s common stock. The Company recorded an
addition to the product licenses in the amount of $91,600.
CQ
Systems, Inc.
In
February 2005, the Company completed the acquisition of CQ Systems, (see
note
15). As part of this agreement, the Company issued 759,468 shares of its
common
stock valued at $1,816,301 to the shareholders of CQ Systems.
Private
Placements
In
August
2004, the Company sold 190,476 shares of the Company’s common stock for $200,000
in a private placement. Of this amount $91,500 had been received during the
year
and a total of 87,143 shares were issued to the purchaser. The remaining balance
of $108,500 or 103,333 shares are shown as “Shares to Be Issued” on the
accompanying financial statements.
During
the quarter ended December 31, 2004, the Company sold 1,390,476 shares of its
common stock for $1,250,000 in private placement agreements.
In
addition, the Company received $170,500 as payment on stock subscriptions
receivable during the fiscal year ended June 30, 2005.
In
July
2003, the Company sold 1,026,824 shares of the Company’s common stock in a
private placement transaction. Maxim Group, LLC in New York acted as the
placement agent for the transaction. The total funds raised were $1,215,000
with
approximately $102,950 in placement fees, commissions, and other expenses paid
from the escrow of the sale for a net of $1,102,050. An SB-2 registration
statement was filed on October 15, 2003 to register the shares for the selling
shareholders in this transaction. The investors included 12 individual
accredited investors with no prior ownership of the Company’s common
stock.
In
May
2004, the Company sold 386,363 shares of the Company’s common stock in a private
placement transaction. Maxim Group, LLC in New York acted as the placement
agent
for the transaction. The total funds raised were $850,000 with approximately
$103,300 in placement fees, commissions, and other expenses paid from the escrow
of the sale. In addition, the Company issued 243,182 warrants in connection
with
the sale. The warrants expire in five years and have an exercise price of $3.30
per share. The warrants were valued using the fair value method at $230,413
or
$1.41 per share and were recorded against the proceeds of the financing in
the
accompanying consolidated financial statements. Net proceeds of the financing
were $516,287. The investors included 9 individual accredited investors with
no
prior ownership of the Company’s common stock. An SB-2 was filed on June 15,
2004 to register these shares.
Services,
Accrued Expenses and Payables
During
the years ended June 30, 2005 and 2004, the Company issued 188,972 and 3,613
restricted Rule 144 common shares in exchange for services rendered,
respectively. The Company recorded an expense of $246,650 and $9,000 for the
years ended June 30, 2005 and 2004, respectively. Compensation expense was
calculated based upon the fair market value of the freely trading shares as
quoted on NASDAQ through 2005 and 2004, over the service period.
In
November 2004, the Company entered into an agreement with a vendor whereby
the
Company issued the vendor 20,000 shares valued at $22,968 for the payment of
outstanding invoices in the amount of $16,052. As a result, the Company recorded
a gain on settlement of debt in the amount of $6,916.
During
the year ended June 30, 2005, the Company issued 14,528 shares of the Company’s
common stock for accrued expenses valued at $27,000.
In
February 2003, the Board of Directors and officers were granted the right to
receive 5,000 shares of the Company’s common stock if certain conditions were
met during their 2003 - 2004 term of office. These conditions were met and
a
total of 45,000 restricted Rule 144 common shares were issued in June 2004.
The
shares were valued at the fair market value at the date of grant of $39,240
or
$0.87 per share.
Issuance
of shares for Conversion of Debt and Settlement of
Litigation
During
the year ended June 30, 2005, nineteen of the convertible debenture holders
elected to convert their notes into common stock. The total of the notes
converted was $1,050,000 and the Company issued 564,519 shares of its common
stock to the note holders.
During
the year ended June 30, 2005, a total of 180,214 shares of the Company’s common
stock valued at $309,128 were issued for the payment of two notes payable of
$300,000 plus $7,453 (see Note 7). In addition, 67,470 shares valued at $104,660
were issued to pay the debts of a subsidiary.
During
the year ended June 30, 2004, a total of 123,350 shares of the Company’s common
stock, valued at $209,200, were issued to three investors as reimbursement
for
debts of the Company paid by the investors. In addition, three convertible
notes
payable of $850,000 plus $11,429 of interest was converted into 477,993 shares
of the Company’s common stock.
During
the year ended June 30, 2004, the Company issued 45,195 shares of common stock
valued at $135,135 in settlement of litigation.
Options
and Warrants Exercised
During
the year ended June 30, 2005, the Company issued 1,210,110 shares of its common
stock for the exercise of options valued at $1,807,733. Of these shares, 320,000
shares valued at $693,000 were cancelled. The Company received $969,733 in
cash
from the exercise of these options and recorded “Stock Subscription Receivable”
in the amount of $145,000.
During
the year ended June 30, 2004, the Company issued 1,067,309 shares of its common
stock upon the exercise of stock options valued at $957,892;
of this
amount $290,000 was included in “Stock Subscription Receivable” in the accompany
consolidated financial statements.
During
the years ended June 30, 2005 and 2004, the Company issued 145,162
and
390,000 shares of its common stock upon the exercise of warrants valued at
$290,324and
$487,500, respectively.
Stock
Subscription Receivable
Stock
subscription receivable represents stock options exercised and issued that
the
Company has not yet received the payment from the purchaser as they were in
processing when the quarter ended.
At
June
30, 2004, the Company had receivables from three employees and one investor
for
options exercised totally $290,000. The total receivable at June 30, 2004,
was
$333,650.
During
the year ended June 30, 2005, the Company recorded $874,500 in receivable and
collected $561,500. In addition, a purchaser (consultant) decided not to
complete the agreed purchase and therefore 20,000 shares were cancelled and
the
related value of $30,000 was reversed from the receivable account. The balance
of the receivable at June 30, 2005 was $616,650.
Treasury
Stock
During
the year ended June 30, 2004, the Company purchased 10,000 shares of its common
stock on the open market for $21,457 as treasury shares.
During
the year ended June 30, 2005, the Company purchased 30,000 shares of its common
stock on the open market for $51,704. The Company issued 24,004 of its treasury
shares valued at $45,964 in settlement of a debt. The balance at June 30, 2005
was $27,197.
Common
Stock Purchase Warrants and Options
From
time
to time, the Company issues options and warrants as incentives to employees,
officers and directors, as well as to non-employees.
Common
stock purchase options and warrants consisted of the following as of June 30,
2005:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Options
|
|
Price
|
|
Warrants
|
|
Price
|
|
Outstanding
and exercisable, June 30, 2004
|
|
|
1,862,277
|
|
$0.75
to $5.00
|
|
|
693,182
|
|
$0.50
to $5.00
|
|
Granted
|
|
|
3,994,833
|
|
$0.75
to $5.00
|
|
|
282,260
|
|
$3.30
|
|
Exercised
|
|
|
(809,110
|
)
|
$0.75
to $2.21
|
|
|
(145,162
|
)
|
$2.00
|
|
Expired
|
|
|
(10,000
|
)
|
$1.00
|
|
|
(175,000
|
)
|
|
|
|
Outstanding
and exercisable, June 30, 2005
|
|
|
5,038,000
|
|
|
|
|
|
655,280
|
|
|
|
|
During
the year ended June 30, 2005, 3,596,333 options were granted to employees of
the
company and are fully vested and expire ten years from the date of grant unless
the employee terminates employment, in which case the options expire within
30
days of their termination. An expense of $5,492 was recorded for the granting
of
these options.
During
the year ended June 30, 2004, 2,087,578 options were granted to employees and
officers of the company and are fully vested and expire ten years from the
date
of grant unless the employee terminates employment, in which case the options
expire within 30 days of their termination. In addition, on March 26, 2004,
250,000 option shares were granted to the members of the Board of Directors.
These options vest over a period of two years.
In
compliance with FAS No. 148, the Company has elected to continue to follow
the
intrinsic value method in accounting for its stock-based employee compensation
plan as defined by APB No. 25 and has made the applicable disclosures
below.
Had
the
Company determined employee stock based compensation cost based on a fair value
model at the grant date for its stock options under SFAS 123, the Company's
net
earnings per share would have been adjusted to the pro forma amounts for years
ended June 30, 2005 and 2004 as follows:
|
|
2005
|
|
2004
|
|
Net
income (loss) - as reported
|
|
$
|
663,325
|
|
$
|
(2,577,058
|
)
|
Stock-based
employee compensation expense,
|
|
|
|
|
|
|
|
included
in reported net loss, net of tax
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation
|
|
|
|
|
|
|
|
expense
determined under fair-value-based
|
|
|
|
|
|
|
|
method
for all rewards, net of tax
|
|
|
(4,533,825
|
)
|
|
(3,158,130
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(3,870,500
|
)
|
$
|
(5,735,188
|
)
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
|
0.06
|
|
|
(0.33
|
)
|
Diluted,
as reported
|
|
|
0.04
|
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
Basic,
pro forma
|
|
|
(0.33
|
)
|
|
(0.73
|
)
|
Diluted,
pro forma
|
|
|
(0.03
|
)
|
|
(0.73
|
)
|
Pro
forma
information regarding the effect on operations is required by SFAS 123, and
has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. Pro forma information using
the
Black-Scholes method at the date of grant based on the following assumptions:
|
|
2003
|
|
2004
|
|
Expected
life (years)
|
|
|
10
years
|
|
|
10
years
|
|
Risk-free
interest rate
|
|
|
3.25
|
%
|
|
3.25
|
%
|
Dividend
yield
|
|
|
-
|
|
|
-
|
|
Volatility
|
|
|
100
|
%
|
|
114
|
%
|
During
the year ended June 30, 2005, nineteen debenture holders converted their notes
into common stock. As part of the conversion, warrants to purchase a total
of
282,260 common shares were issued to the note holders. The warrants expire
in
five years and have an exercise price of $3.30 per share. The warrants were
valued using the fair value method at $249,638 and ranged between $0.69 and
$0.92 per share and recorded the expense in the accompanying consolidated
financial statements. The Black-Scholes option pricing model used the following
assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
82
|
%
|
Dividend
yield
|
|
|
0
|
%
|
During
the year ended June 30, 2004, the Company issued 243,182 warrants in connection
with the sale of stock under a private placement agreement. The warrants expire
in five years and have an exercise price of $3.30 per share. The warrants were
valued using the fair value method at $230,413 or $1.41 per share and were
recorded against the proceeds of the financing in the accompanying consolidated
financial statements. The Black-Scholes option pricing model used the following
assumptions:
Risk-free
interest rate
|
|
|
3.25
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
100
|
%
|
Dividend
yield
|
|
|
0
|
%
|
NOTE
9 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
The
1997 Plan
On
April
1, 1997, the Company adopted an Incentive and Non-statutory Stock Option Plan
(the “1997 Plan”) for its employees and consultants under which a maximum of
100,000 options may be granted to purchase common stock of the Company. Two
types of options may be granted under the Plan: (1) Incentive Stock Options
(also known as Qualified Stock Options) which may only be issued to employees
of
the Company and whereby the exercise price of the option is not less than the
fair market value of the common stock on the date it was reserved for issuance
under the Plan; and (2) Non-statutory Stock Options which may be issued to
either employees or consultants of the Company and whereby the exercise price
of
the option is less than the fair market value of the common stock on the date
it
was reserved for issuance under the plan. Grants of options may be made to
employees and consultants without regard to any performance measures. All
options listed in the summary compensation table (“Securities Underlying
Options”) were issued pursuant to the Plan. An additional 4,000 Incentive Stock
Options were issued to a non-officer-stockholder of the Company. All options
issued pursuant to the Plan vest over an 18 month period from the date of the
grant per the following schedule: 33% of the options vest on the date which
is
six months from the date of the grant; 33% of the options vest on the date
which
is 12 months from the date of the grant; and 34% of the options vest on the
date
which is 18 months from the date of the grant. All options issued pursuant
to
the Plan are nontransferable and subject to forfeiture.
During
the year ended June 30, 2004, all outstanding options in this plan
expired.
The
1999 Plan
On
May
18, 1999, the Company enacted an Incentive and Non-statutory Stock Option Plan
(the “1999 Plan”) for its employees, directors and consultants under which a
maximum of 1,000,000 options may be granted to purchase common stock of the
Company. Two types of options may be granted under the Plan: (1) Incentive
Stock
Options (also known as Qualified Stock Options) which may only be issued to
employees of the Company and whereby the exercise price of the option is not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Non-statutory Stock Options which may
be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is less than the fair market value of the common
stock on the date it was reserved for issuance under the plan. Grants of options
may be made to employees, directors and consultants without regard to any
performance measures. All options issued pursuant to the Plan are
nontransferable and subject to forfeiture.
Any
Option granted to an Employee of the Corporation shall become exercisable over
a
period of no longer than ten (10) years and no less than twenty percent (20%)
of
the shares covered thereby shall become exercisable annually. No Incentive
Stock
Option shall be exercisable, in whole or in part, prior to one (1) year from
the
date it is granted unless the Board shall specifically determine otherwise,
as
provided herein. In no event shall any Option be exercisable after the
expiration of ten (10) years from the date it is granted, and no Incentive
Stock
Option granted to a Ten Percent Holder shall, by its terms, be exercisable
after
the expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which
the Board or the Committee authorizes the granting of such Option.
During
the year ended June 30, 2004, all outstanding options in this plan
expired.
The
2001 Plan
On
March
27, 2002, the Company enacted an Incentive and Non-statutory Stock Option Plan
(the “2001 Plan”) for its employees and consultants under which a maximum of
2,000,000 options may be granted to purchase common stock of the Company. Two
types of options may be granted under the Plan: (1) Incentive Stock Options
(also known as Qualified Stock Options) which may only be issued to employees
of
the Company and whereby the exercise price of the option is not less than the
fair market value of the common stock on the date it was reserved for issuance
under the Plan; and (2) Non-statutory Stock Options which may be issued to
either employees or consultants of the Company and whereby the exercise price
of
the option is less than the fair market value of the common stock on the date
it
was reserved for issuance under the plan. Grants of options may be made to
employees and consultants without regard to any performance measures. All
options issued pursuant to the Plan are nontransferable and subject to
forfeiture.
Any
Option granted to an Employee of the Corporation shall become exercisable over
a
period of no longer than ten (10) years and no less than twenty percent (20%)
of
the shares covered thereby shall become exercisable annually. No Incentive
Stock
Option shall be exercisable, in whole or in part, prior to one (1) year from
the
date it is granted unless the Board shall specifically determine otherwise,
as
provided herein. In no event shall any Option be exercisable after the
expiration of ten (10) years from the date it is granted, and no Incentive
Stock
Option granted to a Ten Percent Holder shall, by its terms, be exercisable
after
the expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which
the Board or the Committee authorizes the granting of such Option.
The
number and exercise prices of options granted under the 2001 Plan for the
years
ended June 30, 2005 and 2004 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2005
|
|
Price
|
|
2004
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
269,777
|
|
$0.75
to $2.50
|
|
|
398,408
|
|
$0.25
to $1.25
|
|
Granted
|
|
|
484,000
|
|
$0.75
to $2.50
|
|
|
635,913
|
|
$0.75
to $2.50
|
|
Exercised
|
|
|
(632,777
|
)
|
$0.75
to $2.50
|
|
|
(764,544
|
)
|
$0.25
to $1.25
|
|
Expired
|
|
|
(10,000
|
)
|
-
|
|
|
-
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
111,000
|
|
$0.75
to $2.50
|
|
|
269,777
|
|
$0.75
to $2.50
|
|
The
2002 Plan
In
January 2003, the Company enacted an Incentive and Non-statutory Stock Option
Plan (the “2002 Plan”) for its employees and consultants under which a maximum
of 2,000,000 options may be granted to purchase restricted Rule 144 common
stock
of the Company. Two types of options may be granted under the Plan: (1)
Incentive Stock Options (also known as Qualified Stock Options) which may only
be issued to employees of the Company and whereby the exercise price of the
option is not less than the fair market value of the common stock on the date
it
was reserved for issuance under the Plan; and (2) Non-statutory Stock Options
which may be issued to either employees or consultants of the Company and
whereby the exercise price of the option is less than the fair market value
of
the common stock on the date it was reserved for issuance under the plan. Grants
of options may be made to employees and consultants without regard to any
performance measures. All options issued pursuant to the Plan are
nontransferable and subject to forfeiture.
Any
Option granted to an Employee of the Corporation shall become exercisable over
a
period of no longer than ten (10) years and no less than twenty percent (20%)
of
the shares covered thereby shall become exercisable annually. No Incentive
Stock
Option shall be exercisable, in whole or in part, prior to one (1) year from
the
date it is granted unless the Board shall specifically determine otherwise,
as
provided herein. In no event shall any Option be exercisable after the
expiration of ten (10) years from the date it is granted, and no Incentive
Stock
Option granted to a Ten Percent Holder shall, by its terms, be exercisable
after
the expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which
the Board or the Committee authorizes the granting of such Option.
The
number and weighted average exercise prices of options granted under the 2002
Plan for the year ended June 30, 2005 and 2004 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2005
|
|
Price
|
|
2004
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
1,142,500
|
|
$0.75
to $2.50
|
|
|
93,600
|
|
-
|
|
Granted
|
|
|
14,500
|
|
$1.00
to $5.00
|
|
|
1,351,665
|
|
$0.75
to $2.50
|
Exercised
|
|
|
(17,500
|
)
|
$0.75
to $2.50
|
|
|
(302,765
|
)
|
$0.25
to $1.25
|
Expired
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
1,139,500
|
|
$0.75
to $5.00
|
|
|
1,142,500
|
|
$0.75
to $2.50
|
|
The
2003 Plan
In
March
2004, the Company enacted an Incentive and Non-statutory Stock Option Plan
(the
“2003 Plan”) for its employees and consultants under which a maximum of
2,000,000 options may be granted to purchase restricted Rule 144 common stock
of
the Company. Two types of options may be granted under the Plan: (1) Incentive
Stock Options (also known as Qualified Stock Options) which may only be issued
to employees of the Company and whereby the exercise price of the option is
not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Non-statutory Stock Options which may
be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is less than the fair market value of the common
stock on the date it was reserved for issuance under the plan. Grants of options
may be made to employees and consultants without regard to any performance
measures. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
Any
Option granted to an Employee of the Corporation shall become exercisable over
a
period of no longer than ten (10) years and no less than twenty percent (20%)
of
the shares covered thereby shall become exercisable annually. No Incentive
Stock
Option shall be exercisable, in whole or in part, prior to one (1) year from
the
date it is granted unless the Board shall specifically determine otherwise,
as
provided herein. In no event shall any Option be exercisable after the
expiration of ten (10) years from the date it is granted, and no Incentive
Stock
Option granted to a Ten Percent Holder shall, by its terms, be exercisable
after
the expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which
the Board or the Committee authorizes the granting of such Option.
The
number and weighted average exercise prices of options granted under the 2003
Plan for the year ended June 30, 2005 and 2004 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2005
|
|
Price
|
|
2004
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
450,000
|
|
-
|
|
|
-
|
|
-
|
|
Granted
|
|
|
386,500
|
|
$1.00
to $5.00
|
|
|
450,000
|
|
$2.64
to $5.00
|
|
Exercised
|
|
|
(49,000
|
)
|
$1.00
to $1.35
|
|
|
-
|
|
-
|
|
Expired
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
787,500
|
|
$1.00
to $5.00
|
|
|
450,000
|
|
$2.64
to $5.00
|
|
The
2004 Plan
In
March
2005, the Company enacted an Incentive and Non-statutory Stock Option Plan
(the
“2004 Plan”) for its employees and consultants under which a maximum of
5,000,000 options may be granted to purchase restricted Rule 144 common stock
of
the Company. Two types of options may be granted under the Plan: (1) Incentive
Stock Options (also known as Qualified Stock Options) which may only be issued
to employees of the Company and whereby the exercise price of the option is
not
less than the fair market value of the common stock on the date it was reserved
for issuance under the Plan; and (2) Non-statutory Stock Options which may
be
issued to either employees or consultants of the Company and whereby the
exercise price of the option is less than the fair market value of the common
stock on the date it was reserved for issuance under the plan. Grants of options
may be made to employees and consultants without regard to any performance
measures. All options issued pursuant to the Plan are nontransferable and
subject to forfeiture.
Any
Option granted to an Employee of the Corporation shall become exercisable over
a
period of no longer than ten (10) years and no less than twenty percent (20%)
of
the shares covered thereby shall become exercisable annually. No Incentive
Stock
Option shall be exercisable, in whole or in part, prior to one (1) year from
the
date it is granted unless the Board shall specifically determine otherwise,
as
provided herein. In no event shall any Option be exercisable after the
expiration of ten (10) years from the date it is granted, and no Incentive
Stock
Option granted to a Ten Percent Holder shall, by its terms, be exercisable
after
the expiration of ten (10) years from the date of the Option. Unless otherwise
specified by the Board or the Committee in the resolution authorizing such
option, the date of grant of an Option shall be deemed to be the date upon
which
the Board or the Committee authorizes the granting of such Option.
The
number and weighted average exercise prices of options granted under the 2004
Plan for the year ended June 30, 2005 are as follows:
|
|
|
|
Exercise
|
|
|
|
2005
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
-
|
|
-
|
|
Granted
|
|
|
3,109,833
|
|
$1.50
to $2.91
|
|
Exercised
|
|
|
(109,833
|
)
|
$1.50
|
|
Expired
|
|
|
-
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
3,000,000
|
|
$1.50
to $2.91
|
|
NOTE
10 - CONVERTIBLE DEBENTURE
On
March
24, 2004, the Company entered into an agreement with several investors for
a
Series A Convertible Debenture (the “Bridge Loan”) whereby a total of $1,200,000
in debentures were procured through Maxim Group, LLC. The Company received
a net
of $1,049,946 after placement expenses. The beneficial conversion feature of
the
debenture was valued at $252,257. The Company has recorded this as a
contra-account against the loan balance and is amortizing the beneficial
conversion feature over the life of the loan. During the years ended June 30,
2005 and 2004, the Company amortized $37,500 and $202,932, respectively. The
unamortized balance at June 30, 2005 was $11,825.
During
the year ended June 30, 2005, nineteen of the convertible debenture holders
elected to convert their notes into common stock. The total of the notes
converted was $1,050,000 and the Company issued 564,519 shares of its common
stock to the note holders. The net balance at June 30, 2005, was $138,175.
Under
the
terms of the Bridge Loan agreements, and supplements thereto, the debentures
bear interest at the rate of 10% per annum, payable on a quarterly basis in
common stock or cash at the election of the Company. The maturity date is 24
months from the date of signing, or March 26, 2006. Pursuant to the terms of
a
supplemental agreement dated May 5, 2004 between NetSol and the debenture
holders, the conversion rate was set at one share for each $1.86 of principal.
In
addition, each debenture holder is entitled to receive at the time of conversion
warrants equal to one-half of the total number of shares issued. The total
number of warrants that may be granted is 322,582. The warrants expire in five
years and have an exercise price of $3.30 per share. The fair value of the
warrants will be calculated and recorded using the Black-Scholes method at
the
time of granting, when the debenture is converted. During the year ended June
30, 2005, nineteen debenture holders converted their notes into common stock.
As
part of the conversion, warrants to purchase a total of 282,260 common shares
were issued to the note holders. The warrants were valued using the fair value
method at $249,638. The expense was recorded in the accompanying consolidated
financial statements.
NOTE
11 - COMMITMENTS AND CONTINGENCIES
Leases
In
December 2003, the moved
its
headquarters from its previous facility to one with approximately 1,919 rentable
square feet and a monthly rent of $3,934 per month. The term of the lease is
for
two years and expires on December 31, 2005. A security deposit of $3,934 was
made and is included in other current assets in the accompanying consolidated
financial statements.
The
facilities in Maryland were on a month-to-month basis rented at the rate of
$1,200 per month. In July 2004 the Maryland office moved to a new location
to
one with approximately 1,380 rentable square feet and a monthly rent of $2,530.
The term of the lease is for three years and expires on June 30, 2007. A
security deposit of $2,530 was made and is included in other current assets
in
the accompanying consolidated financial statements.
The
Australia lease is a three-year lease that expires in September 2007 and
currently is rented at the rate of $1,380 per month. UK operations are currently
conducted in leased premises operating on a month-to-month basis with current
rental costs of approximately $5,500 per month. Our London, UK operations are
currently conducted in leased premises operating on a month-to-month basis
with
current rental costs of approximately $5,500 per month. The CQ System
facilities, located in Horsham, United Kingdom, are leased until June 23, 2011
for an annual rent of £75,000 (approximately $131,871.15) with an early
termination option in June 2006. In June 2005, the Company opened a sales office
in Beijing, China. The Beijing lease is a one year lease that expires in June
2006. The monthly rent is $2,280 per month with the first two months free
bringing the average monthly rent to $1,900 per month.
Upon
expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Rent
expense amounted to $290,610 and $220,261 for the years ended June 30, 2005
and
2004, respectively.
Lahore
Technology Campus
The
newly
built Technology Campus was inaugurated in Lahore, Pakistan in May 2004. This
facility consists of 40,000 square feet of computer and general office space.
This facility is state of the art, purpose-built and fully dedicated for IT
and
software development; the first of its kind in Pakistan. Title to this facility
is held by NetSol Technologies Pvt. Ltd., and is not subject to any mortgages.
The Company also signed a strategic alliance agreement with the IT ministry
of
Pakistan to convert the technology campus into a technology park. By this
agreement, the IT ministry would invest nearly 10 million Rupees (approximately
$150,000) to install fiber optic lines and improve the bandwidth for the
facility. NetSol has relocated over 250 employees into this new
facility.
Employment
Agreements
Effective
January 1, 2004, the Company entered into an employment agreement with Naeem
Ghauri as Chief Executive Officer. The agreement is for a base term of three
years, and continues thereafter on an at will basis until terminated by either
NetSol or Mr. Ghauri. The agreement provides for a yearly salary of 110,000
pounds sterling. The agreement also provides for such additional compensation
as
the Board of Directors determines is proper in recognition of Mr. Ghauri's
contributions and services to the Company. In addition, the agreement provides
Mr. Ghauri with options to purchase up to 100,000 shares of common stock at
an
exercise price of $2.21, 100,000 shares at an exercise price of $3.75 and 50,000
shares at an exercise price of $5.00. These options vest at the rate of 25%
per
quarter and are fully vested on December 31, 2004. These options expire on
December 31, 2008. Mr. Ghauri also received options to purchase up to 20,000
shares at the exercise price of $2.65 per share and options to purchase 30,000
shares at the exercise price of $5.00 per share. These options vest immediately
and are exercisable until March 25, 2009. Effective April 1, 2005, Mr. Ghauri’s
employment agreement was amended to increase his salary to £160,000 per annum
(approximately $280,000 per annum based on an exchange rate of 1.75) and, to
grant him options to purchase up to 500,000 shares at the exercise price of
$1.94 per share and options to purchase up to 500,000 shares at the exercise
price of $2.91 per share. These options vest 25% per quarter commencing with
the
quarter ending June 30, 2005.
Effective
January 1, 2004, the Company entered into an employment agreement with Najeeb
Ghauri as Chief Financial Officer. The agreement is for a base term of three
years, and continues thereafter on an at will basis until terminated by either
NetSol or Mr. Ghauri. The agreement provides for a yearly salary of $200,000.
The agreement also provides for such additional compensation as the Board of
Directors determines is proper in recognition of Mr. Ghauri's contributions
and
services to the Company. In addition, the agreement provides Mr. Ghauri with
options to purchase up to 100,000 shares of common stock at an exercise price
of
$2.21, 100,000 shares at an exercise price of $3.75 and 50,000 shares at an
exercise price of $5.00. These options vest at the rate of 25% per quarter
and
are fully vested on December 31, 2004. These options expire on December 31,
2008. Mr. Ghauri also received options to purchase up to 20,000 shares at the
exercise price of $2.65 per share and options to purchase 30,000 shares at
the
exercise price of $5.00 per share. These options vest immediately and are
exercisable until March 25, 2009. Effective April 1, 2005, Mr. Ghauri’s
employment agreement was amended to increase his salary to $250,000 per annum
and, to grant him options to purchase up to 500,000 shares at the exercise
price
of $1.94 per share and options to purchase up to 500,000 shares at the exercise
price of $2.91 per share. These options vest 25% per quarter commencing with
the
quarter ending June 30, 2005.
Effective
January 1, 2004, the Company entered into an employment agreement with Salim
Ghauri as the President and Chief Executive Officer the Company’s Pakistan
subsidiary. The agreement is for a base term of three years, and continues
thereafter on an at will basis until terminated by either the Company or Mr.
Ghauri. The agreement provides for a yearly salary of $110,000. The agreement
also provides for such additional compensation as the Board of Directors
determines is proper in recognition of Mr. Ghauri's contributions and services
to the Company. In addition, the agreement provides Mr. Ghauri with options
to
purchase up to 100,000 shares of common stock at an exercise price of $2.21,
100,000 shares at an exercise price of $3.75 and 50,000 shares at an exercise
price of $5.00. These options vest at the rate of 25% per quarter and are fully
vested on December 31, 2004. These options expire on December 31, 2008. Mr.
Ghauri also received options to purchase up to 20,000 shares at the exercise
price of $2.65 per share and options to purchase 30,000 shares at the exercise
price of $5.00 per share. These options vest immediately and are exercisable
until March 25, 2009. Effective April 1, 2005, Mr. Ghauri’s employment agreement
was amended to increase his salary to $150,000 per annum and, to grant him
options to purchase up to 500,000 shares at the exercise price of $1.94 per
share and options to purchase up to 500,000 shares at the exercise price of
$2.91 per share. These options vest 25% per quarter commencing with the quarter
ending June 30, 2005.
Effective
January 1, 2004, the Company entered into an employment agreement with Patti
L.
W. McGlasson as legal counsel. The agreement provides for a yearly salary of
$82,000. Ms. McGlasson also received options to purchase up to 10,000 shares
of
common stock at an exercise price equal to the lesser of $2.30 or the market
price of the shares on the date of exercise less $2.00. These options vest
at
the rate of 25% per quarter and are exercisable until December 31, 2008.
Effective March 26, 2004, Ms. McGlasson was elected to the position of
Secretary. In connection with her role as Secretary, Ms. McGlasson received
options to purchase up to 10,000 shares of common stock at $3.00 per share.
These options vest at the rate of 25% per quarter and are exercisable until
December 31, 2008. Ms. McGlasson also received options to purchase up to 20,000
shares at the exercise price of $2.65 per share and options to purchase 30,000
shares at the exercise price of $5.00 per share. These options vest immediately
and are exercisable until March 25, 2009.
All
of
the above agreements provide for certain Company-paid benefits such as employee
benefit plans and medical care plans at such times as the Company may adopt
them. The agreements also provide for reimbursement of reasonable
business-related expenses and for two weeks of paid vacation. The agreements
also provide for certain covenants concerning non-competition, non-disclosure,
indemnity and assignment of intellectual property rights.
Litigation
Herbert
Smith, a former attorney representing the Company, commenced a collection
proceeding against the Company in the High Court of Justice, Queen’s Bench
Division, on July 31, 2002, claiming the Company owed a sum certain to it.
The
Company had signed an engagement letter dated October 18, 2000. Herbert Smith
(“HS”) was hired to proceed against Surrey Design Partnership Ltd. HS claimed
the Company owed 171,733 pounds sterling or approximately $248,871 USD. This
sum
includes interest in the amount of 8% per annum and had been recorded as a
note
payable on the accompanying consolidated financial statements (see note 7).
On
November 28, 2002, a Consent Order was filed with the Court agreeing to a
payment plan, whereby the Company is to pay $10,000 USD upon signing of the
agreement, $4,000 USD a month for one year and $6,000 USD, per month thereafter
until the debt is paid. During the years ended June 30, 2005 and 2004, the
Company paid $166,000 and $73,000. In April 2005, an agreement was reached
with
Herbert Smith whereby they accepted $110,000 as payment in full. As a result,
the Company recorded a gain on forgiveness of debt of $33,321 in the
accompanying consolidated financial statements.
On
January 29, 2002, the Company reached a settlement with Adrian Cowler and The
Surrey Design Partnership Limited, the former owners of Network Solutions Group
Limited (“NSGL”). The settlement had the following terms; I) NetSol to pay
50,000 pounds sterling; II) 3,000 pounds sterling to be paid for 24 months
beginning 31, March 2002; III) 4,000 pounds sterling to be paid for 24 months
beginning March 31, 2004; IV) NetSol to release 155,000 shares in escrow; V)
650,000 144 shares to be issued to Surrey Design. NetSol made some of the
payments and issued all the shares. On June 11, 2002, Plaintiff filed an
enforcement of judgment in California Superior Court of Los Angeles to enforce
the judgment. A request for Entry of Default was filed on July 30, 2002. On
September 10, 2002 NetSol filed its Opposition to Plaintiff’s request for Entry
of Judgment and on September 16, 2002, Plaintiff filed its Motion to Strike
NetSol’s Opposition. On September 25, 2002, the Company and Surrey Design
entered into an Agreement to Stay Enforcement of Judgment. The terms of the
Agreement included (i) NetSol to pay 25,000 pounds sterling upon execution
of
this Agreement; (ii) By February 20, 2003, NetSol to pay an addition 25,000
pounds sterling; (iii) From October 31, 2002 to February 28, 2003, NetSol to
pay
3,000 pounds sterling; and (iv) from March 31, 2003 for a period of 24 months,
NetSol to pay 4,000 pounds sterling. The settlement amount had been recorded
in
the accompanying consolidated financial statements as a note payable (see note
7). During the years ended June 30, 2005 and 2004, the Company paid $125,368
and
$86,857. In December 2004, the Company reached an agreement with Cowler to
pay
the balance of the loan in one lump-sum payment. Cowler agreed to accept £52,000
or $103,371 as payment in full. As a result, the Company recorded a gain on
forgiveness of debt of $21,148 in the accompanying consolidated financial
statements.
On
March
27, 2003, Arab Commerce Bank (“ACB”) filed a complaint in the Supreme Court of
the State of New York (Index No. 600709/03) seeking damages for breach of a
Note
Purchase Agreement and Note. ACB alleged that NetSol did not issue stock in
a
timely manner in December 2000 resulting in compensatory damages in the amount
of $146,466.72. The litigation arises out of a transaction from late 1999 in
which Arab Commerce Bank invested $100,000 in the Company’s securities through a
private placement. ACB claimed that the removal of the legend on its shares
of
common stock longer than contractually required. During this purported delay,
the market value of the Company’s common shares decreased. Essentially, the ACB
complaint sought the lost value of its shares. In the event ACB was unable
to
collect the amount sought, the complaint requested that NetSol repay the
principal sum of the Note of $100,000 and interest at the rate of 9% per annum
based on the maturity date of December 10, 2000. This matter has been settled
pursuant to the terms of a settlement agreement whereby NetSol agreed to issue
to ACB shares of common stock of the Company equal in value to $100,000 plus
$39,178 of interest as of the effective date of the agreement. On December
16,
2003, the Company issued 34,843 shares of its common stock in satisfaction
of
the principal amount due. On February 6, 2004, the Company issued 10,352 shares
of its common stock for the accrued interest.
On
March
3, 2004, Uecker and Associates, Inc. as the assignee for the benefit of the
creditors of PGC Systems, Inc. f.k.a. Portera Systems Inc. filed a request
for
arbitration demanding payment from the Company for the amounts due under the
agreement in the amount of $175,700. On March 31, 2004, the Company filed an
Answering Statement to the Request of Uecker & Associates denying each and
every allegation contained in the Claim filed by Uecker & Associates and
stating NetSol’s affirmative defenses. There was an administrative conference
scheduled with the case manager of the American Arbitration Association on
March
17, 2004. An arbitrator has been selected and the parties are selecting dates
for arbitration in this matter. A settlement was reached by and between the
Company and Portera on November 11, 2004 whereby Portera agreed to a settlement
of any and all issues related to the claim in exchange for one time payment
of
$75,000 which was paid by December 3, 2004.
On
June
24, 2004, the Company reached a settlement agreement with, Brobeck, Phelger,
et
al, a vendor, for amounts in dispute. The vendor agreed to accept $108,500
as
payment in full to be paid in three installments totaling $54,250 and one
payment of $54,250 to be paid either in cash or in the Company’s common stock.
As of June 30, 2004, the Company recorded a gain of $102,119 from the settlement
of this debt in the accompanying consolidated financial statements. In September
2004, the Company issued 24,004 of Treasury Shares valued at $45,965 (see Note
8), as a result the Company recorded a gain of $8,285 from the settlement of
this debt in the accompanying consolidated financial statements.
On
May
12, 2004, Merrill Corporation served an action against NetSol for account
stated, common counts, open book account and unjust enrichment alleging amounts
due of $90,415.33 together with interest thereon from August 23, 2001. On June
24, 2004, the parties reached a settlement agreement. The vendor agreed to
accept $75,450 as payment in full to be paid $10,450 at the time of signing
the
agreement and the balance in five monthly installments of $13,000. The Company
recorded a gain of $14,965 from the settlement of this debt in the accompanying
consolidated financial statements. During the fiscal year ended June 30, 2005,
the monthly installments were paid as agreed.
NOTE
12 - SEGMENT AND GEOGRAPHIC AREAS
The
following table presents a summary of operating information and certain year-end
balance sheet information for the years ended June 30, 2005 and 2004:
|
|
2005
|
|
2004
|
|
Revenues
from unaffiliated customers:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
295,725
|
|
$
|
676,857
|
|
International
|
|
|
12,141,928
|
|
|
5,072,205
|
|
Consolidated
|
|
$
|
12,437,653
|
|
$
|
5,749,062
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
North
America
|
|
$
|
(2,810,508
|
)
|
$
|
(3,452,920
|
)
|
International
|
|
|
3,875,213
|
|
|
744,902
|
|
Consolidated
|
|
$
|
1,064,705
|
|
$
|
(2,708,018
|
)
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
6,373,169
|
|
$
|
4,309,332
|
|
International
|
|
|
14,752,865
|
|
|
7,668,716
|
|
Consolidated
|
|
$
|
21,126,034
|
|
$
|
11,978,048
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
1,324,098
|
|
$
|
1,080,498
|
|
International
|
|
|
240,464
|
|
|
160,294
|
|
Consolidated
|
|
$
|
1,564,562
|
|
$
|
1,240,792
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
North
America
|
|
$
|
-
|
|
$
|
55,986
|
|
International
|
|
|
1,468,499
|
|
|
2,805,768
|
|
Consolidated
|
|
$
|
1,468,499
|
|
$
|
2,861,754
|
|
NOTE
13 - MINORITY INTEREST IN SUBSIDIARY
NetSol
Connect:
In
August
2003, the Company entered into an agreement with United Kingdom based Akhter
Group PLC (“Akhter”). Under the terms of the agreement, Akhter Group acquired
49.9 percent of the Company’s subsidiary; Pakistan based NetSol Connect PVT Ltd.
(“Connect”), an Internet service provider (“ISP”), in Pakistan through the
issuance of additional Connect shares. As part of this Agreement, Connect
changed its name to NetSol Akhter. The partnership with Akhter Computers is
designed to rollout connectivity and wireless services to the Pakistani national
market. On signing of this Agreement, the Shareholders agreed to make the
following investment in the Company against issuance of shares of
Connect.
Akhter
|
|
US$
200,000
|
|
The
Company
|
|
US$
50,000
|
|
During
the quarter ended September 30, 2003, the funds were received by Connect and
a
minority interest of $200,000 was recorded for Akhter’s portion of the
subsidiary. During the quarter ended December 31, 2003, Akhter paid an
additional $10,000 to the Company for this purchase. Per the agreement, it
was
anticipated that Connect would require a maximum of $500,000 for expansion
of
its business from each partner. Akhter was to meet the initial financial
requirements of the Connect until November 1, 2003. As of December 31, 2004,
both NetSol and Akhter had injected the majority of their committed cash to
meet
the expansion requirement of the company. As of June 30, 2005, a total of
$751,356 had been transferred to Connect, of which $410,781 was from Akhter.
For
the
years ended June 30, 2005 and 2004, the subsidiary had net losses of $27,422
and
$689,000, respectively, of which $13,684 and $273,159 respectively, was recorded
against the minority interest. The balance of the minority interest at June
30,
2005 was $323,938.
NetSol-TiG:
In
December 2004, NetSol forged a new and a strategic relationship with a UK based
public company TIG Plc. A new Joint Venture was signed by the two companies
to
create a new company, TiG NetSol Pvt Ltd. (“NetSol-TiG”), with 50.1% ownership
by NetSol Technologies, Inc. and 49.9% ownership by TiG. The agreement
anticipates TiG’s technology business to be outsourced to NetSol’s offshore
development facility. Both companies, according to this agreement, would invest
a total of $1 million or $500,000 each in next few months for infrastructure,
dedicated personnel and systems in the NetSol IT campus in Lahore.
During
year ended June 30, 2005, the Company invested $253,635 and TiG invested
$251,626 and the new subsidiary began operations.
For
the
year ended June 30, 2005, the subsidiary had net income of $250,013, of which
$124,756 was recorded against the minority interest. The balance of the minority
interest at June 30, 2005 was $376,382.
NOTE
14 - GAIN ON SETTLEMENT OF DEBT
In
September 2004, the Company transferred 24,004 of its treasury shares valued
at
$45,965 to Brobeck Phleger & Harrison, LLP, in exchange of debt, as part of
a settlement agreement. The Company recorded a gain of $8,285 on the settlement.
During
the quarter ended September 30, 2004, the Company evaluated the liabilities
of
its discontinued operations and determined that $41,989 was no longer payable.
The Company recorded a gain of $41,989 as a result of the write-off of these
liabilities from its financial statements.
In
October 2004, the Company reached an agreement with a vendor to settle the
amounts owing. The vendor agreed to accept $29,642 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of
$11,029.
In
December 2004, the Company reached an agreement with Cowler to pay the balance
owing on the loan in one lump-sum payment (see note 7). Cowler agreed to accept
£52,000 or $103,371 as payment in full. As a result, the Company recorded a
gain
on forgiveness of debt of $21,148.
During
the quarter ended December 31, 2004, a former officer of Abraxas, the Company’s
Australian subsidiary, agreed to forgive amounts accrued to him for long-term
service leave prior to the Company’s acquisition in 1999. The amounts accrued
were during the period of 1984 to 1999. As a result, the Company recorded a
gain
on forgiveness of debt of $139,549.
In
February 2005, the Company reached an agreement with a former vendor to settle
amounts owing. The vendor agreed to accept $27,580 as payment in full. As a
result, the Company recorded a gain on forgiveness of debt of
$27,581.
In
April
2005, the Company reached an agreement with Herbert Smith to pay the balance
owing on the loan in one lump-sum payment (see note 7). Smith agreed to accept
$135,000 as payment in full. As a result, the Company recorded a gain on
forgiveness of debt of $33,321.
In
June
2005, the Company reached an agreement with a former vendor to settle amounts
owing. The vendor agreed to accept $3,000 as payment in full. As a result,
the
Company recorded a gain on forgiveness of debt of $1,958.
In
May
2005, the Company issued shares of its common stock as payment for two notes
payable and accrued interest (see note 7). As a result, the Company recorded
a
net loss on forgiveness of debt of $1,675.
During
the year ended June 30, 2005, the Company wrote-off old invoices for services
under the statute of limitations. The vendors had not contacted the Company
in
over four years and the original services were in dispute at the time they
were
rendered. As a result, the Company recorded a gain on forgiveness of debt of
$120,951.
NOTE
15 - ACQUISITION OF CQ SYSTEMS
On
January 19, 2005, the Company entered into an agreement to acquire 100% of
the
issued and outstanding shares of common stock of CQ Systems Ltd., a company
organized under the laws of England and Wales. The acquisition closed on
February 22, 2005.
According
to the terms of the Share Purchase Agreement, the Company acquired 100% of
the
issued and outstanding shares of CQ from CQ’s current shareholders, whose
identity is set forth in the Share Purchase Agreement (the “CQ Shareholders”) at
the completion date in exchange for a purchase price consisting of: a) 50.1%
of
CQ’s total gross revenue for the twelve month period ending March 31, 2005 after
an adjustment for any extraordinary revenue, i.e. non-trading revenue (“LTM
Revenue”) multiplied by 1.3 payable: (i) 50% in shares of restricted common
stock of the Company at a per share cost basis of $2.313 and as adjusted by
the
exchange rate of U.S. Dollar to British Pound (at the spot rate for the purchase
of sterling with U.S. dollars certified by NatWest Bank plc as prevailing at
or
about 11:00 a.m.) on January 19, 2005 and, (ii) 50% in cash; and b) 49.9% of
CQ’s LTM Revenue for the period ending March 31, 2006 multiplied by 1.3 payable,
at the Company’s discretion: (i) wholly in cash; or (ii) on the same basis and
on the same terms as the initial payment provided, however that the cost basis
of the Company’s common stock shall be based on the 20 day volume weighted
average of the Company’s shares of common stock as traded on NASDAQ 20 days
prior to March 31, 2005 and, provided that under no circumstances shall the
total number of shares of common stock issued to the CQ Shareholders exceed
19%
of the issued and outstanding shares of common stock, less treasury shares,
of
the Company at January 19, 2005.
The
initial purchase price was £3,576,335 or $6,730,382, of which one-half was due
at closing payable in cash and stock and the other half is due when the audited
March 31, 2006 financial statements are completed. On the closing date, $1.7
million was paid and 681,965 shares were issued to the shareholders of CQ,
valued at $1,676,795 at an average share price of $2.46 (see note 8) was
recorded. In addition, the agreement called for the accumulated retained
earnings amounting to £423,711 or $801,915 of CQ Systems as of the closing date
to be paid to the shareholders in cash and stock. In April 2005, the additional
cash of £350,000 or $662,410 was paid and 77,503 shares of the Company’s common
stock valued at $139,505 were issued. The total amount paid at closing was
$4,178,710.
In
accordance with SFAS 141, the Company has recognized the lesser of the maximum
amount of the contingent consideration based on earnings or the excess of the
fair market value of assets acquired over the purchase price as a deferred
liability. The deferred liability balance at June 30, 2005 was $313,397. The
purchase price has been allocated as follows:
Purchase
Price Allocation:
|
|
|
|
Purchase
Price
|
|
$
|
7,532,297
|
|
Less
contingent consideration
|
|
|
(3,353,587
|
)
|
Net
purchase price
|
|
$
|
4,178,710
|
|
|
|
|
|
|
Net
tangible assets
|
|
$
|
984,420
|
|
Intangible
Assets:
|
|
|
|
|
Product
License
|
|
|
2,190,807
|
|
Customer
Lists
|
|
|
1,316,880
|
|
Deferred
liability
|
|
|
(313,397
|
)
|
Net
purchase price
|
|
$
|
4,178,710
|
|
The
following is the proforma financial information of the Company assuming the
transaction had been consummated at the beginning of the fiscal years ended
June
30, 2004 and 2005:
|
|
For
the years
|
|
|
|
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,910,061
|
|
$
|
10,389,715
|
|
Cost
of Sales
|
|
|
6,684,419
|
|
|
4,533,669
|
|
Gross
Profit
|
|
|
9,225,642
|
|
|
5,856,046
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
7,974,393
|
|
|
8,354,927
|
|
Income
(loss) from operations
|
|
|
1,251,249
|
|
|
(2,498,881
|
)
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(337,346
|
)
|
|
(357,018
|
)
|
Income
(loss) before minority interest
|
|
|
913,903
|
|
|
(2,855,899
|
)
|
Minority
interest in subsidiary
|
|
|
(111,073
|
)
|
|
273,159
|
|
Net
Income (loss)
|
|
$
|
802,830
|
|
$
|
(2,582,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
(0.30
|
)
|
Diluted
|
|
$
|
0.05
|
|
$
|
(0.30
|
)
|
NOTE
16 - SUBSEQUENT EVENTS
On
July
31, 2005, the Company entered into an agreement with Butura Properties to
terminate the lease on the Maryland office space before the lease expiration.
The Company was required to pay $23,000 for accrued rent of $7,590 and $15,410
in early termination fees. In addition, the security deposit of $2,530 was
forfeited.
In
August
2005, the Company listed its wholly-owned subsidiary, NetSol Technologies Ltd.
on the Karachi Stock Exchange (“KSE”). The initial public offering of stock, of
NetSol Technologies Ltd., together with the pre-initial public offering private
placement, raised over $5.83 million. NetSol Technologies Ltd. is listed on
the
KSE under the symbol “NETSOL”. Trading of ‘NETSOL’ on the KSE commenced on
August 26, 2005.
MCCUE
SYSTEMS, INCORPORATED
BALANCE
SHEETS
MARCH
31, 2006
(UNAUDITED)
|
|
2005
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
542,415
|
|
$
|
886,714
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
|
|
|
|
|
of
$44,067
|
|
|
1,164,055
|
|
|
893,919
|
|
Other
current assets
|
|
|
80,218
|
|
|
68,243
|
|
Total
current assets
|
|
|
1,786,688
|
|
|
1,848,876
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
47,852
|
|
|
64,706
|
|
Intangible
assets
|
|
|
139,200
|
|
|
211,312
|
|
Rent
deposit
|
|
|
41,005
|
|
|
41,005
|
|
Total
assets
|
|
$
|
2,014,745
|
|
$
|
2,165,899
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
545,219
|
|
$
|
640,205
|
|
Current
portion of notes payable
|
|
|
64,121
|
|
|
-
|
|
Settlement
payable
|
|
|
-
|
|
|
350,000
|
|
Unearned
revenues
|
|
|
2,101,875
|
|
|
1,458,244
|
|
Total
current liabilities
|
|
|
2,711,215
|
|
|
2,448,449
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
|
|
Series
A Preferred Stock, no par value; 500,000 authorized;
|
|
|
|
|
|
|
|
none
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
B Preferred Stock, no par value; 830,000 authorized;
|
|
|
|
|
|
|
|
none
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, no par value; 5,000,000 share authorized;
|
|
|
|
|
|
|
|
669,539
issued and outstanding
|
|
|
2,710,275
|
|
|
2,710,275
|
|
APIC
|
|
|
31,728
|
|
|
31,728
|
|
Stock
subscription receivable
|
|
|
(125,000
|
)
|
|
-
|
|
Accumulated
deficit
|
|
|
(3,313,473
|
)
|
|
(3,024,553
|
)
|
Total
stockholders' deficit
|
|
|
(696,470
|
)
|
|
(282,550
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
2,014,745
|
|
$
|
2,165,899
|
|
See
accompanying notes to these financial statements.
MCCUE
SYSTEMS, INCORPORATED
STATEMENTS
OF OPERATIONS
(UNAUDITED)
|
|
For
the three months
|
|
|
|
Ended
March 31,
|
|
|
|
2005
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
License
Fees
|
|
$
|
246,960
|
|
$
|
169,126
|
|
Maintance
Fees
|
|
|
485,660
|
|
|
599,545
|
|
Consulting
and services
|
|
|
463,763
|
|
|
281,389
|
|
Hardware
sales
|
|
|
9,800
|
|
|
7,791
|
|
Application
service provider (ASP)
|
|
|
-
|
|
|
76,011
|
|
Total
revenues
|
|
$
|
1,206,183
|
|
$
|
1,133,862
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
598,466
|
|
|
583,968
|
|
Travel
and entertainment
|
|
|
7,621
|
|
|
5,510
|
|
Hardware
|
|
|
3,375
|
|
|
5,145
|
|
Sourcecode
escrow
|
|
|
3,398
|
|
|
1,107
|
|
ASP
expense
|
|
|
-
|
|
|
24,479
|
|
Total
cost of revenues
|
|
|
612,860
|
|
|
620,209
|
|
Gross
profit
|
|
|
593,323
|
|
|
513,653
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
112,801
|
|
|
156,271
|
|
Depreciation
and amortization
|
|
|
9,785
|
|
|
29,368
|
|
Salaries
and wages
|
|
|
182,085
|
|
|
171,058
|
|
Professional
services, including non-cash
|
|
|
|
|
|
|
|
compensation
|
|
|
4,470
|
|
|
85,296
|
|
General
and adminstrative
|
|
|
200,358
|
|
|
200,826
|
|
Total
operating expenses
|
|
|
509,499
|
|
|
642,819
|
|
Income
(loss) from operations
|
|
|
83,824
|
|
|
(129,166
|
)
|
Other
income and (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,282
|
)
|
|
-
|
|
Interest
income
|
|
|
2,996
|
|
|
6,632
|
|
Royalty
income
|
|
|
401
|
|
|
-
|
|
Other
income
|
|
|
-
|
|
|
3,848
|
|
Total
other income
|
|
|
2,115
|
|
|
10,480
|
|
Net
income (loss)
|
|
$
|
85,939
|
|
$
|
(118,686
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
$
|
(0.18
|
)
|
Diluted
|
|
$
|
0.12
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
669,539
|
|
|
669,539
|
|
Diluted
|
|
|
698,075
|
|
|
669,539
|
|
See
accompanying notes to these financial statements.
MCCUE
SYSTEMS, INCORPORATED
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
|
|
For
the three months
|
|
|
|
Ended
March 31,
|
|
|
|
2005
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$
|
85,939
|
|
$
|
(118,686
|
)
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,785
|
|
|
29,368
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(95,257
|
)
|
|
156,651
|
|
Other
current assets
|
|
|
3,663
|
|
|
12,641
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(99,456
|
)
|
|
6,549
|
|
Unearned
revenues
|
|
|
142,884
|
|
|
(1,333
|
)
|
Net
cash provided by operating activities
|
|
|
47,558
|
|
|
85,190
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
-
|
|
|
(13,344
|
)
|
Net
increase in cash and cash equivalents
|
|
|
47,558
|
|
|
71,846
|
|
Cash
and cash equivalents, beginning of period
|
|
|
494,857
|
|
|
814,868
|
|
Cash
and cash equivalents, end of period
|
|
$
|
542,415
|
|
$
|
886,714
|
|
See
accompanying notes to these financial statements.
MCCUE
SYSTEMS, INCORPORATED
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
continued
|
|
For
the three months
|
|
|
|
Ended
March 31,
|
|
|
|
2005
|
|
2006
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,282
|
|
$
|
-
|
|
Taxes
|
|
$
|
-
|
|
$
|
1,600
|
|
See
accompanying notes to these financial statements.
NOTE
1 - BUSINESS AND CONTINUED OPERATIONS
McCue
Systems, Incorporated, a California corporation, (the “Company”) is a software
development firm specializing in lease accounting and asset management
applications for the financial services, automotive and high-tech industries.
The Company is located in Burlingame, California and was incorporated in 1981.
The Company’s product, LeasePak and its suite of modules, is a fully scalable,
open architecture system available on multiple platforms. The Company also
provides implementation, development, systems integration, and customization
services for its clients.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Activity:
The
Company designs, develops, and markets, proprietary software products to
primarily equipment and vehicle lessors in the financial services, automotive
finance and high-tech industries in the United States. The Company also provides
consulting services in exchange for fees from customers.
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash
and Cash Equivalents:
Equivalents
For
purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
Concentration
Financial
instruments that potentially subject the Company to concentration of credit
risk
consist of cash and cash equivalents and accounts receivable. Cash and cash
equivalents consist primarily of interest-bearing accounts which may exceed
the
maximum amount covered by depository insurance. The Company’s policy is to place
its cash on deposit in high credit quality instruments in financial institutions
in the United States.
Accounts
Receivable:
The
Company performs ongoing credit evaluations of its customers and generally
does
not require collateral for sales on credit. The Company maintains reserves
for
potential credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit worthiness, current economic trends and changes
in customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis.
Property
and Equipment:
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation is
computed using various methods over the estimated useful lives of the assets,
ranging from three to seven years.
The
Company accounts for the costs of computer software developed or obtained for
internal use in accordance with Statement of Position 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.” The
Company capitalizes costs of materials, consultants, and payroll and
payroll-related costs for employees incurred in developing internal-use computer
software. These costs are included with “Computer equipment and software.” Costs
incurred during the preliminary project and post-implementation stages are
charged to general and administrative expense.
Intangible
Assets:
The
Company capitalizes certain computer software development costs in accordance
with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed.” Costs incurred internally to create a computer
software product or to develop an enhancement to an existing product are charged
to expense when incurred as research and development expense until technological
feasibility for the respective product is established. Capitalization ceases
when the product or enhancement is available for general release to
customers.
The
Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate
that
the unamortized software development costs exceed the net realizable value,
the
Company writes off the amount which the unamortized software development costs
exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight-line basis over three
years, whichever method results in a higher level of amortization.
Revenue
Recognition:
The
Company recognizes its revenue in accordance with the Securities and Exchange
Commissions (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition
in Financial Statements” (“SAB 101”) and The American Institute of
Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended by
SOP
98-4 and SOP 98-9, SOP 81-1, “Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts,”
and
Accounting Research Bulletin 45 (ARB 45) “Long-Term Construction Type
Contracts.” The
Company’s revenue recognition policy is as follows:
License
Revenue: The
Company recognizes revenue from license contracts without major customization
when a non-cancelable, non-contingent license agreement has been signed,
delivery of the software has occurred, the fee is fixed or determinable, and
collectibilty is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage
of
completion method,
in conformity with ARB 45 and SOP 81-1.
Revenue
from the implementation of software is recognized on a percentage of completion
method,
in conformity with Accounting Research Bulletin (“ARB”) No. 45 and SOP 81-1. Any
revenues from software arrangements with multiple elements are allocated to
each
element of the arrangement based on the relative fair values using specific
objective evidence as defined in the SOPs. An
output
measure of “Unit of Work Completed” is used to determine the percentage of
completion which measures the results achieved at a specific date. Units
completed are certified by the Project Manager.
Services
Revenue:
Revenue
from consulting services is recognized as the services are performed for
time-and-materials contracts. Revenue from training and development services
is
recognized as the services are performed. Revenue from maintenance agreements
is
recognized ratably over the term of the maintenance agreement, which in most
instances is one year.
Fair
Value:
Unless
otherwise indicated, the fair values of all reported assets and liabilities,
which represent financial instruments, none of which are held for trading
purposes, at the approximate carrying values of such amounts.
Advertising
Costs:
The
Company expenses the cost of advertising as incurred. Advertising costs for
the
three months ended March 31, 2005 and 2006 were $35,669 and $52,028,
respectively.
Net
Income (Loss) Per Share:
Net
income/(loss) per share is calculated in accordance with the Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), “Earnings per share.”
Basic net income/loss per share is based upon the weighted average number of
common shares outstanding. Diluted net income per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
For
the three months ended March 31, 2005
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
85,939
|
|
|
669,539
|
|
$
|
0.13
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
28,536
|
|
|
|
|
Warrants
|
|
|
|
|
|
-
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
85,939
|
|
|
698,075
|
|
$
|
0.12
|
|
The
weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements for the three months ended
March
31, 2006 since the effect of dilutive securities is anti-dilutive.
Accounting
for Stock-Based Compensation:
The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which applies the
fair-value method of accounting for stock-based compensation plans. In
accordance with this standard, the Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
In
March
2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 44 (Interpretation 44), “Accounting for Certain Transactions Involving Stock
Compensation.” Interpretation 44 provides criteria for the recognition of
compensation expense in certain stock-based compensation arrangements that
are
accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 became effective July 1, 2000, with certain provisions that
were effective retroactively to December 15, 1998 and January 12, 2000.
Interpretation 44 did not have any material impact on the Company’s financial
statements.
New
Accounting Pronouncements:
In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair
value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
The Company is evaluating the effects adoption of SFAS 123R will have on its
financial statements.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
This statement applies to all voluntary changes in accounting principle and
requires retrospective application to prior period’s financial statements of
changes in accounting principle, unless this would be impracticable. This
statement also makes a distinction between "retrospective application" of an
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company believes that the adoption of this standard will have no
material impact on its financial statements.
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. SFAS No. 155 is not expected to have a material effect
on the financial position or results of operations of the Company.
In
March
2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
This Statement:
Requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract.
Requires
all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable.
Permits
an entity to choose ‘Amortization method’ or ‘Fair value measurement method’ for
each class of separately recognized servicing assets and servicing
liabilities.
At
its
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights,
without calling into question the treatment of other available-for-sale
securities under Statement 115, provided that the available-for-sale securities
are identified in some manner as offsetting the entity’s exposure to changes in
fair value of servicing assets or servicing liabilities that a servicer elects
to subsequently measure at fair value.
Requires
separate presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the statement of financial position and additional
disclosures for all separately recognized servicing assets and servicing
liabilities.
This
Statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Management believes that this statement
will not have a significant impact on the consolidated financial
statements.
Reclassifications:
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform with report classifications of the current
year.
NOTE
3 - MAJOR CUSTOMERS
At
March
31, 2005, two customers accounted for 34%, and 10% of revenues or a total of
$530,079 and a total balance of $334,789 in accounts receivable at quarter
end.
At March 31, 2006 three customers accounted for 34%, 12% and 11% of revenues
or
a total of $648,594 and a total balance of $416,608 in accounts receivable
at
quarter end. No other individual client represents more than 10% of the revenue
for the three months ended March 31, 2005 and 2006.
NOTE
4 - OTHER CURRENT ASSETS
Other
current assets consist of the following as of March 31, 2005 and
2006:
|
|
For
the three months
ended
March 31,
|
|
|
|
2005
|
|
2006
|
|
Prepaid
Expenses
|
|
$
|
39,087
|
|
$
|
47,060
|
|
Employee
Advances
|
|
|
15,700
|
|
|
21,183
|
|
Interest
Receivable
|
|
|
25,431
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,218
|
|
$
|
68,243
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net, consists of the following at March 31, 2005 and
2006:
|
|
2005
|
|
2006
|
|
Office
furniture and equipment
|
|
$
|
89,632
|
|
$
|
89,632
|
|
Computer
equipment
|
|
|
450,623
|
|
|
497,567
|
|
Subtotal
|
|
|
540,255
|
|
|
587,199
|
|
Accumulated
depreciation
|
|
|
(492,403
|
)
|
|
(522,493
|
)
|
|
|
$
|
47,852
|
|
$
|
64,706
|
|
For
the
three months ended March 31, 2005 and 2006, fixed asset depreciation expense
totaled $9,785 and $7,899, respectively.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consist of computer software development costs at March 31, 2005 and
2006:
|
|
2005
|
|
2006
|
|
Intangible
asset - Beginning
|
|
$
|
546,946
|
|
|
665,371
|
|
Additions
|
|
|
-
|
|
|
-
|
|
Accumulated
amortization
|
|
|
(407,746
|
)
|
|
(454,059
|
)
|
Net
balance - Ending
|
|
$
|
139,200
|
|
$
|
211,312
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
|
$
|
-
|
|
$
|
21,469
|
|
Amortization
expense of intangible assets over the next three years is as
follows:
|
|
YEAR
ENDING
|
|
Asset
|
|
|
3/31/07
|
|
|
3/31/08
|
|
|
3/31/09
|
|
|
TOTAL
|
|
Capitalized
Software R&D
|
|
$
|
85,875
|
|
$
|
85,875
|
|
$
|
39,562
|
|
$
|
211,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,875
|
|
$
|
85,875
|
|
$
|
39,562
|
|
$
|
211,312
|
|
NOTE
7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities consisted of the following as of March 31,
2005
and 2006:
|
|
For
the three months
ended
March 31,
|
|
|
|
2005
|
|
2006
|
|
Accounts
Payable - trade
|
|
$
|
141,339
|
|
$
|
205,381
|
|
Bank
Overdraft
|
|
|
4,243
|
|
|
-
|
|
Sales
Tax Payable
|
|
|
56,302
|
|
|
(9,289
|
)
|
Section
125 Plan Payable
|
|
|
3,274
|
|
|
2,859
|
|
Accrued
Liabilities
|
|
|
30,200
|
|
|
38,606
|
|
Accrued
Payroll
|
|
|
12,161
|
|
|
-
|
|
Accrued
Commissions
|
|
|
27,566
|
|
|
40,642
|
|
Accrued
Vacation Payable
|
|
|
268,851
|
|
|
318,152
|
|
Accrued
Interest Payable
|
|
|
1,282
|
|
|
-
|
|
Other
Payable
|
|
|
-
|
|
|
43,853
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
545,218
|
|
$
|
640,204
|
|
On
May
16, 2005, the Company entered into an agreement with a customer whereby the
Company agreed to refund a portion of the license fee purchased by the customer.
The total amount to be refunded was $78,933 and is to be paid in nine quarterly
installments of $8,770. During the year ended December 31, 2005, $35,080 was
paid and a balance of $43,853 was owed at December 31, 2005, which was recorded
as other payable. No payment was made during the three months ended March 31,
2006.
NOTE
8 - DEBTS
NOTES
PAYABLE - CURRENT
On
March
29, 2002, the Company entered into an agreement with the preferred stock holders
whereby the Company repurchased the outstanding preferred shares with cash
in
the amount of $487,132 and notes payable of $194,834 with a three-year maturity
date and an interest rate of 8% per annum, simple interest. The notes were
payable in quarterly installments. As of December 31, 2003 the loan balance
was
$192,844. During the year ended December 31, 2004, $128,722 was
paid
on the notes and the balance owing was $64,121. No payments were made during
the
three months ended March 31, 2005. During the year ended December 31, 2005,
the
balance owing was paid.
NOTE
9 - SETTLEMENT PAYABLE
The
Company was sued by two former employees in 1999 (see note 14). On April 17,
2006, a settlement agreement was entered into whereby the Company agreed to
pay
a total of $700,000 to the two former employees. $350,000 of the $700,000 was
paid by the Company’s insurance company directly to the two former employees
upon the signing of the settlement agreement. The Company paid $275,000 upon
the
signing of the settlement agreement and agreed to pay the remaining $75,000
within 90 days of the settlement agreement. As the amount of the settlement
was
undeterminable at December 31, 2004, no amount was recorded as a liability
in
2004. The Company’s direct liability of $350,000 was recorded as of December 31,
2005 as the amount became determinable before the issuance of the financial
statements. It is shown as a settlement payable. As of March 31, 2006, the
balance of settlement payable is $350,000.
NOTE
10 - STOCKHOLDERS’ EQUITY
Deemed
dividend and write off of stock subscription receivable
In
September 2000, a major shareholder and President of the Company exercised
warrants to purchase 166,667 shares of the Company’s common stock at $0.75 per
share. The Company agreed to loan the amount to the officer to purchase the
shares. The loan carried an interest rate of 9% per annum. In August 2003,
the
interest rate was lowered to 5.5% per annum. As of December 31, 2003, the
balance of interest owing was $17,804. During the year ended December 31, 2004,
$6,894 in interest was recorded and the balance owing at December 31, 2004
was
$24,698. In January 2005, the interest rate was lowered to 2.38%. During the
year ended December 31, 2005, $2,975 of interest was recorded. On December
31,
2005, the Board of Directors authorized the write-off of the balance owing,
including interest. The total amount written-off was $152,673 and was recorded
as a deemed dividend in the statement of stockholders’ deficit in the year ended
December 31, 2005.
NOTE
11 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
Under
the
1997 Employee Stock Option Plan (the “Option Plan”), the Company may grant
options to purchase up to 450,000 shares of common stock to employees and
consultants at prices not less than the fair market value at date of grant
for
incentive stock options and not less than 85% of fair market value for
nonstatutory stock options. For owners of more than 10% of the Company’s stock,
options may only be granted for an exercise price of no less than 110% of fair
market value on the date of grant for both incentive and nonstatutory stock
options. These options generally expire five years from the date of grant and
generally vest 33% one year from the date of grant and 1/36th
each
month thereafter
for the
next 24 months. In the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the
Company,
all
outstanding options granted vest immediately.
NOTE
12 - COMMON STOCK PURCHASE WARRANTS AND OPTIONS
From
time
to time, the Company issues options and warrants as incentives to employees,
officers and directors, as well as to non-employees.
Common
stock purchase options and warrants consisted of the following as of March
31,
2005 and 2006:
|
|
Options
|
|
|
|
Warrants
|
|
|
|
Outstanding
December 31, 2004
|
|
|
100,008
|
|
$0.72
to $1.25
|
|
|
334,294
|
|
$0.72
|
|
Granted
|
|
|
94,000
|
|
$0.72
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
-
|
|
|
Expired
|
|
|
-
|
|
|
|
|
-
|
|
|
|
Outstanding
March 31, 2005
|
|
|
194,008
|
|
|
|
334,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
December 31, 2005
|
|
|
293,408
|
|
$0.72
to $1.25
|
|
|
334,294
|
|
$0.72
|
|
Granted
|
|
|
-
|
|
$0.72
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
-
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
Outstanding
March 31, 2006
|
|
|
293,408
|
|
|
|
|
334,294
|
|
|
|
|
The
following summary presents the weighted average exercise prices, number of
options and warrants outstanding and exercisable, and the remaining contractual
lives of the Company’s stock options and warrants as of March 31, 2005 and
2006:
|
|
OPTIONS
|
|
WARRANTS
|
|
|
|
3/31/2005
|
|
3/31/2006
|
|
3/31/2005
|
|
3/31/2006
|
|
Number
Outstanding
|
|
|
100,008
|
|
|
293,408
|
|
|
334,294
|
|
|
334,294
|
|
Weighted
Ave Remaining Life
|
|
|
3.92
|
|
|
3.65
|
|
|
5.00
|
|
|
4.00
|
|
Weighted
Ave Exercise Price
|
|
$
|
0.75
|
|
$
|
0.82
|
|
$
|
0.72
|
|
$
|
0.72
|
|
Number
Exercisable
|
|
|
39,341
|
|
|
91,175
|
|
|
-
|
|
|
-
|
|
During
the three months ended March 31, 2005, 94,000 options were granted to employees
and officers of the company. The options vest over three years, 33% after one
year and 1/36th
per
month for 24 months, and expire five years from the date of grant unless the
employee terminates employment, in which case the options expire within 90
days
of the employee’s termination date. No expense was recorded for the granting of
these options. The Black-Scholes option pricing model used the following
assumptions:
Risk-free
interest rate
|
|
|
6.0
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
.001
|
%
|
Dividend
yield
|
|
|
0
|
%
|
There
were no options or warrants granted during the three months ended March 31,
2006.
In
2002,
the Company granted 334,294 warrants to purchase Series A preferred stock with
an exercise price of $0.72 per share as part of a preferred stock repurchase
agreement with the former preferred stockholders. These warrants become
exercisable only at the time of a liquidation event defined as a) a merger
or
consolidation of the Company with another Company, b) a sale of substantially
all the assets of the Company to another Company or c) an IPO and expire seven
years from the time of grant. No expense has been taken on these warrants until
such time as they become exercisable.
In
compliance with FAS No. 148, the Company has elected to continue to follow
the
intrinsic value method in accounting for its stock-based employee compensation
plan as defined by APB No. 25 and has made the applicable disclosures
below.
Had
the
Company determined employee stock based compensation cost based on a fair value
model at the grant date for its stock options under SFAS 123, the Company's
net
earnings per share would have been adjusted to the pro forma amounts for three
months ended March 31, 2005 and 2006 as follows:
|
|
2005
|
|
2006
|
|
Net
income (loss) - as reported
|
|
$
|
85,939
|
|
$
|
(118,686
|
)
|
Stock-based
employee compensation expense,
|
|
|
|
|
|
|
|
included
in reported net loss, net of tax
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation
|
|
|
|
|
|
|
|
expense
determined under fair-value-based
|
|
|
|
|
|
|
|
method
for all rewards, net of tax
|
|
|
(17,578
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
$
|
68,361
|
|
$
|
(118,686
|
)
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
|
0.13
|
|
|
(0.18
|
)
|
Diluted,
as reported
|
|
|
0.12
|
|
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
Basic,
pro forma
|
|
|
0.10
|
|
|
(0.18
|
)
|
Diluted,
pro forma
|
|
|
0.10
|
|
|
(0.18
|
)
|
Pro
forma
information regarding the effect on operations is required by SFAS 123, and
has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. Pro forma information using
the
Black-Scholes method at the date of grant is based on the following assumptions:
|
|
2005
|
|
2006
|
|
Expected
life (years)
|
|
|
5
years
|
|
|
5
years
|
|
Risk-free
interest rate
|
|
|
6.0
|
%
|
|
6.0
|
%
|
Dividend
yield
|
|
|
-
|
|
|
-
|
|
Volatility
|
|
|
.001
|
%
|
|
.001
|
%
|
NOTE
13 - EMPLOYEE BENEFIT PLANS
The
Company has a qualified employee savings and retirement plan (401(k) plan).
The
401(k) plan allows the Company to make discretionary contributions of up to
3%
of employee’s salary given at the discretion of the board and/or management. The
Company made no contributions during the three months ended March 31, 2005
and
2006.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Litigation
On
July
27, 1999, two former employees of the Company, Mohamad Rashedi and Gregory
Saylor, and the company formed by the former employees (Integrated Support
Services, a general partnership "IS") filed a complaint in the Superior Court
of
San Mateo County alleging damages for unfair competition, defamation, restraint
of trade and prevention of employment. A counter-suit was filed by the Company
against the plaintiffs alleging misappropriation of proprietary materials.
On or
about Feb. 16, 2001, the matter went to trial and a verdict was entered against
the defendants and the plaintiffs were found not guilty on the defendants
counter-suit. Defendants moved for a new trial on the damages which was granted.
The new trial was scheduled to commence on April 17, 2006.
While
the
Company believes that it is not liable for damages to the plaintiffs, in the
interest of settling the matter and avoiding the expenses of trial, the Company
executed a Settlement and Release Agreement on April 17, 2006. The terms of
the
Settlement and Release Agreement call for the Company to pay the two former
employees $625,000 upon the execution of the Settlement and Release Agreement
and $75,000 within 90 days of the execution of the Settlement and Release
Agreement. The Company's insurance carrier paid half of the settlement cost
directly to the two former employees upon the signing of the settlement
agreement. As of June 12, 2006 the full settlement amount had been paid and
a
dismissal with prejudice of the action was filed effective June 22,
2006.
NOTE
15 - ROYALTY AGREEMENTS
Under
royalty agreements, sales of certain products require the Company to pay
royalties to third parties under specified circumstances and/or under specified
time frames. Royalty expense was $0 for the three months ended March 31, 2005
and 2006, respectively.
In
addition, the Company receives royalties on the sales of certain products.
Royalty income was $401 and $0 for the three months ended March 31, 2005 and
2006, respectively.
NOTE
16 - RELATED PARTY TRANSACTIONS
In
September 2000, a major shareholder and President of the Company exercised
warrants to purchase 166,667 shares of the Company’s common stock at $0.75 per
share. The Company agreed to loan the amount to the President to purchase the
shares. The loan carried an interest rate of 9% per annum. In August 2003,
the
interest rate was lowered to 5.5% per annum. As of December 31, 2003, the
balance of interest owing was $17,804. During the year ended December 31, 2004,
$6,894 in interest was recorded and the balance owing at December 31, 2004
was
$24,698. In January 2005, the interest rate was lowered to 2.38%. During the
three months ended March 31, 2005, $733 of interest was recorded. On December
31, 2005, the Board of Directors authorized the write-off of the balance owing,
including interest. The total amount written-off was $152,673 and was recorded
as a deemed dividend.
The
employment agreement with the President of the Company calls for bonuses to
be
paid to him based on certain milestones achieved and sales generated. During
fiscal years ended December 31, 2004 and 2005, $18,000 and $66,829 was accrued,
respectively. At March 31, 2005 and 2006, $18,000 and $29,552 remained unpaid
and is included in accrued liabilities in these financial statements.
NOTE
17 - SUBSEQUENT EVENTS (unaudited)
On
May 6,
2006 the stockholders voted in favor of the Company being acquired by NetSol
Technologies, Inc. (“NetSol”), a publicly listed corporation on the NASDAQ
exchange, (NTWK). Under the agreement, NetSol will purchase 100% of the
outstanding stock of McCue. The estimated purchase price based on the December
31, 2005 revenues is $8.5 million dollars. The agreement calls for a closing
date on or about June 30, 2006.
According
to the terms of the Share Purchase Agreement, NetSol is to acquire 100% of
the
issued and outstanding shares of McCue from McCue’s current shareholders, whose
identity is set forth in the Share Purchase Agreement (the “McCue Shareholders”)
at the completion date in exchange for a purchase price consisting of: a) 50%
of
McCue’s total gross revenue for the audited twelve month period ending December
31, 2005 after an adjustment for any revenue occurring outside of the company’s
ordinary scope of operations as defined by US GAAP multiplied by 1.5 payable:
(i) 50% in shares of restricted common stock of NetSol at the 30 day volume
weighted average price (“VWAP) for each of the 30 trading days prior to the
execution date of this agreement or at the VWAP for each of the 30 trading
days
prior to November 30, 2005 whichever is the greater VWAP; and, (ii) 50% in
cash;
b) 25% of McCue’s total gross revenue for the twelve months ending December 31,
2006 multiplied by 1.5 payable, at NetSol’s discretion: (i) wholly in cash; or
(ii) on the same basis and on the same terms as the initial payment provided
that under no circumstances shall the total number of shares of common stock
issued to the McCue Shareholders exceed 19% of the issued and outstanding shares
of common stock, less treasury shares, of NetSol at May 6, 2006; and c) 25%
of
McCue’s total gross revenue for the twelve months ending December 31, 2007
multiplied by 1.5 payable, at the Company’s discretion: (i) wholly in cash; or
(ii) on the same basis and on the same terms as the initial payment provided
that under no circumstances shall the total number of shares of common stock
issued to the McCue Shareholders exceed 19% of the issued and outstanding shares
of common stock, less treasury shares, of NetSol at May 6, 2006.
The
initial payment will consist of approximately $2.1 million in cash and 985,213
shares of NetSol’s restricted common stock.
During
May and June 2006, 281,908 options were exercised for a total of $230,276 of
which $4,020 was received in cash and the remaining amount of $226,356 was
recorded as a receivable. The amount due from the shareholders will be withheld
from any funds due to them at the close of the acquisition by NetSol. In
addition, the option holders were granted a loan from the Company of $0.33
per
share to help defray any tax consequence of the option exercise. This loan
is to
be repaid from the proceeds of the second and third installment of the purchase
price of the acquisition by NetSol.
During
May and June 2006, 323,682 warrants were exercised. Of these, 281,540 were
exercised under a cashless exercise provision of $0.85 per share and 238,735
shares were issued as a result. $1,542 was received in cash and a receivable
for
$28,800 was recorded. The receivable will be withheld from any funds due to
them
at the close of the acquisition by NetSol.
On
June
12, 2006 the Company paid the remaining balance of $75,000 due on the settlement
agreement (See Note 14). On June 22, 2006 a dismissal of the case was filed
with
the court.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
McCue
Systems, Incorporated
Burlingame,
California
We
have
audited the accompanying balance sheets of McCue Systems, Incorporated as of
December 31, 2004 and 2005, and the related statements of operations,
stockholders’ deficit and cash flows for the years ended December 31, 2004 and
2005. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits of these statements in accordance with the standards of
the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance
about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, based on our audits, the financial statements referred to above present
fairly, in all material respects, the financial position of McCue Systems,
Incorporated as of December 31, 2004 and 2005, and the related statements of
operations, stockholders’ deficit and cash flows for the years ended December
31, 2004 and 2005 in conformity with accounting principles generally accepted
in
the United States of America.
/s/
Kabani & Company, Inc.
CERTIFIED
PUBLIC ACCOUNTANTS
Los
Angeles, California
July
7,
2006
|
|
2004
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
494,857
|
|
$
|
814,868
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
|
|
|
|
|
of
$44,067
|
|
|
1,068,797
|
|
|
1,050,570
|
|
Other
current assets
|
|
|
83,879
|
|
|
80,884
|
|
Total
current assets
|
|
|
1,647,533
|
|
|
1,946,322
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
57,638
|
|
|
59,261
|
|
Intangible
assets
|
|
|
139,200
|
|
|
232,781
|
|
Rent
deposit
|
|
|
41,005
|
|
|
41,005
|
|
Total
assets
|
|
$
|
1,885,376
|
|
$
|
2,279,369
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
644,673
|
|
$
|
633,656
|
|
Current
portion of notes payable
|
|
|
64,121
|
|
|
-
|
|
Settlement
payable
|
|
|
-
|
|
|
350,000
|
|
Unearned
revenues
|
|
|
1,958,991
|
|
|
1,459,577
|
|
Total
current liabilities
|
|
|
2,667,785
|
|
|
2,443,233
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
|
|
Series
A Preferred Stock, no par value; 500,000 authorized;
|
|
|
|
|
|
|
|
none
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Series
B Preferred Stock, no par value; 830,000 authorized;
|
|
|
|
|
|
|
|
none
issued and outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, no par value; 5,000,000 share authorized;
|
|
|
|
|
|
|
|
669,539
issued and outstanding
|
|
|
2,710,275
|
|
|
2,710,275
|
|
Stock
subscription receivable
|
|
|
(125,000
|
)
|
|
-
|
|
APIC
|
|
|
31,728
|
|
|
31,728
|
|
Accumulated
deficit
|
|
|
(3,399,412
|
)
|
|
(2,905,867
|
)
|
Total
stockholders' deficit
|
|
|
(782,409
|
)
|
|
(163,864
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
1,885,376
|
|
$
|
2,279,369
|
|
MCCUE
SYSTEMS, INCORPORATED
STATEMENTS
OF OPERATIONS
|
|
For
the Years
|
|
|
|
Ended
December 31,
|
|
|
|
2004
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
License
Fees
|
|
$
|
723,351
|
|
$
|
1,385,103
|
|
Maintance
Fees
|
|
|
1,864,298
|
|
|
2,082,868
|
|
Consulting
and services
|
|
|
1,663,277
|
|
|
1,694,357
|
|
Hardware
sales
|
|
|
276,888
|
|
|
331,276
|
|
Application
service provider (ASP)
|
|
|
-
|
|
|
154,033
|
|
Total
revenues
|
|
$
|
4,527,814
|
|
$
|
5,647,637
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
1,945,721
|
|
|
2,089,758
|
|
Travel
and entertainment
|
|
|
36,733
|
|
|
46,797
|
|
Hardware
|
|
|
220,682
|
|
|
219,415
|
|
Sourcecode
escrow
|
|
|
3,878
|
|
|
7,988
|
|
ASP
expense
|
|
|
-
|
|
|
130,311
|
|
Other
|
|
|
1,546
|
|
|
-
|
|
Total
cost of revenues
|
|
|
2,208,560
|
|
|
2,494,269
|
|
Gross
profit
|
|
|
2,319,254
|
|
|
3,153,368
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
764,032
|
|
|
523,053
|
|
Depreciation
and amortization
|
|
|
87,516
|
|
|
58,005
|
|
Settlement
costs
|
|
|
-
|
|
|
350,000
|
|
Bad
debt expense
|
|
|
27,044
|
|
|
20
|
|
Salaries
and wages
|
|
|
426,888
|
|
|
457,481
|
|
Professional
services, including non-cash
|
|
|
|
|
|
|
|
compensation
|
|
|
57,815
|
|
|
94,774
|
|
General
and adminstrative
|
|
|
1,053,448
|
|
|
1,070,144
|
|
Total
operating expenses
|
|
|
2,416,743
|
|
|
2,553,477
|
|
Income
(loss) from operations
|
|
|
(97,489
|
)
|
|
599,891
|
|
Other
income and (expenses):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(8,122
|
)
|
|
(4,561
|
)
|
Interest
income
|
|
|
20,669
|
|
|
15,325
|
|
Royalty
income
|
|
|
13,148
|
|
|
1,467
|
|
Royalty
expense
|
|
|
-
|
|
|
(7,830
|
)
|
Other
income
|
|
|
-
|
|
|
41,926
|
|
Total
other income
|
|
|
25,695
|
|
|
46,327
|
|
Net
income (loss)
|
|
$
|
(71,794
|
)
|
$
|
646,218
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
$
|
0.97
|
|
Diluted
|
|
$
|
(0.11
|
)
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
669,539
|
|
|
669,539
|
|
Diluted
|
|
|
669,539
|
|
|
716,260
|
|
See
accompanying notes to these consolidated financial statements.
MCCUE
SYSTEMS, INCORPORATED
STATEMENTS
OF STOCKHOLDERS’ DEFICIT
FOR
THE
YEARS ENDED DECEMBER 31, 2004 AND 2005
|
|
|
|
|
|
Additional
|
|
Stock
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid-In
|
|
Subscriptions
|
|
Accumulated
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Receivable
|
|
Deficit
|
|
Deficit
|
|
Balance
at December 31, 2003
|
|
|
668,539
|
|
$
|
2,710,275
|
|
$
|
31,167
|
|
$
|
(125,000
|
)
|
$
|
(3,327,618
|
)
|
$
|
(711,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
market value of options issued
|
|
|
|
|
|
|
|
|
561
|
|
|
|
|
|
|
|
|
561
|
|
Net
loss for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,794
|
)
|
|
(71,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
668,539
|
|
|
2,710,275
|
|
|
31,728
|
|
|
(125,000
|
)
|
|
(3,399,412
|
)
|
|
(782,409
|
)
|
Deemed
dividend -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off
of subscription receivable
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
(152,673
|
)
|
|
(27,673
|
)
|
Net
income for the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
646,218
|
|
|
646,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
668,539
|
|
$
|
2,710,275
|
|
$
|
31,728
|
|
$
|
-
|
|
$
|
(2,905,867
|
)
|
$
|
(163,864
|
)
|
See
accompanying notes to these consolidated financial
statements.
MCCUE
SYSTEMS, INCORPORATED
STATEMENTS
OF CASH FLOWS
|
|
For
the Years
|
|
|
|
Ended
December 31,
|
|
|
|
2004
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss) from continuing operations
|
|
$
|
(71,794
|
)
|
$
|
646,218
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
87,516
|
|
|
58,005
|
|
Provision
for uncollectible accounts
|
|
|
27,044
|
|
|
20
|
|
Fair
market value of options granted
|
|
|
561
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
713,483
|
|
|
18,208
|
|
Other
current assets
|
|
|
(26,217
|
)
|
|
(24,677
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
17,380
|
|
|
(11,018
|
)
|
Unearned
revenues
|
|
|
(197,876
|
)
|
|
(499,414
|
)
|
Litigation
settlement
|
|
|
-
|
|
|
350,000
|
|
Net
cash provided by operating activities
|
|
|
550,097
|
|
|
537,342
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(55,379
|
)
|
|
(34,785
|
)
|
Increase
in intangible assets - development costs
|
|
|
(139,200
|
)
|
|
(118,425
|
)
|
Net
cash used in investing activities
|
|
|
(194,579
|
)
|
|
(153,210
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
on loans
|
|
|
(128,722
|
)
|
|
(64,121
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
226,796
|
|
|
320,011
|
|
Cash
and cash equivalents, beginning of period
|
|
|
268,061
|
|
|
494,857
|
|
Cash
and cash equivalents, end of period
|
|
$
|
494,857
|
|
$
|
814,868
|
|
See
accompanying notes to these consolidated financial
statements.
MCCUE
SYSTEMS, INCORPORATED
STATEMENTS
OF CASH FLOWS
Continued
|
|
For
the Years
|
|
|
|
Ended
December 31,
|
|
|
|
2004
|
|
2005
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
8,122
|
|
$
|
4,561
|
|
Taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
OTHER
NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
Deemed
dividend - write off of interest and stock subsriptions
|
|
|
|
|
|
|
|
receivable
from a related party
|
|
$
|
-
|
|
$
|
152,673
|
|
See
accompanying notes to these consolidated financial
statements.
NOTE
1 - BUSINESS AND CONTINUED OPERATIONS
McCue
Systems, Incorporated, a California corporation, (the “Company”) is a software
development firm specializing in lease accounting and asset management
applications for the financial services, automotive and high-tech industries.
The Company is located in Burlingame, California and was incorporated in 1981.
The Company’s product, LeasePak and its suite of modules, is a fully scalable,
open architecture system available on multiple platforms. The Company also
provides implementation, development, systems integration, and customization
services for its clients.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Activity:
The
Company designs, develops, and markets, proprietary software products to
primarily equipment and vehicle lessors in the financial services, automotive
finance and high-tech industries in the United States. The Company also provides
consulting services in exchange for fees from customers.
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash
and Cash Equivalents:
Equivalents
For
purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
Concentration
Financial
instruments that potentially subject the Company to concentration of credit
risk
consist of cash and cash equivalents and accounts receivable. Cash and cash
equivalents consist primarily of interest-bearing accounts which may exceed
the
maximum amount covered by depository insurance. The Company’s policy is to place
its cash on deposit in high credit quality instruments in financial institutions
in the United States.
Accounts
Receivable:
The
Company performs ongoing credit evaluations of its customers and generally
does
not require collateral for sales on credit. The Company maintains reserves
for
potential credit losses on accounts receivable. Management reviews the
composition of accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit worthiness, current economic trends and changes
in customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis.
Property
and Equipment:
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation is
computed using various methods over the estimated useful lives of the assets,
ranging from three to seven years.
The
Company accounts for the costs of computer software developed or obtained for
internal use in accordance with Statement of Position 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use.” The
Company capitalizes costs of materials, consultants, and payroll and
payroll-related costs for employees incurred in developing internal-use computer
software. These costs are included with “Computer equipment and software.” Costs
incurred during the preliminary project and post-implementation stages are
charged to general and administrative expense.
Intangible
Assets:
The
Company capitalizes certain computer software development costs in accordance
with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed.” Costs incurred internally to create a computer
software product or to develop an enhancement to an existing product are charged
to expense when incurred as research and development expense until technological
feasibility for the respective product is established. Capitalization ceases
when the product or enhancement is available for general release to
customers.
The
Company makes on-going evaluations of the recoverability of its capitalized
software projects by comparing the amount capitalized for each product to the
estimated net realizable value of the product. If such evaluations indicate
that
the unamortized software development costs exceed the net realizable value,
the
Company writes off the amount which the unamortized software development costs
exceed net realizable value. Capitalized and purchased computer software
development costs are being amortized ratably based on the projected revenue
associated with the related software or on a straight-line basis over three
years, whichever method results in a higher level of amortization.
Revenue
Recognition:
The
Company recognizes its revenue in accordance with the Securities and Exchange
Commissions (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition
in Financial Statements” (“SAB 101”) and The American Institute of
Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 97-2,
“Software Revenue Recognition,” as amended by
SOP
98-4 and SOP 98-9, SOP 81-1, “Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts,”
and
Accounting Research Bulletin 45 (ARB 45) “Long-Term Construction Type
Contracts.” The
Company’s revenue recognition policy is as follows:
License
Revenue: The
Company recognizes revenue from license contracts without major customization
when a non-cancelable, non-contingent license agreement has been signed,
delivery of the software has occurred, the fee is fixed or determinable, and
collectibilty is probable. Revenue from the sale of licenses with major
customization, modification, and development is recognized on a percentage
of
completion method,
in conformity with ARB 45 and SOP 81-1.
Revenue
from the implementation of software is recognized on a percentage of completion
method,
in conformity with Accounting Research Bulletin (“ARB”) No. 45 and SOP 81-1. Any
revenues from software arrangements with multiple elements are allocated to
each
element of the arrangement based on the relative fair values using specific
objective evidence as defined in the SOPs. An
output
measure of “Unit of Work Completed” is used to determine the percentage of
completion which measures the results achieved at a specific date. Units
completed are certified by the Project Manager.
Services
Revenue:
Revenue
from consulting services is recognized as the services are performed for
time-and-materials contracts. Revenue from training and development services
is
recognized as the services are performed. Revenue from maintenance agreements
is
recognized ratably over the term of the maintenance agreement, which in most
instances is one year.
Fair
Value:
Unless
otherwise indicated, the fair values of all reported assets and liabilities,
which represent financial instruments, none of which are held for trading
purposes, at the approximate carrying values of such amounts.
Advertising
Costs:
The
Company expenses the cost of advertising as incurred. Advertising costs for
the
years ended December 31, 2004 and 2005 were $151,290 and $139,625,
respectively.
Net
Income (Loss) Per Share:
Net
income/(loss) per share is calculated in accordance with the Statement of
Financial Accounting Standards No. 128 (SFAS No. 128), “Earnings per share.”
Basic net income/loss per share is based upon the weighted average number of
common shares outstanding. Diluted net income per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
For
the year ended December 31, 2005
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
646,218
|
|
|
669,539
|
|
$
|
0.97
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
|
|
|
46,721
|
|
|
|
|
Warrants
|
|
|
|
|
|
-
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
646,218
|
|
|
716,260
|
|
$
|
0.90
|
|
The
weighted average number of shares used to compute basic and diluted loss per
share is the same in these financial statements for the year ended December
31,
2004 since the effect of dilutive securities is anti-dilutive.
Accounting
for Stock-Based Compensation:
The
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, which applies the
fair-value method of accounting for stock-based compensation plans. In
accordance with this standard, the Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
In
March
2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 44 (Interpretation 44), “Accounting for Certain Transactions Involving Stock
Compensation.” Interpretation 44 provides criteria for the recognition of
compensation expense in certain stock-based compensation arrangements that
are
accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation.
Interpretation 44 became effective July 1, 2000, with certain provisions that
were effective retroactively to December 15, 1998 and January 12, 2000.
Interpretation 44 did not have any material impact on the Company’s financial
statements.
Income
Taxes:
No
provision was made for income tax for the year ended December 31, 2004 and
2005,
since the Company had significant net operating loss carry forwards. During
the
years ended December 31, 2004 and 2005, the Company incurred net operating
losses for tax purposes of approximately $57,000 and ($663,000), respectively.
As of December 31, 2004 and 2005, the Company had total federal net operating
losses for tax purposes of approximately $2,099,000 and $1,436,000,
respectively. The federal net operating loss carry forwards may be used to
reduce taxable income through the year 2025. As of December 31, 2004 and 2005,
the Company had total state net operating losses for tax purposes of
approximately $1,832,000 and $1,169,000, respectively. The state net operating
loss carry forwards may be used to reduce taxable income through the year 2009.
The availability of the Company’s net operating loss carry forwards are subject
to limitation if there is a 50% or more positive change in the ownership of
the
Company’s stock. The provision for income taxes consists of the state minimum
tax imposed on corporations.
The
gross
deferred tax asset balance as of December 31, 2004 and 2005 was approximately
$877,000 and $1,143,000, respectively. A 100% valuation allowance has been
established against the deferred tax assets, as the utilization of the loss
carry forwards cannot reasonably be assured.
The
components of the net deferred tax asset are summarized below:
|
|
December
31, 2004
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
|
Accruals
deductible in different period
|
|
$
|
165,000
|
|
$
|
165,000
|
|
General
business credit
|
|
|
224,000
|
|
|
224,000
|
|
Net
operating losses
|
|
|
743,000
|
|
|
477,000
|
|
Other
|
|
|
11,000
|
|
|
11,000
|
|
Less:
valuation allowance
|
|
|
(1,143,000
|
)
|
|
(877,000
|
)
|
|
|
$ |
- |
|
$
|
-
|
|
The
following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:
|
|
December
31, 2005
|
|
December
31, 2004
|
|
|
|
|
|
|
|
Tax
expense (credit) at statutory rate-federal
|
|
|
(34
|
)%
|
|
(34
|
)%
|
State
tax expense net of federal tax
|
|
|
(6
|
)
|
|
(6
|
)
|
Changes
in valuation allowance
|
|
|
40
|
|
|
40
|
|
Tax
expense at actual rate
|
|
|
-
|
|
|
-
.
|
|
Income
tax expense consisted of the following:
|
|
2004
|
|
2005
|
|
Current
tax expense:
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
$
|
-
|
|
State
|
|
|
800
|
|
|
800
|
|
Total
current
|
|
$
|
800
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in deferred tax asset:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
19,000
|
|
$
|
(225,000
|
)
|
State
|
|
|
4,000
|
|
|
(40,000
|
)
|
Total
|
|
$
|
23,000
|
|
$
|
(752,000
|
)
|
Less:
valuation allowance
|
|
|
(23,000
|
)
|
|
752,000
|
|
Net
deferred tax asset
|
|
|
-
|
|
|
-
|
|
Tax
expense
|
|
$
|
800
|
|
$
|
800
|
|
Derivative
Instruments:
In
June
1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities.” SFAS No. 133, as amended by
SFAS No. 137, is effective for fiscal years beginning after June 15, 2000.
SFAS
No. 133 requires the Company to recognize all derivatives as either assets
or
liabilities and measure those instruments at fair value. It further provides
criteria for derivative instruments to be designated as fair value, cash flow
and foreign currency hedges and establishes respective accounting standards
for
reporting changes in the fair value of the derivative instruments. After
adoption, the Company is required to adjust hedging instruments to fair value
in
the balance sheet and recognize the offsetting gains or losses as adjustments
to
be reported in net income or other comprehensive income, as appropriate. The
Company has complied with the requirements of SFAS 133, the effect of which
was
not material to the Company’s financial position or results of operations as the
Company does not participates in such activities.
Impairment
of Long-Lived Assets and Long-Lived Assets to be disposed
of:
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which addresses financial accounting and reporting for the impairment
or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations for a Disposal of a Segment of a Business." The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. In that event,
a
loss is recognized based on the amount by which the carrying amount exceeds
the
fair market value of the long-lived assets. Loss on long-lived assets to be
disposed of is determined in a similar manner, except that fair market values
are reduced for the cost of disposal.
New
Accounting Pronouncements:
In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an
Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair
value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal 2006.
The Company is evaluating the effects adoption of SFAS 123R will have on its
financial statements.
In
May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
This statement applies to all voluntary changes in accounting principle and
requires retrospective application to prior period’s financial statements of
changes in accounting principle, unless this would be impracticable. This
statement also makes a distinction between "retrospective application" of an
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company believes that the adoption of this standard will have no
material impact on its financial statements.
In
February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. SFAS No. 155 is not expected to have a material effect
on the financial position or results of operations of the Company.
In
March
2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
This Statement:
6. |
Requires
an entity to recognize a servicing asset or servicing liability each
time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
7. |
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if practicable.
|
8. |
Permits
an entity to choose ‘Amortization method’ or ‘Fair value measurement
method’ for each class of separately recognized servicing assets and
servicing liabilities.
|
9. |
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
10. |
Requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial
position
and additional disclosures for all separately recognized servicing
assets
and servicing liabilities.
|
This
Statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Management believes that this statement
will not have a significant impact on the consolidated financial
statements.
Reclassifications:
For
comparative purposes, prior year’s consolidated financial statements have been
reclassified to conform with report classifications of the current
year.
NOTE
3 - MAJOR CUSTOMERS
At
December 31, 2004, three customers accounted for 35%, 19% and 10% of revenues
or
a total of $2,899,953 and a total balance of $818,874 in accounts receivable
at
year end. At December 31, 2005 four customers accounted for 29%, 11%, 11% and
10% of revenues during 2005 or a total of $3,443,965 and a total balance of
$682,699 in accounts receivable at year end. No other individual client
represents more than 10% of the revenue for the years ended December 31, 2004
and 2005.
NOTE
4 - OTHER CURRENT ASSETS
Other
current assets consist of the following as of December 31, 2004 and
2005:
|
|
2004
|
|
2005
|
|
Prepaid
Expenses
|
|
$
|
45,981
|
|
$
|
48,825
|
|
Employee
Advances
|
|
|
13,200
|
|
|
32,059
|
|
Interest
Receivable
|
|
|
24,698
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
83,879
|
|
$
|
80,884
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net, consists of the following at December 31, 2004 and
2005:
|
|
2004
|
|
2005
|
|
Office
furniture and equipment
|
|
$
|
89,632
|
|
$
|
89,632
|
|
Computer
equipment
|
|
|
450,623
|
|
|
484,223
|
|
Subtotal
|
|
|
540,255
|
|
|
573,855
|
|
Accumulated
depreciation
|
|
|
(482,617
|
)
|
|
(514,594
|
)
|
|
|
$
|
57,638
|
|
$
|
59,261
|
|
For
the
years ended December 31, 2004 and 2005, fixed asset depreciation expense totaled
$87,516 and $33,161, respectively.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consist of computer software development costs at December 31, 2004
and
2005:
|
|
2004
|
|
2005
|
|
Intangible
asset - Beginning
|
|
$
|
407,746
|
|
|
546,946
|
|
Additions
|
|
|
139,200
|
|
|
118,425
|
|
Accumulated
amortization
|
|
|
(407,746
|
)
|
|
(432,590
|
)
|
Net
balance - Ending
|
|
$
|
139,200
|
|
$
|
232,781
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
|
$
|
-
|
|
$
|
24,844
|
|
Amortization
expense of intangible assets over the next three years is as
follows:
YEAR
ENDING
|
|
Asset
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
TOTAL
|
|
Capitalized
Software R&D
|
|
$
|
85,875
|
|
$
|
85,875
|
|
$
|
61,031
|
|
$
|
232,781
|
|
|
|
$
|
85,875
|
|
$
|
85,875
|
|
$
|
61,031
|
|
$
|
232,781
|
|
NOTE
7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts
payable and accrued liabilities consisted of the following as of December 31,
2004 and 2005:
|
|
2004
|
|
2005
|
|
Accounts
Payable - trade
|
|
$
|
287,774
|
|
$
|
135,283
|
|
Bank
Overdraft
|
|
|
21,701
|
|
|
-
|
|
Sales
Tax Payable
|
|
|
13,704
|
|
|
2,241
|
|
Section
125 Plan Payable
|
|
|
2,103
|
|
|
3,886
|
|
Accrued
Liabilities
|
|
|
28,129
|
|
|
89,454
|
|
Accrued
Payroll
|
|
|
19,870
|
|
|
-
|
|
Accrued
Commissions
|
|
|
29,189
|
|
|
57,899
|
|
Accrued
Vacation Payable
|
|
|
242,203
|
|
|
301,040
|
|
Other
Payable
|
|
|
-
|
|
|
43,853
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
644,673
|
|
$
|
633,656
|
|
On
May
16, 2005, the Company entered into an agreement with a customer whereby the
Company agreed to refund a portion of the license fee purchased by the customer.
The total amount to be refunded was $78,933 and is to be paid in nine quarterly
installments of $8,770. During the year ended December 31, 2005, $35,080 was
paid and a balance of $43,853 was owed at December 31, 2005, which was recorded
as other payable.
NOTE
8 - DEBTS
NOTES
PAYABLE - CURRENT
On
March
29, 2002, the Company entered into an agreement with the preferred stock holders
whereby the Company repurchased the outstanding preferred shares with cash
in
the amount of $487,132 and notes payable of $194,834 with a three-year maturity
date and an interest rate of 8% per annum, simple interest. The notes were
payable in quarterly installments. As of December 31, 2003 the loan balance
was
$192,844. During the year ended December 31, 2004, $128,722 was
paid
on the notes and the balance owing was $64,121. During the year ended December
31, 2005, the balance owing was paid.
NOTE
9 - SETTLEMENT PAYABLE
The
Company was sued by two former employees in 1999 (see note 14). On April 17,
2006, a settlement agreement was entered into whereby the Company agreed to
pay
a total of $700,000 to the two former employees. $350,000 of the $700,000 was
paid by the Company’s insurance company directly to the two former employees
upon the signing of the settlement agreement. The Company paid $275,000 upon
the
signing of the settlement agreement and agreed to pay the remaining $75,000
within 90 days of the settlement agreement. As the amount of the settlement
was
undeterminable at December 31, 2004, no amount was recorded as a liability
in
2004. The Company’s direct liability of $350,000 was recorded as of December 31,
2005 as the amount became determinable before the issuance of the financial
statements. It is shown as a settlement payable.
NOTE
10 - STOCKHOLDERS’ EQUITY
Deemed
dividend and write off of stock subscription receivable
In
September 2000, a major shareholder and President of the Company exercised
warrants to purchase 166,667 shares of the Company’s common stock at $0.75 per
share. The Company agreed to loan the amount to the officer to purchase the
shares. The loan carried an interest rate of 9% per annum. In August 2003,
the
interest rate was lowered to 5.5% per annum. As of December 31, 2003, the
balance of interest owing was $17,804. During the year ended December 31, 2004,
$6,894 in interest was recorded and the balance owing at December 31, 2004
was
$24,698. In January 2005, the interest rate was lowered to 2.38%. During the
year ended December 31, 2005, $2,975 of interest was recorded. On December
31,
2005, the Board of Directors authorized the write-off of the balance owing,
including interest. The total amount written-off was $152,673 and was recorded
as a deemed dividend in the statement of stockholders’ deficit in the year ended
December 31, 2005.
NOTE
11 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
Under
the
1997 Employee Stock Option Plan (the “Option Plan”), the Company may grant
options to purchase up to 450,000 shares of common stock to employees and
consultants at prices not less than the fair market value at date of grant
for
incentive stock options and not less than 85% of fair market value for
nonstatutory stock options. For owners of more than 10% of the Company’s stock,
options may only be granted for an exercise price of no less than 110% of fair
market value on the date of grant for both incentive and nonstatutory stock
options. These options generally expire five years from the date of grant and
generally vest 33% one year from the date of grant and 1/36th
each
month thereafter
for the
next 24 months. In the event of a merger of the Company with or into another
corporation, or the sale of substantially all of the assets of the
Company,
all
outstanding options granted vest immediately.
NOTE
12 - COMMON STOCK PURCHASE WARRANTS AND OPTIONS
From
time
to time, the Company issues options and warrants as incentives to employees,
officers and directors, as well as to non-employees.
Common
stock purchase options and warrants consisted of the following as of December
31, 2004 and 2005:
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Options
|
|
Price
|
|
Warrants
|
|
Price
|
|
Outstanding
as of December 31, 2003
|
|
|
9,008
|
|
$
|
1.01
|
|
|
334,294
|
|
$
|
0.72
|
|
Granted
|
|
|
91,000
|
|
$
|
0.72
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Outstanding
as of December 31, 2004
|
|
|
100,008
|
|
$
|
0.75
|
|
|
334,294
|
|
|
|
|
Granted
|
|
|
193,400
|
|
$
|
0.75
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Outstanding
as of December 31, 2005
|
|
|
293,408
|
|
$
|
0.82
|
|
|
334,294
|
|
|
|
|
The
following summary presents the weighted average exercise prices, number of
options and warrants outstanding and exercisable, and the remaining contractual
lives of the Company’s stock options and warrants as of December 31, 2004 and
2005:
|
|
OPTIONS
|
|
WARRANTS
|
|
|
|
12/31/2004
|
|
12/31/2005
|
|
12/31/2004
|
|
12/31/2005
|
|
Number
Outstanding
|
|
|
100,008
|
|
|
293,408
|
|
|
334,294
|
|
|
334,294
|
|
Weighted
Average Remaining Life
|
|
|
3.93
|
|
|
4.00
|
|
|
5.00
|
|
|
4.00
|
|
Weighted
Average Exercise Price
|
|
$
|
0.75
|
|
$
|
0.82
|
|
$
|
0.72
|
|
$
|
0.72
|
|
Number
Exercisable
|
|
|
8,340
|
|
|
39,341
|
|
|
-
|
|
|
-
|
|
Weighted
Average Exercise Price
|
|
$
|
1.04
|
|
$
|
0.79
|
|
|
|
|
|
|
|
During
the year ended December 31, 2004, 88,000 options were granted to employees
and
officers of the company. The options vest over three years, 33% after one year
and 1/36th
per
month for 24 months, and expire five years from the date of grant unless the
employee terminates employment, in which case the options expire within 90
days
of the employee’s termination date
In
addition, 3,000 options were granted to a consultant and expire five years
from
the date of grant. The options were valued using the fair value method at $561
or $0.187 per share and were recorded as an expense in the accompanying
financial statements. The Black-Scholes option pricing model used the following
assumptions:
Risk-free
interest rate
|
|
|
6.0
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
.001
|
%
|
Dividend
yield
|
|
|
0
|
%
|
During
the year ended December 31, 2005, 167,900 options were granted to employees
and
officers of the company. The options vest over three years, 33% after one year
and 1/36th
per
month for 24 months, and expire five years from the date of grant unless the
employee terminates employment, in which case the options expire within 90
days
of their termination.
In
addition, 25,500 options were granted to consultants and expire five years
from
the date of grant. No expense was recorded for these options since their fair
value calculated by Black-Schole option pricing model is zero. The Black-Scholes
option pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
6.0
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
.001
|
%
|
Dividend
yield
|
|
|
0
|
%
|
In
2002,
the Company granted 334,294 warrants to purchase Series A preferred stock with
an exercise price of $0.72 per share as part of a preferred stock repurchase
agreement with the former preferred stockholders. These warrants become
exercisable only at the time of a liquidation event defined as a) a merger
or
consolidation of the Company with another Company, b) a sale of substantially
all the assets of the Company to another Company or c) an IPO and expire seven
years from the time of grant. No expense has been taken on these warrants until
such time as they become exercisable.
In
compliance with FAS No. 148, the Company has elected to continue to follow
the
intrinsic value method in accounting for its stock-based employee compensation
plan as defined by APB No. 25 and has made the applicable disclosures
below.
Had
the
Company determined employee stock based compensation cost based on a fair value
model at the grant date for its stock options under SFAS 123, the Company's
net
earnings per share would have been adjusted to the pro forma amounts for years
ended December 31, 2004 and 2005 as follows:
|
|
2004
|
|
2005
|
|
Net
income (loss) - as reported
|
|
$
|
(71,794
|
)
|
$
|
646,218
|
|
Stock-based
employee compensation expense,
|
|
|
|
|
|
|
|
included
in reported net loss, net of tax
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
stock-based employee compensation
|
|
|
|
|
|
|
|
expense
determined under fair-value-based
|
|
|
|
|
|
|
|
method
for all rewards, net of tax
|
|
|
(385
|
)
|
|
(10,566
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
$
|
(72,179
|
)
|
$
|
635,652
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic,
as reported
|
|
|
(0.11
|
)
|
|
0.97
|
|
Diluted,
as reported
|
|
|
(0.11
|
)
|
|
0.91
|
|
|
|
|
|
|
|
|
|
Basic,
pro forma
|
|
|
(0.11
|
)
|
|
0.95
|
|
Diluted,
pro forma
|
|
|
(0.11
|
)
|
|
0.90
|
|
Pro
forma
information regarding the effect on operations is required by SFAS 123, and
has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. Pro forma information using
the
Black-Scholes method at the date of grant is based on the following assumptions:
|
|
2004
|
|
2005
|
|
Expected
life (years)
|
|
|
5
years
|
|
|
5
years
|
|
Risk-free
interest rate
|
|
|
6.0
|
%
|
|
6.0
|
%
|
Dividend
yield
|
|
|
-
|
|
|
-
|
|
Volatility
|
|
|
.001
|
%
|
|
.001
|
%
|
NOTE
13 - EMPLOYEE BENEFIT PLANS
The
Company has a qualified employee savings and retirement plan (401(k) plan).
The
401(k) plan allows the Company to make discretionary contributions of up to
3%
of employee’s salary given at the discretion of the board and/or management. The
Company made no contributions during the years ended December 31, 2004 and
2005.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases its facility under an operating lease that expires in July 2007.
Rent expense is as follows for the remaining lease term:
July
1,
2005 - June 30, 2006: $20,051 per month.
July
1,
2006 - June 30, 2007: $20,552 per month.
Rent
expense was $236,683 and $243,861 in 2004 and 2005, respectively.
Litigation
On
July
27, 1999, two former employees of the Company, Mohamad Rashedi and Gregory
Saylor, and the company formed by the former employees (Integrated Support
Services, a general partnership "IS") filed a complaint in the Superior Court
of
San Mateo County alleging damages for unfair competition, defamation, restraint
of trade and prevention of employment. A counter-suit was filed by the Company
against the plaintiffs alleging misappropriation of proprietary materials.
On or
about Feb. 16, 2001, the matter went to trial and a verdict was entered against
the defendants and the plaintiffs were found not guilty on the defendants
counter-suit. Defendants moved for a new trial on the damages which was granted.
The new trial was scheduled to commence on April 17, 2006.
While
the
Company believes that it is not liable for damages to the plaintiffs, in the
interest of settling the matter and avoiding the expenses of trial, the Company
executed a Settlement and Release Agreement on April 17, 2006. The terms of
the
Settlement and Release Agreement call for the Company to pay the two former
employees $625,000 upon the execution of the Settlement and Release Agreement
and $75,000 within 90 days of the execution of the Settlement and Release
Agreement. The Company's insurance carrier paid half of the settlement cost
directly to the two former employees upon the signing of the settlement
agreement. As of June 12, 2006 the full settlement amount had been paid and
a
dismissal with prejudice of the action was filed effective June 22,
2006.
NOTE
15 - ROYALTY AGREEMENTS
Under
royalty agreements, sales of certain products require the Company to pay
royalties to third parties under specified circumstances and/or under specified
time frames. Royalty expense was $0 and $7,830 in 2004 and 2005,
respectively.
In
addition, the Company receives royalties on the sales of certain products.
Royalty income was $13,148 and $1,467 in 2004 and 2005,
respectively.
NOTE
16 - RELATED PARTY TRANSACTIONS
In
September 2000, a major shareholder and President of the Company exercised
warrants to purchase 166,667 shares of the Company’s common stock at $0.75 per
share. The Company agreed to loan the amount to the President to purchase the
shares. The loan carried an interest rate of 9% per annum. In August 2003,
the
interest rate was lowered to 5.5% per annum. As of December 31, 2003, the
balance of interest owing was $17,804. During the year ended December 31, 2004,
$6,894 in interest was recorded and the balance owing at December 31, 2004
was
$24,698. In January 2005, the interest rate was lowered to 2.38%. During the
year ended December 31, 2005, $2,975 of interest was recorded. On December
31,
2005, the Board of Directors authorized the write-off of the balance owing,
including interest. The total amount written-off was $152,673 and was recorded
as a deemed dividend.
The
employment agreement with the President of the Company calls for bonuses to
be
paid to him based on certain milestones achieved and sales generated. During
2004 and 2005, $18,000 and $66,829 was accrued. At December 31, 2004 and 2005,
$18,000 and $84,829 remained unpaid and is included in accrued liabilities
in
these financial statements. Salaries paid to the President of the Company were
$224,400, which included $66,000 of retroactive pay deferred from 2002, in
2004
and $160,710 in 2005.
NOTE
17 - SUBSEQUENT EVENTS (unaudited)
On
May 6,
2006 the stockholders voted in favor of the Company being acquired by NetSol
Technologies, Inc. (“NetSol”), a publicly listed corporation on the NASDAQ
exchange, (NTWK). Under the agreement, NetSol will purchase 100% of the
outstanding stock of McCue. The estimated purchase price based on the December
31, 2005 revenues is $8.5 million dollars. The agreement calls for a closing
date on or about June 30, 2006.
According
to the terms of the Share Purchase Agreement, NetSol is to acquire 100% of
the
issued and outstanding shares of McCue from McCue’s current shareholders, whose
identity is set forth in the Share Purchase Agreement (the “McCue Shareholders”)
at the completion date in exchange for a purchase price consisting of: a) 50%
of
McCue’s total gross revenue for the audited twelve month period ending December
31, 2005 after an adjustment for any revenue occurring outside of the company’s
ordinary scope of operations as defined by US GAAP multiplied by 1.5 payable:
(i) 50% in shares of restricted common stock of NetSol at the 30 day volume
weighted average price (“VWAP) for each of the 30 trading days prior to the
execution date of this agreement or at the VWAP for each of the 30 trading
days
prior to November 30, 2005 whichever is the greater VWAP; and, (ii) 50% in
cash;
b) 25% of McCue’s total gross revenue for the twelve months ending December 31,
2006 multiplied by 1.5 payable, at NetSol’s discretion: (i) wholly in cash; or
(ii) on the same basis and on the same terms as the initial payment provided
that under no circumstances shall the total number of shares of common stock
issued to the McCue Shareholders exceed 19% of the issued and outstanding shares
of common stock, less treasury shares, of NetSol at May 6, 2006; and c) 25%
of
McCue’s total gross revenue for the twelve months ending December 31, 2007
multiplied by 1.5 payable, at the Company’s discretion: (i) wholly in cash; or
(ii) on the same basis and on the same terms as the initial payment provided
that under no circumstances shall the total number of shares of common stock
issued to the McCue Shareholders exceed 19% of the issued and outstanding shares
of common stock, less treasury shares, of NetSol at May 6, 2006.
The
initial payment will consist of approximately $2.1 million in cash and 985,213
shares of NetSol’s restricted common stock.
During
May and June 2006, 281,908 options were exercised for a total of $230,276 of
which $4,020 was received in cash and the remaining amount of $226,356 was
recorded as a receivable. The amount due from the shareholders will be withheld
from any funds due to them at the close of the acquisition by NetSol. In
addition, the option holders were granted a loan from the Company of $0.33
per
share to help defray any tax consequence of the option exercise. This loan
is to
be repaid from the proceeds of the second and third installment of the purchase
price of the acquisition by NetSol.
During
May and June 2006, 323,682 warrants were exercised. Of these, 281,540 were
exercised under a cashless exercise provision of $0.85 per share and 238,735
shares were issued as a result. $1,542 was received in cash and a receivable
for
$28,800 was recorded. The receivable will be withheld from any funds due to
them
at the close of the acquisition by NetSol.
On
June
12, 2006 the Company paid the remaining balance of $75,000 due on the settlement
agreement (See Note 14). On June 22, 2006 a dismissal of the case was filed
with
the court.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
PRO-FORMA
FINANCIAL STATEMENTS
MARCH
31,
2006
(UNAUDITED)
The
following unaudited Pro-Forma Statement of Financial Conditions and Statement
of
Operations have been derived from the unaudited consolidated financial
statements of NetSol Technologies, Inc. (“NetSol”) as of March 31, 2006 and the
unaudited financial statements of McCue Systems, Incorporated (a California
corporation) (“McCue Systems”) as of March 31, 2006. The unaudited Pro Forma
Statement of Financial Conditions and Statement of Operations reflect the 100%
acquisition of McCue Systems by NetSol under a stock purchase agreement. The
Company has accounted for the acquisition under the purchase method of
accounting for business combinations. The pro-forma Statement of Financial
Conditions and the pro-forma Statements of Operations assumes the acquisition
was consummated as of July 1, 2005, the beginning of NetSol Technologies’ fiscal
year.
The
initial purchase of $4,235,706 is price is based on the December 31, 2005
audited financial statements of McCue Systems. The other half is due in two
installments; the first 25% after the audited December 31, 2006 financial
statements have been prepared, and the second 25% after the audited December
31,
2007 financial statements have been prepared.
The
Pro-Forma Statement of Financial Conditions and Statement of Operations should
be read in conjunction with the Consolidated Financial Statements of NetSol,
related Notes to the financial statements, and the Financial Statements of
McCue
Systems. The Pro-Forma statements do not purport to represent what the Company’s
financial condition and results of operations would actually have been if the
acquisition of McCue Systems had occurred on the date indicated or to project
the Company’s results of operations for any future period or date. The Pro-Forma
adjustments, as described in the accompanying data, are based on available
information and the assumptions set forth in the notes below, which management
believes are reasonable.
NETSOL
TECHNOLOGIES INC AND
SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF FINANCIAL
CONDITIONS
(UNAUDITED)
|
|
NetSol
|
|
McCue
Systems
|
|
|
|
|
|
|
|
|
|
3/31/2006
|
|
3/31/2006
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
15,783,378
|
|
$
|
1,889,881
|
|
|
|
|
|
(1)
|
|
$
|
17,673,259
|
|
Property
& equipment, net
|
|
|
6,425,581
|
|
|
64,706
|
|
|
-
|
|
|
|
|
|
6,490,287
|
|
Intangible
assets, net
|
|
|
6,873,237
|
|
|
211,312
|
|
|
4,518,256
|
|
|
(1)
|
|
|
11,083,978
|
|
|
|
|
|
|
|
|
|
|
(518,827
|
)
|
|
(2)
|
|
|
|
|
Total
assets
|
|
$
|
29,082,196
|
|
$
|
2,165,899
|
|
$
|
3,999,429
|
|
|
|
|
$
|
35,247,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
5,237,487
|
|
$
|
2,448,449
|
|
$
|
190,608
|
|
|
(3)
|
|
$
|
7,876,544
|
|
Obligations
under capitalized leases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less
current maturities
|
|
|
118,079
|
|
|
-
|
|
|
-
|
|
|
|
|
|
118,079
|
|
Notes
payable
|
|
|
-
|
|
|
-
|
|
|
2,117,864
|
|
|
(1)
|
|
|
2,117,864
|
|
Deferred
liability
|
|
|
313,397
|
|
|
-
|
|
|
-
|
|
|
|
|
|
313,397
|
|
Convertible
debenture
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,668,963
|
|
|
2,448,449
|
|
|
2,308,472
|
|
|
|
|
|
10,425,884
|
|
Minority
interest
|
|
|
1,385,010
|
|
|
-
|
|
|
-
|
|
|
|
|
|
1,385,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
15,142
|
|
|
2,710,275
|
|
|
(2,709,317
|
)
|
|
(1)
|
|
|
16,100
|
|
Additional
paid in capital
|
|
|
52,584,940
|
|
|
31,727
|
|
|
2,085,157
|
|
|
(1)
|
|
|
54,701,824
|
|
Stock
subscription receivable
|
|
|
(372,688
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(372,688
|
)
|
Treasury
stock
|
|
|
(27,197
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(27,197
|
)
|
Common
stock to be issued
|
|
|
116,000
|
|
|
|
|
|
|
|
|
|
|
|
116,000
|
|
Other
comprehensive income (loss)
|
|
|
(319,590
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(319,590
|
)
|
Accumulated
deficit
|
|
|
(29,968,384
|
)
|
|
(3,024,552
|
)
|
|
3,024,552
|
|
|
(1)
|
|
|
(30,677,819
|
)
|
|
|
|
|
|
|
|
|
|
(709,435
|
)
|
|
(2),
(3)
|
|
|
|
|
Total
stockholders' equity
|
|
|
22,028,223
|
|
|
(282,550
|
)
|
|
1,690,958
|
|
|
|
|
|
23,436,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
29,082,196
|
|
$
|
2,165,899
|
|
$
|
3,999,429
|
|
|
|
|
$
|
35,247,524
|
|
NOTES:
(1)
Elimination of Common stock and accumulated earnings of McCue Systems before
the
acquisition and to record the
purchase of McCue Systems by NetSol.
The
initial purchase price is $4,235,706 of which one-half is due at closing in
cash
and stock. The 2nd installment is due 12
months
later and the 3rd installment is due 24 months later, based upon audited
financials statements of the subsequent
periods.
The
initial purchase price and 1st installment allocation is as follows:
Purchase
Price allocation:
|
|
|
|
1st
Installment
|
|
Common
Stock, 958,213 shares
|
|
|
|
|
$
|
958
|
|
Additional
paid in capital
|
|
|
|
|
|
2,116,884
|
|
Cash,
provided by financing
|
|
|
|
|
|
2,117,864
|
|
Additional
consideration payable
|
|
|
|
|
|
-
|
|
Total
purchase price
|
|
|
|
|
$
|
4,235,706
|
|
|
|
|
|
|
|
|
|
McCue
equity (net assets and liabilities)
|
|
|
|
|
$
|
(282,550
|
)
|
Intangible
assets:
|
|
|
|
|
|
|
|
Customer
Lists
|
|
|
3,331,337
|
|
|
3,331,337
|
|
Licenses
|
|
|
127,510
|
|
|
127,510
|
|
Goodwill
|
|
|
5,295,155
|
|
|
1,059,409
|
|
|
|
|
8,754,002
|
|
|
4,518,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,235,706
|
|
(2)
Amortization of intangible assets acquired
(3)
Interest payable accrued on the notes issued for the financing at 12% per
annum
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF OPERATIONS
FOR
THE NINE MONTH PERIODS ENDED MARCH 31, 2006
(UNAUDITED)
|
|
NetSol
|
|
McCue
Systems
|
|
|
|
|
|
|
|
|
|
Nine
month period ended 3-31-06
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
14,040,185
|
|
$
|
4,508,411
|
|
$
|
-
|
|
|
|
|
$
|
18,548,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
5,962,913
|
|
|
1,899,159
|
|
|
-
|
|
|
|
|
|
7,862,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,077,272
|
|
|
2,609,252
|
|
|
-
|
|
|
|
|
|
10,686,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
6,848,682
|
|
|
2,100,006
|
|
|
518,827
|
|
|
(2
|
)
|
|
9,658,121
|
|
|
|
|
|
|
|
|
|
|
190,608
|
|
|
(3
|
)
|
|
|
|
Income
(loss) from operations
|
|
|
1,228,590
|
|
|
509,246
|
|
|
(709,435
|
)
|
|
|
|
|
1,028,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(178,117
|
)
|
|
57,165
|
|
|
-
|
|
|
|
|
|
(120,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
1,050,473
|
|
|
566,411
|
|
|
(709,435
|
)
|
|
|
|
|
907,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
(699,872
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(699,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
350,601
|
|
|
566,411
|
|
|
(709,435
|
)
|
|
|
|
|
207,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
201,100
|
|
|
-
|
|
|
-
|
|
|
|
|
|
201,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
551,701
|
|
$
|
566,411
|
|
$
|
(709,435
|
)
|
|
|
|
$
|
408,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,225,903
|
|
|
669,539
|
|
|
|
|
|
|
|
|
15,895,442
|
|
Diluted
|
|
|
15,651,130
|
|
|
730,014
|
|
|
|
|
|
|
|
|
16,381,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
0.85
|
|
|
|
|
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.02
|
|
$
|
0.78
|
|
|
|
|
|
|
|
$
|
0.01
|
|
NOTES:
(1)
Weighted-average number of shares outstanding for the combined entity includes
all shares issued for the
acquisition of 958,213 shares as if outstanding as of July 1,
2004.
(2)
Amortization of intangible assets acquired in acquisition
(3)
Interest on notes payable for the financing of the
initial installment @ 12% per annum.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
PRO-FORMA
FINANCIAL STATEMENTS
JUNE
30,
2005
(UNAUDITED)
The
following unaudited Pro-Forma Statement of Financial Conditions and Statement
of
Operations have been derived from the audited consolidated financial statements
of NetSol Technologies, Inc. (“NetSol”) as of June 30, 2005 and the unaudited
financial statements of McCue Systems, Incorporated (a California corporation)
(“McCue Systems”) as of June 30, 2005. The unaudited Pro Forma Statement of
Financial Conditions and Statement of Operations reflect the 100% acquisition
of
McCue Systems by NetSol under a stock purchase agreement. The Company has
accounted for the acquisition under the purchase method of accounting for
business combinations. The pro-forma Statement of Financial Conditions and
the
pro-forma Statements of Operations assumes the acquisition was consummated
as of
July 1, 2004, the beginning of NetSol Technologies fiscal year.
The
initial purchase of $4,235,706 is price is based on the December 31, 2005
audited financial statements of McCue Systems. The other half is due in two
installments; the first 25% after the audited December 31, 2006 financial
statements have been prepared, and the second 25% after the audited December
31,
2007 financial statements have been prepared.
The
Pro-Forma Statement of Financial Conditions and Statement of Operations should
be read in conjunction with the Consolidated Financial Statements of NetSol,
related Notes to the financial statements, and the Financial Statements of
McCue
Systems. The Pro-Forma statements do not purport to represent what the Company’s
financial condition and results of operations would actually have been if the
acquisition of McCue Systems had occurred on the date indicated or to project
the Company’s results of operations for any future period or date. The Pro-Forma
adjustments, as described in the accompanying data, are based on available
information and the assumptions set forth in the notes below, which management
believes are reasonable.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF FINANCIAL CONDITIONS
AS
OF JUNE 30, 2005
(UNAUDITED)
|
|
NetSol
|
|
McCue
Systems
|
|
|
|
|
|
|
|
|
|
as
of 6/30/05
|
|
as
of 6/30/05
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Audited)
|
|
(Unaudited)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
8,373,861
|
|
$
|
1,759,734
|
|
|
|
|
|
|
|
$
|
10,133,595
|
|
Property
& equipment, net
|
|
|
5,114,776
|
|
|
50,808
|
|
|
-
|
|
|
|
|
|
5,165,584
|
|
Intangible
assets, net
|
|
|
7,637,397
|
|
|
136,950
|
|
|
5,056,995
|
|
|
(1)
|
|
|
12,139,573
|
|
|
|
|
|
|
|
|
|
|
(691,769
|
)
|
|
(2)
|
|
|
|
|
Total
assets
|
|
$
|
21,126,034
|
|
$
|
1,947,492
|
|
$
|
4,365,226
|
|
|
|
|
$
|
27,438,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
4,602,164
|
|
$
|
2,768,781
|
|
$
|
254,144
|
|
|
(3)
|
|
$
|
7,625,089
|
|
Obligations
under capitalized leases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less
current maturities
|
|
|
122,426
|
|
|
-
|
|
|
-
|
|
|
|
|
|
122,426
|
|
Notes
payable
|
|
|
-
|
|
|
-
|
|
|
2,117,864
|
|
|
(1)
|
|
|
2,117,864
|
|
Deferred
liability
|
|
|
313,397
|
|
|
-
|
|
|
-
|
|
|
(1)
|
|
|
313,397
|
|
Convertible
debenture
|
|
|
138,175
|
|
|
-
|
|
|
|
|
|
|
|
|
138,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,176,162
|
|
|
2,768,781
|
|
|
2,372,008
|
|
|
|
|
|
10,316,951
|
|
Minority
interest
|
|
|
700,320
|
|
|
-
|
|
|
-
|
|
|
|
|
|
700,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
13,831
|
|
|
2,710,275
|
|
|
(2,709,317
|
)
|
|
(1)
|
|
|
14,789
|
|
Additional
paid in capital
|
|
|
46,610,747
|
|
|
31,727
|
|
|
2,085,157
|
|
|
(1)
|
|
|
48,727,631
|
|
Stock
subscription receivable
|
|
|
(616,650
|
)
|
|
(125,000
|
)
|
|
125,000
|
|
|
(1)
|
|
|
(616,650
|
)
|
Treasury
stock
|
|
|
(27,197
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(27,197
|
)
|
Common
stock to be issued
|
|
|
108,500
|
|
|
|
|
|
|
|
|
|
|
|
108,500
|
|
Other
comprehensive income (loss)
|
|
|
(520,691
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(520,691
|
)
|
Accumulated
deficit
|
|
|
(30,318,988
|
)
|
|
(3,438,291
|
)
|
|
3,438,291
|
|
|
(1)
|
|
|
(31,264,901
|
)
|
|
|
|
|
|
|
|
|
|
(945,913
|
)
|
|
(2),
(3)
|
|
|
|
|
Total
stockholders' equity
|
|
|
15,249,552
|
|
|
(821,289
|
)
|
|
1,993,218
|
|
|
|
|
|
16,421,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
21,126,034
|
|
$
|
1,947,492
|
|
$
|
4,365,226
|
|
|
|
|
$
|
27,438,752
|
|
(1)
Elimination of Common stock and accumulated earnings of McCue Systems before
the
acquisition and to record the
purchase of McCue Systems by NetSol.
The
initial purchase price is $4,235,706 of which one-half is due at closing
in cash
and stock. The 2nd installment is due 12
months
later and the 3rd installment is due 24 months later, based upon audited
financials statements of the subsequent
periods.
The
initial purchase price and 1st installment allocation is as follows:
Purchase
Price allocation:
|
|
|
|
1st
Installment
|
|
Common
Stock, 958,213 shares
|
|
|
|
|
$
|
958
|
|
Additional
paid in capital
|
|
|
|
|
|
2,116,884
|
|
Cash,
provided by financing
|
|
|
|
|
|
2,117,864
|
|
Additional
consideration payable
|
|
|
|
|
|
-
|
|
Total
purchase price
|
|
|
|
|
$
|
4,235,706
|
|
|
|
|
|
|
|
|
|
McCue
equity (net assets and liabilities)
|
|
|
|
|
$
|
(821,289
|
)
|
Intangible
assets:
|
|
|
|
|
|
|
|
Customer
Lists
|
|
|
3,331,337
|
|
|
3,331,337
|
|
Licenses
|
|
|
127,510
|
|
|
127,510
|
|
Goodwill
|
|
|
5,833,894
|
|
|
1,598,148
|
|
|
|
|
9,292,741
|
|
|
5,056,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,235,706
|
|
(2)
Amortization of intangible assets acquired
(3)
Interest payable accrued on the notes issued for the financing at 12% per
annum
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF OPERATIONS
FOR
THE TWELVE MONTH PERIOD ENDED JUNE 30, 2005
(UNAUDITED)
|
|
NetSol
|
|
McCue
Systems
|
|
|
|
|
|
|
|
|
|
For
the twelve month period ended 6-30-05
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Audited)
|
|
(Unaudited)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
12,437,653
|
|
$
|
4,415,680
|
|
$
|
-
|
|
|
|
|
$
|
16,853,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
4,754,749
|
|
|
2,308,733
|
|
|
-
|
|
|
|
|
|
7,063,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
7,682,904
|
|
|
2,106,947
|
|
|
-
|
|
|
|
|
|
9,789,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
6,618,199
|
|
|
2,347,229
|
|
|
691,769
|
|
|
(2
|
)
|
|
9,911,339
|
|
|
|
|
|
|
|
|
|
|
254,144
|
|
|
(3
|
)
|
|
|
|
Income
(loss) from operations
|
|
|
1,064,705
|
|
|
(240,282
|
)
|
|
(945,913
|
)
|
|
|
|
|
(121,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(290,307
|
)
|
|
6,071
|
|
|
-
|
|
|
|
|
|
(284,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
774,398
|
|
|
(234,211
|
)
|
|
(945,913
|
)
|
|
|
|
|
(405,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
(111,073
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(111,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
663,325
|
|
|
(234,211
|
)
|
|
(945,913
|
)
|
|
|
|
|
(516,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(282,129
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(282,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
381,196
|
|
$
|
(234,211
|
)
|
$
|
(945,913
|
)
|
|
|
|
$
|
(798,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
-average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,555,838
|
|
|
669,539
|
|
|
|
|
|
|
|
|
13,225,377
|
|
Diluted
|
|
|
15,734,536
|
|
|
669,539
|
|
|
|
|
|
|
|
|
16,404,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
$
|
(0.04
|
)
|
Diluted
|
|
$
|
0.04
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
$
|
(0.03
|
)
|
NOTES:
1)
Weighted-average number of shares outstanding for the combined entity includes
all shares issued for the
acquisition of 958,213 shares as if outstanding as of July 1,
2004.
(2)
Amortization of intangible assets acquired in
acquisition.
(3)
Interest on notes payable for the financing of the initial installment
@ 12% per
annum.
CQ
SYSTEMS, LTD
UNAUDITED
CONSOLIDATED BALANCE SHEET - ASSETS
|
|
Note
|
|
9
months to Dec 31
2004
£
|
|
9
months to Dec 31 2003
£
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
540,732 |
|
|
562,325 |
|
Accounts
receivable (net of £5,000 bad debt provision)
|
|
|
|
|
451,509
|
|
|
595,340
|
|
Prepaid
expenses and other receivables
|
|
|
|
|
66,748
|
|
|
80,317
|
|
TOTAL
CURRENT ASSETS
|
|
|
|
|
1,058,989
|
|
|
1,237,982
|
|
|
|
|
|
|
|
|
|
|
|
AUTOMOBILES
& EQUIPMENT
|
|
2
|
|
|
|
|
|
|
|
Automobiles
|
|
|
|
|
49,732 |
|
|
64,727 |
|
Fixtures
& Fittings
|
|
|
|
|
185,790
|
|
|
172,841
|
|
Computer
Software & Equipment
|
|
|
|
|
661,375
|
|
|
575,328
|
|
|
|
|
|
|
896,897
|
|
|
812,896
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
714,975
|
|
|
657,760
|
|
|
|
|
|
|
181,922
|
|
|
155,136
|
|
|
|
|
|
|
1,240,911
|
|
|
1,393,118
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
9
months to
|
|
9
months to
|
|
|
|
|
|
Dec
31
|
|
Dec
31
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
£
|
|
£
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
|
16,828
|
|
|
25,792
|
|
Hire
purchase liabilities
|
|
|
|
|
|
44,962
|
|
|
28,710
|
|
Payroll,
Vat and corporation taxes payable
|
|
|
|
|
|
176,180
|
|
|
174,356
|
|
Accrued
liabilities
|
|
|
|
|
|
41,329
|
|
|
96,961
|
|
Deferred
income
|
|
|
|
|
|
486,915
|
|
|
421,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
|
|
|
766,214
|
|
|
746,980
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES AND PROVISIONS
|
|
|
|
|
|
|
|
|
|
|
Hire
purchase liabilities
|
|
|
|
|
|
66,871
|
|
|
42,808
|
|
Deferred
tax
|
|
|
|
|
|
2,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
|
836,001
|
|
|
789,788
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
7
|
|
|
|
|
|
|
|
Ordinary
Shares
|
|
|
|
|
|
|
|
|
|
|
1,000,000
shares authorised £0.20 par value
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding 500,000 shares
|
|
|
|
|
|
100,000
|
|
|
100,000
|
|
Retained
earnings
|
|
|
|
|
|
304,910
|
|
|
503,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,240,911
|
|
|
1,393,118
|
|
See
notes
to financial statements.
CQ
SYSTEMS, LTD.
UNAUDITED CONSOLIDATED STATEMENTS
OF INCOME AND RETAINED EARNINGS
|
|
Note
|
|
9
months to Dec 31
2004
£
|
|
9
months to Dec 31 2003
£
|
|
|
|
|
|
|
|
|
|
NET
REVENUE
|
|
|
1.b |
|
|
1,813,546
|
|
|
2,014,630
|
|
COST
OF REVENUE
|
|
|
|
|
|
99,572
|
|
|
954,969
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
|
|
|
1,713,974
|
|
|
1,059,661
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
1.e |
|
|
1,675,748
|
|
|
605,361
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
|
|
|
38,226
|
|
|
454,300
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
19,325 |
|
|
16,404 |
|
Interest
payable
|
|
|
|
|
|
(4,498
|
)
|
|
(6,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE CORPORATION
AND
DEFERRED TAXES
|
|
|
|
|
|
53,053
|
|
|
463,880
|
|
|
|
|
|
|
|
|
|
|
|
|
UK
CORPORATION AND DEFERRED TAXES
|
|
|
3 |
|
|
(10,080
|
)
|
|
(82,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
42,973
|
|
|
381,047
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
|
|
|
400,686
|
|
|
227,997
|
|
Less:
Dividends
|
|
|
|
|
|
(138,749
|
)
|
|
(105,714
|
)
|
End
of year
|
|
|
|
|
|
304,910
|
|
|
503,330
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
9
months to Dec 31 2004
£
|
|
9
months to Dec 31 2003
£
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
42,973
|
|
|
381,047
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
42,973
|
|
|
381,047
|
|
See
notes
to financial statements.
CQ
SYSTEMS, LTD.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
9
months to Dec 31
2004
£
|
|
9
months to Dec 31
2003
£
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Cash
received from customers
|
|
|
1,756,070
|
|
|
1,850,096
|
|
Cash
paid to suppliers and employees
|
|
|
(1,616,573
|
)
|
|
(1,540,468
|
)
|
Interest
received
|
|
|
19,325
|
|
|
16,405
|
|
Interest
paid
|
|
|
(4,498
|
)
|
|
(6,824
|
)
|
Corporation
tax paid
|
|
|
(139,331
|
)
|
|
(27,878
|
)
|
Net
cash provided by operating activities
|
|
|
14,993
|
|
|
291,331
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Net
sales (purchases) of equipment
|
|
|
(144,999
|
)
|
|
(71,427
|
)
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(144,999
|
)
|
|
(71,427
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(138,750
|
)
|
|
(105,714
|
)
|
|
|
|
|
|
|
|
|
Net
cash used by financing activities
|
|
|
(138,750
|
)
|
|
(105,714
|
)
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(268,756
|
)
|
|
114,190
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
809,488
|
|
|
448,136
|
|
End
of year
|
|
|
540,732
|
|
|
562,326
|
|
See
notes
to financial statements.
CQ
SYSTEMS, LTD.
UNAUDITED CONSOLIDATED
STATEMENTS OF CASH FLOWS - Continued
|
|
9
months to
Dec
31
2004
£
|
|
9
months to
Dec
31
2003
£
|
|
|
|
|
|
|
|
RECONCILIATION
OF NET INCOME TO CASH
PROVIDED
BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
42,973
|
|
|
381,047
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Profit
on sale of asset
|
|
|
(5,207
|
)
|
|
|
|
Depreciation
|
|
|
49,868
|
|
|
61,582
|
|
Decrease/(increase)
in accounts receivable and other debtors
|
|
|
(57,476
|
)
|
|
(191,080
|
)
|
Increase
in accounts payable and other creditors
|
|
|
114,086
|
|
|
(43,051
|
)
|
Increase
(decrease) in corporation taxes payable
|
|
|
(129,251
|
)
|
|
82,833
|
|
Increase
in deferred taxes
|
|
|
(38,060
|
)
|
|
(89,716
|
)
|
|
|
|
14,993
|
|
|
291,331
|
|
See
notes
to financial statements.
NOTES
TO FINANCIAL STATEMENTS
1.
|
Summary
of significant accounting
policies
|
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and are stated in United Kingdom sterling.
In
preparing the consolidated financial statements, management is required 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 consolidated balance sheet and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
a.
|
Principles
of consolidation
|
The
consolidated financial statements include the financial statements of the
company and its subsidiary. The group’s subsidiary is Custom Quest Limited, a
dormant company that has not traded since 31 May 2001 in which the group has
a
100% direct holding in the voting rights. The net assets of the subsidiary
company since cessation of trade is £nil.
b.
Revenue
The
group
recognises its revenue in accordance with the Securities and Exchange
Commissions (“SEC”) Staff Accounting Bulletin No 104 “Revenue recognition in
Financial Statements”.
Licence
revenue is recognised where orders have been signed and the product is
delivered. In contracts with multiple elements revenues are allocated to each
element based on the fair value on completion, delivery and acceptance by the
customer. For other services related activity, revenue is recognised when earned
and billed using the time and material basis.
c.
Automobiles
and equipment
Depreciation
is provided at the following rates in order to write off each asset over its
useful life;
Computer
software
50%
straight line
Office
furniture and fittings 15%
straight line
Computer
equipment
33.33%
straight line
Automobiles
25%
straight line
The
group
evaluates tangible fixed assets for impairment losses at least annually and
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable or is greater than its fair value.
Long-lived
assets
Effective
January 1 2002, the group adopted Statement of Financial Accounting Standards
No
144 “Accounting for the impairment or disposal of long-lived assets” (“SFAS
144”) which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The group has evaluated the carrying value of
long-lived assets held in accordance with SFAS 144. SFAS 144 requires impairment
losses to be recorded on long-lived assets when indicators of impairment are
present where the carrying amount exceeds the fair value of the asset. Based
on
its review, the group believes that as of March 31 2004 and 2003, there were
no
significant impairments of its long-lived assets.
NOTES
TO FINANCIAL STATEMENTS - Continued
d.
Deferred
Tax
Deferred
tax is recognised in respect of all timing differences that have originated
but
not reversed at the balance sheet date. These reflect the expected future tax
consequences of temporary differences between the carrying amounts of assets
and
liabilities at the balance sheet date and their respective tax
bases.
e.
|
Research
and Development
|
Expenditure
on research and development is written off in the year in which it is incurred.
Development costs on computer software that is to be sold relates to bespoke
work undertaken for particular customers as and when requested. Under these
circumstances, these costs are written off as incurred rather than capitalised
and amortised, as they relate solely to the individual customers specifications
rather than being available for general release to customers.
f.
Advertising
The
company expenses advertising costs as they are incurred.
g.
|
Hire
Purchase and Leasing
Commitments
|
Assets
obtained under hire purchase contracts are capitalised in the balance sheet
and
are depreciated over their useful estimated lives.
The
interest element of these obligations are charged to the statement of income
and
retained earnings over the lease term. The capital element of the future
payments is treated as liability.
Rentals
paid under operating leases are charged to the statement of income and retained
earnings on a straight line basis.
The
company operates a defined contribution pension scheme. Contributions payable
for the year are charged in the statement of income and retained
earnings.
i. |
Cash
and cash equivalents
|
Cash
and
cash equivalents consist of cash at bank and in hand.
j.
|
Foreign
currency transactions
|
Accounting
principles generally require that recognised revenue, expenses, gains and losses
be included in net income. Certain statements however require entities to report
specific changes in assets and liabilities, such as a gain or loss on a foreign
currency translation, as a separate component of the equity section of the
balance sheet. Such items, along with net income, are components of
comprehensive income. Cumulative translation adjustments were insignificant
in
both the year and preceding year.
2. SECURED
CREDITORS
The
amounts owed under hire purchase contracts totaling £111,833 (2003 - £61,698)
are secured on the assets acquired.
NOTES
TO FINANCIAL STATEMENTS - Continued
3. CORPORATION
TAX
Provision
is made for United Kingdom corporation tax payable on the group’s taxable net
income. This is provided for at the rate of tax prevailing at that time. The
current standard corporation tax rate in the United Kingdom is 30%. Deferred
tax
is provided using the standard rate.
The
UK
corporation and deferred tax charge is stated below:-
|
|
9
months to Dec 31 2004
£
|
|
9
months to Dec 31 2003
£
|
|
Corporation
tax
|
|
|
10,080
|
|
|
82,833
|
|
|
|
|
10,080
|
|
|
82,833
|
|
4. COMMITMENTS
The
group
is committed to making operating lease payments of £82,500 in the forthcoming
year.
NOTES
TO FINANCIAL STATEMENTS - Continued
5. SHAREHOLDERS
EQUITY
|
|
Dec
31
2004
£
|
|
March
31
2004
£
|
|
Net
income for year |
|
|
42,973 |
|
|
381,047 |
|
Dividends
|
|
|
(138,749
|
)
|
|
(105,714
|
)
|
|
|
|
|
|
|
|
|
Net
profit (loss) to shareholders
equity |
|
|
(95,776 |
) |
|
275,333 |
|
Opening
Shareholders equity
|
|
|
400,686
|
|
|
227,997
|
|
|
|
|
|
|
|
|
|
Closing
Shareholders equity
|
|
|
304,910
|
|
|
503,330
|
|
REPORT
OF THE DIRECTORS
FOR
THE YEAR ENDED 31 MARCH 2004
The
directors present their report with the financial statements of the group for
the year ended 31 March 2004.
PRINCIPAL
ACTIVITY
The
principal activity of the group in the year under review was that of the
provision of computer software and services.
DIRECTORS
The
directors during the year under review were:
P
J
Grace
G
E
Tarrant
I
M
Tarrant
A
Elliott
J
Halliday
J
Manktelow
C
S
Taylor - appointed 05/02/04
The
beneficial interests of the directors holding office on 31 March 2004
in the issued share capital of the company were as follows:
|
|
31.03.04
|
|
01.04.03
or
date of appointment
if
later
|
|
Ordinary
£0.20 shares
|
|
|
|
|
|
P
J
Grace
|
|
|
75,000
|
|
|
75,000
|
|
G
E
Tarrant
|
|
|
150,000
|
|
|
150,000
|
|
I
M
Tarrant
|
|
|
150,000
|
|
|
150,000
|
|
A
Elliott
|
|
|
55,983
|
|
|
55,983
|
|
J
Halliday
|
|
|
38,034
|
|
|
38,034
|
|
J
Manktelow
|
|
|
30,983
|
|
|
30,983
|
|
C
S
Taylor
|
|
|
-
|
|
|
-
|
|
The
directors’ interests above include shares held by connected
persons.
STATEMENT
OF DIRECTORS' RESPONSIBILITIES
Company
law requires the directors to prepare financial statements for each financial
year which give a true and fair view of the state of affairs of the company
and
of the profit or loss of the company for that period. In preparing those
financial statements, the directors are required to
-
|
select
suitable accounting policies and then apply them consistently;
|
|
|
-
|
make
judgements and estimates that are reasonable and prudent;
|
|
|
-
|
prepare
the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
|
The
directors are responsible for keeping proper accounting records which disclose
with reasonable accuracy at any time the financial position of the company.
They
are also responsible for safeguarding the assets of the company and hence for
taking reasonable steps for the prevention and detection of fraud and other
irregularities.
ON
BEHALF OF THE BOARD:
Secretary:
P. Tarrant
Date:
24th
January
2005
INDEPENDENT
AUDITOR’S REPORT
Board
of
Directors
CQ
Systems Limited
Horsham,
United Kingdom
We
have
audited the consolidated balance sheets of CQ Systems Limited, a United Kingdom
corporation, as of March 31, 2004 and 2003, and the related statements of
operations, and cash flows for the years ended March 31, 2004 and 2003. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audit of these statements in accordance with auditing
standards generally accepted in the United Kingdom.
Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, based on our audits, the financial statements referred to above present
fairly, in all material respects, the financial position of CQ Systems Limited
as of March 31, 2004 and 2003, and the results of its consolidated operations
and its cash flows for the years ended March 31, 2004 and 2003 in conformity
with accounting principles generally accepted in the United States of America.
The details
were extracted from the financial statements prepared under United Kingdom
GAAP.
The financial statements prepared under United Kingdom GAAP were audited by
ourselves with an unqualified Audit Report issued.
/s/
CMB
Partnership
CMB
Partnership
Surrey,
United Kingdom
24
January 2005
CQ
SYSTEMS, LTD.
CONSOLIDATED
BALANCE SHEET - ASSETS
|
|
|
|
March
31
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
Note
|
|
£
|
|
£
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
809,488
|
|
|
448,136
|
|
Accounts
receivable (net of £5,000 bad debt provision)
|
|
|
|
|
|
400,280
|
|
|
435,806
|
|
Prepaid
expenses and other receivables
|
|
|
|
|
|
60,501
|
|
|
47,216
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
|
|
|
1,270,269
|
|
|
931,158
|
|
|
|
|
|
|
|
|
|
|
|
|
AUTOMOBILES
& EQUIPMENT
|
|
|
2
|
|
|
|
|
|
|
|
Automobiles
|
|
|
|
|
|
64,725
|
|
|
39,732
|
|
Furniture
and equipment
|
|
|
|
|
|
172,841
|
|
|
155,093
|
|
Computer
equipment
|
|
|
|
|
|
580,772
|
|
|
546,646
|
|
|
|
|
|
|
|
818,338
|
|
|
741,471
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
676,768
|
|
|
616,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,570
|
|
|
125,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411,839
|
|
|
1,056,209
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
March
31
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
£
|
|
£
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
|
|
|
16,682
|
|
|
21,365
|
|
Hire
purchase liabilities
|
|
|
|
|
|
23,428
|
|
|
32,153
|
|
Payroll,
Vat and corporation taxes payable
|
|
|
|
|
|
283,017
|
|
|
135,117
|
|
Dividends
payable
|
|
|
|
|
|
53,062
|
|
|
30,000
|
|
Accrued
liabilities
|
|
|
|
|
|
75,197
|
|
|
92,911
|
|
Deferred
income
|
|
|
|
|
|
418,581
|
|
|
410,193
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
|
|
|
869,967
|
|
|
721,739
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES AND PROVISIONS
|
|
|
|
|
|
|
|
|
|
|
Hire
purchase liabilities
|
|
|
|
|
|
38,270
|
|
|
5,275
|
|
Deferred
tax
|
|
|
|
|
|
2,916
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
|
911,153
|
|
|
728,212
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
7
|
|
|
|
|
|
|
|
Ordinary
Shares
|
|
|
|
|
|
|
|
|
|
|
1,000,000
shares authorised £0.20 par value
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding 500,000 shares
|
|
|
|
|
|
100,000
|
|
|
100,000
|
|
Retained
earnings
|
|
|
|
|
|
400,686
|
|
|
227,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411,839
|
|
|
1,056,209
|
|
Approved
and signed on behalf of the board of directors on
See
notes
to financial statements.
CQ
SYSTEMS, LTD.
CONSOLIDATED STATEMENTS
OF INCOME AND RETAINED EARNINGS
|
|
|
|
Year
ended
|
|
Year
ended
|
|
|
|
|
|
March
31
|
|
March
31
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
Note
|
|
£
|
|
£
|
|
|
|
|
|
|
|
|
|
NET
REVENUE
|
|
|
1.b
|
|
|
2,739,303
|
|
|
2,471,477
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
|
|
|
1,082,577
|
|
|
1,069,974
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
|
|
|
1,656,726
|
|
|
1,401,503
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
1.e
|
|
|
1,119,171
|
|
|
1,302,176
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
|
|
|
537,555
|
|
|
99,327
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
19,483
|
|
|
10,257
|
|
Interest
payable
|
|
|
|
|
|
(5,238
|
)
|
|
(3,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE CORPORATION
|
|
|
|
|
|
551,800
|
|
|
106,054
|
|
AND
DEFERRED TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK
CORPORATION AND DEFERRED TAXES
|
|
|
3
|
|
|
(141,049
|
)
|
|
(29,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
410,751
|
|
|
76,978
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
|
|
|
227,997
|
|
|
181,019
|
|
Less:
Dividends
|
|
|
|
|
|
(238,062
|
)
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
|
|
|
|
400,686
|
|
|
227,997
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
Year
ended
March
31
2004
£
|
|
Year
ended
March
31
2003
£
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
410,751
|
|
|
76,978
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
410,751
|
|
|
76,978
|
|
See
notes
to financial statements.
CQ
SYSTEMS, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
ended
|
|
Year
ended
|
|
|
|
March
31
|
|
March
31
|
|
|
|
2004
|
|
2003
|
|
|
|
£
|
|
£
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Cash
received from customers
|
|
|
2,761,544
|
|
|
2,343,179
|
|
Cash
paid to suppliers and employees
|
|
|
(2,074,453
|
)
|
|
(2,235,165
|
)
|
Interest
received
|
|
|
19,483
|
|
|
10,257
|
|
Interest
paid
|
|
|
(5,238
|
)
|
|
(3,530
|
)
|
Corporation
tax paid
|
|
|
(27,878
|
)
|
|
(8,782
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
673,458
|
|
|
105,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (purchases) of equipment
|
|
|
(97,106
|
)
|
|
(27,462
|
)
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
|
(97,106
|
)
|
|
(27,462
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid
|
|
|
(215,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash used by financing activities
|
|
|
(215,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
361,352
|
|
|
78,497
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of year
|
|
|
448,136
|
|
|
369,639
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
|
809,488
|
|
|
448,136
|
|
See
notes
to financial statements.
CQ
SYSTEMS, LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS - Continued
|
|
Year
ended
|
|
Year
ended
|
|
|
|
March
31
|
|
March
31
|
|
|
|
2004
|
|
2003
|
|
|
|
£
|
|
£
|
|
|
|
|
|
|
|
RECONCILIATION
OF NET INCOME TO CASH
|
|
|
|
|
|
PROVIDED
BY OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
410,751
|
|
|
76,978
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
80,587
|
|
|
111,390
|
|
Decrease/(increase)
in accounts receivable and other debtors
|
|
|
22,241
|
|
|
(128,297
|
)
|
Increase
in accounts payable and other creditors
|
|
|
46,708
|
|
|
25,594
|
|
Increase
in corporation taxes payable
|
|
|
111,453
|
|
|
19,096
|
|
Increase
in deferred taxes
|
|
|
1,718
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
262,707
|
|
|
28,981
|
|
|
|
|
|
|
|
|
|
|
|
|
673,458
|
|
|
105,959
|
|
See
notes
to financial statements.
NOTES
TO FINANCIAL STATEMENTS
2.
|
Summary
of significant accounting
policies
|
The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP) and are stated in United Kingdom sterling.
In
preparing the consolidated financial statements, management is required 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 consolidated balance sheet and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
b.
Principles
of consolidation
The
consolidated financial statements include the financial statements of the
company and its subsidiary. The group’s subsidiary is Custom Quest Limited, a
dormant company that has not traded since 31 May 2001 in which the group has
a
100% direct holding in the voting rights. The net assets of the subsidiary
company since cessation of trade is £nil.
b. Revenue
The
group
recognises its revenue in accordance with the Securities and Exchange
Commissions (“SEC”) Staff Accounting Bulletin No 104 “Revenue recognition in
Financial Statements”.
Licence
revenue is recognised where orders have been signed and the product is
delivered. In contracts with multiple elements revenues are allocated to each
element based on the fair value on completion, delivery and acceptance by the
customer. For other services related activity, revenue is recognised on a time
and material basis.
c.
Automobiles
and equipment
Depreciation
is provided at the following rates in order to write off each asset over its
useful life;
Computer
software
|
|
|
50%
straight line
|
|
Office
furniture and fittings
|
|
|
15%
straight line
|
|
Computer
equipment
|
|
|
33.33%
straight line
|
|
Automobiles
|
|
|
25%
straight line
|
|
The
group
evaluates tangible fixed assets for impairment losses at least annually and
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable or is greater than its fair value.
Long-lived
assets
Effective
January 1 2002, the group adopted Statement of Financial Accounting Standards
No
144 “Accounting for the impairment or disposal of long-lived assets” (“SFAS
144”) which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The group has evaluated the carrying value of
long-lived assets held in accordance with SFAS 144. SFAS 144 requires impairment
losses to be recorded on long-lived assets when indicators of impairment are
present where the carrying amount exceeds the fair value of the asset. Based
on
its review, the group believes that as of March 31 2004 and 2003, there were
no
significant impairments of its long-lived assets.
NOTES
TO FINANCIAL STATEMENTS - Continued
d.
Deferred
Tax
Deferred
tax is recognised in respect of all timing differences that have originated
but
not reversed at the balance sheet date. These reflect the expected future tax
consequences of temporary differences between the carrying amounts of assets
and
liabilities at the balance sheet date and their respective tax
bases.
f.
Research
and Development
Expenditure
on research and development is written off in the year in which it is incurred.
Development costs on computer software that is to be sold relates to bespoke
work undertaken for particular customers as and when requested. Under these
circumstances, these costs are written off as incurred rather than capitalised
and amortised, as they relate solely to the individual customers specifications
rather than being available for general release to customers.
f.
Advertising
The
company expenses advertising costs as they are incurred.
k.
Hire
Purchase and Leasing Commitments
Assets
obtained under hire purchase contracts are capitalised in the balance sheet
and
are depreciated over their useful estimated lives.
The
interest element of these obligations are charged to the statement of income
and
retained earnings over the lease term. The capital element of the future
payments is treated as liability.
Rentals
paid under operating leases are charged to the statement of income and retained
earnings on a straight line basis.
The
company operates a defined contribution pension scheme. Contributions payable
for the year are charged in the statement of income and retained
earnings.
m.
Cash
and cash equivalents
Cash
and
cash equivalents consist of cash at bank and in hand.
n.
Foreign
currency transactions
Accounting
principles generally require that recognised revenue, expenses, gains and losses
be included in net income. Certain statements however require entities to report
specific changes in assets and liabilities, such as a gain or loss on a foreign
currency translation, as a separate component of the equity section of the
balance sheet. Such items, along with net income, are components of
comprehensive income. Cumulative translation adjustments were insignificant
in
both the year and preceding year.
2. SECURED
CREDITORS
The
amounts owed under hire purchase contracts totalling £61,698 (2003 - £37,428)
are secured on the assets acquired.
NOTES
TO FINANCIAL STATEMENTS - Continued
3. CORPORATION
AND DEFERRED TAXES
Provision
is made for United Kingdom corporation tax payable on the group’s taxable net
income. This is provided for at the rate of tax prevailing at that time. The
current standard corporation tax rate in the United Kingdom is 30%. Deferred
tax
is provided using the standard rate.
The
UK
corporation and deferred tax charge is stated below:-
|
|
Year
Ended March 31 2004
|
|
Year
Ended March 31 2003
|
|
|
|
£
|
|
£
|
|
|
|
|
|
|
|
Corporation
tax
|
|
|
139,331
|
|
|
27,878
|
|
Deferred
tax
|
|
|
1,718
|
|
|
1,198
|
|
|
|
|
141,049
|
|
|
29,076
|
|
The
corporation tax assessed for the year is set out below:-
|
|
Year
Ended March 31 2004
|
|
Year
Ended March 31 2003
|
|
|
|
£
|
|
£
|
|
|
|
|
|
|
|
Net
Income
|
|
|
551,800
|
|
|
106,064
|
|
|
|
|
|
|
|
|
|
Net
income multiplied by standard rate of corporation tax of 30% (2003:
small
companies corporation tax rate of 19%)
|
|
|
165,540
|
|
|
20,150
|
|
|
|
|
|
|
|
|
|
Effects
of:-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
of capital allowances over depreciation
|
|
|
(1,099
|
)
|
|
6,950
|
|
Expenses
not allowable for tax
|
|
|
977
|
|
|
778
|
|
Marginal
relief
|
|
|
(26,087
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
139,331
|
|
|
27,878
|
|
4. COMMITMENTS
The
group
is committed to making operating lease payments of £82,500 in the forthcoming
year.
NOTES
TO FINANCIAL STATEMENTS - Continued
5. MAJOR
CUSTOMERS
Revenue
from customers accounting for more than 10% of the total net revenue for the
year are as follows:
Singer
& Friedlander Insurance Finance Limited
|
|
|
£689,375
|
|
Cattles
Commercial Leasing Limited and Cattles Commercial Finance
Limited
|
|
|
£544,459
|
|
6. DIVIDENDS
The
shareholders of the company in their meeting dated 23 September 2003 approved
a
dividend of £185,000. A further dividend of £53,062 was approved at a meeting
held on 26 February 2004.
7. SHAREHOLDERS
EQUITY
|
|
March
31 2004
|
|
March
31 2003
|
|
|
|
£
|
|
£
|
|
|
|
|
|
|
|
Net
income for year
|
|
|
410,751
|
|
|
76,978
|
|
Dividends
|
|
|
(238,062
|
)
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
Net
addition to shareholders equity
|
|
|
172,689
|
|
|
46,978
|
|
|
|
|
|
|
|
|
|
Opening
Shareholders equity
|
|
|
327,997
|
|
|
281,019
|
|
|
|
|
|
|
|
|
|
Closing
Shareholders equity
|
|
|
500,686
|
|
|
327,997
|
|
COMPANY
BALANCE SHEET - ASSETS
|
|
|
|
March
31
|
|
|
|
|
|
2004
|
|
2003
|
|
|
|
Note
|
|
£
|
|
£
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
809,488
|
|
|
448,136
|
|
Accounts
receivable (net of £5,000 bad debt provision)
|
|
|
|
|
|
400,280
|
|
|
435,806
|
|
Prepaid
expenses and other debtors
|
|
|
|
|
|
60,501
|
|
|
47,216
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
|
|
|
1,270,269
|
|
|
931,158
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUIPMENT
|
|
|
2
|
|
|
|
|
|
|
|
Automobiles
|
|
|
|
|
|
64,725
|
|
|
39,732
|
|
Furniture
and equipment
|
|
|
|
|
|
172,841
|
|
|
155,093
|
|
Computer
equipment
|
|
|
|
|
|
580,772
|
|
|
546,646
|
|
|
|
|
|
|
|
818,338
|
|
|
741,471
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
|
676,768
|
|
|
616,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,570
|
|
|
125,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411,839
|
|
|
1,056,209
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
March
31
|
|
|
|
2004
|
|
2003
|
|
|
|
£
|
|
£
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts
payable
|
|
|
16,682
|
|
|
21,365
|
|
Hire
purchase liabilities
|
|
|
23,428
|
|
|
32,153
|
|
Payroll,
Vat and corporation taxes payable
|
|
|
283,017
|
|
|
135,117
|
|
Dividends
payable
|
|
|
53,062
|
|
|
30,000
|
|
Accrued
liabilities
|
|
|
75,197
|
|
|
92,911
|
|
Deferred
income
|
|
|
418,581
|
|
|
410,193
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
869,967
|
|
|
721,739
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES AND PROVISIONS
|
|
|
|
|
|
|
|
Hire
purchase liabilities
|
|
|
38,270
|
|
|
5,275
|
|
Deferred
tax
|
|
|
2,916
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
911,153
|
|
|
728,212
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Ordinary
Shares
|
|
|
|
|
|
|
|
1,000,000
shares authorised £0.20 par value
|
|
|
|
|
|
|
|
Issued
500,000 shares
|
|
|
100,000
|
|
|
100,000
|
|
Retained
earnings
|
|
|
400,686
|
|
|
227,997
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411,839
|
|
|
1,056,209
|
|
Approved
and signed on behalf of the board of directors on
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
PRO-FORMA
FINANCIAL STATEMENTS
DECEMBER
31, 2004
(UNAUDITED)
The
following unaudited Pro-Forma Statement of Financial Conditions and Statement
of
Operations have been derived from the unaudited consolidated financial
statements of NetSol Technologies, Inc. (“NetSol”) for the six months ending
December, 2004 and the unaudited financial statements of CQ Systems Limited
(a
UK corporation) (“CQ Systems”) for the nine months ending December 31, 2004. The
unaudited Pro Forma Statement of Financial Conditions and Statement of
Operations reflect the 100% acquisition of CQ Systems by NetSol under a stock
purchase agreement. The Company has accounted for the acquisition under the
purchase method of accounting for business combinations. The pro-forma Statement
of Financial Conditions assumes the acquisition was consummated as of December
31, 2004, and the pro-forma Statements of Operations assumes the acquisition
was
consummated as of July 1, 2003, the beginning of NetSol Technologies fiscal
year.
The
purchase price is £3,576,335 or $6,730,382 of which one-half is due in cash and
shares of NetSol’s common stock at closing. The other half is due after the
audited March 31, 2006 financial statements have been prepared. The initial
purchase price is based on the March 31, 2005 audited financial statements
of CQ
Systems. The final purchase price will be adjusted either up or down when the
audited March 31, 2006 financial statements are completed.
The
Pro-Forma Statement of Financial Conditions and Statement of Operations should
be read in conjunction with the Consolidated Financial Statements of NetSol,
related Notes to the financial statements, and the Financial Statements of
CQ
Systems. The Pro-Forma statements do not purport to represent what the Company’s
financial condition and results of operations would actually have been if the
acquisition of CQ Systems had occurred on the date indicated or to project
the
Company’s results of operations for any future period or date. The Pro-Forma
adjustments, as described in the accompanying data, are based on available
information and the assumptions set forth in the notes below, which management
believes are reasonable.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF FINANCIAL CONDITIONS
FOR
THE PERIOD ENDED DECEMBER 31, 2004
(UNAUDITED)
|
|
NetSol
|
|
CQ
Systems
|
|
|
|
|
|
|
|
|
|
as
of 12/31/04
|
|
as
of 12/31/04
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Historical)
|
|
(Historical)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
5,554,445
|
|
$
|
2,013,642
|
|
$
|
(700,000
|
)
|
|
(1)
|
|
$
|
6,868,087
|
|
Property
& equipment, net
|
|
|
4,276,307
|
|
|
339,527
|
|
|
-
|
|
|
|
|
|
4,615,834
|
|
Intangible
assets, net
|
|
|
4,003,152
|
|
|
-
|
|
|
3,507,687
|
|
|
(1)
|
|
|
7,510,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
13,833,904
|
|
$
|
2,353,169
|
|
$
|
2,807,687
|
|
|
|
|
$
|
18,994,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
2,527,728
|
|
$
|
1,467,228
|
|
$
|
-
|
|
|
|
|
$
|
3,994,957
|
|
Obligations
under capitalized leases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less
current maturities
|
|
|
56,910
|
|
|
124,803
|
|
|
-
|
|
|
|
|
|
181,713
|
|
Deferred
tax
|
|
|
-
|
|
|
5,442
|
|
|
-
|
|
|
|
|
|
5,442
|
|
Notes
payable
|
|
|
-
|
|
|
-
|
|
|
1,886,588
|
|
|
(1)
|
|
|
1,886,587
|
|
Convertible
debenture
|
|
|
112,500
|
|
|
-
|
|
|
-
|
|
|
|
|
|
112,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,697,138
|
|
|
1,597,473
|
|
|
1,886,588
|
|
|
|
|
|
6,181,199
|
|
Minority
Interest
|
|
|
99,752
|
|
|
-
|
|
|
-
|
|
|
|
|
|
99,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
12,254
|
|
|
159,210
|
|
|
(158,528
|
)
|
|
(1)
|
|
|
12,936
|
|
Additional
paid in capital
|
|
|
43,119,861
|
|
|
-
|
|
|
1,676,113
|
|
|
(1)
|
|
|
44,795,974
|
|
Common
stock to be issued
|
|
|
254,800
|
|
|
-
|
|
|
-
|
|
|
|
|
|
254,800
|
|
Stock
subscription receivable
|
|
|
(1,375,642
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(1,375,642
|
)
|
Treasury
stock
|
|
|
(27,197
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(27,197
|
)
|
Other
comprehensive income (loss)
|
|
|
(323,619
|
)
|
|
43,149
|
|
|
(43,149
|
)
|
|
(1)
|
|
|
(323,619
|
)
|
Accumulated
earnings (deficit)
|
|
|
(30,623,443
|
)
|
|
553,337
|
|
|
(553,337
|
)
|
|
(1)
|
|
|
(30,623,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
11,037,014
|
|
|
755,696
|
|
|
921,099
|
|
|
|
|
|
12,713,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
13,833,904
|
|
$
|
2,353,169
|
|
$
|
2,807,687
|
|
|
|
|
$
|
18,994,760
|
|
NOTES:
(1)
Elimination of Common stock and accumulated earnings of CQ Systems before
the
acquisition and to record the
purchase of CQ Systems by NetSol.
The
initial purchase price is $6,730,382, of which one-half is due at closing
in
cash and stock and the remaining half
to
be paid after the audited March 31, 2006 financials have been prepared.
The
initial purchase price and 1st installment allocation is as follows:
Purchase
Price allocation:
|
|
|
|
Initial
|
|
1st
Installment
|
|
Common
Stock, 681,965 shares
|
|
|
|
|
$
|
682
|
|
$
|
682
|
|
Additional
paid in capital
|
|
|
|
|
|
1,676,113
|
|
|
1,676,113
|
|
Cash
|
|
|
|
|
|
700,000
|
|
|
700,000
|
|
Cash,
provided by short-term notes
|
|
|
|
|
|
1,000,000
|
|
|
1,000,000
|
|
Additional
consideration payable
|
|
|
|
|
|
3,353,587
|
|
|
886,588
|
|
Total
purchase price
|
|
|
|
|
$
|
6,730,382
|
|
$
|
4,263,383
|
|
|
|
|
|
|
|
|
|
|
|
|
CQ
equity (net assets and liabilities)
|
|
|
|
|
$
|
755,696
|
|
$
|
755,696
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Customer
Lists
|
|
|
1,316,880
|
|
|
|
|
|
1,316,880
|
|
Licenses
|
|
|
2,190,807
|
|
|
|
|
|
2,190,807
|
|
Goodwill
|
|
|
2,466,999
|
|
|
|
|
|
|
|
|
|
|
5,974,686
|
|
|
5,974,686
|
|
|
3,507,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,730,382
|
|
$
|
4,263,383
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF OPERATIONS
FOR
THE PERIOD ENDED DECEMBER 31, 2004
(UNAUDITED)
|
|
NetSol
|
|
CQ
Systems
|
|
|
|
|
|
|
|
|
|
as
of 12/31/04
|
|
as
of 12/31/04
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Historical)
|
|
(Historical)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
4,781,532
|
|
$
|
2,485,266
|
|
$
|
-
|
|
|
|
|
$
|
7,266,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
1,580,620
|
|
|
1,550,006
|
|
|
-
|
|
|
|
|
|
3,130,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,200,912
|
|
|
935,260
|
|
|
-
|
|
|
|
|
|
4,136,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
2,757,165
|
|
|
833,863
|
|
|
350,769
|
|
|
(3)
|
|
|
3,941,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
443,747
|
|
|
101,397
|
|
|
(350,769
|
)
|
|
|
|
|
194,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(379,314
|
)
|
|
6,782
|
|
|
-
|
|
|
|
|
|
(372,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
64,433
|
|
|
108,179
|
|
|
(350,769
|
)
|
|
|
|
|
(178,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
14,259
|
|
|
-
|
|
|
-
|
|
|
|
|
|
14,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
78,692
|
|
|
108,179
|
|
|
(350,769
|
)
|
|
|
|
|
(163,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(173,409
|
)
|
|
(95,635
|
)
|
|
-
|
|
|
|
|
|
(269,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(94,717
|
)
|
$
|
12,544
|
|
$
|
(350,769
|
)
|
|
|
|
$
|
(432,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
-average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
10,755,918
|
|
|
100,000
|
|
|
|
|
|
|
|
|
10,855,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share
|
|
$
|
0.01
|
|
$
|
1.08
|
|
|
|
|
|
|
|
$
|
(0.02
|
)
|
(1) |
Loss
per share data shown above are applicable for
primary
|
(2)
|
Weighted-average
number of shares outstanding for the combined entity includes all
shares
issued for the
acquisition of 681,964 shares as if outstanding as of July 1,
2003.
|
(3) |
Amortization
of intangible assets acquired in acquisition
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
PRO-FORMA
FINANCIAL STATEMENTS
JUNE
30,
2004
(UNAUDITED)
The
following unaudited Pro-Forma Statement of Financial Conditions and Statement
of
Operations have been derived from the audited consolidated financial statements
of NetSol Technologies, Inc. (“NetSol”) as of June 30, 2004 and the audited
financial statements of CQ Systems Limited (a UK corporation) (“CQ Systems”) as
of March 31, 2004. The unaudited Pro Forma Statement of Financial Conditions
and
Statement of Operations reflect the 100% acquisition of CQ Systems by NetSol
under a stock purchase agreement. The Company has accounted for the acquisition
under the purchase method of accounting for business combinations. The pro-forma
Statement of Financial Conditions assumes the acquisition was consummated as
of
June 30, 2004, and the pro-forma Statements of Operations assumes the
acquisition was consummated as of July 1, 2003, the beginning of NetSol
Technologies fiscal year.
The
purchase price is £3,576,335 or $6,730,382 of which one-half is due in cash and
shares of NetSol’s common stock at closing. The other half is due after the
audited March 31, 2006 financial statements have been prepared. The initial
purchase price is based on the March 31, 2005 audited financial statements
of CQ
Systems. The final purchase price will be adjusted either up or down when the
audited March 31, 2006 financial statements are completed.
The
Pro-Forma Statement of Financial Conditions and Statement of Operations should
be read in conjunction with the Consolidated Financial Statements of NetSol,
related Notes to the financial statements, and the Financial Statements of
CQ
Systems. The Pro-Forma statements do not purport to represent what the Company’s
financial condition and results of operations would actually have been if the
acquisition of CQ Systems had occurred on the date indicated or to project
the
Company’s results of operations for any future period or date. The Pro-Forma
adjustments, as described in the accompanying data, are based on available
information and the assumptions set forth in the notes below, which management
believes are reasonable.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF FINANCIAL CONDITIONS
FOR
THE PERIOD ENDED JUNE 30, 2004
(UNAUDITED)
|
|
NetSol
|
|
CQ
Systems
|
|
|
|
|
|
|
|
|
|
as
of 6/30/04
|
|
as
of 3/31/04
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Historical)
|
|
(Historical)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
3,563,501
|
|
$
|
2,337,549
|
|
$
|
(700,000
|
)
|
|
(1)
|
|
$
|
5,201,050
|
|
Property
& equipment, net
|
|
|
4,203,580
|
|
|
260,517
|
|
|
-
|
|
|
|
|
|
4,464,097
|
|
Intangible
assets, net
|
|
|
4,218,040
|
|
|
-
|
|
|
3,507,687
|
|
|
(1)
|
|
|
7,725,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,985,121
|
|
$
|
2,598,066
|
|
$
|
2,807,687
|
|
|
|
|
$
|
17,390,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
3,573,948
|
|
$
|
1,600,914
|
|
$
|
-
|
|
|
|
|
$
|
5,174,862
|
|
Obligations
under capitalized leases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
less
current maturities
|
|
|
27,604
|
|
|
70,424
|
|
|
-
|
|
|
|
|
|
98,028
|
|
Deferred
tax
|
|
|
-
|
|
|
5,366
|
|
|
-
|
|
|
|
|
|
5,366
|
|
Notes
payable
|
|
|
89,656
|
|
|
-
|
|
|
2,052,254
|
|
|
(1)
|
|
|
2,141,909
|
|
Convertible
debenture
|
|
|
937,500
|
|
|
-
|
|
|
-
|
|
|
|
|
|
937,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
4,628,708
|
|
|
1,676,704
|
|
|
2,052,254
|
|
|
|
|
|
8,357,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
9,483
|
|
|
159,210
|
|
|
(158,528
|
)
|
|
(1)
|
|
|
10,165
|
|
Additional
paid in capital
|
|
|
38,933,621
|
|
|
-
|
|
|
1,676,113
|
|
|
(1)
|
|
|
40,609,734
|
|
Stock
subscription receivable
|
|
|
(497,559
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(497,559
|
)
|
Treasury
stock
|
|
|
(21,457
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(21,457
|
)
|
Other
comprehensive income (loss)
|
|
|
(150,210
|
)
|
|
138,784
|
|
|
(138,784
|
)
|
|
(1)
|
|
|
(150,210
|
)
|
Accumulated
earnings (deficit)
|
|
|
(30,917,465
|
)
|
|
623,368
|
|
|
(623,368
|
)
|
|
(1)
|
|
|
(30,917,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
7,356,413
|
|
|
921,362
|
|
|
755,433
|
|
|
|
|
|
9,033,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
11,985,121
|
|
$
|
2,598,066
|
|
$
|
2,807,687
|
|
|
|
|
$
|
17,390,873
|
|
(1)
Elimination of Common stock and accumulated earnings of CQ Systems before
the
acquisition and to record the
purchase of CQ Systems by NetSol.
The
initial purchase price is $6,730,382, of which one-half is due at closing
in
cash and stock and the remaining half
to
be paid after the audited March 31, 2006 financials have been prepared.
The
initial purchase price and 1st installment allocation is as follows:
Purchase
Price allocation:
|
|
|
|
Initial
|
|
1st
Installment
|
|
Common
Stock, 681,965 shares
|
|
|
|
|
$
|
682
|
|
$
|
682
|
|
Additional
paid in capital
|
|
|
|
|
|
1,676,113
|
|
|
1,676,113
|
|
Cash
|
|
|
|
|
|
700,000
|
|
|
700,000
|
|
Cash,
provided by short-term notes
|
|
|
|
|
|
1,000,000
|
|
|
1,000,000
|
|
Additional
consideration payable
|
|
|
|
|
|
3,353,587
|
|
|
1,052,254
|
|
Total
purchase price
|
|
|
|
|
$
|
6,730,382
|
|
$
|
4,429,049
|
|
|
|
|
|
|
|
|
|
|
|
|
CQ
equity (net assets and liabilities)
|
|
|
|
|
$
|
921,362
|
|
$
|
921,362
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Customer
Lists
|
|
|
1,316,880
|
|
|
|
|
|
1,316,880
|
|
Licenses
|
|
|
2,190,807
|
|
|
|
|
|
2,190,807
|
|
Goodwill
|
|
|
2,301,333
|
|
|
|
|
|
|
|
|
|
|
5,809,020
|
|
|
5,809,020
|
|
|
3,507,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,730,382
|
|
$
|
4,429,049
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
PRO-FORMA STATEMENT OF OPERATIONS
FOR
THE YEAR ENDED JUNE 30, 2004
(UNAUDITED)
|
|
NetSol
|
|
CQ
Systems
|
|
|
|
|
|
|
|
|
|
as
of 6/30/04
|
|
as
of 3/31/04
|
|
Pro
Forma
|
|
|
|
Pro
Forma
|
|
|
|
(Historical)
|
|
(Historical)
|
|
Adjustment
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
5,749,062
|
|
$
|
4,640,653
|
|
$
|
-
|
|
|
|
|
$
|
10,389,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
2,656,377
|
|
|
1,833,994
|
|
|
-
|
|
|
|
|
|
4,490,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,092,685
|
|
|
2,806,659
|
|
|
-
|
|
|
|
|
|
5,899,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
6,028,055
|
|
|
1,895,988
|
|
|
701,537
|
|
|
(3)
|
|
|
8,625,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(2,935,370
|
)
|
|
910,671
|
|
|
(701,537
|
)
|
|
|
|
|
(2,726,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(307,764
|
)
|
|
(214,819
|
)
|
|
-
|
|
|
|
|
|
(522,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(3,243,134
|
)
|
|
695,852
|
|
|
(701,537
|
)
|
|
|
|
|
(3,248,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
273,159
|
|
|
-
|
|
|
-
|
|
|
|
|
|
273,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(2,969,975
|
)
|
|
695,852
|
|
|
(701,537
|
)
|
|
|
|
|
(2,975,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(299,507
|
)
|
|
110,837
|
|
|
-
|
|
|
|
|
|
(188,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
(3,269,482
|
)
|
$
|
806,689
|
|
$
|
(701,537
|
)
|
|
|
|
$
|
(3,164,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
-average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
8,563,518
|
|
|
100,000
|
|
|
|
|
|
|
|
|
8,663,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share
|
|
$
|
(0.35
|
)
|
$
|
6.96
|
|
|
|
|
|
|
|
$
|
(0.34
|
)
|
(1) |
Loss
per share data shown above are applicable for both primary and
fully
diluted.
|
(2) |
Weighted-average
number of shares outstanding for the combined entity includes all
shares
issued for the
acquisition of 681,964 shares as if outstanding as of July 1,
2003.
|
(3) |
Amortization
of intangible assets acquired in acquisition
|
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned hereby appoints Naeem Ghauri, with full power of substitution,
as
his or her Proxy to represent and vote, as designated below, all of the shares
of the Common Stock of NetSol Technologies, Inc., registered in the name of
the
undersigned on September 15, 2006 with the powers the undersigned would possess
if personally present at the Special Meeting of Stockholders to be held at
the
offices of the Company located at 23901 Calabasas Road, Suite 2072, Calabasas,
CA 91302 at 10:000 A.M. local time on October ___, 2006 and at any adjournment
thereof, hereby revokes any proxy or proxies previously given.
1.
ISSUANCE OF SHARES OF COMMON STOCK UNDERLYING CONVERTIBLE NOTES, PREFERRED
STOCK, AS DIVIDEND PAYMENTS AND/OR REDEMPTION UNDER THE PREFERRED STOCK AND
UPON
EXERCISE OF WARRANTS IN THE FINANCING.
/
/
For / /
Against / /
Abstain
2.
AMENDMENT OF ARTICLES OF INCORPORATION
/
/
For / /
Against / /
Abstain
Discretionary
authority is hereby granted with respect to such other matters as may properly
come before the Special Meeting.
THIS
PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS
GIVEN, THE PROXY WILL BE VOTED "FOR" PROPOSALS #1 AND #2, AND IN THE PROXY'S
DISCRETION ON ANY OTHER MATTERS TO COME BEFORE THE MEETING.
Dated:__________________________
, 2006
______________________________________
(Signature)
______________________________________
(Second
signature)
|
PLEASE
DATE AND SIGN ABOVE exactly as your
name
appears on your Stock Certificate,
indicating
where appropriate, official
position
or representative
capacity.
|
ANNEX
A
CONVERTIBLE
NOTE AND WARRANT PURCHASE AGREEMENT
CONVERTIBLE
NOTE AND WARRANT PURCHASE AGREEMENT
by
and
among
Netsol
Technologies, Inc., as Issuer and Seller
and
the
Purchasers named herein, as Purchasers
with
respect to Seller’s
12%
Convertible Notes Due June 15, 2007
and
Warrants to Purchase Common Stock
June
15,
2006
Table
of Exhibits and Schedules
Exhibit
A
|
Form
of 12% Convertible Note Due June 15,
2007
|
Exhibit
B
|
Form
of Certificate of Designation of the Series A 7% Cumulative Convertible
Preferred Stock
|
Exhibit
C
|
Form
of Warrant
|
Exhibit
D
|
Form
of Investor Rights Agreement
|
Exhibit
E
|
Form
of Opinion of Seller’s Counsel
|
Exhibit
F
|
Form
of Escrow Agreement
|
Schedule
1
|
Purchasers
and Amount of Notes and Warrants
Purchased
|
Schedule
3.11
|
Absence
of Certain Changes
|
Schedule
3.15
|
Intellectual
Property
|
Schedule
3.17
|
Preemptive
Rights
|
Schedule
3.19
|
Subsidiaries
and Investments
|
Schedule
3.20
|
Capitalization
|
Schedule
3.21
|
Options,
Warrants, Rights
|
Schedule
3.22
|
Employees,
Employment Agreements and Employee Benefit
Plans
|
CONVERTIBLE
NOTE AND WARRANT PURCHASE AGREEMENT
This
CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT (“Agreement”) is dated as of
June 15, 2006, by and among NetSol Technologies, Inc., a Nevada corporation
(the
“Seller”), and each of the persons listed on Schedule
1
hereto
(each is individually referred to as a “Purchaser” and collectively, the
“Purchasers”).
W
I T N E
S S E T H:
WHEREAS,
each of the Purchasers is willing to purchase from the Seller, and the Seller
desires to sell to the Purchasers, up to an aggregate of $5,500,000 in principal
amount of the Seller’s 12% Convertible Notes Due June 15, 2007 (“Notes”), and
Common Stock Purchase Warrants (the “Warrants”) entitling the holders thereof to
purchase shares of the Seller’s common stock, $0.001 par value (the “Common
Stock”), for an aggregate purchase price of up to $5,500,000, as more fully set
forth herein; and
WHEREAS,
each of the Purchasers and the Seller desires to exchange the Notes for shares
of the Seller’s Series A 7% Cumulative Convertible Preferred Stock, $1,000
liquidation preference per share, par value $0.001 per share (the “Preferred
Stock”), in the event that the Seller obtains Shareholder Approval (as defined
herein);
NOW
THEREFORE, in consideration of the mutual promises and representations,
warranties, covenants and agreements set forth herein, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE
I
- PURCHASE AND SALE
1.1 Purchase
and Sale.
(a) Closing.
Subject
to the terms and conditions set forth in this Agreement, at the closing of
the
transactions contemplated under this Agreement (the “Closing”), each Purchaser
shall purchase, severally and not jointly, and the Seller shall issue and
sell,
to each Purchaser, such principal amount of Notes and such number of Warrants
set forth opposite such Purchaser’s name on Schedule
1
hereto.
The Closing shall occur as promptly as practicable, but no later than five
(5)
business days, following satisfaction or waiver of the conditions set forth
in
Sections 6.1 and 6.2, at the offices of Peter J. Weisman, P.C., 335 Madison
Avenue, Suite 1702, New York, NY 10017, or on such other date and at such
other
location as the Seller and Purchasers shall mutually agree.
(b) Purchase
Price.
The
purchase price (the “Purchase Price”) to be paid by each Purchaser to the Seller
to acquire the Notes and the applicable Warrants at Closing shall be equal
to
the total amount set forth on Schedule 1 hereto opposite such Purchaser’s name
as the Purchase Price for such Purchaser.
(c) Warrants.
The
total number of Warrants on Schedule 1 shall equal 50% of the Purchase Price
divided by the Conversion Value (as defined in the Certificate of Designation).
(d) Definitions.
The
shares of Common Stock issuable upon conversion of the Notes or Preferred
Stock
(including without limitation in payment upon purchase or redemption thereof)
or
upon payment of dividends on the Preferred Stock or interest on the Notes
are
referred to herein as the “Conversion Shares,” and the shares of Common Stock
issuable upon exercise of the Warrants are referred to herein as the “Warrant
Shares.” The date on which the Closing occurs is the “Closing
Date”.
1.2
Terms
of
the Notes, Preferred Stock and Warrants. The terms and provisions of the
Notes
are more fully set forth in the form of Note, attached hereto as Exhibit
A. The
terms and provisions of the Preferred Stock are set forth in the form of
Certificate of Designation of Series A 7% Cumulative Convertible Preferred
Stock, attached hereto as Exhibit B (the “Certificate of Designation”). The
terms and provisions of the Warrants are more fully set forth in the form
of
Common Stock Purchase Warrant, attached hereto as Exhibit C.
ARTICLE
II - TRANSFERS AND LEGENDS
2.1 Transfers.
Except
as required by federal securities laws and the securities law of any state
or
other jurisdiction within the United States, the Notes, the Preferred Stock,
Conversion Shares, Warrants and Warrant Shares (collectively, the “Securities”)
may be transferred, in whole or in part, by any of the Purchasers at any
time.
In the case of Notes or Preferred Stock, such transfer may be effected by
delivering written transfer instructions to the Seller, and the Seller shall
reflect such transfer on its books and records and reissue Notes or certificates
evidencing the Preferred Stock, as the case may be, upon surrender of such
Notes
or certificates evidencing the Preferred Stock being transferred. Any such
transfer shall be made by a Purchaser in accordance with applicable law.
In
connection with any transfer of Securities other than pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
“Securities Act”), or to the Seller, the Seller may require the transferor
thereof to furnish to the Seller an opinion of counsel selected by the
transferor, such counsel and the form and substance of which opinion shall
be
reasonably satisfactory to the Seller and Seller’s counsel, to the effect that
such transfer does not require registration under the Securities Act; provided,
that in the case of a transfer of Conversion Shares and/or Warrant Shares
pursuant to Rule 144 under the Securities Act, no opinion shall be required
if
the transferor provides the Seller with a customary seller’s representation
letter, and if such sale is not pursuant to subsection (k) of Rule 144, a
customary broker’s representation letter and Form 144.
Notwithstanding the foregoing, the Seller hereby consents to and agrees to
register on the books of the Seller and with any transfer agent for the
securities of the Seller, without any such legal opinion, any transfer of
Securities by a Purchaser to an Affiliate of such Purchaser, provided that
the
transferee certifies to the Seller that it is an “accredited investor” as
defined in Rule 501(a) under the Securities Act and that it is acquiring
the
Securities solely for investment purposes (subject to the qualifications
hereof)
and not with a view to, or for, resale, distribution or fractionalization
thereof in whole or in part in violation of the Securities Act. The Seller
shall
reissue certificates evidencing the Securities upon surrender of certificates
evidencing the Securities being transferred in accordance with this Section
2.1.
An “Affiliate” means any Person (as such term is defined below) that, directly
or indirectly through one or more intermediaries, controls or is controlled
by
or is under common control with a Person, as such terms are used in and
construed under Rule 144 under the Securities Act. With respect to a Purchaser,
any investment fund or managed account that is managed on a discretionary
basis
by the same investment manager as such Purchaser will be deemed to be an
Affiliate of such Purchaser. A “Person” means any individual or corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency
or
subdivision of any thereof) or other entity of any kind.
2.2 Legends.
The
certificates representing the Securities, unless such Securities are registered
under the Securities Act or eligible for resale without registration pursuant
to
Rule 144(k) under the Securities Act, shall bear the following
legends:
“THE
SHARES REPRESENTED BY, OR ACQUIRABLE UPON CONVERSION OR EXERCISE OF SECURITIES
EVIDENCED BY, THIS [NOTE] [CERTIFICATE] HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED OR SOLD IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT UNLESS, IN
THE
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, SUCH REGISTRATION
IS
NOT REQUIRED.”
“THE
SALE, TRANSFER OR ASSIGNMENT OF THE SECURITIES REPRESENTED BY THIS [NOTE]
[CERTIFICATE] IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTOR
RIGHTS AGREEMENT DATED AS OF JUNE 15, 2006, AS AMENDED FROM TIME TO TIME,
AMONG
THE COMPANY AND CERTAIN HOLDERS OF ITS OUTSTANDING SECURITIES. COPIES OF
SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER
OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.”
ARTICLE
III - REPRESENTATIONS AND WARRANTIES OF THE SELLER
The
Seller represents and warrants to the Purchasers as follows:
3.1 Corporate
Existence and Power; Subsidiaries.
The
Seller and its Subsidiaries are corporations duly incorporated, validly existing
and in good standing under the laws of the state in which they are incorporated,
and have all corporate powers required to carry on their business as now
conducted. The Seller and its Subsidiaries are duly qualified to do business
as
a foreign corporation and are in good standing in each jurisdiction where
the
character of the property owned or leased by them or the nature of their
activities makes such qualification necessary, except for those jurisdictions
where the failure to be so qualified would not have a Material Adverse Effect
on
the Seller or any of its Subsidiaries. For purposes of this Agreement, the
term
“Material Adverse Effect” means, with respect to any person or entity, a
material adverse effect on its and its Subsidiaries’ condition (financial or
otherwise), business, properties, assets, liabilities (including contingent
liabilities), results of operations or current prospects, taken as a whole,
on
the transactions contemplated hereby or by the agreements and instruments
to be
entered into in connection herewith or therewith, or on the authority or
ability
of the Seller to perform its obligations hereunder or under the Related
Documents. True and complete copies of the Seller’s Articles of Incorporation,
as amended, and Bylaws, as amended, as currently in effect and as will be
in
effect on the Closing Date (collectively, the “Articles and Bylaws”), have
previously been provided to the Purchasers. For purposes of this Agreement,
the
term “Subsidiary” or “Subsidiaries” means, with respect to any entity, any
corporation or other organization of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other persons performing similar functions are directly or
indirectly owned by such entity or of which such entity is a partner or is,
directly or indirectly, the beneficial owner of 50% or more of any class
of
equity securities or equivalent profit participation interests, or is considered
a “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X
promulgated by the Commission under the Exchange Act. The Seller has no
Subsidiaries other than those listed on Schedule 3.1 hereto, each of which,
unless otherwise indicated, is wholly-owned by the Seller.
3.2 Corporate
Authorization.
The
execution, delivery and performance by the Seller of this Agreement, the
Notes,
the Warrants, the Certificate of Designation, the Investor Rights Agreement
and
each of the other documents executed pursuant to and in connection with this
Agreement (collectively, the “Related Documents”), and the consummation of the
transactions contemplated hereby and thereby (including, but not limited
to, the
sale and delivery of the Notes, Preferred Stock and the Warrants, and the
subsequent issuance of the Conversion Shares upon conversion of the Notes
or
Preferred Stock and the Warrant Shares upon exercise of the Warrants) have
been
duly authorized, and no additional corporate or stockholder action is required
for the approval of this Agreement, except that Shareholder Approval is required
to issue Conversion Shares (under the Notes) and Warrant Shares in excess
of the
Issuable Maximum (as defined below). The Conversion Shares and the Warrant
Shares have been duly reserved for issuance by the Seller (without regard
to any
limitations on issuance or beneficial ownership). This Agreement and the
Related
Documents have been or, to the extent contemplated hereby or by the Related
Documents, will be duly executed and delivered and constitute the legal,
valid
and binding agreement of the Seller, enforceable against the Seller in
accordance with their terms, except as may be limited by bankruptcy,
reorganization, insolvency, moratorium and similar laws of general application
relating to or affecting the enforcement of rights of creditors, and except
as
enforceability of its obligations hereunder are subject to general principles
of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
3.3 Charter,
Bylaws and Corporate Records.
The
minute books of the Seller and its Subsidiaries contain complete and accurate
records of all meetings and other corporate actions of the board of directors,
committees of the board of directors, incorporators and stockholders of the
Seller and its Subsidiaries. All material corporate decisions and actions
have
been validly made or taken. All corporate books, including without limitation
the share transfer register, comply with applicable laws and regulations
and
have been regularly updated. Such books fully and correctly reflect all the
decisions of the stockholders.
3.4 Governmental
Authorization.
Except
as otherwise specifically contemplated in this Agreement and the Related
Documents, and except for: (i) the filings referenced in Sections 5.10 and
5.11;
(ii) the filing of the Certificate of Designation; (iii) the filing of a
Form D
with respect to the Notes, Preferred Stock and Warrants under Regulation
D under
the Securities Act; (iv) the filing of the Registration Statement with the
Commission; (v) the application(s) to each trading market for the listing
of the
Conversion Shares and the Warrant Shares for trading thereon; and (vi) any
filings required under state securities laws that are permitted to be made
after
the date hereof, the execution, delivery and performance by the Seller of
this
Agreement and the Related Documents, and the consummation of the transactions
contemplated hereby and thereby (including, but not limited to, the sale
and
delivery of the Notes, Preferred Stock and Warrants and the subsequent issuance
of the Conversion Shares and Warrant Shares upon conversion of the Notes,
Preferred Stock or otherwise or exercise of the Warrants, as applicable)
by the
Seller require no action by or in respect of, or filing with, any governmental
body, agency, official or authority.
3.5 Non-Contravention.
The
execution, delivery and performance by the Seller of this Agreement and the
Related Documents, and the consummation by the Seller of the transactions
contemplated hereby and thereby (including the issuance of the Conversion
Shares
and Warrant Shares) do not and will not (a) contravene or conflict with the
Articles (as amended by the Certificate of Designation) and Bylaws of the
Seller
and its Subsidiaries or any material agreement to which the Seller is a party
or
by which it is bound; (b) contravene or conflict with or constitute a violation
of any provision of any law, regulation, judgment, injunction, order or decree
binding upon or applicable to the Seller or its Subsidiaries; (c) constitute
a
default (or would constitute a default with notice or lapse of time or both)
under or give rise to a right of termination, cancellation or acceleration
or
loss of any benefit under any material agreement, contract or other instrument
binding upon the Seller or its Subsidiaries or under any material license,
franchise, permit or other similar authorization held by the Seller or its
Subsidiaries; or (d) result in the creation or imposition of any Lien (as
defined below) on any asset of the Seller or its Subsidiaries. For purposes of
this Agreement, the term “Lien” means, with respect to any asset, any mortgage,
lien, pledge, charge, security interest, claim or encumbrance of any kind
in
respect of such asset.
3.6 SEC
Documents.
The
Seller is obligated under the Securities Exchange Act of 1934, as amended
(the
“Exchange Act”) to file reports pursuant to Sections 13 or 15(d) thereof (all
such reports filed or required to be filed by the Seller, including all exhibits
thereto or incorporated therein by reference, and all documents filed by
the
Seller under the Securities Act hereinafter called the “SEC Documents”). The
Seller has filed all reports or other documents required to be filed under
the
Exchange Act. All SEC Documents filed by the Seller as of or for any period
beginning on or after July 1, 2003, (i) were prepared in all material respects
in accordance with the requirements of the Exchange Act and (ii) did not
at the
time they were filed (or, if amended or superseded by a filing prior to the
date
hereof, then on the date of such filing) contain any untrue statement of
a
material fact or omit to state a material fact required to be stated therein
or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Seller has previously delivered
to the Purchaser a correct and complete copy of each report (including, without
limitation, the most recent Proxy Statement) which the Seller filed with
the
Securities and Exchange Commission (the “SEC” or the “Commission”) under the
Exchange Act for any period ending on or after June 30, 2005 (the “Recent
Reports”) to the extent not available via EDGAR. None of the information about
the Seller or any of its Subsidiaries which has been disclosed to the Purchasers
herein or in the course of discussions and negotiations with respect hereto
which is not disclosed in the Recent Reports is or was required to be so
disclosed, and no material non-public information has been disclosed to the
Purchasers. To the extent that the Seller fails to so publicly disclose any
such
material non-public information prior to such date, any Purchaser in possession
of such information shall be permitted to publicly disclose such material
non-public information. The Seller agrees that it shall not furnish any
Purchaser any material non-public information concerning the Seller which
it
does not intend to disclose on or prior to such date.
3.7 Financial
Statements.
The
financial statements of the Seller included in the SEC Documents comply in
all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time
of
filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (“GAAP”), except as may be otherwise specified in such
financial statements or the notes thereto and except that unaudited financial
statements may not contain all footnotes required by GAAP, and fairly present
in
all material respects the financial position of the Seller and its consolidated
subsidiaries as of and for the dates thereof and the results of operations
and
cash flows for the periods then ended, subject, in the case of unaudited
statements, to normal, immaterial, year-end audit adjustments. All material
agreements to which the Seller and its Subsidiaries are a party or to which
any
of their respective property or assets are subject that are required to be
filed
as Exhibits to the SEC Documents under Item 601 of Regulation S K are included
as a part of, or specifically identified in, the SEC Documents.
3.8 Compliance
with Law.
The
Seller and its Subsidiaries are in compliance and have conducted their business
so as to comply with all laws, rules and regulations, judgments, decrees
or
orders of any court, administrative agency, commission, regulatory authority
or
other governmental authority or instrumentality, domestic or foreign, applicable
to their operations, the violation of which would cause a Material Adverse
Affect. There are no judgments or orders, injunctions, decrees, stipulations
or
awards (whether rendered by a court or administrative agency or by arbitration),
including any such actions relating to affirmative action claims or claims
of
discrimination, against the Seller or its Subsidiaries or against any of
their
properties or businesses.
3.9 No
Defaults.
The
Seller and its Subsidiaries are not, nor have they received notice that they
would be with the passage of time, giving of notice, or both, (i) in violation
of any provision of their Articles and Bylaws (ii) in default or violation
of
any term, condition or provision of (A) any judgment, decree, order, injunction
or stipulation applicable to the Seller or its Subsidiaries or (B) any
agreement, note, mortgage, indenture, contract, lease or instrument, permit,
concession, franchise or license to which the Seller or its Subsidiaries
are a
party or by which the Seller or its Subsidiaries or their properties or assets
may be bound, and no circumstances exist which would entitle any party to
any
agreement, note, mortgage, indenture, contract, lease or instrument to which
such Seller or its Subsidiaries are a party, to terminate such as a result
of
such Seller or its Subsidiaries, having failed to meet any provision thereof
including, but not limited to, meeting any applicable milestone under any
agreement or contract.
3.10 Litigation.
Except
as disclosed in the Recent Reports or on Schedule
3.10,
there
is no action, suit, proceeding, judgment, claim or investigation pending
or, to
the best knowledge of the Seller, threatened against the Seller and its
Subsidiaries which could, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect on the Seller or its Subsidiaries
or
which in any manner challenges or seeks to prevent, enjoin, alter or materially
delay any of the transactions contemplated hereby, and Seller is not aware
of
any basis for the assertion of any of the foregoing.
There
are
no claims or complaints existing or, to the knowledge of the Seller or its
Subsidiaries, threatened for product liability in respect of any product
of the
Seller or its Subsidiaries, and the Seller and its Subsidiaries are not aware
of
any basis for the assertion of any such claim.
3.11 Absence
of Certain Changes.
Since
June 30, 2005, the Seller has conducted its business only in the ordinary
course
and there has not occurred, except as set forth in the Recent Reports or
any
exhibit thereto or incorporated by reference therein:
(a) Any
event that could reasonably be expected to have a Material Adverse Effect
on the
Seller or any of its Subsidiaries;
(b) Any
amendments or changes in the Articles or Bylaws of the Seller and its
Subsidiaries, other than on account of the filing of the Certificate of
Designation;
(c) Any
damage, destruction or loss, whether or not covered by insurance, that would,
individually or in the aggregate, have or would be reasonably likely to have,
a
Material Adverse Effect on the Seller and its Subsidiaries;
(d) Except
as set forth on Schedule
3.11(d),
any
(i) incurrence,
assumption or guarantee by the Seller or its Subsidiaries of any debt for
borrowed money other than for equipment leases;
(ii) issuance
or sale of any securities convertible into or exchangeable for securities
of the
Seller other than to directors, employees and consultants pursuant to existing
equity compensation or stock purchase plans of the Seller;
(iii) issuance
or sale of options or other rights to acquire from the Seller or its
Subsidiaries, directly or indirectly, securities of the Seller or any securities
convertible into or exchangeable for any such securities, other than options
issued to directors, employees and consultants in the ordinary course of
business in accordance with past practice;
(iv) issuance
or sale of any stock, bond or other corporate security;
(v) discharge
or satisfaction of any material Lien, other than current liabilities incurred
since June 30, 2005 in the ordinary course of business;
(vi) declaration
or making any payment or distribution to stockholders or purchase or redemption
of any share of its capital stock or other security;
(vii) sale,
assignment or transfer of any of its intangible assets except in the ordinary
course of business, or cancellation of any debt or claim except in the ordinary
course of business;
(viii) waiver
of any right of substantial value whether or not in the ordinary course of
business;
(ix) material
change in officer compensation except in the ordinary course of business
and
consistent with past practices; or
(x) other
commitment (contingent or otherwise) to do any of the foregoing.
(e) Any
creation, sufferance or assumption by the Seller or any of its Subsidiaries
of
any Lien on any asset (other than Liens existing on the date hereof or in
connection with equipment leases and working capital lines of credit set
forth
on Schedule
3.11(e))
or any
making of any loan, advance or capital contribution to or investment in any
Person in an aggregate amount which exceeds $25,000 outstanding at any
time;
(f) Any
entry into, amendment of, relinquishment, termination or non-renewal by the
Seller or its Subsidiaries of any material contract, license, lease,
transaction, commitment or other right or obligation, other than in the ordinary
course of business; or
(g) Any
transfer or grant of a right with respect to the trademarks, trade names,
service marks, trade secrets, copyrights or other intellectual property rights
owned or licensed by the Seller or its Subsidiaries, except as among the
Seller
and its Subsidiaries.
3.12 No
Undisclosed Liabilities.
Except
as set forth in the Recent Reports, and except for liabilities and obligations
incurred in the ordinary course of business since June 30, 2005, as of the
date
hereof, (i) the Seller and its Subsidiaries do not have any material liabilities
or obligations (absolute, accrued, contingent or otherwise) which, and (ii)
there has not been any aspect of the prior or current conduct of the business
of
the Seller or its Subsidiaries which may form the basis for any material
claim
by any third party which if asserted could result in any such material
liabilities or obligations which, are not fully reflected, reserved against
or
disclosed in the balance sheet of the Seller as at June 30, 2005.
3.13 Taxes.
All tax
returns and tax reports required to be filed with respect to the income,
operations, business or assets of the Seller and its Subsidiaries have been
timely filed (or appropriate extensions have been obtained) with the appropriate
governmental agencies in all jurisdictions in which such returns and reports
are
required to be filed, and all of the foregoing as filed are correct and complete
and, in all material respects, reflect accurately all liability for taxes
of the
Seller and its Subsidiaries for the periods to which such returns relate,
and
all amounts shown as owing thereon have been paid. All income, profits,
franchise, sales, use, value added, occupancy, property, excise, payroll,
withholding, FICA, FUTA and other taxes (including interest and penalties),
if
any, collectible or payable by the Seller and its Subsidiaries or relating
to or
chargeable against any of its material assets, revenues or income or relating
to
any employee, independent contractor, creditor, stockholder or other third
party
through the Closing Date, will have been fully collected and paid by such
date
if due by such date or provided for by adequate reserves in the Financial
Statements as of and for the periods ended June 30, 2005 (other than taxes
accruing after such date) and all similar items due through the Closing Date
will have been fully paid by that date or provided for by adequate reserves,
whether or not any such taxes were reported or reflected in any tax returns
or
filings. No taxation authority has sought to audit the records of the Seller
or
any of its Subsidiaries for the purpose of verifying or disputing any tax
returns, reports or related information and disclosures provided to such
taxation authority, or for the Seller’s or any of its Subsidiaries’ alleged
failure to provide any such tax returns, reports or related information and
disclosure. No material claims or deficiencies have been asserted against
or
inquiries raised with the Seller or any of its Subsidiaries with respect
to any
taxes or other governmental charges or levies which have not been paid or
otherwise satisfied, including claims that, or inquiries whether, the Seller
or
any of its Subsidiaries has not filed a tax return that it was required to
file,
and, to the best of the Seller’s knowledge, there exists no reasonable basis for
the making of any such claims or inquiries. Neither the Seller nor any of
its
Subsidiaries has waived any restrictions on assessment or collection of taxes
or
consented to the extension of any statute of limitations relating to
taxation.
3.14 Interests
of Officers, Directors and Other Affiliates.
The
description of any interest held, directly or indirectly, by any officer,
director or other Affiliate of Seller (other than the interests of the Seller
and its Subsidiaries in such assets) in any property, real or personal, tangible
or intangible, used in or pertaining to Seller’s business, including any
interest in the Intellectual Property (as defined in Section 3.15 hereof),
as
set forth in the Recent Reports, is true and complete, and no officer, director
or other Affiliate of the Seller has any interest in any property, real or
personal, tangible or intangible, used in or pertaining to the Seller’s
business, including the Seller’s Intellectual Property, other than as set forth
in the Recent Reports.
3.15 Intellectual
Property.
Other
than as set forth in the Recent Reports:
(a) the
Seller or a Subsidiary thereof has the right to use or is the sole and exclusive
owner of all right, title and interest in and to all foreign and domestic
patents, patent rights, trademarks, service marks, trade names, brands and
copyrights (whether or not registered and, if applicable, including pending
applications for registration) owned, used or controlled by the Seller and
its
Subsidiaries (collectively, the “Rights”) and in and to each material invention,
software, trade secret, technology, product, composition, formula, method
of
process used by the Seller or its Subsidiaries (the Rights and such other
items,
the “Intellectual Property”), and, to the Seller’s knowledge, has the right to
use the same, free and clear of any claim or conflict with the rights of
others;
(b) no
royalties or fees (license or otherwise) are payable by the Seller or its
Subsidiaries to any Person by reason of the ownership or use of any of the
Intellectual Property except as set forth on Schedule
3.15;
(c) there
have been no claims made against the Seller or its Subsidiaries asserting
the
invalidity, abuse, misuse, or unenforceability of any of the Intellectual
Property, and, to its knowledge, there are no reasonable grounds for any
such
claims;
(d) neither
the Seller nor its Subsidiaries have made any claim of any violation or
infringement by others of its rights in the Intellectual Property, and to
the
best of the Seller’s knowledge, no reasonable grounds for such claims exist; and
(e) neither
the Seller nor its Subsidiaries have received notice that it is in conflict
with
or infringing upon the asserted rights of others in connection with the
Intellectual Property.
3.16 Restrictions
on Business Activities.
Other
than as set forth in the Recent Reports, there is no agreement, judgment,
injunction, order or decree binding upon the Seller or its Subsidiaries which
has or could reasonably be expected to have the effect of prohibiting or
materially impairing any business practice of the Seller or its Subsidiaries,
any acquisition of property by the Seller or its Subsidiaries or the conduct
of
business by the Seller or its Subsidiaries as currently conducted or as
currently proposed to be conducted by the Seller.
3.17 Preemptive
Rights.
Except
as set forth in Schedule
3.17,
none of
the stockholders of the Seller possess any preemptive rights in respect of
the
Notes, Preferred Shares, Warrants, Conversion Shares or Warrant Shares to
be
issued to the Purchasers in connection herewith, on the Exchange Date, or
upon
conversion of the Preferred Shares or exercise of the Warrants, as
applicable.
3.18 Insurance.
The
insurance policies providing insurance coverage to the Seller or its
Subsidiaries including for product liability are adequate for the business
conducted by the Seller and its Subsidiaries (currently limited to the testing
phase) and are sufficient for compliance by the Seller and its Subsidiaries
with
all requirements of law and all material agreements to which the Seller or
its
Subsidiaries are a party or by which any of their assets are bound. All of
such
policies are in full force and effect and are valid and enforceable in
accordance with their terms, and the Seller and its Subsidiaries have complied
with all material terms and conditions of such policies, including premium
payments. None of the insurance carriers has indicated to the Seller or its
Subsidiaries an intention to cancel any such policy.
3.19 Subsidiaries
and Investments.
Except
as set forth in the Recent Reports or on Schedule
3.19,
the
Seller has no Subsidiaries or Investments. For purposes of this Agreement,
the
term “Investments” shall mean, with respect to any Person, all advances, loans
or extensions of credit to any other Person, all purchases or commitments
to
purchase any stock, bonds, notes, debentures or other securities of any other
Person, and any other investment in any other Person, including partnerships
or
joint ventures (whether by capital contribution or otherwise) or other similar
arrangement (whether written or oral) with any Person, including but not
limited
to arrangements in which (i) the Person shares profits and losses, (ii) any
such
other Person has the right to obligate or bind the Person to any third party,
or
(iii) the Person may be wholly or partially liable for the debts or obligations
of such partnership, joint venture or other arrangement.
3.20 Capitalization.
The
authorized capital stock of the Seller consists of 45,000,000 shares of common
stock, $0.001 par value per share, of which 16,164,599
shares
are issued and outstanding as of June 12, 2006, and 5,000,000 shares of
preferred stock, issuable in one or more classes or series, with such relative
rights and preferences as the Board of Directors may determine, none of which
has been authorized for issuance other than the shares of the Seller’s Series A
7% Cumulative Convertible Preferred Stock contemplated hereby and none of
which,
immediately prior to the Closing, are outstanding. All shares of the Seller’s
issued and outstanding capital stock have been duly authorized, are validly
issued and outstanding, and are fully paid and nonassessable. No securities
issued by the Seller from the date of its incorporation to the date hereof
were
issued in violation of any statutory or common law preemptive rights. There
are
no dividends which have accrued or been declared but are unpaid on the capital
stock of the Seller. All taxes required to be paid by Seller in connection
with
the issuance and any transfers of the Seller’s capital stock have been paid.
Except as set forth on Schedule
3.20,
all
permits or authorizations required to be obtained from or registrations required
to be effected with any Person in connection with any and all issuances of
securities of the Seller from the date of the Seller’s incorporation to the date
hereof have been obtained or effected, and all securities of the Seller have
been issued and are held in accordance with the provisions of all applicable
securities or other laws. This issuance of the Notes, Preferred Stock and
Warrants hereunder and/or the issuance of the Conversion Shares or Warrant
Shares upon conversion of the Notes or Preferred Stock or exercise of the
Warrants will not cause any adjustment to the current conversion price or
exercise under any outstanding securities.
3.21 Options,
Warrants, Rights.
Except
as set forth in the Recent Reports or on Schedule
3.21,
there
are no outstanding (a) securities, notes or instruments convertible into
or
exercisable for any of the capital stock or other equity interests of the
Seller
or its Subsidiaries; (b) options, warrants, subscriptions or other rights
to
acquire capital stock or other equity interests of the Seller or its
Subsidiaries; or (c) commitments, agreements or understandings of any kind,
including employee benefit arrangements, relating to the issuance or repurchase
by the Seller or its Subsidiaries of any capital stock or other equity interests
of the Seller or its Subsidiaries, any such securities or instruments
convertible or exercisable for securities or any such options, warrants or
rights. Other than the rights of the Purchasers under the Notes, Preferred
Stock
and the Warrants and except
as
set forth on Schedule
3.21,
neither
the Seller nor the Subsidiaries have granted anti-dilution rights to any
person
or entity in connection with any outstanding option, warrant, subscription
or
any other instrument convertible or exercisable for the securities of the
Seller
or any of its Subsidiaries. Other than the rights granted to the Purchasers
under the Investor Rights Agreement and except as set forth on Schedule
3.21,
there
are no outstanding rights which permit the holder thereof to cause the Seller
or
the Subsidiaries to file a registration statement under the Securities Act
or
which permit the holder thereof to include securities of the Seller or any
of
its Subsidiaries in a registration statement filed by the Seller or any of
its
Subsidiaries under the Securities Act, and there are no outstanding agreements
or other commitments which otherwise relate to the registration of any
securities of the Seller or any of its Subsidiaries for sale or distribution
in
any jurisdiction.
3.22 Employees,
Employment Agreements and Employee Benefit Plans.
Except
as set forth in the Recent Reports or on Schedule
3.22,
there
are no employment, consulting, severance or indemnification arrangements,
agreements, or understandings between the Seller and any officer, director,
consultant or employee of the Seller or its Subsidiaries (the “Employment
Agreements”). Except as set forth in the Recent Reports or on Schedule
3.22,
no
Employment Agreement provides for the acceleration or change in the award,
grant, vesting or determination of options, warrants, rights, severance
payments, or other contingent obligations of any nature whatsoever of the
Seller
or its Subsidiaries in favor of any such parties in connection with the
transactions contemplated by this Agreement. Except as disclosed in the Recent
Reports or on Schedule
3.22,
the
terms of employment or engagement of all directors, officers, employees,
agents,
consultants and professional advisors of the Seller and its Subsidiaries
are
such that their employment or engagement may be terminated upon not more
than
two weeks’ notice given at any time without liability for payment of
compensation or damages and the Seller and its Subsidiaries have not entered
into any agreement or arrangement for the management of their business or
any
part thereof other than with their directors or employees.
3.23 Absence
of Certain Business Practices.
Neither
the Seller, nor any Affiliate of the Seller, nor to the knowledge of the
Seller,
any agent or employee of the Seller, any other Person acting on behalf of
or
associated with the Seller, or any individual related to any of the foregoing
Persons, acting alone or together, has: (a) received, directly or indirectly,
any rebates, payments, commissions, promotional allowances or any other economic
benefits, regardless of their nature or type, from any customer, supplier,
trading company, shipping company, governmental employee or other Person
with
whom the Seller has done business directly or indirectly; or (b) directly
or
indirectly, given or agreed to give any gift or similar benefit to any customer,
supplier, trading company, shipping company, governmental employee or other
Person who is or may be in a position to help or hinder the business of the
Seller (or assist the Seller in connection with any actual or proposed
transaction) which (i) may subject the Seller to any damage or penalty in
any
civil, criminal or governmental litigation or proceeding, (ii) if not given
in
the past, may have had an adverse effect on the Seller or (iii) if not continued
in the future, may adversely affect the assets, business, operations or
prospects of the Seller or subject the Seller to suit or penalty in any private
or governmental litigation or proceeding.
3.24 Products
and Services.
To the
knowledge of the Seller and except as disclosed in the Recent Reports, there
exists no set of facts (i) which could furnish a basis for the withdrawal,
suspension or cancellation of any registration, license, permit or other
governmental approval or consent of any governmental or regulatory agency
with
respect to any product or service developed or provided by the Seller or
its
Subsidiaries, (ii) which could furnish a basis for the withdrawal, suspension
or
cancellation by order of any state, federal or foreign court of law of any
product or service, or (iii) which could have a Material Adverse Effect on
the
continued operation of any facility of the Seller or its Subsidiaries or
which
could otherwise cause the Seller or its Subsidiaries to withdraw, suspend
or
cancel any such product or service from the market or to change the marketing
classification of any such product or service. Each product or service provided
by Seller or its Subsidiaries has been provided in accordance in all material
respects with the specifications under which such product or service normally
is
and has been provided and the provisions of all applicable laws or regulations.
3.25 Environmental
Matters.
None of
the premises or any properties owned, occupied or leased by the Seller or
its
Subsidiaries (the “Premises”) has been used by the Seller or the Subsidiaries
or, to the Seller’s knowledge, by any other Person, to manufacture, treat,
store, or dispose of any substance that has been designated to be a “hazardous
substance” under applicable Environmental Laws (hereinafter defined) (“Hazardous
Substances”) in violation of any applicable Environmental Laws. To its
knowledge, the Seller has not disposed of, discharged, emitted or released
any
Hazardous Substances which would require, under applicable Environmental
Laws,
remediation, investigation or similar response activity. No Hazardous Substances
are present as a result of the actions of the Seller or, to the Seller’s
knowledge, any other Person, in, on or under the Premises which would give
rise
to any liability or clean-up obligations of the Seller under applicable
Environmental Laws. The Seller and, to the Seller’s knowledge, any other Person
for whose conduct it may be responsible pursuant to an agreement or by operation
of law, are in compliance with all laws, regulations and other federal, state
or
local governmental requirements, and all applicable judgments, orders, writs,
notices, decrees, permits, licenses, approvals, consents or injunctions in
effect on the date of this Agreement relating to the generation, management,
handling, transportation, treatment, disposal, storage, delivery, discharge,
release or emission of any Hazardous Substance (the “Environmental Laws”).
Neither the Seller nor, to the Seller’s knowledge, any other Person for whose
conduct it may be responsible pursuant to an agreement or by operation of
law
has received any written complaint, notice, order, or citation of any actual,
threatened or alleged noncompliance with any of the Environmental Laws, and
there is no proceeding, suit or investigation pending or, to the Seller’s
knowledge, threatened against the Seller or, to the Seller’s knowledge, any such
Person with respect to any violation or alleged violation of the Environmental
Laws, and, to the knowledge of the Seller, there is no basis for the institution
of any such proceeding, suit or investigation.
3.26 Licenses;
Compliance Regulatory Requirements.
Except
as disclosed in the Recent Reports, the Seller holds all material
authorizations, consents, approvals, franchises, licenses and permits required
under applicable law or regulation for the operation of the business of the
Seller and its Subsidiaries as presently operated (the “Governmental
Authorizations”). All the Governmental Authorizations have been duly issued or
obtained and are in full force and effect, and the Seller and its Subsidiaries
are in material compliance with the terms of all the Governmental
Authorizations. The Seller and its Subsidiaries have not engaged in any activity
that, to their knowledge, would cause revocation or suspension of any such
Governmental Authorizations. The Seller has no knowledge of any facts which
could reasonably be expected to cause the Seller to believe that the
Governmental Authorizations will not be renewed by the appropriate governmental
authorities in the ordinary course. Neither the execution, delivery nor
performance of this Agreement shall adversely affect the status of any of
the
Governmental Authorizations.
3.27 Brokers.
Maxim
Partners LLC is acting as placement agent for Seller in connection with the
transactions. Other than Maxim Partners LLC, whose fees shall be paid the
Seller, no broker, finder or investment banker is entitled to any brokerage,
finder’s or other fee or commission in connection with the transactions
contemplated by this Agreement, based upon any arrangement made by or on
behalf
of the Seller. No broker, finder or investment banker is entitled to any
brokerage, finder’s or other fee or commission in connection with the
transactions contemplated by this Agreement, based upon any arrangement made
by
or on behalf of the Seller, which would make any Purchaser liable for any
fees
or commissions.
3.28 Securities
Laws.
Neither
the Seller nor its Subsidiaries nor any agent acting on behalf of the Seller
or
its Subsidiaries has taken or will take any action which might cause this
Agreement or the Notes, Preferred Stock or Warrants to violate the Securities
Act or the Exchange Act or any rules or regulations promulgated thereunder,
as
in effect on the Closing Date. Assuming that all of the representations and
warranties of the Purchasers set forth in Article IV are true, all offers
and
sales of capital stock, securities and notes of the Seller were conducted
and
completed in compliance with the Securities Act. All shares of capital stock
and
other securities issued by the Seller and its Subsidiaries prior to the date
hereof have been issued in transactions that were either registered offerings
or
were exempt from the registration requirements under the Securities Act and
all
applicable state securities or “blue sky” laws and in compliance with all
applicable corporate laws.
3.29 Disclosure.
No
representation or warranty made by the Seller in this Agreement, nor in any
document, written information, financial statement, certificate, schedule
or
exhibit prepared and furnished by the Seller or the representatives of the
Seller pursuant hereto or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material fact,
or to
Seller’s knowledge omits to state a material fact necessary to make the
statements or facts contained herein or therein not misleading in light of
the
circumstances under which they were furnished.
3.30 Off-Balance
Sheet Arrangements.
There
is no transaction, arrangement or other relationship between the Seller and
an
unconsolidated or other off-balance sheet entity that is required to be
disclosed by the Seller in its Exchange Act filings and is not so disclosed
or
that otherwise would be reasonably expected to result in a Material Adverse
Effect. There are no such transactions, arrangements or other relationships
with
the Seller that may create contingencies or liabilities that are not otherwise
disclosed by the Seller in its SEC filings.
3.31 Application
of Takeover Protections.
Except
as is set forth in the Articles of Incorporation and amendments thereto of
Seller, the Seller and its Board of Directors have taken all necessary action,
if any, in order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Seller’s Certificate of
Incorporation (or similar charter documents) or the laws of its state of
incorporation or any agreement to which the Seller is a party that is or
could
become applicable to the Purchasers as a result of the Purchasers and the
Seller
fulfilling their obligations or exercising their rights under this Agreement
and
the Related Documents, including without limitation the Seller’s issuance of the
Securities and the Purchasers’ ownership of the Securities.
3.32 No
Additional Agreements.
The
Seller does not have any agreement with any Purchaser with respect to the
transactions contemplated by this Agreement and the Related Documents other
than
as specified in this Agreement and the Related Documents.
3.33 Acknowledgment
Regarding Purchasers’ Purchase of Seller Securities.
The
Seller acknowledges and agrees that each of the Purchasers is acting solely
in
the capacity of an arm’s length purchaser with respect to this Agreement and the
transactions contemplated hereby. The Seller further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Seller or
any
other Purchaser (or in any similar capacity) with respect to this Agreement
and
the Related Documents and the transactions contemplated hereby and thereby
and
any advice given by any Purchaser or any of their respective representatives
or
agents in connection with this Agreement or the Related Documents or the
transactions contemplated hereby and thereby is merely incidental to such
Purchaser’s purchase of the Securities. The Seller further represents to each
Purchaser that the Seller’s decision to enter into this Agreement and the
Related Documents has been based solely on the independent evaluation of
the
transactions contemplated hereby by the Seller and its
representatives.
3.34 Internal
Accounting Controls.
The
Seller and each of its subsidiaries maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
The
Seller has established disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Seller and designed
such disclosure controls and procedures to ensure that material information
relating to the Seller, including its subsidiaries, is made known to the
certifying officers by others within those entities, particularly during
the
period in which the Seller’s Form 10-K or 10-Q, as the case may be, is
being prepared. The Seller’s certifying officers have evaluated the
effectiveness of the Seller’s disclosure controls and procedures as of the end
of the period covered by the Seller’s most recently filed periodic report under
the Exchange Act (such date, the “Evaluation
Date”).
The
Seller presented in its most recently filed Form 10-K or Form 10-Q the
conclusions of the certifying officers about the effectiveness of the disclosure
controls and procedures based on their evaluations as of the Evaluation Date.
Since the Evaluation Date, there have been no changes in the Seller’s internal
control over financial reporting (as such term is defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely
to
materially affect, the Seller’s internal control over financial
reporting.
3.35 Solvency.
Based
on the financial condition of the Seller as of the Closing Date, (i) the
Seller’s fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Seller’s existing debts and other
liabilities (including known contingent liabilities) as they mature; (ii)
the
Seller’s assets do not constitute unreasonably small capital to carry on its
business for the current fiscal year as now conducted and as proposed to
be
conducted including its capital needs taking into account the particular
capital
requirements of the business conducted by the Seller, and projected capital
requirements and capital availability thereof; and (iii) the current cash
flow
of the Seller, together with the proceeds the Seller would receive, were
it to
liquidate all of its assets, after taking into account all anticipated uses
of
the cash, would be sufficient to pay all amounts on or in respect of its
debt
when such amounts are required to be paid. The Seller does not intend to
incur
debts beyond its ability to pay such debts as they mature (taking into account
the timing and amounts of cash to be payable on or in respect of its
debt).
3.36 Title
to Assets.
The
Seller and the Subsidiaries have good and marketable title in fee simple
to all
real property owned by them that is material to their respective businesses
and
good and marketable title in all personal property owned by them that is
material to their respective businesses, in each case free and clear of all
Liens, except for (i) Liens as do not materially affect the value of such
property, do not materially interfere with the use made and proposed to be
made
of such property by the Seller and the Subsidiaries, (ii) Liens for taxes
not
yet due and payable and (iii) Liens which would not, individually or in the
aggregate, reasonably be expected to have or result in a Material Adverse
Effect. To the Seller’s knowledge, any real property and facilities held under
lease by the Seller and the Subsidiaries are held by them under valid,
subsisting and enforceable leases of which the Seller and the Subsidiaries
are
in compliance except, in each case, as would not reasonably be expected to
result in a Material Adverse Effect.
ARTICLE
IV - REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each
Purchaser, for itself only, hereby severally and not jointly, represents
and
warrants to the Seller as follows:
4.1 Existence
and Power.
The
Purchaser is duly organized, validly existing and in good standing under
the
laws of the jurisdiction of such Purchaser’s organization. The Purchaser has all
powers required to carry on such Purchaser’s business as now
conducted.
4.2 Authorization.
The
execution, delivery and performance by the Purchaser of this Agreement, the
Related Documents to which such Purchaser is a party, and the consummation
by
the Purchaser of the transactions contemplated hereby and thereby have been
duly
authorized, and no additional action is required for the approval of this
Agreement or the Related Documents. This Agreement and the Related Documents
to
which the Purchaser is a party have been or, to the extent contemplated hereby,
will be duly executed and delivered and constitute valid and binding agreements
of the Purchaser, enforceable against such Purchaser in accordance with their
terms, except as may be limited by bankruptcy, reorganization, insolvency,
moratorium and similar laws of general application relating to or affecting
the
enforcement of rights of creditors and except that enforceability of their
obligations thereunder are subject to general principles of equity (regardless
of whether such enforceability is considered in a proceeding in equity or
at
law).
4.3 Investment.
The
Purchaser is acquiring the securities described herein for its own account
and
not with a view to, or for sale in connection with, any distribution thereof,
nor with the intention of distributing or reselling the same, provided, however,
that by making the representation herein, the Purchaser does not agree to
hold
any of the securities for any minimum or other specific term and reserves
the
right to dispose of the securities at any time in accordance with or pursuant
to
a registration statement or an exemption under the Securities Act. The Purchaser
is aware that none of the securities has been registered under the Securities
Act or under applicable state securities or blue sky laws. The Purchaser
is an
“Accredited Investor” as such term is defined in Rule 501 of Regulation D, as
promulgated under the Securities Act (including without limitation, if the
Purchaser is an employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974 and a self-directed plan, then investment
decisions are made solely by persons that are “Accredited
Investors”).
4.4 Reliance
on Exemptions.
The
Purchaser understands that the Notes, Preferred Stock and Warrants are being
offered and sold to such Purchaser in reliance upon specific exemptions from
the
registration requirements of United States federal and state securities laws
and
that the Seller is relying upon the truth and accuracy of, and such Purchaser’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Purchaser set forth herein in order to determine
the
availability of such exemptions and the eligibility of such Purchaser to
acquire
the securities.
4.5 Experience
of the Purchaser.
The
Purchaser, either alone or together with its representatives, has such
knowledge, sophistication and experience in business and financial matters
so as
to be capable of evaluating the merits and risks of the prospective investment
in the Securities, and has so evaluated the merits and risks of such investment.
The Purchaser is able to bear the economic risk of an investment in the
securities and, at the present time, is able to afford a complete loss of
such
investment.
4.6 General
Solicitation.
The
Purchaser is not purchasing the Securities as a result of any advertisement,
article, notice or other communication regarding the securities published
in any
newspaper, magazine or similar media or broadcast over television or radio
or
presented at any seminar or any other general solicitation or general
advertisement.
4.7 Receipt
of Purchaser Information.
The
Purchaser hereby acknowledges that it has been furnished with, or has had
an
opportunity to acquire and carefully review the following documents filed
by the
Seller with the SEC: (a) Annual Report on Form 10-KSB for the year ended
June
30, 2005 and amendments thereto (the “10-KSB”); (b) Quarterly Reports on Form
10-QSB for each of the quarters ended September 30, 2005, December 31, 2005
and
March 31, 2006 and any amendments thereto, respectively; (c) all Current
Reports
on Form 8-K after the filing of the 10-KSB; (d) the Seller’s post-effective
amendment to its registration statement number 333-116512 filed on Form SB-2;
and (e) the Seller’s most recent definitive proxy materials. Purchaser further
represents that the Purchaser has been furnished by the Seller during the
course
of this transaction with all information regarding the Seller that it or
its
investment advisors, attorney and/or accountant has requested or desired
to
know, has been afforded the opportunity to ask questions of and receive answers
from duly authorized officers or other representatives of the Seller concerning
the terms and conditions of the transaction, and has received any additional
information that the Purchaser has requested .
4.8 SEC
Policy on Short Sales. The
Purchaser acknowledges that the Purchaser, directly or through related parties,
affiliates or otherwise, may be prohibited in certain circumstances from
selling
“short or “shorting against the box” (as those terms are generally understood)
any equity security of the Seller as a result of the following Telephone
Interpretation in the SEC Manual of Publicly Available Telephone Interpretations
(July 1997) A. 65 Section 5:
“An
issuer filed a Form S-3 registration statement for a secondary offering of
common stock which is not yet effective. One of the selling shareholders
wanted
to do a short sale of common stock “against the box” and cover the short sale
with registered shares after the effective date. The issuer was advised that
the
short sale could not be made before the registration statement becomes
effective, because the shares underlying the short sale are deemed to be
sold at
the time such sale is made. There would, therefore, be a violation of Section
5
if the shares were effectively sold prior to the effective date.”
ARTICLE
V
- COVENANTS OF THE SELLER AND PURCHASERS
5.1 Insurance.
The
Seller and its Subsidiaries shall, from time to time upon the written request
of
the Purchasers, promptly furnish or cause to be furnished to the Purchasers
evidence, in form and substance reasonably satisfactory to the Purchasers,
of
the maintenance of all insurance maintained by it for loss or damage by fire
and
other hazards, damage or injury to persons and property, including from product
liability, and under workmen’s compensation laws.
5.2 Reporting
Obligations.
So long
as any of the Notes or Preferred Stock is outstanding, and so long as any
portion of the Warrants has not been exercised and has not expired by its
terms,
the Seller shall furnish to the Purchasers, or any other persons who hold
any of
the Notes or Preferred Stock or Warrants (provided that such subsequent holders
give notice to the Seller that they hold Notes or Preferred Stock or Warrants
and furnish their addresses) promptly upon their becoming available one copy
of
(A) each report, notice or proxy statement sent by the Seller to its
stockholders generally, and of each regular or periodic report (pursuant
to the
Exchange Act) and (B) any registration statement, prospectus or written
communication pursuant to the Securities Act relating to the issuance or
registration of Conversion Shares and the Warrant Shares and filed by the
Seller
with the Commission or any securities market or exchange on which shares
of
Common Stock are listed; provided, however, that the Seller shall have no
obligation to deliver reports or schedules under this Section 5.2 to the
extent
such reports are publicly available via EDGAR.
The
Purchasers are hereby authorized to deliver a copy of any financial statement
or
any other information relating to the business, operations or financial
condition of the Seller which may have been furnished to the Purchasers
hereunder, to any regulatory body or agency having jurisdiction over the
Purchasers or to any Person which shall, or shall have right or obligation
to
succeed to all or any part of the Purchasers’ interest in the Seller or this
Agreement.
5.3 Investigation.
The
representations, warranties, covenants and agreements set forth in this
Agreement shall not be affected or diminished in any way by any investigation
(or failure to investigate) at any time by or on behalf of the party for
whose
benefit such representations, warranties, covenants and agreements were made.
Without limiting the generality of the foregoing, the inability or failure
of
the Purchasers to discover any breach, default or misrepresentation by the
Seller under this Agreement or the Related Documents (including under any
certificate furnished pursuant to this Agreement), notwithstanding the exercise
by the Purchasers or other holders of the Notes or Preferred Stock of their
rights hereunder to conduct an investigation shall not in any way diminish
any
liability hereunder.
5.4 Further
Assurances.
The
Seller shall, at its cost and expense, upon written request of the Purchasers,
duly execute and deliver, or cause to be duly executed and delivered, to
the
Purchasers such further instruments and do and cause to be done such further
acts as may be necessary, advisable or proper, at the reasonable request
of the
Purchasers, to carry out more effectually the provisions and purposes of
this
Agreement. The parties shall use their best efforts to timely satisfy each
of
the conditions described in Article VI of this Agreement.
5.5 Use
of
Proceeds.
The
Seller covenants and agrees that the proceeds of the aggregate Purchase Price
shall be used by the Seller solely for the following purposes:
(a) $2
million shall be used to fund the final cash payment due to former shareholders
of CQ Systems Ltd. in connection with the acquisition of such company by
the
Seller;
(b) $2
million shall be used to fund cash payments due to current shareholders of
McCue
Systems Inc. in connection with the acquisition of such company by the Seller;
and
(c) the
remaining proceeds shall be used for working capital, general corporate purposes
and the expenses reasonably incurred by Seller in connection with the
consummation of the transactions contemplated hereby; provided that under
no
circumstances shall any portion of the proceeds be applied to:
(i) accelerated
repayment of debt existing on the date hereof;
(ii) the
payment of dividends or other distributions on any capital stock of the Seller
other than the Preferred Stock or Notes;
(iii) increased
executive compensation or loans to officers, employees, stockholders or
directors, unless approved by a disinterested majority of the Board of
Directors; or
(iv) any
expenditure not directly related to the business of the Seller.
5.6 Corporate
Existence.
So long
as a Purchaser owns Notes, Preferred Stock, Warrants, Conversion Shares,
or
Warrant Shares, the Seller shall preserve and maintain and cause its
Subsidiaries to preserve and maintain their corporate existence and good
standing in the jurisdiction of their incorporation and the rights, privileges
and franchises of the Seller and its Subsidiaries (except, in each case,
in the
event of a merger or consolidation in which the Seller or its Subsidiaries,
as
applicable, is not the surviving entity) in each case where failure to so
preserve or maintain could have a Material Adverse Effect on the
Seller.
5.7 Licenses.
The
Seller shall, and shall cause its Subsidiaries to, maintain at all times
all
material licenses or permits necessary to the conduct of its business and
as
required by any governmental agency or instrumentality thereof.
5.8 Taxes
and Claims.
The
Seller and its Subsidiaries shall duly pay and discharge (a) all material
taxes,
assessments and governmental charges upon or against the Seller or its
properties or assets prior to the date on which penalties attach thereto,
unless
and to the extent that such taxes are being diligently contested in good
faith
and by appropriate proceedings, and appropriate reserves therefor have been
established, and (b) all material lawful claims, whether for labor, materials,
supplies, services or anything else which might or could, if unpaid, become
a
lien or charge upon the properties or assets of the Seller or its Subsidiaries
unless and to the extent only that the same are being diligently contested
in
good faith and by appropriate proceedings and appropriate reserves therefor
have
been established.
5.9 Perform
Covenants.
The
Seller shall (a) make full and timely payment of any and all payments on
the
Notes and Preferred Stock, and all other obligations of the Seller to the
Purchasers in connection therewith, whether now existing or hereafter arising,
and (b) duly comply with all the terms and covenants contained herein and
in
each of the instruments and documents given to the Purchasers in connection
with
or pursuant to this Agreement, all at the times and places and in the manner
set
forth herein or therein.
5.10 Additional
Covenants.
(a) Except
for transactions approved by a majority of the disinterested directors of
the
Board of Directors, neither the Seller nor any of its Subsidiaries shall
enter
into any transaction with any director, officer, employee or holder of more
than
5% of the outstanding capital stock of any class or series of capital stock
of
the Seller or any of its Subsidiaries, member of the family of any such person,
or any corporation, partnership, trust or other entity in which any such
person,
or member of the family of any such person, is a director, officer, trustee,
partner or holder of more than 5% of the outstanding capital stock thereof,
with
the exception of transactions which are consummated upon terms that are no
less
favorable than would be available if such transaction had been effected at
arms-length, in the reasonable judgment of the Board of Directors.
(b) The
Seller shall timely prepare and file with the Securities and Exchange Commission
the form of notice of the sale of securities pursuant to the requirements
of
Regulation D regarding the sale of the Notes, Preferred Stock and Warrants
under
this Agreement.
(c) The
Seller shall timely prepare and file such applications, consents to service
of
process (but not including a general consent to service of process) and similar
documents and take such other steps and perform such further acts as shall
be
required by the U.S. state securities law requirements of each jurisdiction
where a Purchaser resides as indicated on Schedule
1
with
respect to the sale of the Notes, Preferred Stock and Warrants under this
Agreement.
(d) Neither
the Seller nor any of its Affiliates, nor any Person acting on its or their
behalf, shall directly or indirectly make any offers or sales of any securities
or solicit any offers to buy any securities under circumstances that would
cause
the loss of the 4(2) exemption under the Securities Act for the transactions
contemplated hereby. Subject to any consent or approval rights of the Purchasers
hereunder, in the event the Seller contemplates an offering of its equity
or
debt securities within six months following the Closing Date, the Seller
agrees
that it shall notify the Purchasers of such offering (without providing any
material non-public information to any Purchaser without its prior approval)
and
obtain the prior written consent of Purchasers.
5.11 Securities
Laws Disclosure; Publicity.
The
Seller shall (i) on or promptly after the Closing Date, issue a press release
acceptable to The Tail Wind Fund Ltd. disclosing the transactions contemplated
hereby, and (ii) promptly after the Closing Date, file with the Commission
a
Report on Form 8-K disclosing the transactions contemplated hereby. Except
as
provided in the preceding sentence, neither the Seller nor the Purchasers
shall
make any press release or other publicity about the terms of this Agreement
or
the transactions contemplated hereby without the prior approval of the other
unless otherwise required by law or the rules of the Commission.
5.12 Like
Treatment of Purchasers and Holders.
Neither
the Seller nor any of its affiliates shall, directly or indirectly, pay or
cause
to be paid any consideration (immediate or contingent), whether by way of
interest, fee, payment for redemption, conversion or exercise of the Securities,
or otherwise, to any Purchaser or holder of Securities, for or as an inducement
to, or in connection with the solicitation of, any consent, waiver or amendment
to any terms or provisions of this Agreement or the Related Documents, unless
such consideration is required to be paid to all Purchasers or holders of
Securities bound by such consent, waiver or amendment. The Seller shall not,
directly or indirectly, redeem any Securities unless such offer of redemption
is
made pro rata to all Purchasers or holders of Securities, as the case may
be, on
identical terms.
5.13 Independent
Nature of Purchasers’ Obligations and Rights.
The
obligations of each Purchaser under this Agreement or any Related Documents
are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance of the obligations
of any other Purchaser under any such agreement. Nothing contained herein
or in
any Related Documents, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association,
a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to
such
obligations or the transactions contemplated by such agreement. Each Purchaser
shall be entitled to independently protect and enforce its rights, including
without limitation, the rights arising out of this Agreement or out of the
other
Related Documents, and it shall not be necessary for any other Purchaser
to be
joined as an additional party in any proceeding for such purpose. Each Purchaser
represents that it has been represented by its own separate legal counsel
in its
review and negotiation of this Agreement and the Related Documents. For reasons
of administrative convenience only, the Purchasers acknowledge and agree
that
they and their respective counsel have chosen to communicate with the Seller
through Peter J. Weisman, P.C., but Peter J. Weisman, P.C. does not represent
any of the Purchasers in this transaction other than The Tail Wind Fund Ltd.
(the “Lead Investor”).
5.14 Other
Transactions. Until after four months following the date on which the
Registration Statement (as defined in the Investor Rights Agreement) is declared
effective by the Commission, the Seller shall not issue or sell or agree
to
issue or sell any securities in a financing transaction which is a Variable
Rate
Transaction or otherwise provides the purchasers of such securities with
more
favorable terms (including without limitation with respect to the effective
purchase price per share, conversion, exercise or exchange price (whether
before
or after adjustment), term, coupon, warrant coverage or otherwise) than those
contained in this Agreement and the Related Documents and the transactions
contemplated hereby and thereby. “Variable Rate Transaction” shall mean a
transaction in which the Seller issues or sells, or agrees to issue or sell
(a)
any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of, Common
Stock either (x) at a conversion, exercise or exchange rate or other price
that
is based upon and/or varies with the trading prices of or quotations for
the
Common Stock at any time after the initial issuance of such debt or equity
securities, (y) with a fixed conversion, exercise or exchange price that
is
subject to being reset at some future date after the initial issuance of
such
debt or equity security or upon the occurrence of specified or contingent
events
directly or indirectly related to the business of the Seller or the market
for
the Common Stock (but excluding standard stock split anti-dilution provisions),
or (z) under a warrant exercisable for a number of shares based upon and/or
varying with the trading prices of or quotations for the Common Stock at
any
time after the initial issuance of such warrant, or (b) any securities of
the
Seller pursuant to an “equity line” structure which provides for the sale, from
time to time, of securities of the Seller which are registered for resale
pursuant to the Securities Act.
5.15 Shareholder
Approval.
(a) Meeting.
The
Seller shall hold a special meeting of shareholders (which may also be at
the
annual meeting of shareholders) at the earliest practical date after the
Closing
Date for the purpose of obtaining approval (“Shareholder Approval”), in
accordance with the applicable rules and regulations of the Nasdaq Stock
Market
(including without limitation Section 4350(i) of the NASD Manual) and Nevada
corporate law, from the shareholders of the Seller, of (1) the transactions
contemplated by this Agreement and the Related Documents, including without
limitation the issuance of all of the Conversion Shares under the Notes and
under the Preferred Stock and all the Warrant Shares (without regard to
limitations on beneficial ownership with respect to Conversion Shares or
Warrant
Shares) in excess of the Issuable Maximum, as defined in the Notes and Warrants,
and (2) the Seller amending its Articles of Incorporation, pursuant to Section
78.195 of the Nevada Revised Statutes, to vest authority in the Seller’s Board
of Directors to prescribe, the classes, series and the number of each class
or
series of stock and the voting powers, designations, preferences, limitations,
restrictions and relative rights of each class or series of stock pursuant
to a
certificate of designation (“Blank Check Preferred”), with the recommendation of
the Seller’s Board of Directors that such proposals be approved, and the Seller
shall solicit proxies from its shareholders in connection therewith in the
same
manner as all other management proposals in such proxy statement and all
management-appointed proxyholders shall vote their proxies in favor of such
proposals. If the Seller does not obtain Shareholder Approval at the first
meeting, the Seller shall call a meeting every four months thereafter to
seek
Shareholder Approval until the earlier of the date Shareholder Approval is
obtained or the Notes and Warrants are no longer outstanding. Within thirty
(30)
days following the Closing, the Seller shall file with the Commission and
deliver to its shareholders a proxy statement with respect to such shareholders
meeting (the “Shareholders Meeting”), which Shareholders Meeting shall occur
within sixty (60) days following the filing of such proxy
statement.
(b) Exchange.
In the
event Shareholder Approval is obtained, the Seller shall, by written notice
to
the Purchasers (“Exchange Notice”), designate a date (“Exchange Date”) within
twenty (20) business days following such Shareholder Approval upon which
each
Purchaser shall exchange its Notes for (a) such number of shares of Preferred
Stock as is equal to the principal amount of Notes being exchanged divided
by
$1,000, and (b) cash equal to the amount of accrued but unpaid interest on
the
Notes through such Exchange Date. The Exchange Notice shall be delivered
at
least ten (10) business days prior to the Exchange Date. Prior to the Exchange
Date, the Seller shall amend its Articles of Incorporation to permit Blank
Check
Preferred (and provide proof thereof reasonably acceptable to the Purchasers),
file the Certificate of Designation in the form attached hereto as Exhibit
B
with the Secretary of State of the State of Nevada, and furnish a stamped
copy
of such filed Certificate of Designation to the Purchasers (or other proof
of
filing reasonably acceptable to the Purchasers). Within three (3) business
days
following such Exchange Date, the Seller shall deliver to each Purchaser
(a)
certificates evidencing such shares of Preferred Stock, (b) a certificate
of the
Secretary of the Seller, in form and substance satisfactory to the Purchasers,
certifying as of the Exchange Date that the Seller’s Articles of Incorporation,
including and as amended by the Certificate of Designation delivered to the
Purchasers at Closing authorizing the Preferred Stock, has not been amended,
modified or repealed in any way since the Closing Date, and (c) cash payment
for
accrued interest due such Purchaser under the Notes through the Exchange
Date.
All shares of Preferred Stock issued by the Seller in such exchange shall
be
duly authorized, validly issued, fully paid and nonassessable, without any
liens
or encumbrances thereon. Prior to the Exchange Date, the Seller shall not
directly or indirectly amend, modify or repeal the Certificate of Designation
or
the terms thereof in any way or manner without the prior written consent
of the
Purchasers.
5.16 Participation
Rights.
(a) Subject
to
the terms and conditions specified in this Section 5.16, at any time while
the
Notes or shares of Preferred Stock are outstanding, the holders of Notes
or
shares of Preferred Stock shall have a right to participate with respect
to the
issuance or possible issuance by the Seller of any future equity or
equity-linked securities or debt which is convertible into equity or in which
there is an equity component (as the case may be, “Additional Securities”) on
the same terms and conditions as offered by the Seller to the other purchasers
of such Additional Securities. Each time the Seller proposes to offer any
Additional Securities, the Seller shall make an offering of such Additional
Securities to each holder of Notes or shares of Preferred Stock in accordance
with the following provisions:
(i) The
Seller shall deliver a notice (the “Issuance Notice”) to the holders of Notes or
shares of Preferred Stock stating (a) its bona fide intention to offer such
Additional Securities, (b) the number of such Additional Securities to be
offered, (c) the price and terms, if any, upon which it proposes to offer
such
Additional Securities, and (d) the anticipated closing date of the sale of
such
Additional Securities.
(ii) By
written notification received by the Seller, within ten (10) days after giving
of the Issuance Notice, each holder of Notes or shares of Preferred Stock
may
elect to purchase or obtain, at the price and on the terms specified in the
Issuance Notice, up to that number of such Additional Securities which equals
such holder’s Participation Amount for the same consideration and on the same
terms and conditions as such third-party sale, where the “Participation Amount”
for each holder shall equal (a) 50% of the aggregate amount of such Additional
Securities issued or to be issued to investors in such offering prior to
the
exercise of the participation rights contemplated by this Section 5.16 (such
aggregate amount, the “Subsequent Offering Amount”), multiplied by (b) a
fraction, the numerator of which equals the principal amount of Notes or
number
of shares of Preferred Stock then held by such holder and the denominator
of
which equals the aggregate principal amount of Notes or number of shares
of
Preferred Stock purchased or exchanged by all Purchasers pursuant to this
Agreement. The Seller shall promptly, in writing, inform each holder of Notes
or
shares of Preferred Stock which elects to purchase all of the Additional
Shares
available to it (“Fully-Exercising Holder”) of any other holder's failure to do
likewise. During the five-day period commencing after such information is
given,
each Fully-Exercising Holder shall be entitled to obtain that portion of
the
Additional Securities for which the holders of Notes or shares of Preferred
Stock were entitled to subscribe but which were not subscribed for by such
holders which is equal to the proportion that the principal amount of Notes
or
number of shares of Preferred Stock held by such Fully-Exercising Holder
bears
to the aggregate principal amount of Notes or total number of shares of
Preferred Stock held by all Fully-Exercising Holders who wish to purchase
some
of the unsubscribed shares.
(iii) The
Seller may, during the 75-day period following the expiration of the 10-day
and
5-day periods referenced in Section 5.16(a)(ii) above, offer up to the
Subsequent Offering Amount of such Additional Securities to any person or
persons at a price not less than, and upon terms no more favorable to the
offeree than, those specified in the Issuance Notice. If the Seller does
not
consummate the sale of such Additional Securities within such period, the
right
provided hereunder shall be deemed to be revived and such Additional Securities
shall not be offered or sold unless the Participation Amount is again first
reoffered to the holders of Notes or shares of Preferred Stock in accordance
herewith.
(b) Notwithstanding
anything contained herein, no holder Notes or shares of Preferred Stock shall
have the right to purchase Additional Securities hereunder to the extent
same
would cause such holder to exceed the Beneficial Ownership Cap (as defined
in
the Certificate of Designation).
ARTICLE
VI - CONDITIONS TO CLOSINGS
6.1 Conditions
to Obligations of Purchasers to Effect each Closing.
The
obligations of a Purchaser to effect the Closing and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or
prior
to Closing, of each of the following conditions, any of which may be waived,
in
writing, by a Purchaser:
(a) Representations
and Warranties.
The
representations and warranties of the Seller set forth in this Agreement
shall
be true and correct in all material respects (except for those qualified
as to
materiality or a Material Adverse Effect, which shall be true and correct
in all
respects) as of the date of this Agreement and as of the Closing Date (except
to
the extent that such representation or warranty speaks of an earlier date,
in
which case such representation or warranty shall be true and correct in all
material respects (or if qualified as to materiality or a Material Adverse
Effect, true and correct in all respects) as of such date) as though made
on and
as of the Closing Date. On or prior to the Closing Date the Seller shall
deliver
to each of the Purchasers a certificate of the Chief Executive Office and
Chief
Financial Officer of the Seller to the effect that all of the representations
and warranties of the Seller set forth in this Agreement are true and correct
as
of the Closing Date (including, to the extent necessary, updated disclosure
schedules which shall be reasonably acceptable to each Purchaser) and that
the
Seller has performed all of its obligations under this Agreement required
to be
performed prior to the Closing Date.
(b) Performance
of Obligations of Seller.
The
Seller shall have performed in all material respects all agreements and
covenants required to be performed by it under this Agreement on or prior
to the
Closing Date.
(c) No
Suspension of Trading.
From
the date hereof to the Closing Date, trading in the Common Stock shall not
have
been suspended by the Commission (except for any suspension of trading of
limited duration agreed to by the Seller, which suspension shall be terminated
prior to Closing), and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg Financial Markets shall not
have
been suspended or limited, or minimum prices shall not have been established
on
securities whose trades are reported by such service, or on any trading market,
nor shall a banking moratorium have been declared either by the United States
or
New York State authorities, nor shall there have occurred any material outbreak
or escalation of hostilities or other national or international calamity
of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser,
makes
it impracticable or inadvisable to purchase the Notes and Warrants at the
Closing.
(d) Deliverables.
The
Seller shall deliver or cause to be delivered to each of the Purchasers the
following on or prior to the Closing Date:
1.
(i) One
or more Notes, in the aggregate principal amount as is to be purchased at
the
Closing by such Purchaser, registered in the name of such Purchaser;
and
(ii) One
or more certificates evidencing the Warrants, registered in the name of such
Purchaser, pursuant to which such Purchaser shall be entitled to purchase
that
number of shares of Common Stock as indicated in Schedule 1 besides such
Purchaser’s name.
2. The
Investor Rights Agreement, in the form attached hereto as Exhibit
C
(the
“Investor Rights Agreement”), duly executed by the Seller.
3. A
legal opinion of counsel to the Seller (“Seller’s Counsel”), in the form
attached hereto as Exhibit
D.
4. A
certificate of the Secretary of the Seller (the “Secretary’s Certificate”), in
form and substance satisfactory to the Purchasers, certifying as follows
as of
the date of such Closing:
(i) that
the Certificate of Designation authorizing the Preferred Stock has been duly
filed in the office of the Nevada Secretary of State, and that attached to
the
Secretary’s Certificate is true and complete copy of the Certificate of
Incorporation of the Seller, as amended, including the Certificate of
Designation;
(ii) that
a true copy of the Bylaws of the Seller, as amended to the Closing Date,
is
attached to the Secretary’s Certificate;
(iii) that
attached thereto are true and complete copies of the resolutions of the Board
of
Directors of the Seller authorizing the execution, delivery and performance
of
this Agreement and the Related Documents, instruments and certificates required
to be executed by it in connection herewith and approving the consummation
of
the transactions in the manner contemplated hereby including, but not limited
to, the authorization and issuance of the Notes, Preferred Stock and Warrants;
(iv) the
names and true signatures of the officers of the Seller signing this Agreement
and all other documents to be delivered in connection with this
Agreement;
(v) such
other matters as required by this Agreement; and
(vi) such
other matters as the Purchasers may reasonably request.
5. A
wire transfer representing the amount due for legal fees and other expenses
set
forth in Section 8.2 hereof (which may be offset from the Purchase Price
at the
election of the applicable Purchaser).
6. Seller
shall have applied to each U.S. securities exchange, interdealer quotation
system and other trading market where its Common Stock is currently listed
or
qualified for trading or quotation for the listing or qualification of the
Conversion Shares and the Warrant Shares for trading or quotation thereon
in the
time and manner required thereby.
7. Such
other documents as the Purchasers shall reasonably request.
(e)
There shall
have been no Material Adverse Effect with respect to the Seller.
(f) The
Seller shall have entered into an Escrow Agreement with a third party reasonably
acceptable to the Purchasers (the “Escrow Agent”) in the form attached hereto as
Exhibit
E
(the
“Escrow Agreement”) pursuant to which the Escrow Agent shall hold certain funds
and documents described therein. Each of the Purchasers authorizes the Lead
Investor to enter into the Escrow Agreement and to act in the capacity described
therein.
(g) The
aggregate Purchase Price hereunder for all Purchasers shall be at least $5
million.
6.2 Conditions
to Obligations of the Seller to Effect each Closing.
The
obligations of the Seller to effect the Closing and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or
prior
to the Closing of each of the following conditions, any of which may be waived,
in writing, by the Seller:
(a) Representations
and Warranties.
The
representations and warranties of each Purchaser set forth in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date (except to the extent that such
representation or warranty speaks of an earlier date, in which case such
representation or warranty shall be true and correct in all material respects
as
of such date) as though made on and as of the Closing Date.
(b) Performance
of Obligations of the Purchasers.
Each of
the Purchasers shall have performed in all material respects all agreements
and
covenants required to be performed by it under this Agreement on or prior
to the
Closing Date.
(c) Deliverables.
Each of
the Purchasers shall deliver or cause to be delivered to the Seller (i) upon
receipt of the Seller’s items described in Section 6.1(d) above, payment of the
portion of the Purchase Price set forth opposite each Purchaser’s name on
Schedule
1
applicable for such Closing, in cash by wire transfer of immediately available
funds to an account designated in writing by Seller prior to the date hereof;
(ii) an executed copy of the Investor Rights Agreement; and (iii) such other
documents as the Seller shall reasonably request.
ARTICLE
VII - INDEMNIFICATION AND LIQUIDATED DAMAGES
7.1 Survival
of Representations.
The
representations and warranties of the Seller and the Purchasers contained
in or
made pursuant to this Agreement shall survive the execution and delivery
of this
Agreement. The Seller’s and the Purchasers’ warranties and representations shall
in no way be affected by any investigation of the subject matter thereof
made by
or on behalf of the Seller or the Purchasers.
7.2 Indemnification.
The
Seller agrees to indemnify and hold harmless the Purchasers, their Affiliates,
each of their officers, directors, employees and agents and their respective
successors and assigns, from and against any losses, damages, or expenses
which
are caused by or arise out of (i) any breach or default in the performance
by
the Seller of any covenant or agreement made by the Seller in this Agreement
or
in any of the Related Documents; (ii) any breach of warranty or representation
made by the Seller in this Agreement or in any of the Related Documents;
(iii)
any and all third party actions, suits, proceedings, claims, demands, judgments,
costs and expenses (including reasonable legal fees and expenses) incident
to
any of the foregoing; and (iv) any enforcement of this
indemnification.
7.3 Indemnity
Procedure.
The
Seller is referred to herein as the “Indemnifying Party” and the other party or
parties claiming indemnity is referred to as the “Indemnified Party”. An
Indemnified Party under this Agreement shall, with respect to claims asserted
against such party by any third party, give written notice to the Indemnifying
Party of any liability which might give rise to a claim for indemnity under
this
Agreement within sixty (60) business days of the receipt of any written claim
from any such third party, but not later than twenty (20) days prior to the
date
any answer or responsive pleading is due, and with respect to other matters
for
which the Indemnified Party may seek indemnification, give prompt written
notice
to the Indemnifying Party of any liability which might give rise to a claim
for
indemnity; provided, however, that any failure to give such notice will not
waive any rights of the Indemnified Party except to the extent the rights
of the
Indemnifying Party are materially prejudiced.
The
Indemnifying Party shall have the right, at its election, to take over the
defense or settlement of such claim by giving written notice to the Indemnified
Party at least fifteen (15) days prior to the time when an answer or other
responsive pleading or notice with respect thereto is required. If the
Indemnifying Party makes such election, it may conduct the defense of such
claim
through counsel of its choosing (subject to the Indemnified Party’s approval of
such counsel, which approval shall not be unreasonably withheld), shall be
solely responsible for the expenses of such defense and shall be bound by
the
results of its defense or settlement of the claim. The Indemnifying Party
shall
not settle any such claim without prior notice to and consultation with the
Indemnified Party, and no such settlement involving any equitable relief
or
which might have an adverse effect on the Indemnified Party may be agreed
to
without the written consent of the Indemnified Party (which consent shall
not be
unreasonably withheld). So long as the Indemnifying Party is diligently
contesting any such claim in good faith, the Indemnified Party may pay or
settle
such claim only at its own expense and the Indemnifying Party will not be
responsible for the fees of separate legal counsel to the Indemnified Party,
unless the named parties to any proceeding include both parties or
representation of both parties by the same counsel would be inappropriate
due to
conflicts of interest or otherwise. If the Indemnifying Party does not make
such
election, or having made such election does not, in the reasonable opinion
of
the Indemnified Party proceed diligently to defend such claim, then the
Indemnified Party may (after written notice to the Indemnifying Party), at
the
expense of the Indemnifying Party, elect to take over the defense of and
proceed
to handle such claim in its discretion and the Indemnifying Party shall be
bound
by any defense or settlement that the Indemnified Party may make in good
faith
with respect to such claim. In connection therewith, the Indemnifying Party
will
fully cooperate with the Indemnified Party should the Indemnified Party elect
to
take over the defense of any such claim. The parties agree to cooperate in
defending such third party claims and the Indemnified Party shall provide
such
cooperation and such access to its books, records and properties as the
Indemnifying Party shall reasonably request with respect to any matter for
which
indemnification is sought hereunder; and the parties hereto agree to cooperate
with each other in order to ensure the proper and adequate defense
thereof.
With
regard to claims of third parties for which indemnification is payable
hereunder, such indemnification shall be paid by the Indemnifying Party upon
the
earlier to occur of: (i) the entry of a judgment against the Indemnified
Party
and the expiration of any applicable appeal period, or if earlier, five (5)
days
prior to the date that the judgment creditor has the right to execute the
judgment; (ii) the entry of an unappealable judgment or final appellate decision
against the Indemnified Party; or (iii) a settlement of the claim.
Notwithstanding the foregoing, the reasonable expenses of counsel to the
Indemnified Party shall be reimbursed on a current basis by the Indemnifying
Party. With regard to other claims for which indemnification is payable
hereunder, such indemnification shall be paid promptly by the Indemnifying
Party
upon demand by the Indemnified Party.
7.4 Liquidated
Damages.
The
Seller and the Purchasers agree that the Purchasers will suffer damages if
a
Breach Event (as defined below) occurs or is ongoing. The Seller and the
Purchasers further agree that it may not be feasible to ascertain the extent
of
such damages with precision. If a Breach Event (as defined below) occurs,
then
the Purchasers may elect, as liquidated damages, and in addition to any other
remedies legally available to such Purchasers, to require that the Seller
shall
pay to the Purchasers liquidated damages at a rate of 12% per annum of the
aggregate Liquidation Amount of such Purchasers’ outstanding Preferred Stock (or
outstanding principal amount of Notes) payable monthly in cash at the end
of
each month (or part thereof) in which the Breach Event is outstanding.
“Breach
Event” means either:
(i) Any
breach of any warranty or representation of the Seller as of the date made
in
this Agreement, any Related Agreement or any other agreement delivered herewith,
which breach, or the facts and circumstances concerning such breach, has
or is
reasonably likely to have a Material Adverse Effect; or
(ii) Any
breach by the Seller of any material covenant or obligation under this
Agreement, any Related Agreement or any other agreement delivered herewith,
and
which breach, if capable of being cured, has not been cured within ten (10)
days
after notice of such breach has been given by the holders of a majority of
Preferred Stock or principal amount of Notes, as the case may be, to the
Seller.
For
clarification, so long as the Seller complies with Section 5.15 above, the
failure of the Seller’s shareholders to vote in favor of the Shareholder
Approval being sought does not constitute a Breach Event.
The
Seller and the Purchasers have expressly negotiated this Section 7.4, and
have
agreed that in light of the circumstances existing at the time of execution
of
this Agreement, the liquidated damages expressed herein represent a reasonable
estimate of the harm likely to be suffered by the Purchasers upon the occurrence
of a Breach Event.
ARTICLE
VIII - MISCELLANEOUS
8.1 Further
Assurances.
Each
party agrees to cooperate fully with the other parties and to execute such
further instruments, documents and agreements and to give such further written
assurances as may be reasonably requested by any other party to better evidence
and reflect the transactions described herein and contemplated hereby and
to
carry into effect the intents and purposes of this Agreement, and further
agrees
to take promptly, or cause to be taken, all actions, and to do promptly,
or
cause to be done, all things necessary, proper or advisable under applicable
law
to consummate and make effective the transactions contemplated hereby, to
obtain
all necessary waivers, consents and approvals, to effect all necessary
registrations and filings, and to remove any injunctions or other impediments
or
delays, legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement for the purpose of securing to
the
parties hereto the benefits contemplated by this Agreement.
8.2 Fees
and Expenses.
The
parties hereto shall pay their own costs and expenses in connection herewith,
except that the Seller shall pay to Tail Wind Advisory and Management Ltd.
a
non-refundable sum equal to $25,000 as and for legal and due diligence expenses
incurred in connection herewith, $12,500 of which amount has been previously
paid. The Seller shall pay all fees and expenses of any placement agents,
finders and escrow agents in connection with the transactions contemplated
by
this Agreement pursuant to a separate agreement between such
parties.
8.3 Notices.
Any and
all notices or other communications or deliveries required or permitted to
be
provided hereunder shall be in writing and shall be deemed given and effective
on the earliest of (a) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number specified in this Section
prior to 5:00 p.m. (New York City time) on a business day, (b) the next business
day after the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile number specified in this Section on a day
that is
not a business day or later than 5:00 p.m. (New York City time) on any business
day, (c) the business day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service such as Federal Express,
or (d)
actual receipt by the party to whom such notice is required to be given.
The
address for such notices and communications shall be as follows:
If
to the
Purchasers at each Purchaser’s address set forth under its name on Schedule
1
attached
hereto, or with respect to the Seller, addressed to:
NetSol
Technologies, Inc.
23901
Calabasas Road,
Suite
2072
Calabasas,
CA 91302
Attention:
General Counsel
Facsimile
No.: (818) 222-9197
or
to
such other address or addresses or facsimile number or numbers as any such
party
may most recently have designated in writing to the other parties hereto
by such
notice. Copies of notices to any Purchaser shall be sent to the addresses,
if
any, listed on Schedule
1
attached
hereto.
Unless
otherwise stated above, such communications shall be effective when they
are
received by the addressee thereof in conformity with this Section. Any party
may
change its address for such communications by giving notice thereof to the
other
parties in conformity with this Section.
8.4 Governing
Law.
All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by and enforced in accordance with the
laws
of the State of New York without reference to the conflicts of laws principles
thereof.
8.5 Jurisdiction
and Venue.
This
Agreement shall be subject to the exclusive jurisdiction of the Federal District
Court, Southern District of New York and if such court does not have proper
jurisdiction, the State Courts of New York County, New York. The parties
to this
Agreement agree that any breach of any term or condition of this Agreement
shall
be deemed to be a breach occurring in the State of New York by virtue of
a
failure to perform an act required to be performed in the State of New York
and
irrevocably and expressly agree to submit to the jurisdiction of the Federal
District Court, Southern District of New York and if such court does not
have
proper jurisdiction, the State Courts of New York County, New York for the
purpose of resolving any disputes among the parties relating to this Agreement
or the transactions contemplated hereby. The parties irrevocably waive, to
the
fullest extent permitted by law, any objection which they may now or hereafter
have to the laying of venue of any suit, action or proceeding arising out
of or
relating to this Agreement, or any judgment entered by any court in respect
hereof brought in New York County, New York, and further irrevocably waive
any
claim that any suit, action or proceeding brought in Federal District Court,
Southern District of New York and if such court does not have proper
jurisdiction, the State Courts of New York County, New York has been brought
in
an inconvenient forum. Each of the parties hereto consents to process being
served in any such suit, action or proceeding, by mailing a copy thereof
to such
party at the address in effect for notices to it under this Agreement and
agrees
that such service shall constitute good and sufficient service of process
and
notice thereof. Nothing in this Section 8.5 shall affect or limit any right
to
serve process in any other manner permitted by law.
8.6 Successors
and Assigns.
This
Agreement is personal to each of the parties and may not be assigned without
the
written consent of the other parties; provided, however, that any of the
Purchasers shall be permitted to assign this Agreement to any Person to whom
it
assigns or transfers securities issued or issuable pursuant to this Agreement.
Any assignee must be an “accredited investor” as defined in Rule 501(a)
promulgated under the Securities Act.
8.7 Severability.
If any
provision of this Agreement, or the application thereof, shall for any reason
or
to any extent be invalid or unenforceable, the remainder of this Agreement
and
application of such provision to other persons or circumstances shall continue
in full force and effect and in no way be affected, impaired or
invalidated.
8.8 Entire
Agreement.
This
Agreement and the other agreements and instruments referenced herein constitute
the entire understanding and agreement of the parties with respect to the
subject matter hereof and supersedes all prior agreements and
understandings.
8.9 Other
Remedies.
Except
as otherwise provided herein, any and all remedies herein expressly conferred
upon a party shall be deemed cumulative with and not exclusive of any other
remedy conferred hereby or by law, or in equity on such party, and the exercise
of any one remedy shall not preclude the exercise of any other.
8.10 Amendment
and Waivers.
Subject
to Section 5.12, any term or provision of this Agreement may be amended,
and the
observance of any term of this Agreement may be waived (either generally
or in a
particular instance and either retroactively or prospectively) only by a
writing
signed by the Seller and the holders of at least 75% of the Preferred Stock
then
outstanding (or otherwise 75% in principal amount of outstanding Notes),
and
such waiver or amendment, as the case may be, shall be binding upon all
Purchasers. The waiver by a party of any breach hereof or default in the
performance hereof shall not be deemed to constitute a waiver of any other
default or any succeeding breach or default. This Agreement may not be amended
or supplemented by any party hereto except pursuant to a written amendment
executed by the Seller and the holders of at least 75% of the Preferred Stock
then outstanding (or otherwise 75% in principal amount of outstanding Notes).
No
amendment shall be effected to impact a holder of Preferred Stock or Notes
in a
disproportionately adverse fashion without the consent of such individual
holder
of Preferred Stock or Notes.
8.11. Termination.
This
Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations
hereunder only and without any effect whatsoever on the obligations between
the
Seller and the other Purchasers, by written notice to the Seller, if the
Closing
has not been consummated on or before June 19, 2006; provided, however, that
no
such termination will affect the right of any party to sue for any breach
by the
other party (or parties).
8.12 No
Waiver.
The
failure of any party to enforce any of the provisions hereof shall not be
construed to be a waiver of the right of such party thereafter to enforce
such
provisions.
8.13 Construction
of Agreement; Knowledge.
For
purposes of this Agreement, the term “knowledge,” when used in reference to a
corporation means the knowledge of the directors and executive officers of
such
corporation (including, if applicable, any person designated as a chief
scientific, medical or technical officer) assuming such persons shall have
made
inquiry that is customary and appropriate under the circumstances to which
reference is made, and when used in reference to an individual means the
knowledge of such individual assuming the individual shall have made inquiry
that is customary and appropriate under the circumstances to which reference
is
made.
8.14 Counterparts.
This
Agreement may be executed in any number of counterparts, each of which shall
be
an original as against any party whose signature appears thereon and all
of
which together shall constitute one and the same instrument. This Agreement
shall become binding when one or more counterparts hereof, individually or
taken
together, shall bear the signatures of all of the parties reflected hereon
as
signatories. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid and binding obligation
of the
party executing (or on whose behalf such signature is executed) with the
same
force and effect as if such facsimile signature page were an original
thereof.
8.15 No
Third Party Beneficiary.
Nothing
expressed or implied in this Agreement is intended, or shall be construed,
to
confer upon or give any person other than the parties hereto and their
respective heirs, personal representatives, legal representatives, successors
and permitted assigns, any rights or remedies under or by reason of this
Agreement.
8.16 Waiver
of Trial by Jury.
THE
PARTIES HERETO IRREVOCABLY WAIVE TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
[Signature
Page Follows]
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date
first above written.
SELLER:
NETSOL
TECHNOLOGIES, INC.
By:________________________________
Name:
Title:
PURCHASER:
Print
Exact Name:_________________________________
By:_____________________________________________
Name:
Title:
Address:_________________________________________
________________________________________________
________________________________________________
Telephone:_______________________________________
Facsimile:________________________________________
Email:___________________________________________
Amount
of
Investment: $____________________
[Omnibus
NTWK Convertible Note and Warrant Purchase Agreement Signature
Page]
Schedule
3.10
None
Schedule
3.11
None
Schedule
3.15
None
Schedule
3.17
None
Schedule
3.18
None
Schedule
3.20
None
Schedule
3.21
The
Placement Agent Agreement with Maxim Group LLC provides Maxim Group LLC with
piggyback registration rights for the shares of common stock underlying the
Placement Agent Warrant. The Warrant is a 2 year warrant comprising a right
to
acquire up to 8% of the number of shares of Common Stock underlying the
Convertible Notes at an exercise price equal to the per share offering price
in
the transaction.
Schedule
3.22
None
ANNEX
B
12%
CONVERTIBLE NOTE
NEITHER
THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED
(THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
THIS
NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN THE EVENT OF A PARTIAL
REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR CONVERSION
OF
ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY
THIS
NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED INTEREST SET FORTH
BELOW.
12%
CONVERTIBLE NOTE DUE JUNE 15, 2007
OF
NETSOL
TECHNOLOGIES, INC.
Note
No.: ____
|
Original
Principal Amount: $__________
|
Issuance
Date: June 15, 2006
|
New
York, New York
|
THIS
NOTE
(“Note”)
is one
of a duly authorized issue of Notes of NETSOL
TECHNOLOGIES,
INC.,
a
corporation duly organized and existing under the laws of the State of
Nevada
(the
“Company”),
designated as the Company's 12% Convertible Notes Due June 15, 2007
(“Maturity
Date”)
in
an
aggregate principal amount (when taken together with the original principal
amounts of all other Notes) which does not exceed Five Million Five Hundred
Thousand U.S. Dollars (U.S. $5,500,000) (the “Notes”).
FOR
VALUE
RECEIVED,
the
Company hereby promises to pay to the order of
_________________________ or
its
registered assigns or successors-in-interest (“Holder”)
the
principal sum of _____________________________ Dollars (U.S. $__________),
together with all accrued but unpaid interest thereon, if any, on the
Maturity
Date, to the extent such principal amount and interest has not been repaid
or
converted into the Company's Common Stock, $0.001 par value per share
(the
“Common
Stock”),
in
accordance with the terms hereof. Interest on the unpaid principal balance
hereof shall accrue at the rate of 12% per annum from the date of original
issuance hereof (the “Issuance
Date”)
until
the same becomes due and payable on the Maturity Date, or such earlier
date upon
acceleration or by conversion or redemption in accordance with the terms
hereof
or of the other Agreements. Interest on this Note shall accrue daily commencing
on the Issuance Date and shall be computed on the basis of a 360-day
year,
30-day months and actual days elapsed and shall be payable in accordance
with
Section 1 hereof. Notwithstanding anything contained herein, this Note
shall
bear interest on the due and unpaid Principal Amount from and after the
occurrence and during the continuance of an Event of Default pursuant
to Section
4(a) at the rate (the “Default
Rate”)
equal
to the lower of eighteen (18%) per annum or the highest rate permitted
by law.
Unless otherwise agreed or required by applicable law, payments will
be applied
first to any unpaid collection costs, then to unpaid interest and fees
and any
remaining amount to principal.
All
payments of principal and interest on this Note shall be made in lawful money
of
the United States of America by wire transfer of immediately available funds
to
such account as the Holder may from time to time designate by written notice
in
accordance with the provisions of this Note or by Company check. This Note
may
not be prepaid in whole or in part except as otherwise provided herein. Whenever
any amount expressed to be due by the terms of this Note is due on any day
which
is not a Business Day (as defined below), the same shall instead be due on
the
next succeeding day which is a Business Day.
The
Notes
are subject to exchange for the Company’s Series A 7% Cumulative Convertible
Preferred Stock pursuant to the terms of and as set forth in the Purchase
Agreement (as defined below).
Capitalized
terms used herein and not otherwise defined shall have the meanings set forth
in
the Purchase Agreement dated on or about the Issuance Date pursuant to which
the
Notes were originally issued (the “Purchase
Agreement”).
For
purposes hereof the following terms shall have the meanings ascribed to them
below:
“Bankruptcy
Event”
means
any of the following events: (a) the Company or any subsidiary commences
a case
or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or
similar law of any jurisdiction relating to the Company or any subsidiary
thereof; (b) there is commenced against the Company or any subsidiary any
such
case or proceeding that is not dismissed within 60 days after commencement;
(c)
the Company or any subsidiary is adjudicated insolvent or bankrupt or any
order
of relief or other order approving any such case or proceeding is entered;
(d)
the Company or any subsidiary suffers any appointment of any custodian or
the
like for it or any substantial part of its property that is not discharged
or
stayed within 60 days; (e) the Company or any subsidiary makes a general
assignment for the benefit of creditors; (f) the Company or any subsidiary
fails
to pay, or states that it is unable to pay or is unable to pay, its debts
generally as they become due; (g) the Company or any subsidiary calls a meeting
of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (h) the Company or any subsidiary, by any
act or
failure to act, expressly indicates its consent to, approval of or acquiescence
in any of the foregoing or takes any corporate or other action for the purpose
of effecting any of the foregoing.
“Business
Day”
shall
mean any day other than a Saturday, Sunday or a day on which commercial banks
in
the City of New York are authorized or required by law or executive order
to
remain closed.
“Change
in Control Transaction”
will
be
deemed to exist if (i) there occurs any consolidation, merger or other business
combination of the Company with or into any other corporation or other entity
or
person (whether or not the Company is the surviving corporation), or any
other
corporate reorganization or transaction or series of related transactions
in
which in any of such events the voting stockholders of the Company prior
to such
event cease to own 50% or more of the voting power, or corresponding voting
equity interests, of the surviving corporation after such event (including
without limitation any “going private” transaction under Rule 13e-3 promulgated
pursuant to the Exchange Act or tender offer by the Company under Rule 13e-4
promulgated pursuant to the Exchange Act for 20% or more of the Company's
Common
Stock), (ii) any person (as defined in Section 13(d) of the Exchange Act),
together with its affiliates and associates (as such terms are defined in
Rule
405 under the Act), beneficially owns or is deemed to beneficially own (as
described in Rule 13d-3 under the Exchange Act without regard to the 60-day
exercise period) in excess of 35% of the Company's voting power, (iii) there
is
a replacement of more than one-half of the members of the Company’s Board of
Directors which is not approved by those individuals who are members of the
Company's Board of Directors on the date thereof, (iv) in one or a series
of
related transactions, there is a sale or transfer of all or substantially
all of
the assets of the Company, determined on a consolidated basis, or (v) the
Company enters into any agreement providing for an event set forth in (i),
(ii),
(iii) or (iv) above.
“Conversion
Ratio”
means,
at any time, a fraction, of which the numerator is the entire outstanding
Principal Amount of this Note (or such portion thereof that is being redeemed
or
repurchased), and of which the denominator is the Conversion Price as of
the
date such ratio is being determined.
“Conversion
Price”
shall
equal $1.65 (which Conversion Price shall be subject to adjustment as set
forth
herein).
“Convertible
Securities”
means
any convertible securities, warrants, options or other rights to subscribe
for
or to purchase or exchange for, shares of Common Stock.
“Effective
Date”
means
the date on which a Registration Statement covering all the Underlying Shares
and other Registrable Securities (as defined in the Registration Rights
Agreement) is declared effective by the SEC.
“Effective
Registration” shall
mean (i) the resale of all Registrable Securities (as defined in the
Registration Rights Agreement) is covered by an effective registration statement
in accordance with the terms of the Registration Rights Agreement which
registration statement is not subject to any suspension or stop order; (ii)
the
resale of such Registrable Securities may be effected pursuant to a current
and
deliverable prospectus that is not subject at the time to any blackout or
similar circumstance; (iii) such Registrable Securities are listed, or approved
for listing prior to issuance, on the American Stock Exchange, the New York
Stock Exchange or the Nasdaq National or Capital Market, and are not subject
to
any trading suspension (nor shall trading generally have been suspended on
such
exchange or market), and the Company shall not have been notified of any
pending
or threatened proceeding or other action to delist or suspend the Common
Stock
on any of such markets on which the Common Stock is then traded or listed;
(iv)
the requisite number of shares of Common Stock shall have been duly authorized
and reserved for issuance as required by the terms of the Purchase Agreement
and
this Note; (v) the closing bid price per share of Common Stock on the Principal
Market for each of the ten (10) Trading Days immediately preceding the
applicable Payment Date shall be greater than $1.00; (vi) none of the Company
or
any direct or indirect subsidiary of the Company shall be subject to any
Bankruptcy Event; and (vii) no Event of Default shall have occurred and be
continuing under this Note.
“Exchange
Act”
shall
mean the Securities Exchange Act of 1934, as amended.
“MFN
Transaction”
shall
mean a transaction in which the Company issues or sells any securities in
a
capital raising transaction or series of related transactions (the “MFN
Offering”)
which
grants to the investor (the “MFN
Investor”)
the
right to receive additional securities based upon future capital raising
transactions of the Company on terms more favorable than those granted to
the
MFN Investor in the MFN Offering.
“Payment
Date”
shall
mean each January 1st,
April
1st,
July
1st
and
October 1st
of each
year, provided that if any such day is not a Trading Day, then such Payment
Date
shall mean the next succeeding day which is a Trading Day.
“Per
Share Selling Price”
shall
include the amount actually paid by third parties for each share of Common
Stock
in a sale or issuance by the Company. In the event a fee is paid by the Company
in connection with such transaction directly or indirectly to such third
party
or its affiliates, any such fee shall be deducted from the selling price
pro
rata to all shares sold in the transaction to arrive at the Per Share Selling
Price. A sale of shares of Common Stock shall include the sale or issuance
of
Convertible Securities, and in such circumstances the Per Share Selling Price
of
the Common Stock covered thereby shall also include the exercise, exchange
or
conversion price thereof (in addition to the consideration received by the
Company upon such sale or issuance less the fee amount as provided above).
In
case of any such security issued in a transaction in which the purchase price
or
the conversion, exchange or exercise price is directly or indirectly subject
to
adjustment or reset based on a future date, future trading prices of the
Common
Stock, specified or contingent events directly or indirectly related to the
business of the Company or the market for the Common Stock, or otherwise
(but
excluding standard stock split anti-dilution provisions or weighted-average
anti-dilution provisions similar to that set forth herein, provided that
any
actual reduction of such price under any such security pursuant to such
weighted-average anti-dilution provision shall be included and cause a
adjustment hereunder), the Per Share Selling Price shall be deemed to be
the
lowest conversion, exchange, exercise or reset price at which such securities
are converted, exchanged, exercised or reset or might have been converted,
exchanged, exercised or reset, or the lowest adjustment, as the case may
be,
over the life of such securities. If shares are issued for a consideration
other
than cash, the Per Share Selling Price shall be the fair value of such
consideration as determined in good faith by independent certified public
accountants mutually acceptable to the Company and the Holder. In the event
the
Company directly or indirectly effectively reduces the conversion, exercise
or
exchange price for any Convertible Securities which are currently outstanding,
then the Per Share Selling Price shall equal such effectively reduced
conversion, exercise or exchange price.
“Principal
Amount”
shall
refer to the sum of (i) the original principal amount of this Note, (ii)
all
accrued but unpaid interest hereunder, and (iii) any default payments owing
under the Agreements but not previously paid or added to the Principal
Amount.
“Principal
Market”
shall
mean the Nasdaq Stock Market or such other principal market or exchange on
which
the Common Stock is then listed for trading.
“Registration
Statement”
shall
have the meaning set forth in the Investor Rights Agreement.
“Securities
Act”
shall
mean the Securities Act of 1933, as amended.
“Trading
Day”
shall
mean a day on which there is trading on the Principal Market.
“Underlying
Shares”
means
the shares of Common Stock into which the Notes are convertible (including
interest or principal payments in Common Stock as set forth herein) in
accordance with the terms hereof and the Purchase Agreement.
“Variable
Rate Transaction”
shall
mean a transaction in which the Company issues or sells, or agrees to issue
or
sell (a) any debt or equity securities that are convertible into, exchangeable
or exercisable for, or include the right to receive additional shares of,
Common
Stock either (x) at a conversion, exercise or exchange rate or other price
that
is based upon and/or varies with the trading prices of or quotations for
the
Common Stock at any time after the initial issuance of such debt or equity
securities, (y) with a fixed conversion, exercise or exchange price that
is
subject to being reset at some future date after the initial issuance of
such
debt or equity security or upon the occurrence of specified or contingent
events
directly or indirectly related to the business of the Company or the market
for
the Common Stock (but excluding standard stock split anti-dilution provisions),
or (z) under a warrant exercisable for a number of shares based upon and/or
varying with the trading prices of or quotations for the Common Stock at
any
time after the initial issuance of such warrant, or (b) any securities of
the
Company pursuant to an “equity line” structure which provides for the sale, from
time to time, of securities of the Company which are registered for sale
or
resale pursuant to the 1933 Act (which for the purpose of this definition
shall
include a sale of the Company’s securities “off the shelf” in a registered
offering, whether or not such offering is underwritten).
“VWAP”
shall
mean the daily dollar volume-weighted average sale price for the Common Stock
on
the Principal Market on any particular Trading Day during the period beginning
at 9:30 a.m., New York City Time (or such other time as the Principal Market
publicly announces is the official open of trading), and ending at 4:00 p.m.,
New York City Time (or such other time as the Principal Market publicly
announces is the official close of trading), as reported by Bloomberg through
its "Volume at Price" functions or, if the foregoing does not apply, the
dollar
volume-weighted average price of such security in the over-the-counter market
on
the electronic bulletin board for such security during the period beginning
at
9:30 a.m., New York City Time (or such other time as the Principal Market
publicly announces is the official open of trading), and ending at 4:00 p.m.,
New York City Time (or such other time as the Principal Market publicly
announces is the official close of trading), as reported by Bloomberg, or,
if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported
in
the "pink sheets" by the National Quotation Bureau, Inc. If the VWAP cannot
be
calculated for such security on such date on any of the foregoing bases,
the
VWAP of such security on such date shall be the fair market value as mutually
determined by the Company and the holders of at least a majority of the
aggregate Principal Amount outstanding under the Notes. All such determinations
of VWAP shall to be appropriately and equitably adjusted in accordance with
the
provisions set forth herein for any stock dividend, stock split, stock
combination or other similar transaction occurring during any period used
to
determine the Conversion Price or Market Price (or other period utilizing
VWAPs).
The
following terms and conditions shall apply to this Note:
Section
1. Payments
of Principal and Interest.
(a) Interest
Only Payments.
Subject
to the terms of Section 1(b) below, on each Payment Date beginning on October
1,
2006, and on the Exchange Date, the Company shall pay to the Holder all interest
accrued to date on the entire Principal Amount of this Note (“Interest
Amount”),
in
accordance with this Section 1.
(b) Certain
Additional Payments by the Company.
Any
payment by the Company to the Holder hereunder, whether for principal, interest
or otherwise, shall not be subject to any deduction, withholding or offset
for
any reason whatsoever except to the extent required by law, and the Company
represents that to its best knowledge no deduction, withholding or offset
is so
required for any tax or any other reason. Notwithstanding any term or provision
of this Note to the contrary, if it shall be determined that any payment
by the
Company to or for the benefit of the Holder (whether for principal, interest
or
otherwise and whether paid or payable or distributed or distributable, actual
or
deemed, pursuant to the terms of this Note or otherwise) (a “Payment”) would be
or is subject to any deduction, withholding or offset due to any duty or
tax
(such duty or tax, together with any interest and/or penalties related thereto,
hereinafter collectively referred to as the “Payment Tax”), then the Company
shall, in addition to all sums otherwise payable hereunder, pay to the Holder
an
additional payment (a “Gross-Up Payment”) in an amount such that after all such
Payment Taxes (whether by deduction, withholding, offset or payment) (including
any interest or penalties with respect to such taxes), including without
limitation any Payment Taxes (and any interest and penalties imposed with
respect thereto) imposed upon any Gross-Up Payment, Holder actually receives
an
amount of Gross-Up Payment equal to the Payment Tax imposed upon the Payment
(i.e., the Holder receives a net amount equal to the Payment).
Section
2. Senior
Debt.
So long
as any Principal Amount of Notes is outstanding, the Company and its
subsidiaries shall not directly or indirectly, without the affirmative vote
of
the holders of at least 75% of the outstanding Principal Amount of the Notes
then outstanding, incur or permit to exist additional indebtedness which
is
senior to the Notes, or incur, assume or permit to exist any lien, mortgage,
security interest or encumbrance (other than statutory liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being
contested in good faith, if such reserve or other appropriate provision,
if any,
as shall be required by GAAP shall have been made in respect thereof) on
any of
its assets, except for capital leases, financing for equipment and purchase
money security interests.
Section
3. Conversion.
(a) Conversion
Right.
Subject
to the terms hereof and restrictions and limitations contained herein, the
Holder shall have the right, at such Holder's option, at any time and from
time
to time to convert the outstanding Principal Amount under this Note in whole
or
in part by delivering to the Company a fully executed notice of conversion
in
the form of conversion notice attached hereto as Exhibit
A
(the
“Conversion
Notice”),
which
may be transmitted by facsimile. Notwithstanding anything to the contrary
herein, this Note and the outstanding Principal Amount hereunder shall not
be
convertible into Common Stock to the extent that such conversion would result
in
the Holder hereof exceeding the limitations contained in, or otherwise violating
the provisions of, Section 3(i) below.
(b) Common
Stock Issuance upon Conversion.
(i) Conversion
Date Procedures.
Upon
conversion of this Note pursuant to Section 3(a) above, the outstanding
Principal Amount hereunder shall be converted into such number of fully paid,
validly issued and non-assessable shares of Common Stock, free of any liens,
claims and encumbrances, as is determined by dividing the outstanding Principal
Amount being converted by the then applicable Conversion Price. The date
of any
Conversion Notice hereunder and any Payment Date shall be referred to herein
as
the “Conversion
Date”.
If a
conversion under this Note cannot be effected in full for any reason, or
if the
Holder is converting less than all of the outstanding Principal Amount hereunder
pursuant to a Conversion Notice, the Company shall promptly deliver to the
Holder (but no later than five Trading Days after the Conversion Date) a
Note
for such outstanding Principal Amount as has not been converted if this Note
has
been surrendered to the Company for partial conversion. The Holder shall
not be
required to physically surrender this Note to the Company upon any conversion
or
hereunder unless the full outstanding Principal Amount represented by this
Note
is being converted or repaid. The Holder and the Company shall maintain records
showing the outstanding Principal Amount so converted and repaid and the
dates
of such conversions or repayments or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Note upon each such conversion or repayment.
(ii) Stock
Certificates or DWAC.
The
Company will deliver to the Holder not
later
than three (3) Trading Days after the Conversion Date, a certificate or
certificates which shall be free of restrictive legends and trading
restrictions, representing the number of shares of Common Stock being acquired
upon the conversion of this Note. In lieu of delivering physical certificates
representing the shares of Common Stock issuable upon conversion of this
Note,
provided the Company's transfer agent is participating in the Depository
Trust
Company (“DTC”)
Fast
Automated Securities Transfer (“FAST”)
program, upon request of the Holder, the Company shall use commercially
reasonable efforts to cause its transfer agent to electronically transmit
such
shares issuable upon conversion to the Holder (or its designee), by crediting
the account of the Holder’s (or such designee’s) prime broker with DTC through
its Deposit Withdrawal Agent Commission system (provided that the same time
periods herein as for stock certificates shall apply). If in the case of
any
conversion hereunder, such certificate or certificates are not delivered
to or
as directed by the Holder by the third Trading Day after the Conversion Date,
the Holder shall be entitled by written notice to the Company at any time
on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return this
Note
tendered for conversion. If the Company fails to deliver to the Holder such
certificate or certificates (or shares through DTC) pursuant to this Section
3(b) (free of any restrictions on transfer or legends, if such shares have
been
registered) in accordance herewith, prior to the sixth Trading Day after
the
Conversion Date, the Company shall pay to the Holder, in cash, an amount
equal
to 1% of the Principal Amount per month.
(c) Conversion
Price Adjustments.
(i) Stock
Dividends, Splits and Combinations.
If the
Company or any of its subsidiaries, at any time while the Notes are outstanding
(A) shall pay a stock dividend or otherwise make a distribution or distributions
on any equity securities (including instruments or securities convertible
into
or exchangeable for such equity securities) in shares of Common Stock, (B)
subdivide outstanding Common Stock into a larger number of shares, or (C)
combine outstanding Common Stock into a smaller number of shares, then each
Affected Conversion Price (as defined below) shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
before such event and the denominator of which shall be the number of shares
of
Common Stock outstanding after such event. Any adjustment made pursuant to
this
Section 3(c)(i) shall become effective immediately after the record date
for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case
of a
subdivision or combination.
As
used
herein, the Affected Conversion Prices (each an “Affected
Conversion Price”)
shall
refer to: (i) the Conversion Price; and (ii) each reported VWAP occurring
on any
Trading Day included in the period used for determining the Market Price
or
Conversion Price, as the case may be, which Trading Day occurred before the
record date in the case of events referred to in clause (A) of this subparagraph
3(c)(i) and before the effective date in the case of the events referred
to in
clauses (B) and (C) of this subparagraph 3(c)(i).
(ii) Distributions.
If the
Company or any of its subsidiaries, at any time while the Notes are outstanding,
shall distribute to all holders of Common Stock evidences of its indebtedness
or
assets or cash or rights or warrants to subscribe for or purchase any security
of the Company or any of its subsidiaries (excluding those referred to in
Section 3(c)(i) above), then concurrently with such distributions to holders
of
Common Stock, the Company shall distribute to holders of the Notes the amount
of
such indebtedness, assets, cash or rights or warrants which the holders of
Notes
would have received had all their Notes been converted into Common Stock
at the
lower of the Conversion Price and the then
applicable Market Price immediately prior to the record date for such
distribution.
(iii) Common
Stock Issuances.
In the
event that the Company or any of its subsidiaries (A) issues or sells any
Common
Stock or Convertible Securities, or any warrants or other rights to subscribe
for or to purchase or any options for the purchase of its Common Stock or
(B)
directly or indirectly effectively reduces the conversion, exercise or exchange
price for any Convertible Securities which are currently outstanding (other
than
pursuant to terms existing on the date hereof), at or to an effective Per
Share
Selling Price which is less than the greater of (x) the closing sale price
per
share of the Common Stock on the Principal Market on the Trading Day next
preceding such issue or sale or, in the case of issuances to holders of its
Common Stock, the date fixed for the determination of stockholders entitled
to
receive such warrants, rights, or options (“Fair
Market Price”),
or
(y) the Conversion Price, then in each such case, the Affected Conversion
Price
in effect immediately prior to such issue or sale or record date, as applicable,
shall be automatically reduced effective concurrently with such issue or
sale to
an amount determined by multiplying the Affected Conversion Price then in
effect
by a fraction, (x) the numerator of which shall be the sum of (1) the number
of
shares of Common Stock outstanding immediately prior to such issue or sale,
plus
(2) the number of shares of Common Stock which the aggregate consideration
received by the Company for such additional shares would purchase at such
Fair
Market Price or Conversion Price, as the case may be, and (y) the denominator
of
which shall be the number of shares of Common Stock of the Company outstanding
immediately after such issue or sale.
The
foregoing provision shall not apply to any issuances or sales of Common Stock
or
Convertible Securities (i) pursuant to any Convertible Securities currently
outstanding on the date hereof in accordance with the terms of such Convertible
Securities in effect on the date hereof, or (ii) to any officer, director
or
employee of the Company pursuant to a bona fide option or equity incentive
plan
duly adopted by the Company. The Company shall give to the each Holder of
Notes
written notice of any such sale of Common Stock within 24 hours of the closing
of any such sale and shall within such 24 hour period issue a press release
announcing such sale if such sale is a material event for, or otherwise material
to, the Company.
For
the purposes of the foregoing adjustments, in the case of the issuance of
any
Convertible Securities, the maximum number of shares of Common Stock issuable
upon exercise, exchange or conversion of such Convertible Securities shall
be
deemed to be outstanding.
For
purposes of this Section 3(c)(i), if an event occurs that triggers more than
one
of the above adjustment provisions, then only one adjustment shall be made
and
the calculation method which yields the greatest downward adjustment in the
Conversion Price shall be used.
(iv) Rounding
of Adjustments. All
calculations under this Section 3 or Section 1 shall be made to the nearest
cent
or the nearest 1/100th of a share, as the case may be.
(v) Notice
of Adjustments. Whenever
any Affected Conversion Price is adjusted pursuant to Section 3(c)(i), (ii)
or
(iii) above, the Company shall promptly deliver to each holder of the Notes,
a
notice setting forth the Affected Conversion Price after such adjustment
and
setting forth a brief statement of the facts requiring such adjustment, provided
that any failure to so provide such notice shall not affect the automatic
adjustment hereunder.
(vi) Change
in Control Transactions.
In case
of any Change in Control Transaction, the Holder shall have the right thereafter
to, at its option, (A) convert this Note, in whole or in part, at the lower
of
the Conversion Price and the then
applicable Market Price into the shares of stock and other securities, cash
and/or property receivable upon or deemed to be held by holders of Common
Stock
following such Change in Control Transaction, and the Holder shall be entitled
upon such event to receive such amount of securities, cash or property as
the
shares of the Common Stock of the Company into which this Note could have
been
converted immediately prior to such Change in Control Transaction would have
been entitled if such conversion were permitted, subject to such further
applicable adjustments set forth in this Section 3 or (B) require the Company
or
its successor to redeem this Note, in whole or in part, at a redemption price
equal to the greater of (i) 125% of the outstanding Principal Amount being
redeemed and (ii) the product of (x) the average of the Fair Market Price
for
the five (5) Trading Days immediately preceding the Holder's election to
have
its Notes redeemed and (y) the Conversion Ratio. The terms of any such Change
in
Control Transaction shall include such terms so as to continue to give to the
Holders the right to receive the amount of securities, cash and/or property
upon
any conversion or redemption following such Change in Control Transaction
to
which a holder of the number of shares of Common Stock deliverable upon such
conversion would have been entitled in such Change in Control Transaction,
and
interest payable hereunder shall be in cash or such new securities and/or
property, at the Holder’s option. This provision shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or
share
exchanges.
(vii) Notice
of Certain Events.
If:
|
A.
|
the
Company shall declare a dividend (or any other distribution) on
its Common
Stock; or
|
|
B.
|
the
Company shall declare a special nonrecurring cash dividend on or
a
redemption of its Common Stock; or
|
|
C.
|
the
Company shall authorize the granting to all holders of the Common
Stock
rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights;
or
|
|
D.
|
the
approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common
Stock of the Company, any consolidation or merger to which the
Company is
a party, any sale or transfer of all or substantially all of the
assets of
the Company, of any compulsory share of exchange whereby the Common
Stock
is converted into other securities, cash or property;
or
|
|
E.
|
the
Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the
Company;
|
then
the
Company shall cause to be filed at each office or agency maintained for the
purpose of conversion of this Note, and shall cause to be mailed to the Holder
at its last address as it shall appear upon the books of the Company, on
or
prior to the date notice to the Company's stockholders generally is given,
a
notice stating (x) the date on which a record is to be taken for the purpose
of
such dividend, distribution, redemption, rights or warrants, or if a record
is
not to be taken, the date as of which the holders of Common Stock of record
to
be entitled to such dividend, distributions, redemption, rights or warrants
are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective
or
close, and the date as of which it is expected that holders of Common Stock
of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange.
(d) Reservation
and Issuance of Underlying Securities.
The
Company covenants that it will at all times reserve and keep available out
of
its authorized and unissued Common Stock solely for the purpose of issuance
upon
conversion of this Note (including repayments in stock), free from preemptive
rights or any other actual contingent purchase rights of persons other than
the
holders of the Notes, not less than such number of shares of Common Stock
as
shall (subject to any additional requirements of the Company as to reservation
of such shares set forth in the Purchase Agreement) be issuable (taking into
account the adjustments under this Section 3 but without regard to any ownership
limitations contained herein) upon the conversion of this Note hereunder
in
Common Stock (including repayments in stock). The Company covenants that
all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
authorized, validly issued, fully paid, nonassessable and freely
tradeable.
(e) No
Fractions.
Upon a
conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction
of a
share based on the closing price of a share of Common Stock at such time.
If the
Company elects not, or is unable, to make such a cash payment, the Holder
shall
be entitled to receive, in lieu of the final fraction of a share, one whole
share of Common Stock.
(f) Charges,
Taxes and Expenses.
Issuance of certificates for shares of Common Stock upon the conversion of
this
Note (including repayment in stock) shall be made without charge to the holder
hereof for any issue or transfer tax or other incidental expense in respect
of
the issuance of such certificate, all of which taxes and expenses shall be
paid
by the Company, and such certificates shall be issued in the name of the
Holder
or in such name or names as may be directed by the Holder; provided,
however,
that in
the event certificates for shares of Common Stock are to be issued in a name
other than the name of the Holder, this Note when surrendered for conversion
shall be accompanied by an assignment form; and provided further,
that
the Company shall not be required to pay any tax or taxes which may be payable
in respect of any such transfer.
(g) Cancellation.
After
all of the Principal Amount (including accrued but unpaid interest and default
payments at any time owed on this Note) have been paid in full or converted
into
Common Stock, this Note shall automatically be deemed canceled and the Holder
shall promptly surrender the Note to the Company at the Company’s principal
executive offices.
(h) Notices
Procedures.
Any and
all notices or other communications or deliveries to be provided by the Holder
hereunder, including, without limitation, any Conversion Notice, shall be
in
writing and delivered personally, by confirmed facsimile, or by a nationally
recognized overnight courier service to the Company at the facsimile telephone
number or address of the principal place of business of the Company as set
forth
in the Purchase Agreement. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or by a nationally recognized overnight
courier service addressed to the Holder at the facsimile telephone number
or
address of the Holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed delivered (i) upon receipt, when delivered personally,
(ii) when sent by facsimile, upon receipt if received on a Business Day prior
to
5:00 p.m. (Eastern Time), or on the first Business Day following such receipt
if
received on a Business Day after 5:00 p.m. (Eastern Time) or (iii) upon receipt,
when deposited with a nationally recognized overnight courier
service.
(i) Conversion
Limitations.
(A) 9.9%
Limitation.
Notwithstanding anything to the contrary contained herein, the number of
shares
of Common Stock that may be acquired by the Holder upon conversion pursuant
to
the terms hereof shall not exceed a number that, when added to the total
number
of shares of Common Stock deemed beneficially owned by such Holder (other
than
by virtue of the ownership of securities or rights to acquire securities
(including the Notes and Warrants) that have limitations on the Holder’s right
to convert, exercise or purchase similar to the limitation set forth herein),
together with all shares of Common Stock deemed beneficially owned at such
time
(other than by virtue of the ownership of securities or rights to acquire
securities that have limitations on the right to convert, exercise or purchase
similar to the limitation set forth herein) by the holder’s “affiliates” at such
time (as defined in Rule 144 of the Act) (“Aggregation
Parties”)
that
would be aggregated for purposes of determining whether a group under Section
13(d) of the Securities Exchange Act of 1934 as amended, exists, would exceed
9.9% of the total issued and outstanding shares of the Common Stock (the
“Restricted
Ownership Percentage”).
Each
holder shall have the right (w) at any time and from time to time to reduce
its
Restricted Ownership Percentage immediately upon notice to the Company and
(x)
(subject to waiver) at any time and from time to time, to increase its
Restricted Ownership Percentage immediately in the event of the announcement
as
pending or planned, of a Change in Control Transaction.
(B) Overall
Limit on Common Stock Issuable.
Notwithstanding anything herein to the contrary, if the Company has not obtained
Shareholder Approval (as defined in the Purchase Agreement), then the Company
may not issue, upon conversion of this Note, a number of shares of Common
Stock
in excess of the amount of shares of Common Stock which may be issued upon
conversion of the Notes and exercise of the Warrants (the “Issuable Maximum”)
without causing the Company to breach its obligations under the rules or
regulations of the Nasdaq Stock Market (including without limitation Section
4350(i) of the NASD Manual). Each Holder of Notes shall be entitled to a
portion
of the Issuable Maximum equal to the quotient obtained by dividing (x) the
aggregate principal amount of the Notes issued and sold to such Holder by
(y)
the aggregate principal amount of all Notes issued and sold by the Company.
If
any Holder shall no longer hold any Notes and Warrants, then such holder’s
remaining portion of the Issuable Maximum, if any, shall be reallocated pro-rata
among the remaining holders. For clarification purposes, shares of Common
Stock
otherwise reserved for issuance upon exercise of unexercised Warrants shall
be
utilized for conversion under the Notes to the extent necessary to avoid
any
issuance in excess of the Issuable Maximum, provided that in the event of
any
redemption of Warrants pursuant to the terms contained therein, the Holder
thereof shall have the right to allocate the underlying shares in excess
of the
Issuable Maximum between such Notes and Warrants.
Section
4. Defaults
and Remedies.
(a) Events
of Default. An
“Event
of Default”
is:
(i)
a default in payment of any amount due hereunder which default continues
for
more than 5 business days after the due date thereof; (ii) a default in the
timely issuance of Underlying Shares upon and in accordance with terms hereof,
which default continues for five Business Days after the Company has received
written notice informing the Company that it has failed to issue shares or
deliver stock certificates within the fifth day following the Conversion
Date;
(iii) failure by the Company for fifteen (15) days after written notice has
been
received by the Company to comply with any material provision of any of the
Notes, the Purchase Agreement, the Registration Rights Agreement or the Warrants
(including without limitation the failure to issue the requisite number of
shares of Common Stock upon conversion hereof and the failure to redeem Notes
upon the Holder’s request following a Change in Control Transaction pursuant to
Section 3(c)(vi); (iv) a material breach by the Company of its representations
or warranties in the Purchase Agreement, Registration Rights Agreement or
Warrants; (v) any default after any cure period under, or acceleration prior
to
maturity of, any mortgage, indenture or instrument under which there may
be
issued or by which there may be secured or evidenced any indebtedness for
money
borrowed by the Company for in excess of $25,000 or for money borrowed the
repayment of which is guaranteed by the Company for in excess of $25,000,
whether such indebtedness or guarantee now exists or shall be created hereafter;
or (vi) if the Company is subject to any Bankruptcy Event.
(b) Remedies.
If an
Event of Default occurs and is continuing with respect to any of the Notes,
the
Holder may declare all of the then outstanding Principal Amount of this Note
and
all other Notes held by the Holder, including any interest due thereon, to
be
due and payable immediately, except that in the case of an Event of Default
arising from events described in clauses (v) and (vi) of Section 4(a), this
Note
shall become due and payable without further action or notice. In the event
of
such acceleration, the amount due and owing to the Holder shall be the greater
of (1) 125% of the outstanding Principal Amount of the Notes held by the
Holder
(plus all accrued and unpaid interest, if any) and (2) the product of (A)
the
highest closing price for the five (5) Trading days immediately preceding
the
Holder’s acceleration and (B) the Conversion Ratio. In either case the Company
shall pay interest on such amount in cash at the Default Rate to the Holder
if
such amount is not paid within 7 days of Holder’s request. The remedies under
this Note shall be cumulative.
Section
5. Participation
Rights.
(a) Subject
to the terms and conditions specified in this Section 5, at any time while
the
Notes are outstanding, the holders of Notes shall have a right to participate
with respect to the issuance or possible issuance by the Company of any future
equity or equity-linked securities or debt which is convertible into equity
or
in which there is an equity component (as the case may be, “Additional
Securities”) on the same terms and conditions as offered by the Company to the
other purchasers of such Additional Securities. Each time the Company proposes
to offer any Additional Securities, the Company shall make an offering of
such
Additional Securities to each holder of Notes in accordance with the following
provisions:
(i) The
Company shall deliver a notice (the “Issuance Notice”) to the holders of Notes
stating (a) its bona fide intention to offer such Additional Securities,
(b) the
number of such Additional Securities to be offered, (c) the price and terms,
if
any, upon which it proposes to offer such Additional Securities, and (d)
the
anticipated closing date of the sale of such Additional Securities.
(ii) By
written notification received by the Company, within ten (10) days after
giving
of the Issuance Notice, each holder of Notes may elect to purchase or obtain,
at
the price and on the terms specified in the Issuance Notice, up to that number
of such Additional Securities which equals such holder’s Participation Amount
for the same consideration and on the same terms and conditions as such
third-party sale, where the “Participation Amount” for each holder shall equal
(a) 50% of the aggregate amount of such Additional Securities issued or to
be
issued to investors in such offering prior to the exercise of the participation
rights contemplated by this Section 5 (such aggregate amount, the “Subsequent
Offering Amount”), multiplied by (b) a fraction, the numerator of which equals
the principal amount of Notes then held by such Holder and the denominator
of
which equals the aggregate principal amount of Notes purchased by all Purchasers
pursuant to the Convertible Note Purchase Agreement. The Company shall promptly,
in writing, inform each holder of Notes which elects to purchase all of the
Additional Shares available to it (“Fully-Exercising Holder”) of any other
holder's failure to do likewise. During the five-day period commencing after
such information is given, each Fully-Exercising Holder shall be entitled
to
obtain that portion of the Additional Securities for which the Holders of
Notes
were entitled to subscribe but which were not subscribed for by such Holders
which is equal to the proportion that principal amount of Notes held by such
Fully-Exercising Holder bears to the aggregate principal amount of Notes
held by
all Fully-Exercising Holders who wish to purchase some of the unsubscribed
shares.
(iii) The
Company may, during the 75-day period following the expiration of the 10-day
and
5-day periods referenced in Section 5(a)(ii) above, offer up to the Subsequent
Offering Amount of such Additional Securities to any person or persons at
a
price not less than, and upon terms no more favorable to the offeree than,
those
specified in the Issuance Notice. If the Company does not consummate the
sale of
such Additional Securities within such period, the right provided hereunder
shall be deemed to be revived and such Additional Securities shall not be
offered or sold unless the Participation Amount is again first reoffered
to the
holders of Notes in accordance herewith.
(b) Notwithstanding
anything contained herein, no holder of Notes shall have the right to purchase
Additional Securities hereunder to the extent same would cause such holder
to
exceed the Restricted Ownership Percentage.
Section
6. General.
(a) Payment
of Expenses.
The
Company agrees to pay all reasonable charges and expenses, including attorneys'
fees and expenses, which may be incurred by the Holder in successfully enforcing
this Note and/or collecting any amount due under this Note.
(b) Savings
Clause.
In case
any provision of this Note is held by a court of competent jurisdiction to
be
excessive in scope or otherwise invalid or unenforceable, such provision
shall
be adjusted rather than voided, if possible, so that it is enforceable to
the
maximum extent possible, and the validity and enforceability of the remaining
provisions of this Note will not in any way be affected or impaired thereby.
In
no event shall the amount of interest paid hereunder exceed the maximum rate
of
interest on the unpaid principal balance hereof allowable by applicable law.
If
any sum is collected in excess of the applicable maximum rate, the excess
collected shall be applied to reduce the principal debt. If the interest
actually collected hereunder is still in excess of the applicable maximum
rate,
the interest rate shall be reduced so as not to exceed the maximum allowable
under law.
(c) Amendment.
Neither
this
Note nor any term hereof may be amended, waived, discharged or terminated
other
than by a written instrument signed by the Company and the Holder.
(d) Assignment,
Etc.
The
Holder may assign or transfer this Note to any transferee only with the prior
written consent of the Company, which may not be unreasonably withheld or
delayed, provided that (i) the Holder may assign or transfer this Note to
any of
such Holder's affiliates without the consent of the Company
and
(ii) upon any Event of Default, the Holder may assign or transfer this
Note
without
the consent of the Company. The
Holder
shall notify the Company of any such assignment or transfer promptly. This
Note
shall be binding upon the Company and its successors and shall inure to the
benefit of the Holder and its successors and permitted assigns.
(e) No
Waiver.
No
failure on the part of the Holder to exercise, and no delay in exercising
any
right, remedy or power hereunder, shall operate as a waiver thereof, nor
shall
any single or partial exercise by the Holder of any right, remedy or power
hereunder preclude any other or future exercise of any other right, remedy
or
power. Each and every right, remedy or power hereby granted to the Holder
or
allowed it by law or other agreement shall be cumulative and not exclusive
of
any other, and may be exercised by the Holder from time to time.
(f) Governing
Law; Jurisdiction.
(i) Governing
Law. THIS
NOTE
WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF
NEW YORK WITHOUT REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF THAT
WOULD
OTHERWISE REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER
JURISDICTION.
(ii) Jurisdiction.
The
Company irrevocably submits to the exclusive jurisdiction of any State or
Federal Court sitting in the State of New York, County of New York, or San
Jose,
California, over any suit, action, or proceeding arising out of or relating
to
this Note.
The
Company irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of
any
such suit, action, or proceeding brought in such a court and any claim that
suit, action, or proceeding has been brought in an inconvenient
forum.
The
Company agrees that the service of process upon it mailed by certified or
registered mail (and service so made shall be deemed complete three days
after
the same has been posted as aforesaid) or by personal service shall be deemed
in
every respect effective service of process upon it in any such suit or
proceeding. Nothing herein shall affect Holder's right to serve process in
any
other manner permitted by law. The Company agrees that a final non-appealable
judgement in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful
manner.
(iii) NO
JURY TRIAL.
THE
COMPANY
HERETO
KNOWINGLY AND VOLUNTARILY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL
BY
JURY WITH RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR
IN
CONNECTION WITH, THIS NOTE.
(g) Replacement
Notes.
This
Note may be exchanged by Holder at any time and from time to time for a Note
or
Notes with different denominations representing an equal aggregate outstanding
Principal Amount, as reasonably requested by Holder, upon surrendering the
same.
No service charge will be made for such registration or exchange. In the
event
that Holder notifies the Company that this Note has been lost, stolen or
destroyed, a replacement Note identical in all respects to the original Note
(except for registration number and Principal Amount, if different than that
shown on the original Note), shall be issued to the Holder, provided that
the
Holder executes and delivers to the Company an agreement reasonably satisfactory
to the Company to indemnify the Company from any loss incurred by it in
connection with the Note.
[Signature
Page Follows]
IN
WITNESS WHEREOF,
the
Company has caused this Note to be duly executed on the day and in the year
first above written.
NETSOL
TECHNOLOGIES,
INC.
By:_______________________________________________
Name:
Title:
Attest:
Sign:______________________
Print
Name:
EXHIBIT
A
FORM
OF CONVERSION NOTICE
(To
be
executed by the Holder
in
order
to convert a Note)
|
Re:
|
Note
(this “Note”) issued by NETSOL
TECHNOLOGIES, INC. to ___________________ on or about June 15,
2006 in the
original principal amount of
$___________.
|
The
undersigned hereby elects to convert the aggregate outstanding Principal
Amount
(as defined in the Note) indicated below of this Note into shares of Common
Stock, $0.001 par value per share (the “Common Stock”), of NETSOL
TECHNOLOGIES, INC.
(the
“Company”) according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and
is
delivering herewith such certificates and opinions as reasonably requested
by
the Company in accordance therewith. No fee will be charged to the holder
for
any conversion, except for such transfer taxes, if any.
Conversion
information:
________________________________________________________
Date
to
Effect Conversion
________________________________________________________
|
|
|
|
|
Aggregate
Principal Amount of Note Being
Converted
|
________________________________________________________
|
|
|
|
|
Number
of Shares of Common Stock
to be Issued
|
________________________________________________________
Applicable
Conversion Price
________________________________________________________
Signature
________________________________________________________
Name
________________________________________________________
Address
ANNEX
C
COMMON
STOCK PURCHASE WARRANT
THIS
WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, ASSIGNED
OR
TRANSFERRED, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID
ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT REGISTRATION UNDER SAID ACT IS NOT REQUIRED.
THIS
WARRANT
DOES
NOT REQUIRE PHYSICAL SURRENDER OF THE WARRANT
IN
THE EVENT OF A PARTIAL EXERCISE. AS A RESULT, FOLLOWING ANY EXERCISE OF
ANY
PORTION OF THIS WARRANT,
THE NUMBER OF SHARES OF COMMON STOCK FOR WHICH THIS WARRANT MAY BE
EXERCISED MAY
BE LESS THAN THE NUMBER OF SHARES SET FORTH BELOW.
Issuance
Date: June 15, 2006
Warrant
No. A-__
COMMON
STOCK PURCHASE WARRANT
To
Purchase ____________1 Shares of Common Stock of NETSOL TECHNOLOGIES,
INC.
THIS
IS TO CERTIFY THAT ___________________________________, or registered assigns
(the “Holder”), is entitled, during the Exercise Period (as hereinafter
defined), to purchase from NetSol Technologies, Inc., a Nevada corporation
(the
“Company”), the Warrant Stock (as hereinafter defined and subject to adjustment
as provided herein), in whole or in part, at a purchase price of
$2.00 per
share, all on and subject to the terms and conditions hereinafter set
forth.
1. Definitions.
As used in this Warrant, the following terms have the respective meanings
set
forth below:
“Affiliate”
means any person or entity that, directly or indirectly through one or
more
intermediaries, controls or is controlled by or is under common control
with a
person or entity, as such terms are used in and construed under Rule 144
under
the Securities Act. With respect to a Holder of Warrants, any investment
fund or
managed account that is managed on a discretionary basis by the same investment
manager as such Holder will be deemed to be an Affiliate of such Holder.
“Appraised
Value”
means, in respect of any share of Common Stock on any date herein specified,
the
fair saleable value of such share of Common Stock (determined without giving
effect to the discount for (i) a minority interest or (ii) any lack of
liquidity
of the Common Stock or to the fact that the Company may have no class of
equity
registered under the Exchange Act) as of the last day of the most recent
fiscal
month ending prior to such date specified, based on the value of the Company
on
a fully-diluted basis, as determined by a nationally recognized investment
banking firm selected by the Company’s Board of Directors and having no prior
relationship with the Company.
_____________________
1
Insert 50% of Purchase Price divided by Conversion
Value
under
Series A Certificate of Designation.
“Business
Day”
means any day except Saturday, Sunday and any day which shall be a legal
holiday
or a day on which banking institutions in the State of New York generally
are
authorized or required by law or other government actions to close.
“Change
of Control”
means the (i) acquisition by an individual or legal entity or group (as
set
forth in Section 13(d) of the Exchange Act) of more than one-half of the
voting
rights or equity interests in the Company; or (ii) sale, conveyance, or
other
disposition of all or substantially all of the assets, property or business
of
the Company or the merger into or consolidation with any other corporation
(other than a wholly owned subsidiary corporation) or effectuation of any
transaction or series of related transactions where holders of the Company’s
voting securities prior to such transaction or series of transactions fail
to
continue to hold at least 50% of the voting power of the Company (or, if
other
than the Company, the successor or acquiring entity) immediately following
such
transaction.
“Commission”
means the Securities and Exchange Commission or any other federal agency
then
administering the Securities Act and other federal securities laws.
“Common
Stock”
means (except where the context otherwise indicates) the Common Stock,
$0.001
par value per share, of the Company, and any capital stock into which such
Common Stock may thereafter be changed or converted, and shall also include
(i)
capital stock of the Company of any other class (regardless of how denominated)
issued to the holders of shares of Common Stock upon any reclassification
thereof which is also not preferred as to dividends or assets on liquidation
over any other class of stock of the Company and which is not subject to
redemption and (ii) shares of common stock of any successor or acquiring
corporation received by or distributed to the holders of Common Stock of
the
Company in the circumstances contemplated by Section 4.5.
“Current
Market Price”
means, in respect of any share of Common Stock on any date herein specified,
(1) if
there shall not then be a public market for the Common Stock, the higher
of
(a)
the book value per share of Common Stock at such date, and
(b)
the Appraised Value per share of Common Stock at such date,
or
(2) if
there shall then be a public market for the Common Stock, the average of
the
daily market prices for the five (5) consecutive Trading Days immediately
before
such date. The daily market price for each such Trading Day shall be (i)
the
closing bid price on such day on the principal stock exchange on which
such
Common Stock is then listed or admitted to trading, or quoted, as applicable,
(ii) if no sale takes place on such day on any such exchange, the last
reported
closing bid price on such day as officially quoted on any such exchange,
(iii)
if the Common Stock is not then listed or admitted to trading on any stock
exchange, the last reported closing bid price on such day in the
over-the-counter market, as furnished by the National Association of Securities
Dealers Automatic Quotation System or the National Quotation Bureau, Inc.,
(iv)
if neither such corporation at the time is engaged in the business of reporting
such prices, as furnished by any similar firm then engaged in such business,
or
(v) if there is no such firm, as furnished by any member of the NASD selected
mutually by the holder of this Warrant and the Company or, if they cannot
agree
upon such selection, as selected by two such members of the NASD, one of
which
shall be selected by holder of this Warrant and one of which shall be selected
by the Company.
“Current
Warrant Price”
means, in respect of a share of Common Stock at any date herein specified,
the
price at which a share of Common Stock may be purchased pursuant to this
Warrant
on such date. Unless and until the Current Warrant Price is adjusted pursuant
to
the terms herein, the initial Current Warrant Price shall be $2.00 per
share of
Common Stock.
“Exchange
Act”
means the Securities Exchange Act of 1934, as amended, or any similar federal
statute, and the rules and regulations of the Commission thereunder, all
as the
same shall be in effect from time to time.
“Exercise
Period”
means the period during which this Warrant is exercisable pursuant to Section
2.1.
“Expiration
Date”
means the fifth (5th)
anniversary of the date of issuance hereof.
“GAAP”
means generally accepted accounting principles in the United States of
America
as from time to time in effect.
“NASD”
means the National Association of Securities Dealers, Inc., or any successor
corporation thereto.
“Notes”
means the Notes as defined in and issued pursuant to the Purchase
Agreement.
“Other
Property”
has the meaning set forth in Section 4.5.
“Person”
means any individual, sole proprietorship, partnership, joint venture,
trust,
incorporated organization, association, corporation, limited liability
company,
institution, public benefit corporation, entity or government (whether
federal,
state, county, city, municipal or otherwise, including, without limitation,
any
instrumentality, division, agency, body or department thereof).
“Purchase
Agreement”
means that certain Convertible Note and Warrant Purchase Agreement dated
as of
June 15, 2006 among the Company and the other parties named therein, pursuant
to
which this Warrant was originally issued.
“Restricted
Common Stock”
means shares of Common Stock which are, or which upon their issuance upon
the
exercise of any Warrant would be required to be, evidenced by a certificate
bearing the restrictive legend set forth in Section 3.2.
“Securities
Act”
means the Securities Act of 1933, as amended, or any similar federal statute,
and the rules and regulations of the Commission thereunder, all as the
same
shall be in effect at the time.
“Trading
Day”
means any day on which the primary market on which shares of Common Stock
are
listed is open for trading.
“Transfer”
means any disposition of any Warrant or Warrant Stock or of any interest
in
either thereof, which would constitute a sale thereof within the meaning
of the
Securities Act.
“Warrants”
means this Warrant and all warrants issued upon transfer, division or
combination of, or in substitution for, any thereof. All Warrants shall
at all
times be identical as to terms and conditions and date, except as to the
number
of shares of Common Stock for which they may be exercised.
“Warrant
Price”
means an amount equal to (i) the number of shares of Common Stock being
purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied
by
(ii) the Current Warrant Price.
“Warrant
Stock”
means the [____________] shares of Common Stock to be purchased upon the
exercise hereof, subject to adjustment as provided herein.
2. Exercise
of Warrant.
2.1. Manner
of Exercise.
(a) From
and after the date of issuance hereof and until 5:00 P.M., New York time,
on the
Expiration Date (the “Exercise Period”), the Holder may exercise this Warrant,
on any Business Day, for all or any part of the number of shares of Warrant
Stock purchasable hereunder.
(b) In
order to exercise this Warrant, in whole or in part, the Holder shall deliver
to
the Company at its principal office or at the office or agency designated
by the
Company pursuant to Section 12, (i) a written notice of Holder’s election to
exercise this Warrant, which notice shall specify the number of shares
of
Warrant Stock to be purchased, (ii) payment of the Warrant Price as provided
herein, and (iii) upon exercise of this Warrant in full, this Warrant.
Such
notice shall be substantially in the form of the subscription form appearing
at
the end of this Warrant as Exhibit
A,
duly executed by the Holder or its agent or attorney. Upon receipt thereof,
the
Company shall, as promptly as practicable, and in any event within three
Business Days thereafter, electronically
transmit the Common Stock issuable upon exercise hereof to the Holder,
by
crediting the account of the Holder’s prime broker with Depository Trust Company
(“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system using
the Fast Automated Securities Transfer (“FAST”) program. The parties agree to
coordinate with DTC to accomplish this objective. In lieu of such electronic
delivery through DWAC, the Company shall, to the extent requested by the
Holder
or required by law,
execute or cause to be executed and deliver or cause to be delivered to
the
Holder a certificate or certificates representing the aggregate number
of full
shares of Warrant Stock issuable
upon exercise hereof. The time periods for delivery of physical certificates
evidencing the Warrant Shares are the same as those described above.
Any
stock certificate or certificates so delivered shall be, to the extent
possible,
in such denomination or denominations as the Holder shall request in the
notice
and shall be registered in the name of the Holder or such other name as
shall be
designated in the notice. This Warrant shall be deemed to have been exercised
and such certificate or certificates shall be deemed to have been issued,
and
the Holder or any other Person so designated to be named therein shall
be deemed
to have become a Holder of record of such shares for all purposes, as of
the
date when the notice to exercise is received by the Company as described
above.
If this Warrant shall have been exercised in part, the Company shall, at
the
time of delivery of the certificate or certificates representing Warrant
Stock,
if not effected using book entry as described below, deliver to the Holder
a new
Warrant evidencing the rights of the Holder to purchase the unpurchased
shares
of Common Stock called for by this Warrant, which new Warrant shall in
all other
respects be identical with this Warrant, or at the request of the Holder,
appropriate notation may be made on this Warrant and the same returned
to the
Holder.
(c) Payment
of the Warrant Price may be made at the option of the Holder by: (i) certified
or official bank check payable to the order of the Company, or (ii) wire
transfer to the account of the Company, provided that if
at any time following the 120th
day after the Closing Date there is no effective Registration Statement
registering, or no current prospectus available for, the resale of the
Warrant
Shares by the Holder, then this Warrant may also be exercised at such time
by
means of a “cashless exercise” in which the Holder shall be entitled to receive
a certificate for the number of Warrant Shares equal to the quotient obtained
by
dividing [(A-B) (X)] by (A), where:
(A) = the
VWAP on the Trading Day immediately
preceding the date of such election;
(B) =
the Warrant Price of this Warrant, as adjusted; and
(X)
= the number of Warrant Shares issuable upon exercise of this Warrant in
accordance with the terms of this Warrant by means of a cash exercise rather
than a cashless exercise.
Notwithstanding
anything herein to the contrary, on the Expiration Date, this Warrant shall
be
automatically exercised via cashless exercise pursuant to this Section
2.1(c).
(d) All
shares of Common Stock issuable upon the exercise of this Warrant pursuant
to
the terms hereof shall be validly issued and, upon payment of the Warrant
Price,
shall be fully paid and nonassessable and not subject to any preemptive
rights.
(e) Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon exercise
of any
portion of this Warrant in accordance with the terms hereof, the warrantholder
shall not be required to physically surrender this Warrant to the Company
unless
such holder is purchasing the full amount of Warrant Shares represented
by this
Warrant. The warrantholder and the Company shall maintain records showing
the
number of Warrant Shares so purchased hereunder and the dates of such purchases
or shall use such other method, reasonably satisfactory to the warrantholder
and
the Company, so as not to require physical surrender of this Warrant upon
each
such exercise. In connection therewith a form of ledger to maintain a record
of
such transactions is attached hereto. The warrantholder and any assignee,
by
acceptance of this Warrant or a new Warrant, acknowledge and agree that,
by
reason of the provisions of this paragraph, following exercise of any portion
of
this Warrant, the number of Warrant Shares which may be purchased upon
exercise
of this Warrant may be less than the number of Warrant Shares set forth
on the
face hereof.
2.2. Fractional
Shares.
The Company shall not be required to issue a fractional share of Common
Stock
upon exercise of any Warrant. As to any fraction of a share which the Holder
of
one or more Warrants, the rights under which are exercised in the same
transaction, would otherwise be entitled to purchase upon such exercise,
the
Company shall pay an amount in cash equal to the Current Market Price per
share
of Common Stock on the date of exercise multiplied by such fraction.
2.3. Continued
Validity.
A Holder of shares of Common Stock issued upon the exercise of this Warrant,
in
whole or in part (other than a Holder who acquires such shares after the
same
have been publicly sold pursuant to a Registration Statement under the
Securities Act or sold pursuant to Rule 144 thereunder), shall continue
to be
entitled with respect to such shares to all rights to which it would have
been
entitled as the Holder under Sections 10 and 13 of this Warrant.
2.4. Restrictions
on Exercise Amount.
(i) Unless
a Holder delivers to the Company irrevocable written notice prior to the
date of
issuance hereof or sixty-one days prior to the effective date of such notice
that this Section 2.4(i) shall not apply to such Holder, the Company shall
not
issue to the Holder, and the Holder may not acquire, a number of shares
of
Warrant Stock to the extent that, upon such exercise, the number of shares
of
Common Stock then beneficially owned by such holder and its Affiliates
and any
other persons or entities whose beneficial ownership of Common Stock would
be
aggregated with the Holder’s for purposes of Section 13(d) of the Exchange Act
(including shares held by any “group” of which the holder is a member, but
excluding shares beneficially owned by virtue of the ownership of securities
or
rights to acquire securities that have limitations on the right to convert,
exercise or purchase similar to the limitation set forth herein) would
exceed
9.9% of the total number of shares of Common Stock of the Company then
issued
and outstanding. For purposes hereof, “group” has the meaning set forth in
Section 13(d) of the Exchange Act and applicable regulations of the Commission,
and the percentage held by the holder shall be determined in a manner consistent
with the provisions of Section 13(d) of the Exchange Act. Each delivery
of a
notice of exercise by a Holder will constitute a representation by such
Holder
that it has evaluated the limitation set forth in this paragraph and determined,
based on the most recent public filings by the Company with the Commission,
that
the issuance of the full number of shares of Warrant Stock requested in
such
notice of exercise is permitted under this paragraph.
(ii) Notwithstanding
anything herein to the contrary, if the Company has not obtained Shareholder
Approval (as defined in the Purchase Agreement), then the Company may not
issue,
upon exercise of this Warrant, a number of shares of Common Stock in excess
of
the amount of shares of Common Stock which may be issued upon conversion
of the
Notes and exercise of the Warrants (the “Issuable Maximum”) without causing the
Company to breach its obligations under the rules or regulations of the
Nasdaq
Stock Market (including without limitation Section 4350(i) of the NASD
Manual).
Each Warrantholder shall be entitled to a portion of the Issuable Maximum
equal
to the quotient obtained by dividing (x) the aggregate principal amount
of the
Notes issued and sold to such holder by (y) the aggregate principal amount
of
all Notes issued and sold by the Company. If any Warrantholder shall no
longer
hold any Notes and Warrants, then such holder’s remaining portion of the
Issuable Maximum, if any, shall be reallocated pro-rata among the remaining
holders. If the Shareholder Approval is not obtained prior to November
1, 2006
and if at any time or from time to time thereafter the number of shares
Common
Stock issued pursuant to conversion or redemption of or as interest on
the Notes
and upon exercise of the Warrants, together with the number of shares of
Common
Stock that would then be issuable by the Seller upon conversion of all
the Notes
and exercise of all the Warrants then outstanding (without regard to any
restrictions on beneficial ownership), would exceed the Issuable Maximum
but for
this Section, then each Warrantholder shall have the right to compel the
Company
to redeem such number of Warrants held by such holder which cannot be converted
or exercised due to such limitation, as may be selected by such holder.
The
redemption price for any such Warrants redeemed shall equal the value of
such
Warrants (or portion thereof) being redeemed as determined using the
Black-Scholes Option Pricing Formula on Bloomberg. Such redemption price
shall
be paid within thirty (30) days after the exercise of such redemption right.
For
clarification purposes, shares of Common Stock otherwise reserved for issuance
upon exercise of unexercised Warrants shall be utilized for conversion
under the
Notes to the extent necessary to avoid any issuance in excess of the Issuable
Maximum, provided that in the event of any redemption of Notes or Warrants
pursuant to this Section, the holder thereof shall have the right to allocate
the underlying shares in excess of the Issuable Maximum between such Notes
and
Warrants.
3. Transfer,
Division and Combination.
3.1. Transfer.
The Warrants and the Warrant Stock shall be freely transferable, subject
to
compliance with all applicable laws, including, but not limited to the
Securities Act. If, at the time of the surrender of this Warrant in connection
with any transfer of this Warrant or the resale of the Warrant Stock, this
Warrant or the Warrant Stock, as applicable, shall not be registered under
the
Securities Act, the Company may require, as a condition of allowing such
transfer (i) that the Holder or transferee of this Warrant or the Warrant
Stock
as the case may be, furnish to the Company a written opinion of counsel
that is
reasonably acceptable to the Company to the effect that such transfer may
be
made without registration under the Securities Act, (ii) that the Holder
or
transferee execute and deliver to the Company an investment letter in form
and
substance reasonably acceptable to the Company, and (iii) that the transferee
be
an “accredited investor” as defined in Rule 501(a) promulgated under the
Securities Act. Transfer of this Warrant and all rights hereunder, in whole
or
in part, in accordance with the foregoing provisions, shall be registered
on the
books of the Company to be maintained for such purpose, upon surrender
of this
Warrant at the principal office of the Company referred to in Section 2.1
or the
office or agency designated by the Company pursuant to Section 12, together
with
a written assignment of this Warrant substantially in the form of Exhibit
B
hereto duly executed by the Holder or its agent or attorney and funds sufficient
to pay any transfer taxes payable upon the making of such transfer. Upon
such
surrender and, if required, such payment, the Company shall execute and
deliver
a new Warrant or Warrants in the name of the assignee or assignees and
in the
denomination specified in such instrument of assignment, and shall issue
to the
assignor a new Warrant evidencing the portion of this Warrant not so assigned,
and this Warrant shall promptly be cancelled. Following a transfer that
complies
with the requirements of this Section 3.1, the Warrant may be exercised
by a new
Holder for the purchase of shares of Common Stock regardless of whether
the
Company issued or registered a new Warrant on the books of the
Company.
In
connection with any transfer of this Warrant after the Registration Statement
(as defined in the Investor Rights Agreement) is declared effective under
the
Securities Act, the Holder
or transferee of this Warrant shall
reimburse the Company for its reasonable out of pocket costs in connection
with
such transfer (including without limitation the reasonable attorneys fees
for
preparing and filing a prospectus supplement with the SEC and/or delivering
an
updated opinion letter to the Seller’s transfer agent).
3.2. Restrictive
Legends.
Each certificate for Warrant Stock initially issued upon the exercise of
this
Warrant, and each certificate for Warrant Stock issued to any subsequent
transferee of any such certificate, unless, in each case, such Warrant
Stock
is
registered under the Securities Act
or is eligible for resale without registration pursuant to Rule 144(k)
under the
Securities Act, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE
SECURITIES ACT OF 1933 AS AMENDED, AND MAY NOT BE OFFERED, SOLD, ASSIGNED
OR
TRANSFERRED, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID
ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT REGISTRATION UNDER SAID ACT IS NOT REQUIRED.”
“THE
SALE, TRANSFER OR ASSIGNMENT OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT
DATED AS OF JUNE 15, 2006, AS AMENDED FROM TIME TO TIME, AMONG THE COMPANY
AND
CERTAIN HOLDERS OF ITS OUTSTANDING SECURITIES. COPIES OF SUCH AGREEMENT
MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF
THIS
CERTIFICATE TO THE SECRETARY OF THE COMPANY.”
3.3. Division
and Combination; Expenses; Books.
This Warrant may be divided or combined with other Warrants upon presentation
hereof at the aforesaid office or agency of the Company, together with
a written
notice specifying the names and denominations in which new Warrants are
to be
issued, signed by the Holder or its agent or attorney. Subject to compliance
with Section 3.1 as to any transfer which may be involved in such division
or
combination, the Company shall execute and deliver a new Warrant or Warrants
in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice. The Company shall prepare, issue and deliver at its own
expense the new Warrant or Warrants under this Section 3. The Company agrees
to
maintain, at its aforesaid office or agency, books for the registration
and the
registration of transfer of the Warrants.
4. Adjustments.
The number of shares of Common Stock for which this Warrant is exercisable,
and
the price at which such shares may be purchased upon exercise of this Warrant,
shall be subject to adjustment from time to time as set forth in this Section
4.
The Company shall give the Holder notice of any event described below which
requires an adjustment pursuant to this Section 4 in accordance with Sections
5.1 and 5.2.
4.1. Stock
Dividends, Subdivisions and Combinations.
If at any time while this Warrant is outstanding the Company shall:
(i) declare
a dividend or make a distribution on its outstanding shares of Common Stock
in
shares of Common Stock,
(ii) subdivide
its outstanding shares of Common Stock into a larger number of shares of
Common
Stock, or
(iii) combine
its outstanding shares of Common Stock into a smaller number of shares
of Common
Stock, then:
(1) the
number of shares of Common Stock acquirable upon exercise of this Warrant
immediately after the occurrence of any such event shall be adjusted to
equal
the number of shares of Common Stock which a record holder of the same
number of
shares of Common Stock that would have been acquirable under this Warrant
immediately prior to the record date for such dividend or distribution
or the
effective date of such subdivision or combination would own or be entitled
to
receive after such record date or the effective date of such subdivision
or
combination, as applicable, and
(2) the
Current Warrant Price shall be adjusted to equal:
(A) the
Current Warrant Price in effect at the time of the record date for such
dividend
or distribution or of the effective date of such subdivision or combination,
multiplied by the number of shares of Common Stock into which this Warrant
is
exercisable immediately prior to the adjustment, divided by
(B) the
number of shares of Common Stock into which this Warrant is exercisable
immediately after such adjustment.
Any
adjustment made pursuant to clause (i) of this paragraph shall become effective
immediately after the record date for the determination of stockholders
entitled
to receive such dividend or distribution, and any adjustment pursuant to
clauses
(ii) or (iii) of this paragraph shall become effective immediately after
the
effective date of such subdivision or combination.
4.2. Certain
Other Distributions.
If at any time while this Warrant is outstanding the Company shall cause
the
holders of its Common Stock to be entitled to receive any dividend or other
distribution of:
(i) cash,
(ii) any
evidences of its indebtedness, any shares of stock of any class or any
other
securities or property or assets of any nature whatsoever (other than cash
or
additional shares of Common Stock as provided in Section 4.1 hereof), or
(iii) any
warrants or other rights to subscribe for or purchase any evidences of
its
indebtedness, any shares of stock of any class or any other securities
or
property or assets of any nature whatsoever, then:
(1) the
number of shares of Common Stock acquirable upon exercise of this Warrant
shall
be adjusted to equal the product of the number of shares of Common Stock
acquirable upon exercise of this Warrant immediately prior to the record
date
for such dividend or distribution, multiplied by a fraction (x) the numerator
of
which shall be the Current Warrant Price per share of Common Stock at the
date
of taking such record and (y) the denominator of which shall be such Current
Warrant Price minus the amount allocable to one share of Common Stock of
any
such cash so distributable and of the fair value (as determined in good
faith by
the Board of Directors of the Company) of any and all such evidences of
indebtedness, shares of stock, other securities or property or warrants
or other
subscription or purchase rights so distributable; and
(2) the
Current Warrant Price in effect immediately prior to the record date fixed
for
determination of stockholders entitled to receive such distribution shall
be
adjusted to equal (x) the Current Warrant Price multiplied by the number
of
shares of Common Stock acquirable upon exercise of this Warrant immediately
prior to the adjustment, divided by (y) the number of shares of Common
Stock
acquirable upon exercise of this Warrant immediately after such adjustment.
A
reclassification of the Common Stock (other than a change in par value,
or from
par value to no par value or from no par value to par value) into shares
of
Common Stock and shares of any other class of stock shall be deemed a
distribution by the Company to the holders of its Common Stock of such
shares of
such other class of stock within the meaning of this Section 4.2 and, if
the
outstanding shares of Common Stock shall be changed into a larger or smaller
number of shares of Common Stock as a part of such reclassification, such
change
shall be deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of Section
4.1.
4.3. Securities
Issuances.
In the event that the Company or any of its subsidiaries (A) issues or
sells any
Common Stock or convertible securities, warrants, options or other rights
to
subscribe for or to purchase or exchange for, shares of Common Stock
(“Convertible Securities”) or (B) directly or indirectly effectively reduces the
conversion, exercise or exchange price for any Convertible Securities which
are
currently outstanding, at or to an effective Per Share Selling Price (as
defined
below) which is less than the greater of (I) the closing sale price per
share of
the Common Stock on the principal market on which the Common Stock is traded
the
Trading Day next preceding such issue or sale or, in the case of issuances
to
holders of its Common Stock, the date fixed for the determination of
stockholders entitled to receive such warrants, rights, or options (“Fair Market
Price”), or (II) the Current Warrant Price, then in each such case the Current
Warrant Price in effect immediately prior to such issue or sale or record
date,
as applicable, shall be automatically reduced effective concurrently with
such
issue or sale to an amount determined by multiplying the Current Warrant
Price
then in effect by a fraction, (x) the numerator of which shall be the sum
of (1)
the number of shares of Common Stock outstanding immediately prior to such
issue
or sale, plus (2) the number of shares of Common Stock which the aggregate
consideration received by the Company for such additional shares would
purchase
at such Fair Market Price or Current Warrant Price, as the case may be,
and (y)
the denominator of which shall be the number of shares of Common Stock
of the
Company outstanding immediately after such issue or sale. The foregoing
provision shall not apply to any issuances or sales of Common Stock or
Convertible Securities (i) pursuant to any Convertible Securities currently
outstanding on the date hereof in accordance with the terms of such Convertible
Securities in effect on the date hereof, or (ii) to any officer, director
or
employee of the Company pursuant to a bona fide option or equity incentive
plan
duly adopted by the Company. The Company shall give to the Warrantholder
written
notice of any such sale of Common Stock within 24 hours of the closing
of any
such sale and shall within such 24 hour period issue a press release announcing
such sale if such sale is a material event for, or otherwise material to,
the
Company.
For
the purposes of the foregoing adjustments, in the case of the issuance
of any
Convertible Securities, the maximum number of shares of Common Stock issuable
upon exercise, exchange or conversion of such Convertible Securities shall
be
deemed to be outstanding.
For
purposes of this Section 4.3, if an event occurs that triggers more than
one of
the above adjustment provisions, then only one adjustment shall be made
and the
calculation method which yields the greatest downward adjustment in the
Current
Warrant Price shall be used.
“Per
Share Selling Price” shall include the amount actually paid by third parties for
each share of Common Stock in a sale or issuance by the Company. In the
event a
fee is paid by the Company in connection with such transaction directly
or
indirectly to such third party or its affiliates, any such fee shall be
deducted
from the selling price pro rata to all shares sold in the transaction to
arrive
at the Per Share Selling Price. A sale of shares of Common Stock shall
include
the sale or issuance of Convertible Securities, and in such circumstances
the
Per Share Selling Price of the Common Stock covered thereby shall also
include
the exercise, exchange or conversion price thereof (in addition to the
consideration received by the Company upon such sale or issuance less the
fee
amount as provided above). In case of any such security issued in a transaction
in which the purchase price or the conversion, exchange or exercise price
is
directly or indirectly subject to adjustment or reset based on a future
date,
future trading prices of the Common Stock, specified or contingent events
directly or indirectly related to the business of the Company or the market
for
the Common Stock, or otherwise (but excluding standard stock split anti-dilution
provisions or weighted-average anti-dilution provisions similar to that
set
forth herein, provided that any actual reduction of such price under any
such
security pursuant to such weighted-average anti-dilution provision shall
be
included and cause a adjustment hereunder), the Per Share Selling Price
shall be
deemed to be the lowest conversion, exchange, exercise or reset price at
which
such securities are converted, exchanged, exercised or reset or might have
been
converted, exchanged, exercised or reset, or the lowest adjustment, as
the case
may be, over the life of such securities. If shares are issued for a
consideration other than cash, the Per Share Selling Price shall be the
fair
value of such consideration as determined in good faith by independent
certified
public accountants mutually acceptable to the Company and the Holder. In
the
event the Company directly or indirectly effectively reduces the conversion,
exercise or exchange price for any Convertible Securities which are currently
outstanding, then the Per Share Selling Price shall equal such effectively
reduced conversion, exercise or exchange price.
4.4. Other
Provisions Applicable to Adjustments.
The following provisions shall be applicable to the making of adjustments
of the
number of shares of Common Stock into which this Warrant is exercisable
and the
Current Warrant Price provided for in Section 4:
(a) When
Adjustments to Be Made.
The adjustments required by Section 4 shall be made whenever and as often
as any
specified event requiring an adjustment shall occur, except that any that
would
otherwise be required may be postponed (except in the case of a subdivision
or
combination of shares of the Common Stock, as provided for in Section 4.1)
up
to, but not beyond the date of exercise if such adjustment either by itself
or
with other adjustments not previously made adds or subtracts less than
1% of the
shares of Common Stock into which this Warrant is exercisable immediately
prior
to the making of such adjustment. Any adjustment representing a change
of less
than such minimum amount (except as aforesaid) which is postponed shall
be
carried forward and made as soon as such adjustment, together with other
adjustments required by this Section 4 and not previously made, would result
in
a minimum adjustment or on the date of exercise. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at the
close of
business on the date of its occurrence.
(b) Fractional
Interests.
In computing adjustments under this Section 4, fractional interests in
Common
Stock shall be taken into account to the nearest 1/100th of a share.
(c) When
Adjustment Not Required.
If the Company undertakes a transaction contemplated under this Section
4 and as
a result takes a record of the holders of its Common Stock for the purpose
of
entitling them to receive a dividend or distribution or subscription or
purchase
rights or other benefits contemplated under this Section 4 and shall, thereafter
and before the distribution to stockholders thereof, legally abandon its
plan to
pay or deliver such dividend, distribution, subscription or purchase rights
or
other benefits contemplated under this Section 4, then thereafter no adjustment
shall be required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
(d) Escrow
of Stock.
If after any property becomes distributable pursuant to Section 4 by reason
of
the taking of any record of the holders of Common Stock, but prior to the
occurrence of the event for which such record is taken, a holder of this
Warrant
exercises the Warrant during such time, then such holder shall continue
to be
entitled to receive any shares of Common Stock issuable upon exercise hereunder
by reason of such adjustment and such shares or other property shall be
held in
escrow for the holder of this Warrant by the Company to be issued to holder
of
this Warrant upon and to the extent that the event actually takes place.
Notwithstanding any other provision to the contrary herein, if the event
for
which such record was taken fails to occur or is rescinded, then such escrowed
shares shall be canceled by the Company and escrowed property returned
to the
Company.
4.5. Reorganization,
Reclassification, Merger, Consolidation or Disposition of Assets.
(a)
If there shall occur a Change of Control and, pursuant to the terms of
such
Change of Control, shares of common stock of the successor or acquiring
corporation, or any cash, shares of stock or other securities or property
of any
nature whatsoever (including warrants or other subscription or purchase
rights)
in addition to or in lieu of common stock of the successor or acquiring
corporation (“Other Property”), are to be received by or distributed to the
holders of Common Stock of the Company, then the Holder of this Warrant
shall
have the right thereafter to receive, upon the exercise of the Warrant,
the
number of shares of common stock of the successor or acquiring corporation
or of
the Company, if it is the surviving corporation, and the Other Property
receivable upon or as a result of such Change of Control by a holder of
the
number of shares of Common Stock into which this Warrant is exercisable
immediately prior to such event.
(b)
In case of any such Change of Control described in Section 4.5(a) above,
the
resulting, successor or acquiring entity (if other than the Company) and,
if an
entity different from the successor or acquiring entity, the entity whose
capital stock or assets the holders of the Common Stock are entitled to
receive
as a result of such Change of Control, shall expressly assume the due and
punctual observance and performance of each and every covenant and condition
contained in this Warrant to be performed and observed by the Company and
all
the obligations and liabilities hereunder, subject to such modifications
as may
be deemed appropriate (as determined by resolution of the Board of Directors
of
the Company) in order to provide for adjustments of shares of the Common
Stock
into which this Warrant is exercisable which shall be as nearly equivalent
as
practicable to the adjustments provided for in Section 4. For purposes
of
Section 4, common stock of the successor or acquiring corporation shall
include
stock of such corporation of any class which is not preferred as to dividends
or
assets on liquidation over any other class of stock of such corporation
and
which is not subject to redemption and shall also include any evidences
of
indebtedness, shares of stock or other securities which are convertible
into or
exchangeable for any such stock, either immediately or upon the arrival
of a
specified date or the happening of a specified event and any warrants or other
rights to subscribe for or purchase any such stock. The foregoing provisions
of
this Section 4 shall similarly apply to successive Change of Control
transactions.
4.6. Other
Action Affecting Common Stock.
In case at any time or from time to time the Company shall take any action
in
respect of its Common Stock, other than the payment of dividends permitted
by
Section 4 or any other action described in Section 4, then, unless such
action
will not have a materially adverse effect upon the rights of the holder
of this
Warrant, the number of shares of Common Stock or other stock into which
this
Warrant is exercisable and/or the purchase price thereof shall be adjusted
in
such manner as may be equitable in the circumstances.
4.7. Certain
Limitations.
Notwithstanding anything herein to the contrary, the Company agrees not
to enter
into any transaction which, by reason of any adjustment hereunder, would
cause
the Current Warrant Price to be less than the par value per share of Common
Stock.
4.8. Stock
Transfer Taxes.
The issue of stock certificates upon exercise of this Warrant shall be
made
without charge to the holder for any tax in respect of such issue. The
Company
shall not, however, be required to pay any tax which may be payable in
respect
of any transfer involved in the issue and delivery of shares in any name
other
than that of the holder of this Warrant, and the Company shall not be required
to issue or deliver any such stock certificate unless and until the person
or
persons requesting the issue thereof shall have paid to the Company the
amount
of such tax or shall have established to the satisfaction of the Company
that
such tax has been paid.
5. Notices
to Warrant Holders.
5.1. Certificate
as to Adjustments.
Upon the occurrence of each adjustment or readjustment of the Current Warrant
Price, the Company, at its expense, shall promptly compute such adjustment
or
readjustment in accordance with the terms hereof and prepare and furnish
to the
Holder of this Warrant a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment
or
readjustment is based. The Company shall, upon the written request at any
time
of the Holder of this Warrant, furnish or cause to be furnished to such
Holder a
like certificate setting forth (i) such adjustments and readjustments,
(ii) the
Current Warrant Price at the time in effect and (iii) the number of shares
of
Common Stock and the amount, if any, or other property which at the time
would
be received upon the exercise of Warrants owned by such Holder.
5.2. Notice
of Corporate Action.
If at any time:
(a) the
Company shall take a record of the holders of its Common Stock for the
purpose
of entitling them to receive a dividend (other than a cash dividend payable
out
of earnings or earned surplus legally available for the payment of dividends
under the laws of the jurisdiction of incorporation of the Company) or
other
distribution, or any right to subscribe for or purchase any evidences of
its
indebtedness, any shares of stock of any class or any other securities
or
property, or to receive any other right, or
(b) there
shall be any capital reorganization of the Company, any reclassification
or
recapitalization of the capital stock of the Company or any consolidation
or
merger of the Company with, or any sale, transfer or other disposition
of all or
substantially all the property, assets or business of the Company to, another
corporation,
(c) there
shall be a voluntary or involuntary dissolution, liquidation or winding
up of
the Company, or
(d) the
Company shall cause the holders of its Common Stock to be entitled to receive
(i) any dividend or other distribution of cash, (ii) any evidences of its
indebtedness, or (iii) any shares of stock of any class or any other securities
or property or assets of any nature whatsoever (other than cash or additional
shares of Common Stock as provided in Section 4.1 hereof); or (iv) any
warrants
or other rights to subscribe for or purchase any evidences of its indebtedness,
any shares of stock of any class or any other securities or property or
assets
of any nature whatsoever;
then,
in any one or more of such cases, the Company shall give to the Holder
(i) at
least 20 days’ prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights
to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or
winding
up, and (ii) in the case of any such reorganization, reclassification,
merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or
winding
up, at least 20 days’ prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of
such
dividend, distribution or right, the date on which the holders of Common
Stock
shall be entitled to any such dividend, distribution or right, and the
amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if
any
such time is to be fixed, as of which the holders of Common Stock shall
be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or
winding
up. Each such written notice shall be sufficiently given if addressed to
the
Holder at the last address of the Holder appearing on the books of the
Company
and delivered in accordance with Section 15.2.
5.3. No
Rights as Stockholder.
This Warrant does not entitle the Holder to any voting or other rights
as a
stockholder of the Company prior to exercise and payment for the Warrant
Price
in accordance with the terms hereof.
6. No
Impairment.
The Company shall not by any action, including, without limitation, amending
its
articles of incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any
other
voluntary action, avoid or seek to avoid the observance or performance
of any of
the terms of this Warrant, but will at all times in good faith assist in
the
carrying out of all such terms and in the taking of all such actions as
may be
necessary or appropriate to protect the rights of the Holder against impairment.
Without limiting the generality of the foregoing, the Company will (a)
not
increase the par value of any shares of Common Stock receivable upon the
exercise of this Warrant above the amount payable therefor upon such exercise
immediately prior to such increase in par value, (b) take all such action
as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of Common Stock upon the exercise
of
this Warrant, and (c) use its best efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Company to perform its obligations
under this Warrant. Upon the request of the Holder, the Company will at
any time
during the period this Warrant is outstanding acknowledge in writing, in
form
satisfactory to the Holder, the continuing validity of this Warrant and
the
obligations of the Company hereunder.
7. Reservation
and Authorization of Common Stock; Registration With Approval of Any
Governmental Authority.
From and after the date of issuance hereof, the Company shall at all times
reserve and keep available for issue upon the exercise of Warrants such
number
of its authorized but unissued shares of Common Stock as will be sufficient
to
permit the exercise in full of all outstanding Warrants (without regard
to any
ownership limitations provided in Section 2.4(i)). All shares of Common
Stock
which shall be so issuable, when issued upon exercise of any Warrant and
payment
therefor in accordance with the terms of such Warrant, shall be duly and
validly
issued and fully paid and nonassessable, and not subject to preemptive
rights.
Before taking any action which would cause an adjustment reducing the Current
Warrant Price below the then par value, if any, of the shares of Common
Stock
issuable upon exercise of the Warrants, the Company shall take any corporate
action which may be necessary in order that the Company may validly and
legally
issue fully paid and non-assessable shares of such Common Stock at such
adjusted
Current Warrant Price. Before taking any action which would result in an
adjustment in the number of shares of Common Stock for which this Warrant
is
exercisable or in the Current Warrant Price, the Company shall obtain all
such
authorizations or exemptions thereof, or consents thereto, as may be necessary
from any public regulatory body or bodies having jurisdiction thereof.
If any
shares of Common Stock required to be reserved for issuance upon exercise
of
Warrants require registration or qualification with any governmental authority
under any federal or state law before such shares may be so issued (other
than
as a result of a prior or contemplated distribution by the Holder of this
Warrant), the Company will in good faith and as expeditiously as possible
and at
its expense endeavor to cause such shares to be duly registered.
8. Taking
of Record; Stock and Warrant Transfer Books.
In the case of all dividends or other distributions by the Company to the
holders of its Common Stock with respect to which any provision of Section
4
refers to the taking of a record of such holders, the Company will in each
such
case take such a record and will take such record as of the close of business
on
a Business Day. The Company will not at any time, except upon dissolution,
liquidation or winding up of the Company, close its stock transfer books
or
Warrant transfer books so as to result in preventing or delaying the exercise
or
transfer of any Warrant.
9. Registration
Rights. The resale of the Warrant Stock shall be registered in accordance
with the terms and conditions contained in that certain Investor Rights
Agreement dated of even date hereof, among the Holder, the Company and
the other
parties named therein (the “Investor Rights Agreement”). The Holder acknowledges
that pursuant to the Investor Rights Agreement, the Company has the right
to
request that the Holder furnish information regarding such Holder and the
distribution of the Warrant Stock as is required by law or the Commission
to be
disclosed in the Registration Statement (as such term is defined in the
Investor
Rights Agreement), and the Company may exclude from such registration the
shares
of Warrant Stock acquirable hereunder if Holder fails to furnish such
information within a reasonable time prior to the filing of each Registration
Statement, supplemented prospectus included therein and/or amended Registration
Statement.
10. Supplying
Information.
Upon any default by the Company of its obligations hereunder or under the
Investor Rights Agreement, the Company shall cooperate with the Holder
in
supplying such information as may be reasonably necessary for such Holder
to
complete and file any information reporting forms presently or hereafter
required by the Commission as a condition to the availability of an exemption
from the Securities Act for the sale of any Warrant or Restricted Common
Stock.
11. Loss
or Mutilation.
Upon receipt by the Company from the Holder of evidence reasonably satisfactory
to it of the ownership of and the loss, theft, destruction or mutilation
of this
Warrant and indemnity or security reasonably satisfactory to it and
reimbursement to the Company of all reasonable expenses incidental thereto
and
in case of mutilation upon surrender and cancellation hereof, the Company
will
execute and deliver in lieu hereof a new Warrant of like tenor to the Holder;
provided, however, that in the case of mutilation, no indemnity shall be
required if this Warrant in identifiable form is surrendered to the Company
for
cancellation.
12. Office
of the Company.
As long as any of the Warrants remain outstanding, the Company shall maintain
an
office or agency (which may be the principal executive offices of the Company)
where the Warrants may be presented for exercise, registration of transfer,
division or combination as provided in this Warrant.
13. Financial
and Business Information.
13.1. Quarterly
Information.
The Company will deliver to the Holder, as soon as available and in any
event
within 45 days after the end of each of the first three quarters of each
fiscal
year of the Company, one copy of an unaudited consolidated balance sheet
of the
Company and its subsidiaries as at the end of such quarter, and the related
unaudited consolidated statements of income, retained earnings and cash
flow of
the Company and its subsidiaries for such quarter and, in the case of the
second
and third quarters, for the portion of the fiscal year ending with such
quarter,
setting forth in each case in comparative form the figures for the corresponding
periods in the previous fiscal year. Such financial statements shall be
prepared
by the Company in accordance with GAAP and accompanied by the certification
of
the Company’s chief executive officer or chief financial officer that such
financial statements present fairly the consolidated financial position,
results
of operations and cash flow of the Company and its subsidiaries as at the
end of
such quarter and for such year-to-date period, as the case may be; provided,
however, that the Company shall have no obligation to deliver such quarterly
information under this Section 13.1 to the extent it is publicly available;
and
provided further, that if such information contains material non-public
information, the Company shall so notify the Holder prior to delivery thereof
and the Holder shall have the right to refuse delivery of such information.
13.2. Annual
Information.
The Company will deliver to the Holder as soon as available and in any
event
within 90 days after the end of each fiscal year of the Company, one copy
of an
audited consolidated balance sheet of the Company and its subsidiaries
as at the
end of such year, and audited consolidated statements of income, retained
earnings and cash flow of the Company and its subsidiaries for such year;
setting forth in each case in comparative form the figures for the corresponding
periods in the previous fiscal year; all prepared in accordance with GAAP,
and
which audited financial statements shall be accompanied by an opinion thereon
of
the independent certified public accountants regularly retained by the
Company,
or any other firm of independent certified public accountants of recognized
national standing selected by the Company; provided, however, that the
Company
shall have no obligation to deliver such annual information under this
Section
13.2 to the extent it is publicly available; and provided further, that
if such
information contains material non-public information, the Company shall
so
notify the Holder prior to delivery thereof and the Holder shall have the
right
to refuse delivery of such information..
13.3. Filings.
The Company will file on or before the required date all regular or periodic
reports (pursuant to the Exchange Act) with the Commission and will deliver
to
Holder promptly upon their becoming available one copy of each report,
notice or
proxy statement sent by the Company to its stockholders generally.
14. Limitation
of Liability.
No provision hereof, in the absence of affirmative action by the Holder
to
purchase shares of Common Stock, and no enumeration herein of the rights
or
privileges of the Holder hereof, shall give rise to any liability of the
Holder
for the purchase price of any Common Stock, whether such liability is asserted
by the Company or by creditors of the Company.
15. Miscellaneous.
15.1 Nonwaiver
and Expenses.
No course of dealing or any delay or failure to exercise any right hereunder
on
the part of the Holder shall operate as a waiver of such right or otherwise
prejudice Holder’s rights, powers or remedies. If the Company fails to make,
when due, any payments provided for hereunder, or fails to comply with
any other
provision of this Warrant, the Company shall pay to the Holder such amounts
as
shall be sufficient to cover any third party costs and expenses including,
but
not limited to, reasonable attorneys’ fees, including those of appellate
proceedings, incurred by the Holder in collecting any amounts due pursuant
hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.
15.2 Notice
Generally.
All notices, requests, demands or other communications provided for herein
shall
be in writing and shall be given in the manner and to the addresses set
forth in
the Purchase Agreement.
15.3 Successors
and Assigns.
Subject to compliance with the provisions of Section 3.1, this Warrant
and the
rights evidenced hereby shall inure to the benefit of and be binding upon
the
successors of the Company and the successors and assigns of the Holder.
The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant, and shall be enforceable by any such
Holder.
15.4 Amendment.
This Warrant may be modified or amended or the provisions of this Warrant
waived
with the written consent of both the Company and the Holder.
15.5 Severability.
Wherever possible, each provision of this Warrant shall be interpreted
in such
manner as to be effective and valid under applicable law, but if any provision
of this Warrant shall be prohibited by or invalid under applicable law,
such
provision shall be modified to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Warrant.
15.6 Headings.
The headings used in this Warrant are for the convenience of reference
only and
shall not, for any purpose, be deemed a part of this Warrant.
15.7 Governing
Law.
This Warrant and the transactions contemplated hereby shall be deemed to
be
consummated in the State of New York and shall be governed by and interpreted
in
accordance with the local laws of the State of New York without regard
to the
provisions thereof relating to conflicts of laws. The Company hereby irrevocably
consents to the exclusive jurisdiction of the State and Federal courts
located
in New York City, New York in connection with any action or proceeding
arising
out of or relating to this Warrant. In any such litigation the Company
agrees
that the service thereof may be made by certified or registered mail directed
to
the Company pursuant to Section 15.2.
[Signature
Page Follows]
IN
WITNESS WHEREOF, NetSol Technologies, Inc. has caused this Warrant to be
executed by its duly authorized officer and attested by its
Secretary.
Dated:
June
15,
2006
NETSOL
TECHNOLOGIES, INC.
By:______________________________
Name:
Title:
Attest:
By:______________________________
Name:
Title:
EXHIBIT
A
SUBSCRIPTION
FORM
[To
be executed only upon exercise of Warrant]
NetSol
Technologies, Inc.
23901
Calabasas Road,
Suite
2072
Calabasas,
CA 91302
Attention:
General Counsel
Facsimile
No.: (818) 222-9197
This
undersigned hereby elects to exercise the right of purchase represented
by the
within Warrant (“Warrant”) for, and to purchase thereunder _______________
shares of Common Stock (“Warrant Shares”) provided for therein, and requests
that certificates for the Warrant Shares be issued as follows:
_______________________________
Name
_______________________________
Address
_______________________________
_______________________________
and,
if
the number of Warrant Shares shall not be all the Warrant Shares purchasable
upon exercise of the Warrant, that a new Warrant for the balance of the
Warrant
Shares.
In
lieu
of delivering physical certificates representing the Warrant Shares purchasable
upon exercise of this Warrant, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the Holder, the Company shall
use its
best efforts to cause its transfer agent to electronically transmit the
Warrant
Shares issuable upon conversion or exercise to the undersigned, by crediting
the
account of the undersigned's prime broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system.
To
the
extent the undersigned intends to sell the Warrant Shares issued to the
undersigned upon exercise of this Warrant pursuant to a Registration Statement
(as defined in the Registration Rights Agreement), the undersigned agrees
to
comply with all applicable prospectus delivery requirements under the Securities
Act with respect to such sale.
Dated:_______________________
|
Signature:______________________
|
________________________________
Name
(please print)
________________________________
Address
EXHIBIT
B
ASSIGNMENT
FORM
FOR
VALUE RECEIVED the undersigned registered owner of this Warrant for the
purchase
of shares of common stock of NetSol Technologies, Inc. hereby sells, assigns
and
transfers unto the Assignee named below all of the rights of the undersigned
under this Warrant, with respect to the number of shares of common stock
set
forth below:
_______________________________________
_______________________________________
_______________________________________
(Name
and Address of Assignee)
_______________________________________
(Number
of Shares of Common Stock)
and
does hereby irrevocably constitute and appoint ____________ attorney-in-fact
to
register such transfer on the books of the Company, maintained for the
purpose,
with full power of substitution in the premises.
Dated:_________________________________
______________________________________
(Print
Name and Title)
______________________________________
(Signature)
______________________________________
(Witness)
NOTICE:
The signature on this assignment must correspond with the name as written
upon
the face of the Warrant in every particular, without alteration or enlargement
or any change whatsoever.
ANNEX
D
INVESTOR
RIGHTS AGREEMENT
INVESTOR
RIGHTS AGREEMENT
This
Investor Rights Agreement (this “Agreement”)
is
made and entered into as of June 15, 2006 among NetSol Technologies, Inc.,
a
Nevada corporation (the “Company”),
and
each of the purchasers executing this Agreement and listed on Schedule
1
attached
hereto (collectively, the “Purchasers”).
This
Agreement is being entered into pursuant to the Convertible Note and Warrant
Purchase Agreement, dated as of the date hereof, by and among the Company
and
the Purchasers (the “Purchase
Agreement”).
The
Company and the Purchasers hereby agree as follows:
1. Definitions.
Capitalized
terms used and not otherwise defined herein shall have the meanings given
such
terms in the Purchase Agreement. As used in this Agreement, the following
terms
shall have the following meanings:
“Advice”
shall
have the meaning set forth in Section 3(m).
“Affiliate”
means,
with respect to any Person, any other Person that directly or indirectly
controls or is controlled by or under common control with such Person.
For the
purposes of this definition, “control,” when used with respect to any Person,
means the possession, direct or indirect, of the power to direct or cause
the
direction of the management and policies of such Person, whether through
the
ownership of voting securities, by contract or otherwise; and the terms
of
“affiliated,” “controlling” and “controlled” have meanings correlative to the
foregoing.
“Blackout
Period”
shall
have the meaning set forth in Section 3(n).
“Board”
shall
have the meaning set forth in Section 3(n).
“Business
Day”
means
any day except Saturday, Sunday and any day which shall be a legal holiday
or a
day on which banking institutions in the State of New York generally are
authorized or required by law or other government actions to close.
“Commission”
means
the Securities and Exchange Commission.
“Common
Stock”
means
the Company's Common Stock, par value $0.001 per share.
“Effectiveness
Period”
shall
have the meaning set forth in Section 2.
“Event”
shall
have the meaning set forth in Section 8(e).
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“Filing
Deadline”
means
the eighth (8th)
business day following the Shareholders Meeting (as defined in the Purchase
Agreement).
“Holder”
or
“Holders”
means
the holder or holders, as the case may be, from time to time of Registrable
Securities, including without limitation the Purchasers and their assignees.
“Indemnified
Party”
shall
have the meaning set forth in Section 5(c).
“Indemnifying
Party”
shall
have the meaning set forth in Section 5(c).
“Losses”
shall
have the meaning set forth in Section 5(a).
“Person”
means
an individual or a corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or political subdivision thereof)
or
other entity of any kind.
“Proceeding”
means
an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.
“Prospectus”
means
the prospectus included in any Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted
from a
prospectus filed as part of an effective registration statement in reliance
upon
Rule 430A promulgated under the Securities Act), as amended or supplemented
by
any prospectus supplement, with respect to the terms of the offering of
any
portion of the Registrable Securities covered by such Registration Statement,
and all other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference in
such
Prospectus.
“Registrable
Securities”
means
(a) the Conversion Shares and the Warrant Shares (without regard to any
limitations on beneficial ownership or issuance contained in the Certificate
of
Designation or Warrants) or other securities issued or issuable to each
Purchaser or its transferee or designee (i) upon conversion or exchange
of the
Notes or Preferred Stock and/or as dividends or interest on the Preferred
Stock
or Notes (including without limitation any and all shares of Common Stock
issued
upon purchase of any Preferred Stock or Notes by the Company) and/or upon
exercise of the Warrants, or (ii) upon any distribution with respect to,
any
exchange for or any replacement of such Notes, Preferred Stock or Warrants
or
(iii) upon any conversion, exercise or exchange of any securities issued
in
connection with any such distribution, exchange or replacement; (b) securities
issued or issuable upon any stock split, stock dividend, recapitalization
or
similar event with respect to the foregoing; and (c) any other security
issued
as a dividend or other distribution with respect to, in exchange for, in
replacement or redemption of, or in reduction of the liquidation value
of, any
of the securities referred to in the preceding clauses; provided, however,
that
such securities shall cease to be Registrable Securities when such securities
have been sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction or when such securities
may be
sold without any restriction pursuant to Rule 144(k) as determined by the
counsel to the Company pursuant to a written opinion letter, addressed
to the
Company's transfer agent to such effect as described in Section 2 of this
Agreement.
“Registration
Statement”
means
the registration statements and any additional registration statements
contemplated by Section 2, including (in each case) the Prospectus, amendments
and supplements to such registration statement or Prospectus, including
pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference in such registration statement.
“Rule
144”
means
Rule 144 promulgated by the Commission pursuant to the Securities Act,
as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect
as such
Rule.
“Rule
158”
means
Rule 158 promulgated by the Commission pursuant to the Securities Act,
as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect
as such
Rule.
“Rule
415”
means
Rule 415 promulgated by the Commission pursuant to the Securities Act,
as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect
as such
Rule.
“Securities
Act”
means
the Securities Act of 1933, as amended.
“Special
Counsel”
means
Peter J. Weisman, P.C.
“Warrant
Shares”
means
the shares of Common Stock issuable upon the exercise of the warrants issued
or
to be issued to the Purchasers or their assignees or designees in connection
with the offering consummated under the Purchase Agreement.
2. Registration.
As soon
as possible following the Shareholders Meeting (but not later than the
Filing
Deadline, and not prior to the Shareholder Meeting), the Company shall
prepare
and file with the Commission a “shelf” Registration Statement covering all
Registrable Securities for a secondary or resale offering to be made on
a
continuous basis pursuant to Rule 415. The Registration Statement shall
be on
Form S-3 (or if such form is not available to the Company on another form
appropriate for such registration in accordance herewith). The Company
shall
cause the Registration Statement to be declared effective under the Securities
Act not later than one hundred twenty (120) days after the Closing, shall
file
with the Commission a request for acceleration of effectiveness in accordance
with Rule 461 promulgated under the Securities Act within five (5) Business
Days
of the date that the Company is notified (orally or in writing, whichever
is
earlier) by the Commission that a Registration Statement will not be “reviewed,”
or not be subject to further review, and shall keep such Registration Statement
continuously effective under the Securities Act until such date as is the
earlier of (x) the date when all Registrable Securities covered by such
Registration Statement have been sold or (y) the date on which all Registrable
Securities may be sold without any restriction pursuant to Rule 144(k)
as
determined by the counsel to the Company pursuant to a written opinion
letter,
addressed to the Company's transfer agent to such effect (the “Effectiveness
Period”).
Upon
the initial filing thereof and upon the filing of any pre-effective amendment
thereto, the Registration Statement shall cover at least 150% of the shares
of
Common Stock for issuance upon the conversion of the Preferred Stock or
Notes,
as the case may be, and 100% of the shares of Common Stock for issuance
upon the
exercise of the Warrants (without regard to any issuance or beneficial
ownership
limitations). Such Registration Statement also shall cover, to the extent
allowable under the Securities Act and the Rules promulgated thereunder
(including Securities Act Rule 416), such indeterminate number of additional
shares of Common Stock resulting from stock splits, stock dividends or
similar
transactions with respect to the Registrable Securities. If Shareholder
Approval
is obtained at the Shareholders Meeting, the Registration Statement shall
cover
the Conversion Shares underlying the Preferred Stock, otherwise it shall
cover
the Conversion Shares underlying the Notes.
3. Registration
Procedures.
In
connection with the Company's registration obligations hereunder, the Company
shall:
(a) Prepare
and file with the Commission on or prior to the Filing Deadline, a Registration
Statement on Form S-3 (or if such form is not available to the Company
on
another form appropriate for such registration in accordance herewith)
(which
shall include a Plan of Distribution substantially in the form of Exhibit
A
attached
hereto), and cause the Registration Statement to become effective and remain
effective as provided herein; provided, however, that not less than three
(3)
Business Days prior to the filing of the Registration Statement or any
related
Prospectus or any amendment or supplement thereto, the Company shall (i)
furnish
to the Special Counsel, copies of all such documents proposed to be filed,
which
documents (other than those incorporated by reference) will be subject
to the
review of such Special Counsel, and (ii) at the request of any Holder cause
its
officers and directors, counsel and independent certified public accountants
to
respond to such inquiries as shall be necessary, in the reasonable opinion
of
counsel to such Holders, to conduct a reasonable investigation within the
meaning of the Securities Act. The Company shall not file the Registration
Statement or any such Prospectus or any amendments or supplements thereto
to
which the Holders of a majority of the Registrable Securities or the Special
Counsel shall reasonably object in writing within three (3) Business Days
after
their receipt thereof, unless counsel to the Company determines in writing
that
such objection is without merit.
(b) (i)
Prepare and file with the Commission such amendments, including post-effective
amendments, to the Registration Statement as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and to the extent any Registrable
Securities are not included in such Registration Statement for reasons
other
than the failure of the Holder to comply with Section 3(m) hereof, shall
prepare
and file with the Commission such additional Registration Statements in
order to
register for resale under the Securities Act all Registrable Securities;
(ii)
cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant
to
Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as possible, and in no event
later
than 10 Business Days, to any comments received from the Commission with
respect
to the Registration Statement or any amendment thereto and as promptly
as
possible provide the Holders true and complete copies of all correspondence
from
and to the Commission relating to the Registration Statement; and (iv)
comply in
all material respects with the provisions of the Securities Act and the
Exchange
Act with respect to the disposition of all Registrable Securities covered
by the
Registration Statement during the applicable period in accordance with
the
intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so
supplemented.
(c) Notify
the Holders of Registrable Securities to be sold and the Special Counsel
as
promptly as possible (A) when a Prospectus or any Prospectus supplement
or
post-effective amendment to the Registration Statement is proposed to be
filed
(but in no event in the case of this subparagraph (A), less than three
(3)
Business Days prior to date of such filing); (B) when the Commission notifies
the Company whether there will be a “review” of such Registration Statement and
whenever the Commission comments in writing on such Registration Statement;
and
(C) with respect to the Registration Statement or any post-effective amendment,
when the same has become effective (which notice shall be delivered to
the
Purchasers and Special Counsel on the same day as such effectiveness),
and after
the effectiveness thereof: (i) of any request by the Commission or any
other
Federal or state governmental authority for amendments or supplements to
the
Registration Statement or Prospectus or for additional information; (ii)
of the
issuance by the Commission of any stop order suspending the effectiveness
of the
Registration Statement covering any or all of the Registrable Securities
or the
initiation of any Proceedings for that purpose; (iii) of the receipt by
the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for
sale in
any jurisdiction, or the initiation or threatening of any Proceeding for
such
purpose; and (iv) if the financial statements included in the Registration
Statement become ineligible for inclusion therein or of the occurrence
of any
event that makes any statement made in the Registration Statement or Prospectus
or any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case
of
the Registration Statement or the Prospectus, as the case may be, it will
not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
therein,
in the light of the circumstances under which they were made, not misleading.
Without limitation to any remedies to which the Holders may be entitled
under
this Agreement, if any of the events described in clauses (i) through (iv)
of
Section 3(c)(C) occurs, the Company shall use its best efforts to respond
to and
correct the event.
(d) Use
its best efforts to avoid the issuance of, or, if issued, use best efforts
to
obtain the withdrawal of, (i) any order suspending the effectiveness of
the
Registration Statement or (ii) any suspension of the qualification (or
exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e) If
requested by any Holder of Registrable Securities, (i) promptly incorporate
in a
Prospectus supplement or post-effective amendment to the Registration Statement
such information as the Company reasonably agrees should be included therein
and
(ii) make all required filings of such Prospectus supplement or such
post-effective amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such Prospectus supplement
or
post-effective amendment; provided, however, that the Company shall not
be
required to take any action pursuant to this Section 3(e) that would, in
the
written opinion of counsel for the Company (addressed to the Special Counsel),
violate applicable law.
(f) Furnish
to each Holder and the Special Counsel, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, including
financial statements and schedules, and all exhibits to the extent requested
by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly
deliver to each Holder and the Special Counsel, without charge, as many
copies
of the Prospectus or Prospectuses (including each form of prospectus) and
each
amendment or supplement thereto as such Persons may reasonably request;
and the
Company hereby consents to the use of such Prospectus and each amendment
or
supplement thereto by each of the selling Holders in connection with the
offering and sale of the Registrable Securities covered by such Prospectus
and
any amendment or supplement thereto.
(h) Prior
to any public offering of Registrable Securities, use its best efforts
to
register or qualify or cooperate with the selling Holders and the Special
Counsel in connection with the registration or qualification (or exemption
from
such registration or qualification) of such Registrable Securities for
offer and
sale under the securities or Blue Sky laws of such jurisdictions within
the
United States as any Holder requests in writing, to keep each such registration
or qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things necessary or advisable
to
enable the disposition in such jurisdictions of the Registrable Securities
covered by a Registration Statement; provided, however, that the Company
shall
not be required to qualify generally to do business in any jurisdiction
where it
is not then so qualified or to take any action that would subject it to
general
service of process in any jurisdiction where it is not then so subject
or
subject the Company to any material tax in any such jurisdiction where
it is not
then so subject.
(i) Cooperate
with the Holders to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold pursuant to
a
Registration Statement, which certificates shall be free, to the extent
permitted by applicable law and the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any Holder may request at least two (2)
Business
Days prior to any sale of Registrable Securities. In connection therewith,
the
Company shall promptly after the effectiveness of the Registration Statement
(but no later than one day thereafter) cause an opinion of counsel to be
delivered to and maintained with its transfer agent, together with any
other
authorizations, certificates and directions required by the transfer agent,
which authorize and direct the transfer agent to issue such Registrable
Securities without legend upon sale by the Holder of such shares of Registrable
Securities under the Registration Statement.
(j) Upon
the occurrence of any event contemplated by Section 3(c)(C)(iii) or (iv),
as
promptly as possible, prepare a supplement or amendment, including a
post-effective amendment, to the Registration Statement or a supplement
to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a
material
fact required to be stated therein or necessary to make the statements
therein,
in the light of the circumstances under which they were made, not misleading.
(k) Cause
all Registrable Securities relating to such Registration Statement to be
listed
on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
Stock
Market.
(l) Comply
in all material respects with all applicable rules and regulations of the
Commission and make generally available to its security holders earnings
statements satisfying the provisions of Section 11(a) of the Securities
Act and
Rule 158 not later than 45 days after the end of any 3-month period (or
90 days
after the end of any 12-month period if such period is a fiscal year) commencing
on the first day of the first fiscal quarter of the Company after the effective
date of the Registration Statement, which statement shall conform to the
requirements of Rule 158.
(m) Request
each selling Holder to furnish to the Company information regarding such
Holder
and the distribution of such Registrable Securities as is required by law
or the
Commission to be disclosed in the Registration Statement, and the Company
may
exclude from such registration the Registrable Securities of any such Holder
who
fails (i) to furnish such information or (ii) to agree to furnish, upon
request,
such additional information regarding such Holder as may later be required
by
law to be disclosed, in each case, within a reasonable time prior to the
filing
of each Registration Statement, supplemented Prospectus and/or amended
Registration Statement.
If
the
Registration Statement refers to any Holder by name or otherwise as the
holder
of any securities of the Company, then such Holder shall have the right
to
require (if such reference to such Holder by name or otherwise is not required
by the Securities Act or any similar federal statute then in force) the
deletion
of the reference to such Holder in any amendment or supplement to the
Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each
Holder agrees by its acquisition of such Registrable Securities that, upon
receipt of a notice from the Company of the occurrence of any event of
the kind
described in Section 3(c)(i), 3(c)(ii), 3(c)(iii), 3(c)(iv) or 3(n), such
Holder
will forthwith discontinue disposition of such Registrable Securities under
the
Registration Statement until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated
by
Section 3(j), or until it is advised in writing (the “Advice”)
by the
Company that the use of the applicable Prospectus may be resumed, and,
in either
case, has received copies of any additional or supplemental filings that
are
incorporated or deemed to be incorporated by reference in such Prospectus
or
Registration Statement.
(n) If
(i) there is material non-public information regarding the Company which
the
Company's Board of Directors (the “Board”)
reasonably determines not to be in the Company's best interest to disclose
and
which the Company is not otherwise required to disclose, or (ii) there
is a
significant business opportunity (including, but not limited to, the acquisition
or disposition of assets (other than in the ordinary course of business)
or any
merger, consolidation, tender offer or other similar transaction) available
to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose and which the Company would be required to disclose
under the Registration Statement, then the Company may postpone or suspend
filing or effectiveness of a registration statement for a period not to
exceed
20 consecutive days, provided that the Company may not postpone or suspend
its
obligation under this Section 3(n) for more than 30 days in the aggregate
during
any 12 month period (each, a “Blackout
Period”).
4. Registration
Expenses.
All
fees
and expenses incident to the performance of or compliance with this Agreement
by
the Company shall be borne by the Company whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with
each
other securities exchange, quotation system or market on which Registrable
Securities are required hereunder to be listed, (B) with respect to filings
required to be made with the Commission, and (C) in compliance with state
securities or Blue Sky laws (including, without limitation, fees and
disbursements of Special Counsel in connection with Blue Sky qualifications
of
the Registrable Securities and determination of the eligibility of the
Registrable Securities for investment under the laws of such jurisdictions
as
the Holders of a majority of Registrable Securities may designate)), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Registrable Securities and of printing or photocopying
prospectuses), (iii) messenger, telephone and delivery expenses, (iv) Securities
Act liability insurance, if the Company so desires such insurance, (v)
fees and
expenses of all other Persons retained by the Company in connection with
the
consummation of the transactions contemplated by this Agreement, including,
without limitation, the Company's independent public accountants (including,
in
the case of an underwritten offering, the expenses of any comfort letters
or
costs associated with the delivery by independent public accountants of
a
comfort letter or comfort letters) and legal counsel, and (vi) fees and
expenses
of the Special Counsel in connection with any Registration Statement hereunder.
In addition, the Company shall be responsible for all of its internal expenses
incurred in connection with the consummation of the transactions contemplated
by
this Agreement (including, without limitation, all salaries and expenses
of its
officers and employees performing legal or accounting duties), the expense
of
any annual audit, the fees and expenses incurred in connection with the
listing
of the Registrable Securities on any securities exchange as required
hereunder.
5. Indemnification.
(a) Indemnification
by the Company.
The
Company shall, notwithstanding any termination of this Agreement, indemnify
and
hold harmless each Holder, the officers, directors, agents, brokers (including
brokers who offer and sell Registrable Securities as principal as a result
of a
pledge or any failure to perform under a margin call of Common Stock),
investment advisors and employees of each of them, each Person who controls
any
such Holder (within the meaning of Section 15 of the Securities Act or
Section
20 of the Exchange Act) and the officers, directors, agents and employees
of
each such controlling Person, to the fullest extent permitted by applicable
law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, costs of preparation and reasonable attorneys'
fees) and expenses (collectively, “Losses”),
as
incurred, arising out of or relating to any untrue or alleged untrue statement
of a material fact contained or incorporated by reference in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment
or
supplement thereto or in any preliminary prospectus, or arising out of
or
relating to any omission or alleged omission of a material fact required
to be
stated therein or necessary to make the statements therein (in the case
of any
Prospectus or form of prospectus or amendment or supplement thereto, in
the
light of the circumstances under which they were made) not misleading,
except to
the extent, but only to the extent, that (i) such untrue statements or
omissions
are based solely upon information regarding such Holder furnished in writing
to
the Company by such Holder expressly for use therein, which information
was
reasonably relied on by the Company for use therein or to the extent that
such
information relates to (x) such Holder and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement,
such
Prospectus or such form of prospectus or in any amendment or supplement
thereto
or (y) such Holder's proposed method of distribution of Registrable Securities
as set forth in Exhibit A (or as such Holder otherwise informs the Company
in
writing); or (ii) in the case of an occurrence of an event of the type
described
in Section 3(c)(ii), 3(c)(iii), 3(c)(iv) or 3(n), the use by a Holder of
an
outdated or defective Prospectus after the delivery to the Holder of written
notice from the Company that the Prospectus is outdated or defective and
prior
to the receipt by such Holder of the Advice contemplated in Section 3(m).
The
Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection
with the
transactions contemplated by this Agreement. Such indemnity shall remain
in full
force and effect regardless of any investigation made by or on behalf of
an
Indemnified Party (as defined in Section 5(c) to this Agreement) and shall
survive the transfer of the Registrable Securities by the Holders.
(b) Indemnification
by Holders.
Each
Holder shall, severally and not jointly, indemnify and hold harmless the
Company, its directors, officers, agents and employees, each Person who
controls
the Company (within the meaning of Section 15 of the Securities Act and
Section
20 of the Exchange Act), and the directors, officers, agents and employees
of
such controlling Persons, to the fullest extent permitted by applicable
law,
from and against all Losses, as incurred, arising solely out of or based
solely
upon any untrue statement of a material fact contained in the Registration
Statement, any Prospectus, or any form of prospectus, or in any amendment
or
supplement thereto, or arising solely out of or based solely upon any omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or form of prospectus
or
supplement thereto, in the light of the circumstances under which they
were
made) not misleading, to the extent, but only to the extent, that (i) such
untrue statement or omission is contained in or omitted from any information
so
furnished in writing by such Holder to the Company specifically for inclusion
in
the Registration Statement or such Prospectus and that such information
was
reasonably relied upon by the Company for use in the Registration Statement,
such Prospectus, or in any amendment or supplement thereto, or to the extent
that such information relates to (x) such Holder and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus, or such form of prospectus or in any amendment
or
supplement thereto or (y) such Holder's proposed method of distribution
of
Registrable Securities as set forth in Exhibit A (or as such Holder otherwise
informs the Company in writing) or (ii) in the case of an occurrence of
an event
of the type described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv) or 3(n),
the use
by a Holder of an outdated or defective Prospectus after the delivery to
the
Holder of written notice from the Company that the Prospectus is outdated
or
defective and prior to the receipt by such Holder of the Advice contemplated
in
Section 3(m); provided, however, that the indemnity agreement contained
in this
Section 5(b) shall not apply to amounts paid in settlement of any Losses
if such
settlement is effected without the prior written consent of the Holder,
which
consent shall not be unreasonably withheld. Notwithstanding anything to
the
contrary contained herein, the Holder shall be liable under this Section
5(b)
for only that amount as does not exceed the net proceeds to such Holder
as a
result of the sale of Registrable Securities pursuant to such Registration
Statement.
(c) Conduct
of Indemnification Proceedings.
If any
Proceeding shall be brought or asserted against any Person entitled to
indemnity
hereunder (an “Indemnified
Party”),
such
Indemnified Party promptly shall notify the Person from whom indemnity
is sought
(the “Indemnifying
Party”)
in
writing, and the Indemnifying Party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to the Indemnified Party
and
the payment of all reasonable fees and expenses incurred in connection
with
defense thereof; provided, that the failure of any Indemnified Party to
give
such notice shall not relieve the Indemnifying Party of its obligations
or
liabilities pursuant to this Agreement, except (and only) to the extent
that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have proximately and materially adversely prejudiced the Indemnifying
Party.
An
Indemnified Party shall have the right to employ separate counsel in any
such
Proceeding and to participate in the defense thereof, but the fees and
expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees
and
expenses; or (2) the Indemnifying Party shall have failed promptly to assume
the
defense of such Proceeding and to employ counsel reasonably satisfactory
to such
Indemnified Party in any such Proceeding; or (3) the named parties to any
such
Proceeding (including any impleaded parties) include both such Indemnified
Party
and the Indemnifying Party, and such Indemnified Party shall have been
advised
by counsel in writing (with a copy to the Indemnifying Party) that a conflict
of
interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such Indemnified
Party notifies the Indemnifying Party in writing that it elects to employ
separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense thereof and such counsel
shall be at the reasonable expense of the Indemnifying Party). The Indemnifying
Party shall not be liable for any settlement of any such Proceeding effected
without its written consent, which consent shall not be unreasonably withheld.
No Indemnifying Party shall, without the prior written consent of the
Indemnified Party, effect any settlement of any pending Proceeding in respect
of
which any Indemnified Party is a party, unless such settlement includes
an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding and does not impose any
monetary
or other obligation or restriction on the Indemnified Party.
All
reasonable fees and expenses of the Indemnified Party (including reasonable
fees
and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten
(10)
Business Days of written notice thereof to the Indemnifying Party, which
notice
shall be delivered no more frequently than on a monthly basis (regardless
of
whether it is ultimately determined that an Indemnified Party is not entitled
to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses
to
the extent it is finally judicially determined that such Indemnified Party
is
not entitled to indemnification hereunder).
(d) Contribution.
If a
claim for indemnification under Section 5(a) or 5(b) is unavailable to
an
Indemnified Party because of a failure or refusal of a governmental authority
to
enforce such indemnification in accordance with its terms (by reason of
public
policy or otherwise), then each Indemnifying Party, in lieu of indemnifying
such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions
that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall
be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or
omission
or alleged omission of a material fact, has been taken or made by, or relates
to
information supplied by, such Indemnifying Party or Indemnified Party,
and the
parties' relative intent, knowledge, access to information and opportunity
to
correct or prevent such action, statement or omission. The amount paid
or
payable by a party as a result of any Losses shall be deemed to include,
subject
to the limitations set forth in Section 5(c), any reasonable attorneys'
or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such
fees or
expenses if the indemnification provided for in this Section was available
to
such party in accordance with its terms. Notwithstanding anything to the
contrary contained herein, the Holder shall be required to contribute under
this
Section 5(d) for only that amount as does not exceed the net proceeds to
such
Holder as a result of the sale of Registrable Securities pursuant to such
Registration Statement.
The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5(d) were determined by pro rata allocation or
by any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of
the Securities Act) shall be entitled to contribution from any Person who
was
not guilty of such fraudulent misrepresentation.
The
indemnity and contribution agreements contained in this Section are in
addition
to any liability that the Indemnifying Parties may have to the Indemnified
Parties. The indemnity and contribution agreements herein are in addition
to and
not in diminution or limitation of any indemnification provisions under
the
Purchase Agreement.
6. Rule
144.
As
long
as any Holder owns any Notes, Preferred Stock, Conversion Shares, Warrants
or
Warrant Shares, the Company covenants to timely file (or obtain extensions
in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. As long as any Holder owns any Notes,
Preferred Stock, Conversion Shares, Warrants or Warrant Shares, if the
Company
is not required to file reports pursuant to Section 13(a) or 15(d) of the
Exchange Act, it will prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities
Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any
other
information required thereby, in the time period that such filings would
have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Person
to
sell Conversion Shares and Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule
144
promulgated under the Securities Act, including compliance with the provisions
of the Purchase Agreement relating to the transfer of the Conversion Shares
and
Warrant Shares. Upon the request of any Holder, the Company shall deliver
to
such Holder a written certification of a duly authorized officer as to
whether
it has complied with such requirements.
7. Covenants
of Purchasers.
In
connection with the Registration Statement, each of the Purchasers covenants
as
follows:
(a)
Unless and until such Purchaser has provided written notice to the Company
to
the contrary, all sales of Registrable Securities by such Purchaser shall
be
made without payment of underwriting discounts or commissions except for
the
usual and customary commission paid to brokers or dealers.
(b)
Such
Purchaser shall advise the Company of any arrangement with a broker or
dealer
for the sale of such Purchaser’s Registrable Securities through a block trade,
special offering, exchange or secondary distribution or a principal purchase
by
a broker or dealer, and the details of such transaction.
(c)
Such
Purchaser shall comply with all prospectus delivery requirements with respect
to
sales of the Registrable Securities to the extent required by the Securities
Act
and other applicable law.
(d)
Such
Purchaser shall report to the Company, upon written request of the Company,
whether all Registrable Securities held by such Purchaser have been sold
or
otherwise transferred.
8. Miscellaneous.
(a) Remedies.
In the
event of a breach by the Company or by a Holder, of any of their obligations
under this Agreement, each Holder or the Company, as the case may be, in
addition to being entitled to exercise all rights granted by law and under
this
Agreement, including recovery of damages, will be entitled to specific
performance of its rights under this Agreement. The Company and each Holder
agree that monetary damages would not provide adequate compensation for
any
losses incurred by reason of a breach by it of any of the provisions of
this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense
that
a remedy at law would be adequate.
(b) No
Inconsistent Agreements.
Except
as otherwise disclosed in the Purchase Agreement, neither the Company nor
any of
its subsidiaries is a party to an agreement currently in effect, nor shall
the
Company or any of its subsidiaries, on or after the date of this Agreement,
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the Holders in this Agreement or otherwise conflicts
with the provisions hereof. Without limiting the generality of the foregoing,
without the written consent of the Holders of a majority of the then outstanding
Registrable Securities, the Company shall not grant to any Person the right
to
request the Company to register any securities of the Company under the
Securities Act unless the rights so granted are subject in all respects
to the
prior rights in full of the Holders set forth herein, and are not otherwise
in
conflict with the provisions of this Agreement.
(c) Notice
of Effectiveness.
Within
two (2) Business Days after the Registration Statement which includes the
Registrable Securities is ordered effective by the Commission, the Company
shall
deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to the Holders
whose
Registrable Securities are included in such Registration Statement) confirmation
that the Registration Statement has been declared effective by the Commission
in
form and substance reasonably acceptable to the holders of Registrable
Securities.
(d) Piggy-Back
Registrations.
If at
any time when there is not an effective Registration Statement covering
all of
the Registrable Securities, the Company shall determine to prepare and
file with
the Commission a registration statement relating to an offering for its
own
account or the account of others under the Securities Act of any of its
equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under
the
Securities Act) or its then equivalents relating to equity securities to
be
issued solely in connection with any acquisition of any entity or business
or
equity securities issuable in connection with stock option or other employee
benefit plans, the Company shall send to each Holder of Registrable Securities
written notice of such determination and, if within seven (7) Business
Days
after receipt of such notice, any such Holder shall so request in writing
(which
request shall specify the Registrable Securities intended to be disposed
of by
the Holder), the Company will cause the registration under the Securities
Act of
all Registrable Securities which the Company has been so requested to register
by the Holder, to the extent required to permit the disposition of the
Registrable Securities so to be registered, provided that if at any time
after
giving written notice of its intention to register any securities and prior
to
the effective date of the registration statement filed in connection with
such
registration, the Company shall determine for any reason not to register
or to
delay registration of such securities, the Company may, at its election,
give
written notice of such determination to such Holder and, thereupon, (i)
in the
case of a determination not to register, shall be relieved of its obligation
to
register any Registrable Securities in connection with such registration
(but
not from its obligation to pay expenses in accordance with Section 4 hereof),
and (ii) in the case of a determination to delay registering, shall be
permitted
to delay registering any Registrable Securities being registered pursuant
to
this Section 8(d) for the same period as the delay in registering such
other
securities. The Company shall include in such registration statement all
or any
part of such Registrable Securities such Holder requests to be registered;
provided, however, that the Company shall not be required to register any
Registrable Securities pursuant to this Section 8(d) that are eligible
for sale
pursuant to Rule 144(k) of the Securities Act. In the case of an underwritten
public offering, if the managing underwriter(s) or underwriter(s) should
reasonably object to the inclusion of the Registrable Securities in such
registration statement, then if the Company after consultation with the
managing
underwriter should reasonably determine that the inclusion of such Registrable
Securities, would materially adversely affect the offering contemplated
in such
registration statement, and based on such determination recommends inclusion
in
such registration statement of fewer or none of the Registrable Securities
of
the Holders, then (x) the number of Registrable Securities of the Holders
included in such registration statement shall be reduced pro-rata among
such
Holders (based upon the number of Registrable Securities requested to be
included in the registration), if the Company after consultation with the
underwriter(s) recommends the inclusion of fewer Registrable Securities,
or (y)
none of the Registrable Securities of the Holders shall be included in
such
registration statement, if the Company after consultation with the
underwriter(s) recommends the inclusion of none of such Registrable Securities;
provided, however, that if securities are being offered for the account
of other
persons or entities as well as the Company, such reduction shall not represent
a
greater fraction of the number of Registrable Securities intended to be
offered
by the Holders than the fraction of similar reductions imposed on such
other
persons or entities (other than the Company).
(e) Failure
to File Registration Statement and Other Events.
The
Company and the Holders agree that the Holders will suffer damages if the
Registration Statement is not filed on or prior to the Filing Deadline
and
maintained in the manner contemplated herein during the Effectiveness Period.
The Company and the Holders further agree that it would not be feasible
to
ascertain the extent of such damages with precision. Accordingly, if (i)
the
Registration Statement is not filed on or prior to the Filing Deadline,
or (ii)
the Company fails to file with the Commission a request for acceleration
in
accordance with Rule 461 promulgated under the Securities Act within five
(5)
Business Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will
not
be “reviewed,” or not subject to further review, or (iii) the Registration
Statement is not declared effective by the Commission as to all Registrable
Securities within one-hundred twenty (120) days after the Closing Date,
or (iv)
the Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective as to all Registrable
Securities at any time prior to the expiration of the Effectiveness Period,
without being succeeded promptly by a subsequent Registration Statement
filed
with the Commission, except as otherwise permitted by this Agreement, including
pursuant to Section 3(n), or (v) trading in the Common Stock shall be suspended
or if the Common Stock is delisted from any securities exchange, quotation
system or market on which Registrable Securities are required hereunder
to be
listed (each an “Exchange”),
without immediately being listed on any other Exchange, for any reason
for more
than one (1) Business Day, other than pursuant to Section 3(n), or (vi)
the
conversion or redemption rights of the Holders, or the exercise rights
of the
Holders under the Warrants, are suspended for any reason without the consent
of
the particular Holder other than as set forth in the Certificate of Designation,
or (vii) the Company has breached Section 3(n) of this Agreement (any such
failure or breach being referred to as an “Event”),
the
Company shall pay in cash as liquidated damages for such failure and not
as a
penalty to each Holder an amount equal to one percent (1%) of such Holder's
Purchase Price paid by such Holder pursuant to the Purchase Agreement for
the
initial thirty (30) day period until the applicable Event has been cured
or
until the Notes or Preferred Stock, as the case may be, have been redeemed
(whichever is earlier), which shall be pro rated for such periods less
than
thirty (30) days, and one percent (1%) of such Holder's Purchase Price
paid by
such Holder pursuant to the Purchase Agreement for each subsequent thirty
(30)
day period until the applicable Event has been cured which shall be pro
rated
for such periods less than thirty days (the “Periodic
Amount”).
Payments to be made pursuant to this Section 8(e) shall be due and payable
immediately upon demand in immediately available cash funds. The parties
agree
that the Periodic Amount represents a reasonable estimate on the part of
the
parties, as of the date of this Agreement, of the amount of damages that
may be
incurred by the Holders if the Registration Statement is not filed on or
prior
to Filing Deadline and maintained in the manner contemplated herein during
the
Effectiveness Period or if any other Event as described herein has occurred.
Notwithstanding the foregoing, the Company shall remain obligated to cure
the
breach or correct the condition that caused the Event, and the Holder shall
have
the right to take any action necessary or desirable to enforce such obligation.
(f) Specific
Enforcement, Consent to Jurisdiction.
(i) The
Company and the Holders acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It
is accordingly agreed that the parties shall be entitled to an injunction
or
injunctions to prevent or cure breaches of the provisions of this Agreement
and
to enforce specifically the terms and provisions hereof, this being in
addition
to any other remedy to which any of them may be entitled by law or
equity.
(ii) Each
of the Company and the Holders (i) hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts located in New York City,
New York
for the purposes of any suit, action or proceeding arising out of or relating
to
this Agreement and (ii) hereby waives, and agrees not to assert in any
such
suit, action or proceeding, any claim that it is not personally subject
to the
jurisdiction of such court, that the suit, action or proceeding is brought
in an
inconvenient forum or that the venue of the suit, action or proceeding
is
improper. Each of the Company and the Holders consents to process being
served
in any such suit, action or proceeding by mailing a copy thereof to such
party
at the address in effect for notices to it under this Agreement and agrees
that
such service shall constitute good and sufficient service of process and
notice
thereof. Nothing in this Section 8(f) shall affect or limit any right to
serve
process in any other manner permitted by law.
(g) Amendments
and Waivers.
The
provisions of this Agreement, including the provisions of this sentence,
may not
be amended, modified or supplemented, and waivers or consents to departures
from
the provisions hereof may not be given, unless the same shall be in writing
and
signed by the Company and the Holders of at least 75% of the Registrable
Securities. Notwithstanding the foregoing, a waiver or consent to depart
from
the provisions hereof with respect to a matter that relates exclusively
to the
rights of Holders and that does not directly or indirectly affect the rights
of
other Holders may be given by Holders of the Registrable Securities to
which
such waiver or consent relates; provided, however, that the provisions
of this
sentence may not be amended, modified, or supplemented except in accordance
with
the provisions of the immediately preceding sentence.
(h) Notices.
Any and
all notices or other communications or deliveries required or permitted
to be
provided hereunder shall be in writing and shall be deemed given and effective
on the earlier of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified
for
notice prior to 5:00 p.m., New York City time, on a Business Day, (ii)
the next
Business Day after the date of transmission, if such notice or communication
is
delivered via facsimile at the facsimile number specified in this Section
on a
day that is not a Business Day or later than 5:00 p.m., New York City time,
on
any date and earlier than 11:59 p.m., New York City time, on such date,
(iii)
the Business Day following the date of mailing, if sent by nationally recognized
overnight courier service such as Federal Express or (iv) actual receipt
by the
party to whom such notice is required to be given. The addresses for such
communications shall be with respect to each Holder at its address set
forth
under its name on Schedule
1
attached
hereto, or with respect to the Company, addressed to:
Netsol
Technologies, Inc.
23901
Calabasas Road,
Suite
2072
Calabasas,
CA 91302
Attention:
General Counsel
Facsimile
No.: (818) 222-9197
or
to
such other address or addresses or facsimile number or numbers as any such
party
may most recently have designated in writing to the other parties hereto
by such
notice. Copies of notices to any Holder shall be sent to the addresses,
if any,
listed on Schedule
1
attached
hereto.
(i) Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties
and
their successors and permitted assigns and shall inure to the benefit of
each
Holder and its successors and assigns; provided, that the Company may not
assign
this Agreement or any of its rights or obligations hereunder without the
prior
written consent of each Holder; and provided, further, that each Holder
may
assign its rights hereunder in the manner and to the Persons as permitted
under
the Purchase Agreement.
(j) Assignment
of Registration Rights.
The
rights of each Holder hereunder, including the right to have the Company
register for resale Registrable Securities in accordance with the terms
of this
Agreement, shall be automatically assignable by each Holder to any transferee
of
such Holder of all or a portion of the Notes, Preferred Stock, the Warrants
or
the Registrable Securities if: (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement
is
furnished to the Company within a reasonable time after such assignment,
(ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee
or
assignee, and (b) the securities with respect to which such registration
rights
are being transferred or assigned, (iii) following such transfer or assignment
the further disposition of such securities by the transferee or assignees
is
restricted under the Securities Act and applicable state securities laws,
(iv)
at or before the time the Company receives the written notice contemplated
by
clause (ii) of this Section 8(j), the transferee or assignee agrees in
writing
with the Company to be bound by all of the provisions of this Agreement,
and (v)
such transfer shall have been made in accordance with the applicable
requirements of the Purchase Agreement. The rights to assignment shall
apply to
the Holders (and to subsequent) successors and assigns.
The
Company may require, as a condition of allowing such assignment in connection
with a transfer of Notes, Preferred Stock, Warrants or Registrable Securities
(i) that the Holder or transferee of all or a portion of the Notes, Preferred
Stock, the Warrants or the Registrable Securities as the case may be, furnish
to
the Company a written opinion of counsel that is reasonably acceptable
to the
Company to the effect that such transfer may be made without registration
under
the Securities Act, (ii) that the Holder or transferee execute and deliver
to
the Company an investment letter in form and substance acceptable to the
Company
and (iii) that the transferee be an “accredited investor” as defined in Rule
501(a) promulgated under the Securities Act.
(k) Counterparts;
Facsimile.
This
Agreement may be executed in any number of counterparts, each of which
when so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement. In the event that any signature
is
delivered by electronic image or facsimile transmission, such signature
shall
create a valid binding obligation of the party executing (or on whose behalf
such signature is executed) the same with the same force and effect as
if such
electronic image or facsimile signature were the original thereof.
(l) Governing
Law.
This
Agreement shall be governed by and construed in accordance with the laws
of the
State of New York, without regard to principles of conflicts of law
thereof.
(m) Cumulative
Remedies.
The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
(n) Severability.
If any
term, provision, covenant or restriction of this Agreement is held by a
court of
competent jurisdiction to be invalid, illegal, void or unenforceable in
any
respect, the remainder of the terms, provisions, covenants and restrictions
set
forth herein shall remain in full force and effect and shall in no way
be
affected, impaired or invalidated, and the parties hereto shall use their
reasonable efforts to find and employ an alternative means to achieve the
same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that
may be
hereafter declared invalid, illegal, void or unenforceable.
(o) Headings.
The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof.
(p) Registrable
Securities Held by the Company and its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Registrable Securities is required hereunder, Registrable Securities held
by the
Company or its Affiliates (other than any Holder or transferees or successors
or
assigns thereof if such Holder is deemed to be an Affiliate solely by reason
of
its holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
(q) Obligations
of Purchasers.
The
Company acknowledges that the obligations of each Purchaser under this
Agreement, are several and not joint with the obligations of any other
Purchaser, and no Purchaser shall be responsible in any way for the performance
of the obligations of any other Purchaser under this Agreement. The decision
of
each Purchaser to enter into to this Agreement has been made by such Purchaser
independently of any other Purchaser. The Company further acknowledges
that
nothing contained in this Agreement, and no action taken by any Purchaser
pursuant hereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create
a
presumption that the Purchasers are in any way acting in concert or as
a group
with respect to such obligations or the transactions contemplated hereby.
Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation, the rights arising out of this Agreement,
and it
shall not be necessary for any other Purchaser to be joined as an additional
party in any proceeding for such purpose.
Each
Purchaser acknowledges and agrees that it has been represented by its own
separate legal counsel in their review and negotiation of this Agreement
and
with respect to the transactions contemplated hereby. For reasons of
administrative convenience only, this Agreement has been prepared by Special
Counsel (counsel for The Tail Wind Fund Ltd. (“TWF”))
and
the Special Counsel will perform certain duties under this Agreement. Such
counsel does not represent all of the Purchasers but only TWF. The Company
has
elected to provide all Purchasers with the same terms and Agreement for
the
convenience of the Company and not because it was required or requested
to do so
by the Purchasers. The Company acknowledges that such procedure with respect
to
this Agreement in no way creates a presumption that the Purchasers are
in any
way acting in concert or as a group with respect to this Agreement or the
transactions contemplated hereby or thereby.
[signature
page follows]
IN
WITNESS WHEREOF, the parties hereto have caused this Investor Rights Agreement
to be duly executed by their respective authorized persons as of the date
first
indicated above.
COMPANY:
NETSOL
TECHNOLOGIES, INC.
By:______________________________
Name:
Title:
PURCHASER:
Print
Exact Name:_________________________________
By:_____________________________________________
Name:
Title:
[Omnibus
NetSol Technologies, Inc. Investor Rights Agreement Signature
Page]
SCHEDULE
1
PURCHASERS
Name
and Address
|
Copy
of Notice to:
|
The
Tail Wind Fund Ltd.
c/o
Tail Wind Advisory & Management Ltd.
77
Long Acre
London
WC2E 9LB, UK
Fax:
011-44-207-420-3803
|
Peter
J. Weisman, P.C.
335
Madison Avenue
Suite
1702
New
York, NY 10017
Fax:
212-317-8666
|
Solomon
Strategic Holdings, Inc.
c/o
Andrew P. MacKellar
Greenlands
The
Red Gap
Castletown
IM9 1HB
British
Isles
Fax:
+011 (44) 1624 824191
|
Peter
J. Weisman, P.C.
335
Madison Avenue
Suite
1702
New
York, NY 10017
Fax:
212-317-8666
|
EXHIBIT
A
PLAN
OF
DISTRIBUTION
We
are
registering the shares of common stock on behalf of the selling security
holders. Sales of shares may be made by selling security holders, including
their respective donees, transferees, pledgees or other successors-in-interest
directly to purchasers or to or through underwriters, broker-dealers or
through
agents. Sales may be made from time to time on the Nasdaq Capital Market,
any
other exchange or market upon which our shares may trade in the future,
in the
over-the-counter market or otherwise, at market prices prevailing at the
time of
sale, at prices related to market prices, or at negotiated or fixed prices.
The
shares may be sold by one or more of, or a combination of, the
following:
-
|
a
block trade in which the broker-dealer so engaged will attempt
to sell the
shares as agent but may position and resell a portion of the
block as
principal to facilitate the transaction (including crosses in
which the
same broker acts as agent for both sides of the
transaction);
|
-
|
purchases
by a broker-dealer as principal and resale by such broker-dealer,
including resales for its account, pursuant to this
prospectus;
|
-
|
ordinary
brokerage transactions and transactions in which the broker solicits
purchases;
|
-
|
through
options, swaps or derivatives;
|
-
|
in
privately negotiated transactions;
|
-
|
in
making short sales entered into after the date of this prospectus
or in
transactions to cover such short sales; and
|
-
|
put
or call option transactions relating to the shares.
|
The
selling security holders may effect these transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as
agents
or principals. These broker-dealers may receive compensation in the form
of
discounts, concessions or commissions from the selling security holders
and/or
the purchasers of shares for whom such broker-dealers may act as agents
or to
whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The selling
security
holders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers
regarding
the sale of their securities.
The
selling security holders may enter into hedging transactions with broker-dealers
or other financial institutions. In connection with those transactions,
the
broker-dealers or other financial institutions may engage in short sales
of the
shares or of securities convertible into or exchangeable for the shares
in the
course of hedging positions they assume with the selling security holders.
The
selling security holders may also enter into options or other transactions
with
broker-dealers or other financial institutions which require the delivery
of
shares offered by this prospectus to those broker-dealers or other financial
institutions. The broker-dealer or other financial institution may then
resell
the shares pursuant to this prospectus (as amended or supplemented, if
required
by applicable law, to reflect those transactions).
The
selling security holders and any broker-dealers that act in connection
with the
sale of shares may be deemed to be “underwriters” within the meaning of Section
2(11) of the Securities Act of 1933, and any commissions received by
broker-dealers or any profit on the resale of the shares sold by them while
acting as principals may be deemed to be underwriting discounts or commissions
under the Securities Act. The selling security holders may agree to indemnify
any agent, dealer or broker-dealer that participates in transactions involving
sales of the shares against liabilities, including liabilities arising
under the
Securities Act. We have agreed to indemnify each of the selling security
holders
and each selling security holder has agreed, severally and not jointly,
to
indemnify us against some liabilities in connection with the offering of
the
shares, including liabilities arising under the Securities Act.
The
selling security holders will be subject to the prospectus delivery requirements
of the Securities Act. We have informed the selling security holders that
the
anti-manipulative provisions of Regulation M promulgated under the Securities
Exchange Act of 1934 may apply to their sales in the market.
Selling
security holders also may resell all or a portion of the shares in open
market
transactions in reliance upon Rule 144 under the Securities Act, provided
they
meet the criteria and conform to the requirements of Rule 144.
Upon
being notified by a selling security holder that a material arrangement
has been
entered into with a broker-dealer for the sale of shares through a block
trade,
special offering, exchange distribution or secondary distribution or a
purchase
by a broker or dealer, we will file a supplement to this prospectus, if
required
pursuant to Rule 424(b) under the Securities Act, disclosing:
-
|
the
name of each such selling security holder and of the participating
broker-dealer(s);
|
-
|
the
number of shares involved;
|
-
|
the
initial price at which the shares were
sold;
|
-
|
the
commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable;
|
-
|
that
such broker-dealer(s) did not conduct any investigation to verify
the
information set out or incorporated by reference in this prospectus;
and
|
-
|
other
facts material to the transactions.
|
In
addition, if required under applicable law or the rules or regulations
of the
Commission, we will file a supplement to this prospectus when a selling
security
holder notifies us that a donee or pledgee intends to sell more than 500
shares
of common stock.
We
are
paying all expenses and fees in connection with the registration of the
shares.
The selling security holders will bear all brokerage or underwriting discounts
or commissions paid to broker-dealers in connection with the sale of the
shares.
ANNEX
E
FORM
OF 7% CUMULATIVE CONVERTIBLE PREFERRED STOCK
CERTIFICATE
OF DESIGNATION OF THE POWERS, PREFERENCES
AND
RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL
RIGHTS
OF PREFERRED STOCK AND QUALIFICATIONS,
LIMITATIONS
AND RESTRICTIONS THEREOF
of
SERIES
A 7% CUMULATIVE CONVERTIBLE PREFERRED STOCK
of
NETSOL
TECHNOLOGIES, INC.
NETSOL
TECHNOLOGIES, INC.,
a
Nevada corporation (the "Corporation"),
pursuant to the provisions of Sections 78.195 and 78.1955 of Chapter 78
of
Nevada Revised Statutes, does hereby make this Certificate of Designations
and
does hereby state and certify that pursuant to the authority expressly
vested in
the Board of Directors of the Corporation by the Articles of Incorporation
of
the Corporation, the Board of Directors duly adopted the following resolutions
by unanimous written consent on ________, 2006, which resolutions remain
in full
force and effect as of the date hereof:
RESOLVED,
that,
pursuant to Article 3 of the Articles of Incorporation of the Corporation,
as
amended to date, the Board of Directors hereby authorizes the issuance
of, and
fixes the designation and preferences and relative, participating, optional
and
other special rights, and qualifications, limitations and restrictions,
of a
series of preferred stock of the Corporation consisting of 5,500 shares,
par
value $0.001 per share, to be designated “Series A Cumulative Convertible
Preferred Stock.”
RESOLVED,
that all
shares of Series A Cumulative Convertible Preferred Stock shall rank equally
in
all respects and shall be subject to the following terms and
provisions:
There
is
hereby created out of the authorized and unissued shares of the preferred
stock
of the Corporation a series of preferred stock designated as the “Series A
Cumulative Convertible Preferred Stock,” which is hereinafter referred to as the
“Convertible Preferred Stock.” The number of shares constituting such series
shall be 5,500.
1. Dividends.
The
holders of the Convertible Preferred Stock shall be entitled to receive,
when,
if and as declared by the Corporation’s Board of Directors, out of funds legally
available therefor, cumulative dividends payable as set forth in this Section
1.
(a) Dividends
on each share of Convertible Preferred Stock shall accrue and shall be
cumulative and accumulate from the date of issuance of such share (the
“Date of
Original Issue”), whether or not earned or declared by the Board of Directors of
the Corporation, until paid. The Corporation shall declare and pay dividends
on
the Convertible Preferred Stock, in either cash or in shares of the
Corporation’s Common Stock (the “Common Stock”) at the Corporation’s option and
subject to the terms set forth herein, as set forth below, in arrears,
on first
business day of each calendar quarter of each year (each, a “Dividend Payment
Date”), commencing on January 2, 2007 (the “Initial Dividend Payment Date”). If
the Corporation elects to pay the dividend in shares of Common Stock, the
Corporation shall set aside a sufficient number of shares of Common Stock
for
the payment of such declared dividends and shall deliver certificates
representing such shares of Common Stock to the holders of shares of Convertible
Preferred Stock as of the record date for such dividend in payment of such
declared dividends within three business days after such Dividend Payment
Date.
Each such dividend declared by the Board of Directors on the Convertible
Preferred Stock shall be paid to the holders of record of shares of the
Convertible Preferred Stock as they appear on the stock register of the
Corporation on the record date which shall be the business day next preceding
a
Dividend Payment Date. Dividends in arrears for any past dividend period
may be
declared by the Board of Directors of the Corporation and paid on shares
of the
Convertible Preferred Stock on any date fixed by the Board of Directors
of the
Corporation, whether or not a regular Dividend Payment Date, to holders
of
record of shares of the Convertible Preferred Stock as they appear on the
Corporation’s stock register on the record date. The record date, which shall
not be greater than 5 days before such Dividend Payment Date, shall be
fixed by
the Board of Directors of the Corporation. Any dividend payment made on
shares
of the Convertible Preferred Stock shall first be credited against the
dividends
accumulated with respect to the earliest dividend period for which dividends
have not been paid.
(b) The
dividend rate (the “Dividend Rate”) on each share of Convertible Preferred Stock
shall be 7% per share per annum on $1,000 (the Liquidation Preference (as
hereinafter defined) of each such share) for the period from the Date of
Original Issue until the Initial Dividend Payment Date and, for each dividend
period thereafter, which shall commence on the last day of the preceding
dividend period and shall end on the next Dividend Payment Date, shall
be at the
Dividend Rate (as adjusted from time to time as hereinafter provided) on
such
Liquidation Preference. Notwithstanding the foregoing, if at any time a
Breach
Event (as defined below) occurs, then the Dividend Rate shall be 18% per
share
per annum for each dividend period or part thereof in which a Breach Event
has
occurred or is outstanding. The amount of dividends per share of the Convertible
Preferred Stock payable for each dividend period or part thereof (the “Dividend
Value”) shall be computed by multiplying the Dividend Rate for such dividend
period by a fraction the numerator of which shall be the number of days
in the
dividend period or part thereof on which such share was outstanding and
the
denominator of which shall be 365 and multiplying the result by the Liquidation
Preference. If a dividend is to be paid in Common Stock, the Common Stock
shall
be valued at 95% of the Current Market Price (as hereinafter defined) as
of such
Dividend Payment Date. In furtherance thereof, the Corporation shall reserve
out
of the authorized but unissued shares of Common Stock, solely for issuance
in
respect of the payment of dividends as herein described, a sufficient number
of
shares of Common Stock to pay such dividends, when, if and as declared
by the
Board of Directors of the Corporation.
“Current
Market Price” means, in respect of any share of Common Stock on any date herein
specified:
(1) if
there shall not then be a public market for the Common Stock, the higher
of (a)
the book value per share of Common Stock at such date, and (b) the Appraised
Value (as hereinafter defined) per share of Common Stock at such date,
or
(2) if
there shall then be a public market for the Common Stock, the average of
the
daily market prices for the five (5) consecutive trading days immediately
before
such date. The daily market price for each such trading day shall be (i)
the
VWAP (as defined below) on such day on the principal stock exchange on
which
such Common Stock is then listed or admitted to trading, or quoted, as
applicable, (ii) if no sale takes place on such day on any such exchange,
the
last reported closing bid price on such day as officially quoted on any
such
exchange, (iii) if the Common Stock is not then listed or admitted to trading
on
any stock exchange, the last reported closing bid price on such day in
the
over-the-counter market, as furnished by the National Association of Securities
Dealers Automatic Quotation System or the National Quotation Bureau, Inc.,
(iv)
if neither such corporation at the time is engaged in the business of reporting
such prices, as furnished by any similar firm then engaged in such business,
or
(v) if there is no such firm, as furnished by any member of the National
Association of Securities Dealers, Inc. (the “NASD”) selected mutually by
holders of a majority of the Convertible Preferred Stock and the Corporation
or,
if they cannot agree upon such selection, as selected by two such members
of the
NASD, one of which shall be selected by holders of a majority of the Convertible
Preferred Stock and one of which shall be selected by the Corporation (as
applicable, the “Daily Market Price”).
“VWAP”
shall
mean the daily dollar volume-weighted average sale price for the Common
Stock on
the Principal Market on any particular trading day during the period beginning
at 9:30 a.m., New York City Time (or such other time as such exchange or
market
publicly announces is the official open of trading), and ending at 4:00
p.m.,
New York City Time (or such other time as such exchange or market publicly
announces is the official close of trading), as reported by Bloomberg through
its "Volume at Price" functions. All such determinations of VWAP shall
be
appropriately and equitably adjusted in accordance with the provisions
set forth
herein for any stock dividend, stock split, stock combination or other
similar
transaction occurring during any pricing period or any period utilizing
VWAPs in
calculations hereunder.
“Principal
Market” shall mean the Nasdaq Stock Market or such other principal market or
exchange on which the Common Stock is then listed for trading.
“Appraised
Value” means, in respect of any share of Common Stock on any date herein
specified, the fair saleable value of such share of Common Stock (determined
without giving effect to the discount for (i) a minority interest or (ii)
any
lack of liquidity of the Common Stock or to the fact that the Corporation
may
have no class of equity registered under the Securities Exchange Act of
1934, as
amended (the “Exchange Act”)) as of the last day of the most recent fiscal month
end prior to such date specified, based on the value of the Corporation
(assuming the conversion and exercise of all of the Corporation’s authorized and
issued capital stock), as determined by a nationally recognized investment
banking firm selected by the Corporation’s Board of Directors and having no
prior relationship with the Corporation, and reasonably acceptable to not
less
than a majority in interest of the holders of the Convertible Preferred
Stock
then outstanding.
“Breach
Event” means either:
(i) Any
breach of any warranty or representation of the Corporation as of the date
made
in the Convertible Note Purchase Agreement (as defined below) or any agreement
delivered therewith which breach, or the facts and circumstances concerning
such
breach, has or is reasonably likely to have a Material Adverse Effect (as
defined in the Convertible Note Purchase Agreement); or
(ii) Any
breach by the Corporation of any material covenant or obligation under
the
Convertible Note Purchase Agreement or any agreement delivered therewith
(including without limitation this Certificate of Designation and the Related
Agreements, as defined in the Convertible Note Purchase Agreement), and
which
breach, if capable of being cured, has not been cured within ten (10) days
after
notice of such breach has been given by the holders of a majority of Convertible
Preferred Stock to the Corporation (the “Breach Cure Period”).
(c) Except
as hereinafter provided, no dividends shall be declared or paid or set
apart for
payment on the shares of Common Stock or any other class or series of capital
stock of the Corporation for any dividend period unless full cumulative
dividends have been or contemporaneously are declared and paid on the
Convertible Preferred Stock through the most recent Dividend Payment Date.
If
full cumulative dividends have not been paid on shares of the Convertible
Preferred Stock, all dividends declared on shares of the Convertible Preferred
Stock shall be paid pro rata to the holders of outstanding shares of the
Convertible Preferred Stock.
(d) Dividends
on the Convertible Preferred Stock may be paid even if, after giving effect
thereto, the Corporation’s total assets would be less than the sum of its total
liabilities, plus the amount that would be needed, if the Corporation were
to be
dissolved at the time of such distribution, to satisfy the preferential
rights
upon dissolution of stockholders, if any, whose preferential rights are
superior
to those receiving the distribution.
(e) The
holders of the Convertible Preferred Stock shall each be entitled to receive
dividends, on a pari passu basis with the holders of shares of Common Stock,
out
of any assets legally available therefor, with the amount of such dividends
to
be distributed to the holders of Convertible Preferred Stock computed on
the
basis of the number of shares of Common Stock which would be held by such
holder
if, immediately prior to the declaration of the dividend, all of the shares
of
Convertible Preferred Stock had been converted into shares of Common Stock
at
the then current Conversion Value (as hereinafter defined).
(f) Limitation
on Stock Dividends.
Notwithstanding anything to the contrary contained herein, the Corporation
may
not pay dividends hereunder in shares of Common Stock (and must deliver
cash in
respect thereof) unless as of the Dividend Payment Date (i) the resale
of all
Registrable Securities (as defined in the Investor Rights Agreement entered
into
pursuant to the Convertible Note Purchase Agreement, the “Investor Rights
Agreement”) is covered by an effective registration statement in accordance with
the terms of the Investor Rights Agreement which registration statement
is not
subject to any suspension or stop orders; (ii) the resale of such Registrable
Securities may be effected pursuant to a current and deliverable prospectus
that
is not subject at the time to any blackout or similar circumstance; (iii)
such
Registrable Securities are listed, or approved for listing prior to issuance,
on
the Nasdaq Stock Market, the New York Stock Exchange or the American Stock
Exchange, and are not subject to any trading suspension (nor shall trading
generally have been suspended on such exchange or market), and the Corporation
shall not have been notified of any pending or threatened proceeding or
other
action to delist or suspend the Common Stock on any of such markets on
which the
Common Stock is then traded or listed; (iv) the requisite number of shares
of
Common Stock shall have been duly authorized and reserved for issuance
as
required by the terms of the Convertible Note Purchase Agreement and this
Certificate of Designation; (v) the Current Market Price is not less than
$1.00
(as appropriately and equitably adjusted for stock splits, stock dividends
and
similar events); (vi) none of the Corporation or any direct or indirect
subsidiary of the Corporation shall be subject to any bankruptcy, insolvency
or
similar proceeding; (vii) the Corporation has paid all prior dividend payments
when due hereunder; (viii) such issuance would not cause the ownership
or
issuance limitations contained in Section 5(h) below to be violated; and
(ix)
the Corporation has delivered to all holders of Convertible Preferred Stock
written notice of its election to pay such dividend in Common Stock at
least
five (5) but no more than thirty (30) trading days prior to the applicable
Dividend Payment Date. All holders of Convertible Preferred Stock shall
be
treated proportionately with respect to payment of dividends in cash or
Common
Stock.
2. Voting
Rights.
Except
as otherwise provided herein or by law, the holders of the Convertible
Preferred
Stock shall have full voting rights and powers, subject to the Beneficial
Ownership Cap as defined in Section 5(h), equal to the voting rights and
powers
of holders of Common Stock and shall be entitled to notice of any stockholders
meeting in accordance with the Bylaws of the Corporation, and shall be
entitled
to vote, with respect to any question upon which holders of Common Stock
have
the right to vote, including, without limitation, the right to vote for
the
election of directors, voting together with the holders of Common Stock
as one
class. To the extent permitted under the applicable rules of the applicable
exchange or market on which the Common Stock is listed or quoted, each
holder of
shares of Convertible Preferred Stock shall be entitled to the number of
votes
equal to the number of shares of Common Stock into which such shares of
Convertible Preferred Stock could be converted on the record date for the
taking
of a vote (subject to the Beneficial Ownership Cap limitations set forth
in
Section 5(h) and provided that solely for such voting purposes the conversion
price shall be deemed to be the greater of the Conversion Value then in
effect
and the closing bid price of the Common Stock on the Nasdaq Stock Market
immediately preceding the Closing Date) or, if no record date is established,
at
the day prior to the date such vote is taken or any written consent of
stockholders is first executed. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Convertible Preferred
Stock
held by each holder could be converted) shall be rounded to the nearest
whole
number (with one-half being rounded upward).
3. Rights
on Liquidation; Rank.
(a) In
the event of any voluntary or involuntary liquidation, dissolution or winding
up
of the Corporation (any such event being hereinafter referred to as a
“Liquidation”), before any distribution of assets of the Corporation shall be
made to or set apart for the holders of Common Stock, the holders of Convertible
Preferred Stock shall be entitled to receive payment out of such assets
of the
Corporation in an amount equal to $1,000 per share of Convertible Preferred
Stock (such applicable amount being referred to as the “Liquidation Preference”
for the Convertible Preferred Stock), plus any accumulated and unpaid dividends
thereon (whether or not earned or declared) on the Convertible Preferred
Stock.
If the assets of the Corporation available for distribution to the holders
of
Convertible Preferred Stock shall not be sufficient to make in full the
payment
herein required, such assets shall be distributed pro-rata among the holders
of
Convertible Preferred Stock based on the aggregate Liquidation Preferences
of
the shares of Convertible Preferred Stock held by each such holder.
(b) If
the assets of the Corporation available for distribution to stockholders
exceed
the aggregate amount of the Liquidation Preferences payable with respect
to all
shares of Convertible Preferred Stock then outstanding, then, after the
payment
required by paragraph 3(a) above shall have been made or irrevocably set
aside,
the holders of Common Stock shall be entitled to receive with respect to
each
share of Common Stock payment of a pro rata portion of such assets based
on the
aggregate number of shares of Common Stock held by each such holder. The
holders
of the Convertible Preferred Stock shall participate in such a distribution
on a
pro-rata basis with the holders of the Common Stock, with the amount
distributable to the holders of Convertible Preferred Stock to be computed
on
the basis of the number of shares of Common Stock which would be held by
them if
immediately prior to the Liquidation all of the outstanding shares of
Convertible Preferred Stock had been converted into shares of Common Stock
at
the then current Conversion Value.
(c) A
Change of Control (as defined below) of the Corporation shall not be deemed
a
Liquidation, but shall instead be governed by the terms of Section 7
below.
(d) The
Convertible Preferred Stock shall rank senior to all classes and series
of
Common Stock and existing preferred stock and to each other class or series
of
preferred stock established hereafter by the Board of Directors of the
Corporation, with respect to dividend rights, redemption rights, rights
on
liquidation, winding-up and dissolution and all other rights in any manner,
whether voluntary or involuntary. So long as any shares of Convertible
Preferred
Stock are outstanding, the Corporation shall not issue or reissue any shares
of
existing authorized classes or series of preferred stock.
4. Actions
Requiring the Consent of Holders of Convertible Preferred Stock.
As long
as any shares of Convertible Preferred Stock are outstanding, the consent
of the
holders of at least 75% of the shares of Convertible Preferred Stock at
the time
outstanding, given in accordance with the Articles of Incorporation and
Bylaws
of the Corporation, as amended, shall be necessary for effecting or validating
any of the following transactions or acts:
(a) Any
amendment, alteration or repeal of any of the provisions of this Certificate
of
Designation (whether by merger, consolidation or otherwise);
(b) Any
amendment, alteration or repeal of the Articles of Incorporation of the
Corporation that will adversely affect the rights of the holders of the
Convertible Preferred Stock (whether by merger, consolidation or
otherwise);
(c) The
authorization or creation by the Corporation of, or the increase in the
number
of authorized shares of, any stock of any class, or any security convertible
into stock of any class, or the authorization or creation of any new class
of
preferred stock (or any action which would result in another series of
preferred
stock), ranking in terms of liquidation preference, conversion rights,
redemption rights or dividend rights, pari
passu
with or
senior to, the Convertible Preferred Stock in any manner;
(d) The
redemption, purchase or other acquisition, directly or indirectly, of any
shares
of capital stock of the Corporation or any of its subsidiaries or any option,
warrant or other right to purchase or acquire any such shares, or any other
security, other than (A) the redemption of Convertible Preferred Stock
pursuant
to the terms hereof, or (B) the repayment or prepayment of any indebtedness
in
the ordinary course of business; and
(e) The
declaration or payment of any dividend or other distribution (whether in
cash,
stock or other property) with respect to the capital stock of the Corporation
or
any subsidiary, other than a dividend or other distribution pursuant to
the
terms of the Convertible Preferred Stock.
5. Conversion.
(a) Right
to Convert.
Subject
to the limitation set forth in Section 5(h) hereof, the holder of any share
or
shares of Convertible Preferred Stock shall have the right at any time
and from
time to time, at such holder’s option, to convert all or any lesser portion of
such holder’s shares of Convertible Preferred Stock into such number of duly
authorized, validly issued, fully paid and non-assessable shares of Common
Stock, free and clear of all encumbrances, restrictions and legends (provided
a
Registration Statement is declared effective), as is determined by dividing
(i)
the aggregate Liquidation Preference of the shares of Convertible Preferred
Stock to be converted plus accrued and unpaid dividends thereon by (ii)
the
Conversion Value (as defined below) then in effect for such Convertible
Preferred Stock. No fractional shares or scrip representing fractional
shares
shall be issued upon the conversion of any Convertible Preferred Stock.
With
respect to any fraction of a share of Common Stock called for upon any
conversion, the Corporation shall pay to the holder an amount in cash equal
to
such fraction multiplied by the Current Market Price per share of the Common
Stock.
(b) Forced
Conversion.
Subject
to the terms hereof, if at any time the Current Market Price is greater
than
200% of the Conversion Value for any fifteen (15) consecutive trading days
(a
“Pricing Period”), then the Corporation shall have the right to compel each
holder of Convertible Preferred Stock to convert any or all of the Convertible
Preferred Stock then held by such holder by delivering a written notice
(“Forced
Conversion Notice”) to each such Holder; provided
that
(1) such
Forced Conversion Notice must specify the number of shares of Convertible
Preferred Stock to be converted by such holder and the date by which such
holder
must have completed conversion(s) of Convertible Preferred Stock aggregating
to
such amount (“Forced Conversion Date”), which date shall be at least 10 trading
days after such holder’s receipt of such Forced Conversion Notice (a “Notice
Period”), (2) the Corporation may deliver such Forced Conversion Notice(s)
hereunder only within five (5) trading days following the occurrence of
such
Pricing Period and not prior to the completion of such Pricing Period,
and (3)
all holders of Convertible Preferred Stock shall be treated proportionately
with
respect to the Corporation’s election to force conversion hereunder. Such forced
conversion shall be subject to and governed by all the provisions relating
to
voluntary conversion of Convertible Preferred Stock contained herein.
Notwithstanding anything contained herein, the Corporation shall not be
entitled
to exercise any forced conversion right set forth in this subsection 5(b)
unless
at all times during the applicable Pricing Period and Notice Period (i)
the
resale of all Registrable Securities (as defined in the Investor Rights
Agreement) is covered by an effective registration statement in accordance
with
the terms of the Investor Rights Agreement which registration statement
is not
subject to any suspension or stop orders; (ii) the resale of such Registrable
Securities may be effected pursuant to a current and deliverable prospectus
that
is not subject at the time to any blackout or similar circumstance; (iii)
such
Registrable Securities are listed, or approved for listing prior to issuance,
on
the Nasdaq Stock Market, the New York Stock Exchange or the American Stock
Exchange, and are not subject to any trading suspension (nor shall trading
generally have been suspended on such exchange or market), and the Corporation
shall not have been notified of any pending or threatened proceeding or
other
action to delist or suspend the Common Stock on any of such markets on
which the
Common Stock is then traded or listed; (iv) the requisite number of shares
of
Common Stock has been duly authorized and reserved for issuance as required
by
the terms of the Convertible Note Purchase Agreement; (v) the closing bid
price
per share of Common Stock on the Principal Market is greater than $1.00;
(vi)
none of the Corporation or any direct or indirect subsidiary of the Corporation
shall be subject to any bankruptcy, insolvency or similar proceeding; (vii)
the
Corporation has paid all prior dividend payments due hereunder; and (viii)
such
issuance would not cause the ownership or share issuance limitations contained
in Section 5(h) below to be violated.
(c) Mechanics
of Conversion.
(i) The
right of conversion hereunder shall be exercised by the holder of shares
of
Convertible Preferred Stock by delivering to the Corporation a conversion
notice
in the form attached hereto as Exhibit
A
(the
“Conversion Notice”), appropriately completed and duly signed and specifying the
number of shares of Convertible Preferred Stock that the holder elects
to
convert (the “Converting Shares”) into shares of Common Stock. Promptly after
the receipt of the Conversion Notice, the Corporation shall issue and deliver
or
transmit, or cause to be delivered or transmitted, to the holder of the
Converting Shares or such holder’s nominee, such number of shares of Common
Stock issuable upon the conversion of such Converting Shares. Such conversion
shall be deemed to have been effected as of the close of business on the
date of
receipt by the Corporation of the Conversion Notice (the “Conversion Date”), and
the person or persons entitled to receive the shares of Common Stock issuable
upon conversion shall be treated for all purposes as the holder or holders
of
record of such shares of Common Stock as of the close of business on the
Conversion Date.
(ii) The
Corporation shall effect such issuance of Common Stock (and certificates
for
unconverted Convertible Preferred Stock) within three (3) trading days
of the
Conversion Date and shall electronically transmit the Common Stock issuable
upon
conversion to the holder, or Common Stock in payment of dividends hereunder,
by
crediting the account of the holder’s prime broker with Depository Trust Company
(“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system using
the Fast Automated Securities Transfer (“FAST”) program. The parties agree to
coordinate with DTC to accomplish this objective. If such Common Shares
are not
received by the holder within five (5) trading days of the Conversion Notice,
then the holder will be entitled to revoke and withdraw its Conversion
Notice,
in whole or in part, at any time prior to its receipt of those Common Shares.
In
lieu of such electronic delivery through DWAC, the Corporation shall deliver
physical certificates representing the Common Stock issuable upon conversion
of
Converting Shares to the extent requested by the holder or required by
law. The
time periods for delivery of physical certificates evidencing the Converting
Shares, or Common Stock in payment of dividends hereunder, are the same
as those
described above. The person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the
record
holder or holders of such Common Shares at the close of business on the
Conversion Date. If the conversion has not been rescinded in accordance
with
this paragraph and the Corporation fails to deliver to the holder such
certificate or certificates or shares through DTC pursuant to this Section
5
(free of any restrictions on transfer or legends, if such shares have been
registered) in accordance herewith, prior to the seventh trading day after
the
Conversion Date (assuming timely surrender of the Convertible Preferred
Stock
certificates), the Corporation shall pay to such holder, in cash, on a
per diem
basis, an amount equal to 1% of the Liquidation Preference of all Convertible
Preferred Stock held by such holder per month until such delivery takes
place.
The
Corporation’s obligation to issue Common Stock upon conversion of Convertible
Preferred Stock shall be absolute, is independent of any covenant of any
holder
of Convertible Preferred Stock, and shall not be subject to: (i) any offset
or
defense; or (ii) any claims against the holders of Convertible Preferred
Stock
whether pursuant to this Certificate of Designation, that certain Preferred
Stock and Warrant Purchase Agreement entered into among the Corporation
and the
purchasers of the Convertible Preferred Stock on the Date of Original Issue
(the
“Convertible Note Purchase Agreement”), the Investor Rights Agreement, the
Warrants (as defined in the Convertible Note Purchase Agreement) or
otherwise.
(iii) Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon conversion
of
any shares of Convertible Preferred Stock in accordance with the terms
hereof,
the holder thereof shall not be required to physically surrender such holder’s
certificates for Convertible Preferred Stock to the Corporation unless
such
holder is converting all of the Convertible Preferred Stock then held by
such
holder. The holders of Convertible Preferred Stock and the Corporation
shall
maintain records showing the number of shares of Convertible Preferred
Stock so
converted hereunder, the number of shares of Common Stock received upon
conversion and the dates of such conversions, or shall use such other method,
reasonably satisfactory to the holders and the Corporation, so as not to
require
physical surrender of certificates for Convertible Preferred Stock upon
each
such conversion.
(d) Mandatory
Redemption at Maturity.
(i) If
any shares of Convertible Preferred Stock remain outstanding on the June
15,
2009 (“Maturity Date”), the Corporation shall redeem such shares of Convertible
Preferred Stock for an amount in cash per Preferred Share (the “Maturity Date
Redemption Price”) equal to the Liquidation Preference plus all accrued but
unpaid dividends thereon by wire transfer of immediately available funds
to an
account designated in writing by the holder of such shares of Convertible
Preferred Stock.
(ii) If
the Corporation fails to redeem all of the shares of Convertible Preferred
Stock
outstanding on the Maturity Date by payment of the Maturity Date Redemption
Price for each such Preferred Share, then in addition to any remedy such
holder(s) may have hereunder, under the Convertible Note Purchase Agreement
or
any of the related agreements, (I) the applicable Maturity Date Redemption
Price
payable in respect of such unredeemed shares of Convertible Preferred Stock
shall bear interest at the rate of 1.5% per month, prorated for partial
months,
until paid in full, and (II) any holder of shares of Convertible Preferred
Stock
shall have the option to require the Corporation to convert any or all
of such
holder's shares of Convertible Preferred Stock for which the Maturity Date
Redemption Price (together with any interest thereon) has not been paid
into
shares of Common Stock equal to the number which results from dividing
the
Maturity Date Redemption Price (together with any interest thereon) by
90% of
the Conversion Value.
(e) Conversion
Prices.
(i) The
initial Conversion Value for the Convertible Preferred Stock shall be $1.65,
such Conversion Value to be subject to adjustment in accordance with the
provisions of this Section 5 (and such adjustments shall apply for dividends,
subdivisions, combinations, distributions and securities issuances occurring
after June 15, 2006 even if this Certificate of Designation is filed after
the
occurrence of such dividends, subdivisions, combinations, distributions
or
securities issuances). Such conversion value in effect from time to time,
as
adjusted pursuant to this Section 5, is referred to herein as a “Conversion
Value.” All of the remaining provisions of this Section 5 shall apply separately
to each Conversion Value in effect from time to time with respect to Convertible
Preferred Stock.
(f) Stock
Dividends, Subdivisions and Combinations.
If at
any time while the Convertible Preferred Stock is outstanding, the Corporation
shall:
(i) cause
the holders of its Common Stock to be entitled to receive a dividend payable
in,
or other distribution of, additional shares of Common Stock,
(ii) subdivide
its outstanding shares of Common Stock into a larger number of shares of
Common
Stock, or
(iii) combine
its outstanding shares of Common Stock into a smaller number of shares
of Common
Stock,
then
in
each such case the Conversion Value shall be multiplied by a fraction of
which
the numerator shall be the number of shares of Common Stock (excluding
treasury
shares, if any) outstanding immediately before such event and of which
the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event. Any adjustment made pursuant to clause (i)
of this
paragraph shall become effective immediately after the record date for
the
determination of stockholders entitled to receive such dividend or distribution,
and any adjustment pursuant to clauses (ii) or (iii) of this paragraph
shall
become effective immediately after the effective date of such subdivision
or
combination. If any event requiring an adjustment under this paragraph
occurs
during the period that a Conversion Value is calculated hereunder, then
the
calculation of such Conversion Value shall be adjusted appropriately to
reflect
such event.
(g) Certain
Other Distributions.
If at
any time while the Convertible Preferred Stock is outstanding the Corporation
shall take a record of the holders of its Common Stock for the purpose
of
entitling them to receive any dividend or other distribution of:
(i) cash,
(ii) any
evidences of its indebtedness, any shares of stock of any class or any
other
securities or property or assets of any nature whatsoever (other than cash
or
additional shares of Common Stock as provided in Section 5(f) hereof),
or
(iii) any
warrants or other rights to subscribe for or purchase any evidences of
its
indebtedness, any shares of stock of any class or any other securities
or
property or assets of any nature whatsoever (in each case set forth in
subparagraphs 5(g)(i), 5(g)(ii) and 5(g)(iii) hereof, the “Distributed
Property”),
then
upon
any conversion of Convertible Preferred Stock that occurs after such record
date, the holder of Convertible Preferred Stock shall be entitled to receive,
in
addition to the Conversion Shares otherwise issuable upon such conversion,
the
Distributed Property that such holder would have been entitled to receive
in
respect of such number of Conversion Shares had the holder been the record
holder of such Conversion Shares as of such record date. Such distribution
shall
be made whenever any such conversion is made. In the event that the Distributed
Property consists of property other than cash, then the fair value of such
Distributed Property shall be as reasonably determined in good faith by
the
Board of Directors of the Corporation and set forth in reasonable detail
in a
written valuation report (the “Valuation Report”) prepared by the Board of
Directors. The Corporation shall give written notice of such determination
and a
copy of the Valuation Report to all holders of Convertible Preferred Stock,
and
if the holders of a majority of the outstanding Convertible Preferred Stock
object to such determination within twenty (20) business days following
the date
such notice is given to all of the holders of Convertible Preferred Stock,
the
Corporation shall submit such valuation to an investment banking firm of
recognized national standing selected by not less than a majority of the
holders
of the Convertible Preferred Stock and acceptable to the Corporation in
its
reasonable discretion, whose opinion shall be binding upon the Corporation
and
the Convertible Preferred Stock holders. A reclassification of the Common
Stock
(other than a change in par value, or from par value to no par value or
from no
par value to par value) into shares of Common Stock and shares of any other
class of stock shall be deemed a distribution by the Corporation to the
holders
of its Common Stock of such shares of such other class of stock within
the
meaning of this Section 5(g) and, if the outstanding shares of Common Stock
shall be changed into a larger or smaller number of shares of Common Stock
as a
part of such reclassification, such change shall be deemed a subdivision
or
combination, as the case may be, of the outstanding shares of Common Stock
within the meaning of Section 5(f).
(h) Blocking
Provision.
(i) Notwithstanding
anything herein to the contrary, except as provided otherwise in this Section
5(h)(i), the number of Conversion Shares that may be acquired by any holder,
and
the number of shares of Convertible Preferred Stock that shall be entitled
to
voting rights under Section 2 hereof, shall be limited to the extent necessary
to insure that, following such conversion (or deemed conversion for voting
purposes), the number of shares of Common Stock then beneficially owned
by such
holder and its Affiliates and any other persons or entities whose beneficial
ownership of Common Stock would be aggregated with the holder’s for purposes of
Section 13(d) of the Exchange Act (including shares held by any “group” of which
the holder is a member, but excluding shares beneficially owned by virtue
of the
ownership of securities or rights to acquire securities that have limitations
on
the right to convert, exercise or purchase similar to the limitation set
forth
herein), does not exceed 9.9% of the total number of shares of Common Stock
of
the Corporation then issued and outstanding (the “Beneficial Ownership Cap”).
For purposes hereof, “group” has the meaning set forth in Section 13(d) of the
Exchange Act and applicable regulations of the Securities and Exchange
Commission, and the percentage held by the holder shall be determined in
a
manner consistent with the provisions of Section 13(d) of the Exchange
Act. As
used herein, the term “Affiliate” means any person or entity that, directly or
indirectly through one or more intermediaries, controls or is controlled
by or
is under common control with a person or entity, as such terms are used
in and
construed under Rule 144 under the Securities Act. With respect to a holder
of
Convertible Preferred Stock, any investment fund or managed account that
is
managed on a discretionary basis by the same investment manager as such
holder
will be deemed to be an Affiliate of such holder. Each delivery of a Conversion
Notice by a holder of Convertible Preferred Stock will constitute a
representation by such Holder that it has evaluated the limitation set
forth in
this paragraph and determined, subject to the accuracy of information filed
under the Securities Act and the Exchange Act by the Corporation with respect
to
the outstanding Common Stock of the Corporation, that the issuance of the
full
number of shares of Common Stock requested in such Conversion Notice is
permitted under this paragraph. This paragraph shall be construed and
administered in such manner as shall be consistent with the intent of the
first
sentence of this paragraph. Any provision hereof which would require a
result
that is not consistent with such intent shall be deemed severed herefrom
and of
no force or effect with respect to the conversion contemplated by a particular
Conversion Notice.
(ii) Notwithstanding
the foregoing provisions of Section 5(h), (A) any holder of Convertible
Preferred Stock shall have the right prior to the Date of Original Issue
upon
written notice to the Corporation, or after the Date of Original Issue
upon 61
days prior written notice to the Corporation, to choose not to be governed
by
the Beneficial Ownership Cap provided herein, and (B) any holder of Convertible
Preferred Stock shall have the right, prior to or after the Date of Original
Issue upon written notice to the Corporation, to reduce its Beneficial
Ownership
Cap to 4.9%.
(i) Common
Stock Reserved.
The
Corporation shall at all times reserve and keep available out of its authorized
but unissued Common Stock, solely for issuance upon the conversion of shares
of
Convertible Preferred Stock as herein provided, such number of shares of
Common
Stock as shall from time to time be issuable upon the conversion of all
the
shares of Convertible Preferred Stock at the time outstanding (without
regard to
any ownership limitations provided in Section 5(h)).
(j) Securities
Issuances.
In the event that the Corporation or any of its subsidiaries (A) issues
or sells
any Common Stock or convertible securities, warrants, options or other
rights to
subscribe for or to purchase or exchange for, shares of Common Stock
(“Convertible Securities”) or (B) directly or indirectly effectively reduces the
conversion, exercise or exchange price for any Convertible Securities which
are
currently outstanding, at or to an effective Per Share Selling Price (as
defined
below) which is less than the greater of (I) the closing sale price per
share of
the Common Stock on the principal market on which the Common Stock is traded
the
Trading Day next preceding such issue or sale or, in the case of issuances
to
holders of its Common Stock, the date fixed for the determination of
stockholders entitled to receive such warrants, rights, or options (“Fair Market
Price”), or (II) the Conversion Value, then in each such case the Conversion
Value in effect immediately prior to such issue or sale or record date,
as
applicable, shall be automatically reduced effective concurrently with
such
issue or sale to an amount determined by multiplying the Conversion Value
then
in effect by a fraction, (x) the numerator of which shall be the sum of
(1) the
number of shares of Common Stock outstanding immediately prior to such
issue or
sale, plus (2) the number of shares of Common Stock which the aggregate
consideration received by the Corporation for such additional shares would
purchase at such Fair Market Price or Conversion Value, as the case may
be, and
(y) the denominator of which shall be the number of shares of Common Stock
of
the Corporation outstanding immediately after such issue or sale. The foregoing
provision shall not apply to any issuances or sales of Common Stock or
Convertible Securities (i) pursuant to any Convertible Securities currently
outstanding on the date hereof in accordance with the terms of such Convertible
Securities in effect on the date hereof, or (ii) to any officer, director
or
employee of the Corporation pursuant to a bona fide option or equity incentive
plan duly adopted by the Corporation. The Corporation shall give to the
each
holder of Convertible Preferred Stock written notice of any such sale of
Common
Stock within 24 hours of the closing of any such sale and shall within
such 24
hour period issue a press release announcing such sale if such sale is
a
material event for, or otherwise material to, the Corporation.
For
the purposes of the foregoing adjustments, in the case of the issuance
of any
Convertible Securities, the maximum number of shares of Common Stock issuable
upon exercise, exchange or conversion of such Convertible Securities shall
be
deemed to be outstanding.
For
purposes of this Section 5(j), if an event occurs that triggers more than
one of
the above adjustment provisions, then only one adjustment shall be made
and the
calculation method which yields the greatest downward adjustment in the
Conversion Value shall be used.
“Per
Share Selling Price” shall include the amount actually paid by third parties for
each share of Common Stock in a sale or issuance by the Corporation. In
the
event a fee is paid by the Corporation in connection with such transaction
directly or indirectly to such third party or its affiliates, any such
fee shall
be deducted from the selling price pro rata to all shares sold in the
transaction to arrive at the Per Share Selling Price. A sale of shares
of Common
Stock shall include the sale or issuance of Convertible Securities, and
in such
circumstances the Per Share Selling Price of the Common Stock covered thereby
shall also include the exercise, exchange or conversion price thereof (in
addition to the consideration received by the Corporation upon such sale
or
issuance less the fee amount as provided above). In case of any such security
issued in a transaction in which the purchase price or the conversion,
exchange
or exercise price is directly or indirectly subject to adjustment or reset
based
on a future date, future trading prices of the Common Stock, specified
or
contingent events directly or indirectly related to the business of the
Corporation or the market for the Common Stock, or otherwise (but excluding
standard stock split anti-dilution provisions or weighted-average anti-dilution
provisions similar to that set forth herein, provided that any actual reduction
of such price under any such security pursuant to such weighted-average
anti-dilution provision shall be included and cause a adjustment hereunder),
the
Per Share Selling Price shall be deemed to be the lowest conversion, exchange,
exercise or reset price at which such securities are converted, exchanged,
exercised or reset or might have been converted, exchanged, exercised or
reset,
or the lowest adjustment, as the case may be, over the life of such securities.
If shares are issued for a consideration other than cash, the Per Share
Selling
Price shall be the fair value of such consideration as determined in good
faith
by independent certified public accountants mutually acceptable to the
Corporation and the Holder. In the event the Corporation directly or indirectly
effectively reduces the conversion, exercise or exchange price for any
Convertible Securities which are currently outstanding, then the Per Share
Selling Price shall equal such effectively reduced conversion, exercise
or
exchange price.
6. Other
Provisions Applicable to Adjustments.
The
following provisions shall be applicable to the making of adjustments of
the
number of shares of Common Stock into which the Convertible Preferred Stock
is
convertible and the current Conversion Value provided for in Section
5:
(a) When
Adjustments to Be Made.
The
adjustments required by Section 5 shall be made whenever and as often as
any
specified event requiring an adjustment shall occur, except that any adjustment
to the Conversion Value that would otherwise be required may be postponed
(except in the case of a subdivision or combination of shares of the Common
Stock, as provided for in Section 5(f)) up to, but not beyond the Conversion
Date if such adjustment either by itself or with other adjustments not
previously made adds or subtracts less than 1% of the shares of Common
Stock
into which the Convertible Preferred Stock is convertible immediately prior
to
the making of such adjustment. Any adjustment representing a change of
less than
such minimum amount (except as aforesaid) which is postponed shall be carried
forward and made as soon as such adjustment, together with other adjustments
required by Section 5 and not previously made, would result in a minimum
adjustment or on the Conversion Date. For the purpose of any adjustment,
any
specified event shall be deemed to have occurred at the close of business
on the
date of its occurrence.
(b) Fractional
Interests.
In
computing adjustments under Section 5, fractional interests in Common Stock
shall be taken into account to the nearest 1/100th of a share.
(c) When
Adjustment Not Required.
If the
Corporation undertakes a transaction contemplated under Section 5(g) and
as a
result takes a record of the holders of its Common Stock for the purpose
of
entitling them to receive a dividend or distribution or subscription or
purchase
rights or other benefits contemplated under Section 5(g) and shall, thereafter
and before the distribution to stockholders thereof, legally abandon its
plan to
pay or deliver such dividend, distribution, subscription or purchase rights
or
other benefits contemplated under Section 5(g), then thereafter no adjustment
shall be required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
(d) Escrow
of Stock.
If
after any property becomes distributable pursuant to Section 5 by reason
of the
taking of any record of the holders of Common Stock, but prior to the occurrence
of the event for which such record is taken, a holder of the Convertible
Preferred Stock either converts the Convertible Preferred Stock or there
is a
mandatory conversion during such period or such holder is unable to convert
shares pursuant to Section 5(h), such holder of Convertible Preferred Stock
shall continue to be entitled to receive any shares of Common Stock issuable
upon conversion under Section 5 by reason of such adjustment (as if such
Convertible Preferred Stock were not yet converted) and such shares or
other
property shall be held in escrow for the holder of the Convertible Preferred
Stock by the Corporation to be issued to holder of the Convertible Preferred
Stock upon and to the extent that the event actually takes place.
Notwithstanding any other provision to the contrary herein, if the event
for
which such record was taken fails to occur or is rescinded, then such escrowed
shares shall be canceled by the Corporation and escrowed property returned
to
the Corporation.
7. Merger,
Consolidation or Disposition of Assets.
(a) If,
after the Date of Original Issue and while the Convertible Preferred Stock
is
outstanding, there occurs: (i) an acquisition by an individual or legal
entity
or group (as set forth in Section 13(d) of the Exchange Act) of more than
one-half of the voting rights or equity interests in the Corporation and
such
acquisition is approved by the Corporation’s Board of Directors; or (ii) a
merger or consolidation of the Corporation or a sale, transfer or other
disposition of all or substantially all the Corporation’s property, assets or
business to another corporation where the holders of the Corporation’s voting
securities prior to such transaction fail to continue to hold at least
50% of
the voting power of the Corporation and such transaction is approved by
the
Corporation’s Board of Directors (each, a “Change of Control”), then the
successor or acquiring corporation (if other than the Corporation) shall
expressly assume the due and punctual observance and performance of each
and
every covenant and condition contained in this Certificate of Designation
to be
performed and observed by the Corporation and all the obligations and
liabilities hereunder, with such modifications and adjustments as equitable
and
appropriate in order to place the holders of Convertible Preferred Stock
in the
equivalent economic position as prior to such Change in Control.
(b) In
case of any such Change of Control, each holder of Convertible Preferred
Stock
shall have the right thereafter to, at its option, (A) convert any or all
of the
shares of Convertible Preferred Stock held by such holder into shares of
common
stock of the successor or acquiring corporation, and the holder shall be
entitled upon such event to receive such amount of securities, cash or
property
as the shares of the Common Stock of the Corporation into which such holder’s
Convertible Preferred Stock could have been converted immediately prior
to such
Change of Control would have been entitled if such conversion were effected
immediately prior to Change of Control, subject to such further applicable
adjustments set forth in this Certificate of Designation, or (B) require
the
Corporation or its successor to redeem such holder’s Convertible Preferred
Stock, in whole or in part, at a redemption price equal to 125% of the
Liquidation Preference of such shares of Convertible Preferred Stock being
redeemed.
(c) In
case of any such Change of Control, without in any way limiting the terms
and
conditions of the Investor Rights Agreement, the Company agrees to use
its best
efforts to minimize the length of any Blackout Period (as defined in the
Investor Rights Agreement) associated with such Change of Control.
(d) The
foregoing provisions of this Section 7 shall similarly apply to successive
Change of Control transactions. The provisions of this Section 7 shall
be
inapplicable in the event that the Convertible Preferred Stock is subject
to
mandatory conversion under Section 5 or redemption under Section
13.
8. Other
Action Affecting Common Stock.
In case
at any time or from time to time the Corporation shall take any action
in
respect of its Common Stock, other than the payment of dividends permitted
by
Section 5 or any other action described in Section 5, then, unless such
action
will not have a materially adverse effect upon the rights of the holder
of
Convertible Preferred Stock, the number of shares of Common Stock or other
stock
into which the Convertible Preferred Stock is convertible exercisable and/or
the
purchase price thereof shall be adjusted in such manner as may be equitable
in
the circumstances.
9. Certain
Limitations.
Notwithstanding anything herein to the contrary, the Corporation agrees
not to
enter into any transaction which, by reason of any adjustment hereunder,
would
cause the current Conversion Value to be less than the par value per share
of
Common Stock.
10. Participation
Rights.
(a) Subject
to the terms and conditions specified in this Section 10, at any time while
the
Convertible Preferred Stock is outstanding, the holders of shares of Convertible
Preferred Stock shall have a right to participate with respect to the issuance
or possible issuance by the Corporation of any future equity or equity-linked
securities or debt which is convertible into equity or in which there is
an
equity component (as the case may be, “Additional Securities”) on the same terms
and conditions as offered by the Corporation to the other purchasers of
such
Additional Securities. Each time the Corporation proposes to offer any
Additional Securities, the Corporation shall make an offering of such Additional
Securities to each holder of shares of Convertible Preferred Stock in accordance
with the following provisions:
(i) The
Corporation shall deliver a notice (the “Issuance Notice”) to the holders of
shares of Convertible Preferred Stock stating (a) its bona fide intention
to
offer such Additional Securities, (b) the number of such Additional Securities
to be offered, (c) the price and terms, if any, upon which it proposes
to offer
such Additional Securities, and (d) the anticipated closing date of the
sale of
such Additional Securities.
(ii) By
written notification received by the Corporation, within ten (10) days
after
giving of the Issuance Notice, each holder of shares of Convertible Preferred
Stock may elect to purchase or obtain, at the price and on the terms specified
in the Issuance Notice, up to that number of such Additional Securities
which
equals such holder’s Participation Amount for the same consideration and on the
same terms and conditions as such third-party sale, where the “Participation
Amount” for each holder shall equal (a) 50% of the aggregate amount of such
Additional Securities issued or to be issued to investors in such offering
prior
to the exercise of the participation rights contemplated by this Section
10
(such aggregate amount, the “Subsequent Offering Amount”), multiplied by (b) a
fraction, the numerator of which equals the number of shares of Convertible
Preferred Stock then held by such holder and the denominator of which equals
the
aggregate number of shares of Convertible Preferred Stock purchased or
exchanged
by all Purchasers pursuant to the Convertible Note Purchase Agreement.
The
Corporation shall promptly, in writing, inform each holder of shares of
Convertible Preferred Stock which elects to purchase all of the Additional
Shares available to it (“Fully-Exercising Holder”) of any other holder's failure
to do likewise. During the five-day period commencing after such information
is
given, each Fully-Exercising Holder shall be entitled to obtain that portion
of
the Additional Securities for which the holders of shares of Convertible
Preferred Stock were entitled to subscribe but which were not subscribed
for by
such holders which is equal to the proportion that the number of shares
of
Convertible Preferred Stock held by such Fully-Exercising Holder bears
to the
total number of shares of Common Stock held by all Fully-Exercising Holders
who
wish to purchase some of the unsubscribed shares.
(iii) The
Corporation may, during the 75-day period following the expiration of the
10-day
and 5-day periods referenced in Section 10(a)(ii) above, offer up to the
Subsequent Offering Amount of such Additional Securities to any person
or
persons at a price not less than, and upon terms no more favorable to the
offeree than, those specified in the Issuance Notice. If the Corporation
does
not consummate the sale of such Additional Securities within such period,
the
right provided hereunder shall be deemed to be revived and such Additional
Securities shall not be offered or sold unless the Participation Amount
is again
first reoffered to the holders of shares of Convertible Preferred Stock
in
accordance herewith.
(b) Notwithstanding
anything contained herein, no holder of Convertible Preferred Stock shall
have
the right to purchase Additional Securities hereunder to the extent same
would
cause such holder to exceed the Beneficial Ownership Cap.
11. Certificate
as to Adjustments.
Upon
the occurrence of each adjustment or readjustment of the Conversion Value,
the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish
to each
holder of Convertible Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Convertible Preferred Stock, furnish
or
cause to be furnished to such holder a like certificate setting forth (i)
such
adjustments and readjustments, (ii) the Conversion Value at the time in
effect
for the Convertible Preferred Stock and (iii) the number of shares of Common
Stock and the amount, if any, or other property which at the time would
be
received upon the conversion of Convertible Preferred Stock owned by such
holder
(without regard to the ownership limitations set forth in Section 5(h)).
12. Notices
of Record Date.
In the
event of any fixing by the Corporation of a record date for the holders
of any
class of securities for the purpose of determining the holders thereof
who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, any shares of Common Stock or other securities, or any right
to
subscribe for, purchase or otherwise acquire, or any option for the purchase
of,
any shares of stock of any class or any other securities or property, or
to
receive any other right, the Corporation shall mail to each holder of
Convertible Preferred Stock at least twenty (20) days prior to the date
specified therein, a notice specifying the date on which any such record
is to
be taken for the purpose of such dividend, distribution or rights, and
the
amount and character of such dividend, distribution or right.
13. Redemption.
(a) Redemption
Triggering Event.
If a
Redemption Triggering Event (as defined below) has occurred, and a holder
has so
elected, the Corporation shall redeem the Convertible Preferred Stock of
any
holder who gives a Demand for Redemption (as defined below). The Corporation
shall, promptly thereafter, redeem the shares of Convertible Preferred
Stock as
set forth in the Demand for Redemption. The Corporation shall effect such
redemption on the Redemption Date by paying in cash for each such share
to be
redeemed an amount equal to the greater of (i) the Redemption Price (as
defined
below) or (ii) the total number of shares of Common Stock into which such
Convertible Preferred Stock is convertible multiplied by the Current Market
Price at the time of the Redemption Triggering Event. “Redemption Triggering
Event” means the Corporation’s failure or refusal to convert or redeem any
shares of Convertible Preferred Stock in accordance with the terms hereof,
or
the providing of written notice to such effect. The amount payable in redemption
of each share of Convertible Preferred Stock (the “Redemption Price”) shall be
cash equal (i) all accrued but unpaid dividends as of the Redemption Date
(as
defined below) with respect to each share to be redeemed, plus (ii) 125%
of the
Liquidation Preference of each share of Convertible Preferred Stock to
be
redeemed.
(b) Demand
for Redemption.
A
holder desiring to elect a redemption as herein provided shall deliver
a notice
(the “Demand for Redemption”) to the Corporation while such Redemption
Triggering Event continues specifying the following:
(i) The
approximate date and nature of the Redemption Triggering Event;
(ii) The
number of shares of Convertible Preferred Stock to be redeemed; and
(iii) The
address to which the payment of the Redemption Price shall be delivered,
or, at
the election of the holder, wire instructions with respect to the account
to
which payment of the Redemption Price shall be required.
A
holder
may deliver the certificates evidencing the Convertible Preferred Stock
to be
redeemed with the Demand for Redemption or under separate cover. Payment
of the
Redemption Price shall be made not later than two (2) business days after
the
date on which each of the following conditions has been satisfied: (i)
a holder
has delivered a Demand for Redemption and the certificates evidencing the
shares
of Convertible Preferred Stock to be redeemed; and (ii) the Breach Cure
Period
has expired.
(c) Status
of Redeemed or Purchased Shares.
Any
shares of the Convertible Preferred Stock at any time purchased, redeemed
or
otherwise acquired by the Corporation shall not be reissued and shall be
retired.
14. Stock
Transfer Taxes.
The
issue of stock certificates upon conversion of the Convertible Preferred
Stock
shall be made without charge to the converting holder for any tax in respect
of
such issue; provided, however, that the Corporation shall be entitled to
withhold any applicable withholding taxes with respect to such issue, if
any.
The Corporation shall not, however, be required to pay any tax which may
be
payable in respect of any transfer involved in the issue and delivery of
shares
in any name other than that of the holder of any of the Convertible Preferred
Stock converted, and the Corporation shall not be required to issue or
deliver
any such stock certificate unless and until the person or persons requesting
the
issue thereof shall have paid to the Corporation the amount of such tax
or shall
have established to the satisfaction of the Corporation that such tax has
been
paid.
15. Notices.
Any and
all notices or other communications or deliveries required or permitted
to be
provided hereunder shall be in writing and shall be deemed given and effective
on the earliest of (a) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number specified in this Section
prior to 5:00 p.m. (New York City time) on a business day, (b) the next
business
day after the date of transmission, if such notice or communication is
delivered
via facsimile at the facsimile number specified in this Section on a day
that is
not a business day or later than 5:00 p.m. (New York City time) on any
business
day, (c) the business day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service such as Federal Express,
or (d)
actual receipt by the party to whom such notice is required to be given.
The
address for such notices and communications shall be as follows: (i) if
to the
Corporation, to NetSol Technologies, Inc., 23901 Calabasas Road, Suite
2072,
Calabasas, CA 91302, facsimile: (818) 222-9197, Attention: General Counsel,
or
(ii) if to a holder of Convertible Preferred Stock, to the address or facsimile
number appearing on the Corporation’s stockholder records or, in either case, to
such other address or facsimile number as the Corporation or a holder of
Convertible Preferred Stock may provide to the other in accordance with
this
Section.
16. Stock
Transfer Taxes.
The
issue of stock certificates upon conversion of the Convertible Preferred
Stock
shall be made without charge to the converting holder for any tax in respect
of
such issue; provided, however, that the Corporation shall be entitled to
withhold any applicable withholding taxes with respect to such issue, if
any.
The Corporation shall not, however, be required to pay any tax which may
be
payable in respect of any transfer involved in the issue and delivery of
shares
in any name other than that of the holder of any of the Convertible Preferred
Stock converted, and the Corporation shall not be required to issue or
deliver
any such stock certificate unless and until the person or persons requesting
the
issue thereof shall have paid to the Corporation the amount of such tax
or shall
have established to the satisfaction of the Corporation that such tax has
been
paid.
17. Attorneys'
Fees.
In
connection with enforcement by a holder of Convertible Preferred Stock
of any
obligation of the Corporation hereunder, the prevailing party shall be
entitled
to recovery of reasonable attorneys’ fees and expenses incurred.
18. Specific
Enforcement. The
Corporation agrees that irreparable damage would occur in the event that
any of
the provisions of this Certificate of Designation were not performed in
accordance with their specific terms or were otherwise breached. Each holder
of
Convertible Preferred Stock and each permitted assignee shall have all
rights
and remedies set forth in this Certificate of Designation and all rights
and
remedies which such holders have been granted at any time under any other
agreement or contract and all of the rights which such holders have under
any
law. Any person having any rights under any provision of this Certificate
of
Designation shall be entitled to enforce such rights specifically or pursue
other injunctive relief or other equitable remedies (without posting a
bond or
other security), to recover damages by reason of any breach of any provision
of
this Certificate of Designation and to exercise all other rights granted
by law.
Each holder of Convertible Preferred Stock and each permitted assignee
without
prejudice may withdraw, revoke or suspend its pursuit of any remedy at
any time
prior to its complete recovery as a result of such remedy.
19. Severability
of Provisions.
If any
right, preference or limitation of the Convertible Preferred Stock set
forth in
this Certificate of Designation (as this Certificate of Designation may
be
amended from time to time) is invalid, unlawful or incapable of being enforced
by reason of any rule or law or public policy, all other rights, preferences
and
limitations set forth in this Certificate of Designation, which can be
given
effect without the invalid, unlawful or unenforceable right, preference
or
limitation shall nevertheless remain in full force and effect, and no right,
preference or limitation herein set forth be deemed dependent upon any
such
other right, preference or limitation unless so expressed herein.
[Signature
Page Follows]
IN
WITNESS WHEREOF, the undersigned have executed this designation on behalf
of the
Corporation and affixed the corporate seal hereto this _____ day of _________,
2006.
NETSOL
TECHNOLOGIES, INC.
By:
_______________________________
Name:
Title:
EXHIBIT
A
FORM
OF
CONVERSION NOTICE
(To
be
executed by the registered Holder in order to convert shares of Convertible
Preferred Stock)
The
undersigned hereby irrevocably elects to convert the number of shares of
Series
A 7% Cumulative Convertible Preferred Stock (the “Convertible Preferred Stock”)
indicated below into shares of common stock, par value $0.001 per share
(the
“Common Stock”), of NetSol Technologies, Inc., a Nevada corporation (the
“Corporation”), according to the Certificate of Designation of the Convertible
Preferred Stock and the conditions hereof, as of the date written below.
The
undersigned hereby requests that certificates for the shares of Common
Stock to
be issued to the undersigned pursuant to this Conversion Notice be issued
in the
name of, and delivered to, the undersigned or its designee as indicated
below.
If the shares of Common Stock are to be issued in the name of a person
other
than the undersigned, the undersigned will pay all transfer taxes payable
with
respect thereto.
____________________________________________________________________________________________________
Date
of
Conversion (Date of Notice)
____________________________________________________________________________________________________
Number
of
shares of Convertible Preferred Stock owned prior to Conversion
____________________________________________________________________________________________________
Number
of
shares of Convertible Preferred Stock to be converted
____________________________________________________________________________________________________
Stated
Value (Liquidation Preference) of Convertible Preferred Stock to be
Converted
____________________________________________________________________________________________________
Amount
of
accumulated and unpaid dividends on shares of Convertible Preferred Stock
to be
converted
____________________________________________________________________________________________________
Number
of
shares of Common Stock to be issued (including conversion of accrued but
unpaid
dividends on shares
of
Convertible Preferred Stock to be converted)
____________________________________________________________________________________________________
Applicable
Conversion Value
____________________________________________________________________________________________________
Number
of
shares of Convertible Preferred Stock owned subsequent to Conversion
Conversion
Information:
|
NAME
OF HOLDER:
|
|
|
|
By:___________________________________
|
|
Print
Name:_____________________________
|
|
Print
Title:______________________________
|
|
|
|
Print
Address of Holder:
|
|
_____________________________________________________ |
|
_____________________________________________________ |
|
|
|
Issue
Common Stock
to:__________________________________________
|
|
at:___________________________________________________________
|
ANNEX
F
PLACEMENT
AGENT WARRANT AGREEMENT
NETSOL
TECHNOLOGIES, INC.
THE
WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE
THEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY
NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE UNDER SUCH ACT OR THE RULES OR REGULATIONS PROMULGATED
THEREUNDER.
WARRANT
TO PURCHASE
266,666
SHARES OF COMMON STOCK
AS
DESCRIBED HEREIN
Expiration
Date: June 20, 2008
This
certifies that, for value received, Maxim Partners, LLC, or its successors
and
assigns ("Holder")
is
entitled to purchase from NetSol Technologies, Inc. a Nevada corporation,
(the
"Company")
up to
and including 266,666 fully paid and nonassessable shares (the "Number
of Shares")
of the
Common Stock of the Company (the "Common
Stock")
on the
terms set forth herein at an exercise price of $1.65 per share (the
"Purchase
Price").
The
Number of Shares and the Purchase Price may be adjusted from time to time
as
described in this Warrant.
1. Exercise.
1.1. Time
for Exercise.
This
Warrant may be exercised in whole or in part at any time, and from time to
time,
during the period commencing on the date of this Warrant and expiring on
June
20, 2008.
1.2. Manner
of Exercise.
This
Warrant shall be exercised as follows:
1.2.1. by
delivering this Warrant (or a lost stock affidavit in lieu thereof in the
event
this Warrant has been lost, stolen or mutilated) to the Company with the
exercise form attached hereto as Exhibit A duly completed and signed, specifying
the Number of Shares as to which the Warrant is being exercised at that time
(the "Exercise
Number").
The
Holder shall simultaneously deliver to the Company cash or a certified check
in
an amount equal to the Exercise Number multiplied by the Purchase Price.
Except
for exercises in full of this Warrant, the Exercise Number must be at least
1,000 shares; or
1.2.2. in
the
event the Holder elects to exercise this Warrant on a cashless basis, by
delivering this Warrant (or a lost stock affidavit in lieu thereof in the
event
this Warrant has been lost, stolen or mutilated) to the Company with the
net-exercise form attached hereto as Exhibit B duly completed and signed
(the
“Net
Election Notice”).
Upon
receipt of the Net Election Notice, the Company shall deliver to the Holder,
without payment
by the Holder of the Purchase Price or any other consideration, that number
of
shares of Common Stock computed using the following formula:
X=
Y(A-B)/A
Where: X=
The
number of shares of Common Stock to be issued to the Holder (or such other
person or persons as directed by the Holder,
subject
to compliance with the terms of this Warrant and all applicable laws)
upon
such
exercise of this Warrant in accordance with this Section 1.2.2;
Y=
The
number of shares of Common Stock purchasable pursuant to this Warrant which
the
Holder has surrendered for cashless exercise;
A=
The
Fair Market Value (as defined below) of one share of Common Stock as of the
date
of delivery of the Net Election Notice by the Holder; and
B=
The
Purchase Price
For
purposes of this Agreement, the “Fair
Market Value”
of
a
share of Common Stock as of a particular date (the “Valuation
Date”)
shall
mean the following:
(i) if
the
Common Stock is then listed on a national securities exchange, the average
closing sale price of one share of Common Stock on such exchange over the
ten (10) trading days ending on the last trading day prior to the Valuation
Date; provided that if such stock has not traded in the ten (10)
consecutive trading days prior to the Valuation Date, the Fair Market Value
shall be the average closing price of one share of Common Stock in the most
recent ten (10) trading days during which the Common Stock has traded prior
to the Valuation Date;
(ii) if
the
Common Stock is then included in The Nasdaq Stock Market, Inc. (“Nasdaq”),
the
average closing sale price of one share of Common Stock on Nasdaq over the
ten (10) trading days ending on the last trading day prior to the Valuation
Date or, if no closing sale price is available for any of such ten (10)
trading days, the closing sale price for such day shall be determined as
the
average of the high bid and the low ask price quoted on Nasdaq as of the
end of
such trading day; provided that if the Common Stock has not traded in the
ten (10) consecutive trading days prior to the Valuation Date, the Fair
Market Value shall be the average closing price of one share of Common Stock
in
the most recent ten (10) trading days during which the Common Stock has
traded prior to the Valuation Date;
(iii) If
the
Common Stock is then included in the Over-the-Counter Bulletin Board, the
average closing sale price of one share of Common Stock on the Over-the-Counter
Bulletin Board over the ten (10) trading days ending on the last trading
day prior to the Valuation Date or, if no closing sale price is available
for
any of such ten (10) trading days, the closing sale price for such day
shall be determined as the average of the high bid and the low ask price
quoted
on the Over-the-Counter Bulletin Board as of the end of such trading day;
provided that if the Common Stock has not traded in the ten (10)
consecutive trading days prior to the Valuation Date, the Fair Market Value
shall be the average closing price of one share of Common Stock in the most
recent ten (10) trading days during which the Common Stock has traded prior
to the Valuation Date;
(iv) if
the
Common Stock is then included in the “pink sheets”, the average closing sale
price of one share of Common Stock on the “pink sheets” over the ten (10)
trading days ending on the last trading day prior to the Valuation Date or,
if
no closing sale price is available for any of such ten (10) trading days,
the closing sale price for such day shall be determined as the average of
the
high bid and the low ask price quoted on the “pink sheets” as of the end of such
trading day; provided that if the Common Stock has not traded in the
ten (10) consecutive trading days prior to the Valuation Date, the Fair
Market Value shall be the average closing price of one share of Common Stock
in
the most recent ten (10) trading days during which the Common Stock has
traded prior to the Valuation Date; or
(v) if
the
Common Stock is not then listed on a national securities exchange or quoted
on
Nasdaq or the Over-the-Counter Bulletin Board or the “pink sheets”, the Fair
Market Value of one share of Common Stock as of the Valuation Date shall
be
determined in good faith by the Board of Directors of the Company.
The
Board
of Directors of the Company shall respond promptly in writing to a written
inquiry by the Holder prior to the exercise hereunder as to the Fair Market
Value of a share of Common Stock.
1.3. Effect
of Exercise.
Promptly after any exercise, but in no event more than two (2) business days
thereafter, the Company shall deliver to the Holder (i) duly executed
certificates in the name or names specified in the applicable exercise notice
representing the Exercise Number, and (ii) if this Warrant is exercised only
in
part, a new Warrant of like tenor representing the balance of the Number
of
Shares. Such certificates shall be deemed to have been issued, and the person
receiving them shall be deemed to be a holder of record of such shares, as
of
the close of business on the date of exercise of this Warrant in accordance
with
Section 1.2, if on that date the stock transfer books of the Company are
closed,
as of the next business day on which the stock transfer books of the Company
are
open.
1.4. Registration
Obligations.
The
Holder shall be entitled to the same registration rights and penalties, if
any,
granted to the investors in the $5,500,000 Convertible Note and Warrant
transaction dated June 15, 2006 in which Holder acted as Placement Agent
(“Private Placement”).
1.5. Limitations
on Exercise.
Notwithstanding anything herein to the contrary, if the Company has not obtained
shareholder approval (as defined in the Purchase Agreement to the Private
Placement), then the Company may not issue, upon exercise of this Warrant,
a
number of shares of Common Stock that together with the shares of Common
Stock
issuable upon conversion of the Notes and exercise of the Warrants of the
Private Placement would cause the Company to breach its obligations under
the
rules or regulations of the Nasdaq Stock Market (including without limitation
Section 4350(i) of the NASD Manual).
2. Transfer
of Warrants and Stock.
2.1. Transfer
Restrictions.
Neither
this Warrant nor the securities issuable upon its exercise may be sold,
transferred or pledged unless the Company shall have been supplied with
reasonably satisfactory evidence that such transfer is not in violation of
the
Securities Act of 1933, as amended, and any applicable state securities laws.
The Company may place a legend to that effect on this Warrant, any replacement
Warrant and each certificate representing shares issuable upon exercise of
this
Warrant. Subject to the satisfaction of this condition only, this Warrant
shall
be freely transferable by the Holder.
2.2. Manner
of Transfer.
Upon
delivery of this Warrant to the Company with the assignment form duly completed
and signed, the Company will promptly execute and deliver to each transferee
and, if applicable, the Holder, Warrants of like tenor evidencing the rights
(i)
of the transferee(s) to purchase the Number of Shares specified for in the
assignment forms, and (ii) of the Holder to purchase any untransferred portion,
which in the aggregate shall equal the Number of Shares of the Warrant prior
to
such transfer. The Company may decline to proceed with any partial transfer
if
any new Warrant would represent the right to purchase fewer than 1,000 shares
of
Common Stock (such number to be adjusted as provided in Section 4).
If
this Warrant is properly assigned in compliance with this Section 2,
it may
be exercised by an assignee without having a new Warrant issued.
2.3. Loss,
Destruction of Warrant Certificates.
Upon
receipt of (i) evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of any Warrant and (ii) except in the case
of
mutilation, an indemnity or security reasonably satisfactory to the Company,
the
Company will promptly execute and deliver a replacement Warrant of like tenor
representing the right to purchase the same Number of Shares.
3. Cost
of Issuances.
The
Company shall pay all expenses, transfer taxes and other charges payable
in
connection with the preparation, issuance and delivery of stock certificates
or
replacement Warrants, except for any transfer tax or other charge imposed
as a
result of (a) any issuance of certificates in any name other than the name
of
the Holder, or (b) any transfer of the Warrant. The Company shall not be
required to issue or deliver any stock certificate or Warrant until it receives
reasonably satisfactory evidence that any such tax or other charge has been
paid
by the Holder.
4. Anti-Dilution
Provisions.
If any
of the following events occur at any time hereafter during the life of this
Warrant, then the Purchase Price and the Number of Shares immediately prior
to
such event shall be changed as described in order to prevent
dilution:
4.1. Stock
Splits and Reverse Splits.
If at
any time the outstanding shares of Common Stock are subdivided into a greater
number of shares or if a dividend is issued on the Common Stock in shares
of
Common Stock, then the Purchase Price will be reduced proportionately and
the
Number of Shares will be increased proportionately. Conversely, if at any
time
the outstanding shares of Common Stock are consolidated into a smaller number
of
shares, then the Purchase Price will be increased proportionately and the
Number
of Shares will be reduced proportionately.
4.2. Effect
of Reorganization and Asset Sales.
If any
(i) reorganization or reclassification of the Common Stock, (ii) consolidation
or merger of the Company with or into another corporation, (iii) sale of
all or
substantially all of its operating assets to another corporation, or (iv)
sale
of the Company substantially as a going concern followed by a liquidation
of the
Company (any such occurrence shall be an "Event"),
is
effected in such a way that holders of Common Stock are entitled to receive
securities and/or assets as a result of their Common Stock ownership, then
upon
exercise of this Warrant the Holder will have the right to receive the shares
of
stock, securities or assets which they would have received if such rights
had
been fully exercised as of the record date for such Event. The Company will
not
effect any Event unless prior to or simultaneously with its consummation
the
successor corporation resulting from the consolidation or merger (if other
than
the Company), or the corporation purchasing the Company's assets, assumes
the
performance of the Company's obligations under this Warrant (as appropriately
adjusted to reflect such consolidation, merger or sale such that the Holder's
rights under this Warrant remain, as nearly as practicable, unchanged) by
a
binding written instrument.
4.3. Other
Securities Adjustments.
If as a
result of this Section 4,
a
Holder is entitled to receive any securities other than Common Stock upon
exercise of this Warrant, the number and purchase price of such securities
shall
thereafter be adjusted from time to time in the same manner as provided pursuant
to this Section 4
for
Common Stock. The allocation of purchase price between various securities
shall
be made in writing by the Board of Directors of the Company in good faith
at the
time of the event by which the Holder become entitled to receive the new
securities, and a copy sent to the Holder.
4.4. Notices.
4.4.1. Notice
of Adjustments.
When
any adjustment is required to be made under this Section 4, the Company shall
promptly (i) determine such adjustments, (ii) prepare and retain on file
a
statement describing in reasonable detail the method used in arriving at
the
adjustment; and (iii) cause a copy of such statement, together with any
agreement required by Section 4.2
and any
allocation under Section 4.3,
to be
mailed to the Holder within 10 days after the date on which the circumstances
giving rise to such adjustment occurred.
4.4.2. Notice
of Events.
If at
any time (i) the Company declares any dividends on the Common Stock, (ii)
any
Event is expected to occur, or (iii) there is a voluntary or involuntary
dissolution, liquidation or winding up of the Company, then the Company shall
give the Holder at least thirty (30) but not more than ninety (90) days written
notice of the date on which the books of the Company will close or upon which
a
record will be taken with regard to such occurrence. Such notice will also
specify the date as of which the holders of the Common Stock will participate
in
the dividend or will be entitled to exchange their shares for securities
or
other property. The notice may state that the record date is subject to the
effectiveness of a registration statement under the Securities Act or to
a
favorable vote or determination of shareholders or of any governmental
agency.
4.5. Computations
and Adjustments.
Upon
each computation of an adjustment under this Section 4,
the
Purchase Price shall be computed to the next lowest cent and the Number of
Shares shall be calculated to the next highest whole share. However, the
fractional amount shall be used in calculating any future adjustments. No
fractional shares of Common Stock shall be issued in connection with the
exercise of this Warrant, but the Company shall, in the case of any exercise
under this Warrant, make a cash payment for any fractional shares based on
the
Fair Market Value of a share of Common Stock on the date of exercise of this
Warrant. Notwithstanding any changes in the Purchase Price or the Number
of
Shares, this Warrant, and any Warrants issued in replacement or upon transfer
thereof, may continue to state the initial Purchase Price and the initial
Number
of Shares. Alternatively, the Company may elect to issue a new Warrant or
Warrants of like tenor for the additional shares of Common Stock purchasable
hereunder or, upon surrender of the existing Warrant, to issue a replacement
Warrant evidencing the aggregate Number of Shares to which the Holder is
entitled after such adjustments.
4.6. Exercise
Before Payment Date.
In the
event that this Warrant is exercised after the record date for any event
requiring an adjustment, but prior to the actual event, the Company may elect
to
defer issuing to the Holder any payment or additional securities required
by
such adjustment until the actual event occurs; provided, however, that the
Company shall deliver a “due bill” or other appropriate instrument to the Holder
transferable to the same extent as the Common Stock issuable on exercise
evidencing the Holder's right to receive such additional payment or securities
upon the occurrence of the event requiring such adjustment.
5. Covenants.
The
Company agrees that:
5.1. Reservation
of Stock.
During
the period in which this Warrant may be exercised, the Company will reserve
sufficient authorized but unissued securities (and, if applicable, property)
to
enable it to satisfy its obligations on exercise of this Warrant. If at any
time
the Company's authorized securities shall not be sufficient to allow the
exercise of this Warrant, the Company shall take such corporate action as
may be
necessary to increase its authorized but unissued securities to be sufficient
for such purpose; and,
5.2. No
Liens, etc.
All
securities that may be issued upon exercise of this Warrant will, upon issuance,
be validly issued, fully paid, nonassessable and free from all taxes, liens
and
charges with respect to the issue thereof, and shall be listed on any exchanges
on which that class of securities is listed.
6. Status
of Holder.
6.1. Not
Shareholder.
Unless
the Holder exercises this Warrant in writing, the Holder shall not be entitled
to any rights (i) as a stockholder of the Company with respect to the shares
as
to which the Warrant is exercisable including, without limitation, the right
to
vote or receive dividends or other distributions, or (ii) to receive any
notice
of any proceedings of the Company except as otherwise provided in this
Warrant.
6.2. Limitation
of Liability.
Unless
the Holder exercises this Warrant in writing, the Holder's rights and privileges
hereunder shall not give rise to any liability for the Purchase Price or
as a
stockholder of the Company, whether to the Company or its creditors.
7. General
Provisions.
7.1. Complete
Agreement; Modifications.
This
Warrant and any documents referred to herein or executed contemporaneously
herewith constitute the parties' entire agreement with respect to the subject
matter hereof and supersede all agreements, representations, warranties,
statements, promises and understandings, whether oral or written, with respect
to the subject matter hereof. This Warrant may not be amended, altered or
modified except by a writing signed by the parties.
7.2. Additional
Documents.
Each
party hereto agrees to execute any and all further documents and writings
and to
perform such other actions which may be or become necessary or expedient
to
effectuate and carry out this Warrant.
7.3. No
Third-Party Benefits; Successors and Assigns.
None of
the provisions of this Warrant shall be for the benefit of, or enforceable
by,
any third-party beneficiary, except for any transferee of this Warrant in
accordance with its terms. Except as provided herein to the contrary, this
Warrant shall be binding upon and inure to the benefit of the parties, their
respective successors and permitted assigns.
7.4. Governing
Law.
All
questions with respect to the Warrant and the rights and liabilities of the
parties will be governed by the laws of New York, regardless of the choice
of
law provisions of that state or any other jurisdiction.
7.5. Waivers
Strictly Construed.
With
regard to any power, remedy or right provided herein or otherwise available
to
any party hereunder (i) no waiver or extension of time shall be effective
unless
expressly contained in a writing signed by the waiving party; and (ii) no
alteration, modification or impairment shall be implied by reason of any
previous waiver, extension of time, delay or omission in exercise, or other
indulgence.
7.6. Severability.
The
validity, legality or enforceability of the remainder of this Warrant shall
not
be affected even if one or more of its provisions shall be held to be invalid,
illegal or unenforceable in any respect.
IN
WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
effective as the date set forth above.
NetSol Technologies, Inc.
a Nevada corporation
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Attest:
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By
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By
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Najeeb Ghauri, Chairman
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Patti L. W. McGlasson,
Secretary
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EXHIBIT
A
EXERCISE
FORM
To
Be
Executed
Upon
Exercise of Warrant
The
undersigned hereby exercises the Warrant with regard to _____________ shares
of
Common Stock and herewith makes payment of the purchase price in full. The
undersigned requests that certificate(s) for such shares [and the Warrant
for
the unexercised portion of this Warrant] be issued [to the Holder] [in the
name
set forth below].
Dated:
_____________________
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[NAME OF HOLDER] |
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By |
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(Signature) |
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Name: |
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(Please
Print)
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Address: |
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Employer
Identification Number,
Social
Security Number or
other
identifying number:
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___________________________________
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[TRANSFEREE:
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Name:
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(Please Print) |
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Address:
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Employer
Identification Number,
Social
Security Number or other
identifying
number:
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EXHIBIT
B
NET
ELECTION FORM
To
NetSol
Technologies, Inc.:
Date:[_________________________]
The
undersigned hereby elects under Section
1.2.2
of this
Warrant to surrender the right to purchase [____________] shares of Common
Stock
pursuant to this Warrant and hereby requests the issuance of [_____________]
shares of Common Stock. The certificate(s) for the shares issuable upon such
net
issue election shall be issued in the name of the undersigned or as otherwise
indicated below.
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Signature |
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Name for Registration |
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Mailing Address |
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ASSIGNMENT
FORM
FOR
VALUE
RECEIVED, ______________________________ hereby sells, assigns and transfers
to
the transferee named below [the rights to purchase ___ of the Number of Shares
under] this Warrant, together with all rights, title and interest therein.
[The
rights to purchase the remaining Number of Shares shall remain the property
of
the undersigned.]
Dated:
_____________________
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[NAME OF HOLDER] |
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By |
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Signature |
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Address: |
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Employer
Identification Number,
Social
Security Number
or
other identifying number:
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___________________________________ |
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TRANSFEREE:
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Name:
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(Please Print) |
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Address:
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Employer
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Social
Security Number or other
identifying
number:
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