Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
x
ANNUAL
REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR
THE FISCAL YEAR ENDED JUNE 30, 2007
or
o
TRANSITION
REPORT UNDER
SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number 0-22773
NETSOL
TECHNOLOGIES, INC.
(Name
of
small business issuer as specified in its charter)
NEVADA
|
95-4627685
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification
Number)
|
23901
Calabasas Road, Suite 2072,
Calabasas,
CA 91302
(Address
of principal executive offices) (Zip code)
(818)
222-9195 / (818) 222-9197
(Issuer's
telephone/facsimile numbers, including area code)
SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
COMMON
STOCK, $.001 PAR VALUE
THE
NASDAQ STOCK MARKET LLC
SECURITIES
REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON
STOCK, $.001 PAR VALUE
NASDAQ
CAPITAL MARKET
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B, and no disclosure will be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
x
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act).
Yes
o
No x
Registrant's
revenues for the fiscal year ended June 30, 2007 were $29,282,086.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $23,878,944 as of September 13, 2007.
As
of
September 13, 2007, Registrant had 21,374,922 shares of its $.001 par value
Common Stock issued and outstanding and 4,130 shares of its Preferred Stock
issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
(None)
Transitional
Small Business Disclosure Format (Check one): Yes o; No x
TABLE
OF CONTENTS AND CROSS REFERENCE SHEET
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|
PAGE
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PART
I
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Item
1
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Business
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1
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Item
2
|
Properties
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22
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Item
3
|
Legal
Proceedings
|
23
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Item
4
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Submission
of Matters to a Vote of Security Holders
|
23
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|
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PART
II
|
|
|
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Item
5
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Market
for Common Equity and Related Stockholder Matters and Small Business
|
|
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Issuer
Purchases of Equity Securities
|
24
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Item
6
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Management's
Discussion and Analysis and Plan of Operations
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25
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Item
7
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Financial
Statements
|
37
|
Item
8
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
37
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Item
8A
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Controls
and Procedures
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37
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Item
8B
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Other
Information
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37
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|
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PART
III
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|
|
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Item
9
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Directors,
Executive Officers, Promoters and Control Persons; Corporate
Governance;
Compliance with Section 16(a) of the Exchange Act
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39
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|
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Item
10
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Executive
Compensation
|
41
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Item
11
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
Item
12
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Certain
Relationships and Related Transactions
|
54
|
|
|
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PART
IV
|
|
|
|
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Exhibits
and Reports on Form 8-K
|
55
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Item
14
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Principal
Accountant Fees and Services
|
57
|
PART
I
This
Form
10-KSB contains forward looking statements relating to the development of the
Company's products and services and future operation results, including
statements regarding the Company that are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. The words "believe," "expect," "anticipate," "intend," variations
of
such words, and similar expressions, identify forward looking statements, but
their absence does not mean that the statement is not forward looking. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Factors
that
could affect the Company's actual results include the progress and costs of
the
development of products and services and the timing of the market acceptance.
ITEM
1 - BUSINESS
GENERAL
NetSol
Technologies, Inc. (“NetSol” or the “Company”) is global information technology
solution provider. NetSol’s global resource base includes diversely qualified
and experienced resources across software development, project management,
operations & multiple products or services offerings. NetSol helps clients
to identify, evaluate and implement technology solutions to meet their strategic
business challenges and maximize their bottom line. By utilizing its worldwide
resources, NetSol delivers high-quality, cost-effective equipment and vehicle
finance portfolio management solutions. The Company also delivers managed IT
services ranging from consulting and application development to systems
integration and development outsourcing. NetSol’s commitment to quality is
demonstrated by its achievement of both ISO 9001 and SEI (Software Engineering
Institute) CMMi (Capability Maturity Model) Level 5 assessment,
a
distinction shared by only 94 companies worldwide. The Company’s clients include
global automakers, financial institutions, technology companies and governmental
agencies.
NetSol’s largest customers, DaimlerChrysler Services and Toyota, rank the
Company as a preferred vendor in more than 40 countries. Founded in 1996, NetSol
is headquartered in Calabasas, California. NetSol Technologies also has
operations and/or offices in: Horsham, United Kingdom; the San Francisco Bay
Area, California, USA; Adelaide, Australia; Beijing, China; Lahore, Islamabad,
Rawalpindi and Karachi, Pakistan; and, Bangkok, Thailand.
COMPANY
BUSINESS MODEL
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 while
also utilizing our facility in Beijing, China. 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. In the areas of professional
services, the Company is now changing its focus from just being a custom
development facility to offering high end services like systems integration
and
technology consulting services. NetSol management believes that the use of
this
model will only further benefit the Company in its penetration of US, European,
developed and developing country markets. NetSol’s subsidiary, NetSol
Technologies Limited, is listed on the Karachi Stock Exchange
(NETSOL).
The
two
recent acquisitions in Horsham in the United Kingdom and in Burlingame,
California in the United States, add an onshore development capacity. The
capacity and capability of these locations provide the Company with contingency
development capability in the event of any unforeseen crises at the Lahore
facility. So far, the Lahore development facility has operated smoothly without
any interruption since 1996. Currently about 80% of the Company’s software
development takes place in the Lahore technology campus with the remaining
20%
in the US and UK.
Achieving
Software Maturity and Quality Assurance.
NetSol,
from the outset, invested heavily in creating a state of the art, world-class
software development capability. A series of QA initiatives resulted in both
ISO
9001 certification as well as a CMMi level 5 assessment. These assessments
solidify NetSol’s project delivery ability as well as permit the Company to
target market segments consisting of organizations and corporations who prefer
to work with software providers having the ultimate quality standard, CMMi
Level
5 rating. Achieving these CMMi targets required dedication by all levels of
the
Company.
Software
Engineering Institute’s (“SEI”) CMMi, which is organized into five maturity
levels, has become a de facto ‘Gold Standard’ for assessing and improving
software processes. Through the CMMi, SEI and the software development community
have established an effective means for modeling, defining, and measuring the
maturity of the processes used by software professionals. The CMMi for software
describes the principles and practices underlying software process maturity
and
is intended to help software organizations improve the maturity of their
software processes in terms of an evolutionary path from ad hoc, chaotic
processes to mature, disciplined software processes. Mature processes meet
standardized software engineering methods and are integratable into a customer’s
system. Mature processes ensure enhanced product quality resulting in faster
project turn around and a shortened time-to-market. In short, a mature process
would, ideally, have fewer bugs and integrate better into the customer’s system.
The
Company has always strived to improve quality in every aspect of its business.
This quality drive, based on the Company’s vision, trickles down from the top to
the lowest levels in the organization. The Company believes that it is this
quality focus that enabled the Company’s software development facility to become
the first ISO 9001 certified software development facility in Pakistan in 1998.
This accomplishment marked the beginning of the Company’s continuing long term
program towards achieving the higher challenges of SW-CMMI. Thanks to the
dedication of the Company’s employees, it is the first ever to reach CMMi level
5 in Pakistan. Achieving the ultimate quality standard of CMMi Level 5 has
been
one of the most significant milestones in the history of NetSol and the company
now joins the ranks of select club of global IT giants like IBM, Boeing,
Infosys, and Lockheed Martin offering the highest quality of products and
services. According to SEI there are less than 100 companies in the world
claiming certification of CMMi Level 5.
The
Company is divided into two groups, the Global Product Group and the Global
Services Group; and three regions: North America; Europe, Middle East and Africa
(“EMEA”); and, Asia Pacific (“APAC”).
The
North
American Region is headed by John McCue, as President of NetSol McCue, based
in
Burlingame, California. NetSol McCue has 35 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. The LeasePak
brand is recognized in the US and Canadian marketplace and is configured to
handle the unique tax and regulation requirements of North America. LeasePak
is
complementary to NetSol’s LeaseSoft offering and its geographic specificity
complements LeaseSoft in regions in which LeaseSoft does not currently have
coverage or domain support knowledge. In order to best leverage the cost
arbitrage and enhance gross margins, NetSol US operations (after the McCue
acquisition) has already begun training 15 developers and programmers in the
Lahore development facility to reduce dependency in the high-cost base in
Silicon Valley. The integration of both back end and front end of McCue with
NetSol is on track. The Company will continue to use NetSol McCue as a platform
for introduction of LeaseSoft to the U.S. market.
NetSol
McCue 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, NetSol McCue offers the LeasePak Bronze, Silver and Gold Editions
for systems and portfolios of virtually all sizes and complexities. These
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 such companies as Cisco, Hyundai, JP
Morgan/Chase, KeyCorp Leasing, City National Bank, Bank of Tokyo Mitsubishi,
La
Salle National Bank, Terex Corp., National City Capital Corp., ORIX, and
Volkswagen Credit.
With
common customers and common goals, we believe that NetSol McCue provides a
complimentary North American presence to our global offering of software and
services to the lease and finance industry. Not only does this provide a U.S.
base of operations and footprint for NetSol, but makes NetSol the only company
focusing on the commercial and consumer lease/finance marketplace with actual
live implementations within nearly every region of the globe, including, U.S.,
Canada, Europe, Asia-Pacific and the far-East. With NetSol McCue, NetSol now
has
a regional asset finance solution suitable for the biggest auto and equipment
finance commercial markets of North America.
The
EMEA
Region, headed by former NetSol Chief Executive Officer, Naeem Ghauri, continues
to capitalize on the 2005 acquisition of CQ Systems Ltd. (now NetSol-CQ). As
a
result of the acquisition, NetSol has access to a broad European customer base
using IT solutions complementary to NetSol’s own LeaseSoft product suite. NetSol
continues to leverage NetSol-CQ’s knowledge base and strong presence in the
Asset Finance market to broaden the product and market reach within the UK
and
Continental Europe. NetSol-CQ’s strong sales and marketing capability has
further helped NetSol gain recognition and positioning for the broader LeaseSoft
suite of products.
The
integration of the former CQ Systems with NetSol has been smooth and consistent
with NetSol’s planned strategy. During the early part of 2007, NetSol-CQ entered
the second phase of integration by increasing its offshore development
capability by 100%, through expansion of its Lahore based team. The Company
expects to enhance this further during the year, improving productivity and
net
margins.
New
products introduced in the last quarter included: LeaseSoft Auto-Decision
Engine, developed to provide automation of credit checking and underwriting
for
standards based financial products, and LeaseSoft EDI, introduced to facilitate
process automation between business introducers and funders. These enhancements
to LeaseSoft Asset complement product releases earlier in the year; LeaseSoft
Portal introduced to support online access to proposals and form the foundation
of web-based origination systems and LeaseSoft Document Manager introduced
to
facilitate the automation production and distribution of proposal documentation,
including indexation and branding of all outboard and inbound documents. All
new
products and enhancements have been well received by the market with sales
and
successful implementations during the fiscal year. The EDI, Auto-Decision and
Origination projects were delivered on time and to budget and LeaseSoft Evolve
with its first sale to Kennet Equipment Finance, was implemented in record
time
(LeaseSoft Evolve is, targeted at small portfolio companies with 250 to 2,500
agreements is a software package designed to facilitate a simple and cost
effective solution to support Asset Finance operations).
Product
development continues to focus on expanding the product and market reach within
the core competence of leasing and financial services creating the opportunity
to broaden the product and services offerings and increasing revenues for the
end-to-end life cycle management on lease-based contracts.
The
introduction of new products and services contributed to the Company’s growing
success in Europe with leading banks adopting the LeaseSoft Asset application
suite as their end-to-end Asset Finance software solution. These organizations
are continuing to invest to further develop their business origination systems
to achieve competitive advantage in the marketplace.
In
parallel with the introduction and new products and services NetSol-CQ has
further strengthened its core competences in leasing domain knowledge and in
Microsoft and Oracle based technologies which form the basis of all its new
developments, to meet the ongoing demand for high quality professional
services.
NetSol
will continue to manage LeaseSoft pre-sales support and deliveries by having
two
specialized pools of resources for each of the four products under LeaseSoft.
One group focuses on software development required for customization and
enhancements. The second group comprises of LeaseSoft consultants concentrating
on implementation and onsite support. Both groups are being continually trained
in the domain of finance and leasing, system functionality, communication
skills, organizational behavior and client management.
NETSOL
APAC OPERATIONS
Our
off-shore development center, and indeed the center of the Company’s services
and software operations, the APAC region is headed by former President of NetSol
and current Chief Executive Officer of NetSol PK (the Company’s Pakistan
subsidiary), Salim Ghauri. The Asian continent, Australia and New Zealand,
from
the perspective of LeaseSoft marketing, are targeted by NetSol Technologies
from
its Lahore subsidiary, its offices in Australia, Thailand and Beijing, China.
NetSol PK has continued to grow its service contracts within the local Pakistani
public and defense sectors. An important aspect of these contracts is that
not
all of them focused solely on software development and engineering.
This
year, APAC has gone a step further by providing both consultancy services to
organizations so as to improve their quality of operations and services and,
winning strategically important assignments with the E-Governance domains for
organizations of national significance in Pakistan. These clients include
private as well as public sector enterprises. In response, APAC has created
a
new division known as NDD - NetSol Defense Division in Islamabad. There is
a
sizable budget allocated by the government of Pakistan to automate and use
new
technologies and systems. NetSol is in a sound position to win some of these
high ticketed projects.
APAC
has
entered into a major new development project at the provincial level to support
the data entry and projects management of Land Revenue Systems. This is a very
new opportunity that has been funded by World Bank to reform the land management
system in Pakistan. This development project positions NetSol to win potentially
very large size projects.
IT
Consulting & Services
Information
technology services are valuable only if they fulfill the business strategy
and
project objectives set forth by the customer. NetSol’s expert consultants have
the technical knowledge and business experience to ensure the optimization
of
the development process in alignment with basic business principles. The Company
offers a broad array of professional services to clients in the global
commercial markets and specializes in the application of advanced and complex
IT
enterprise solutions to achieve its customers' strategic objectives. Its service
offerings include IT Consulting & Services; NetSol Defense Division;
Business Intelligence, Information Security, Outsourcing Services and Software
Process Improvement Consulting; maintenance and support of existing systems;
and, project management.
Outsourcing
involves operating all or a portion of a customer's technology infrastructure,
including systems analysis, system design and architecture, change management,
enterprise applications development, network operations, desktop computing
and
data center management.
IT
Consulting & Services in Pakistan has included a first entrant advantage
into the e-government sector for both provincial and federal governments and
armed forces automation projects. The development of solutions for clients
has
resulted in the development of vertical offerings catering to various industries
and accordingly, diversifying NetSol’s offerings. These verticals have been used
successfully in Pakistan to provide services for the Motor Transport Management
System, Land Record Management System, Legislature, computer based trainings,
enterprise content management, unit management systems, e government and
defense.
The
NetSol Defense Division (NDD), founded in 2005, specializes in providing
solutions for improvement and optimization of business operations of the defense
and military forces, particularly for ERP, office automation and non-warfare
operations. Since late 2006, the division has undertaken research and
development in collaboration with various partners for warfare and similar
operations management systems. With a unique blend of experienced and highly
skilled IT specialists and managers, and most importantly the domain expertise
from the defense sector itself, NDD has positioned itself as a
platform-independent system integration partner for the unique mission
requirements of the defense and intelligence communities within Pakistan. The
NDD is currently undertaking the following projects for this sector: Unit
Management System, an initiative for the automation of administrative functions
for the Pakistani Army, helping to realize the Army’s key objective of improving
productivity and efficacy of the units of the Pakistani Army; Academy
Information Management System for the Pakistan Military Academy, one of the
top
rated military institutes in the world; and, Network Centric Warfare (NCW)
working to provide an information grid which provides a seamless integration
of
sensors, weapons, and decision makers through a common operating environment
and
mission applications built in compliance with laid down inter-operability
standards.
Business
Intelligence (BI) solution providers must have both the capability to service
BI
customers using its own resources but also service the customers of
international affiliates in the APAC region. Typical BI projects run into
several years of phased implementation and rely on expensive international
resources with a very restricted and limited accessibility. As such, management
believes, that NetSol’s competitors compromise on quality by turning BI projects
into IT projects, which is a recipe for failure. Our strategy is simple; we
identify the business pins of our potential customer and involve our industry
domain experts directly with business managers at the client side. This results
in ownership of the project with the business group rather than the IT group
which is involved in the overall initiative only from a support and facilitation
standpoint.
NetSol’s
service capability has expanded to Basel II compliance. The Basel II Accord
is a
mandate by the Bank for International Settlements (BIS) requiring banks around
the world to introduce processes and systems in their organization that will
more effectively control and manage their enterprise wide risk. Basel II has
introduced “risk differentiation” by allowing banks to hold capital reserves
directly proportional to the amount of credit risk they are taking. Further,
the
accord has introduced a capital charge for operational risk. SunGard is the
world’s number one software company for the financial industry with a
comprehensive range of solutions. NetSol formed a strategic alliance with
SunGard in April 2006, and launched its Basil II solutions with a jointly
sponsored seminar in Karachi. The strong Basel II implementation know-how of
NetSol’s BI consulting group combined with the world’s foremost software in the
risk and financial industry makes NetSol, in management’s opinion, the world’s
strongest and most proficient Basel II service in Pakistan.
Information
Security services is provided by NetSol INFOSEC Unit. This unit provides
services to secure all corporate information and its supporting processes,
systems and networks. NetSol’s Information Security Services is a group of
vendor-neutral, dedicated security consultants with real-life field experience.
The INFOSEC group utilizes industry standard security best practices coupled
with best-of-breed products to deliver proven and robust Information Security
Management Systems (ISMS). Services include: managed security services provider;
BS-7799/ISO 27001 Compliance Life-cycle services; information security
assessment; penetration testing and vulnerability assessment; disaster recovery
planning; and, network architecture design, deployment and management.
Software
Process Improvement Consulting is provided by NetSol to companies in Pakistan
through an independent division. The division provides quality engineering
and
related consulting services to technology companies. These activities are
broadly developed under the guidelines of SEI based CMMi processes as well
as
the information security consulting practices. Currently, NetSol is one of
the
few companies authorized by Pakistan Software Export Board (PSEB) for BS7799/ISO
27001 consulting practices in Pakistan as well as complete life cycle consulting
for CMMi.
All
of
these services are available for the US and UK market. More particularly, the
company’s U.S. division has developed a broad range of services aimed at
LeasePak customers. These include customized report writing, system
reconfiguration, upgrade support, integration support, and business process
reviews and process re-engineering.
LeaseSoft
The
Company develops advanced software systems for the lease and finance industries.
NetSol has developed “LeaseSoft” as a product for automated solutions pertaining
to leasing and asset hire or purchase lifecycle management.
LeaseSoft,
a robust suite of four software applications, is an end-to-end solution for
the
lease and finance industry covering the complete leasing and finance cycle
starting from quotation origination through end of contract. The four software
applications under LeaseSoft have been designed and developed for a highly
flexible setting and are capable of dealing with multinational, multi-company,
multi-asset, multi-lingual, multi-distributor and multi-manufacturer
environments. Each application is a complete system in itself and can be used
independently to address specific sub-domains of the leasing/financing cycle.
NetSol recently added LeaseSoft Fleet Management System (FMS). The Company
has
already signed an agreement for FMS with a major automotive company in the
Asia
Pacific region.
LeaseSoft
is a result of more than eight years of effort resulting in over 60 modules
grouped in four comprehensive applications. These four applications are complete
systems in themselves and can be used independently to exhaustively address
specific sub-domains of the leasing/financing cycle. When used together, they
fully automate the entire leasing / financing cycle.
The
constituent software applications are:
· Credit
Application Processing System (CAP).
LeaseSoft.CAP provides companies in the financial sector an environment to
handle the incoming credit applications from dealers, agents, brokers and the
direct sales force. LeaseSoft.CAP automatically gathers information from
different interfaces like credit rating agencies, evaluation guides, and
contract management systems and scores the applications against defined
scorecards. This mechanized workflow permits the credit team members to make
their decisions more quickly and accurately. Implementation of LeaseSoft.CAP
dramatically reduces application-processing time in turn resulting in greater
revenue through higher number of applications finalized in a given time.
LeaseSoft.CAP reduces the probability of a wrong decision thus, again, providing
a concrete business value through minimizing the bad debt portfolio.
LeaseSoft.CAP is a database independent online system developed in Microsoft's
.Net framework. Toyota Leasing Thailand and BMW Financial Services China are
the
first two clients of LeaseSoft.CAP. The benefit of LeaseSoft.CAP being an online
system is that it can be run from any PC with normal specifications as long
as
there is an internet connection.
· Contract
Management System (CMS).
LeaseSoft.CMS provides comprehensive business functionality that enables its
users to effectively and smoothly manage and maintain a contract with the most
comprehensive details throughout its life cycle. It provides interfaces with
company banks and accounting systems. LeaseSoft.CMS effectively maintains
details of all business partners that do business with the company including,
but not limited to, customers, dealers, debtors, guarantors, insurance companies
and banks. Developed with the input of a number of leasing consultants, this
product represents a complete lease and finance product. NetSol’s LeaseSoft.CMS
provides business functionality for all areas that are required to run an
effective, efficient and customer oriented lease and finance
business.
· Wholesale
Finance System (WFS).
LeaseSoft.WFS automates and manages the floor plan/bailment activities of
dealerships through a finance company. The design of the system is based on
the
concept of one asset/one loan to facilitate asset tracking and costing. The
system covers credit limit, payment of loan, billing and settlement, stock
auditing, online dealer and auditor access, and ultimately the pay-off
functions.
· Fleet
Management System (FMS).
LeaseSoftFMS is designed to efficiently handle all fleet management needs.
FMS
is easily integrated with LeaseSoftCMS and WFS as well as with any third party
contract management system to ensure a single comprehensive system. FMS’ key
features include: a detailed tracking information on every driver and vehicle;
customizable reports; periodic reporting on fleet related aspects; internet
based access to information; integration with third party software; and, linkage
to GPS for real time tracking.
Typically,
NetSol’s sales cycle for these products ranges between three to six months.
NetSol derives its income both from selling the license to use the products,
as
well as, from related software services. The related services include
requirement study/gap analysis, customization on the basis of gaps development,
testing, configuration, installation at the client site, data migration,
training, user acceptance testing, supporting initial live operations and,
finally, the long term maintenance of the system. Any changes or enhancement
done is also charged to the customer. In the requirements study/gaps analysis,
the NetSol LeaseSoft team goes to the client site to study the client’s business
and functional requirements and maps them against the existing functionality
available in LeaseSoft. LeaseSoft has now reached a stage where hardly, if
any
gaps, are identified as a result of such a study. In the customization phase,
the gaps are made part of LeaseSoft through a development cycle. This
development takes place in Lahore, Pakistan. Then the new as per requirement
system is thoroughly tested. This phase also takes place in Pakistan. LeaseSoft
is a highly parameterized configurable application and hence it is able to
be
configured according to the business of the customer. This phase can take place
both onsite as well as in Lahore but is usually at least partially done in
Lahore. Next, follows the installation of the system at client site. If the
customer was using some other system and already has data in electronic form,
then NetSol’s data migration team migrates this data from the old system to the
LeaseSoft database. Data migration is a mix of both client site and Lahore
based
work. The client is also imparted training in the areas of business user
training, functional business training and system administration training.
Training is followed by user acceptance testing (UAT) where client nominated
staff and NetSol consultants test the system against the customer business
requirements. After UAT, the system is put in normal business use. LeaseSoft
is
a mission critical software, and the whole business operations, from the asset
side of a finance/leasing company, hinge upon the performance of the system.
Hence in the early days after going live, NetSol consultants remain at the
client site to assist the company in smooth operations. After this phase, the
regular maintenance and support services phase for the implemented software
begins. In addition to the daily rate paid by the customer for each consultant,
the customer also pays for all the transportation related expenses, boarding
of
the consultants, and a living allowance. These practices enable NetSol to
increase marginal revenue in a proportion larger than the marginal cost
incurred.
License
fees can vary generally between $300,000 up to $1,000,000 per license per
module. There are various attributes which determine the level of complexity,
a
few of which are: number of contracts; size of the portfolio; business strategy
of the company; number of business users; and, branch network of the customer.
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 collectibility is probable. However, revenue from sale of licenses with
major customization, modification, and development is recognized on percent
of
completion basis. Revenue from software services includes fixed price contracts
and is recognized in accordance with the percentage of completion method using
the output measure of “Unit of Work Completed.” The annual maintenance fee,
which usually is an agreed upon percentage of overall monetary value of the
implementation, then becomes an ongoing revenue stream realized on yearly
basis.
As
a
marketing strategy NetSol is preparing a lighter version of LeaseSoft to target
companies with simpler business models. LeaseSoft is highly modular. Hence
various sets of functionalities can be used against the restricted requirements
of the client. The first deployment of this lighter version is currently being
carried out in Maritius for Mauritius Commercial Bank.
NetSol
has also provided the option of using its LeaseSoft application on monthly
rental basis to those organizations which are small in size or have small
turnover. This facility is initially provided to Australian Motor Finance (AMF).
AMF is a sub-prime lender in Australia. NetSol has provided them LeaseSoft
Proposal Management System and LeaseSoft Contract Management System.
NETSOL
NORTH AMERICA OPERATION - NetSol McCue, Inc.
In
June
2006, NetSol acquired the issued and outstanding shares of McCue Systems, Inc.,
(now “NetSol McCue”) a California corporation located in Burlingame, California.
NetSol
McCue 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, NetSol McCue offers the LeasePak Bronze, Silver and Gold Editions
for systems and portfolios of virtually all sizes and complexities. These
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. NetSol customers include such companies as Cisco,
Hyundai, JP Morgan/Chase, KeyCorp Leasing, City National Bank, Bank of Tokyo
Mitsubishi, La Salle National Bank, Terex Corp., National City Capital Corp.,
ORIX, and Volkswagen Credit.
NetSol
McCue, the company’s U.S. division, has commenced the rollout of a full suite of
IT outsourcing services and customized development solutions to the North
American equipment finance technology market. The services offering will
leverage 30 plus years of equipment leasing and lending experience. While the
division's Client Consulting Services department has long offered NetSol McCue
customers a range of business process engineering services, the new offering
package will greatly expand the menu of available services to meet market needs.
New services to be offered will include customized application development,
a
full range of Quality Assurance (QA) services, customized strategic report
design, and business intelligence tool development. Leveraging well-established
relationships with users of the division's flagship application, the IT Services
team will market to these existing customers, then to adjacent groups within
customer organizations, eventually building out to a full, industry-wide sales
and marketing strategy.
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. Not only does this provide a U.S.
base of operations and footprint for NetSol, but makes NetSol the only company
focusing on the commercial and consumer lease/finance marketplace with actual
live implementations within nearly every region of the globe, including, U.S.,
Canada, Europe, Asia-Pacific and the far-East. With the McCue’s acquisition,
NetSol now has a regional asset finance pm solution to suitable for the biggest
auto and equipment finance commercial markets of North America.
NETSOL
EMEA OPERATIONS - NETSO-CQ Ltd., UK.
In
February 2005, NetSol acquired 100% of CQ Systems Ltd., (“NetSol-CQ”) an IT
products and service company based in the UK. As a result of this acquisition,
NetSol has access to a broad European customer base using IT solutions
complementary to NetSol’s LeaseSoft product. NetSol plans to leverage CQ’s
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 NetSol gain immediate recognition and positioning
for the LeaseSoft suite of products.
NetSol-CQ’s
integration has included the continued leverage of the Company’s high quality
but lower cost resources in its offshore development center in Lahore, Pakistan.
This phase of the transition plan has been completed whereby a dedicated team
of
software engineers and testers have been trained on CQ product suite and most
of
the quality assurance, documentation and some of the CQ products core software
development activities have been transitioned to Lahore. NetSol-CQ has been
able
to implement significant productivity and cost improvements which have included
realizing the higher level of cost efficiencies of using the Lahore offshore
facility for software development and quality assurance.
In
November 2005, CQ was re-branded as NetSol-CQ and was launched into the UK
market with new branding and logo. This was part of a global strategy to have
consistency in our marketing collateral across the globe. All NetSol-CQ products
have been re-branded as LeaseSoft and the Enterprise product would now be known
as LeaseSoft Asset.
Like
all
NetSol companies, NetSol-CQ has seen its sales and revenues focus increasingly
on total client services rather than on a purely, one-off, product based model.
Roughly two-thirds of the new sales for NetSol-CQ came from products which
did
not exist when CQ was purchased by NetSol. The total client services model
has
seen an expansion from a solely back office based product to a greater front
office focus. This front office focus tends to be highly customized as the
initial interface for the customer. NetSol-CQ’s auto decision component was
developed sooner than any competitors and together with its web-based portal,
is
one of the many front ends solutions that NetSol-CQ is implementing.
NetSol
will continue to manage LeaseSoft pre-sales support and deliveries by having
two
specialized pools of resources for each of the five products under LeaseSoft.
One group focuses on software development required for customization and
enhancements. The second group comprises of LeaseSoft consultants concentrating
on implementation and onsite support. Both groups are being continually trained
in the domain of finance and leasing, system functionality, communication
skills, organizational behavior and client management.
The
Asian
continent, Australia and New Zealand, from the perspective of LeaseSoft
marketing, are targeted by NetSol Technologies from its Lahore subsidiary,
its
offices in Beijing, and it’s newly opened business and technical support office
in Bangkok, Thailand. NetSol UK through its base in Horsham, United Kingdom,
focuses on the European market. The marketing for LeaseSoft in USA and Canada
is
carried out directly by the Company.
NetSol
has established a strategy to aggressively market LeaseSoft in various regions
of the world. As part of the strategy, NetSol is forming alliances with
reputable IT companies and has already appointed distributors in Singapore
and
Japan. NetSol has entered into a mutually non-exclusive agreement with Singapore
Computer Systems (SCS) that allows SCS to market LeaseSoft in the entire Asia
Pacific Region. Furthermore, NetSol is looking forward to developing partner
networks all across the world with reputable companies.
NetSol
office in Beijing, China
As
part
of the same strategy and focus on marketing LeaseSoft, NetSol established a
sales office in Beijing, China, which acts as the sales and marketing front
for
NetSol in the People’s Republic of China and as the liaison office for its
ongoing operations and implementation services for DaimlerChrysler Services,
BMW
and other clients in the country. The new Asia Pacific office is jointly managed
by NetSol Technologies, Inc. and its wholly owned U.K. subsidiary, NetSol-CQ,
Ltd.
NetSol
’s new office in Bangkok, Thailand
To
further strengthen its presence in the Asia-Pacific market, and to provide
exclusive services to its clients, the APAC region has recently established
a
support office in Bangkok, Thailand. This office is located at a prime location
in Bangkok. The core responsibilities of this office are to enhance business
through targeting potential customers and to provide technical support to its
existing clients in Thailand.
Management
believes that LeaseSoft has begun to be recognized as a unique, world-class
product offering. This belief is based on the following instances:
· |
11
new implementation contracts signed during the
year.
|
· |
Of
these, 7 new contracts signed during the fourth
quarter.
|
· |
New
names in the customer list, including Fiat Automotive Finance, CNH
Capital, and a large automotive blue chip company in
China.
|
· |
The
addition of the Fleet Management System to the LeaseSoft
Suite.
|
The
current LeaseSoft client base includes DaimlerChrysler Financial Services
(Australia, Japan, New Zealand, Singapore, South Korea, Thailand, China and
Taiwan), Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota
Motors Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank,
Finlease Company Limited, CNH Capital Australia, Fiat Automotive Finance China,
a Large Automotive Blue chip Company in China and BMW Financial Services in
China.
NetSol
is
the only Leasing and Finance Solution Provider for automotive finance companies
providing support to Chinese clients locally from within the branch offices
in
China and Thailand.
NetSol
also maintains a LeaseSoft specific product website www.leasesoft.biz.
This
product website is also available in the Chinese and Thai languages at
http://www.leasesoft.biz/chinese
and
http://www.leasesoft.biz/thai.
Status
of New Products and Services
InBanking™
With
the
acquisition of Pearl Treasury System, whose product offering is now referred
to
as InBanking™, the Company expands its menu of software into the banking and
other financial areas. In 2003, NetSol acquired the intellectual property rights
(“IPR”) of Pearl Treasury System (“PTS”). PTS was developed to 70% completion in
the late 1990s, led by its system designer who had 30 plus years in banking
through positions as Trader and Head of Trading, Treasury, Risk, Operations
and
IT for banks such as Bankers’ Trust and Mitsubishi Trust & Banking.
PTS
was
originally developed on two tier client server technologies and was designed
to
provide full process automation and decision support in the front, middle and
back offices of treasury and capital markets operations. On an internal review
of PTS post acquisition, it was decided to re-write the system within .NET
technologies, bringing the system into the leading edge n-tier/browser-based
environment. The project name for this program is InBanking™.
The
tremendous flexibility enabled by the comprehensive data model and multi-tier
architectural design of InBanking™ has been fully recognized, identifying the
potential to further develop InBanking™ beyond treasury and capital markets.
Additionally, InBanking™ is modular and can therefore be implemented as
best-of-breed solutions for, as an example, front-office trading, middle office
credit or market risk, or back office settlement. InBanking™ can also be
implemented to support all these areas, plus others, as a single fully
integrated solution.
The
development of the beta version of InBanking is now completed and NetSol is
currently seeking a bank or financial institution to act as pilot development
partners for the beta version of InBanking™ to support their specific
requirements.
LeaseSoft
Portals and Modules in 2007
Our
EMEA
division developed new products and modules including:
LeaseSoft
Portal- introduced to support online access to proposals and for the foundation
of web-based origination systems
LeaseSoft
Document Manager- introduced to facilitate the automation production and
distribution of proposal documentation, including indexation and branding of
all
outboard and inbound documents.
LeaseSoft
Auto-Decision Engine- developed to provide automation of credit checking and
underwriting for standards based financial products
LeaseSoft
EDI Manager- introduced to facilitate process automation between business
introducers and funders
Evolve-
launched to provide an entry level software package for own book brokerages
and
small to medium size funders.
LeasePak
Productivity Suite
In
2005,
McCue Systems developed the LeasePak Productivity Suite as an additional
companion set of products to operate in conjunction with the LeasePak licensed
software. This toolset enables the LeasePak user to leverage the power of the
system to streamline originations, integrate the dealer/vendor network, automate
documentation, enhance customer service, manage risk, and control infrastructure
overhead. In 2007, LeasePak 6.0a was released for general availability and
has
gone into production for use at 2 major clients.
The
components of the LeasePak Productivity Suite are:
Channel
IT- A web-based front end origination channel manager, ChannelIT provides a
browser-based origination tool for use by the remote sales force as well as
the
broker/dealer network and vendor partners. Using ChannelIT’s seamless interface
to LeasePak, contract originators and operational personnel have instant access
to credit information, terms, and conditions, reducing acceptance times and
eliminating costly data re-entry.
Link
IT-
A toolkit of application interfaces to streamline the integration of the
LeasePak lease portfolio management system with best-of-breed third-party tools
and enterprise applications. Designed to work with web services as well as
with
the client-server architecture, LinkIT streamlines application integration
and
reduces version-maintenance overhead.
Doc
IT-
The integrated document generation for LeasePak auto-generates the letters
and
documents required to book and finalize a deal. Using customer private-label
graphics and customer existing document formatting, LeasePak generates letters
and documents, delivers them, and archives them for instant access throughout
the life of the contract, asset, and customer relationship.
View
IT-
A complete business intelligence toolset to give the customer the information
required to monitor its lease/loan portfolios. ViewIT provides streamlined
strategic reporting, easy-to-use ad-hoc reporting, plus a data warehouse and
executive dashboard to identify trends, manage risk, and assure compliance
for
using real-time strategic information.
Serv
IT-
LeasePak’s customer web portal enables users to offer customers the convenience
of web-based account self-management. The lessor benefits from reduced help
desk
costs as customers use the web to, amongst other tasks, check payments, update
account information, and request payoff quotes.
AcquireIT
- A powerful data management and business development tool that enhances the
ability of LeasePak users to generate business with each other. This add-on
allows equipment leasing entities to greatly reduce the overhead in time and
resources required to buy and sell aggregated contracts and/or portfolios,
giving LeasePak users a competitive advantage over users of other portfolio
management systems.
With
the
release of LeasePak 6.0, users have new options for navigation and reporting.
Additionally, new capabilities have been incorporated into the
product:
· Business
Development
Module: Streamlines the exchange of aggregated finance contract portfolios
between LeasePak users.
· Commercial
Lending Module:
Adds core functionality for the management of commercial loans.
· Asset
Focus Module:
Provides new options for users to enhance asset accounting and reporting
options.
NetSol
Technology Institute
Recently
started by the Company, and formerly NetSol Omni, the NetSol Technology
Institute (NTI) has been started with the goal of playing a vital role in the
transition phase of the Pakistan IT industry by creating a pool of skilled
IT
human resources. NTI is aimed at building a strong educational base, initially
as an institute, then branching out either as a wholly owned chain or franchise.
NTI offers specialized career oriented trainings and workshops on the latest
tools and technologies. The curriculum is based on current and future industry
needs and resource requirements. The instructors are industry practitioners
sharing their personal experiences during the training. NTI delivers training
on
different platforms including in-house training and third party arrangements.
We
hope to enter into collaborations with international industry consortiums for
endorsement of our trainings.
Outsourcing
Services-Extended Innovation (EI)
In
November 2004, the Company entered into a joint venture agreement with The
Innovation Group (“TiG”) whereby the TIG-NetSol (Pvt) Ltd., now Extended
Innovation (EI) a Pakistani company, provides support services enabling TiG
to
scale solution delivery operations in key growth markets. TiG-NetSol operations
are centered in NetSol’s IT Village, Lahore, Pakistan. NetSol owns a majority of
the venture. The entities share in the profits of the joint venture on the
basis
of their shareholding. The outsourcing model between TiG and NetSol involves
services pertaining to business analyses, configuration, testing, software
quality assurance (SQA), technical communication as well as project management
for TiG software. Initiated with a 10 person outsourcing team in Lahore in
February 2005, this arrangement has extended to a 120 person team in June 2007
with the additional resources catering to the increased influx of outsourcing
of
configuration and testing assignments from TiG.
Prominent
TiG customers being serviced from EI include Allstate Insurance Canada, Avis
Budget Car Rental Group USA, Norwich Union UK, Hertz UK, Aviva Canada,
Erinaceous UK amongst others. Backed up by a dedicated 4Mbps fiber optic
link and an additional 2Mbps wireless backup link for communication and
teleconferencing, this arrangement will allow NetSol’s human resources to
efficiently and effectively respond to additional outsourcing and offshore
configuration work.
Growth
Through Acquisition and Alliance
On
June
30, 2006, NetSol completed its acquisition of McCue Systems, Inc., a California
corporation (now NetSol McCue, Inc.). NetSol McCue 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. With common customers and common goals, we believe the acquisition
of NetSol McCue provides a complimentary North American presence to our global
offering of software and services to the lease and finance industry. NetSol
McCue is expected to contribute about 25% of U.S. based revenue to the NetSol
group revenue in 2008. Netsol now has a solid US operation based in Burlingame,
California with over 40 key and established customers in North .America and
a
very seasoned team of 40 personnel led by the founder John McCue as the
President of North American Operations.
Our
recent acquisitions mark the implementation of our mergers and acquisition
plan
developed in mid-2004. In this plan, NetSol management identified mergers and
acquisitions as potential methods of capitalizing on the demand of the Company’s
flagship product, LeaseSoft, on infiltrating previously untapped or under-tapped
markets, and as a means of launching its treasury banking software systems.
The
completion of these acquisitions now provides NetSol with positioning as the
only software supplier in the leasing space with a global footprint of installed
customers in each geographic region throughout the world. This, together with
the visible turnaround in the services and outsourcing sectors in global
markets, led to a growth strategy encompassing both organic growth and mergers
and acquisitions. While the calendar year 2004, focused on capitalizing on
organic growth and investing in building up the Company’s marketing and sales
organization, the early part of 2005 saw a renewed focus on mergers and
acquisitions.
The
Company continues to explore mergers and acquisition opportunities with a focus
on strategic acquisitions that provide immediate, strong, bottom line benefits.
Management believes that an ideal target will fulfill one or many of these
criteria: geographic synergy/providing a foot print in a market; unique and/or
complimentary product lines; or complimentary or target customers in a
previously untapped market. While there is no guaranty that an acquisition
which
appears to be sound will ultimately benefit the Company, management continues
to
analyze the price, value and market of any potential target. The model of
targeting well established, profitable product companies, within NetSol’s
domain, management believes, has proven successful with the both the CQ and
McCue acquisition. Management believes this model can be replicated over the
next three years.
Growth
through Establishing Partners Network
NetSol
is
well aware that market reach is essential to effectively market IT products
and
services around the globe. For this purpose, the Company is looking forward
to
establishing a network of partners worldwide. These companies will represent
NetSol in their respective countries and will develop business for NetSol.
Keeping these strategic objectives in view, NetSol has entered into a mutually
non-exclusive agreement with Singapore Computer Systems (SCS) that allows SCS
to
market LeaseSoft in the entire Asia Pacific region.
NetSol
is
a member of the world’s largest equipment leasing association, the Equipment
Finance Leasing Association of North America or ELA. Boasting more than 1,000
members, the ELA is a strong presence in this $250 billion North American
market. Our U.S. Operations CEO, John McCue, is a member of the board of
trustees of the Equipment Leasing and Finance Foundation, the U.S. equipment
leasing industry’s most important reports and periodical journal.
Strategic
Alliances
With
its
leadership position in technology and software development in Pakistan, NetSol
has been actively involved in a number of partnerships with multiple
international entities and corporations. These include joint ventures, systems
integration, local services, as well as consulting for large enterprises. Some
of NetSol’s partners in Pakistan are:
· Oracle
· Infor
/
Datastream
· SunGard
· Intaero
· Intel
· Microsoft
Gold Partner
· IBM
· Sun
Microsystems
· HP
· Internet
Security Systems
· FileNet
· Business
Objects
· DaimlerChrysler
Services
· Innovation
Group PLC UK
U.S.
and
UK partners include Field Solutions, Group 88 and Lease Dimensions.
LeaseSoft
is recognized as a Solution Blueprint by Intel Corporation. Intel has very
stringent technical and market potential criteria for marking a solution as
solution blueprint. The document is also available online from Intel’s website
http://www.intel.com/business/bss/solutions/blueprints/industry/finance/index.htm
NetSol
and Intel Corporation have a strategic relationship that would potentially
permit NetSol to market its core product, ‘LeaseSoft’, through Intel websites.
In a joint press release made earlier in 2004, by both NetSol and Intel, both
companies would deliver a new Solution Blueprint for its core leasing solution.
With the collaboration to create a world-class blueprint for the leasing and
finance industry, deployment should become even faster and smoother for our
customers. Intel's website defines Intel’s Solution Blueprints as detailed
technical documents that define pre-configured, repeatable solutions based
on
successful real-world implementations. Built on Intel® architecture and flexible
building block components, these solutions help deliver increased customer
satisfaction, lower operating costs, and better productivity.
DaimlerChrysler
Services Asia Pacific has established an “Application Support Center (ASC)” in
Singapore to facilitate the regional companies in LeaseSoft related matters.
This support center is powered by highly qualified technical and business
personnel. ASC LeaseSoft in conjunction with NetSol Technologies Ltd. Lahore
are
supporting DCS companies in seven different countries in Asia and this list
can
increase as other DCS companies from other countries may also opt for LeaseSoft.
In June 2004, the Company entered into a Frame Agreement with DaimlerChrysler
AG. This agreement, which serves as a base line agreement for use of the
LeaseSoft products by DaimlerChrysler Services AG companies and affiliated
companies, represents an endorsement of the LeaseSoft product line and the
capabilities of NetSol to worldwide DaimlerChrysler Financial Services (DCFS)
entities. This endorsement has had a tremendous impact on our perspective
customers, it has helped our sales and Business Development personnel to market
and sell our LeaseSoft solution to blue chip customers around the world. This
relationship has resulted in new agreements with DCFS and has served as a
marketing source which has resulted in agreements with companies such as Toyota
and BMW.
EMEA’s
strategic relationship with Field Solutions opened the Company’s opportunity to
increase product sales of Evolve, particularly for brokers looking to start
their own book. The Field Solutions strategic relationship has now been expanded
through collaboration on Sales Pricing Tools to facilitate tax based leasing
operations in the middle to big ticket market segment, further extending the
regions’ product and market reach.
Technical
Affiliations
The
Company currently has technical affiliations as: a MicroSoft Certified GOLD
Partner; a member of the Intel Solution blueprint Program; IBM Business Partner
and, an Oracle Certified Partner.
Marketing
and Selling
The
Marketing Program
NetSol
management continues its optimism that the Company will experience ever
increasing opportunities for its product offerings in 2008 and beyond. The
Company is aggressively growing the marketing and sales organizations in the
United Kingdom, in conjunction with NetSol-CQ, in Pakistan and, with NetSol
McCue, in the USA. Management believes that the year 2008 will follow 2006
and
2007 as a year for continued growth, the launching of footprints in new markets,
and penetration of established markets such as North America, Asia Pacific
and
Europe.
While
affiliations and partnering resulted in potential growth for the Company,
marketing and selling remain essential to building Company revenue. The
objective of the Company's marketing program is to create and sustain preference
and loyalty for NetSol as a leading provider of enterprise solutions, e-services
consulting, and software solutions. Marketing is performed at the corporate
and
business unit levels. The corporate marketing department has overall
responsibility for communications, advertising, public relations and the website
and, also engineers and oversees central marketing and communications programs
for use by each of the business units.
A
number
of new marketing initiatives have either been launched or are in the pipeline.
These programs are designed to create brand awareness and to deliver our message
directly to our target group. As the company has evolved in the past three
years, the number of product and service offerings has grown manifolds. The
depth and breadth of our products and services would be more effectively
marketed by participation in more industry events, advertising, holding
seminars, delivering keynote addresses and creating more channel distribution.
Our key marketing initiatives have been designed to transition the brand equity
built by the NetSol McCue and NetSol-CQ brands to the Company as a
whole.
Our
dedicated marketing personnel, within the business units, undertake a variety
of
marketing activities, including sponsoring focused client events to demonstrate
our skills and products, sponsoring and participating in targeted conferences
and holding private briefings with individual companies. We believe that the
industry focus of our sales professionals and our business unit marketing
personnel enhances their knowledge and expertise in these industries and will
generate additional client engagements. As the US technology market gradually
improves, NetSol marketing teams are concentrating on the markets overseas
with
cautious entry into the US market.
The
Markets
NetSol
provides its services primarily to clients in global commercial industries.
In
the global commercial area, the Company's service offerings are marketed to
clients in a wide array of industries including, automotive, chemical, textiles,
Internet marketing, software, medical, banks, higher education and
telecommunication associations, and, financial services.
Geographically,
NetSol has operations on the West Coast of the United States, Central Asia,
Europe, and Asia Pacific regions.
During
the last two fiscal years, the Company's revenue mix by major markets was as
follows:
|
|
2007
|
|
2006
|
|
Asia
Pacific Region (NetSol Technolgies, Ltd., NetSol TiG,
Abraxas)
|
|
|
61.04
|
%
|
|
55.34
|
%
|
Europe
(NetSol-CQ, UK Ltd.)
|
|
|
18.72
|
%
|
|
39.67
|
%
|
North
America (NetSol Technologies, Inc., NetSol McCue)
|
|
|
16.92
|
%
|
|
0.24
|
%
|
Telecom
Sector (NetSol Connect)
|
|
|
3.32
|
%
|
|
4.75
|
%
|
Total
Revenues
|
|
|
100.00
|
%
|
|
100.00
|
%
|
Fiscal
Year 2006-2007 Performance Overview
The
Company has effectively expanded its development base and technical capabilities
by training its programmers to provide customized IT solutions in many other
sectors and not limiting itself to the lease and finance industry.
NetSol
Technologies Ltd. (“PK Tech”)
Our
off-shore development facility continues to perform strongly and has enhanced
its capabilities and expanded its sales and marketing activities. In May 2004,
NetSol inaugurated its newly built Technology Campus in Lahore, Pakistan. The
state-of-the-art, NetSol building currently houses over 600 employees and has
become the engine of NetSol’s business model providing world class IT talent and
a cost arbitrage that is attractive to western customers. This state of the
art
technology campus has become the envy of the industry as being the only and
first CMMi level 5 company in Pakistan.
The
Lahore operation supports the worldwide customer base of the LeaseSoft suite
of
products and all other product offerings. NetSol has continued to lend support
to the Lahore subsidiary to further develop its quality initiatives and
infrastructure. The development facility in Pakistan, being the engine which
drives NetSol worldwide, continues to be the major source of revenue generation.
The Pakistan operation contributed 51% of the 2007 revenues with $14.8 million
in revenues for the current year with a net profit of $4.7 million before
adjusting the minority interest. This was accomplished primarily through export
of IT services and product licensed to both the domestic and overseas
markets.
While
available to support its product and services base on a world-wide basis, NetSol
Technologies Ltd.’s selling and marketing efforts are focused on Asia Pacific,
China and Middle East. In China, the company has established a business office
in the capital city of Beijing from which it expects to have more business
in
the future. A new business office in Bangkok, Thailand, was added in order
to
provide business and technical support for the Company’s Thai based customers.
NetSol
has signed on new customers for LeaseSoft as well as for bespoke development
services. For LeaseSoft the following new projects were earned by the Company:
· |
11
new implementation contracts signed during the
year.
|
· |
Of
these, 7 new contracts signed during the fourth
quarter.
|
· |
New
names in the customer list, including Fiat Automotive Finance, CNH
Capital, and a large automotive blue chip company in
China.
|
· |
The
addition of the Fleet Management System to the LeaseSoft
Suite.
|
The
current LeaseSoft client base includes DaimlerChrysler Financial Services
(Australia, Japan, New Zealand, Singapore, South Korea, Thailand, China and
Taiwan), Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota
Motors Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank,
Finlease Company Limited, CNH Capital Australia, Fiat Automotive Finance China,
a Large Automotive Blue chip Company in China, and BMW Financial Services in
China.
Information
technology services are valuable only if they fulfill the business strategy
and
project objectives set forth by the customer. NetSol’s expert consultants have
the technical knowledge and business experience to ensure the optimization
of
the development process in alignment with basic business principles. The Company
offers a broad array of professional services to clients in the global
commercial markets and specializes in the application of advanced and complex
IT
enterprise solutions to achieve its customers' strategic objectives. Its service
offerings include IT Consulting & Services; NetSol Defense Division;
Business Intelligence, Information Security, Outsourcing Services and Software
Process Improvement Consulting; maintenance and support of existing systems;
and, project management.
EMEA
NetSol
Technologies Limited, the Company’s UK subsidiary, was formed in fiscal 2003.
Located in the heart of London, one of the world’s major banking and finance
centers, the subsidiary is responsible for the Company’s activities in the UK,
Europe and Middle East, and ongoing marketing and sales of the LeaseSoft
portfolio of leasing solutions, and NetSol’s range of on and off-shore IT
services.
In
February 2005, NetSol acquired 100% of CQ Systems Ltd., (“NetSol-CQ”) an IT
products and service company based in the UK. As a result of this acquisition,
NetSol has access to a broad European customer base using IT solutions
complementary to NetSol’s LeaseSoft product. NetSol plans to leverage CQ’
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 NetSol gain immediate recognition and positioning
for the LeaseSoft suite of products.
NetSol-CQ’s
integration has included the continued leverage of the Company’s high quality
but lower cost resources in its offshore development center in Lahore, Pakistan.
This phase of the transition plan has been completed whereby a dedicated team
of
software engineers and testers have been trained on CQ product suite and most
of
the quality assurance, documentation and some of the CQ products core software
development activities have been transitioned to Lahore. NetSol-CQ has been
able
to implement significant productivity and cost improvements which have included
realizing the higher level of cost efficiencies of using the Lahore offshore
facility for software development and quality assurance.
In
November 2005, CQ was re-branded as NetSol-CQ and was launched into the UK
market with new branding and logo. This was part of a global strategy to have
consistency in our marketing collateral across the globe. All NetSol-CQ products
have been re-branded as LeaseSoft and the Enterprise product would now be known
as LeaseSoft Asset.
Like
all
NetSol companies, NetSol-CQ has seen its sales and revenues focus increasingly
on total client services rather than on a purely, one-off, product based model.
Roughly two-thirds of the new sales for NetSol-CQ came from products which
did
not exist when CQ was purchased by NetSol. The total client services model
has
seen an expansion from a solely back office based product to a greater front
office focus. This front office focus tends to be highly customized as the
initial interface for the customer. NetSol-CQ’s auto decision component was
developed sooner than any competitors, and together with its web-based portal,
is one of the many front ends solutions that NetSol-CQ is implementing.
NetSol
will continue to manage LeaseSoft pre-sales support and deliveries by having
two
specialized pools of resources for each of the five products under LeaseSoft.
One group focuses on software development required for customization and
enhancements. The second group comprises of LeaseSoft consultants concentrating
on implementation and onsite support. Both groups are being continually trained
in the domain of finance and leasing, system functionality, communication
skills, organizational behavior and client management.
The
combined EMEA group contributed approximately $5.5 million in revenues during
the current fiscal year or 19% of the Company’s revenues. The total net loss
was, approximately, $832,000.
A
few of
EMEA’s recently signed agreements include:
*
A major
European bank agreed to acquire our premium finance broker portal in June 2007
and is set to go live before the end of calendar year 2007.
*
Kaupthing Singer and Friedlander (“KSFPF”) selected NetSol-CQ to develop a fully
integrated credit card payment and refund facilities. This project went live
in
fiscal 2007.
North
America - NetSol McCue
NetSol
McCue (formerly 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, NetSol McCue offers the LeasePak Bronze,
Silver and Gold Editions for systems and portfolios of virtually all sizes
and
complexities. These 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. NetSol customers include
such companies as Cisco, Hyundai, JP Morgan/Chase, KeyCorp Leasing, City
National Bank, Bank of Tokyo Mitsubishi, La Salle National Bank, Terex Corp.,
National City Capital Corp., ORIX, and Volkswagen Credit.
NetSol
McCue experienced a large number of upgrades from LeasePak to LeasePak 6.0
by
Volkswagen Credit, Terex Corportion, LeaseDimensions, Inc., Group 88 Consulting,
Key Equipment Finance, a Fortune 50 Blue-Chip worldwide IT provider, a major
Fortune 100 bank, a major Korean auto manufacturer, and a major Fortune 500
bank.
NetSol
McCue contributed approximately $5.0 million in revenues during the current
fiscal year or 17% of the Company’s revenues. The total net profit was,
approximately, $39,000.
TIG-NetSol
(Pvt) Limited, Joint Venture - Extended Innovation
The
joint
venture of NetSol with a UK based IT solutions provider TiG, Plc. contributed
approximately $2.6 million in revenue during the current fiscal year or 9%
of
the Company’s revenues. The total net profit was, approximately, $1.4 million
before adjusting for the 49.9% minority interest in earnings.
In
November 2004, the Company entered into a joint venture agreement with The
Innovation Group (“TiG”) whereby the TIG-NetSol (Pvt) Ltd., now Extended
Innovation a Pakistani company, provides support services enabling TiG to scale
solution delivery operations in key growth markets. TiG-NetSol operations are
centered in NetSol’s IT Village, Lahore, Pakistan. NetSol owns 50.52 percent of
the new venture, with TiG owning the remaining 49.48 percent. The entities
share
in the profits of the joint venture on the basis of their shareholding. The
outsourcing model between TiG and NetSol involves services pertaining to
business analyses, configuration, testing, software quality assurance (SQA),
technical communication as well as project management for TiG software.
Initiated with a 10 person outsourcing team in Lahore in February 2005, this
arrangement has extended to a 120 person team in June 2007 with the additional
resources catering to the increased influx of outsourcing of configuration
and
testing assignments from TiG.
Prominent
TiG customers being serviced from EI include Allstate Insurance Canada, Avis
Budget Car Rental Group USA, Norwich Union UK, Hertz UK, Aviva Canada,
Erinaceous UK and many others. Backed up by a dedicated 4Mbps fiber optic link
and an additional 2Mbps wireless backup link for communication and
teleconferencing, this arrangement will allow NetSol’s human resources to
efficiently and effectively respond to additional outsourcing and offshore
configuration work.
NetSol
Connect (Pvt) Limited
In
August
2003, NetSol entered into an agreement with United Kingdom based Akhter Group
PLC (Akhter). Under the terms of the agreement, Akhter Group acquired 49.9%
of
the Company’s subsidiary; Pakistan based NetSol Connect (Pvt) Ltd., an Internet
service provider (ISP) in Pakistan. In fiscal year 2004, NetSol Connect steadily
grew its presence in three cities (Karachi, Lahore and Islamabad) by acquiring
a
small Internet online company called Raabta Online. This created a national
presence for wireless broadband business in key markets that have experienced
explosive growth. NetSol Connect with its new laser and wireless technologies
has a potential to become a major brand in Pakistan. The partnership with Akhter
Computers is designed to rollout the services of connectivity and wireless
to
the Pakistani national market.
NetSol
Connect (Pvt) Ltd. will continue to seek to grow revenues. The revenue
contribution for NetSol Connect was $972,000 or about 3% of 2007 revenues.
The
total net loss was $57,000 before adjusting the minority interest in
losses.
LeaseSoft
Sales
NetSol
has signed on new customers for LeaseSoft as well as for bespoke development
services. For LeaseSoft the following new projects were earned by the Company:
· |
11
new implementation contracts signed during the
year.
|
· |
Of
these, 7 new contracts signed during the fourth
quarter.
|
· |
New
names in the customer list, including Fiat Automotive Finance, CNH
Capital, and a large automotive blue chip company in
China.
|
· |
The
addition of the Fleet Management System to the LeaseSoft
Suite.
|
The
current LeaseSoft client base includes DaimlerChrysler Financial Services
(Australia, Japan, New Zealand, Singapore, South Korea, Thailand, China and
Taiwan), Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota
Motors Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank,
Finlease Company Limited, CNH Capital Australia, Fiat Automotive Finance China,
Large Automotive Bluechip Company in China and BMW Financial Services in China.
Technology
Campus
Due
to
the Company’s large domestic and international growth, the NetSol development
infrastructure has required expansion. Management and the Board have approved
the construction of a new structure behind the current NetSol tower in Lahore.
The new building will have potential to accommodate an additional 1,000 plus
engineers and programmers. We are at a designing and permit processing stage.
The estimated time for completion is mid-2009 and we have budgeted for the
capital expenditures required for this expansion. Meanwhile, we
have acquired offices adjacent to our campus to meet the growing demand and
backlog for next 18 months. We expect to move into this space in mid-September
2007 to accommodate the growth in personnel.
The
original Technology Campus was completed in May 2004 and the Lahore operations
relocated to the facilities in May 2004. The facility was formally inaugurated
by the Prime Minister of Pakistan H.E. Shaukat Aziz on March 4, 2005. By
relocating the entire Lahore operation from its previously leased premises
to
the Campus, the Company saves approximately $150,000 annually. The campus has
been declared a Software Technology Park by the Government of Pakistan. The
Government has also financed the linking of the campus with the high speed
fiber
optic backbone capable of providing 155 MB internet bandwidth. The Internet
bandwidth is effectively utilized to offer state of the art video conferencing
and VOIP (Voice over IP) facilities for effective and seamless communication
with our global customer base. Encompassing a covered area of more than 55,000
square feet and housing over 600 professionals, this is one of the largest
such
facilities for IT services in the region. In addition to being the headquarters
for NetSol’s subsidiaries in Pakistan, it also serves the NetSol group’s global
services and products development facility. The CMMi Level 5 rated facility
ensures quality engineering practices to its clients across the globe. The
campus site is located in Pakistan's second largest city, Lahore, with a
population of six million. An educational and cultural center, the city is
home
to most of the leading technology oriented academia of Pakistan including names
like LUMS, NU-FAST & UET. These institutions are also the source of quality
IT resources for the Company. Lahore is a modern city with very good
communication and solid infrastructure and road network. The Technology campus
is located at about a 5-minute drive from the newly constructed advanced and
high-tech Lahore International Airport. This campus is the first purpose built
software building with state of the art technology and communications
infrastructure in Pakistan. The investment made by the company in developing
this technology campus is proving to be highly effective in attracting new
business not only from global blue chip customers but also from the fast
developing Pakistan market.
People
and Culture
The
Company believes it has developed a strong corporate culture that is critical
to
its success. Its key values are delivering world-class quality software,
client-focused timely delivery, leadership, long-term relationships, creativity,
openness and transparency and professional growth. The services provided by
NetSol require proficiency in many fields, such as software engineering, project
management, business analysis, technical writing, sales and marketing,
communication and presentation skills. Every one of our software developers
is
proficient in the English language. English is the second most spoken language
in Pakistan and is mandatory in middle and high schools.
To
encourage all employees to build on our core values, we reward teamwork and
promote individuals who demonstrate these values. NetSol offers all of its
employees the opportunity to participate in its stock option program. Also,
the
Company has an intensive orientation program for new employees to introduce
our
core values and a number of internal communications and training initiatives
defining and promoting these core values. We believe that our growth and success
are attributable in large part to the high caliber of our employees and our
commitment to maintain the values on which our success has been based. NetSol
worldwide is an equal opportunity employer. NetSol attracts professionals not
just from Pakistan, where it is very well known, but also IT professionals
living overseas.
Management
believes it has been successful in capitalizing on the “Reverse Brain Drain”
phenomenon whereby it has been able to attract and retain highly qualified
and
suitably experienced IT and management professionals working overseas and
returning to Pakistan. These include senior management as well as software
development professionals that directly contribute to the organization’s
improvement of various engineering processes and procedures at NetSol.
NetSol
believes it has gathered, over the course of many years, a team of very loyal,
dedicated and committed employees. Their continuous support and belief in the
management has been demonstrated by their further investment of cash. Most
of
these employees have exercised their millions of stock options during very
difficult times for the Company. Management believes that its employees are
the
most invaluable asset of NetSol. The Company’s survival in the most challenging
times is due, in part, to their dedication towards continuous achievement of
highest quality standards and customer satisfaction. With each acquisition,
NetSol is able to combine both work forces.
Overall,
NetSol as a global IT company has over 30% female employees with the biggest
concentration in our development facility in Lahore and in the U.S.
headquarters. The Company is an equal opportunity employer. Being a successful
company with a well respected name in the business community, NetSol encourages
its employees to actively participate and contribute to charitable contributions
for catastrophic tragedies such as Tsunami disaster and the Gulf Coast disaster
caused by Katrina Hurricane in the US and the October 2005 earthquake in
Pakistan.
There
is
significant competition for employees with the skills required to perform the
services we offer. The company runs an elaborate training program for different
cadre of employees ranging from technical knowledge, business domains as well
as
communication, management and leadership skills. The Company believes that
it
has been successful in its efforts to attract and retain the highest level
of
talent available, in part because of the emphasis on core values, training
and
professional growth. We intend to continue to recruit, hire and promote
employees who share this vision.
As
of
June 30, 2007, we had 766 full-time employees; comprised of 553 IT project
and
technical personnel in Pakistan, UK, Australia, and US; and 213 non-IT personnel
in Pakistan, UK, Australia and US. The non-IT personnel include 59 employees
in
management, 49 employees in sales and marketing, 28 employees in accounting,
18
in customer support, and 59 in general and administration. There are a total
of
59 part-time employees. None of our employees are subject to a collective
bargaining agreement. Our telecom subsidiary NetSol Connect has 113 full time
employees based in Karachi, Pakistan, which are included in the total full-time
employee count.
Competition
Neither
a
single company nor a small number of companies dominate the IT market in the
space in which the Company competes. A substantial number of companies offer
services that overlap and are competitive with those offered by NetSol. Some
of
these are large industrial firms, including computer manufacturers and computer
consulting firms that have greater financial resources than NetSol and, in
some
cases, may have greater capacity to perform services similar to those provided
by NetSol.
In
the
LeaseSoft business space, the barriers to entry are getting higher. The products
are getting more cutting edge and richness in functionality is paramount. Older
companies have prolonged the life of their legacy products by creating web-based
front ends, while the core of the systems has not been re-engineered.
Our
competitors have not been as active in mergers and acquisitions as NetSol.
This
is mostly due to lack of funding for such acquisitions as most of the companies
are privately held. Start ups have to gain traction over several years to make
their products more robust and scalable and therefore find it difficult to
compete on price and functionality. Additionally, our competition mostly are
based in high cost locations in the US, UK and Europe as opposed to NetSol
with
its facility in Lahore. NetSol is now the only company in the leasing and
finance solution space that provides regional solutions in North America, Europe
and Asia Pacific. In addition, it is the only company in this space that is
publicly listed and provides an offshore development infrastructure with CMMi
level 5 accreditation.
Some
of
the competitors of the Company are International Decisions Systems, EDW, Data
Scan, AIPAC, CHP, KPMG, LMK Resources, Systems Innovation (Si3), Bearing Point,
Kalsoft, Systems Limited, Oratech Pakistan, TechAccess Pakistan a few others.
These companies are scattered worldwide geographically. In terms of offshore
development, we are in competition with some of the Indian companies such as
Wipro, HCL, TCS, InfoSys, Satyam Infoway and others. Many of the competitors
of
NetSol have longer operating history, larger client bases, and longer
relationships with clients, greater brand or name recognition and significantly
greater financial, technical, and public relations resources than NetSol.
Existing or future competitors may develop or offer services that are comparable
or superior to ours at a lower price, which could have a material adverse effect
on our business, financial condition and results of operations.
Customers
Some
of
the customers of NetSol include: DaimlerChrysler Financial Services (Australia,
Japan, New Zealand, Singapore, South Korea, Thailand, China and Taiwan),
Mercedes-Benz Finance Japan, Yamaha Motors Finance Australia, Toyota Motors
Finance China, Toyota Leasing Thailand, Mauritius Commercial Bank, Finlease
Company Limited, CNH Capital Australia, Fiat Automotive Finance China, a large
automotive bluechip company in China and BMW Financial Services in China. In
addition, NetSol provides offshore development and testing services to The
Innovation Group Plc UK and their blue chip global insurance giants like
Allstate, Cendent, etc. NetSol is also a strategic business partner for
DaimlerChrysler (which consists of a group of many companies), which accounts
for approximately 2% of our revenue. Toyota
Motors (which consists of a group of many companies) accounts for approximately
9% of our revenues.
No
single client represents more than 10% of the revenue for the fiscal year ended
June 30, 2007.
Some
NetSol McCue, U.S. customers include: Volkswagen Credit U.S. & Canada; Cisco
Capital; Hyundai Motor Finance; Keycorp Leasing; Bank of Tokyo Mitsubishi;
Chase
Equipment Finance; National City Commercial Credit; City National Bank; and,
Terex Corporation. No individual NetSol McCue customer represents more than
10%
of the revenues for the Company for the fiscal year ended June 30,
2007
As
compared to the previous year, NetSol Technologies, Ltd. was able to materialize
a number of services contracts within the local Pakistani public and defense
sectors. An important aspect of these contracts is that not all of them were
solely focusing on software development and engineering. This year, NetSol,
has
gone a step further by providing consultancy services to organizations so as
to
improve their quality of operations and services in addition to winning
strategically important assignments within the E-Governance domain for
organizations of national significance in Pakistan, including, Prime Minister’s
office and the lower and upper houses of Parliament. These clients include
private as well as public sector enterprises. Also, NetSol was successful in
consolidating its standing as one of the preferred solutions provider for the
Military sector and Defense organizations. The NetSol service portfolio has
now
diversified into a comprehensive supply chain of end to end services and
solutions catering to BPR, consultancies, applications development, and systems
engineering integration as well as other supporting processes for turnkey
projects.
Web
Presence
The
Company is committed to regaining and extending the advantages of its direct
model approach by moving even greater volumes of product sales, service and
support to the Internet. The Internet provides greater convenience and
efficiency to customers and, in turn, to the Company. The Company receives
150,000 hits per month to www.NetSoltek.com.
The
Company also maintains a product specific website for LeaseSoft at www.leasesoft.biz
and
regional websites for NetSol Pakistan at www.netsolpk.com; NetSol-CQ at
www.netsolcq.com;
and,
NetSol McCue at www.netsol-mccue.com.
NetSol’s
software development and SQA team as well as its clients use its web based
customer relationship management solution (HelpDesk) for timely and direct
communication during the support and maintenance phases of Through its Web
sites, customers, potential customers and investors can access a wide range
of
information about the Company's product offerings, can configure and purchase
systems on-line, and can access volumes of support and technical information
about the Company. More details can be found on http://www.netsolhelp.com.
Operations
The
Company's headquarters are in Calabasas, California. Nearly 80% of the
production and development is carried out at NetSol’s technology campus in
Lahore, Pakistan. The other 20% of development is conducted in the Proximity
Development Center or "PDC" in Horsham, UK and the U.S. development facility
located in the Silicon Valley area of California. The marketing effort is shared
and coordinated between the primary divisions operating at NetSol Technologies
Ltd. in Lahore, Pakistan; NetSol UK, NetSol-CQ in the UK; and NetSol McCue
in
the U.S. US marketing operations are conducted through the parent and NetSol
McCue. These are the core operating companies engaged in developing and
marketing IT solutions and software development and marketing. An initiative
is
underway to unify the look and feel of all advertising, branding and marketing
material.
NetSol
UK, together with NetSol-CQ, services and supports the clients in the UK and
Europe. NetSol PK services and supports the customers in the Asia Pacific and
South Asia regions. NetSol McCue, together with the parent, supports all of
the
North American customers.
Approximately
80% of programming and development occurs at NetSol’s world class and state of
the art technology campus in Lahore, Pakistan. This facility which is the engine
and nerve center for NetSol was awarded the highest gold standard of CMMi level
5 in 2006. Despite global unrest due to the Iraq war and international
terrorism, as well as economic pressure due to skyrocketing oil prices, the
economy of Pakistan has made a positive turn around. The economy of Pakistan
has
grown to over 8.6% in 2006 and over 8% in 2007 and it is expected to sustain
the
same trend for years to come. According to government figures, over the past
four years, economic growth has averaged 7%; making Pakistan one of Asia’s
fastest growing economies. For the first time in the history of Pakistan, the
foreign exchange reserve has exceeded $15 billion in comparison with just below
$2 billion in 2000. There has been a massive surge in FDI or foreign direct
investments in Pakistan by foreigners. These investments have been in many
sectors, including: industrial infrastructure, telecom, oil & gas, stock
market and real estate. The stock market in Pakistan is the most bullish in
the
Asia Pacific region with market growth over 10 times to date (Karachi Stock
Exchange on October 18, 2001 was at 1,103 points vs. about 12,500 recently).
Pakistan, now a close US ally, is recognized by the western world as becoming
very conducive and attractive for foreign collaboration and investments. The
breakthrough ‘thawing’ of relationships between Pakistan and its biggest
democratic neighbor, India, has stabilized the South East Asia region. This
environment has raised the comfort and confidence of foreign investors and
major
US and European corporations to enhance their businesses in Pakistan. Due to
many strategic measures and decisions by the government of Pakistan, the telecom
sector has been privatized. Several new foreign telecom giants have made some
serious investments in Pakistan. The biggest example is an U.A.E. based Telecom
giant ‘EITESALAAT’ which acquired 26% or management control of ‘PTCL’ a
government owned telecom company. Many other major state owned companies have
been privatized attracting several big name global names such as Telenor of
Norway and Warid Telecom of the Middle East. These companies have invested
billions in the telecom sector in Pakistan. This reflects a true potential
and
tremendous growth opportunities in Pakistan. There has been a surge of
international investors cashing on the growing privatization of some significant
national assets and state run industries. Last year, Pakistan received a record
$5.1 billion in foreign direct investments. A new class of entrepreneurs is
emerging in Pakistan, adding to the country’s economic boom. This projects a
very positive image and makes Pakistan a most conducive economy into which
to
invest. According to a report from World Bank ranking, most rank Pakistan as
the
60th
country
in the ease of doing business ahead of both China and India.
The
IT
and telecommunication sector is the fastest growing sector in Pakistan mostly
due to growing privatization, relaxed policies and a 15 year tax holiday on
IT
exports of services and products. These policies have strongly encouraged
companies, like NetSol, to enhance its infrastructure and develop a solid and
formidable team of IT professionals.
The
Company is in an extremely strong position to continue to use this offshore
model, which includes competitive price advantage to serve its customers. Due
to
all major improvements economically, politically and regionally, Pakistan’s
perception is improving drastically in recent months. A few major names such
as
Microsoft, Oracle, Cisco, Tata Consulting Services (India) and many other major
names have recently signed agreements for collaboration and alliances with
Pakistani companies. NetSol’s few major successes achieved in 2007 were:
* The
continued integration of NetSol McCue and NetSolCQ
*
5 new
clients added in China, became the biggest single market
*
A
turnaround in our Australian market adding new names such as CNH Australia
* Launch
of
Thailand office
*
Robust
growth of NetSol’s joint venture with TiG, over 120 programmers dedicated
*
Continued
addition of blue chip customers such as Terex Corp, Fiat, Toyota Financial,
IBM
Global and Investec
Major
US
banks and brokerage houses such as Lehman Brothers and Merrill Lynch have been
bullish on Pakistan’s economy as a whole and its IT sector in particular. Lehman
Brothers, in 2006-2007 issued an industry report covering IT and BPO space
in
the emerging markets of S.E. Asia under title ‘New New Markets’ and highlighted
Pakistan in general and NetSol in specific as the growth and emerging markets.
This report was based on extensive due diligence done by Lehman Brother’s
research group. The report projects Pakistan as a more favorable place to do
business and profiled NetSol as the best IT company. This report addresses
the
country risks quite fairly and rated as ‘favorable’ country to do business and
the next emerging IT destination. Merrill Lynch repeatedly favored the
opportunities in Pakistan and its future outlook. This is despite some recent
political uncertainties in the country.
Some
other US publications such as Newsweek, Asia Edition in March 2006 did an
extensive story on ‘Pakistan Promise’ also highlighting the economic
fundamentals and buoyancy with great optimism. NetSol was also profiled in
this
article as the fastest growing and the number one IT company there. In addition
there have been some very positive editorials in the Wall Street Journal and
other major US publications on the strong fundamentals of the Pakistan economy
lifting confidence of foreign investors and businesses. The $300 million grant
by the World Bank to reform the land recording system in the province of Punjab
further endorses the confidence of prestigious agencies.
Just
recently Moody’s International assessed Pakistan as less vulnerable than many
countries in the Asia Pacific region. Also, Standard & Poor’s rating on
Pakistan has been improved to positive. The present government has taken major
bold steps to attract new foreign investment and bolster the local economy.
The
confidence of the local investors and foreign investors has been undoubtedly
enhanced resulting in stronger demand of new listing in the stock markets.
The
specific successes achieved from the acquisitions of CQ Systems and McCue
Systems endorses the fact that Pakistan is a safe place to do business when
compared to many other troubled spots in the Middle East. Our NetSol TiG joint
venture represents the best example of not only NetSol’s capabilities but the
ability of a Pakistan based company to achieve off shore business model success
for a Western based company. This joint venture provides the major US and UK
customers of TiG-UK with world class service from NetSol Pakistan, enhancing
the
client’s productivity at much more attractive prices. Despite the overall
positive outlook for Pakistan, the company is quite prepared in any contingency
to use alternate development facilities located in Beijing (China), Horsham
(UK), Burlingame (USA) and Adelaide (Australia). These locations mitigate any
underlying risk due to any geopolitical crises.
Organization
NetSol
Technologies, Inc. (formerly NetSol International, Inc.) was founded in 1997
and
is organized as a Nevada corporation. The Company amended its Articles of
Incorporation on March 20, 2002 to change its name to NetSol Technologies,
Inc.
The
success of the Company, in the near term, will depend, in large part, on the
Company's ability to: (a) continue to grow revenues and improve profits, (b)
raise funds for continued operations and growth; (c) make a major entry in
the
US market and, (d) streamline sales and marketing efforts in the Asia Pacific
region, Europe, Japan and Australia. However, management's outlook for the
continuing operations, which has been consolidated and has been streamlined,
remains optimistic and bullish. With continued emphasis on a shift in product
mix towards the higher margin consulting services, the Company anticipates
to be
able to continue to improve operating results at its core by reducing costs
and
improving gross margins. Management is very excited and positive about a
seamless transition and integration of NetSol-CQ and NetSol McCue with NetSol
front end and back end operations.
Intellectual
Property
The
Company relies upon a combination of nondisclosure and other contractual
arrangements, as well as common law trade secret, copyright and trademark laws
to protect its proprietary rights. The Company enters into confidentiality
agreements with its employees, generally requires its consultants and clients
to
enter into these agreements, and limits access to and distribution of its
proprietary information. The NetSol logo and name, as well as the LeaseSoft
logo
and product name have been copyrighted and trademark registered in Pakistan.
The
Company intends to trademark and copyright its intellectual property as
necessary and in the appropriate jurisdictions.
Governmental
Approval and Regulation
Current
Company operations do not require specific governmental approvals. Like all
companies, including those with multinational subsidiaries, we are subject
to
the laws of the countries in which the Company maintains subsidiaries and
conducts operations. Pakistani law allows a tax exemption on income from exports
of IT services and products up to 2016. While foreign based companies may invest
in Pakistan, repatriation of their investment, in the form of dividends or
other
methods, requires approval of the State Bank of Pakistan. The present Pakistani
government has effectively reformed the policies and regulations effecting
foreign investors and multinational companies thus, making Pakistan an
attractive and friendly country in which to do business.
Research
and Development
In
anticipation of an upcoming World Bank funded program, NetSol Pakistan has
been
proactively undertaking a Research and Development exercise to develop a proof
of concept for “computerization of Land Records Management Information System
(LRMIS)”. NetSol’s LRMIS is developed after thorough evaluations of existing
manual system and client/user needs, detailed system analysis and process flow
definition. It automates various land record management registers and is
programmed to generate key reports on multiple parameters. Overall it provides
the benefits of timely data availability, data transparency and accuracy, cost
effectiveness, easy transaction tracking and better decision making using
IT-enablement in a field where its need is hugely felt. As of June 30, 2007,
the
Company has invested approximately $888,000 on this project.
ITEM
2 - PROPERTIES
Company
Facilities
The
Company’s headquarters have been located at 23901 Calabasas Road, Suite 2072,
Calabasas, CA 91302 since 2003. It is located in approximately 1,919 rentable
square feet, with a monthly rent of $4,754. The lease is a one-year lease
expiring in December 2007.
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,
China
|
|
|
431
|
|
|
General
Office
|
|
$
|
4,315
|
|
|
|
|
|
|
|
|
|
|
|
|
Burlingame,
CA (NetSol McCue)
|
|
|
8,089
|
|
|
Computer
and General Office
|
|
$
|
16,178
|
|
|
|
|
|
|
|
|
|
|
|
|
Horsham,
UK (NetSol-CQ)
|
|
|
6,570
|
|
|
Computer
and General Office
|
|
$
|
10,989
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
PK (Karachi Office)
|
|
|
1,883
|
|
|
General
Office
|
|
$
|
1,726
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
PK (Islamabad Office)
|
|
|
3,240
|
|
|
General
Office & Guest House
|
|
$
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
NetSol
(Rawalpindi Office)
|
|
|
1,112
|
|
|
General
Office
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
Thailand
|
|
|
285
|
|
|
Computer
and General Office
|
|
$
|
1,035
|
|
The
Australia lease is a three-year lease that expires in May 2008 and currently
is
rented at the rate of $1,380 per month. The Beijing lease is a two year lease
that expires in August 2009. The monthly rent is $4,315 per month. The Bangkok
lease is a one year lease with monthly rent of $1,035. The NetSol-CQ System
facilities, located in Horsham, United Kingdom, are leased until June 23, 2011
for an annual rent of £75,000 (approximately $144,900). NetSol McCue, Inc.,
located in Burlingame, California, premises are leased until June 30, 2009
with
a monthly rent of $16,178.
The
NetSol Karachi lease is a 3 year lease that expires on December 4, 2008 and
currently is rented at the rate of $1,726 per month. The NetSol Islamabad lease
is a 15 year lease that expires on August 31, 2016 and currently is rented
at
the rate of $1,417 per month. The NetSol Rawalpindi lease is a 2 year lease
that
expires on January 4, 2008 and currently is rented at the rate of $800 per
month.
Upon
expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space.
Lahore
Technology Campus
The
newly
built Technology Campus was inaugurated in Lahore, Pakistan in May 2004. This
facility consists of 50,000 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 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 has invested early 10 million Rupees (approximately
$150,000) to install fiber optic lines and improve the bandwidth for the
facility. In order to cater for future business expansion and taking advantage
of depressing real estate market, the company purchased two new cottages
adjacent to its main building. Total covered area of these cottages is 4,900
sq
feet and it cost was approximately $250,000. The management has moved its
accounts, finance, internal audit, company secretariat and costing and budgeting
department into these cottages. For the recreation of its valuable human
resources, the management has also established a gymnasium there.
ITEM
3 - LEGAL PROCEEDINGS
To
the
best knowledge of Company’s management and counsel, there is no material
litigation pending or threatened against the Company.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NetSol
conducted its annual meeting of shareholders on June 4, 2007. The following
are
the items that were voted upon:
1.
Election of Directors
The
following persons were elected directors of the Company to hold office until
the
next Annual General Meeting of the Shareholders. The following sets for the
voting tabulation for each director:
Director
|
|
Voted
|
|
Withhold
|
|
Percent
of Total Voted
|
|
Total
Shares Voted
|
|
Najeeb
Ghauri
|
|
|
17,643,179
|
|
|
283,037
|
|
|
98.36
|
|
|
17,926,216
|
|
Naeem
Ghauri
|
|
|
17,641,179
|
|
|
285,037
|
|
|
98.41
|
|
|
17,926,216
|
|
Salim
Ghauri
|
|
|
17,627,273
|
|
|
298,943
|
|
|
98.33
|
|
|
17,926,216
|
|
Shahid
Burki
|
|
|
17,629,232
|
|
|
296,984
|
|
|
98.34
|
|
|
17,926,216
|
|
Alexander
Shakow
|
|
|
17,643,198
|
|
|
283,018
|
|
|
98.31
|
|
|
17,926,216
|
|
|
|
|
17,622,798
|
|
|
302,418
|
|
|
98.31
|
|
|
17,926,216
|
|
Mark
Caton
|
|
|
17,635,755
|
|
|
290,461
|
|
|
98.38
|
|
|
17,926,216
|
|
2.
Ratification of Appointment of Auditors
Kabani
& Company Inc. was appointed as Auditors for the Company to hold office
until the close of the next annual general meeting of the Company. The directors
were authorized to fix the remuneration to be paid to the auditors. The
following sets forth the tabulation of the shares voting for this matter.
Total
Shares Voted
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Percent
|
|
17,926,216
|
|
|
17,650,809
|
|
|
297,302
|
|
|
25,534
|
|
|
98.46
|
%
|
PART
II
ITEM
5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS;
RECENT SALES OF UNREGISTERED SECURITIES
(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.
Fiscal
|
|
2005-2006
|
|
|
|
2004-2005
|
|
|
|
Quarter
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
(ended September 30)
|
|
|
2.22
|
|
|
1.42
|
|
|
2.36
|
|
|
1.65
|
|
2nd
(ended December 31)
|
|
|
1.94
|
|
|
1.32
|
|
|
2.39
|
|
|
1.70
|
|
|
|
|
2.00
|
|
|
1.31
|
|
|
2.19
|
|
|
1.75
|
|
4th
(ended June 30)
|
|
|
2.05
|
|
|
1.50
|
|
|
2.40
|
|
|
1.63
|
|
RECORD
HOLDERS - As of September 13, 2007, the number of holders of record of the
Company's common stock was 227. As of September 13, 2007, there were 21,374,922
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, 2007:
|
|
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
|
|
|
7,102,363
|
(1)
|
$
|
2.45
|
(2)
|
|
4,032,148
|
(3)
|
Equity
Compensation
Plans
not approved by
Security
holders
|
|
|
None
|
|
|
None
|
|
|
None
|
|
Total
|
|
|
7,102,363
|
|
$
|
2.45
|
|
|
4,032,148
|
|
(1) |
Consists
of 31,000 under the 2001 Incentive and Nonstatutory Stock Option
Plan;
972,000 under the 2002 Incentive and Nonstatutory Stock Option Plan;
745,000 under the 2003 Incentive and Nonstatutory Stock Option Plan;
3,574,363 under the 2004 Incentive and Nonstatutory Stock Option
Plan; and
1,780,000 under the 2005 Incentive and Nonstatutory Stock Option
Plan.
|
(2) |
The
weighted average of the options is
$2.60.
|
(3) |
Represents
812,148 available for issuance under the 2003 Incentive and Nonstatutory
Stock Option Plan; and, 3,220,000 available for issuance under the
2005
Incentive and Nonstatutory Stock Option Plan.
|
(b)
RECENT SALES OF UNREGISTERED SECURITIES
In
April
2007, the Company issued a total of 37,896 shares of common stock to two
consultants in exchange for services rendered. These shares were issued in
reliance on an exemption from registration available under Regulation S of
the
Securities Act of 1933, as amended.
During
the quarter ended June 30, 2007, holders of our Series A 7% Cumulative
Convertible Preferred Stock converted a total of 895 shares of preferred stock
into 587,878 shares of common stock. These shares were issued in reliance on
exemptions from registration available under Regulation D and Regulation S
of
the Securities Act of 1933, as amended.
During
the quarter ended June 30, 2007, holders of our Series A 7% Cumulative
Convertible Preferred Stock received 54,209 shares of common stock as payment
of
dividends due under the terms of the Certificate of Designation. These shares
were issued in reliance on exemptions from registration available under
Regulation S and D of the Securities Act of 1933, as amended.
During
the quarter ended June 30, 2007, the Company issued 397,700 shares of restricted
common stock to the shareholders of McCue Systems, Inc. for the second
installment payment due for the acquisition.
During
the fiscal years ended June 30, 2007 and 2006, employees exercised options
to
acquire 574,273 and 285,383 shares of common stock in exchange for a total
exercise price of $2,590,473 and $390,632 respectively.
ITEM
6 - MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
The
following discussion is intended to assist in an understanding of NetSol’s
financial position and results of operations for the year ended June 30, 2007.
Forward
Looking Information
This
report contains certain forward-looking statements and information relating
to
NetSol that is based on the beliefs of 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 NetSol or its management, are intended
to
identify forward-looking statements. These statements reflect management’s
current view of NetSol 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 inaccurate, actual results
may vary materially from those described in this report as anticipated,
estimated or expected. NetSol’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 NetSol’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 is built. NetSol does not intend to update these
forward-looking statements.
The
change of senior management on October 1, 2006 resulted in the creation of
three
new geographic regions. The division of the Company into regions is designed
for
better accountability, ownership and results. The regions are comprised of
North
America, EMEA and APAC. This restructuring is designed to provide better
visibility and direction to NetSol’s global operation.
NetSol
also restructured the global business in two groups: Global Products and Global
Services. This is a major change to provide much more focused ownership,
visibility, pipeline and targeted results. The plan is to create very strong
sales and marketing organizations which will work with our key resources spread
out across many countries generating stronger and better coordinated
results.
Management
has set the following new goals for NetSol for the next 12 months:
· |
Fully
integrate management, customers, and regional products of NetSol,
NetSol-CQ, and NetSol McCue.
|
· |
Launch
IT services model in the US by leveraging the offshore low-cost
development capabilities.
|
· |
Introduce
and market two LeaseSoft modules: WSF and CAPS in the US
markets.
|
· |
Expand
product portfolio by enhancing current products and new releases
to cater
to wider global markets.
|
· | Enhance software design, engineering and service delivery capabilities by increasing investment in training.
|
· | Continue to invest in research and development in an amount between 7-10% of yearly budgets in financial, banking and various other domains within NetSol’s core competencies.
|
· | Recruit new sales personnel in US to grow the penetration in North American markets.
|
· | Aggressively penetrate the booming Chinese market and continue to exploit NetSol’s presence in China.
|
· | Migrate up to 50% of development costs of US and UK operations to Lahore.
|
· | Increase Capex, to enhance communications and development infrastructure. Roll out a second phase of construction of technology campus in Lahore to respond to a growth of new orders and customers.
|
· | Market aggressively on a regional basis the Company’s tri-product solutions by broader marketing efforts for LeaseSoft in APAC and untapped markets; aggressively grow LeasePak solutions in North America; and, further establish NetSol-CQ Enterprise solution in the European markets.
|
Top Line Growth through Investment in organic marketing activities. NetSol marketing activities will continue to:
· |
Expand
the marketing and distributions of regional products solutions
in four
continents: North America, Europe, Asia Pacific and
Africa.
|
· |
Expand
relationships with all 40 customers in the US, Europe and Asia
Pacific by
offering enhanced product offerings.
|
· |
Product
positioning through alliances and partnership.
|
· |
Capitalize
on NetSol, McCue and NetSol-CQ affiliations with ELA (Equipment
Leasing
Association of N.A.) and European leasing
forums.
|
· |
Become
a leading IT company in APAC in asset-based applications and capitalize
on
the surge in demand of NetSol
products.
|
· |
Joint
Ventures and new alliances.
|
· |
Be
a dominant IT solutions provider in Pakistan amidst of explosive
growth in
the economy and automation in private and public sectors.
|
· |
Hold
frequent users group meetings in North America and Asia Pacific and
customers road shows to attract bigger value new
contracts.
|
Funding
and Investor Relations:
· |
Retained
a new IR and communications firm in New York to position NetSol
as a
strong IT company with unlimited growth and upside
outlook.
|
· |
NetSol
management was invited on Sep 13, 2006 to closing bell at NASDAQ
Sock
Exchange.
|
· |
Adequately
capitalize NetSol to face challenges and opportunities presented
through
the most economical means and vehicles creating further stability
and
sustainability.
|
· |
Focus
each division level to achieve optimum profitability and efficiencies
to
reduce the need for new external capital other than to fund major
new
initiatives.
|
· |
Aggressive
marketing campaign on Wall Street to get the story of NetSol known
to
retail, institutions, micro cap funds and analysts.
|
· |
Infuse
new capital from potential exercise of outstanding investors’ warrants,
employees’ options and debt financing for business development and
enhancement of infrastructures.
|
· |
Continuing
to efficiently and prudently manage cash flow and budgets. Subsidiaries
will contribute to support the headquarters and corporate
overheads.
|
· |
Expose
NetSol to various small cap and technology investors’ forum across North
America.
|
· |
Make
every effort to enhance NetSol’s market capitalization in the
US.
|
· |
Reorganize
the divisions globally for seamless integration to achieve better
productivity, efficiency and leverage offshore capabilities to enhance
margins.
|
Improving
the Bottom Line:
· |
Grow
topline, enhance gross profit margins to 65% by leveraging the
low-cost
development facility in Lahore.
|
· |
Generate
much higher revenues per developer and service group, enhance productivity
and lower cost per employee
overall.
|
· |
Consolidate
subsidiaries and integrate and combine entities to reduce overheads
and
employ economies of scale.
|
· |
Continue
to review costs at every level to consolidate and enhance operating
efficiencies.
|
· |
Grow
process automation and leverage the best practices of CMMi level
5.
|
· |
Created
3 new geographic regions: North America, EMEA and APAC to leverage
the
infrastructure and resources and to drive direct ownership based
on
revenue and the bottom line. Also broke the company’s business in two
business groups: Global Product Group and Global Services
Group.
|
· |
More
local empowerment and profit and loss ownership in each country
office.
Institute performance based compensation structure through three
areas
that includes both top-line and bottom-line
targets.
|
· |
Cost
efficient management of every operation and continue further consolidation
to improve bottom line.
|
· |
Initiated
steps to consolidate some of the new lines of services businesses
to
improve bottom line.
|
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 CMMi Level 2 in early 2002. In a
quest to continuously improve its quality standards, NetSol reached CMMi
Level 5 on August 11, 2006. The Company is expecting a growing demand for
its products and alliances from blue chip companies worldwide. NetSol plans
to
further enhance its capabilities by creating similar development engines in
other Southeast Asian countries with CMMi 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 CMMi levels of quality standards will provide customers
with options and flexibility based on costs and broader access to skills and
technology. NetSol PK has already launched implementation of ISO 27001, a global
standard and a set of best practices for Information Security
Management
MATERIAL
TRENDS AFFECTING NETSOL
NetSol
has identified the following material trends affecting NetSol
Positive
trends:
· |
Outsourcing
of services and software development is growing
worldwide.
|
· |
The
leasing and finance industry in North America has increased $260
billion
and about the same size for the rest of
world.
|
· |
Recent
outpouring of very positive US press and research coverage by major
banks
such as Lehman Brothers and Merrill Lynch on Pakistan outlook and
NetSol
growing image and name.
|
· |
The
influx of US companies and investors in addition to investors from
all
other parts of world to Pakistan. The US ranked to be the largest
investors in Pakistan economy in current fiscal year
2007.
|
· |
The
levy of Indian IT sector excise tax of 35% (NASSCOM) on software
exports
is very positive for NetSol. In Pakistan there is a 15 year tax
holiday on
IT exports of services. There are 10 more years remaining on this
tax
incentive.
|
· |
Cost
arbitrage, labor costs still very competitive and attractive when
compared
with India. Pakistan is significantly under priced for IT services
and
programmers as compared to India.
|
· |
Pakistan
is one of the fastest growing IT destinations from emerging and
new
markets.
|
· |
Chinese
market is burgeoning and wide open for NetSol’s ‘niche’ products and
services. NetSol is gaining a strong foothold in this
market.
|
· |
Only
a handful of IT solutions providers in the world with global distribution
network, complete end-to-end solution, and presence in the world’s key and
strategic markets.
|
· |
One
of the few global IT companies in the leasing and finance domain
with gold
standard CMMi level 5
accreditation.
|
· |
NetSol
and NetSol PK are both listed in one of the most visible stock
indexes in
their respective markets.
|
· |
NetSol
majority owned subsidiary NetSol PK listed on KSE (Karachi Stock
Exchange)
has traded at record price of Rs. 118 in July 2007. The IPO price
was Rs.
25 in August 2005.
|
· |
Overall
economic expansion worldwide and explosive growth in the emerging
markets
specifically.
|
· |
Continuous
improvement of US and Indian relationships with
Pakistan.
|
· |
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 $15 billion; stabilizing reforms of government and financial
institutions; improved credit ratings in the western markets, and
elimination of corruption at the highest
level.
|
· |
Robust
growth in outsourcing globally and investment of major US and European
corporations in the developing countries. As demonstrated by the
book ‘The
World is Flat’ by Tom Friedman, there is a need for western companies to
expand their businesses in emerging markets. Both Pakistan and China
are
in the forefront.
|
Negative
trends:
.
· |
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.
|
· |
Negative
perception and image created by extremism and terrorism in the
South Asian
region.
|
· |
Instability
of oil prices and uncertainty about the geo-political landscape
in the
Middle East.
|
· |
Continuous
impact of Iraq war on US and global
economy.
|
· |
Political
instability and uncertainty in Pakistan due to the pending government
elections.
|
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 NetSol
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 NetSol. 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. 121, “Accounting for the
Impairment of Long-Lived Assets and Assets to Be Disposed Of” 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. 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 generated by the
Company or any of its subsidiaries 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. Deferred tax assets resulting from the net operating losses
are reduced in part by a valuation allowance. 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 the fiscal years ended
June 30, 2007 and 2006, we estimated the allowance on net deferred tax assets
to
be one hundred percent of the net deferred tax assets
CASH
RESOURCES
We
were
successful in improving our cash position by the end of our fiscal year, June
30, 2007 with $4.0 million in cash worldwide. In addition, $1.0 million was
injected by the exercise of options by several employees in 2007 and $1.25
million was injected from a sale of restricted common stock in a private
placement.
CHANGE
IN MANAGEMENT AND BOARD OF DIRECTORS
Chief
Executive Officer and Presidents of Global Regions
In
October 2006, Mr. Naeem Ghauri resigned from his position of Chief Executive
Officer and was appointed President of the European Middle East and Africa
(EMEA) region as well as President of the Global Products Division. Mr. Ghauri
retains his position on the board of directors. Mr. Najeeb Ghauri was named
Chief Executive Officer while retaining his position as Chairman of the Board.
Mr. Salim Ghauri was named President of the Asia Pacific (APAC) region and
retains his position as Chief Executive Officer of NetSol Technologies Ltd.
and
his position on the board of directors.
Board
of
Directors
At
the
2007 Annual Shareholders Meeting a seven member board was elected. The
shareholders voted for the following slate of directors: Mr. Najeeb U. Ghauri,
Mr. Salim Ghauri, Mr. Eugen Beckert, Mr. Naeem U. Ghauri, Mr. Shahid Burki,
Mr.
Mark Caton and Mr. Alexander Shakow.
Committees
The
Audit
committee is made up of Mr. Shahid Burki as Chairman, Mr. Caton, Mr. Beckert
and
Mr. Shakow as members. The Compensation committee consists of Mr. Caton as
its
Chairman and Mr. Beckert, Mr. Burki, and Mr. Shakow as its members. The
Nominating and Corporate Governance Committee consists of Mr. Beckert as
chairman and Mr. Burki, Mr. Caton and Mr. Shakow as members.
RESULTS
OF OPERATIONS
THE
YEAR ENDED JUNE 30, 2007 COMPARED TO THE YEAR ENDED JUNE 30, 2006
Net
revenues for the year ended June 30, 2007 were $29,282,086 as compared to
$18,690,412 for the year ended June 30, 2006. Net revenues are broken out among
the subsidiaries as follows:
|
|
2007
|
|
|
|
2006
|
|
|
|
North
America:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
USA
|
|
$
|
4,500
|
|
|
0.02
|
%
|
$
|
45,250
|
|
|
0.24
|
%
|
Netsol
McCue
|
|
|
4,948,583
|
|
|
16.90
|
%
|
|
-
|
|
|
0.00
|
%
|
|
|
|
4,953,083
|
|
|
16.92
|
%
|
|
45,250
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
UK
|
|
|
138,656
|
|
|
0.47
|
%
|
|
2,038,533
|
|
|
10.91
|
%
|
Netsol-CQ
|
|
|
5,344,316
|
|
|
18.25
|
%
|
|
5,376,427
|
|
|
28.77
|
%
|
|
|
|
5,482,972
|
|
|
18.72
|
%
|
|
7,414,960
|
|
|
39.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
Tech (1)
|
|
|
14,796,001
|
|
|
50.53
|
%
|
|
8,424,630
|
|
|
45.07
|
%
|
Netsol
Connect
|
|
|
972,095
|
|
|
3.32
|
%
|
|
887,290
|
|
|
4.75
|
%
|
Netsol-TiG
|
|
|
2,622,318
|
|
|
8.96
|
%
|
|
1,642,256
|
|
|
8.79
|
%
|
Netsol-Omni
|
|
|
44,151
|
|
|
0.15
|
%
|
|
43,837
|
|
|
0.23
|
%
|
Netsol-Abraxas
Australia
|
|
|
411,466
|
|
|
1.41
|
%
|
|
232,189
|
|
|
1.24
|
%
|
|
|
|
18,846,031
|
|
|
64.36
|
%
|
|
11,230,202
|
|
|
60.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Revenues
|
|
$
|
29,282,086
|
|
|
100.00
|
%
|
$
|
18,690,412
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Refers
to
NetSol Technologies Limited
The
following table sets forth the items in our consolidated statement of operations
for the years ended June 30, 2007 and 2006 as a percentage of
revenues.
|
|
For
the Years Ended
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Revenues:
|
|
|
|
|
|
%
of sales
|
|
|
|
|
|
%
of sales
|
|
Licence
fees
|
|
$
|
9,788,266
|
|
|
33.43
|
%
|
$
|
5,192,371
|
|
|
27.78
|
%
|
Maintenance
fees
|
|
|
5,441,339
|
|
|
18.58
|
%
|
|
2,444,075
|
|
|
13.08
|
%
|
Services
|
|
|
14,052,481
|
|
|
47.99
|
%
|
|
11,053,966
|
|
|
59.14
|
%
|
Total
revenues
|
|
|
29,282,086
|
|
|
100.00
|
%
|
|
18,690,412
|
|
|
100.00
|
%
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
8,812,934
|
|
|
30.10
|
%
|
|
6,117,886
|
|
|
32.73
|
%
|
Depreciation
and amortization
|
|
|
652,669
|
|
|
2.23
|
%
|
|
733,370
|
|
|
3.92
|
%
|
Travel,
communication, and other
|
|
|
4,193,376
|
|
|
14.32
|
%
|
|
2,169,262
|
|
|
11.61
|
%
|
Total
cost of sales
|
|
|
13,658,979
|
|
|
46.65
|
%
|
|
9,020,518
|
|
|
48.26
|
%
|
Gross
profit
|
|
|
15,623,107
|
|
|
53.35
|
%
|
|
9,669,894
|
|
|
51.74
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
2,356,831
|
|
|
8.05
|
%
|
|
1,789,349
|
|
|
9.57
|
%
|
Depreciation
and amortization
|
|
|
1,988,603
|
|
|
6.79
|
%
|
|
2,286,678
|
|
|
12.23
|
%
|
Salaries
and wages
|
|
|
4,294,368
|
|
|
14.67
|
%
|
|
2,557,648
|
|
|
13.68
|
%
|
Professional
services
|
|
|
1,067,702
|
|
|
3.65
|
%
|
|
607,706
|
|
|
3.25
|
%
|
Bad
debt expense
|
|
|
189,873
|
|
|
0.65
|
%
|
|
30,218
|
|
|
0.16
|
%
|
General
and adminstrative
|
|
|
3,078,862
|
|
|
10.51
|
%
|
|
2,657,642
|
|
|
14.22
|
%
|
Total
operating expenses
|
|
|
12,976,239
|
|
|
44.31
|
%
|
|
9,929,241
|
|
|
53.12
|
%
|
Income
(loss) from operations
|
|
|
2,646,868
|
|
|
9.04
|
%
|
|
(259,347
|
)
|
|
-1.39
|
%
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss)
on sale of assets
|
|
|
(2,977
|
)
|
|
-0.01
|
%
|
|
(35,090
|
)
|
|
-0.19
|
%
|
Beneficial
conversion feature
|
|
|
(2,208,334
|
)
|
|
-7.54
|
%
|
|
(14,389
|
)
|
|
-0.08
|
%
|
Amortization
of debt discount
|
|
|
(2,803,691
|
)
|
|
-9.57
|
%
|
|
-
|
|
|
0.00
|
%
|
Liquidation
damages
|
|
|
(180,890
|
)
|
|
-0.62
|
%
|
|
-
|
|
|
0.00
|
%
|
Fair
market value of warrants issued
|
|
|
(68,411
|
)
|
|
-0.23
|
%
|
|
(21,505
|
)
|
|
-0.12
|
%
|
Gain
on forgiveness of debt
|
|
|
-
|
|
|
0.00
|
%
|
|
8,294
|
|
|
0.04
|
%
|
Interest
expense
|
|
|
(617,818
|
)
|
|
-2.11
|
%
|
|
(442,887
|
)
|
|
-2.37
|
%
|
Interest
income
|
|
|
339,164
|
|
|
1.16
|
%
|
|
280,276
|
|
|
1.50
|
%
|
Other
income and (expenses)
|
|
|
114,423
|
|
|
0.39
|
%
|
|
191,736
|
|
|
1.03
|
%
|
Income
taxes
|
|
|
(160,306
|
)
|
|
-0.55
|
%
|
|
(106,021
|
)
|
|
-0.57
|
%
|
Total
other expenses
|
|
|
(5,588,840
|
)
|
|
-19.09
|
%
|
|
(139,586
|
)
|
|
-0.75
|
%
|
Net
loss before minority interest in subsidiary
|
|
|
(2,941,972
|
)
|
|
-10.05
|
%
|
|
(398,933
|
)
|
|
-2.13
|
%
|
Minority
interests in earnings of subsidiary
|
|
|
(1,935,589
|
)
|
|
-6.61
|
%
|
|
(954,120
|
)
|
|
-5.10
|
%
|
Net
loss
|
|
|
(4,877,561
|
)
|
|
-16.66
|
%
|
|
(1,353,053
|
)
|
|
-7.24
|
%
|
Dividend
required for preferred stockholders
|
|
|
(237,326
|
)
|
|
-0.81
|
%
|
|
-
|
|
|
0.00
|
%
|
Bonus
stock dividend (minority holders portion)
|
|
|
(345,415
|
)
|
|
-1.18
|
%
|
|
-
|
|
|
0.00
|
%
|
Net
loss applicable to common shareholders
|
|
|
(5,460,302
|
)
|
|
-18.65
|
%
|
|
(1,353,053
|
)
|
|
-7.24
|
%
|
The
total
consolidated net revenue for fiscal year 2007 was $29,282,086 compared to
$18,690,412 in fiscal year 2006. This is a nearly 57% increase in revenue.
Maintenance fee revenue increased 123% from $2,444,075 to $5,441,339. Revenue
from services, which includes consulting and implementation, increased 27% from
$11,053,966 to $14,052,481. The increase is attributable mostly to growth in
services business, several new license sales of LeaseSoft in China, a full
year
of revenues attributed by NetSol McCue in the USA, growing outsourcing business
of NetSol-TIG (JV) and additional maintenance work. In addition, several new
business divisions were formed the latter part of last year in Lahore. The
Company has experienced solid and consistent demand for IT services in the
domestic sectors of Pakistan. The Company had hoped to close at least two major
service contracts in Pakistan (with an approximate value of $3 million). This
is
now expected to occur in within the next two quarters. Organic sales, sales
without the contribution from NetSol McCue, increased 30% or $5,643,091 to
$24,333,503 during the fiscal year. NetSol in Pakistan has been pre-qualified
to
participate in several public sector projects. The most significant is the
World
Bank funded Land Record Management Information Systems or LRMIS. This project
has a World bank grant of $300 million in Pakistan and NetSol was given a pilot
project in the province of Punjab early 2007 and we anticipate to win the key
projects in this area in next few quarters.
The
fiscal year ended June 30, 2007 was a very busy and exciting period for NetSol
worldwide. The activities for NetSol’s new license sales for LeaseSoft is
increasingly on the rise. The current pipeline boasts over 30 plus captive
auto
manufacturers and non-captives globally at an advance stage of closing or
decision making.
The
Company added over 12 new customers in US, APAC and EMEA regions including
several new license sales, upgrades, and a few new services clients. We added
2
new major auto-captive customers in China in addition to Daimler Chrysler and
Toyota Leasing. 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 2007.
NetSol
made a significant move by acquiring 100% of a US based software company McCue
Systems Inc., (now “NetSol McCue”) in June 2006. The acquisition of NetSol McCue
has provided the Company with a very strong and seasoned management team with
a
mature, profitable, business which contributes strongly to our top and bottom
lines. In this first year of integration, they contributed $4,948,583 in
revenues and $38,510 in net profits. The challenge and increased costs of
integration into a global, publicly-held organization has caused the lower
profit margin during the fiscal year.
Due
to
the revision in our pricing policy, NetSol LeaseSoft license value in APAC
is in
the range of $500,000 to $1.5 million, without factoring in services maintenance
and implementation fees. Normally, NetSol negotiates 25-30% yearly maintenance
contracts with customers. 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 the second half of fiscal year 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 60%.
We
have
added the following new business divisions in Pakistan to expand our
operations:
· |
BI
Consulting: a consulting division with the initial objective of
targeting
the banking industry. The implementation of the new International
Basel II
Accord by local banks has created a huge demand for solutions that
allow
banks to accurately quantify their risks of incurring losses. This
is a
predictive capability offered by business intelligence software;
and, for
that purpose we’ve aligned ourselves with the largest financial services
software company, SunGard, which is also among the top ten software
companies globally.
|
· |
Information
Security (INFOSEC): in recognition of the ever growing awareness
of highly
publicized IT Security problems, NetSol has established a new business
unit.
The
unit will provide services to secure all corporate information
and their
supporting processes, systems and networks. INFOSEC is designed
to ensure
"The
right information to the right people at the right time".
NetSol
is partnering with a recognized global leader in information security
(ISS
- Internet Security Systems) to execute this business
plan.
|
· |
NetSol
Defense Division (NDD): in light of our coordination with the Pakistan
Defense Sector, NetSol established its very own Defense Division
to cater
specifically to the growing demands in this domain and to deliver
services
with the professionalism and reliability that epitomizes NetSol’s CMMi
Level 5 standing.
|
· |
Enterprise
Business Solutions (EBS): due to the dynamic nature of the business
environment and the increasing demand for operational efficiency
in
today’s world, NetSol has built its own Enterprise Business Solutions
(EBS) division partnering with Oracle and DataStream. With EBS,
NetSol
gives companies the ability to manage, maintain and track assets,
plus the ability to use this data to drive decision-making in areas
such
as Maintenance, Inventory, Warranty, Up-time Reliability & Risk
Management.
|
The
gross
profit was $15,623,107 for year ended June 30, 2007 as compared with $9,669,894
for the same period of the previous year. This is a 62% increase. The gross
profit percentage was 53% for the current fiscal year and 52% in the prior
year.
The cost of sales was $13,658,979 in the current year compared to $9,020,518
in
the prior year. Although salaries and consultant fees increased $2,695,048
from
$6,117,886 in the prior year to $8,812,934, as a percentage of sales, it
decreased 3% from 33% in the prior year to 30% in the current year. The company
hired over 84 new programmers and engineers to meet the growing demand,
including 14 for the new acquisition, NetSol McCue. The current fiscal year
includes the added costs of the new acquisition of McCue Systems. In addition,
the Company has added several new business divisions in Pakistan hiring the
best
talent in these specialized areas. It takes between 18-24 months for these
new
business units to fully develop their offerings and begin generating revenues.
A
few of these units are now producing revenues at the close of fiscal year end
2007. The rest of the divisions are anticipated to start generating revenues
in
the next two quarters. With the addition of NetSol-CQ and NetSol McCue, several
new programmers have been hired in Lahore to learn the systems, and at the
end
of the current fiscal year these programmers were just beginning to finish
their
training period and become productive. Even with the additional costs, as a
percentage of sales, the cost of sales decreased from 48% to 47%. The gross
profit margin is expected to continue to improve as the integration of both
the
operations in Horsham, UK and Burlingame, US are fully integrated and cost
savings are achieved. The Company has invested heavily in its infrastructure,
both in people and equipment during the current fiscal year as it situated
itself for increased growth organically and from the acquisitions of NetSol-CQ
in February 2005 and NetSol McCue in June 2006.
Operating
expenses were $12,976,239 for the year ended June 30, 2007 as compared to
$9,929,241 for the year ended June 30, 2006. 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 NetSol McCue.
As a
percentage of sales, operating expenses decreased 9% from 53% to 44% for fiscal
2006 and 2007, respectively.
During
the years ended June 30, 2007 and 2006, the Company issued 57,755 and 67,255
restricted common shares in exchange for services rendered, respectively. The
Company recorded this non-cash compensation expense of $89,350 and $136,117
for
the years ended June 30, 2007 and 2006, respectively. Total professional service
expense, including non-cash compensation, was $1,067,702 and $607,706 for the
years ended June 30, 2007 and 2006, respectively. During the years ended June
30, 2007 and 2006, the Company recorded depreciation and amortization expense
of
$1,988,603 and $2,286,678.. Salaries and wages expenses were $4,294,368 and
$2,557,648 for the years ended June 30, 2007 and 2006, respectively, or an
increase of $1,736,720, or 68%. Included in this increase is an additional
33
employees. As a percentage of sales, salaries only increased 1% to 14.67%
compared to 13.68% in the prior year. General and administrative expenses were
$3,078,862 and $2,657,642 for the years ended June 30, 2007 and 2006,
respectively, an increase of $421,220 or 16%. As a percentage of sales, these
expenses decreased 4% to 10.51% in the current year compared to 14.22% in the
prior year. The increase in costs is due to the addition of the new subsidiary,
NetSol McCue, three new sales offices in Pakistan, the sales office in China,
increased board fees, increased travel and other expenses that supporting a
large workforce entail. As of June 30, 2007, we had 825 employees world-wide.
Selling
and marketing expenses increased to $2,356,831 for the year ended June 30,
2007
as compared to $1,789,379 for the year ended June 30, 2006, reflecting the
growing sales activity of the Company and the addition of the new subsidiary,
NetSol McCue and the new sales offices in Pakistan and China. As a percentage
of
sales, these expenses decreased 2% to 8.05% in the current year compared to
9.57% in the prior year. The Company wrote-off, as uncollectible, bad debts
of
$189,873 and $30,218, during the years ended June 30, 2007 and 2006,
respectively.
The
income from operations in fiscal year 2007 was $2,646,868 compared to loss
of
$259,347 in fiscal year 2006. Included in these amounts are non-cash charges
of
depreciation and amortization of $1,988,603 and $2,286,678 settlement expenses
of $15,953 and $43,200 and bad debt expense of $30,218 and $13,118,
respectively.
Net
loss
in fiscal year 2007 was $4,877,561 compared to $1,353,053 in fiscal year 2006
or
$3,524,508 decrease.
In
addition, the Company was required to pay a dividend to the preferred
stockholders of $237,326 and our subsidiary PK Tech which is listed on the
Karachi Stock Exchange issued a dividend of bonus shares to its shareholders.
The net value issued to the minority holders was $345,415. These increased
the
net loss applicable to common shareholders to $5,460,302. The current fiscal
year amount includes a net reduction for the minority interest in earnings
of
$1,935,589 compared to a reduction of $954,120 in the prior year for the 49.9%
minority interest in NetSol Connect and TIG-NetSol, and the 28.13% of NetSol
Tech owned by unaffiliated parties. The Company also recognized non-recurring
expenses including $2,208,334 and $14,389 expense for the beneficial conversion
feature on notes payable and convertible debenture, $2,803,691 and $0 of
amortized costs of debt, $180,890 and $0 of liquidation damages, and a gain
of
$0 and $8,294 from the settlement of a debt, respectively. In addition, the
Company recorded an expense of $68,411 and $21,505 for the fair market value
of
options and warrants granted for the years ended June 30, 2007 and 2006,
respectively. The net loss per share was $0.27 in 2006 compared to net income
of
$0.09 in 2006. The total weighted average of shares outstanding basic and
dilutive was 18.2 million against 14.6 million basic and diluted shares in
2006.
The
net
EBITDA loss was $1,417,368 compared to income of $2,215,903 after amortization
and depreciation charges of $2,641,272 and $3,020,048, income taxes of $160,306
and 106,021, and interest expense of $658,615 and $442,887 respectively. With
the addition of the non-cash charge for the amortized costs of debt of
$2,803,691 and the beneficial conversion feature expense of $2,208,334 the
adjusted pro forma EBITDA income would be $3,594,657 for the fiscal year ended
June 30, 2007 and the adjusted pro forma EBITDA earnings per share, basic and
diluted, would be $0.20. Although the net EBITDA income is a non-GAAP measure
of
performance, we are providing it because we believe it to be an important
supplemental measure of our performance that is commonly used by securities
analysts, investors, and other interested parties in the evaluation of companies
in our industry. It should not be considered as an alternative to net income,
operating income or any other financial measures calculated and presented,
nor
as an alternative to cash flow from operating activities as a measure of our
liquidity. It may not be indicative of the Company’s historical operating
results nor is it intended to be predictive of potential future
results.
Quarterly
Results of Operations for the quarter ended June 30, 2007 and June 30,
2006
Net
revenues for the quarter ended June 30, 2007 and 2006 are broken out among
the
subsidiaries as follows:
|
|
2007
|
|
|
|
2006
|
|
|
|
North
America:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
USA
|
|
$
|
-
|
|
|
0.00
|
%
|
$
|
-
|
|
|
0.00
|
%
|
NetSol
McCue
|
|
|
1,693,383
|
|
|
19.74
|
%
|
|
-
|
|
|
0.00
|
%
|
|
|
|
1,693,383
|
|
|
19.74
|
%
|
|
-
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
UK
|
|
|
44,052
|
|
|
0.51
|
%
|
|
108,867
|
|
|
2.34
|
%
|
Netsol-CQ
|
|
|
1,341,162
|
|
|
15.64
|
%
|
|
1,200,128
|
|
|
25.81
|
%
|
|
|
|
1,385,214
|
|
|
16.15
|
%
|
|
1,308,995
|
|
|
28.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netsol
Tech
|
|
|
4,307,370
|
|
|
50.22
|
%
|
|
2,536,188
|
|
|
54.54
|
%
|
Netsol
Connect
|
|
|
232,261
|
|
|
2.71
|
%
|
|
210,334
|
|
|
4.52
|
%
|
Netsol-TiG
|
|
|
918,336
|
|
|
10.71
|
%
|
|
519,469
|
|
|
11.17
|
%
|
Netsol-Omni
|
|
|
167
|
|
|
0.00
|
%
|
|
35,188
|
|
|
0.76
|
%
|
Netsol-Abraxas
Australia
|
|
|
39,708
|
|
|
0.46
|
%
|
|
40,053
|
|
|
0.86
|
%
|
|
|
|
5,497,842
|
|
|
64.10
|
%
|
|
3,341,232
|
|
|
71.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Revenues
|
|
$
|
8,576,439
|
|
|
100.00
|
%
|
$
|
4,650,227
|
|
|
100.00
|
%
|
The
following table presents our unaudited quarterly results of operations for
the
quarters ended June 30, 2007 and 2006. You should read the following table
together with the consolidated financial statements and related notes contained
elsewhere in this report. We have prepared the unaudited information on the
same
basis as our audited consolidated financial statements. This table includes
normal recurring adjustments that we consider necessary for the fair
presentation of our financial position and operating results for the quarters
presented. Operating results for any quarter are not necessarily indicative
of
results for any future quarters or for a full year.
|
|
For
the Three Months Ended
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Revenues:
|
|
|
|
|
|
%
of sales
|
|
|
|
|
|
%
of sales
|
|
Licence
fees
|
|
$
|
2,936,770
|
|
|
34.24
|
%
|
$
|
1,239,984
|
|
|
26.67
|
%
|
Maintenance
fees
|
|
|
1,451,243
|
|
|
16.92
|
%
|
|
735,537
|
|
|
15.82
|
%
|
Services
|
|
|
4,188,426
|
|
|
48.84
|
%
|
|
2,674,706
|
|
|
57.52
|
%
|
Total
revenues
|
|
|
8,576,439
|
|
|
100.00
|
%
|
|
4,650,227
|
|
|
100.00
|
%
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
2,204,328
|
|
|
25.70
|
%
|
|
2,020,271
|
|
|
43.44
|
%
|
Depreciation
and amortization
|
|
|
60,404
|
|
|
0.70
|
%
|
|
239,356
|
|
|
5.15
|
%
|
Travel,
communication, and other
|
|
|
985,568
|
|
|
11.49
|
%
|
|
797,978
|
|
|
17.16
|
%
|
Total
cost of sales
|
|
|
3,250,300
|
|
|
37.90
|
%
|
|
3,057,605
|
|
|
65.75
|
%
|
Gross
profit
|
|
|
5,326,139
|
|
|
62.10
|
%
|
|
1,592,622
|
|
|
34.25
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
811,328
|
|
|
9.46
|
%
|
|
598,443
|
|
|
12.87
|
%
|
Depreciation
and amortization
|
|
|
497,461
|
|
|
5.80
|
%
|
|
574,907
|
|
|
12.36
|
%
|
Salaries
and wages
|
|
|
895,610
|
|
|
10.44
|
%
|
|
870,922
|
|
|
18.73
|
%
|
Professional
services
|
|
|
293,499
|
|
|
3.42
|
%
|
|
242,554
|
|
|
5.22
|
%
|
Bad
debt expense
|
|
|
72,606
|
|
|
0.85
|
%
|
|
2,929
|
|
|
0.06
|
%
|
General
and adminstrative
|
|
|
866,220
|
|
|
10.10
|
%
|
|
790,804
|
|
|
17.01
|
%
|
Total
operating expenses
|
|
|
3,436,724
|
|
|
40.07
|
%
|
|
3,080,559
|
|
|
66.25
|
%
|
Income
(loss) from operations
|
|
|
1,889,415
|
|
|
22.03
|
%
|
|
(1,487,937
|
)
|
|
-32.00
|
%
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss)
on sale of assets
|
|
|
16,090
|
|
|
0.19
|
%
|
|
(1,076
|
)
|
|
-0.02
|
%
|
Beneficial
conversion feature
|
|
|
-
|
|
|
0.00
|
%
|
|
-
|
|
|
0.00
|
%
|
Amortization
of debt discount and capitalized cost of debt
|
|
|
-
|
|
|
0.00
|
%
|
|
-
|
|
|
0.00
|
%
|
Liquidation
damages
|
|
|
-
|
|
|
0.00
|
%
|
|
-
|
|
|
0.00
|
%
|
Fair
market value of warrants issued
|
|
|
(34,424
|
)
|
|
-0.40
|
%
|
|
-
|
|
|
0.00
|
%
|
Gain
on forgiveness of debt
|
|
|
-
|
|
|
0.00
|
%
|
|
-
|
|
|
0.00
|
%
|
Interest
expense
|
|
|
(74,476
|
)
|
|
-0.87
|
%
|
|
(201,987
|
)
|
|
-4.34
|
%
|
Interest
income
|
|
|
73,248
|
|
|
0.85
|
%
|
|
10,391
|
|
|
0.22
|
%
|
Other
income and (expenses)
|
|
|
25,488
|
|
|
0.30
|
%
|
|
246,333
|
|
|
5.30
|
%
|
Income
taxes
|
|
|
(33,686
|
)
|
|
-0.39
|
%
|
|
(15,130
|
)
|
|
-0.33
|
%
|
Total
other expenses
|
|
|
(27,760
|
)
|
|
-0.32
|
%
|
|
38,531
|
|
|
0.83
|
%
|
Net
income (loss) before minority interest in
subsidiary
|
|
|
1,861,655
|
|
|
21.71
|
%
|
|
(1,449,406
|
)
|
|
-31.17
|
%
|
Minority
interests in earnings of subsidiary
|
|
|
(561,508
|
)
|
|
-6.55
|
%
|
|
(254,248
|
)
|
|
-5.47
|
%
|
Net
income (loss)
|
|
|
1,300,147
|
|
|
15.16
|
%
|
|
(1,703,654
|
)
|
|
-36.64
|
%
|
Dividend
required for preferred stockholders
|
|
|
(77,640
|
)
|
|
-0.91
|
%
|
|
-
|
|
|
0.00
|
%
|
Bonus
stock dividend (minority holders portion)
|
|
|
(345,415
|
)
|
|
-4.03
|
%
|
|
-
|
|
|
0.00
|
%
|
Net
income (loss) applicable to common
shareholders
|
|
|
877,092
|
|
|
10.23
|
%
|
|
(1,703,654
|
)
|
|
-36.64
|
%
|
Other
comprehensive (loss)/gain:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(259,113
|
)
|
|
|
|
|
(100,069
|
)
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
617,979
|
|
|
|
|
$
|
(1,803,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
|
|
|
$
|
(0.11
|
)
|
|
|
|
Diluted
|
|
$
|
0.07
|
|
|
|
|
$
|
(0.11
|
)
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,706,920
|
|
|
|
|
|
15,468,248
|
|
|
|
|
Diluted
|
|
|
19,835,177
|
|
|
|
|
|
15,468,248
|
|
|
|
|
Liquidity
and Capital Resources
The
Company's cash position was $4,010,164 at June 30, 2007 compared to $2,493,768
at June 30, 2006. In 2006, the Company had $1,739,851 in certificates of
deposit. The total cash position, including the certificates of deposits, was
$4,010,164 as of June 30, 2007 compared to $4,233,619 as of June 30, 2006.
In
addition, the Company had $4,533,555 in restricted cash as of June 30, 2006.
The
cash was restricted insofar as it was dedicated to specific uses as described
in
the financing completed in June 2006.
The
Company’s current assets, as of June 30, 2007, totaled $23,237,058 and were
46.92% of total assets, a decrease of 4.8% from $22,230,443 or 51.74% as of
June
30, 2006. As of June 30, 2007, the Company's working capital (current assets
less current liabilities) totaled $11,449,252 compared to $10,710,791 as of
June
30, 2006, an increase of $738,461. As of June 30, 2007, the Company had over
$8.4 million in accounts receivable and $8.5 million in revenues in excess
of
billings.
Net
cash
used by operating activities amounted to $123,528 for the year ended June 30,
2007, as compared to $1,691,918 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. The increase in sales has resulted
in
an increase in accounts receivable and revenues in excess of billings. We expect
to receive payments on these accounts within the next fiscal year.
Net
cash
used in investing activities amounted to $7,639,916 for the year ended June
30,
2007, as compared to $4,410,130 for the comparable period last fiscal year.
The
difference lies primarily in the purchase of NetSol-CQ and NetSol McCue Systems
and the related increase in intangible assets acquired as well as an increase
in
purchases of fixed assets. During the current fiscal year, this amount included
the second installment for NetSol McCue, while in the prior year the amount
included the final payment for NetSol-CQ and the initial payment for NetSol
McCue. The Company had purchases of property and equipment of $2,420,470
compared to $2,709,569 for the comparable period last fiscal year.
Net
cash
provided by financing activities amounted to $9,173,555 and $7,149,478 for
years
ended June 30, 2007, and 2006, respectively. The current fiscal year included
the cash inflow of $1,030,093 from the sale of common stock and $1,008,250
from
the exercising of stock options and warrants, compared to $1,400,000 and
$669,382 in the prior year, respectively. In the current fiscal year, the
Company had net proceeds from loans and capital leases of $1,697,267 as compared
to $82,650 in the comparable period last year. In addition, the Company had
dividends payable to preferred stock holders of $77,640 in the current year.
In
the prior year, 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 and the
Company obtained a $5,500,000 convertible note payable to facilitate the closing
of the NetSol McCue acquisition and the final cash payment of the NetSol-CQ
acquisition and had $4,533,555 in restricted cash. Again, the cash is deemed
restricted in that it is designated for use in the NetSol McCue acquisition,
the
NetSol-CQ acquisition and as working capital according to the terms of the
June
2006 financing.
The
Company plans on pursuing various and feasible means of raising new funding
to
expand its infrastructure, enhance product offerings and strengthen 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. The company attracted
5
new institutional investors in 2006 that invested $5.5 million, raising its
institutional investor base to over 15%. There are over 7.1 million employees
and officers options unexercised and over 3 million investor warrants remaining
to be exercised.
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:
· |
The
third payment of NetSol McCue would be due based on the ‘earn out’
formula. This could be in the range of $1.0 million to $2.0 million
in
cash and common stock. This is based on an earn out structure and
the
Company expects to fund it through internal cash
flow;
|
· |
Notes
payable and related interest for approximately $887,000;
|
· |
Liquidity
damages owed to convertible note holders of approximately
$12,223;
|
· |
Working
capital of $1.0 million for US and UK business expansion, new business
development activities and infrastructure
enhancements.
|
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.
However, the Company is very conscious of the dilutive effect and price
pressures in raising equity-based capital.
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.
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 common stock
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.
ITEM
7. FINANCIAL STATEMENTS
The
Consolidated Financial Statements that constitute Item 7 are included at the
end
of this report on page F-1.
ITEM
8. 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, 2006 and June 30, 2007, 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 financial statements for the fiscal years
ended June 30, 2006 and June 30, 2007 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.
ITEM
8A. CONTROLS AND PROCEDURES
Management,
under the supervision and with the participation of the chief executive officer
and chief financial officer, conducted an evaluation of the disclosure controls
and procedures as defined in Rule 13a-15(e) as of the fiscal quarter ended
on
June 30, 2007. Based
upon that evaluation, the Chairman, Chief Financial
Officer and Chief Executive Officer concluded that our disclosure controls
and
procedures are effective.
There
has
been no change, including corrective actions with regard to deficiencies or
weaknesses in the Company’s internal controls or in other factors that has
materially affected, or is reasonably likely to materially affect, these
internal controls over financial reporting.
ITEM
8B. OTHER MATTERS
Effective
September 18, 2007, the Board of Directors adopted the following
amendments/modifications to its committee charters and Code of
Ethics:
Audit
Committee Charter. The Charter has been amended to permit the committee chair
to
cast a deciding vote in the event of a tie vote by the committee. A provision
has been added permitting the committee to evaluate its own performance.
Finally, the physical address of the Corporate Secretary has been added to
Annex
A which explains the procedures for submitting claims or complaints.
Compensation
Committee Charter. The Charter has been amended to permit the committee chair
to
cast a deciding vote in the event of a tie vote by the committee.
Nominating
and Corporate Governance Charter. The Charter has been amended to permit the
committee chair to cast a deciding vote in the event of a tie vote by the
committee. Further, the Charter has been amended to augment the Company’s
insider trading policy by establishing a black-out trading period during the
periods from the end of a quarterly period until the Company’s quarterly reports
are filed with the SEC and from 30 days prior to the filing of the Company’s
annual report with the SEC. This additional policy does not, in any way, modify
or lesson the continued insider trading prohibitions and policies set forth
in
the Charter.
Code
of
Ethics. The Code of Ethics has been amended to augment the Company’s insider
trading policy by establishing a black-out trading period during the periods
from the end of a quarterly period until the Company’s quarterly reports are
filed with the SEC and from 30 days prior to the filing of the Company’s annual
report with the SEC. This additional policy does not, in any way, modify or
lesson the continued insider trading prohibitions and policies set forth in
the
Code.
The
amended charters have been posted on the Company’s website, www.netsoltek.com
and the
amended Code of Ethics is filed as an exhibit to this report.
PART
III
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH
SECTION 16(a) OF THE EXCHANGE ACT
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires that the
Company's directors and executive officers and persons owning more than 10%
of
the outstanding Common Stock, file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Executive officers,
directors and beneficial owners of more than 10% of the Company's Common Stock
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based
solely on copies of such forms furnished as provided above, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal year ended June 30, 2007, all Section 16(a) filing requirements
applicable to its executive officers, directors and beneficial owners of more
than 10% of its Common Stock were complied with.
DIRECTORS
AND EXECUTIVE OFFICERS
The
following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with
the
Company held by each person and the date such person became a director or
executive officer of the Company. The Board of Directors elects the executive
officers of the Company annually. Each year the stockholders elect the Board
of
Directors. The executive officers serve terms of one year or until their death,
resignation or removal by the Board of Directors. In addition, there was no
arrangement or understanding between any executive officer and any other person
pursuant to which any person was selected as an executive officer.
The
directors and executive officers of the Company are as follows:
Name
|
|
Year
First Elected As an Officer or Director
|
|
Age
|
|
Position
Held with the Registrant
|
|
Family
Relationship
|
Najeeb
Ghauri
|
|
1997
|
|
53
|
|
Director
and Chairman
|
|
Brother
to Naeem and Salim Ghauri
|
Salim
Ghauri
|
|
1999
|
|
52
|
|
President
and Director
|
|
Brother
to Naeem and Najeeb Ghauri
|
Naeem
Ghauri
|
|
1999
|
|
50
|
|
Chief
Executive Officer, Director
|
|
Brother
to Najeeb and Salim Ghauri
|
Tina
Gilger
|
|
2005
|
|
45
|
|
Chief
Financial Officer
|
|
None
|
Patti
L. W. McGlasson
|
|
2004
|
|
42
|
|
Secretary,
General Counsel
|
|
None
|
Shahid
Javed Burki
|
|
2000
|
|
69
|
|
Director
|
|
None
|
Eugen
Beckert
|
|
2001
|
|
60
|
|
Director
|
|
None
|
Mark
Caton
|
|
2002
|
|
58
|
|
Director
|
|
None
|
Alexander
Shakow
|
|
2007
|
|
70
|
|
Director
|
|
None
|
Business
Experience of Officers and Directors:
NAJEEB
U.
GHAURI is the Chief Executive Officer and Chairman of NetSol. He has been a
Director of the Company since 1997, Chairman since 2003 and Chief Executive
Officer since October 2006. Mr. Ghauri is the co founder of
NetSol Technologies, Inc. He was responsible for NetSol listing on
NASDAQ in 1999 and NetSol subsidiary listing on KSE (Karachi Stock
Exchange) in 2005. Mr. Ghauri was most instrumental in transforming
NetSol (formerly Mirage Holdings, Inc.) from a clothing/ apparel business to
a
fully focused global IT company. Mr. Ghauri served as the Company's Chief
Executive Officer from 1999 to 2001 and as the Chief Financial Officer from
2001
to 2005. As CEO, Mr. Ghauri is responsible for managing the
day-to-day operations of the Company, as well as the Company's overall growth
and expansion plan. In addition to numerous accomplishments at
NetSol, Mr. Ghauri was honored to ring the closing bell at NASDAQ
Stock Exchange in September 2006. Prior to joining the Company, Mr. Ghauri
was part of the marketing team of Atlantic Richfield Company (ARCO) (now
acquired by BP), a Fortune 500 company, from 1987-1997. Prior to ARCO, he spent
nearly 5 years with Unilever as brand and sales managers. Mr. Ghauri received
his Bachelor of Science degree in Management/Economics from Eastern Illinois
University in 1979, and his M.B.A. in Marketing Management from Claremont
Graduate School in California in 1982. Mr. Ghauri was elected
Vice Chairman of US Pakistan Business Council in 2006. A Washington D.C. based
council of US Chamber of Commerce. He is also very active in several
philanthropic activities in emerging markets and is a founding director Pakistan
Human Development Fund, a non-profit organization, a partnership with UNDP
to
promote literacy, health services and poverty alleviation in Pakistan.
SALIM
GHAURI has been with the Company since 1999 as the President and Director of
the
Company. Mr. Ghauri is currently the Chairman and CEO of NetSol Technologies
Limited and President of the Asia Pacific Region and CEO of Global Services
Group. Mr. Ghauri was the founder of Network Solutions (Pvt.) Ltd. in 1995,
Later NetSol Technologies (Pvt) Limited. Built under his leadership, NetSol
gradually built a strong team of IT professionals and infrastructure in Pakistan
and became the first software house in Pakistan certified as ISO 9001 and CMMi
Level 5 assessed. Mr. Ghauri received his Bachelor of Science degree in Computer
Science from University of Punjab in Lahore, Pakistan. Before NetSol
Technologies Ltd., Mr. Ghauri was employed with BHP in Sydney, Australia from
1987-1995, where he commenced his employment as a consultant. Mr. Ghauri was
appointed in 2007 as an Honorary Consul for Australia-Punjab
Region.
NAEEM
GHAURI has been a Director of the Company since 1999 and was the Company’s Chief
Executive Officer from August 2001 to October 2006. Mr. Ghauri serves as the
Managing Director of NetSol (UK) Ltd., a wholly owned subsidiary of the Company
located in London, England. Mr. Ghauri was responsible for the launch of NetSol
Connect in Pakistan. Prior to joining the Company, Mr. Ghauri was Project
Director for Mercedes-Benz Finance Ltd., a subsidiary of DaimlerChrysler,
Germany from 1994-1999. Mr. Ghauri supervised over 200 project managers,
developers, analysis and users in nine European Countries. Mr. Ghauri earned
his
degree in Computer Science from Brighton University, England. Mr. Ghauri serves
on the board of NetSol CQ, a subsidiary of the Company.
TINA
GILGER jointed NetSol as Chief Financial Officer in July 2005. Ms.
Gilger has acted as a consultant to the Company since October 2003 in the
capacity of controller. In the three years prior to becoming NetSol’s CFO, Ms.
Gilger acted as an audit liaison for six reporting public companies, of which
one was NetSol. From 2000 to 2002, Ms. Gilger acted as audit liaison for a
public company specializing in reverse mergers for public companies listed
on
the OTC:BB. Ms. Gilger received her degree in Accounting, with an emphasis
in
Business Management from the University of Utah in 1990. Ms. Gilger was licensed
as a Certified Public Accountant by the State of California in 1992, passing
all
four parts of the exam on the first attempt.
PATTI
L.
W. MCGLASSON joined NetSol as General Counsel in January 2004 and was elected
to
the position of Secretary in March 2004. Prior to joining NetSol, Ms. McGlasson
practiced at Vogt & Resnick, law corporation, where her practice focused on
corporate, securities and business transactions. As part of her Masters in
Law
in Transnational Business, she interned at the law firm of Loeff Claeys Verbeke
in Rotterdam, the Netherlands in 1991. Ms. McGlasson was admitted to practice
in
California in 1991. She received her Bachelor of Arts in Political Science
in
1987 from the University of California, San Diego and, her Juris Doctor and
Masters in Law in Transnational Business from the University of the Pacific,
McGeorge School of Law, in 1991 and 1993, respectively.
EUGEN
BECKERT was appointed to the Board of Directors in August 2001 to fill a vacancy
and continues to serve on the Board. A native of Germany, Mr. Beckert received
his masters in Engineering and Economics from the University of Karlsruhe,
Germany. Mr. Beckert was with Mercedes-Benz AG/Daimler Benz AG from 1973,
working in technology and systems development. In 1992, he was appointed
director of Global IT (CIO) for Debis Financial Services, the services division
of Daimler Benz. From 1996 to 2000, he acted as director of Processes and
Systems (CIO) for Financial Services of DaimlerChrysler Asia Pacific Services.
During
this period he was instrumental to having the LEASESOFT products of NetSol
developed and introduced in several countries as a pilot customer.
From
2001 to 2004, he served as Vice President in the Japanese company of DCS. Mr.
Beckert retired from DaimlerChrysler in November 2006. Mr. Beckert is chairman
of the Nominating and Corporate Governance Committee and a member of the Audit
and Compensation Committees.
SHAHID
JAVED BURKI was appointed to the Board of Directors in February 2003. He had
a
distinguished career with World Bank at various high level positions from 1974
to 1999. He was a Director of Chief Policy Planning with World Bank from
1974-1981. He was also a Director of International Relations from 1981-1987.
Mr.
Burki served as Director of China Development from 1987-1994 and, Vice President
of Latin America with the World Bank from 1994-1999. In between, he briefly
served as the Finance Minister of Pakistan from 1996-1997. Mr. Burki also served
as the CEO of the Washington based investment firm EMP Financial Advisors from
1992-2002. Presently, he is the Chairman of Pak Investment & Finance
Corporation. He was awarded a Rhodes scholarship in 1962 and M.A in Economics
from Oxford University in 1963. He also earned a Master of Public Administration
degree from Harvard University, Cambridge, MA in 1968. Most recently, he
attended Harvard University and completed an Executive Development Program
in
1998. During his lifetime, Mr. Burki has authored many books and articles
including: China's
Commerce
(Published by Harvard in 1969) and Accelerated
Growth in Latin America
(Published by World Bank in 1998). Mr. Burki is a chairman of the Compensation
Committee and a member of the Audit and Nominating and Corporate Governance
Committees.
MARK
CATON joined the board of directors of NetSol on January 1, 2007 to fill a
vacancy and was elected to the board in June 2007. Mr. Caton is currently
President of Centela Systems, Inc. a distributor of computer peripheral
solutions in the multimedia and digital electronic market segment, a position
he
has held since 2003. Prior to joining Centela, Mr. Caton was President of NetSol
Technologies USA, responsible for US sales, from June 2002 to December 2003.
Mr.
Caton was employed by ePlus from 1997 to 2002 as Senior Account Representative.
He was a member of the UCLA Alumni Association Board of Directors and served
on
the Board of Directors of NetSol from 2002-2003. Mr. Caton is a Chairman of
the
Compensation Committee and a member of the Audit and Nominating Committees.
Mr.
Caton received his BA from UCLA in psychology in 1971.
ALEXANDER
SHAKOW joined the board on June 4, 2007. Mr. Shakow had a distinguished
career with the World Bank where he held various high level positions from
1981-2002. Since 2002, he has been an independent consultant for various
international organizations. From 1968-1981, Mr. Shakow held
many senior positions at the United States Agency for International Development,
including Assistant Administrator for Program and Policy; Director -Office
of
Development and Planning, Bureau for Asia; and, Director - Indonesia,
Malaysia and Singapore affairs. Mr. Shakow was also a staff member
of the United States Peace Corps from 1963-1968, including director in
Indonesia. Mr. Shakow received his PhD from the London School of Economics
and Political Science in 1962. He earned his undergraduate degree with
honors from Swarthmore College in 1958. Mr. Shakow is listed in
Who’s
Who in America and
Who’s
Who in the World;
and
currently is a member of the Board of Trustees of EnterpriseWorks/VITA.
Mr. Shakow is a member of the Audit, Compensation and Nominating and Corporate
Governance Committees.
ITEM
10-EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
Compensation
Philosophy and Objectives
The
Compensation Committee believes that the most effective executive compensation
program is one that is designed to reward the achievement of specific annual,
long-term and strategic goals by the Company, and which aligns executives’
interests with those of the stockholders by rewarding performance at or above
established goals, with the ultimate objective of increasing stockholder value.
The philosophy of the Compensation Committee is to evaluate both performance
and
compensation to ensure that we maintain our ability to attract and retain
superior employees in key positions and that compensation provided to key
employees remains competitive relative to the compensation paid to similarly
situated executives of our peer companies. To that end, the Compensation
Committee believes executive compensation packages should include both cash
and
equity-based compensation that reward performance as measured against
established goals.
Setting
Executive Compensation
Management
develops our compensation plans by utilizing publicly available compensation
data in the media services and technology industries. We believe that the
practices of these groups of companies provide us with appropriate compensation
benchmarks, because these groups of companies are in similar businesses and
tend
to compete with us for executives and other employees. For benchmarking
executive compensation, we typically review the compensation data we have
collected from these groups of companies, as well as a subset of the data from
those companies that have a similar number of employees as the Company. For
purposes of determining executive compensation, we have not engaged consultants
to help us analyze this data or to compare our compensation programs with the
practices of the companies represented in the compensation data we review.
Based
on
management's analyses and recommendations, the Compensation Committee has
approved a pay-for-performance compensation philosophy, which is intended to
establish base salaries and total executive compensation (taking into
consideration the executive's experience and abilities) that are competitive
with those companies with a similar number of employees represented in the
compensation data we review.
We
work
within the framework of this pay-for-performance compensation philosophy to
determine each component of an executive's initial compensation package based
on
numerous factors, including:
|
· |
the
individual's particular background, track record and circumstances,
including training and prior relevant work experience;
|
|
· |
the
individual's role with us and the compensation paid to similar persons
in
the companies represented in the compensation data that we review;
|
|
· |
the
demand for individuals with the individual's specific expertise and
experience;
|
|
· |
performance
goals and other expectations for the position;
and,
|
|
· |
uniqueness
of industry skills.
|
The
terms
of each executive officer's compensation are derived from employment agreements
negotiated between the Company and the executive. Each executive's employment
agreement is generally negotiated to cover a one to three-year period, and
prescribes the base salary and other annual payments, if any, to the executive.
Employment agreements for all executive officers are approved by the Board
of
Directors and the Compensation Committee. Employment agreements for other
executives are approved by the Company's Chief Executive Officer.
2007
Executive Compensation Components
For
the
fiscal year ended June 30, 2007, the principal components of compensation that
our named executive officers were eligible to receive were:
|
· |
Long
Term Equity Incentive Compensation;
|
|
· |
Performance-based
incentive compensation (discretionary bonus);
and,
|
|
· |
Perquisites
and other personal benefits.
|
Base
Salary
An
executive's base salary is evaluated together with components of the executive's
other compensation to ensure that the executive's total compensation is
consistent with our overall compensation philosophy.
The
base
salaries were established in arms-length negotiations between the executive
and
the Company, taking into account their extensive experience, knowledge of the
industry, track record, and achievements on behalf of the Company.
Base
salaries are adjusted annually by the Compensation Committee.
Annual
Bonus
During
our fiscal year ended 2007, Mr. Najeeb Ghauri was awarded a cash bonus of
$50,000. Ms. Gilger was awarded a cash bonus of $7,004. Ms. McGlasson was
awarded a cash bonus of $6,536. Mr. Salim Ghauri was awarded a cash bonus of
$50,000 and Mr. Naeem Ghauri was awarded a cash bonus of $50,000.
Long-Term
Equity Incentive Compensation
We
believe that long-term performance is achieved through an ownership culture
that
encourages long-term participation by our executives in equity-based awards.
Our
various Employee Stock Option Plans allow us to grant stock options to
employees. We currently make initial equity awards of stock options to new
executives and certain non-executive employees in connection with their
employment with the Company. Annual grants of options, if any, are approved
by
the Compensation Committee.
Equity
Incentives. Executives
and certain non-executive employees who join us may be awarded stock option
grants after they join the Company. These grants have an exercise price equal
to
the fair market value of our common stock on the grant date. The stock option
awards are intended to provide the executive with incentive to build value
in
the organization over an extended period of time. The size of the stock option
award is also reviewed in light of the executive's track record, base salary,
other compensation and other factors to ensure that the executive's total
compensation is in line with our overall compensation philosophy. A review
of
all components of compensation is conducted when determining equity awards
to
ensure that total compensation conforms to our overall philosophy and
objectives.
Perquisites
and Other Personal Benefits
We
provide named executive officers with perquisites and other personal benefits
that we and the Compensation Committee believe are reasonable and consistent
with our overall compensation program to better enable the Company to attract
and retain superior employees for key positions. The Compensation Committee
periodically reviews the levels of perquisites and other personal benefits
provided to executive officers.
Termination
Based Compensation
Upon
termination of employment, all executive officers are entitled to receive
severance payments under their employment agreements. In determining whether
to
approve, and as part of the process of setting the terms of, such severance
arrangements, the Compensation Committee recognizes that executives and officers
often face challenges securing new employment following termination. Further,
the Committee recognizes that many of the named executives and officers have
participated in the Company since its founding and that this participation
has
not resulted in a return on their investments. Termination and Change in Control
Payments considered both the risk and the dedication of these executives’
service to the Company.
Our
Chief
Executive Officer, President of EMEA and President of APAC have employment
agreements that provide, if his employment is terminated without cause or if
the
executive terminates the agreement with Good Reason, he is entitled to
(a) all remaining salary to the end of the date of termination, plus salary
from the end of the employment term through the end of the third anniversary
of
the date of termination, and (b) the continuation by the Company of medical
and dental insurance coverage for him and his family until the end of the
employment term and through the end of the third anniversary of the date of
termination. Provided, however, if such benefits can not be continued for this
extended period, the Executive shall receive cash
(including a tax-equivalency payment for Federal, state and local income and
payroll taxes assuming Executive is in the maximum tax bracket for all such
purposes) where such benefits may not be continued.
These
agreements further provide for vesting of all options and restrictive stock
grants, if any.
The
Secretary of the Company has an employment agreement that provides, if she
is
terminated without cause or if the executive terminates the agreement with
Good
Reason, she is entitled to (a) all remaining salary to the end of the date
of termination, plus salary from the end of the employment term through the
end
of the first anniversary of the date of termination, and (b) the
continuation by the Company of medical and dental insurance coverage for her
and
her family until the end of the employment term and through the end of the
first
anniversary of the date of termination. Provided, however, if such benefits
can
not be continued for this extended period, the Executive shall receive
cash
(including a tax-equivalency payment for Federal, state and local income and
payroll taxes assuming Executive is in the maximum tax bracket for all such
purposes) where such benefits may not be continued.
These
agreements further provide for vesting of all options and restrictive stock
grants, if any.
Tax
and Accounting Implications
Deductibility
of Executive Compensation
As
part
of its role, the Compensation Committee reviews and considers the deductibility
of executive compensation under Section 162(m) of the Internal Revenue
Code, which provides that we may not deduct compensation of more than $1,000,000
that is paid to certain individuals. We believe that compensation paid under
the
management incentive plans are generally fully deductible for federal income
tax
purposes.
Accounting
for Stock-Based Compensation
Beginning
on July 1, 2006, we began accounting for stock-based payments, including awards
under our Employee Stock Option Plans, in accordance with the requirements
of
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based
Payment,
or
SFAS 123(R).
Summary
Compensation Table
The
following table shows the compensation for the fiscal year ended June 30, 2007
earned by our Chairman and Chief Executive Officer, our Chief Financial Officer
who is our Principal Financial and Accounting Officer, and others considered
to
be executive officers of the Company.
Name
and Principle Position
|
|
|
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Other
Compensation
($)
|
|
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Najeeb
Ghauri
|
|
|
2007
|
|
$
|
275,000
|
|
$
|
50,000
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(3)
|
|
$
|
46,700
|
|
(5)
|
|
$
|
371,700
|
|
Chief
Executive Officer,
|
|
|
2006
|
|
$
|
250,000
|
|
$
|
-
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(4)
|
|
$
|
26,656
|
|
|
|
$
|
276,656
|
|
Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Naeem
Ghauri
|
|
|
2007
|
|
$
|
225,000
|
|
$
|
50,000
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(3)
|
|
$
|
34,660
|
|
(6)
|
|
$
|
309,660
|
|
Chief
Executive Officer,
|
|
|
2006
|
|
$
|
280,000
|
|
$
|
-
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(4)
|
|
$
|
31,903
|
|
(6)
|
|
$
|
311,903
|
|
Global
Products Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salim
Ghauri
|
|
|
2007
|
|
$
|
175,000
|
|
$
|
50,000
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(3)
|
|
$
|
-
|
|
(7)
|
|
$
|
225,000
|
|
Chief
Executive Officer,
|
|
|
2006
|
|
$
|
150,000
|
|
$
|
-
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(4)
|
|
$
|
-
|
|
|
|
$
|
150,000
|
|
Global
Services Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tina
Gilger
|
|
|
2007
|
|
$
|
95,000
|
|
$
|
7,004
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(3)
|
|
$
|
17,587
|
|
(8)
|
|
$
|
119,591
|
|
Chief
Financial Officer
|
|
|
2006
|
|
$
|
95,000
|
|
$
|
7,096
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(4)
|
|
$
|
12,188
|
|
(8)
|
|
$
|
114,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patti
L. W. McGlasson
|
|
|
2007
|
|
$
|
110,000
|
|
$
|
6,536
|
|
$
|
-
|
|
|
|
$
|
-
|
|
(3)
|
|
$
|
-
|
|
|
|
$
|
116,536
|
|
Secretary,
General Counsel
|
|
|
2006
|
|
$
|
110,000
|
|
$ |
-
|
|
$ |
19,397 |
|
(2)
|
|
$
|
-
|
|
(4)
|
|
$
|
-
|
|
(9)
|
|
$
|
129,397
|
|
(1) No
stock
was awarded to any officer during the fiscal year ended June 30, 2007 and
therefore, no expense was recognized in the consolidated financial statements.
(2)
For
the fiscal year ended June 30, 2006, 10,000 shares of common stock were awarded
to Ms. McGlasson for compensation in her role as general counsel. Based on
the
fair market value at the date of issuance the Company recorded $19,397 in
expense for the stock awarded. No other officer was awarded stock during the
fiscal year.
(3)
No
options were awarded to any officer during the fiscal year ended June 30, 2007
and therefore, no expense was recognized in the consolidated financial
statements.
(4)
See
Note 11 to our Consolidated Financial Statements included herein as to the
assumptions used to determine the fair value of our option awards. During
fiscal
year ended June 30, 2006, FAS 123R was not effective for the Company and
therefore, the Company did not record any expense for the options awarded.
The
following table reflects the options granted to each officer and the amount
the
Company would have been required to record had FAS 123R been
effective:
Options
Granted FYE 2006
|
|
|
|
|
|
|
|
|
BLACK
|
|
|
|
|
|
|
|
|
|
|
EXERCISE
|
|
|
SCHOLES
|
|
|
FAIR
|
|
NAME
|
|
|
#
SHARES
|
|
|
PRICE
|
|
|
VALUE
|
|
|
VALUE
|
|
Najeeb
Ghauri
|
|
|
250,000
|
|
$
|
1.83
|
|
$
|
1.676
|
|
$
|
419,000
|
|
|
|
|
250,000
|
|
$
|
2.50
|
|
$
|
2.323
|
|
$
|
580,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Naeem
Ghauri
|
|
|
250,000
|
|
$
|
1.83
|
|
$
|
1.676
|
|
$
|
419,000
|
|
|
|
|
250,000
|
|
$
|
2.50
|
|
$
|
2.323
|
|
$
|
580,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salim
Ghauri
|
|
|
250,000
|
|
$
|
1.83
|
|
$
|
1.676
|
|
$
|
419,000
|
|
|
|
|
250,000
|
|
$
|
2.50
|
|
$
|
2.323
|
|
$
|
580,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tina
Gilger
|
|
|
10,000
|
|
$
|
1.86
|
|
$
|
1.249
|
|
$
|
12,490
|
|
|
|
|
10,000
|
|
$
|
2.79
|
|
$
|
1.106
|
|
$
|
11,060
|
|
|
|
|
20,000
|
|
$
|
1.65
|
|
$
|
1.108
|
|
$
|
22,160
|
|
|
|
|
20,000
|
|
$
|
2.25
|
|
$
|
1.012
|
|
$
|
20,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patti
McGlasson
|
|
|
20,000
|
|
$
|
1.65
|
|
$
|
1.108
|
|
$
|
22,160
|
|
|
|
|
20,000
|
|
$
|
2.25
|
|
$
|
1.012
|
|
$
|
20,240
|
|
(5)
Consists of $29,000 and $12,000 paid for automobile and travel allowance and
$17,856 and $14,656 paid for medical and dental insurance premiums paid by
the
Company for participation in the health insurance program for the fiscal years
ended June 30, 2007 and 2006, respectively.
(6)
Consists of $31,876 and $29,340 paid for automobile and travel allowance and
$2,784 and $2,562 paid for private medical insurance premiums paid by the
Company for the fiscal years ended June 30, 2007 and 2006,
respectively.
(7)
The
amount paid to the officer was in aggregate less than $10,000 for the fiscal
years ended June 30, 2007 and 2006, respectively.
(8)
Consists of $17,587 and $12,188 paid for medical and dental insurance premiums
paid by the Company for participation in the health insurance program for the
fiscal years ended June 30, 2007 and 2006, respectively.
(9)
The
amount paid to the officer was in aggregate less than $10,000 for the fiscal
years ended June 30, 2007 and 2006, respectively.
There
were no options granted to the named executives during the fiscal year ended
June 30, 2007.
Discussion
of Summary Compensation Table
The
terms
of our executive officers' compensation are derived from our employment
agreements with them and the annual performance review by our Compensation
Committee. The terms of Mr. Najeeb Ghauri, Mr. Naeem Ghauri and Mr. Salim
Ghauri’s employment agreements with the Company were the result of negotiations
between the Company and the executives and were approved by our Compensation
Committee and Board of Directors. The terms of Ms. McGlasson’s employment
agreement with the Company were the result of negotiations between our Chief
Executive Officer and Ms. McGlasson and were approved by our Compensation
Committee and Board of Directors. The terms of Ms. Gilger’s employment were
the result of negotiations between our Chief Executive Officer and
Ms. Gilger and were approved by our Compensation Committee and Board of
Directors.
Employment
Agreement with Najeeb Ghauri
Effective
January 1, 2007, the Company entered into an Employment Agreement with our
Chief
Executive Officer, Najeeb Ghauri. Pursuant to the Employment Agreement between
Mr. Ghauri and the Company (the "CEO Agreement"), the Company agreed to
employ Mr. Ghauri as its Chief Executive Officer from the date of the CEO
Agreement through December 31, 2009. Under the CEO Agreement, Mr. Ghauri is
entitled to an annualized base salary of $275,000 and is eligible for annual
bonuses at the discretion of the Compensation Committee. The Company retained
the right to
increase the base compensation as it deems necessary. In addition,
Mr. Ghauri is entitled to participate in the Company's stock option plans,
is entitled to two weeks of paid vacation per calendar year and is to receive
a
car allowance totaling $3,000 per month for the term of the CEO Agreement.
Finally, during the term of the CEO Agreement, the Company shall pay the amount
of premiums or other costs incurred for the coverage of Mr. Ghauri, his
spouse and dependent family members under the Company's health and related
benefit plans.
The
CEO
Agreement also includes provisions respecting severance, non-solicitation,
non-competition, and confidentiality obligations. Pursuant to the CEO Agreement,
if he terminates his employment for Good Reason (as described below), or, is
terminated prior to the end of the employment term by the Company other than
for
Cause (as described below) or death, he shall be entitled to all remaining
salary from the termination date until 36 months thereafter, at the rate of
salary in effect on the date of termination, immediate vesting of all options
and, continuation of all health related plan benefits for a period of 36 months.
He shall have no obligation to seek other employment and any income so earned
shall not reduce the foregoing amounts. If he is terminated by the Company
for
Cause (as described below), or at the end of the employment term, he shall
not
be entitled to further compensation. Under the CEO Agreement, Good Reason
includes the assignment of duties inconsistent with his title, a material
reduction in salary and perquisites, the relocation of the Company's principal
office by 30 miles, if the Company asks him to perform any act which is illegal,
including the commission of a crime or act of moral turpitude, or a material
breach of the CEO Agreement by the Company. Under the CEO Agreement, Cause
includes conviction of crime involving moral turpitude, failure to perform
his
duties to the Company, engaging in activities which are directly competitive
to
or intentionally injurious to the Company, or any material breach of the CEO
Agreement by Mr. Ghauri.
The
above
summary of the CEO Agreement is qualified in its entirety by reference to the
full text of the CEO Agreement, a copy of which was filed as an exhibit to
this
report.
Employment
Agreement with Naeem Ghauri
Effective
January 1, 2007, the Company entered into an Employment Agreement with our
President of the EMEA Region and Chief Executive Officer of the Global Products
Division, Naeem Ghauri. Pursuant to the Employment Agreement between
Mr. Ghauri and the Company (the "President EMEA Agreement"), the Company
agreed to employ Mr. Ghauri as its President of the EMEA region and Chief
Executive Officer of the Global Products Division from the date of the President
EMEA Agreement through December 31, 2009. Under the President EMEA Agreement,
Mr. Ghauri is entitled to an annualized base salary of $225,000 and is
eligible for annual bonuses at the discretion of the Compensation Committee.
The
Company retained the right to increase the base compensation as it deems
necessary. In addition, Mr. Ghauri is entitled to participate in the
Company's stock option plans, is entitled to two weeks of paid vacation per
calendar year and is to receive a car allowance totaling $2,000 per month for
the term of the President EMEA Agreement. Finally, during the term of the
President EMEA Agreement, the Company shall pay the amount of premiums or other
costs incurred for the coverage of Mr. Ghauri, his spouse and dependent
family members under the Company's health and related benefit plans.
The
President EMEA Agreement also includes provisions respecting severance,
non-solicitation, non-competition, and confidentiality obligations. Pursuant
to
the President EMEA Agreement, if he terminates his employment for Good Reason
(as described below), or, is terminated prior to the end of the employment
term
by the Company other than for Cause (as described below) or death, he shall
be
entitled to all remaining salary from the termination date until 36 months
thereafter, at the rate of salary in effect on the date of termination,
immediate vesting of all options and, continuation of all health related plan
benefits for a period of 36 months. He shall have no obligation to seek other
employment and any income so earned shall not reduce the foregoing amounts.
If
he is terminated by the Company for Cause (as described below), or at the end
of
the employment term, he shall not be entitled to further compensation. Under
the
President EMEA Agreement, Good Reason includes the assignment of duties
inconsistent with his title, a material reduction in salary and perquisites,
the
relocation of the Company's principal office by 30 miles, if the Company asks
him to perform any act which is illegal, including the commission of a crime
or
act of moral turpitude, or a material breach of the President EMEA Agreement
by
the Company. Under the President EMEA Agreement, Cause includes conviction
of
crime involving moral turpitude, failure to perform his duties to the Company,
engaging in activities which are directly competitive to or intentionally
injurious to the Company, or any material breach of the President EMEA Agreement
by Mr. Ghauri.
The
above
summary of the President EMEA Agreement is qualified in its entirety by
reference to the full text of the President EMEA Agreement, a copy of which
was
filed as an exhibit to this report.
Employment
Agreement with Salim Ghauri
Effective
January 1, 2007, the Company entered into an Employment Agreement with our
President of the APAC Region and Chief Executive Officer of the Global Services
Division, Mr. Salim Ghauri. Pursuant to the Employment Agreement between
Mr. Ghauri and the Company (the "President APAC Agreement"), the Company
agreed to employ Mr. Ghauri as its President APAC and Chief Executive
Officer of the Global Services Division from the date of the President APAC
Agreement through December 31, 2009. Under the President APAC Agreement,
Mr. Ghauri is entitled to an annualized base salary of $175,000 and is
eligible for annual bonuses at the discretion of the Compensation Committee.
The
Company retained the right to increase the base compensation as it deems
necessary. In addition, Mr. Ghauri is entitled to participate in the
Company's stock option plans, is entitled to two weeks of paid vacation per
calendar year. Finally, during the term of the President APAC Agreement, the
Company shall pay the amount of premiums or other costs incurred for the
coverage of Mr. Ghauri, his spouse and dependent family members under the
Company's health and related benefit plans.
The
President APAC Agreement also includes provisions respecting severance,
non-solicitation, non-competition, and confidentiality obligations. Pursuant
to
the President APAC Agreement, if he terminates his employment for Good Reason
(as described below), or, is terminated prior to the end of the employment
term
by the Company other than for Cause (as described below) or death, he shall
be
entitled to all remaining salary from the termination date until 36 months
thereafter, at the rate of salary in effect on the date of termination,
immediate vesting of all options and, continuation of all health related plan
benefits for a period of 36 months. He shall have no obligation to seek other
employment and any income so earned shall not reduce the foregoing amounts.
If
he is terminated by the Company for Cause (as described below), or at the end
of
the employment term, he shall not be entitled to further compensation. Under
the
President APAC Agreement, Good Reason includes the assignment of duties
inconsistent with his title, a material reduction in salary and perquisites,
the
relocation of the Company's principal office by 30 miles, if the Company asks
him to perform any act which is illegal, including the commission of a crime
or
act of moral turpitude, or a material breach of the President APAC Agreement
by
the Company. Under the President APAC Agreement, Cause includes conviction
of
crime involving moral turpitude, failure to perform his duties to the Company,
engaging in activities which are directly competitive to or intentionally
injurious to the Company, or any material breach of the President APAC Agreement
by Mr. Ghauri.
The
above
summary of the President APAC Agreement is qualified in its entirety by
reference to the full text of the President APAC Agreement, a copy of which
was
filed as an exhibit to this report.
Effective
May 1, 2006, the Company entered into an Employment Agreement with our Secretary
and General Counsel, Ms. Patti L. W. McGlasson. Pursuant to the Employment
Agreement between Ms. McGlasson and the Company (the "General Counsel
Agreement"), the Company agreed to employ Ms. McGlasson as its Secretary
and General Counsel from the date of the General Counsel Agreement through
April
30, 2008. Under the General Counsel Agreement, Ms. McGlasson was entitled
to an annualized base salary of $110,000 and is eligible for annual bonuses
at
the discretion of the Chief Executive Officer. Effective August 1, 2007, Ms.
McGlasson’s annualized salary was raised to $130,000. The Company retained the
right to increase the base compensation as it deems necessary. In addition,
Ms. McGlasson is entitled to participate in the Company's stock option
plans and, is entitled to two weeks of paid vacation per calendar year. Finally,
during the term of the General Counsel Agreement, the Company shall pay the
amount of premiums or other costs incurred for the coverage of Ms. Ghauri,
hers spouse and dependent family members under the Company's health and related
benefit plans.
The
General Counsel Agreement also includes provisions respecting severance,
non-solicitation, non-competition, and confidentiality obligations. Pursuant
to
the General Counsel Agreement, if she terminates her employment for Good Reason
(as described below), or, is terminated prior to the end of the employment
term
by the Company other than for Cause (as described below) or death, she shall
be
entitled to all remaining salary from the termination date until 12 months
thereafter, at the rate of salary in effect on the date of termination,
immediate vesting of all options and, continuation of all health related plan
benefits for a period of 12 months. She shall have no obligation to seek other
employment and any income so earned shall not reduce the foregoing amounts.
If
she is terminated by the Company for Cause (as described below), or at the
end
of the employment term, she shall not be entitled to further compensation.
Under
the General Counsel Agreement, Good Reason includes the assignment of duties
inconsistent with her title, a material reduction in salary and perquisites,
the
relocation of the Company's principal office by 60 miles, if the Company asks
him to perform any act which is illegal, including the commission of a crime
or
act of moral turpitude, or a material breach of the President APAC Agreement
by
the Company. Under the General Counsel Agreement, Cause includes conviction
of
crime involving moral turpitude, failure to perform his duties to the Company,
engaging in activities which are directly competitive to or intentionally
injurious to the Company, or any material breach of the General Counsel
Agreement by Ms. McGlasson.
The
above
summary of the General Counsel Agreement is qualified in its entirety by
reference to the full text of the General Counsel Agreement, a copy of which
was
filed as an exhibit to the Company’s 10-KSB for the fiscal year ended June 30,
2006 on September 27, 2006.
The
following table shows grants of stock options and grants of unvested stock
awards outstanding on June 30, 2007, the last day of our fiscal year, to each
of
the individuals named in the Summary Compensation Table.
|
|
NUMBER
OF
|
|
NUMBER
OF
|
|
|
|
|
|
|
|
SECURITIES
|
|
SECURITIES
|
|
|
|
|
|
|
|
UNDERLYING
|
|
UNDERLYING
|
|
OPTION
|
|
OPTION
|
|
|
|
OPTIONS
(#)
|
|
OPTIONS
(#)
|
|
EXERCISE
|
|
EXPIRATION
|
|
NAME
|
|
EXERCISABLE
|
|
UNEXERCISABLE
|
|
PRICE
($)
|
|
DATE
|
|
Najeeb
Ghauri
|
|
|
100,000
|
|
|
-
|
|
|
2.21
|
|
|
1/1/14
|
|
|
|
|
100,000
|
|
|
|
|
|
3.75
|
|
|
1/1/14
|
|
|
|
|
50,000
|
|
|
|
|
|
5.00
|
|
|
1/1/14
|
|
|
|
|
20,000
|
|
|
|
|
|
2.64
|
|
|
3/26/14
|
|
|
|
|
30,000
|
|
|
|
|
|
5.00
|
|
|
3/26/14
|
|
|
|
|
374,227
|
|
|
|
|
|
1.94
|
|
|
4/1/15
|
|
|
|
|
500,000
|
|
|
|
|
|
2.91
|
|
|
4/1/15
|
|
|
|
|
250,000
|
|
|
|
|
|
1.83
|
|
|
6/2/16
|
|
|
|
|
250,000
|
|
|
|
|
|
2.50
|
|
|
6/2/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Naeem
Ghauri
|
|
|
100,000
|
|
|
-
|
|
|
2.21
|
|
|
1/2/14
|
|
|
|
|
100,000
|
|
|
|
|
|
3.75
|
|
|
1/2/14
|
|
|
|
|
50,000
|
|
|
|
|
|
5.00
|
|
|
1/2/14
|
|
|
|
|
20,000
|
|
|
|
|
|
2.64
|
|
|
3/26/14
|
|
|
|
|
30,000
|
|
|
|
|
|
5.00
|
|
|
3/26/14
|
|
|
|
|
10,000
|
|
|
|
|
|
2.50
|
|
|
2/16/12
|
|
|
|
|
374,227
|
|
|
|
|
|
1.94
|
|
|
4/1/15
|
|
|
|
|
500,000
|
|
|
|
|
|
2.91
|
|
|
4/1/15
|
|
|
|
|
250,000
|
|
|
|
|
|
1.83
|
|
|
6/2/16
|
|
|
|
|
250,000
|
|
|
|
|
|
2.50
|
|
|
6/2/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salim
Ghauri
|
|
|
100,000
|
|
|
-
|
|
|
2.21
|
|
|
1/2/14
|
|
|
|
|
100,000
|
|
|
|
|
|
3.75
|
|
|
1/2/14
|
|
|
|
|
50,000
|
|
|
|
|
|
5.00
|
|
|
3/26/14
|
|
|
|
|
20,000
|
|
|
|
|
|
2.64
|
|
|
3/26/14
|
|
|
|
|
30,000
|
|
|
|
|
|
5.00
|
|
|
3/26/14
|
|
|
|
|
20,000
|
|
|
|
|
|
2.50
|
|
|
2/16/12
|
|
|
|
|
374,227
|
|
|
|
|
|
1.94
|
|
|
4/1/15
|
|
|
|
|
500,000
|
|
|
|
|
|
2.91
|
|
|
4/1/15
|
|
|
|
|
250,000
|
|
|
|
|
|
1.83
|
|
|
6/2/16
|
|
|
|
|
250,000
|
|
|
|
|
|
2.50
|
|
|
6/2/16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tina
Gilger
|
|
|
10,000
|
|
|
-
|
|
|
1.86
|
|
|
7/20/15
|
|
|
|
|
10,000
|
|
|
|
|
|
2.79
|
|
|
7/20/15
|
|
|
|
|
20,000
|
|
|
|
|
|
1.65
|
|
|
7/7/15
|
|
|
|
|
20,000
|
|
|
|
|
|
2.25
|
|
|
7/7/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patti
L. W. McGlasson
|
|
|
10,000
|
|
|
-
|
|
|
3.00
|
|
|
1/1/14
|
|
|
|
|
20,000
|
|
|
|
|
|
2.64
|
|
|
3/26/14
|
|
|
|
|
30,000
|
|
|
|
|
|
5.00
|
|
|
3/26/14
|
|
|
|
|
20,000
|
|
|
|
|
|
1.65
|
|
|
7/7/15
|
|
|
|
|
20,000
|
|
|
|
|
|
2.25
|
|
|
7/7/15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Exercises and Stock Vested
Mr.
Najeeb Ghauri exercised options to acquire 125,773 shares of common stock of
the
Company at the exercise price of $1.94 per share during the last fiscal year.
Mr.
Naeem
Ghauri exercised options to acquire 125,773 shares of common stock of the
Company at the exercise price of $1.94 per share during the last fiscal year.
Mr.
Salim
Ghauri exercised options to acquire 125,773 shares of common stock of the
Company at the exercise price of $1.94 per share during the last fiscal year.
Pension
Benefits
We
do not
have any qualified or non-qualified defined benefit plans.
Potential
Payments upon Termination or Change of Control
Generally,
regardless of the manner in which a named executive officer's employment
terminates, he is entitled to receive amounts earned during his term of
employment. Such amounts include the portion of the executive's base salary
that
has accrued prior to any termination and not yet been paid and unused
vacation pay.
In
addition, we are required to make the additional payments and/or provide
additional benefits to the individuals named in the Summary Compensation Table
in the event of a termination of employment or a change of control, as set
forth
below.
Najeeb
Ghauri, Chairman and Chief Executive Officer
In
the
event that Mr. Ghauri is terminated as a result of a change in control (defined
below), he is entitled to all payments due in the event of a termination for
Cause or Good Reason and: (a) a one time payment equal to the product of 2.99
and his salary during the preceding 12 months; (b) a one-time payment equal
to
the higher of (i) Executive’s bonus for the previous year and (ii) one percent
of the Company’s consolidated gross revenues for the previous twelve (12)
months; and, at the election of the Executive, (c) a one-time cash payment
equal
to the cash value of all shares eligible for exercise upon the exercise of
Executive’s Options then currently outstanding and exercisable as if they had
been exercised in full (the “Change of Control Termination Payment”). In the
event Executive elects to receive the cash value of the shares underlying
Executive’s options, he shall so notify the Company of his intent.
The
following table summarizes the potential payments to Mr. Ghauri assuming
his employment with us was terminated or a change of control occurred on June
30, 2007, the last day of our most recently completed fiscal year.
|
|
|
|
|
|
|
|
|
TERMINATION
|
|
|
|
|
|
|
|
|
|
|
BY
US
|
|
|
|
|
|
|
|
|
|
|
WITHOUT
|
|
|
|
|
|
|
|
TERMINATION
|
|
|
CAUSE
OR BY
|
|
|
|
|
CHANGE
|
|
|
UPON
DEATH
|
|
|
EXECUTIVE
|
|
|
|
|
OF
|
|
|
OR
|
|
|
FOR
GOOD
|
|
BENEFITS
AND PAYMENTS
|
|
|
CONTROL
|
|
|
DISABILITY
|
|
|
CAUSE
|
|
Base
Salary
|
|
$
|
878,103
|
|
$
|
-
|
|
$
|
878,103
|
|
Bonus
|
|
|
50,000
|
|
|
|
|
|
|
|
Salary
Multiple Pay-out
|
|
|
822,250
|
|
|
|
|
|
|
|
Bonus
or Revenue One-time Pay-Out
|
|
|
292,821
|
|
|
|
|
|
|
|
Net
Cash Value of Options
|
|
|
1,399,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,442,319
|
|
$
|
-
|
|
$
|
878,103
|
|
|
|
|
|
|
|
|
|
|
|
|
Naeem
Ghauri, President EMEA and Chief Executive Officer of Global Products Division
In
the
event that Mr. Ghauri is terminated as a result of a change in control (defined
below), he is entitled to all payments due in the event of a termination for
Cause or Good Reason and: (a) a one time payment equal to the product of 2.99
and his salary during the preceding 12 months; (b) a one-time payment equal
to
the higher of (i) Executive’s bonus for the previous year and (ii) one percent
of the Company’s consolidated gross revenues for the previous twelve (12)
months; and, at the election of the Executive, (c) a one-time cash payment
equal
to the cash value of all shares eligible for exercise upon the exercise of
Executive’s Options then currently outstanding and exercisable as if they had
been exercised in full (the “Change of Control Termination Payment”). In the
event Executive elects to receive the cash value of the shares underlying
Executive’s options, he shall so notify the Company of his intent.
The
following table summarizes the potential payments to Mr. Ghauri assuming
his employment with us was terminated or a change of control occurred on June
30, 2007, the last day of our most recently completed fiscal year.
|
|
|
|
|
|
TERMINATION
|
|
|
|
|
|
|
|
BY
US
|
|
|
|
|
|
|
|
WITHOUT
|
|
|
|
|
|
TERMINATION
|
|
CAUSE
OR BY
|
|
|
|
CHANGE
|
|
UPON
DEATH
|
|
EXECUTIVE
|
|
|
|
OF
|
|
OR
|
|
FOR
GOOD
|
|
|
|
CONTROL
|
|
DISABILITY
|
|
CAUSE
|
|
Base
Salary
|
|
$
|
675,000
|
|
$
|
-
|
|
$
|
675,000
|
|
Bonus
|
|
|
50,000
|
|
|
|
|
|
|
|
Salary
Multiple Pay-out
|
|
|
672,750
|
|
|
|
|
|
|
|
Bonus
or Revenue One-time Pay-Out
|
|
|
292,821
|
|
|
|
|
|
|
|
Net
Cash Value of Options
|
|
|
1,406,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,097,316
|
|
$
|
-
|
|
$
|
675,000
|
|
Salim
Ghauri, President APAC and Chief Executive Officer of Global Services Division
In
the
event that Mr. Ghauri is terminated as a result of a change in control (defined
below), he is entitled to all payments due in the event of a termination for
Cause or Good Reason and: (a) a one time payment equal to the product of 2.99
and his salary during the preceding 12 months; (b) a one-time payment equal
to
the higher of (i) Executive’s bonus for the previous year and (ii) one percent
of the Company’s consolidated gross revenues for the previous twelve (12)
months; and, at the election of the Executive, (c) a one-time cash payment
equal
to the cash value of all shares eligible for exercise upon the exercise of
Executive’s Options then currently outstanding and exercisable as if they had
been exercised in full (the “Change of Control Termination Payment”). In the
event Executive elects to receive the cash value of the shares underlying
Executive’s options, he shall so notify the Company of his intent.
The
following table summarizes the potential payments to Mr. Ghauri assuming
his employment with us was terminated or a change of control occurred on June
30, 2007, the last day of our most recently completed fiscal year.
BENEFITS
AND PAYMENTS
|
|
CHANGE
OF
CONTROL
|
|
TERMINATION
UPON
DEATH
OR
DISABILITY
|
|
TERMINATION
BY US
WITHOUT
CAUSE OR BY EXECUTIVE
FOR
GOOD
CAUSE
|
|
Base
Salary
|
|
$
|
525,000
|
|
$
|
-
|
|
$
|
525,000
|
|
Bonus
|
|
|
50,000
|
|
|
|
|
|
|
|
Salary
Multiple Pay-out
|
|
|
523,250
|
|
|
|
|
|
|
|
Bonus
or Revenue One-time Pay-Out
|
|
|
292,821
|
|
|
|
|
|
|
|
Net
Cash Value of Options
|
|
|
1,414,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,805,416
|
|
$
|
-
|
|
$
|
525,000
|
|
In
the
event that Ms. McGlasson is terminated as a result of a change in control
(defined below), she is entitled to all payments due in the event of a
termination for Cause or Good Reason and: (a) a one time payment equal to the
product of 2.99 and her salary during the preceding 12 months; (b) a one-time
payment equal to the higher of (i) Executive’s bonus for the previous year and
(ii) one-half of one percent of the Company’s consolidated gross revenues for
the previous twelve (12) months; and, at the election of the Executive, (c)
a
one-time cash payment equal to the cash value of all shares eligible for
exercise upon the exercise of Executive’s Options then currently outstanding and
exercisable as if they had been exercised in full (the “Change of Control
Termination Payment”). In the event Executive elects to receive the cash value
of the shares underlying Executive’s options, she shall so notify the Company of
her intent.
The
following table summarizes the potential payments to Ms. McGlasson assuming
her employment with us was terminated or a change of control occurred on June
30, 2007, the last day of our most recently completed fiscal year.
BENEFITS
AND PAYMENTS
|
|
|
|
TERMINATION
UPON
DEATH
OR
DISABILITY
|
|
TERMINATION
BY US WITHOUT CAUSE OR BY EXECUTIVE
FOR
GOOD
CAUSE
|
|
Base
Salary
|
|
$
|
110,000
|
|
$
|
-
|
|
$
|
110,000
|
|
Bonus
|
|
|
6,536
|
|
|
|
|
|
|
|
Salary
Multiple Pay-out
|
|
|
328,900
|
|
|
|
|
|
|
|
Bonus
or Revenue One-time Pay-Out
|
|
|
146,410
|
|
|
|
|
|
|
|
Net
Cash Value of Options
|
|
|
136,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
728,646
|
|
$
|
-
|
|
$
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
Compensation
Director
Compensation Table
The
following table sets forth a summary of the compensation earned by our Directors
and/or paid to certain of our Directors pursuant to the Company's compensation
policies for the fiscal year ended June 30, 2007, other than Najeeb Ghauri,
Naeem Ghauri and Salim Ghauri who are executives and directors.
|
|
FEES
|
|
|
|
|
|
|
|
EARNED
|
|
|
|
|
|
|
|
OR
PAID
|
|
OPTION
|
|
|
|
|
|
IN
CASH
|
|
AWARDS
|
|
TOTAL
|
|
NAME
|
|
($)
|
|
($)
(1)
|
|
($)
|
|
Eugen
Beckert
|
|
|
24,500
|
|
|
-
|
|
|
24,500
|
|
Shahid
Javed Burki
|
|
|
26,750
|
|
|
-
|
|
|
26,750
|
|
Mark
Caton
|
|
|
8,000
|
|
|
-
|
|
|
8,000
|
|
Alexander
Shakow (2)
|
|
|
1,333
|
|
|
-
|
|
|
1,333
|
|
Jim
Moody (3)
|
|
|
11,250
|
|
|
-
|
|
|
11,250
|
|
Derek
Soper (4)
|
|
|
14,667
|
|
|
-
|
|
|
14,667
|
|
(1) |
There
were no options awarded during fiscal year ended June 30, 2007
|
|
Mr.
Shakow joined the board upon his election by the Board of Directors
on
June 4, 2007.
|
(3) |
Mr.
Moody resigned from our Board of Directors effective December 31,
2007.
|
(4) |
Mr.
Soper did not stand for re-election to our Board of Directors and
his term
concluded on June 4, 2007.
|
Director
Compensation Policy
Messrs. Ghauri
are not paid any fees or other compensation for services as members of our
Board
of Directors.
The
non-employee members of our Board of Directors received as compensation for
services as directors as well as reimbursement for documented reasonable
expenses incurred in connection with attendance at meetings of our Board of
Directors and the committees thereof. The Company paid the following amounts
to
members of the Board of Directors for the activities shown during the fiscal
year ended June 30, 2007
|
|
CASH
|
|
BOARD
ACTIVITY
|
|
PAYMENTS
|
|
Annual
Cash Retainer
|
|
$
|
10,000
|
|
Committee
Membership
|
|
$
|
2,000
|
|
Chairperson
for Audit Committee
|
|
$
|
15,000
|
|
Chairperson
for Compensation Committee
|
|
$
|
12,000
|
|
Chairperson
for Nominating and Corporate Governance Committee
|
|
$
|
9,000
|
|
Members
of our Board of Directors are also eligible to receive stock option grants
both
upon joining the Board of Directors and on an annual basis in line with
recommendations by the Compensation Committee, which grants are non-qualified
stock options under our Employee Stock Option Plans. Further, from time to
time,
the non-employee members of the Board of Directors are eligible to receive
stock
grants that may be granted if and only if approved by the shareholders of the
Company.
Compensation
Committee Interlocks and Insider Participation
The
current members of the Compensation Committee are Messrs. Caton (Chairman),
Mr. Beckert, Mr. Burki and Mr. Shakow. During the fiscal year ended June 30,
2007, the Chairman of the Compensation Committee was Mr. Beckert. From June
30,
2006, the Compensation Committee consisted of Mr. Beckert, Mr. Burki, Mr. Moody
and Mr. Soper. Mr. Moody resigned effective December 31, 2007. Mr. Moody was
replaced on the committee by Mr. Caton. Mr. Soper did not stand for reelection
to the board and accordingly, his committee membership concluded on June 4,
2007. There were no other members of the committee during the fiscal year ended
June 30, 2007. All current members of the Compensation Committee are
"independent directors" as defined under the Nasdaq Marketplace Rules. None
of
these individuals were at any time during the fiscal year ended June 30, 2007,
or at any other time, an officer or employee of the Company.
No
executive officer of the Company serves as a member of the board of directors
or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
Employee
Stock Option Plans
The
2001
plan authorizes the issuance of up to 2,000,000 options to purchase common
stock
of which 2,000,000 have been granted. The grant prices range between $.75 and
$2.50.
The
2002
plan authorizes the issuance of up to 2,000,000 options to purchase common
stock
of which 2,000,000 options have been granted. The grant prices range between
$.75 and $5.00.
In
March
2004, our shareholders approved the 2003 stock option plan. This plan authorizes
up to 2,000,000 options to purchase common stock of which 1,189,606 have been
granted. The grant prices range between $1.00 and $5.00.
In
March
2005, our shareholders approved the 2004 stock option plan. This plan authorizes
up to 5,000,000 options to purchase common stock of which 4,998,246 have been
granted. The grant prices range between $1.50 and $3.00.
In
April
2006, our shareholders approved the 2005 stock option plan. This plan authorizes
up to 5,000,000 options to purchase common stock of which 1,780,000 have been
granted. The grant prices range between $1.70 and $2.55.
ITEM
11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, its only class of outstanding voting
securities as of September 13, 2007, 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:
|
|
|
|
Percentage
|
|
Name
and
|
|
Number
of
|
|
Beneficially
|
|
Address
|
|
Shares(1)(2)
|
|
owned(4)
|
|
|
|
|
|
|
|
Najeeb
Ghauri (3)
|
|
|
2,412,650
|
|
|
11.28
|
%
|
Naeem
Ghauri (3)
|
|
|
2,261,367
|
|
|
10.58
|
%
|
Salim
Ghauri (3)
|
|
|
2,377,416
|
|
|
11.12
|
%
|
Eugen
Beckert (3)
|
|
|
223,900
|
|
|
*
|
|
Shahid
Javed Burki (3)
|
|
|
204,000
|
|
|
*
|
|
Mark
Caton (3)
|
|
|
6,000
|
|
|
*
|
|
Alexander
Shakow (3)
|
|
|
0
|
|
|
*
|
|
Patti
McGlasson (3)
|
|
|
140,000
|
|
|
*
|
|
Tina
Gilger (3)
|
|
|
86,731
|
|
|
*
|
|
The
Tail Wind Fund Ltd.(5)(6)
|
|
|
2,116,117
|
|
|
9.9
|
%
|
All
officers and directors
|
|
|
|
|
|
|
|
as
a group (nine persons)
|
|
|
7,572,064
|
|
|
35.42
|
%
|
*
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 September 19, 2007 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, 1,774,227; Mr. Naeem Ghauri, 1,784,227; Mr. Salim
Ghauri, 1,774,227; Mr. Eugen Beckert, 135,000; Mr. Shahid Burki, 150,000; Ms.
Tina Gilger, 75,000; and Ms. Patti McGlasson, 115,000.
(3)
Address c/o NetSol Technologies, Inc. at 23901 Calabasas Road, Suite 2072,
Calabasas, CA 91302.
(4)
Shares issued and outstanding as of September 13, 2007 were 21,374,922.
(5)
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.
(6)
Subject to the Ownership Limitation (defined below), The Tail Wind Fund Ltd.
(“Tail Wind”) would own a total of 4,281,411 shares of Common Stock, including:
2,141,515 shares of Common Stock issuable upon conversion of shares of preferred
stock issued to Tail Wind (“the Preferred Stock”); 833,334 shares of Common
Stock issuable upon exercise of Warrants issued to Tail Wind on such date
(“Warrants”); 804,795 shares of common stock issued s part of a private
placement in June 2007; warrants to acquire 303,030 shares of Common Stock
issued as part of the June 2007 private placement; 83,306 issued as dividend
payments on the Preferred Stock; and 115,431 as interest on the Note issued
in
June 2006 and converted into preferred stock in October 2006. The private
placement was also subject to the Ownership Limitation. 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
21,374,922 shares of common stock outstanding, beneficially owns 4,281,411
shares of Common Stock and disclaims beneficial ownership of
1,966,557 shares
of
Common Stock.
ITEM
12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In
July
2007, the board approved compensation for service on the Audit, Compensation
and
Nominating and Corporate Governance Committees. This compensation is discussed
in the sections entitled “Compensation of Directors” beginning on page
32.
In
July
2007, the board approved compensation for service on the board of directors,
the
Audit, Compensation and Nominating and Corporate Governance Committees. This
compensation is discussed in the sections entitled “Compensation of Directors”
beginning on page 43.
PART
IV
ITEM
13 - EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibits
3.1 |
Articles
of Incorporation of Mirage Holdings, Inc., a Nevada corporation,
dated
March 18, 1997, incorporated
by reference as Exhibit 3.1 to NetSol’s Registration Statement No.
333-28861 filed on Form
SB-2 filed June 10, 1997.*
|
3.2 |
Amendment
to Articles of Incorporation dated May 21, 1999, incorporated by
reference
as Exhibit 3.2 to NetSol’s Annual Report for the fiscal year ended June
30, 1999 on Form 10K-SB filed September 28,
1999.*
|
3.3 |
Amendment
to the Articles of Incorporation of NetSol International, Inc. dated
March
20, 2002 incorporated by reference as Exhibit 3.3 to NetSol’s Annual
Report on Form 10-KSB/A filed on February 2,
2001.*
|
3.4 |
Amendment
to the Articles of Incorporation of NetSol Technologies, Inc. dated
August
20, 2003 filed as Exhibit A to NetSol’s Definitive Proxy Statement filed
June 27, 2003.*
|
3.5 |
Amendment
to the Articles of Incorporation of NetSol Technologies, Inc. dated
March
14, 2005 filed as Exhibit 3.0 to NetSol’s quarterly report filed on Form
10-QSB for the period ended March 31,
2005.*
|
3.6 |
Amendment
to the Articles of Incorporation dated October 18,
2006(1)
|
3.7 |
Bylaws
of Mirage Holdings, Inc., as amended and restated as of November
28, 2000
incorporated by reference as Exhibit 3.3 to NetSol’s Annual Report for the
fiscal year ending in June 30, 2000 on Form 10K-SB/A filed on February
2,
2001.*
|
3.8 |
Amendment
to the Bylaws of NetSol Technologies, Inc. dated February 16, 2002
incorporated by reference as Exhibit 3.5 to NetSol’s Registration
Statement filed on Form S-8 filed on March 27,
2002.*
|
4.1 |
Form
of Common Stock Certificate*
|
4.3 |
Form
of Series A 7% Cumulative Preferred Stock filed as Annex E to NetSol’s
Definitive Proxy Statement filed September 18,
2006*.
|
10.1 |
Lease
Agreement for Calabasas executive offices dated December 3, 2003
incorporated by reference as Exhibit 99.1 to NetSol’s Current Report filed
on Form 8-K filed on December 24,
2003.*
|
10.2 |
Company
Stock Option Plan dated May 18, 1999 incorporated by reference as
Exhibit
10.2 to the Company’s Annual Report for the Fiscal Year Ended June 30,
1999 on Form 10K-SB filed September 28,
1999.*
|
10.3 |
CompanyStock
Option Plan dated April 1, 1997 incorporated by reference as Exhibit
10.5
to NetSol’s Registration Statement No. 333-28861 on Form SB-2 filed June
10, 1997*
|
10.4 |
Company
2003 Incentive and Nonstatutory incorporated by reference as Exhibit
99.1
to NetSol’s Definitive Proxy Statement filed February 6,
2004.*
|
10.5 |
Company
2001 Stock Options Plan dated March 27, 2002 incorporated by reference
as
Exhibit 5.1 to NetSol’s Registration Statement on Form S-8 filed on March
27, 2002.*
|
10.6 |
Frame
Agreement by and between DaimlerChrysler Services AG and NetSol
Technologies dated June 4, 2004 incorporated by reference as Exhibit
10.13
to NetSol’s Annual Report for the year ended June 30, 2005 on Form 10-KSB
filed on September 15, 2005.*
|
10.7 |
Share
Purchase Agreement dated as of January 19, 2005 by and between the
Company
and the shareholders of CQ Systems Ltd.
incorporated by reference as Exhibit 2.1 to NetSol’s Current Report filed
on form 8-K on January 25, 2005.*
|
10.8 |
Stock
Purchase Agreement dated May 6, 2006 by and between the Company,
McCue
Systems, Inc. and the shareholders of McCue Systems, Inc. incorporated
by
reference as Exhibit 2.1 to NetSol’s Current Report filed on form 8-K on
May 8, 2006.*
|
10.9 |
Employment
Agreement by and between NetSol Technologies, Inc. and Patti L. W.
McGlasson dated May 1, 2006 incorporated by reference as Exhibit
10.20 to
NetSol’s Annual Report on form 10-KSB dated September 18, 2006*.
|
10.10 |
Employment
Agreement by and between NetSol Technologies, Inc. and John McCue
dated
June 30, 2006 incorporated by reference as Exhibit 10.21 to NetSol’s
Annual Report on form 10-KSB dated September 18,
2006*
|
10.11. |
Employment
Agreement by and between the Company and Najeeb Ghauri dated January
1,
2007(1)
|
10.12 |
Employment
Agreement by and between the Company and Naeem Ghauri dated January
1,
2007(1).
|
10.13 |
Employment
Agreement by and between the Company and Salim Ghauri dated January
1,
2007(1).
|
10.14 |
Employment
Agreement by and between the Company and Tina Gilger dated August
1,
2007(1).
|
10.15 |
Lease
Agreement by and between McCue Systems, Inc. and Sea Breeze 1 Venture
dated April 29, 2003*.
|
10.16 |
Amendment
to Lease Agreement by and between McCue Systems, Inc. and Sea Breeze
1
Venture dated June 25, 2007(1).
|
10.17 |
Lease
Agreement by and between NetSol Pvt Limited and Civic Centres Company
(PVT) Limited dated May 28, 2001 incorporated by this reference as
Exhi
bit 10.23 to NetSol’s Annual Report on form 10-KSB dated September 18,
2006.*.
|
10.18 |
Lease
Agreement by and between NetSol Pvt Limited and Mrs.Rameeza Zobairi
dated
December 5, 2005 incorporated by this reference as Exhibit 10.24
to
NetSol’s Annual Report on form 10-KSB dated September 18,
2006.*.
|
10.19 |
Lease
Agreement by and between NetSol Pvt Limited and Mr. Nisar Ahmed dated
May
4, 2006 incorporated by this reference as Exhibit 10.25 to NetSol’s Annual
Report on form 10-KSB dated September 18,
2006.*
|
10.20 |
Lease
Agreement by and between NetSol Technologies, Ltd. and Argyll Business
Centres Limited dated April 28, 2006 incorporated by this reference
as
Exhibit 10. 26 to NetSol’s Annual Report on form 10-KSB dated September
18, 2006.*
|
10.21 |
Tenancy
Agreement by and between NetSol Technologies, Ltd. and Beijing Lucky
Goldstar Building Development Co. Ltd. dated June 26,
2007.(1)
|
10.22 |
Company
2005 Stock Option Plan incorporated by reference as Exhibit 99.1
to
NetSol’s Definitive Proxy Statement filed on March 3,
2006.*
|
10.23 |
Company
2004 Stock Option Plan incorporated by reference as Exhibit 99.1
to
NetSol’s Definitive Proxy Statement filed on February 7,
2005.*
|
10.24 |
Working
area sublease by and between NetSol Technologies, Ltd. and Toyota
Leasing
(Thailand) Co. Ltd., dated June 21,
2007.(1)
|
14.1 |
Amended
and Restated Code of Ethics (1)
|
21.1 |
A
list of all subsidiaries of the
Company(1)
|
31.1 |
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CEO)(1)
|
31.2 |
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(CFO)(1)
|
32.1 |
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
(CEO)(1)
|
32.2 |
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley act of 2002
(CFO)(1)
|
*Previously
Filed
(1)
Filed
Herewith
(b)
Reports on Form 8-K
1) |
On
April 30, 2007, the Company filed a current report including its
press
release dated April 30, 2007 which announced the results of operations
and
financial conditions for its Pakistani subsidiary, NetSol Technologies,
Ltd. for the quarter ended March 31,
2007.
|
2) |
On
May 8, 2007, the Company filed a current report including its press
release dated May 8, 2007 and Financial Results Presentation dated
May 8,
2007 which announced the results of operations and financial conditions
for the quarter ended March 31,
2007.
|
3) |
On
June 7, 2007 the Company filed a current report announcing the decision
of
Derek Soper not to stand for reelection and the election, at the
Company’s
annual shareholders’ meeting, of the current board of
directors.
|
Item
14 Principal Accountant Fees and Services
Audit
Fees
Kabani
& Co. audited the Company’s financial statements for the fiscal years ended
June 30, 2007 and June 30, 2006. The aggregate fees billed by
Kabani & Co. for the annual audit and review of financial statements
included in the Company’s Form 10-KSB or services that are normally provided by
Kabani & Company that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for the year ended June
30,
2007 was $105,000, and for the year ended June 30, 2006 was $135,500.
Audit
Related Fees
The
aggregate fees billed by Kabani & Co. during fiscal 2007 including
assurance and related audit services not covered in the preceding paragraph
was
$40,000. These “Audit Related Fees” were primarily for services in connection
with the review of quarterly financial statements and the Company’s filing of a
Registration Statement and amendments thereto on Form S-3. The aggregate
fees billed by Kabani & Company during fiscal 2006 including assurance and
related audit services not covered in the preceding paragraph was $31,500.
These
“Audit Related Fees” were primarily for services in connection with the review
of quarterly financial statements and the Company’s filing of a Registration
Statement on Form S-8.
Tax
Fees
Tax
fees
for fiscal year 2007 were $12,500 and consisted of the preparation of the
Company’s federal and state tax returns for the fiscal years 2006. Tax fees for
fiscal year 2006 were $21,500 and consisted of the preparation of the Company’s
federal and state tax returns for the fiscal years 2004 and 2005.
All
Other Fees
There
were no other fees billed by Kabani & Co. or services rendered to
NetSol during the fiscal years ended June 30, 2007 and 2006, other than as
described above.
Pre-Approval
Procedures
The
Audit
Committee and the Board of Directors are responsible for the engagement of
the
independent auditors and for approving, in advance, all auditing services and
permitted non-audit services to be provided by the independent auditors. The
Audit Committee maintains a policy for the engagement of the independent
auditors that is intended to maintain the independent auditor’s independence
from NetSol. In adopting the policy, the Audit Committee considered the various
services that the independent auditors have historically performed or may be
needed to perform in the future. The policy, which is to be reviewed and
re-adopted at least annually by the Audit Committee:
|
(i)
|
Approves
the performance by the independent auditors of certain types of service
(principally audit-related and tax), subject to restrictions in some
cases, based on the Committee’s determination that this would not be
likely to impair the independent auditors’ independence from
NetSol;
|
|
(ii)
|
Requires
that management obtain the specific prior approval of the Audit Committee
for each engagement of the independent auditors to perform other
types of
permitted services; and,
|
|
(iii)
|
Prohibits
the performance by the independent auditors of certain types of services
due to the likelihood that their independence would be
impaired.
|
Any
approval required under the policy must be given by the Audit Committee, by
the
Chairman of the Committee in office at the time, or by any other Committee
member to whom the Committee has delegated that authority. The Audit Committee
does not delegate its responsibilities to approve services performed by the
independent auditors to any member of management.
The
standard applied by the Audit Committee in determining whether to grant approval
of an engagement of the independent auditors is whether the services to be
performed, the compensation to be paid therefore and other related factors
are
consistent with the independent auditors’ independence under guidelines of the
Securities and Exchange Commission and applicable professional standards.
Relevant considerations include, but are not limited to, whether the work
product is likely to be subject to, or implicated in, audit procedures during
the audit of NetSol’s financial statements; whether the independent auditors
would be functioning in the role of management or in an advocacy role; whether
performance of the service by the independent auditors would enhance NetSol’s
ability to manage or control risk or improve audit quality; whether performance
of the service by the independent auditors would increase efficiency because
of
their familiarity with NetSol’s business, personnel, culture, systems, risk
profile and other factors; and whether the amount of fees involved, or the
proportion of the total fees payable to the independent auditors in the period
that is for tax and other non-audit services, would tend to reduce the
independent auditors’ ability to exercise independent judgment in performing the
audit.
SIGNATURES
In
accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
NetSol
Technologies, Inc. |
|
|
|
Date:
September
20, 2007 |
BY:
|
/S/
NAJEEB GHAURI |
|
Najeeb
Ghauri |
|
Chief Executive
Officer |
|
|
|
|
|
Date:
September
20, 2007 |
BY:
|
/S/
Tina
Gilger |
|
Tina
Gilger |
|
Chief
Financial
Officer |
In
accordance with the Exchange Act, this amended report has been signed below
by
the following persons on behalf of the Registrant and in the capacities and
on
the dates indicated.
|
|
|
|
|
|
|
|
Date:
September 20, 2007 |
BY: |
/S/
NAJEEB U. GHAURI |
|
Najeeb
U. Ghauri
Chief
Executive Officer
Director,
Chairman
|
|
|
|
|
|
Date:
September 20, 2007 |
BY: |
/S/
SALIM GHAURI |
|
Salim
Ghauri
President,
APAC
Director
|
|
|
|
|
|
Date:
September 20, 2007 |
BY: |
/S/
EUGEN BECKERT |
|
|
|
|
|
|
|
Date:
September 20, 2007 |
BY: |
/S/
SHAHID JAVED BURKI |
|
Shahid
Javed Burki
Director
|
|
|
|
|
|
Date:
September 20, 2007 |
BY: |
/S/
MARK
CATON |
|
|
|
|
|
|
|
Date:
September 20, 2007 |
BY: |
/S/
ALEXANDER SHAKOW |
|
Alexander
Shakow
Director
|
NETSOL
TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Consolidated
Balance Sheet as of June 30, 2007
|
|
F-3
|
|
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2007 and
2006
|
|
F-4
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended
|
|
|
June
30, 2007 and 2006
|
|
F-5
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2007 and
2006
|
|
F-7
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-9
|
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, 2007, and the related consolidated statements
of
operations, stockholders’ equity and cash flows for the years ended June 30,
2007 and 2006. 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
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 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, 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, 2007 and the results of
its
consolidated operations and its cash flows for the years ended June 30, 2007
and
2006 in conformity with accounting principles generally accepted in the United
States of America.
/s/
Kabani & Company, Inc.
CERTIFIED
PUBLIC ACCOUNTANTS
Los
Angeles, California
September
10, 2007
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
JUNE
30,
2007
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,010,164
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$106,090
|
|
|
7,937,686
|
|
|
|
|
Revenues
in excess of billings
|
|
|
8,501,769
|
|
|
|
|
Other
current assets
|
|
|
2,278,749
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
22,728,368
|
|
Property
and equipment,
net of accumulated depreciation
|
|
|
|
|
|
7,583,752
|
|
Other
assets, long-term
|
|
|
|
|
|
1,308,267
|
|
Intangibles:
|
|
|
|
|
|
|
|
Product
licenses, renewals, enhancements, copyrights,
|
|
|
|
|
|
|
|
trademarks,
and tradenames, net
|
|
|
7,772,848
|
|
|
|
|
Customer
lists, net
|
|
|
2,427,405
|
|
|
|
|
Goodwill
|
|
|
7,708,501
|
|
|
|
|
Total
intangibles
|
|
|
|
|
|
17,908,754
|
|
Total
assets
|
|
|
|
|
$
|
49,529,141
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
3,590,652
|
|
|
|
|
Current
portion of notes and obligations under capitalized leases
|
|
|
887,098
|
|
|
|
|
Other
payables - acquisitions
|
|
|
962,406
|
|
|
|
|
Unearned
revenues
|
|
|
2,815,660
|
|
|
|
|
Due
to officers
|
|
|
356,422
|
|
|
|
|
Dividend
to preferred stockholders payable
|
|
|
77,640
|
|
|
|
|
Loans
payable, bank
|
|
|
3,097,928
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
11,787,806
|
|
Obligations
under capitalized leases, less
current maturities
|
|
|
|
|
|
339,759
|
|
Total
liabilities
|
|
|
|
|
|
12,127,565
|
|
Minority
interest
|
|
|
|
|
|
3,552,635
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, 5,000,000 shares authorized;
|
|
|
|
|
|
|
|
4,130
issued and outstanding
|
|
|
4,130,000
|
|
|
|
|
Common
stock, $.001 par value; 45,000,000 shares authorized;
|
|
|
|
|
|
|
|
20,556,553
issued and outstanding
|
|
|
20,556
|
|
|
|
|
Additional
paid-in-capital
|
|
|
66,988,147
|
|
|
|
|
Treasury
stock
|
|
|
(10,194
|
)
|
|
|
|
Accumulated
deficit
|
|
|
(37,132,343
|
)
|
|
|
|
Stock
subscription receivable
|
|
|
(1,001,407
|
)
|
|
|
|
Common
stock to be issued
|
|
|
1,329,612
|
|
|
|
|
Other
comprehensive loss
|
|
|
(475,430
|
)
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
33,848,941
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
$
|
49,529,141
|
|
See
accompanying notes to these consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Years Ended
|
|
|
|
June
30, 2007
|
|
June
30, 2006
|
|
Revenues:
|
|
|
|
|
|
Licence
fees
|
|
$
|
9,788,266
|
|
$
|
5,192,371
|
|
Maintenance
fees
|
|
|
5,441,339
|
|
|
2,444,075
|
|
Services
|
|
|
14,052,481
|
|
|
11,053,966
|
|
Total
revenues
|
|
|
29,282,086
|
|
|
18,690,412
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
Salaries
and consultants
|
|
|
8,812,934
|
|
|
6,117,886
|
|
Travel
and entertainment
|
|
|
1,529,796
|
|
|
756,880
|
|
Communication
|
|
|
161,128
|
|
|
129,741
|
|
Depreciation
and amortization
|
|
|
652,669
|
|
|
733,370
|
|
Other
|
|
|
2,502,452
|
|
|
1,282,641
|
|
Total
cost of sales
|
|
|
13,658,979
|
|
|
9,020,518
|
|
Gross
profit
|
|
|
15,623,107
|
|
|
9,669,894
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
2,356,831
|
|
|
1,789,349
|
|
Depreciation
and amortization
|
|
|
1,988,603
|
|
|
2,286,678
|
|
Salaries
and wages
|
|
|
4,294,368
|
|
|
2,557,648
|
|
Professional
services, including non-cash compensation
|
|
|
1,067,702
|
|
|
607,706
|
|
Bad
debt expense
|
|
|
189,873
|
|
|
30,218
|
|
General
and adminstrative
|
|
|
3,078,862
|
|
|
2,657,642
|
|
Total
operating expenses
|
|
|
12,976,239
|
|
|
9,929,241
|
|
Income
(loss) from operations
|
|
|
2,646,868
|
|
|
(259,347
|
)
|
Other
income and (expenses)
|
|
|
|
|
|
|
|
Loss
on sale of assets
|
|
|
(2,977
|
)
|
|
(35,090
|
)
|
Beneficial
conversion feature
|
|
|
(2,208,334
|
)
|
|
(14,389
|
)
|
Amortization
of debt discount and capitalized cost of debt
|
|
|
(2,803,691
|
)
|
|
-
|
|
Liquidation
damages
|
|
|
(180,890
|
)
|
|
-
|
|
Fair
market value of warrants issued
|
|
|
(68,411
|
)
|
|
(21,505
|
)
|
Gain
on forgiveness of debt
|
|
|
-
|
|
|
8,294
|
|
Interest
expense
|
|
|
(617,818
|
)
|
|
(442,887
|
)
|
Interest
income
|
|
|
339,164
|
|
|
280,276
|
|
Other
income and (expenses)
|
|
|
114,423
|
|
|
191,736
|
|
Total
other expenses
|
|
|
(5,428,534
|
)
|
|
(33,565
|
)
|
Net
loss before taxes and minority interest in
subsidiary
|
|
|
(2,781,666
|
)
|
|
(292,912
|
)
|
Minority
interest in earnings of subsidiary
|
|
|
(1,935,589
|
)
|
|
(954,120
|
)
|
Income
taxes
|
|
|
(160,306
|
)
|
|
(106,021
|
)
|
Net
loss
|
|
|
(4,877,561
|
)
|
|
(1,353,053
|
)
|
Dividend
required for preferred stockholders
|
|
|
(237,326
|
)
|
|
-
|
|
Bonus
stock dividend (minority holders portion)
|
|
|
(345,415
|
)
|
|
-
|
|
Net
loss applicable to common shareholders
|
|
|
(5,460,302
|
)
|
|
(1,353,053
|
)
|
Other
comprehensive (loss) gain:
|
|
|
|
|
|
|
|
Translation
adjustment
|
|
|
(55,770
|
)
|
|
101,031
|
|
Comprehensive
loss
|
|
$
|
(5,516,072
|
)
|
$
|
(1,252,022
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.27
|
)
|
$
|
(0.09
|
)
|
Diluted
|
|
$
|
(0.27
|
)
|
$
|
(0.09
|
)
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
18,189,590
|
|
|
14,567,007
|
|
Diluted
|
|
|
18,189,590
|
|
|
14,567,007
|
|
See
accompanying notes to these consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE
YEARS ENDED JUNE 30, 2006 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
Capitalized
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Sub-
|
|
|
|
Finance
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Treasury
|
|
scriptions
|
|
Shares
to
|
|
Costs
|
|
Income/
|
|
Accumulated
|
|
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Receivable
|
|
be
Issued
|
|
of
Debt
|
|
(Loss)
|
|
Deficit
|
|
Equity
|
|
Balance
at June 30, 2005
|
|
|
13,830,884
|
|
$
|
13,831
|
|
$
|
46,610,746
|
|
$
|
(27,197
|
)
|
$
|
(616,650
|
)
|
$
|
108,500
|
|
$
|
-
|
|
$
|
(520,691
|
)
|
$
|
(30,318,988
|
)
|
$
|
15,249,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for cash
|
|
|
933,334
|
|
|
933
|
|
|
1,399,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
Issuance
of common stock for services
|
|
|
67,255
|
|
|
67
|
|
|
111,548
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
119,115
|
|
Excercise
of common stock options
|
|
|
285,383
|
|
|
285
|
|
|
346,697
|
|
|
|
|
|
317,400
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
669,382
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for notes payable & interest
|
|
|
36,607
|
|
|
37
|
|
|
70,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,018
|
|
Issuance
of common stock for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
of convertible debentures
|
|
|
80,646
|
|
|
81
|
|
|
149,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for purchase of CQ Systems
|
|
|
884,535
|
|
|
885
|
|
|
1,847,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,848,680
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for purchase of McCue Systems
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
1,628,979
|
|
|
|
|
|
|
|
|
|
|
|
1,628,979
|
|
Issuance
of common stock in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exchange
for accrued expenses
|
|
|
42,231
|
|
|
42
|
|
|
64,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,078
|
|
Issuance
of treasury shares for services
|
|
|
|
|
|
|
|
|
|
|
|
17,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,003
|
|
Capital
contribution from issuance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiary
stock on foreign exchange
|
|
|
-
|
|
|
-
|
|
|
4,031,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,031,002
|
|
Fair
market value of warrants and options issued
|
|
|
-
|
|
|
-
|
|
|
2,474,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,474,751
|
|
Capitalized
finance costs of debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
(326,599
|
)
|
|
|
|
|
|
|
|
(326,599
|
)
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,031
|
|
|
|
|
|
101,031
|
|
Net
loss for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,353,053
|
)
|
|
(1,353,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
|
16,160,875
|
|
$
|
16,161
|
|
$
|
57,106,542
|
|
$
|
(10,194
|
)
|
$
|
(299,250
|
)
|
$
|
1,749,979
|
|
$
|
(326,599
|
)
|
$
|
(419,660
|
)
|
$
|
(31,672,041
|
)
|
$
|
26,144,938
|
|
Continued
See
accompanying notes to these consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY - Continued
FOR
THE
YEARS ENDED JUNE 30, 2006 AND 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
Capitalized
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Sub-
|
|
|
|
Finance
|
|
hensive
|
|
|
|
Total
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-in
|
|
Treasury
|
|
scriptions
|
|
Shares
to
|
|
Costs
|
|
Income/
|
|
Accumulated
|
|
Stockholders'
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Receivable
|
|
be
Issued
|
|
of
Debt
|
|
(Loss)
|
|
Deficit
|
|
Equity
|
|
Balance
at June 30, 2006
|
|
-
|
|
$
|
-
|
|
|
16,160,875
|
|
$
|
16,161
|
|
$
|
57,106,542
|
|
$
|
(10,194
|
)
|
$
|
(299,250
|
)
|
$
|
1,749,979
|
|
$
|
(326,599
|
)
|
$
|
(419,660
|
)
|
$
|
(31,672,041
|
)
|
$
|
26,144,938
|
|
Preferred
Stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
note
|
|
5,500
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500,000
|
|
Excercise
of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options
|
|
|
|
|
|
|
|
1,525,030
|
|
|
1,525
|
|
|
2,548,198
|
|
|
|
|
|
(517,250
|
)
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
2,027,473
|
|
Common
stock issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
103,333
|
|
|
104
|
|
|
108,396
|
|
|
|
|
|
(219,907
|
)
|
|
1,141,500
|
|
|
|
|
|
|
|
|
|
|
|
1,030,093
|
|
Services
|
|
|
|
|
|
|
|
261,984
|
|
|
261
|
|
|
390,216
|
|
|
|
|
|
35,000
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
432,977
|
|
Conversion
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred
stock
|
|
(1,370
|
)
|
|
(1,370,000
|
)
|
|
830,302
|
|
|
830
|
|
|
1,369,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Payment
of dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
preferred stock
|
|
|
|
|
|
|
|
105,589
|
|
|
105
|
|
|
159,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,684
|
|
Common
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
exhange for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
related
interest
|
|
|
|
|
|
|
|
230,863
|
|
|
231
|
|
|
339,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,368
|
|
Purchase
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McCue
Systems
|
|
|
|
|
|
|
|
1,329,470
|
|
|
1,330
|
|
|
2,274,677
|
|
|
|
|
|
|
|
|
(1,564,367
|
)
|
|
|
|
|
|
|
|
|
|
|
711,640
|
|
Beneficial
conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208,334
|
|
Repricing
of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,667
|
|
Bonus
shares issued by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,415
|
|
Adjustment
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholder
list
|
|
|
|
|
|
|
|
9,107
|
|
|
9
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Fair
market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
warrants and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
issued
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
136,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,571
|
|
Finance
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
capital raised
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(9,746
|
)
|
|
|
|
|
|
|
|
|
|
|
326,599
|
|
|
|
|
|
|
|
|
316,853
|
|
Foreign
currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
translation
adjusts
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,770
|
)
|
|
|
|
|
(55,770
|
)
|
Net
loss for the year
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,460,302
|
)
|
|
(5,460,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2007
|
|
4,130
|
|
$
|
4,130,000
|
|
|
20,556,553
|
|
$
|
20,556
|
|
$
|
66,988,147
|
|
$
|
(10,194
|
)
|
$
|
(1,001,407
|
)
|
$
|
1,329,612
|
|
$
|
-
|
|
$
|
(475,430
|
)
|
$
|
(37,132,343
|
)
|
$
|
33,848,941
|
|
See
accompanying notes to these consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years
|
|
|
|
Ended
June 30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(5,460,302
|
)
|
$
|
(1,353,053
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
in by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,641,272
|
|
|
3,020,048
|
|
Provision
for uncollectible accounts
|
|
|
189,873
|
|
|
30,218
|
|
Gain
on forgiveness of debt
|
|
|
-
|
|
|
(8,294
|
)
|
Loss
on sale of assets
|
|
|
2,977
|
|
|
35,090
|
|
Minority
interest in subsidiary
|
|
|
1,935,589
|
|
|
954,120
|
|
Stock
issued for services
|
|
|
88,099
|
|
|
200,194
|
|
Stock
issued for convertible note payable interest
|
|
|
311,868
|
|
|
-
|
|
Stock
issued for dividends payable to preferred stockholder
|
|
|
159,684
|
|
|
-
|
|
Bonues
stock dividend issued by subsidiary
|
|
|
345,415
|
|
|
-
|
|
Fair
market value of warrants and stock options granted
|
|
|
136,571
|
|
|
25,618
|
|
Beneficial
conversion feature
|
|
|
2,208,334
|
|
|
14,389
|
|
Amortization
of capitalized cost of debt
|
|
|
2,815,358
|
|
|
100,172
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(2,858,608
|
)
|
|
(1,351,660
|
)
|
Increase
in other current assets
|
|
|
(3,199,796
|
)
|
|
(3,789,179
|
)
|
Increase
in accounts payable and accrued expenses
|
|
|
560,138
|
|
|
430,419
|
|
Net
cash used in operating activities
|
|
|
(123,528
|
)
|
|
(1,691,918
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,420,470
|
)
|
|
(2,709,569
|
)
|
Sales
of property and equipment
|
|
|
366,088
|
|
|
301,684
|
|
Purchases
of certificates of deposit
|
|
|
-
|
|
|
(1,534,371
|
)
|
Proceeds
from sale of certificates of deposit
|
|
|
1,737,481
|
|
|
-
|
|
(Payments)/Accruals
of acquisition payable
|
|
|
(4,027,753
|
)
|
|
4,086,204
|
|
Increase
in intangible assets
|
|
|
(3,295,262
|
)
|
|
(5,027,968
|
)
|
Cash
brought in at acquisition
|
|
|
-
|
|
|
473,890
|
|
Net
cash used in investing activities
|
|
|
(7,639,916
|
)
|
|
(4,410,130
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
1,030,093
|
|
|
1,400,000
|
|
Proceeds
from the exercise of stock options and warrants
|
|
|
1,008,250
|
|
|
669,382
|
|
Capital
contributed from sale of subsidiary stock
|
|
|
-
|
|
|
4,031,001
|
|
Dividend
to preferred shareholders payable
|
|
|
77,640
|
|
|
-
|
|
Reduction
of restricted cash
|
|
|
4,533,555
|
|
|
(4,533,555
|
)
|
Proceeds
from convertible notes payable
|
|
|
-
|
|
|
5,500,000
|
|
Proceeds
from loans from officers
|
|
|
165,000
|
|
|
-
|
|
Net
proceeds on loans and capital lease obligations
|
|
|
2,359,017
|
|
|
82,650
|
|
Net
cash provided by financing activities
|
|
|
9,173,555
|
|
|
7,149,478
|
|
Effect
of exchange rate changes in cash
|
|
|
106,285
|
|
|
74,611
|
|
Net
increase in cash and cash equivalents
|
|
|
1,516,396
|
|
|
1,122,041
|
|
Cash
and cash equivalents, beginning of year
|
|
|
2,493,768
|
|
|
1,371,727
|
|
Cash
and cash equivalents, end of year
|
|
$
|
4,010,164
|
|
$
|
2,493,768
|
|
See
accompanying notes to these consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Continued
|
|
For
the Years
|
|
|
|
Ended
June 30,
|
|
|
|
2007
|
|
2006
|
|
SUPPLEMENTAL
DISCLOSURES:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
232,783
|
|
$
|
244,390
|
|
Taxes
|
|
$
|
70,184
|
|
$
|
45,511
|
|
|
|
|
|
|
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Common
stock issued for payment of note payable and related
interest
|
|
$
|
27,500
|
|
$
|
71,018
|
|
Common
stock issued for accrued expenses and accounts payable
|
|
$
|
40,750
|
|
$
|
7,044
|
|
Common
stock issued to consultants for R&D services
|
|
$
|
269,126
|
|
$
|
-
|
|
Common
stock issued for acquisition of subsidiary
|
|
$
|
2,295,649
|
|
$
|
1,848,680
|
|
Common
stock to be issued for acquisition of subsidiary
|
|
$
|
-
|
|
$
|
1,628,979
|
|
Common
stock issued for conversion of debentures
|
|
$
|
150,000
|
|
$
|
150,000
|
|
Warrants
issued to convertible note holders
|
|
$
|
-
|
|
$
|
2,108,335
|
|
Warrants
issued for cost of debt
|
|
$
|
-
|
|
$
|
340,799
|
|
Stock
issued for the conversion of Preferred Stock
|
|
$
|
1,370,000
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued for conversion of convertible note payable
|
|
$
|
5,500,000
|
|
$
|
-
|
|
See
accompanying notes to these consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
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.
In
March
2000, the Company formed NetSol (PVT), Limited as a wholly owned subsidiary.
The
subsidiary was merged into the Company’s subsidiary, NetSol Technologies,
Limited in April 2006.
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 the fiscal year ended
June 30, 2006 these amounts were fully amortized.
Business
Combinations Accounted for Under the Purchase Method:
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 was due when the audited
March 31, 2006 financial statements were 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.
In
June
2006, the final installment for the purchase of CQ Systems was determined based
on the audited revenues for the twelve month period ending March 31, 2006.
Based
on the earn-out formula in the purchase agreement, £2,087,071 or $3,785,210 was
due in cash and stock. On June 12, 2006, 884,535 shares of the Company’s
restricted common stock were issued to the shareholders of CQ Systems. In July
2006, the cash portion of $1,936,530 plus $31,810 of interest was paid to the
shareholders.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
McCue
Systems
On
May 6,
2006, the Company entered into an agreement to acquire 100% of the issued and
outstanding stock of McCue Systems, Inc. (“McCue”), a California corporation.
The acquisition closed on June 30, 2006. The initial purchase price was
estimated at $8,471,455 of which one-half was due at closing payable in cash
and
stock. The other half is due in two installments over the next two years based
on the revenue after the audited December 31, 2006 and 2007 financial statements
are completed. On the closing date, $2,117,864 payable and 958,213 shares to
be
issued valued at $1,628,979 were recorded. The cash was paid on July 5, 2006
and
the shares were also issued in July 2006. The total amount paid at closing
was
$3,746,843. In June 2007, the second installment due was determined based on
the
audited revenues for the twelve month period ending December 31, 2006. Based
on
the earn-out formula in the purchase agreement, $1,807,910 was due in cash
and
stock. On June 27, 2006 397,700 shares of the Company’s restricted common stock
were issued to the shareholders of McCue Systems. In July and August 2006,
$450,000 and $429,007, respectively, of the cash portion was paid to the
shareholders.
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.
Joint
Venture:
TiG-Netsol
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 TiG-Netsol is export
of
computer software and its related services developed in Pakistan.
NetSol
Omni
In
February 2006, the Company purchased 50.1% of the outstanding shares for $60,012
in Talk Trainers (Private) Limited, (“Talk Trainers”), a Pakistan corporation
which provides educational services, professional courses, training and Human
Resource services to the corporate sector. The major stockholder of Talk
Trainers was Mr. Ayub Ghauri, 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. During the quarter
ended June 30, 2006, Talk Trainers changed its name to NetSol Omni (Private)
Limited.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Merger
of Subsidiaries
On
April
28, 2006, the Companies wholly-owned subsidiary NetSol (PVT), Limited (“PK
Private”) merged into NetSol Technologies (PVT), Ltd, both located in Lahore,
Pakistan. As the subsidiaries were under common control, the assets and
liabilities of PK Private were recorded at historically values at the time
of
the merger. The consolidated financial statements reflect the income and
expenses of PK Private for the fiscal year up to the date of the merger.
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, McCue Systems, Inc. (“McCue”), NetSol
Technologies Limited (“UK”), NetSol-Abraxas Australia Pty Ltd. (“Abraxas”),
NetSol-CQ Limited (“CQ”), and its majority-owned subsidiaries, NetSol
Technologies (Pvt), Ltd.(“PK Tech”), NetSol Connect (Pvt), Ltd. (now,
NetSol Akhter Pvt. Ltd.) (“Connect”),
TIG-NetSol (Pvt) Limited (“TIG”), and
NetSol Omni (Private) Limited (“Omni”).
All
material inter-company accounts have been eliminated in consolidation.
Business
Activity:
The
Company designs, develops, markets, and exports proprietary software products
to
customers in the automobile finance and leasing industry worldwide. The Company
also provides system integration, consulting, IT products and 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.
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 revenues recognized under the percentage of completion method.
As the customer is billed under the terms of their contract, the corresponding
amount is transferred from this account to “Accounts Receivable.”
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Revenue
Recognition:
The
Company recognizes its revenue in accordance with the Securities and Exchange
Commissions (“SEC”) Staff Accounting Bulletin No. 104, “Revenue
Recognition” (“SAB 104”) 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, 2007 and 2006 were $643,081 and $593,811
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
weighted average number of shares used to compute basic and diluted loss per
share is the same in these consolidated financial statements for the years
ended
June 30, 2007 and 2006 since the effect of dilutive securities is
anti-dilutive.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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 NetSol
-
CQ Systems use British Pounds; NetSol Technologies (Pvt) Ltd., NetSol Private,
NetSol Connect, TiG-Netsol, and NetSol Omni use Pakistan Rupees; NetSol Abraxas
uses the Australian dollar as the functional currencies. NetSol Technologies,
Inc., and McCue Systems, 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 years ended June 30, 2007 and 2006,
comprehensive income included net translation income of $55,770 and $101,031,
respectively. Other comprehensive loss, as presented on the accompanying
consolidated balance sheet in the stockholders’ equity section amounted to
$475,430 as of June 30, 2007.
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.
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 year
ended June 30, 2007.
INCOME
TAXES
United
States of America
As
of
June 30, 2007, the Company and its subsidiary in the US had approximately
$29,846,716 in net operating loss carry forwards available to offset future
taxable income. Federal net operating losses can generally be carried forward
20
years. The deferred tax assets for the United States entities at June 30, 2007
consists mainly of net operating loss carry forwards and were fully reserved
as
the management believes it is more likely than not that these assets will not
be
realized in the future.
The
following table sets forth the significant components of the net deferred tax
assets for operation in the US as of June 30, 2007 and
2006.
|
|
2007
|
|
2006
|
|
Net
Operating Loss Carryforward
|
|
$
|
29,846,716
|
|
$
|
27,091,578
|
|
Total
Deferred Tax Assets
|
|
|
11,938,686
|
|
|
10,836,631
|
|
Less:
Valuation Allowance
|
|
|
(11,938,686
|
)
|
|
(10,836,631
|
)
|
Net
Deferred Tax Asset
|
|
$
|
-
|
|
$
|
-
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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:
|
|
2007
|
|
2006
|
|
Tax
expense (credit) at statutory rate - federal
|
|
|
-34
|
%
|
|
-34
|
%
|
State
tax expense net of federal tax
|
|
|
-6
|
%
|
|
-6
|
%
|
Changes
in valuation allowance
|
|
|
40
|
%
|
|
40
|
%
|
Foreign
income tax:
|
|
|
|
|
|
|
|
UK
|
|
|
-30
|
%
|
|
-30
|
%
|
Pakistan
|
|
|
35
|
%
|
|
35
|
%
|
Changes
in valuation allowance
|
|
|
-2
|
%
|
|
3
|
%
|
Tax
expense at actual rate
|
|
|
3
|
%
|
|
8
|
%
|
Pakistan
As
of
June 30, 2007 the Company’s Pakistan subsidiaries had net operating loss carry
forwards which can be carried forward for six years to offset future taxable
income. The deferred tax assets for the Pakistan subsidiaries at June 30, 2007
consists mainly of net operating loss carry forwards and were fully reserved
as
the management believes it is more likely than not that these assets will not
be
realized in the future.
The
following table sets forth the significant components of the net deferred tax
assets for operation in Pakistan as of June 30, 2007 and
2006.
|
|
2007
|
|
2006
|
|
Net
Operating Loss Carryforward
|
|
$
|
1,496,002
|
|
$
|
1,423,264
|
|
Total
Deferred Tax Assets
|
|
|
523,601
|
|
|
498,142
|
|
Less:
Valuation Allowance
|
|
|
(523,601
|
)
|
|
(498,142
|
)
|
Net
Deferred Tax Asset
|
|
$
|
-
|
|
$
|
-
|
|
UK
As
of
June 30, 2007 and 2006, the Company’s UK subsidiaries had net operating loss
carry forwards which can be carried forward indefinitely to offset future
taxable income. The deferred tax assets for the Pakistan subsidiaries at June
30, 2007 consists mainly of net operating loss carry forwards and were fully
reserved as the management believes it is more likely than not that these assets
will not be realized in the future.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
following table sets forth the significant components of the net deferred tax
assets for operation in the UK as of June 30, 2007 and 2006.
|
|
2007
|
|
2006
|
|
Net
Operating Loss Carryforward
|
|
$
|
1,649,025
|
|
$
|
283,180
|
|
Total
Deferred Tax Assets
|
|
|
494,707
|
|
|
84,954
|
|
Less:
Valuation Allowance
|
|
|
(494,707
|
)
|
|
(84,954
|
)
|
Net
Deferred Tax Asset
|
|
$
|
-
|
|
$
|
-
|
|
Aggregate
net deferred tax assets
The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of June 30, 2007 and 2006:
|
|
2007
|
|
2006
|
|
Aggregate:
|
|
|
|
|
|
Total
Deferred Tax Assets
|
|
|
11,967,580
|
|
|
11,249,820
|
|
Less:
Valuation Allowance
|
|
|
(11,967,580
|
)
|
|
(11,249,820
|
)
|
Net
Deferred Tax Asset
|
|
$
|
-
|
|
$
|
-
|
|
Income
tax payable was approximately $160,306 and $106,021 for the years ended June
30,
2007 and 2006, respectively.
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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
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.
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 16).
New
Accounting Pronouncements:
In
September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
88, 106, and 132(R)”. This Statement improves financial reporting by requiring
an employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements:
1. A
brief
description of the provisions of this Statement
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
2. The
date
that adoption is required
3. The
date
the employer plans to adopt the recognition provisions of this Statement, if
earlier.
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008. The management is currently
evaluating the effect of this pronouncement on the consolidated financial
statements.
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48)”. FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
This
interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. This statement is effective
for fiscal years beginning after December 15, 2006. Management is currently
in
the process of evaluating the expected effect of FIN 48 on our results of
operations and financial position.
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. Management is currently
evaluating the effect of this pronouncement 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
During
fiscal year ended June 30, 2007, there were no customers who represented 10%
or
more of the Company’s total revenue.
The
Company is a strategic business partner for DaimlerChrysler (which consists
of a
group of many companies), which accounts for approximately 2% and 11% of revenue
for the fiscal years ended June 30, 2007 and 2006 and Toyota Motors (which
consists of a group of many companies) accounts for approximately 9% and 12%
of
revenue for the fiscal year ended June 30, 2007 and 2006. Accounts receivable
at
June 30, 2007 and 2006 for these companies was $1,701,666 and $1,546,642.
NOTE
4 - OTHER CURRENT ASSETS
Other
current assets consist of the following as of June 30, 2007:
Prepaid
Expenses
|
|
$
|
776,785
|
|
Advance
Income Tax
|
|
|
187,219
|
|
Employee
Advances
|
|
|
166,469
|
|
Security
Deposits
|
|
|
260,199
|
|
Advance
Rent |
|
|
186,656
|
|
Other
Receivables
|
|
|
656,727
|
|
Other
Assets
|
|
|
44,694
|
|
|
|
|
|
|
Total
|
|
$
|
2,278,749
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net, consist of the following at June 30, 2007:
Office
furniture and equipment
|
|
$
|
1,216,833
|
|
Computer
equipment
|
|
|
6,776,051
|
|
Assets
under capital leases
|
|
|
1,321,159
|
|
Building
|
|
|
3,247,352
|
|
Construction
in process
|
|
|
274,698
|
|
Land
|
|
|
600,481
|
|
Autos
|
|
|
213,336
|
|
Improvements
|
|
|
419,797
|
|
Subtotal
|
|
|
14,069,707
|
|
Accumulated
depreciation
|
|
|
(6,485,955
|
)
|
|
|
$
|
7,583,752
|
|
For
the
years ended June 30, 2007 and 2006, fixed asset depreciation expense totaled
$1,015,835 and $1,053,382, respectively. Of these amounts, $567,145 and
$663,397, respectively, are reflected as part of cost of goods sold.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consist of the following at June 30, 2007:
|
|
|
Product
Licenses
|
|
|
Customer
Lists
|
|
|
Total
|
|
Intangible
asset - June 30, 2006
|
|
$
|
10,920,327
|
|
$
|
5,438,594
|
|
$
|
16,358,921
|
|
Additions
|
|
|
3,470,253
|
|
|
12,500
|
|
|
3,482,753
|
|
Effect
of translation adjustment
|
|
|
113,128
|
|
|
-
|
|
|
113,128
|
|
Accumulated
amortization
|
|
|
(6,730,860
|
)
|
|
(3,023,689
|
)
|
|
(9,754,549
|
)
|
Net
balance - June 30, 2007
|
|
$
|
7,772,848
|
|
$
|
2,427,405
|
|
$
|
10,200,253
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense:
|
|
|
|
|
|
|
|
|
|
|
Year
ended June 30, 2007
|
|
$
|
930,793
|
|
$
|
694,644
|
|
$
|
1,625,437
|
|
Year
ended June 30, 2006
|
|
$
|
1,377,385
|
|
$
|
589,281
|
|
$
|
1,966,666
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
above
amortization expense includes amounts in “Cost of Goods Sold” for capitalized
software development costs of $85,523 and $69,973 for the fiscal years ended
June 30, 2007 and 2006, respectively.
At
June
30, 2007, product licenses, renewals, enhancements, copyrights, trademarks,
and
tradenames, included unamortized software development and enhancement costs
of
$5,782,366. Software development amortization expense was $227,335 and $105,389
for the years ended June 30, 2007 and June 30, 2006, respectively.
Amortization
expense of intangible assets over the next five years is as
follows:
|
|
FISCAL
YEAR ENDING
|
|
|
|
Asset
|
|
6/30/08
|
|
6/30/09
|
|
6/30/10
|
|
6/30/11
|
|
6/30/12
|
|
TOTAL
|
|
Product
Licences
|
|
$
|
949,173
|
|
$
|
869,325
|
|
$
|
586,094
|
|
$
|
197,105
|
|
$
|
85,523
|
|
$
|
2,687,220
|
|
Customer
Lists
|
|
|
694,644
|
|
|
694,644
|
|
|
606,852
|
|
|
431,266
|
|
|
-
|
|
|
2,427,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,643,817
|
|
$
|
1,563,969
|
|
$
|
1,192,946
|
|
$
|
628,371
|
|
$
|
85,523
|
|
$
|
5,114,626
|
|
Goodwill
is comprised of amounts recognized in the acquisition of the
following:
|
|
|
Balance
at
|
|
|
Balance
at
|
|
|
|
|
June
30, 2007
|
|
|
June
30, 2006
|
|
NetSol
PK Tech
|
|
$
|
1,166,611
|
|
$
|
1,166,611
|
|
CQ
Systems
|
|
|
3,471,813
|
|
|
3,471,813
|
|
McCue
Systems
|
|
|
3,010,846
|
|
|
1,395,251
|
|
NetSol
Omni
|
|
|
59,231
|
|
|
59,231
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,708,501
|
|
$
|
6,092,906
|
|
There
was
no impairment of goodwill for the years ended June 30, 2007 and
2006.
NOTE
7 - OTHER ASSETS - LONG TERM
As
of
June 30, 2007, one of the Company’s subsidiaries has reclassified two of its
accounts receivable as long-term amounting to $1,015,404, at present value
discount of $62,628. The discount was calculated using a rate of 6% and a time
period of one year as the collection is scheduled in July 2008.
During
the year, PK Tech has outgrown its current facility and has looked to other
sources to house its growing numbers of employees. The owner of the adjacent
land agreed to build an office to the Company’s specifications and the Company
agreed to help pay for the development of the land in exchange for discounted
rent for the next three years. As of June 30, 2007, the Company has paid a
total
of $479,519 in connection with this agreement. Of this amount, $186,656 has
been
classified as current, representing one-year of rental payments, with the
balance of $292,863 shown as long-term assets.
NOTE
8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following at June 30,
2007:
Accounts
Payable
|
|
$
|
1,039,141
|
|
Accrued
Liabilities
|
|
|
2,159,537
|
|
Accrued
Payroll
|
|
|
14,869
|
|
Accrued
Payroll Taxes
|
|
|
71,921
|
|
Interest
Payable
|
|
|
120,119
|
|
Deferred
Revenues
|
|
|
40,597
|
|
Taxes
Payable
|
|
|
114,468
|
|
|
|
|
|
|
Total
|
|
$
|
3,560,652
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9
- DEBTS
NOTES
PAYABLE
Notes
payable consist of the following at June 30, 2007:
|
|
Balance
at
|
|
Current
|
|
Long-Term
|
|
Name
|
|
6/30/07
|
|
Maturities
|
|
Maturities
|
|
D&O
Insurance
|
|
$
|
66,207
|
|
$
|
66,207
|
|
$
|
-
|
|
Professional
Liability Insurance
|
|
|
641
|
|
|
641
|
|
|
-
|
|
Noon
Group
|
|
|
565,045
|
|
|
565,045
|
|
|
-
|
|
Subsidiary
Capital Leases
|
|
|
255,205
|
|
|
255,205
|
|
|
339,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
887,098
|
|
$
|
887,098
|
|
$
|
339,759
|
|
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. In March, 2006, the note was extended for another year.
During the fiscal year ended June 30, 2007, $48,750 of accrued interest was
recorded for this loan. In April 2006, $51,250 of accrued interest was paid.
Total unpaid accrued interest at June 30, 2006 was $65,044. In July 2007, the
full principle and interest were paid.
In
October 2006, the Company renewed its professional liability insurance for
which
the annual premium is $7,816. The Company has arranged for financing with the
insurance company with a down payment of $2,267 and nine monthly payments of
$646 each. During the fiscal year ended June 30, 2007, the Company paid $5,772.
The balance owing at June 30, 2007 was $641 and is classified as a current
liability in the accompanying consolidated financials statements.
In
January 2007, the Company renewed its directors and officers’ liability
insurance for which the annual premium is $163,620. In January 2007, the Company
arranged financing with AFCO Credit Corporation with a down payment of $16,784
with the balance to be paid in nine monthly installments of $16,784 each. The
balance owing as of June 30, 2007 was $66,207.
In
addition, the various subsidiaries had current capital leases of $255,205 as
of
June 30, 2007.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
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, 2007:
TYPE
OF
|
|
MATURITY
|
|
INTEREST
|
|
BALANCE
|
|
LOAN
|
|
DATE
|
|
RATE
|
|
USD
|
|
|
|
|
|
|
|
|
|
Export
Refinance
|
|
|
Every
6 months
|
|
|
7.5
|
%
|
$
|
1,968,827
|
|
Running
Finance
|
|
|
On
demand
|
|
|
12.0
|
%
|
|
123,050
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
2,091,877
|
|
The
Company’s subsidiary, NetSol UK, has a line of credit with HSBC Bank. Interest
rate charged on amounts drawn-down is 1.75% over base rate. At June 30, 2007
this rate was 5.5%. As of June 30, 2007, the line of credit balance was £502,046
or $1,006,051. In July 2007, this line of credit was converted into a term
loan
(see Note 21).
Total
loans payable - bank at June 30, 2007 was $3,097,928.
OTHER
PAYABLE - ACQUISITION
As
of
June 30, 2007, Other Payable - Acquisition consists of total payments of
$962,406 due to the shareholders of McCue Systems.
McCue
Systems
On
June
30, 2006, the acquisition with McCue Systems, Inc. (“McCue”) closed (see Note
20). As a result, the first installment consisting of $2,117,864 cash and
958,213 shares of the Company’s restricted common stock was recorded. The cash
portion was shown as “Other Payable - Acquisition” and the stock was shown as
“Shares to Be Issued” as of June 30, 2006. During the fiscal year ended June 30,
2007, $2,059,413 of the cash portion of was paid to the McCue shareholders
and
in July 2006 the stock was issued. In June 2007, the second installment on
the
acquisition consisting of $903,955 in cash and 408,988 shares of the Company’s
restricted common stock became due and was recorded. The cash portion was shown
as “Other Payable - Acquisition” and the stock portion was issued on June 27,
2007. The balance at June 30, 2007 was $962,406. In July and August 2007
$879,007 of the cash was paid, leaving a balance of $83,399 to be paid which
represents the few remaining McCue shareholders that have not been located
as of
this date.
DUE
TO OFFICERS
The
officers of the Company from time to time loan funds to the Company. One of
the
officers had deferred the increase in his wages. During the fiscal year ended
June 30, 2007, $43,750 of accrued wages was added to the balance due to officers
and $62,458 was remitted to one officer against the amounts owing to him. In
addition, the board of directors authorized a bonus in the amount of $50,000
each to the three founding officers for recognition of past service and the
growth in the Company. During the quarter ended March 31, 2007, the officers
used the bonus to exercise options (see Note 13). In addition, one subsidiary
had $4,567 due to an officer of the subsidiary.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
On
September 1, 2006, an officer of the Company loaned $165,000 to the Company
for
its immediate short-term cash needs in the corporate office. The loan has a
maturity date of three months and is interest free and has been automatically
extended. The terms of the loan were approved by the Company’s board of
directors. The balance of this loan was repaid in July 2007.
In
2006,
an officer of the Company loaned $150,000 to the Company for its immediate
short-term cash needs in the corporate office.
The
balance due to officers as of June 30, 2007 was $356,422.
CAPITAL
LEASE OBLIGATIONS
The
Company leases various fixed assets under capital lease arrangements expiring
in
various years through 2012. The assets and liabilities under capital leases
are
recorded at the lower of the present value of the minimum lease payments or
the
fair value of the asset. The assets are depreciated over the lesser of their
related lease terms or their estimated useful lives and are secured by the
assets themselves. Depreciation of assets under capital leases is included
in
depreciation expense for the fiscal years ended June 30, 2007 and
2006.
Following
is the aggregate minimum future lease payments under capital leases as of June
30, 2007:
Minimum
Lease Payments
|
|
|
|
Due
FYE 6/30/08
|
|
$
|
313,135
|
|
Due
FYE 6/30/09
|
|
|
252,328
|
|
Due
FYE 6/30/10
|
|
|
130,217
|
|
Due
FYE 6/30/11
|
|
|
2,106
|
|
Due
FYE 6/30/12
|
|
|
1,229
|
|
Total
Minimum Lease Payments
|
|
|
699,015
|
|
Interest
Expense relating to future periods
|
|
|
(104,051
|
)
|
Present
Value of minimum lease payments
|
|
|
594,964
|
|
Less:
Current portion
|
|
|
(255,205
|
)
|
Non-Current
portion
|
|
$
|
339,759
|
|
Following
is a summary of fixed assets held under capital leases as of June 30,
2007:
Computer
Equipment and Software
|
|
$
|
661,646
|
|
Furniture
and Fixtures
|
|
|
50,007
|
|
Vehicles
|
|
|
458,839
|
|
Building
Equipment
|
|
|
150,666
|
|
|
|
|
|
|
Total
|
|
|
1,321,158
|
|
Less:
Accumulated Depreciation
|
|
|
(508,294
|
)
|
Net
|
|
$
|
812,864
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
NOTE 10
- DIVIDEND PAYABLE - PREFERRED SHAREHOLDERS
On
October 30, 2006, the convertible notes payable (see note 12) were converted
into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The
dividend is to be paid quarterly, either in cash or stock at the Company’s
election. The dividend for the fiscal year ended June 30, 2007 totaled $237,326.
Of this $159,686 has been paid in stock and the remaining balance of $77,640
is
payable and is reflected in these consolidated financial statements. This amount
was paid with the issuance of 48,956 shares of the Company’s common stock on
July 9, 2007.
NOTE
11 - 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 had recorded this as a contra-account against the loan balance and
amortized the beneficial conversion feature over the life of the loan.
Under
the
terms of the Bridge Loan agreements, and supplements thereto, the debentures
bore an 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 was
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 was 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 was 322,582. The warrants expire
in
five years and have an exercise price of $3.30 per share. The fair value of
the
warrants was calculated and recorded using the Black-Scholes method at the
time
of granting, when the debenture was converted.
During
the fiscal year ended June 30, 2006, three of the convertible debenture holders
elected to convert 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. The warrants were valued using the fair value method at $21,505 and
was
recorded as an expense in the accompanying consolidated financial statements
for
the fiscal year ended June 30, 2006.
NOTE
12 - CONVERTIBLE NOTE PAYABLE
On
June
15, 2006, the Company entered into an agreement with 5 accredited investors
whereby the Company issued 5 convertible notes payable for an aggregate
principal value of $5,500,000. These notes had interest at the rate of 12%
per
annum and were due in full one year from the issuance date or on June 15, 2007
(the “Financing”). The Convertible Notes could 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. Upon the approval of the
stockholders, to the extent not already converted into common shares, the
Convertible Notes Payable will immediately convert into shares of Preferred
Stock. On October 18, 2006, the shareholders approved the issuance of the shares
and on October 30, 2006 the notes were converted into 5,500 shares of Series
A
7% Cumulative Preferred Stock (see note 13). During the fiscal year ended June
30, 2007, $251,167 of interest was accrued. On December 13, 2006, the note
holders agreed to accept shares of the Company’s common stock in payment of the
interest owed to them. In addition, the note holders required the Company to
issue a total of 60,000 shares of the Company’s common stock valued at $88,201
as a premium to receive payment in shares rather than cash. This amount is
included in “interest expense” in the accompanying consolidated financial
statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
The
beneficial conversion feature expense based on the net value of the loan after
reducing the proceeds by the value of the warrants issued was
$2,208,334.
The
common stock shares issued under this financing agreement, including warrants,
were to be registered within 120 days after closing (or October 19, 2006).
If
the Company did not meet the registration requirement, the Company was to 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 each thirty (30) day period until
the applicable Event has been cured. The registration statement became effective
on January 19, 2007. During the fiscal year ended June 30, 2007, the Company
accrued $168,667 as liquidation damages due and has paid the full amount. As
a
result, the Company recorded an additional $12,223 in liquidation damages during
the fiscal year ended June 30, 2007. This amount is included in “Accrued
Liabilities” in the accompanying consolidated financial statements.
As
part
of the agreement, the investors received warrants to purchase 1,666,668 shares
of the Company’s common stock. The warrants have an exercise price of $2.00 and
expire in five years. These warrants were valued using the Black-Scholes model
at $2,108,335 and have been capitalized as a contra-account against the note
balance in these consolidated financial statements. These costs are being
amortized over the life of the loan or a pro-rata basis as the loan is converted
into common or preferred stock. As the loans were converted on October 30,
2006,
the balance of $2,022,363 was amortized and recorded as “amortization of debt
discount” in the accompanying consolidated financial statements.
The
Black-Scholes pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
6.00
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
100
|
%
|
Dividend
yield
|
|
|
0
|
%
|
Under
the
agreement, any future financing whereby warrants are issued at an exercise
price
lower than the exercise price of the warrants in the agreement, an adjustment
to
the exercise price is to be made. During the fiscal year ended June 30, 2007,
a
financing was completed which included the issuance of warrants at an exercise
price of $1.65 (see Note 13). Following the formula set out in the agreement,
it
was determined that the adjusted exercise price was $1.93 per share. As a
result, the Company revalued the warrants for the adjusted exercise price using
the Black-Scholes model at $2,120,000 and recorded an expense of $11,667 for
the
repricing of the warrants. The Black-Scholes pricing model used the same
assumptions as for the original valuation of the warrants.
In
connection with this financing, the Company paid $474,500 in cash for placement
agent fees and legal fees. These costs were capitalized and are being amortized
over the life of the loan or a pro-rata basis as the loan is converted into
common or preferred stock. As the loans were converted on October 30, 2006,
the
balance of $454,729 of these costs were amortized and recorded as “amortization
of capitalized cost of debt” in the accompanying consolidated financial
statements.
As
part
of the financing, warrants to purchase 266,666 shares of the Company’s common
stock were issued to the placement agent as part of its fee. The warrants have
an exercise price of $1.65 and expire in two years. These warrants were valued
using the Black-Scholes model at $340,799 and have been capitalized in these
consolidated financial statements. These costs are being amortized over the
life
of the loan or a pro-rata basis as the loan is converted into common or
preferred stock. As the loans were converted on October 30, 2006, the balance
of
$326,599 of these costs were amortized and recorded as “amortization of
capitalized cost of debt” in the accompanying consolidated financial statements.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
The
Black-Scholes pricing model used the following assumptions:
Risk-free
interest rate
|
|
|
6.00
|
%
|
Expected
life
|
|
|
2
years
|
|
Expected
volatility
|
|
|
100
|
%
|
Dividend
yield
|
|
|
0
|
%
|
NOTE
13 - STOCKHOLDERS’ EQUITY
PREFERRED
STOCK
On
October 30, 2006, the convertible notes payable (see note 12) were converted
into 5,500 shares of Series A 7% Cumulative Convertible Preferred Stock. The
preferred shares are valued at $1,000 per share or $5,500,000. The preferred
shares are convertible into common stock at a rate of $1.65 per common share.
The total shares of common stock that can be issued under these Series A
Preferred Stock is 3,333,333. On January 19, 2007, the Form S-3 statement to
register the underlying common stock and related dividends became effective.
As
of June 30, 2007, 1,370 of the preferred shares had been converted into 830,302
shares of the Company’s common stock.
The
Series A Convertible Preferred Stock carries certain liquidation and
preferential rights. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, before any distribution of assets
of the Corporation can 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 then outstanding, plus any accumulated and unpaid
dividends thereon (whether or not earned or declared) on the Convertible
Preferred Stock. In addition, the Convertible Preferred Stock ranks 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.
Business
Combinations:
CQ
Systems, Inc.
In
February 2005, the Company completed the acquisition of CQ Systems, (see Note
19). As part of this agreement, the Company issued 759,468 shares of its
restricted common stock valued at $1,816,301 to the shareholders of CQ
Systems.
In
June
2006, the final installment was due for the acquisition and the Company issued
884,535 shares of its restricted common stock valued at $1,848,680 to the
shareholders of CQ Systems.
McCue
Systems, Inc.
In
June
2006, the Company completed the acquisition of McCue Systems, Inc. (see Note
20). During fiscal year end June 30, 2007 as part of this agreement, the Company
issued 931,770 shares of its restricted common stock valued at $1,584,009 to
the
shareholders of McCue Systems for the initial down payment.
In
June
2007, the second installment became due for the acquisition and the Company
issued 397,700 shares of its restricted common stock valued at $711,640 to
the
shareholders of McCue Systems. In addition, a total of 37,731 shares valued
at
$64,612 are shown in “Shares to Be Issued” in these consolidated financial
statements representing McCue Systems shareholders that have not been located
as
of this date.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
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 $158,093 has been received as of June
30,
2005, with the balance of $41,907 shown in “Subscriptions Receivable” on the
accompanying consolidated financial statements. During the year ended June
30,
2007 $30,093 was received. The total shares have been issued to the purchaser.
In
January 2006, the Company sold 933,334 shares of the Company’s common stock for
$1,400,000 in a private placement.
In
June
2007, the Company sold 757,576 shares of the Company’s common stock to two
institutional investors for $1,250,000. These shares are shown in “Shares to be
Issued” in the accompanying consolidated financial statements. The Company
received $1,000,000 of this by June 30, 2007 and the remainder is shown as
“Subscription Receivable.” The $250,000 cash due was received on July 2, 2007.
The shares were issued in July 2007. As part of the agreement, the investors
were granted 378,788 warrants with an exercise price of $1.65.
Services,
Accrued Expenses and Payables
During
the year ended June 30, 2006, the Company issued 10,500 restricted Rule 144
common shares valued at $20,382 in exchange for services rendered. Compensation
expense was calculated based upon the fair market value of the freely trading
shares as quoted on NASDAQ through 2006 and 2005, 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
July
2005, 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
2005 - 2006 term of office. These conditions were met and a total of 15,000
restricted Rule 144 common shares were issued in August 2006. The shares were
valued at the fair market value at the date of grant of $23,100 or $1.54 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.
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 12,177 and 7,755 shares of its common stock during the fiscal years
ended
June 30, 2007 and 2006 valued at $21,250 and $15,000, respectively. The
agreement was terminated on December 15, 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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
In
March
2006, a director exercised 15,000 options at $.75 per share for a total of
$11,250. The value of the shares was applied against accrued fees
payable.
In
January 2006, the Company entered into an agreement with two consultants whereby
the Company agreed to issue shares of the Company’s restricted common stock for
their services. During the fiscal year ended June 30, 2007, the Company issued
160,624 shares of restricted common stock valued at $269,128. The agreement
was
terminated in May 2007.
In
October 2006, the Company entered into an agreement with a consultant whereby
the Company agreed to issue 25,000 shares of the Company’s restricted common
stock at the signing of the agreement. The shares were valued at $36,250 or
$1.45 per share.
In
October 2006, the Company entered into an agreement with a consultant whereby
the Company agreed to issue a total of 40,000 of the Company’s restricted stock,
to be paid at the end of each quarter of service. As of June 30, 2007, the
Company has recorded as “Stock to Be Issued” 10,000 shares valued at $15,000 or
$1.50 per share under this agreement.
Issuance
of shares for Conversion of Debt
During
the year ended June 30, 2006, three of the convertible debenture holders elected
to convert their notes into common stock, respectively. The total of the notes
converted was $150,000 and the Company issued 80,646 shares of its common stock
to the note holders.
Options
and Warrants Exercised
During
the year ended June 30, 2006, the Company issued 285,383 shares of its common
stock for the exercise of options valued at $343,132. Of these, $52,500 has
been
recorded as “Stock Subscription Receivable”. In addition, 3,030 shares valued at
$5,000 have been shown as “Stock to Be Issued.”
During
the year ended June 30, 2007, the Company issued 1,571,243 shares of its common
stock for the exercise of options valued at $2,585,474. Of this, $1,173,750
was
recorded as “Stock Subscription Receivable”, $33,750 was a cashless exercise
whereby the exercise price was applied against amounts owed by the Company
to a
Director, and $7,000 was applied to amounts owed by the Company to an employee.
$150,000 was a cashless exercise whereby the exercise price was applied against
amounts owed by the Company to three officers (see Note 9). In addition, 3,030
shares of the Company’s common stock valued at $5,000 was issued against
payments made in the previous year and was recorded as a reduction in “Shares to
Be Issued.”
Payment
of Interest
On
December 13, 2006, the Company issued a total of 230,863 shares of the Company’s
common stock valued at $339,137 or $1.47 per share to the convertible note
holders as payment of the interest due to them (see note 12). This payment
included 60,000 shares valued at $88,201 as premium shares to accept payment
of
the interest in the Company’s common stock rather than cash. These shares have
been registered with the Securities and Exchange Commission.
Payment
of Dividend to Preferred Stockholders
During
the fiscal year ended June 30, 2007, the Company issued a total of 105,589
shares of the Company’s common stock valued at $159,684 as payment of the
dividend owed to the Preferred Stockholders (see Note 10).
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
Stock
Subscription Receivable
Stock
subscription receivable represents stock options exercised and issued that
the
Company has not yet received the payment from the purchaser.
During
the year ended June 30, 2006, the Company recorded $52,500 in receivable and
collected $369,900. 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 of the receivable at June 30, 2006 was $299,250.
During
the year ended June 30, 2007, issued a total of $1,673,750 of new receivables
and received payments of $936,593. In addition, $35,000 was applied to amounts
owing from a subsidiary. The balance at June 30, 2007 was
$1,001,407.
Treasury
Stock
During
the year ended June 30, 2006, the Company issued 10,000 of its treasury shares
valued at $17,002 for the payment of services. There was no activity in this
account during the fiscal year ended June 30, 2007. The balance at June 30,
2007
was $10,194.
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,
2007:
|
|
|
|
|
|
Aggregated
|
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
|
|
#
shares
|
|
Price
|
|
Value
|
|
Options:
|
|
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2006
|
|
|
8,585,500
|
|
$
|
0.75
to $5.00
|
|
$
|
269,125
|
|
Granted
|
|
|
180,606
|
|
$
|
1.65
|
|
|
|
|
Exercised
|
|
|
(1,573,743
|
)
|
$
|
0.75
to $1.94
|
|
|
|
|
Expired
|
|
|
(90,000
|
)
|
$
|
2.64
to $5.00
|
|
|
|
|
Outstanding
and exercisable, June 30, 2007
|
|
|
7,102,363
|
|
$
|
0.75
to $5.00
|
|
$
|
129,521
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2006
|
|
|
2,598,937
|
|
$
|
1.75
to $5.00
|
|
$
|
13,333
|
|
Granted
|
|
|
403,788
|
|
$
|
1.65
to $3.70
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding
and exercisable, June 30, 2007
|
|
|
3,002,725
|
|
$
|
1.65
to $5.00
|
|
$
|
58,091
|
|
The
average life remaining on the options and warrants as of June 30, 2007
is as
follows:
|
|
|
|
Weighted
|
|
|
|
Number
|
|
Average
|
|
|
|
Outstanding
|
|
Remaining
|
|
|
|
and
|
|
Contractual
|
|
Exercise
Price
|
|
Exercisable
|
|
Life
|
|
OPTIONS:
|
|
|
|
|
|
$0.01
- $0.99
|
|
|
39,000
|
|
|
4.56
|
|
$1.00
- $1.99
|
|
|
2,963,363
|
|
|
8.00
|
|
$2.00
- $2.99
|
|
|
3,270,000
|
|
|
7.76
|
|
$3.00
- $5.00
|
|
|
830,000
|
|
|
6.77
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
7,102,363
|
|
|
7.73
|
|
|
|
|
|
|
|
|
|
WARRANTS:
|
|
|
|
|
|
|
|
$1.00
- $1.99
|
|
|
2,324,622
|
|
|
4.07
|
|
$2.00
- $2.99
|
|
|
120,000
|
|
|
1.35
|
|
$3.00
- $5.00
|
|
|
558,103
|
|
|
1.87
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
3,002,725
|
|
|
3.56
|
|
All options and warrants are vested and are exercisable
as of June 30, 2007.
Options:
During
the year ended June 30, 2006, 3,848,413 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 these options ranges between
$1.65 and $3.00. No expense was recorded for the granting of these
options.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
During
the year ended June 30, 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
|
%
|
Prior
to
July 1, 2006, the Company measured stock compensation expense using the
intrinsic value method of accounting in accordance with Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations (APB No. 25).
The
company adopted SFAS No. 123-R effective July 1, 2006 using the modified
prospective method. Under this transition method, stock compensation expense
recognized in the six months ended December 31, 2006 includes compensation
expense for all stock-based compensation awards vested during the six months
ended December 31, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123-R.
For
periods presented prior to the adoption of SFAS No. 123R, pro forma
information regarding net income and earnings per share as required by SFAS
No. 123R has been determined as if the Company had accounted for its
employee stock options under the original provisions of SFAS No. 123. The
fair value of these options was estimated using the Black-Scholes option pricing
model. For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option’s vesting period. The pro forma
expense to recognize and adjusted net earnings per share for the fiscal year
ended June 30, 2006 is as follows:
|
|
2006
|
|
Net
income (loss) - as reported
|
|
$
|
(1,353,053
|
)
|
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
|
|
|
(5,674,402
|
)
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(7,027,455
|
)
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
Basic,
as reported
|
|
|
(0.09
|
)
|
Diluted,
as reported
|
|
|
(0.09
|
)
|
|
|
|
|
|
Basic,
pro forma
|
|
|
(0.48
|
)
|
Diluted,
pro forma
|
|
|
(0.48
|
)
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
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:
|
|
2006
|
|
Expected
life (years)
|
|
|
10
years
|
|
Risk-free
interest rate
|
|
|
3.25%
- 6.0
|
%
|
Dividend
yield
|
|
|
-
|
|
Volatility
|
|
|
54%
- 100
|
%
|
Impact
of
adoption of SFAS No. 123-R for the fiscal year ended June 30, 2007:
During
the quarter ended June 30, 2007, 180,606 options were granted to employees
with
an exercise price of $1.65 per share and an expiration date of one-year. All
options granted have been exercised as of June 30, 2007. Using the Black-Scholes
method to value the options, the Company recorded $102,584 in compensation
expense for these options in the accompanying consolidated financial statements.
The Black-Scholes option pricing model used the following
assumptions:
Risk-free
interest rate
|
|
|
7
|
%
|
Expected
life
|
|
|
1
years
|
|
Expected
volatility
|
|
|
83
|
%
|
Methods
of estimating fair value:
Under
both SFAS No. 123-R and under the fair value method of accounting under
SFAS No. 123 (i.e., SFAS No. 123 Pro Forma), the fair value of stock
options is determined using the Black-Scholes model.
Under
SFAS No. 123-R, the company's expected volatility assumption is based on the
historical volatility of the Company's stock. The expected life assumption
is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of
the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
SFAS
No. 123-R requires forfeitures to be estimated at the time of grant and
revised in subsequent periods, if necessary, if actual forfeitures differ from
those estimates.
Warrants:
During
the year ended June 30, 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. 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 $21,505 and ranged between $0.45 and $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
|
|
|
44%
- 56
|
%
|
Dividend
yield
|
|
|
0
|
%
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
On
October 11, 2006, the Company entered into an agreement with a consultant
whereby the Company agreed to grant the consultant a total of 100,000 warrants
with an exercise price of $1.85 and 100,000 warrants with an exercise price
of
$3.70. The warrants vest equally over the term of the agreement on a quarterly
basis commencing on January 11, 2007 and vest only upon completion of the
quarter’s service as earned. The agreement was terminated on March 31, 2007. The
warrants are exercisable until October 10, 2011. During the fiscal year ended
June 30, 2007, a total of 25,000 of the warrants had vested. The warrants were
valued using the fair value method at $33,987 or $1.44 and $1.28 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
|
|
|
7.0
|
%
|
Expected
life
|
|
|
5
years
|
|
Expected
volatility
|
|
|
100
|
%
|
Dividend
yield
|
|
|
0
|
%
|
NOTE
14 - INCENTIVE AND NON-STATUTORY STOCK OPTION PLAN
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, 2007 and 2006 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2007
|
|
Price
|
|
2006
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
46,000
|
|
$
|
0.75
to $2.50
|
|
|
111,000
|
|
$
|
0.75
to $2.50
|
|
Granted
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
(15,000
|
)
|
$
|
1.00
to $1.25
|
|
|
(65,000
|
)
|
$
|
0.75
to $1.75
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
31,000
|
|
$
|
0.75
to $1.25
|
|
|
46,000
|
|
$
|
0.75
to $1.25
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
The
number and weighted average exercise prices of options granted under the 2002
Plan for the year ended June 30, 2007 and 2006 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2006
|
|
Price
|
|
2006
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
1,059,500
|
|
$
|
0.75
to $2.50
|
|
|
1,139,500
|
|
$
|
0.75
to $2.50
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(47,500
|
)
|
$
|
0.75
to $2.30
|
|
|
(80,000
|
)
|
$
|
0.75
|
|
Expired
|
|
|
(40,000
|
)
|
$
|
3.00
to $5.00
|
|
|
-
|
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
972,000
|
|
$
|
0.75
to $5.00
|
|
|
1,059,500
|
|
$
|
0.75
to $5.00
|
|
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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
The
number and weighted average exercise prices of options granted under the 2003
Plan for the year ended June 30, 2007 and 2006 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2007
|
|
Price
|
|
2006
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
970,000
|
|
$
|
1.00
to $5.00
|
|
|
787,500
|
|
$
|
1.00
to $5.00
|
|
Granted
|
|
|
180,606
|
|
$
|
1.65
|
|
|
182,500
|
|
$
|
1.70
to $2.55
|
|
Exercised
|
|
|
(355,606
|
)
|
$
|
1.25
to $1.65
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
(50,000
|
)
|
$
|
2.64
to $5.00
|
|
|
-
|
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
745,000
|
|
$
|
1.70
to $5.00
|
|
|
970,000
|
|
$
|
1.25
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 common stock of the Company. A
registration statement on form n S-8 was filed on April 7, 2006 registering
the
shares of common stock underlying the options in this plan. 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, 2007 and 2006 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2006
|
|
Price
|
|
2006
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
4,730,000
|
|
$
|
1.65
to $3.00
|
|
|
3,000,000
|
|
$
|
1.94
to $2.91
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
1,888,413
|
|
$
|
1.65
to $3.00
|
|
Exercised
|
|
|
(1,155,637
|
)
|
$
|
1.65
to $1.94
|
|
|
(158,413
|
)
|
$
|
1.65
to $1.75
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
3,574,363
|
|
$
|
1.65
to $3.00
|
|
|
4,730,000
|
|
$
|
1.65
to $3.00
|
|
The
2005 Plan
In
April
2006, the Company enacted an Incentive and Non-statutory Stock Option Plan
(the
“2005 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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
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 2005
Plan for the year ended June 30, 2006 are as follows:
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
2007
|
|
Price
|
|
2006
|
|
Price
|
|
Outstanding
and exercisable, beginning of year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
1,780,000
|
|
$
|
1.70
to $2.55
|
|
|
1,780,000
|
|
$
|
1.70
to $2.55
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
and exercisable, end of year
|
|
|
1,780,000
|
|
$
|
1.70
to $2.55
|
|
|
1,780,000
|
|
$
|
1.70
to $2.55
|
|
NOTE
15 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company’s headquarters
is located in California in approximately 1,919 rentable square feet and a
monthly rent of $4,754per month. The term of the lease is for one year and
expires on December 31, 2007. A security deposit of $4,447 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. The Beijing lease is a
two
year lease that expires in August 2009. The monthly rent is $4,315 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 $144,900).
NetSol McCue, Inc., located in Burlingame, California, premises are leased
until
June 30, 2009 with a monthly rent of $16,178.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
The
NetSol Karachi lease is a 3 year lease that expires on December 4, 2008 and
currently is rented at the rate of $1,726 per month. The NetSol Islamabad lease
is a 15 year lease that expires on August 31, 2016 and currently is rented
at
the rate of $1,417 per month. The NetSol Rawalpindi lease is a 2 year lease
that
expires on January 4, 2008 and currently is rented at the rate of $800 per
month.
Upon
expiration of its leases, the Company does not anticipate any difficulty in
obtaining renewals or alternative space. Rent
expense amounted to $804,295 and $521,496 for the years ended June 30, 2007
and
2006, respectively.
Lahore
Technology Campus
In
May
2004, the newly built Technology Campus was inaugurated in Lahore, Pakistan.
This facility consists of 50,000 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 Ltd. and is not subject to any
mortgages. In order to cater for future business expansion and taking advantage
of depressing real estate market, the company purchased two new cottages
adjacent to its main building. Total covered area of these cottages is 4,900
sq
feet and it cost was $250,000 approx. The management has moved its accounts,
finance, internal audit, company secretariat and costing and budgeting
department into these cottages. For the recreation of its valuable human
resources, the management has also established a gymnasium there.
Employment
Agreements
Effective
January 1, 2007, the Company entered into an Employment Agreement with our
Chief
Executive Officer. Pursuant to the Employment Agreement between him and the
Company (the "CEO Agreement"), the Company agreed to employ him as its
Chief Executive Officer from the date of the CEO Agreement through December
31,
2009. Under the CEO Agreement, he is entitled to an annualized base salary
of $275,000 and is eligible for annual bonuses at the discretion of the
Compensation Committee. The Company retained the right to
increase the base compensation as it deems necessary. In addition, he is
entitled to participate in the Company's stock option plans, is entitled to
two
weeks of paid vacation per calendar year and is to receive a car allowance
totaling $3,000 per month for the term of the CEO Agreement. Finally, during
the
term of the CEO Agreement, the Company shall pay the amount of premiums or
other
costs incurred for the coverage of him, his spouse and dependent family members
under the Company's health and related benefit plans.
Effective
January 1, 2007, the Company entered into an Employment Agreement with our
President of the EMEA Region and Chief Executive Officer of the Global Products
Division. Pursuant to the Employment Agreement between him and the Company
(the "President EMEA Agreement"), the Company agreed to employ him as its
President of the EMEA region and Chief Executive Officer of the Global Products
Division from the date of the President EMEA Agreement through December 31,
2009. Under the President EMEA Agreement, he is entitled to an annualized
base salary of $225,000 and is eligible for annual bonuses at the discretion
of
the Compensation Committee. The Company retained the right to increase the
base
compensation as it deems necessary. In addition, he is entitled to
participate in the Company's stock option plans, is entitled to two weeks of
paid vacation per calendar year and is to receive a car allowance totaling
$2,000 per month for the term of the President EMEA Agreement. Finally, during
the term of the President EMEA Agreement, the Company shall pay the amount
of
premiums or other costs incurred for the coverage of him, his spouse and
dependent family members under the Company's health and related benefit
plans.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
Effective
January 1, 2007, the Company entered into an Employment Agreement with our
President of the APAC Region and Chief Executive Officer of the Global Services
Division. Pursuant to the Employment Agreement between him and the Company
(the "President APAC Agreement"), the Company agreed to employ him as its
President APAC and Chief Executive Officer of the Global Services Division
from
the date of the President APAC Agreement through December 31, 2009. Under the
President APAC Agreement, he is entitled to an annualized base salary of
$175,000 and is eligible for annual bonuses at the discretion of the
Compensation Committee. The Company retained the right to increase the base
compensation as it deems necessary. In addition, he is entitled to
participate in the Company's stock option plans, is entitled to two weeks of
paid vacation per calendar year. Finally, during the term of the President
APAC
Agreement, the Company shall pay the amount of premiums or other costs incurred
for the coverage of him, his spouse and dependent family members under the
Company's health and related benefit plans.
Effective
May 1, 2006, the Company entered into an Employment Agreement with our Secretary
and General Counsel. Pursuant to the Employment Agreement between her and
the Company (the "General Counsel Agreement"), the Company agreed to
employ her as its Secretary and General Counsel from the date of the
General Counsel Agreement through April 30, 2008. Under the General Counsel
Agreement, she was entitled to an annualized base salary of $110,000 and is
eligible for annual bonuses at the discretion of the Chief Executive Officer.
Effective August 1, 2007, her annualized salary was raised to $130,000. The
Company retained the right to increase the base compensation as it deems
necessary. In addition, she is entitled to participate in the Company's
stock option plans and, is entitled to two weeks of paid vacation per calendar
year. Finally, during the term of the General Counsel Agreement, the Company
shall pay the amount of premiums or other costs incurred for the coverage of
her, her spouse and dependent family members under the Company's health and
related benefit plans.
Effective
July 20, 2005, we entered into an employment agreement with the Chief
Financial Officer. The agreement was amended effective May 1, 2006 to provide
a
yearly salary of $95,000. Effective August 1, 2007, her annualized salary was
raised to $132,000 and is eligible for annual bonuses at the discretion of
the
Chief Executive Officer. The Company retained the right to increase the base
compensation as it deems necessary. In addition, she is entitled to
participate in the Company's stock option plans and, is entitled to two weeks
of
paid vacation per calendar year. Finally, during the term of the Chief Financial
Officer Agreement, the Company shall pay the amount of premiums or other costs
incurred for the coverage of her and her dependent family members under the
Company's health and related benefit plans.
The
agreements also provide for reimbursement of reasonable business-related
expenses. The agreements also provide for certain covenants concerning
non-competition, non-disclosure, indemnity and assignment of intellectual
property rights.
Litigation
As
of
June 30, 2007 and 2006, to the best knowledge of the Company’s management and
counsel, there is no material litigation pending or threatened against the
Company.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
NOTE
16 - 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, 2007 and 2006:
|
|
2007
|
|
2006
|
|
Revenues
from unaffiliated customers:
|
|
|
|
|
|
North
America
|
|
$
|
4,953,083
|
|
$
|
45,250
|
|
Europe
|
|
|
5,482,972
|
|
|
7,414,960
|
|
Asia
- Pacific
|
|
|
18,846,031
|
|
|
11,230,202
|
|
Consolidated
|
|
$
|
29,282,086
|
|
$
|
18,690,412
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
(3,358,739
|
)
|
$
|
(3,688,598
|
)
|
North
America
|
|
|
29,257
|
|
|
-
|
|
Europe
|
|
|
(704,530
|
)
|
|
898,141
|
|
Asia
- Pacific
|
|
|
6,680,880
|
|
|
2,531,110
|
|
Consolidated
|
|
$
|
2,646,868
|
|
$
|
(259,347
|
)
|
|
|
|
|
|
|
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
13,263,112
|
|
$
|
17,630,388
|
|
North
America
|
|
|
2,070,829
|
|
|
2,329,837
|
|
Europe
|
|
|
4,833,181
|
|
|
4,318,911
|
|
Asia
- Pacific
|
|
|
29,362,019
|
|
|
18,746,011
|
|
Consolidated
|
|
$
|
49,529,141
|
|
$
|
43,025,147
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
1,406,989
|
|
$
|
1,887,646
|
|
North
America
|
|
|
131,850
|
|
|
-
|
|
Europe
|
|
|
268,795
|
|
|
173,258
|
|
Asia
- Pacific
|
|
|
833,638
|
|
|
959,144
|
|
Consolidated
|
|
$
|
2,641,272
|
|
$
|
3,020,048
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
Corporate
headquarters
|
|
$
|
3,986
|
|
$
|
4,367
|
|
North
America
|
|
|
20,820
|
|
|
-
|
|
Europe
|
|
|
249,690
|
|
|
192,752
|
|
Asia
- Pacific
|
|
|
2,145,974
|
|
|
2,512,450
|
|
Consolidated
|
|
$
|
2,420,470
|
|
$
|
2,709,569
|
|
NOTE
17 - MINORITY INTEREST IN SUBSIDIARY
The
Company had minority interests in several of its subsidiaries. The balance
of
the minority interest as of June 30, 2007 was as follows:
|
|
|
|
MIN
INT
|
|
|
|
|
|
BALANCE
AT
|
|
SUBSIDIARY
|
|
MIN
INT %
|
|
6/30/07
|
|
|
|
|
|
|
|
PK
Tech
|
|
|
28.13
|
%
|
$
|
1,876,212
|
|
NetSol-TiG
|
|
|
49.90
|
%
|
|
1,413,848
|
|
Connect
|
|
|
49.90
|
%
|
|
262,575
|
|
Omni
|
|
|
49.90
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
3,552,635
|
|
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
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
fiscal years ended June 30, 2007 and 2006, the subsidiary had net income of
$4,747,590 and $1,780,892, of which $1,375,247 and $500,965, respectively,
was
recorded against the minority interest. The balance of the minority interest
at
June 30, 2007 was $1,876,212.
On
May 18
2007, the subsidiary’s board of directors authorized a 15% stock bonus dividend
to all its stockholders as of that date. The net value of shares issued to
minority holders was $345,415.
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.
During
year ended June 30, 2005, the Company invested $253,635 and TiG invested
$251,626 and the new subsidiary began operations during the quarter ended March
31, 2005.
For
the
fiscal years ended June 30, 2007 and 2006, the subsidiary had net income of
$1,401,444and $879,134, of which $596,802 and $438,688 was recorded against
the
minority interest, respectively. The balance of the minority interest at June
30, 2007 was $1,413,848.
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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
As
of
June 30, 2005, a total of $751,356 had been transferred to Connect, of which
$410,781 was from Akhter. In June 2006, a total of $40,000 cash was distributed
to each partner as a return of capital.
For
the
fiscal years ended June 30, 2007 and 2006, the subsidiary had net loss of
$57,117 and net income of $14,304, respectively, of which ($28,501) and $7,318
respectively, was recorded against the minority interest. The balance of the
minority interest at June 30, 2007 was $262,575.
Talk
Trainers (Private) Limited (“Talk Trainers”) - NetSol Omni
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 services, professional courses, training and human
resource services to the corporate sector. The major stockholder of Talk
Trainers was Mr. Ayub Ghauri, 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. During the quarter
ended June 30, 2006, Talk Trainers changed their name to NetSol
Omni.
For
the
fiscal years ended June 30, 2007 and 2006, the subsidiary had a net loss of
$71,298 and net income of $14,689, of which ($7,959) and $8,315 was recorded
against the minority interest. The balance of the minority interest at June
30,
2007 was $0.
NOTE
18 - GAIN ON SETTLEMENT OF DEBT
During
the year ended June 30, 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.
NOTE
19 - 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 11) 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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
In
accordance with SFAS 141, the Company had 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 was 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
|
|
In
June
2006, the final installment for the purchase of CQ Systems was determined based
on the audited revenues for the twelve month period ending March 31, 2006.
Based
on the earn-out formula in the purchase agreement, £2,087,071 or $3,785,210 was
due in cash and stock. On June 12, 2006, 884,535 shares of the Company’s
restricted common stock were issued to the shareholders of CQ Systems. In July
2006, the cash portion of $1,936,530 plus $31,810 of interest was paid to the
shareholders. As a result of the final payment the Company recorded an addition
of $3,471,813 to goodwill.
NOTE 20
- ACQUISITION OF McCUE SYSTEMS
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 acquisition closed on June 30, 2006.
According
to the terms of the Share Purchase Agreement, the Company acquired 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.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
The
initial purchase price was estimated at $8,471,455 of which one-half was due
at
closing payable in cash and stock. The other half is due in two installments
over the next two years based on revenues after the audited December 31, 2006
and 2007 financial statements are completed. On the closing date, $2,117,864
payable and 958,213 shares to be issued valued at $1,628,979, adjusted for
the
market value at closing, was recorded. The cash was paid on July 5, 2006 and
the
shares were also issued in July 2006. The total amount recorded at closing
was
$3,746,843.
The
purchase price was allocated as follows:
Purchase
Price Allocation:
|
|
|
|
Purchase
Price
|
|
$
|
8,471,455
|
|
Less
contingent consideration
|
|
|
(4,235,727
|
)
|
Adjustment
for valuation of shares to market at closing
|
|
|
(488,885
|
)
|
Net
purchase price
|
|
$
|
3,746,843
|
|
|
|
|
|
|
Net
tangible assets
|
|
$
|
80,245
|
|
Intangible
Assets:
|
|
|
|
|
Product
License
|
|
|
127,510
|
|
Customer
Lists
|
|
|
2,143,837
|
|
Goodwill
|
|
|
1,395,251
|
|
Net
purchase price
|
|
$
|
3,746,843
|
|
In
June
2007, the second installment for the purchase of McCue Systems was determined
based on the audited revenues for the twelve month period ending December 31,
2006. Based on the earn-out formula in the purchase agreement, $1,807,910 was
due in cash and stock. On June 27, 2007, 397,700 shares of the 408,988 shares
due of the Company’s restricted common stock were issued to the shareholders of
McCue Systems. The balance represents shareholders of McCue Systems that haven’t
been located as of this date. In July and August 2007, $450,000 and $429,007
of
the cash portion was paid to the shareholders. As a result of the second payment
the Company recorded an addition of $1,615,595 to goodwill.
NETSOL
TECHNOLOGIES INC AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENT
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, 2006:
|
|
For
the year
|
|
|
|
Ended
June 30,
|
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
Statement
of Operations:
|
|
|
|
Revenues
|
|
$
|
24,537,975
|
|
Cost
of Sales
|
|
|
11,547,697
|
|
Gross
Profit
|
|
|
12,990,278
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
13,393,543
|
|
Income
(loss) from operations
|
|
|
(403,265
|
)
|
|
|
|
|
|
Other
income and (expenses)
|
|
|
(242,300
|
)
|
Income
(loss) before minority interest
|
|
|
(645,565
|
)
|
Minority
interest in subsidiary
|
|
|
(954,120
|
)
|
Net
Income (loss)
|
|
$
|
(1,599,685
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
NOTE
21 - SUBSEQUENT EVENTS
On
July
16, and August 9, 2007, the cash payment of $450,000 and $429,007 due to the
McCue Shareholders for the second payment of the acquisition was
made.
On
July
2, 2007, the Company received the balance due of $250,000 due for the private
placement of its common shares on June 29, 2007(see Note 13). The shares for
this private placement were issued on July 3, 2007.
On
July
9, 2007, the dividend payable of $77,640 to preferred shareholders (see Note
10)
was made through the issuance of 48,956 shares of the Company’s common
stock.
On
July
4, 2007, the Company entered into a debt agreement with AMZ Bank in Lahore,
Pakistan for a total of $2,457,642. The loan is collateralized by approximately
4,000,000 shares the Company owns in its Pakistan subsidiary, PK Tech. Finance
costs associated with this debt totaled $39,445 and the Company received a
net
balance of $2,418,197. The loan has a maturity of three months and an interest
rate based on the Karachi Interbank Offer Rate (KIBOR) plus 5%. At July 4,
2007
the KIBOR rate was 9.58%.
In
July
2007, the Company’s subsidiary, NetSol UK, entered into an agreement with HSBC
Bank whereby the line of credit outstanding of £500,000 was converted into a
note payable with a maturity of three years. The interest rate is 7.75% with
monthly payments of £15,610 or approximately $31,280.
In
July
2007, one of the preferred shareholders converted 74 shares of preferred stock
into 44,848 shares of the Company’s common stock.
In
July
2007, the Company repaid the note payable to Sir Noon, principle and interest
of
$565,045 (see Note 9).