0000950124-01-503248.txt : 20011008
0000950124-01-503248.hdr.sgml : 20011008
ACCESSION NUMBER: 0000950124-01-503248
CONFORMED SUBMISSION TYPE: 10SB12G/A
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20010920
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: SOLUTIONNET INTERNATIONAL INC
CENTRAL INDEX KEY: 0001093468
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575]
IRS NUMBER: 954749095
STATE OF INCORPORATION: MN
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10SB12G/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-27697
FILM NUMBER: 1741189
BUSINESS ADDRESS:
STREET 1: 1594 CENTRE POINTE DR
STREET 2: #102P
CITY: MILPITAS
STATE: CA
ZIP: 95035
BUSINESS PHONE: 2488517400
MAIL ADDRESS:
STREET 1: 31700 WEST 13 MILE RD
STREET 2: STE 201
CITY: FARMINGTON HILLS
STATE: MI
ZIP: 48335
10SB12G/A
1
k64198a2e10sb12ga.txt
AMENDENT NO. 2 TO FORM 10-SB
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
SOLUTIONNET INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
MINNESOTA 95-4749095
--------------------------------------------------------------------------------
(State or Other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1594 CENTRE POINTE DRIVE, MILPITAS CA 95035
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(408) 934-9748
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
NA NA
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
--------------------------------------------------------------------------------
(Title of class)
2
TABLE OF CONTENTS
Page No.
--------
Part I
Item 1. Description of Business 4
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Item 3. Description of Property 19
Item 4. Security Ownership of Certain Beneficial Owners and Management 20
Item 5. Directors, Executive Officers, Promoters and Control Persons 21
Item 6. Executive Compensation 23
Item 7. Certain Relationships and Related Transactions 25
Item 8. Description of Securities 26
Part II
Item 1. Market Price of and Dividends on the Registrant's Common 28
Equity and Other Shareholder Matters
Item 2. Legal Proceedings 30
Item 3. Changes in and Disagreements with Accountants 30
Item 4. Recent Sales of Unregistered Securities 30
Item 5. Indemnification of Directors and Officer 31
Part F/S
Index to Financial Statements F - 1
Part III
Item 1. Index to Exhibits 33
Item 2. Description of Exhibits 34
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WITH THE EXCEPTION OF THE STATEMENTS REGARDING HISTORICAL MATTERS AND
STATEMENTS REGARDING THE COMPANY'S CURRENT STATUS, CERTAIN MATTERS DISCUSSED
HEREIN ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES AND
EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. SUCH-FORWARD LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF
THE WORDS "ANTICIPATE", "BELIEVE", "ESTIMATE", "PLAN", "EXPECT", "INTEND" AND
SIMILAR EXPRESSIONS. FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE. ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY
FROM THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH MATERIAL DIFFERENCES INCLUDE FOREIGN EXCHANGE RATES, DEPENDENCE ON SKILLED
AND KEY PERSONNEL, CLIENT CONCENTRATION AND COMPETITION AND THOSE OTHER RISKS
DISCLOSED MORE FULLY UNDER "PART I - ITEM 1. DESCRIPTION OF BUSINESS" AND "ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - RISK FACTORS."
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
SolutionNet International, Inc., a Minnesota corporation (the "Company" or
"SolutionNet"), is a holding company, dedicated to the development and marketing
of proprietary, multi-application internet information technology ("IT")
solutions. SolutionNet develops and markets proprietary software products (Enet
Internet Banking ("ENet Banking"), Intelligent Data Mapper ("IDM"), E-Business
Kits and Electronic Medical Information ("EMI")) to the financial services,
telecommunications and health care markets and provides consulting and software
development services.
SolutionNet owns 100% of the outstanding shares of SolutionNet Inc. - British
Virgin Islands, incorporated under the laws of the British Virgin Islands in
1999 ("SolutionNet BVI"), which owns 100% of the outstanding shares of
SolutionNet (Asia Pacific) Pte Ltd Singapore, incorporated under the laws of
Singapore in 1994 ("SolutionNet (Asia Pacific")). SolutionNet (Asia Pacific)
owns 100% of the shares of SolutionNet (Middle East) Ltd. ("SolutionNet (Middle
East)"), a limited liability company formed under the laws of the United Arab
Emirates. Neither the holding company, SolutionNet, or SolutionNet BVI, has any
operations of its own. SolutionNet (Asia Pacific) is the principal operating
subsidiary of SolutionNet. SolutionNet (Middle East) had no operations through
December 31, 2000.
COMPANY HISTORY
SolutionNet was incorporated under the laws of the State of Minnesota under the
name of ETG International, Inc. ("ETGI") on August 25, 1994. On October 11,
1994, an Iowa corporation (formerly Grason Industries, Inc. which was
incorporated in August 1984) was merged into ETGI. Pursuant to an exchange
agreement, in April 1999 ETGI (which had changed its name to SolutionNet, but
was an inactive company) by way of exchange, issued (i) shares constituting a
majority of its outstanding shares to Densmore Group Limited, a corporation
incorporated under the laws of the British Virgin Islands ("Densmore") and (ii)
acquired all of the outstanding shares of SolutionNet BVI, and thereby control
of SolutionNet (Asia Pacific). Densmore had owned all of the outstanding shares
of SolutionNet BVI. Suresh Venkatachari, the President of SolutionNet, owns all
of the outstanding shares of Densmore. Densmore was formed by Mr. Venkatachari
to acquire the shares of SolutionNet because it provided certain tax and estate
planning advantages. Mr. Venkatachari does not believe such advantages are
necessary at this time and, accordingly, Mr. Venkatachari caused Densmore to
transfer all of its shares of SolutionNet to Mr. Venkatachari. See "Part I-Item
4. Security Ownership of Certain Beneficial Owners and Management."
SOLUTIONNET PRODUCTS AND SERVICES
SolutionNet focuses its efforts on the development and marketing of the products
(ENet Banking, IDM, E-Business Kits and EMI) and IT services (consulting and
software
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development) described below. All of the products are written in Java and are
capable of using smart card technology. A smart card, which is provided to the
customer and end-users of SolutionNet's customers (banks, health care centers,
etc.) is similar to a credit card, but includes a smart chip which stores the
user's identification and password that is used to authenticate the user while
he uses the system online on the Internet. A smart card is a security measure
used to protect against tampering.
ENET INTERNET BANKING
ENet Banking is designed to be an Internet-based, fully secured online banking
solution providing banks' corporate and retail customers with access to their
accounts worldwide. ENet is designed to offer real-time interactive information
solutions allowing clients to access information related to their accounts, make
electronic payments, engage in foreign exchange transactions, and generally to
transact and exchange information globally. ENet Banking also allows users to
receive alerts on their banking transactions. ENet Banking permits banks to
serve their clients by allowing information sharing between bank branches. ENet
works with various local and international standards for communicating credit
and debit instructions between parties.
INTELLIGENT DATA MAPPER
IDM is software designed to allow data interface over the Internet enabling the
integration of multiple applications and platforms including UNIX, AS/400, NT
and Windows 98. IDM provides an interface for different operating systems and
thereby allows industry to integrate and communicate data globally.
E-BUSINESS KITS
E-Business Kits are designed for companies which want to develop a business to
business and/or business to customer website on their own. E-Business Kits
provide software for developing business to business and business to customer
websites. E-Business Kits also include the availability of on-line invoicing and
payment features.
ELECTRONIC MEDICAL INFORMATION
EMI is a software product that is designed to enable patients, doctors,
healthcare centers and commercial organizations to interact via the Internet.
EMI has been designed to ease the administrative burden of SolutionNet's target
customers by permitting interactive on-line invoicing (including the
coordination of payments with health insurance providers), delivery of
prescriptions directly to pharmacists, and the coordination of laboratory tests
with other medical providers.
CONSULTING
The Company operates as a full-service consulting and programming house
providing end-user Internet technologies, Enterprise Resource Planning
solutions, Multimedia applications, technology and systems integration, offshore
resources and consultant
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training. Consulting services accounted for approximately 57% and 84% of total
SolutionNet revenues for the year ended December 31, 2000 and for the six
months ended June 30, 2001, respectively.
SolutionNet offers consulting services by supplying its staff as contractors to
work at its clients' facilities. Consulting contracts vary in length, ranging
generally from six months to a year, but may be extended as necessary. Among
other things, the contracts generally require monthly fixed payments, describe
the duties of the contractors, protect the confidentiality of the client and
provide that work product and intellectual property rights belong to the client.
Generally, the client has the right to terminate a contract on 30 days' notice.
Some contracts provide that the client will not hire the contractors during the
term of the contract and for a period thereafter. However, if SolutionNet agrees
to allow the client to hire the contractor, the client is required to pay
SolutionNet a fee (generally a percentage of annualized billings) depending on
when the contractor is hired.
SOFTWARE DEVELOPMENT SERVICES
SolutionNet provides various software development services. SolutionNet may
develop new software or develop new functions for existing software
applications. The software development process generally includes defining the
project parameters, designing, prototyping, pilots, programming, testing,
installation and maintenance. In the early stage of a development project,
SolutionNet personnel often work at a client's site to help determine the
parameters of a project and to coordinate with the Singapore facilities where
most of the design review, software programming and program testing is
conducted. The software development services are generally provided on a fixed
fee, fixed deadline basis, with SolutionNet responsible for delivering a
completed product to its customer by the deadline.
MARKETING AND DISTRIBUTION
The Company uses a variety of marketing programs designed to stimulate demand
for its products and services. The goal of the marketing activities is to create
awareness of the Company brand and product offerings. Marketing activities
include target marketing, an interactive Internet site, participation in
industry-related activities, use of distributors, partnerships with IT companies
and an in-house marketing department to promote its products in the Asia Pacific
region, the Middle East and India.
The Company targets its marketing efforts towards software solution
decision-makers in large organizations. The Company also markets through its own
Internet site. The Company makes many of its products available for evaluation
through its website at solutionnet.net. The web site is used to collect certain
customer information through an automated registration process. The Company uses
the customer information as a springboard for targeting its marketing of
upgrades, new products, add-on products, and merchandise.
The Company seeks to increase its corporate profile by participating in
exhibitions, trade fairs and other industry-related activities on a local,
regional and global scale. In order to more fully develop and maintain a global
presence, the Company has formed relationships with globally recognized
companies. The Company currently maintains
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technology and marketing relationships with Oracle Corporation ("Oracle"), Sun
Microsystems ("Sun"), Microsoft Corporation ("Microsoft") and the Algorithm
Research unit of Cylink Corporation ("Cylink"). SolutionNet has satisfied
certain criteria and paid applicable fees to become a "partner" under certain
partnership programs offered by Oracle and Microsoft. These programs offer
SolutionNet the benefit of, among other things, using the applicable program
logos, and obtaining licenses to use and reproduce certain of their products for
internal business purposes, application development, testing, training and
demonstration, and marketing purposes. In certain cases, SolutionNet can be
involved in co-marketing or special campaigns with such program partners. Also,
SolutionNet is included in such program partners' on-line referral directories
and SolutionNet is provided certain on-line support services from such program
partners. The relationships also permit SolutionNet to provide links to their
websites. With respect to Sun, SolutionNet is a distributor specializing in
reselling Sun's iPlanet e-Commerce solutions. In addition, SolutionNet is
provided access to Sun's iPlanet Enterprise Partner website. With respect to
Cylink, SolutionNet has an agreement under which it incorporates certain Cylink
security-based technologies, including the "smart card" technology, into
SolutionNet's products to protect the secure exchange of confidential
information. SolutionNet also is a distributor of such Cylink security-based
technologies.
To grow its international presence, SolutionNet uses various distributors to
market its products and services. Generally, distributors are given specific
geographic regions on a non-exclusive basis to market SolutionNet's products and
services. Payments for the products sold are to be made directly to SolutionNet
by the distributor. The distributor is an independent contractor paid on
commission, and appointed for a term, generally, of twelve months, with
automatic renewal unless three months' prior notice of termination is provided.
Typically, SolutionNet agrees, during the first six months of the relationship,
not to appoint other distributors for the territory assigned if certain
performance criteria are satisfied. The distributor generally markets the
products by using its customer and prospect database, organizing industry
related seminars and conferences, and advertising and participating in
exhibitions and trade fairs, sometimes jointly with SolutionNet. SolutionNet
trains the personnel of the distributor and provides necessary technical
support. Distributors must also agree, for a period ranging from six months to
one year, not to compete with SolutionNet's products, and undertake to keep
SolutionNet's proprietary information confidential. The Company has current
marketing relationships with Cybersign, Fujitsu, NCR and Tata Infotech to sell
the product in the Asia Pacific region, the Middle East and India. The Company
is currently attempting to locate and appoint suitable distributors in the
United States, United Kingdom and Australia.
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COMPANY-SPONSORED PRODUCT DEVELOPMENT ACTIVITIES
Our objective is to be a leading provider of financial and ebusiness solutions.
In order to achieve this objective, we are continuously investing in product
development activities to enhance our core technology and incorporating industry
leading application components into our products.
The following is a summary of the amounts spent during each of the last two
fiscal years on product development activities:
2000 1999
---- ----
$ 524,630 $ 394,411
COMPETITION
We are a very small player in the industry, however, with proprietary products
like E-Net Banking, EMI, IDM and E-Business Kits, the Company believes it has
built a solid foundation upon which to grow and expand the size and scope of its
business. We also plan to compete by using our distribution network and partner
relationships to help penetrate the market for the initial sale and by
maintaining customer relationships through solid customer support. However, the
market for software and services for intranets, extranets, and the Internet is
relatively new, intensely competitive, and subject to rapid technological
change. We expect competition to continue and increase in the future. Such
competition could impair our finances or business prospects.
Our primary competition currently includes:
- In-house development efforts by prospective customers or partners;
- Other vendor of application software or application development
platforms and tools directed at interactive and financial services,
such as Broadvision, Security First, Brokat, Infosys;
- Web content developers that develop custom software or integrate other
application software into custom solutions and
- International Business Machines Corporation.
The principal competitive factors affecting the market for our products
are:
- Depth and breadth of functionality offered;
- Ease of application development;
- Reliance on industry standards;
- Product reliability;
- Proven track record;
- Scalability;
- Maintainability;
- Personalization and other features;
- Product quality;
- Price and
- Customer support.
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Compared to us, many of these and other current and future competitors have
longer operating histories and significantly greater financial, technical,
marketing and other resources. As a result, they may be able to respond more
quickly to new or changing opportunities, technologies and customer
requirements. Many of these companies also can use their greater name
recognition and more extensive customer base to gain market share at our
expense. Current and potential competitors may bundle their products to
discourage users from purchasing our products. Competitive pressures may make it
difficult for us to acquire and retain customers and may require us to reduce
the price of our products.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company believes that it is in compliance with applicable material
environmental laws and regulations.
GOVERNMENT REGULATION AND INTELLECTUAL PROPERTY RIGHTS
Except indirectly with respect to the U.S. government regulation on the export
of encryption technology (discussed below) and government regulation of visas
(also see below), the Company is not aware of any required governmental
approvals of the Company's products and services.
The Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company intends to file trademark
applications in the United States and Singapore. The Company does not have any
patents or registered copyrights. Ownership of software and associated
deliverables created for clients is generally retained by or assigned to the
client, and the Company does not retain an interest in such software and
deliverables.
The Company enters into confidentiality agreements with its employees,
consultants and vendors and limits distribution of proprietary information. We
also control access to and distribution of our software, documents and other
proprietary information. Notwithstanding these precautions, there can be no
assurance that the steps taken by the Company in this regard will be adequate to
deter misappropriation of proprietary information or that the Company will be
able to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights. The laws of other countries may afford us little
or no effective protection of our intellectual property.
A breach of the encryption technology that we use could expose the Company to
liability and harm our reputation, causing a loss of customers. A significant
barrier to online commerce and communication is the secure exchange of valuable
and confidential information over public networks. We rely on encryption and
authentication technology,
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including public key cryptography technology licensed from Cylink Corporation,
to provide the security and authentication necessary to effect the secure
exchange of confidential information. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments could
cause a breach of the RSA algorithm or other algorithms that we use to protect
customer transaction data.
The United States government regulates the export of technology, including
encryption technology, which our products incorporate. Export regulations,
either in their current form or as may be subsequently enacted, may limit our
ability to distribute our software outside the United States. Any revocation or
modification of our export authority or adoption of new laws or regulations
relating to the export of software and encryption technology could limit our
international operations. The unlawful export of our software could also harm
our reputation. Although we take precautions against unlawful export of our
software, the global nature of the Internet makes it difficult to effectively
control the distribution of software.
Although the Company's intellectual property has never been the subject of an
infringement claim, there can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertion of such
claims will not result in litigation or that the Company would prevail is such
litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Furthermore, litigation, regardless of its outcome, could result in substantial
costs to, and diversion of effort by the Company. Any infringement claim or
litigation against the Company could, therefore, materially and adversely affect
the Company's business, operating results and financial condition.
Singapore currently has no restrictions on the number of foreigners working in
Singapore. If, however, the policy were to change, the Company's dependence on
employees from India may be materially adversely affected. The United States
does have strict restrictions on immigration. If the Company enters the U.S.
market, it will have to compete with other companies for the limited visas
available.
CUSTOMERS
The company derives its business and revenues from a large client base.
Currently, the following customers provided more than 10% of the Company's
annual revenues for the year ended December 31, 2000.
Hewlett-Packard (Singapore) 15%
Deutsche Bank (Singapore) 14%
While we have in the past provided software development to Hewlett-Packard
(Singapore) and Deutsche Bank (Singapore), we currently only provide them,
pursuant to agreements with our IT staff as contractors at their facilities in
Singapore. Under professional service agreements with both Deutsche Bank
(Singapore) and Hewlett-Packard (Singapore), SolutionNet is to provide them with
consultants as needed from time to time. Under the Deutsche Bank (Singapore)
professional services agreement, Deutsche Bank (Singapore) pays SolutionNet a
monthly fee for each
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SolutionNet employee providing services under the agreement. The agreement may
be terminated at any time upon 30 days written notice. If Deutsche Bank
(Singapore) hires an employee of SolutionNet after such employee has completed
its work for Deutsche Bank (Singapore), Deutsche Bank (Singapore) will reimburse
SolutionNet in an amount equal to the fees of such employee for one month. Under
the Hewlett-Packard (Singapore) professional services agreement, Hewlett-Packard
(Singapore) pays a monthly fee for each SolutionNet employee providing services
under the agreement as set forth in purchase orders. Purchase orders may be
terminated on 30 days' notice. Under the Hewlett-Packard (Singapore) agreement,
SolutionNet agrees not to solicit any Hewlett-Packard (Singapore) customers to
whom services have been provided by SolutionNet's employees for one year after
the performance of such services. To the extent that Hewlett-Packard and
Deutsche Bank either determine to change their current practices and stop or
significantly decrease doing business with us either because they select another
vendor, hire employees directly rather than independent contractors or relocate
their divisions to countries with lower labor costs, the Company's operations
could be materially adversely affected.
A sample list of our customers by industry as follows:
- Financial Services : ABN Amro Bank, Bank of Bahrain and Kuwait,
Citibank N.A., Deutsche Bank, HDFC Bank, Indian Bank and Qatar
National Bank
- Manufacturing / Services: BASF, Compaq, Hewlett-Packard, Siemens
Components and Sun Microsystems.
The volume of work performed for specific clients is likely to vary from year to
year particularly since the Company is usually not the exclusive outside
software service provider for its clients. Thus, a major client in one year may
not provide the same level of revenues in a subsequent year. The loss of any
large client could have a material adverse effect on the Company's results of
operations and financial condition. Since many of the contracted projects are
critical to the operations of its clients' businesses, any failure to meet
client expectations could result in a cancellation or non-renewal of a contract.
However, there are a number of factors other than the Company's performance that
could cause the loss of a client, such as a client moving more work in-house.
INTERNATIONAL SALES OPERATIONS
The Company's customers and its distributors' territories are located in
Bahrain, Brunei, India, Indonesia, Kuwait, Malaysia, Philippines, Qatar,
Thailand and Vietnam. International sales operations expose the Company to a
number of risks including the impact of recessions and/or political instability
in one or more of the countries, unexpected changes in regulatory requirements,
restrictions on the transfer of funds to or from foreign countries, seasonal
reductions in business activities, certification requirements, trade
restrictions and limited protection of intellectual property rights. In
addition, international operations expose the Company to the risks of changes in
foreign exchange rates. The Company's functional currency is the Singapore
dollar although it transacts a major portion of its business in foreign
currencies and accordingly has foreign currency exposure through its sales and
purchases outside of Singapore. The Company currently does not actively hedge
against exchange rate fluctuations, although it may
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elect to do so in the future. Accordingly, changes in exchange rates may have a
material adverse effect on the Company's net sales, cost of services sold, gross
margin and net income, any of which alone or in the aggregate may in turn have a
material adverse effect on the Company's business, operating results and
financial condition. For the year ended December 31, 2000, approximately 87% of
the Company's revenues were in Singapore dollars and 13% were in currencies
other than the Singapore dollar, whereas 95% of the Company's expenses were in
Singapore dollars and 5% were in currencies other than the Singapore dollar.
Revenues generated in non-Singapore currencies are translated into Singapore
dollars using the exchange rate prevailing on the dates revenues are recognized.
Expenses of non-Singapore operations are incurred in foreign currencies and are
translated into Singapore dollar at either the monthly average exchange rate or
the exchange rate on the date the expense is incurred, depending on the source
of payment. The financial statements are translated into U.S. dollars using the
average monthly exchange rate for revenues and expenses and the period end rate
for assets and liabilities in accordance with accounting principles generally
accepted in the United States of America. The gains or losses from such
translation are reported as "Accumulated other comprehensive income" or
"Accumulated other comprehensive loss," a separate component of stockholders'
equity. The Company expects that a portion of its revenues will continue to be
generated in non-Singapore currencies for the foreseeable future and that most
of the Company's expenses, including personnel costs as well as capital and
operating expenditures, will continue to be denominated in Singapore dollars.
Consequently, the Company's results of operations will be adversely affected to
the extent that the Singapore dollar appreciates against the other currencies.
As disclosed under "Marketing and Distribution," the Company intends to expand
its customer base into the United States, the United Kingdom and Australia. In
addition to expansion into these areas by marketing efforts, the Company may
expand by acquisition. As of this date, however, the Company has no
understanding, commitment or agreement with respect to any material future
acquisition. Since the Company has not made any acquisitions in the past, there
can be no assurance that the Company will be able to identify suitable
acquisition candidates available for sale at reasonable prices, consummate any
acquisition, or successfully integrate any acquired business into the Company's
operations. Further, acquisitions may involve a number of special risks,
including diversion of management's attention, failure to retain key acquired
personnel and clients, unanticipated events or circumstances, legal liabilities
and amortization of acquired intangible assets, some or all of which could have
a material adverse effect on the assets, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition.
EMPLOYEES
As of June 30, 2001, the Company had 112 full-time employees. The Company
believes its relationship with its employees is satisfactory. The Company's
employees are not represented by any union.
Given the Company's relatively early stage of development, the Company's success
depends on the ability to attract, develop, motivate and retain highly qualified
personnel. The Company's ability to execute project engagements and to obtain
new clients
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depends, in large part, on its ability to attract, train, motivate and retain
highly skilled IT professionals, particularly project managers, software
engineers and other senior technical personnel. An inability to hire and retain
additional qualified personnel will impair the Company's ability to bid for or
obtain new projects and to continue to expand its business. The Company believes
that there is significant competition for IT professionals with the skills
necessary to perform the services offered by the Company. There can be no
assurance that the Company will be able to assimilate and manage new IT
professionals effectively. Any increase in the attrition rates experienced by
the Company, particularly the rate of attrition of experienced software
engineers and project managers, would adversely affect the Company's results of
operations and financial condition. There can be no assurance that the Company
will be successful in recruiting and retaining a sufficient number of
replacement IT professionals with the requisite skills to replace those IT
professionals who leave. Further, there can be no assurance that the Company
will be able to redeploy and retrain its IT professionals to keep pace with
continuing changes in IT, evolving standards and changing client preferences.
The Company's success depends to a significant degree upon continued
contributions of members of the Company's senior management and other key
research and development and sales and marketing personnel. The loss of any of
such persons could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
SolutionNet develops and markets proprietary multi-application IT solutions. Its
proprietary software products include ENet Banking, IDM, E-Business Kits and EMI
for the financial services, telecommunications and health care markets. Its IT
services consist of consulting (generally providing SolutionNet staff to act as
consultants at its customers' facilities) and developing new software or new
functions for existing software applications for its customers. Revenue from the
sale of the software product is recognized upon delivery to the customer,
providing no significant Company obligations remain and collection of the
resulting receivable is probable. Revenue from consulting services is recognized
in the period in which the services are rendered. Revenue under distributor
agreements is recognized upon shipment of the software products providing no
significant Company obligations remain and collectibility is probable.
Currently, SolutionNet markets its products and services in the Asia Pacific
region, the Middle East and India. Future markets for SolutionNet products and
services may include Australia, the United Kingdom and the United States.
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RESULTS OF OPERATION-YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED
DECEMBER 31, 1999
The following table sets forth certain items reflected in our consolidated
statements of operation expressed as a percent of total revenues for the periods
indicated.
Year Ended December 31,
-----------------------
1999 2000
Revenues:
Software sales 29% 43%
Services 71 57
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Total revenues 100 100
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Cost of Revenues:
Cost of Software sales 31 17
Cost of Services 48 43
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Total cost of revenues 79 60
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Gross Profit 21 40
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Operating expenses:
Sales and marketing 14 19
General and administrative 15 25
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Total operating expenses 29 44
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Operating (loss) income (8) (4)
Others, net -- 1
------ ------
(loss) Income before income taxes (8) (3)
Income tax provision -- --
------ ------
Net (loss) income (8) (3)
====== ======
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2000 Compared to 1999
Revenues: Our total revenues increased 63% to $3.67 Million for 2000 from $2.25
Million for 1999 and consisted of an increase in software sales revenue of
$919,418 or 142% and an increase in services revenue of $501,763 or 31%. The
142% increase in our software sales revenue is primarily a result of new
customers for our ENet Banking product. The 31% increase in services revenue is
a result of growth from both existing and new customers. For the year ended
December 31, 2000, approximately 83% of our services revenues were generated
from existing customers.
Cost of Revenues: Our cost of software sales has decreased by $69,749 or
10% on a year to year basis while revenues increased by 142%. The gross profit
percentage is 60% in 2000 compared to 8% in 1999. The increased gross profit
is due primarily to the timing of revenue recognition and more efficient
implementation due to experience with our product.
Cost of Services during 2000 increased $501,878 or 47% on a year to year basis.
Cost of services as a percent of services revenue was 75% in 2000 compared to
67% in 1999. The increase in cost of services as a percentage of revenue is
primarily attributed to an increase in personnel.
Operating Expenses: Sales and Marketing expenses consist primarily of salaries,
employee-related benefit costs and commissions of sales and marketing personnel,
travel and entertainment and marketing related expenditures for exhibitions and
trade shows. Sales and marketing expenses for the year were $708,927 in 2000 as
compared to $315,835 in 1999, which represents an increase of $393,092 or 124%
year to year. The increase in sales and marketing expense is primarily a result
of the cost of additional sales and marketing personnel and travel.
General and administrative expenses consist primarily of salaries and employee
related benefits of management, administration and support staff, office and
rental and professional service fees. General and administrative expenses for
the year were $905,721 in 2000 as compared to $337,233 in 1999, which represents
an increase of $568,488 or 169% year to year. The increase in general and
administrative expense is primarily a result of expansion of the management team
and new operations in the Middle East.
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LIQUIDITY AND CAPITAL RESOURCES
We have generally funded our operations through a combination of cash from
operations, borrowings from related parties, and the issuance of shares of
common stock. Net cash used in operating activities was ($2.45) million and
($896,039) for the years ended December 31, 2000 and 1999, respectively. The
decrease in cash provided by operations in 2000 was primarily due to increased
investments in marketing of our products and software development costs.
The principal use of cash for investing activities during the two years ended
December 31, 2000 was for the purchase of computer equipment.
Net cash provided by financing activities was $3 Million and $963,000 for the
years ended December 31, 2000 and 1999, respectively. The increase was primarily
due to funds received from the issuance of common stock and borrowings from
related parties.
Most of our revenues are billed in Singapore dollars. We recognize transaction
gains and losses in the period of occurrence. Foreign currency fluctuations in
2000 and 1999 did not have a material impact on income (loss) from operations as
currency fluctuations on revenue denominated in a foreign currency were offset
by currency fluctuations on expenses denominated in a foreign currency. There
were no material operating trends or effects on liquidity as a result of
fluctuations in the functional currency. We do not generally use any types of
derivatives to hedge against foreign currency fluctuation, nor do we speculate
in foreign currency. There is no assurance that exchange rate fluctuations may
not cause significant fluctuations in SolutionNet's results of operations.
Inflation did not have a material impact on our revenues or income (loss) from
operations for the years ended December 31, 2000 and 1999.
RESULTS OF OPERATION- SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS
ENDED JUNE 30, 2000
The following tables set forth certain items reflected in our consolidated
statements of operation expressed as a percent of total revenues for the periods
indicated.
Six Months ended June 30,
-------------------------
2000 2001
Revenues:
Software sales 21% 16%
Services 79 84
----- -----
Total revenues 100 100
----- -----
Cost of Revenues:
Cost of Software sales 18 23
Cost of Services 54 59
----- -----
Total cost of revenues 72 82
----- -----
Gross Profit 28 18
----- -----
Operating expenses:
Sales and marketing 24 22
General and administrative 14 41
----- -----
Total operating expenses 38 63
----- -----
Operating (loss) income (10) (45)
Others, net -- --
----- -----
(loss) Income before income taxes (10) (45)
Income tax provision -- --
----- -----
Net (loss) income (10) (45)
===== =====
Revenues: Our total revenues increased 10% to $1.5 Million for the six months
ended June 30, 2001 from $1.3 Million for the six months ended June 30, 2000 and
consisted of a decrease in software sales revenue of $39,251 or 14% and an
increase in services revenue of $175,990 or 16%. The 16% increase in service
revenue is a result of growth from both existing and new customers. For the six
months ended June 30, 2001, approximately 72% of our services revenue was
generated from existing customers.
Cost of Revenues: Our cost of software sales has increased $95,666 or 39% on a
comparison of the six months ended June 30, 2001 to the six months ended June
30, 2000. The cost of software sales as a percent of software sales revenue was
144% for the six months ended June 30, 2001 compared to 87% for the six months
ended June 30, 2000. The increase in cost of software sales was primarily due to
delays in implementation of certain projects and the increased amortization of
capitalized product development expenses over the corresponding period in 2000.
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Cost of Services for the six months ended June 30, 2001 increased $144,248 or
19% over the six months ended June 30, 2000. Cost of services as a percent of
services revenue was 70% for the six months ended June 30, 2001 compared to 68%
for the six months ended June 30, 2000. The increase in cost of services as a
percentage of revenue is primarily attributed to an increase in personnel.
Operating Expenses: Sales and Marketing expenses consist primarily of salaries,
employee-related benefit costs and commissions of sales and marketing personnel,
travel and entertainment and marketing related expenditures for exhibitions and
trade shows. Sales and marketing expenses for the six months ended June 30, 2001
were $332,898 as compared to $325,164 for the six months ended June 30, 2000,
which represents an increase of $7,734 or 2%. The small increase in sales and
marketing expense is primarily a result of the cost of additional marketing
promotion expenses.
General and administrative expenses consist primarily of salaries and employee
related benefits of management, administration and support staff, office and
rental and professional service fees. General and administrative expenses were
$617,304 for the six months ended June 30, 2001 as compared to $195,187 for the
six months ended June 30, 2000, which represents an increase of $422,117 or
216%. The increase in general and administrative expense is primarily due to
increased professional fees and increased management expenses compared to the
June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have generally funded our operations through a combination of cash from
operations, borrowings from related parties, and the issuance of shares of
common stock. Net cash used in operating activities was ($409,607) and
($268,243) for the six months ended June 30, 2001 and 2000, respectively.
The decrease in cash provided by operations for the six months ended June 30,
2001 is primarily due to increased investments in marketing of our products and
software development costs.
The principal use of cash for investing activities during the six months ended
June 30, 2001 and 2000 was for the purchase of computer equipment.
Net cash provided by financing activities was $35,005 and 798,493 for the six
months ended June 30, 2001 and 2000, respectively. The decrease for the six
months ended June 30, 2001 was due to no issuance of common stock and less funds
received from related party borrowings.
Most of our revenues are billed in Singapore dollars. We recognize transaction
gains and losses in the period of occurrence. Foreign currency fluctuations for
the six months ended June 30, 2001 and 2000 did not have a material impact on
income (loss) from operations as currency fluctuations on revenue denominated in
a foreign currency were offset by currency
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fluctuations on expenses denominated in a foreign currency. There were no
material operating trends or effects on liquidity as a result of fluctuations in
the functional currency. We do not generally use any types of derivatives to
hedge against foreign currency fluctuation, nor do we speculate in foreign
currency. There is no assurance that exchange rate fluctuations may not cause
significant fluctuations in SolutionNet's results of operations.
Inflation did not have a material impact on our revenues or income (loss) from
operations for the six months ended June 30, 2001 and 2000
FUTURE CAPITAL NEEDS
Our ability to obtain cash adequate to fund our needs depends generally on the
results of our operations and the availability of financing. Management believes
that cash flow from operations, in conjunction with possible additional
issuances of common stock will be sufficient to fund capital expenditures in the
future. However, there can be no assurance in this regard or that we can
successfully sell our shares of common stock or that the prices we can receive
from the possible sale of our common stock will be favorable to SolutionNet.
RISK FACTORS
In addition to the risks discussed in "Part I-Description of Business," we are
subject to the risks and uncertainties described below. The risks and
uncertainties described below and in "Part I-Description of Business" are not
the only ones facing us. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business could be
harmed and the trading price of our common stock could decline.
Product Risks. Our revenues and operating results can vary from quarter to
quarter depending on a number of factors including:
- the upgrading of our current products and introduction of new
products;
- the timing and introduction or enhancements of the products
and services of our competitors;
- the mix of products sold by us;
- changes in our pricing policies or the pricing policies of our
competitors; and
- customer order deferrals in anticipation of new products or
enhancements by us or our competitors.
Macro-Economic Conditions. Our sales may be subject to macro-economic conditions
that could have an effect on the willingness of our customers and prospects to
make large capital spending decisions. The current macro-economic forecast for
the United States, Singapore and some other countries indicate an economic
slowdown. Many companies have issued public announcements regarding workforce
and spending reductions. Because of these corporate pronouncements and economic
conditions, our customers may defer capital spending decisions that could
negatively affect our revenue and operating results.
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Product and Service Marketplace. Our products and services facilitate online
commerce and communication over public and private networks. The market for
these products and services is in its relatively early stages of development. If
Internet commerce does not continue to grow or grows more slowly than expected,
it could negatively affect our revenue and operating results.
International Operations. Our international activities expose us to additional
risks. In the year ended December 31, 2000, all our revenues were derived from
sales outside of North America. A key component of our business strategy is to
expand our international activities. As we continue to expand internationally,
we will be increasingly subject to risks of doing business internationally,
including:
- unexpected changes in regulatory requirements;
- export controls relating to encryption technology and other
export restrictions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- fluctuations in currency exchange rates;
- reduced protection for intellectual property rights in some
countries;
- cultural barriers;
- seasonal reductions in business activity during the summer
months in Middle East and certain other parts of the world;
and
- potentially adverse tax consequences.
Product Defects. Sophisticated software products, like those sold by us, may
contain undetected errors that will not become apparent until after the products
are introduced or when the volume of provided services increases. It is possible
that, despite testing by our prospective customers and us, errors will be found
in our products. Product defects could result in all or any of the following
consequences to our business:
- loss of revenues;
- delay in market acceptance;
- diversion of development resources;
- damage to our reputation; and
- increased service and warranty costs.
Dependence on Executive Officers and Key Employees. Our performance
substantially depends on the performance of our executive officers and key
employees. The loss of the services of any of our executive officers or key
employees could cause us to incur increased operating expenses and divert senior
management resources in searching for replacements. We do not carry "key person"
life insurance policies on any of our employees. Our future success also depends
on our continuing ability to identify, hire, train and retain other highly
qualified technical and managerial personnel. Competition for these personnel is
intense, especially in the Internet industry. We have in the past experienced,
and may continue to experience, difficulty in hiring and retaining sufficient
numbers of highly skilled employees.
ITEM 3. DESCRIPTION OF PROPERTY.
SolutionNet's principal U.S. office is located at 1594 Centre Pointe Drive,
Milpitas, California 95035. The lease of this office expires in October 2001.
SolutionNet's Singapore office is located at No. 1 Shenton Way, Number 22-06/09,
Singapore 068803. The lease of this office, which is approximately 5,930 square
feet, expires in August 2002.
SolutionNet does not own any real estate properties and has no agreements to
acquire any such properties at this time.
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ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of outstanding shares
of Company Common Stock beneficially owned by (i) each person known by the
Company to own more than 5.0% of its outstanding Common Stock; (ii) each of the
directors of the Company; (iii) each of the named executive officers in Part
I-Item 6; and (iv) all officers and directors as a group.
NAME AND ADDRESS AMOUNT OWNED PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER OF RECORD OF CLASS
-------------- ------------------- --------- ----------
Common Suresh Venkatachari 7,100,000 56.3%
Blk 223 #06-475
Yishun St. 21
Singapore, 760223
Common Sampath Seshadri 200,000(1) 1.6%
6592 Burtonwood Dr.
West Bloomfield, MI 48322
Common Murali Natarajan 0 0
No. 1 Shenton Way
Number 22-06/09
Singapore, 068803
Common Karthikeyan Raman 5,000 -- (2)
No. 1 Shenton Way
Number 22-06/09
Singapore, 068803
Common Sara Hallitex Corporation(3) 1,730,000(4) 13.7%
4344 Promenade Way
Suite 102P
Marina del Rey, CA 90292
Officers and Directors as a Group (5 persons) 7,305,000(5) 57.9%(5)
---------------
(1) Mr. Seshadri is the owner of record of 100,000 shares of common stock and
his wife is also the owner of 100,000 shares of common stock.
(2) Represents less than 1.0% of the outstanding shares.
(3) It is the Company's belief that Sara Hallitex Corporation changed its name
to Web Capital Ventures, Inc. ("Web Capital"). The Company is also of the belief
that Garrett K. Krause, the President and Chief Executive Officer of Web Capital
controls a majority of the outstanding shares of Web Capital. In addition, based
on an SEC filing of Web Capital in January 2000, Mr. Krause controls an
additional 541,000 shares (4.1%) of SolutionNet.
(4) These shares are the subject of litigation brought by SolutionNet against
Web Capital, Garrett K. Krause and others. See "Part II - Item 2. Legal
Proceedings."
(5)As disclosed below, officers and directors as a group hold options for
187,000 shares.
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ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following is a list of the names and ages of all directors and executive
officers of the Company:
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION HELD SINCE
Suresh Venkatachari 34 Chairman of the Board, March 1999
President, Chief Executive
Officer, Treasurer, Secretary
and Director
Sampath Seshadri 47 Vice-President and Director April 1999
Murali Natarajan 43 Vice President (Finance) April 2001
TRV Varadarajan 45 Head of Human Resources April 2001
and Administrator
Karthikeyan Raman 31 Assistant Vice President April 2001
and Chief Technology Officer
SURESH VENKATACHARI has served as the Chairman of the Board, Director,
President, and Chief Executive Officer of the Company since March 1999. Mr.
Suresh founded SolutionNet (Asia Pacific) in 1994. Mr. Suresh is also the
Director and Chief Executive Officer of SolutionNet (Asia Pacific). From April
1991 to May 1996, Mr. Venkatachari was a Project and Implementation Manager with
Deutsche Bank, responsible for the development and implementation of electronic
banking. From May 1988 to March 1991, Mr. Venkatachari was an independent IT
consultant. Two of his clients included Singapore Airlines and Systime
Corporation.
Mr. Venkatachari obtained his bachelor's degree in electronics and
instrumentation from Annamalai University, India in 1988.
SAMPATH SESHADRI has served as Vice-President and Director of the
Company since April 1999. Mr. Seshadri is responsible for strategic planning,
financial and business operations. Since January 1996, Mr. Seshadri has also
been the President and CEO of VED Software Services, Inc., a Michigan
corporation (consulting and IT services). From June 1992 to December 1995, Mr.
Seshadri was vice president of HTC Global Services, Inc., a Michigan corporation
(formerly Hi-Tech Consultants, Inc.) (consulting and programming services).
Prior to this time, Mr. Seshadri was a consultant in the IT field providing
services to Fortune 1000 companies.
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Mr. Seshadri holds a bachelors' and masters' degree from the University
of Bombay.
Mr. Seshadri and Mr. Venkatachari are brothers-in-law.
MURALI NATARAJAN, has been serving as the Vice President of Financial
Operations of the Company (since April 2001) and of SolutionNet ((Asia Pacific))
(since February 1999). He is responsible for all of the operational aspects of
SolutionNet (Asia Pacific) and is part of the core management group that is
responsible for strategic management of the Company. From July 1995 to February
1999, Mr. Natarajan worked for Interactive Media Services Pte Ltd as a Finance
and Administrative Manager. From December 1993 to May 1995, Mr Natarajan worked
for KM Oli Mohamed Pte Ltd (jewelry company).
A management accountant by profession, Mr. Natarajan is a member of the
Institute of Cost and Works Accountants of India and a Certified Internal
Auditor, US. Mr. Natarajan received his Bachelor of Commerce Degree from
Vivekananda College, Madras University, India.
TRV VARADARAJAN, has been serving as the head of Human Resource and
Administration of the Company (since April 2001) and of SolutionNet ((Asia
Pacific)) (since August 1998). From June 1979 to June 1998, Mr. Varadarajan was
employed by S&S Power Switchgear Ltd, Chennai, India in the areas of management
control of finance and accounts, human resource management, commercial operation
and general business administration.
Mr. Varadarajan has obtained an Honors Degree in Commerce from
Annamalai University, India. Mr. Varadarajan is also a Professional Cost
Accountant and has received various certifications in Application Software
Technology.
KARTHIKEYAN RAMAN, has been serving the Company (since April 2001) and
SolutionNet (Asia Pacific) since May 2000) as Assistant Vice President and Chief
Technology Officer. In this capacity, he is responsible for strategic technology
initiatives, standards, program management, and the design, development and
operation of various SolutionNet products and new product research. Innovation
is his top priority so that SolutionNet products incorporate state-of-the-art
technology.
From July 1995 to May 2000, Mr. Raman held key technical positions in
the Electronic Banking Department of Deutsche Bank Regional Head office,
Singapore. He has pioneered the design and development of the Electronic Banking
software db-direct in both Client-Server and Web based Internet Architectures.
From March 1993 to June 1995, Mr. Raman worked for Tata Consultancy Services,
India as a systems analyst. Mr. Raman holds a Master's degree in Computer
Science from Birla Institute of Technology and Science, Pilani, India and a
Bachelor's degree in Computer Science from Bharathiyar University, India.
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ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate annual remuneration of each of the
three highest paid persons who are officers or directors during the Company's
year ended December 31, 2000.
ANNUAL COMPENSATION
CAPACITIES IN REMUNERATION 2000 AGGREGATE
NAME OF INDIVIDUAL REMUNERATION WAS RECEIVED REMUNERATION
------------------ ------------------------- ------------
Suresh Venkatachari Chairman of the Board, $100,000
President, Chief Executive Officer,
Treasurer, Secretary and Director
Murali Natarajan Vice President (Finance) $ 38,889
Karthikeyan Raman Assistant Vice President $ 25,679(1)
and Chief Technology
Officer
Officers and Directors $191,260
As a Group (5 persons)
(1) Started employment with SolutionNet (Asia Pacific) in May 2000.
EMPLOYMENT AGREEMENTS
Mr. Suresh Venkatachari. SolutionNet and Mr. Venkatachari entered into a 2 year
employment agreement which expires on May 1, 2003. The agreement provides that
Mr. Venkatachari will serve as Chairman of the Board, President and Chief
Executive Officer of SolutionNet at an annual salary of $100,000 (U.S.) in the
first year and $150,000 (U.S.) in the second year plus, depending upon
SolutionNet's performance, a minimum bonus at 50% of his annual salary and will
receive options to purchase shares of common stock in numbers as determined by
the Board of Directors. The employment agreement also provides that if Mr.
Venkatachari's employment is terminated (with or without cause) or if he resigns
because of a material change in the scope of his duties or because of a change
in control of SolutionNet, he would be entitled to severance payments in an
amount equal to his base salary plus his bonus for the preceding year or an
imputed bonus of 50% of base salary if he is discharged or suffers a material
change in his duties prior to a bonus being established for the prior year. Such
severance payments shall be payable for the unexpired term of the agreement or
twelve months, whichever is longer.
Mr. Murali Natarajan. SolutionNet (Asia Pacific) and Murali Natarajan entered
into an employment agreement dated February 1, 1999. Mr. Natarajan's annual
salary is $38,889 (U.S.). Either party may terminate the contract by giving
thirty (30) days' notice or equivalent salary in lieu thereof. In addition,
SolutionNet (Asia Pacific) may terminate
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the agreement without notice if Mr. Natarajan does not perform his duties or is
found guilty of any personal misconduct or of any willful breach and continues
to neglect the terms of his employment or any other duties or terms that
SolutionNet (Asia Pacific) may from time to time assign.
Mr. Karthikeyan Raman. SolutionNet (Asia Pacific) and Karthikeyan Raman entered
into a letter of employment dated May 29, 2000. Mr. Raman's salary is $45,495
(U.S.) and is reviewed annually. Either party may terminate the contract by
giving 30 days' notice or equivalent salary in lieu thereof. In addition,
SolutionNet (Asia Pacific) may terminate the agreement without notice if Mr.
Raman does not perform his duties or is found guilty of any personal misconduct
or of any willful breach and continues to neglect the terms of his employment or
any other duties or terms that SolutionNet (Asia Pacific) or its clients may
from time to time assign. Mr. Raman also agrees that he will not directly or
indirectly solicit and/or accept an offer for employment from the clients of
SolutionNet (Asia Pacific) or join a competitor's company within one year after
termination of his employment.
2001 EQUITY PARTICIPATION PLAN
On April 26, 2001, the Board of Directors approved SolutionNet's 2001 Equity
Participation Plan (the "Equity Participation Plan"). The Equity Participation
Plan reserves 1,500,000 shares of Common Stock of the Company for issuance
thereunder.
The Equity Participation Plan authorizes the Compensation Committee or the Board
of Directors ("Committee") to grant incentive and non-statutory stock options as
well as restricted stock. Officers, consultants, and other employees (including
employee directors) of SolutionNet and its subsidiaries and affiliates whom the
Committee believes have the potential to contribute to the future success of
SolutionNet, and those non-employee directors who the Board of Directors
believes have the potential to contribute to the future success of SolutionNet,
are eligible to receive awards under the Equity Participation Plan. In the event
of a stock dividend, stock split, reorganization, merger, or similar corporate
transaction (other than a change in control), the Committee is authorized to
make appropriate adjustments to prevent dilution or enlargement of the benefits
or potential benefits intended to be made available under the Equity
Participation Plan or with respect to an outstanding award. In the event of a
change in control, each option granted shall become exercisable as to all shares
covered thereby immediately prior to the consummation of such change in control
and the restrictions included in any restricted stock grant shall be deemed
rescinded and terminated.
The Equity Participation Plan may be wholly or partially amended or modified,
suspended or terminated at any time from time to time by the Committee. However,
without approval of SolutionNet's shareholders given within twelve months before
or after the action by the Committee, no action of the Committee may, except as
otherwise provided in the Equity Participation Plan, be taken that would require
shareholder approval as a matter of law, regulation or rule. No amendment,
suspension or termination of the Equity Participation Plan shall, without the
consent of the participants, alter or impair any rights or obligations under any
award therefor granted, unless the award itself expressly so provides.
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The Equity Participation Plan is administered by the Committee. Among other
things, the Committee has the power to interpret the Equity Participation Plan,
the stock option agreements issued thereunder and the agreements pursuant to
which restricted stock awards are granted. Under stock option agreements entered
into between SolutionNet and participants, stock options generally vest over a
two and one-half year period; 33.3% six months from the date of grant, and
33.33% each year thereafter.
OPTIONS, WARRANTS AND RIGHTS
The following table sets forth the amount of options, warrants or rights held by
the persons listed as of April 26, 2001. Neither Densmore nor Garrett Krause own
any outstanding options, warrants or rights. The Company terminated warrant
rights previously provided to Sara Hallitex Corporation pursuant to contract,
however, see "Part II - Item 2" with respect to the cross-complaint filed by Web
Capital.
NAME TITLE AND AMOUNT OF DATE
OF COMMON STOCK CALLED FOR BY EXERCISE OF
HOLDER OPTIONS, WARRANTS OR RIGHTS PRICE EXERCISE
Suresh Venkatachari 100,000(1) $ 0.27 2
Sampath Seshadri 25,000 $ 0.27 2
Murali Natarajan 25,000(1) $ 0.27 2
Karthikeyan Raman 12,000(1) $ 0.27 2
Officers and Directors as a Group 187,000(1) $ 0.27 2
(5 persons)
-------------------------------
(1) Options granted under 2001 Equity Participation Plan.
(2) Options vest as follows: one-third on October 27, 2001, one-third on
October 27, 2002 and one-third on October 27, 2003
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended December 31, 2000, SolutionNet (Asia Pacific) entered into
a consulting agreement dated as of March 1, 2000 (which replaced an earlier
agreement entered into in April 1999) with Netsavvy Solutions PVT LTD, a
corporation organized under the laws of the Commonwealth of India ("Netsavvy"),
and also entered into a "recruitment" agreement with Netsavvy dated October 1,
2000. Under the consulting agreement, Netsavvy agrees to design, develop and
support certain software (including Enet - Corporate Internet Banking and EMI -
Electronic Medical Info) and to provide technical support for and maintenance of
the software. The agreement was for a one-year period, but remains in effect on
a month to month basis. Under the recruitment agreement, Netsavvy agrees to
retain recruiters to recruit IT consultants. The recruitment agreement is in
effect for one year and may be extended upon the agreement of the parties.
Either party may terminate the recruitment agreement on one month's notice.
Also, on May 2, 2000 SolutionNet and Netsavvy entered into a distributorship
agreement pursuant to which Netsavvy acts as non-exclusive distributor for India
and South Asian countries. The terms of the distributorship agreement are
generally the same as those disclosed in "Part I - Item 1. Description of
Business - Marketing and Distribution. Suresh Venkatachari, the CEO of the
Company, is a director of Netsavvy and owns 35% of the outstanding shares of
Netsavvy. During the years ended December 31, 2000 and 1999, the Company
provided services and/or products to Netsavvy totaling $307,599 (U.S.) and $0,
respectively, and received services and/or products totaling $434,711 (U.S.)
and $401,774 U.S., respectively.
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During the year ended December 31, 2000, SolutionNet (Asia Pacific) entered into
a supply agreement dated August 31, 2000, with GVMS Online Pte Ltd., a
corporation organized under the laws of the Republic of Singapore ("GVMS").
Under the supply agreement, SolutionNet (Asia Pacific) developed a global voice
mails system for GVMS. Murali Natarajan and TRV Varadarajan are directors and
each owns 50% of the outstanding shares of GVMS. During the year ended December
31, 2000, the Company provided services to GVMS totaling $132,762 (U.S.).
Management believes that the terms and conditions of the engagements are fair
and comparable to those which could have been obtained from independent parties.
In 1999, Suresh Venkatachari, the President and CEO of the Company, made an
interest-free loan of $119,000 to the Company. The loan arrangement is not in
writing and the loan is still outstanding.
On October 1, 1999, SolutionNet and SolutionNet (Europe), a corporation
organized under the laws of the United Kingdom entered into a loan agreement.
Under the agreement, SolutionNet is to provide a three-year interest-free loan
of not more than $150,000 (U.S.) to SolutionNet Europe. Under the agreement,
SolutionNet (Europe) is to provide assistance to SolutionNet in business
development, marketing and the sales of SolutionNet's products in the United
Kingdom and Europe during the first two years of the agreement without cost to
SolutionNet. No loans were made under the agreement in 1999. The largest
aggregate amount outstanding during the year ended December 31, 2000 was $93,827
(U.S.). The loan has been and is being used for working capital purposes. Suresh
Venkatachari is a director and owner of 50% of the outstanding shares of
SolutionNet (Europe). The Company and SolutionNet (Europe) may consider some
type of business combination in the future.
ITEM 8. DESCRIPTION OF SECURITIES.
GENERAL MATTERS
The authorized capital stock of SolutionNet consists of 20,000,000 shares of
Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred
Stock, $0.001 par value per share ("Preferred Stock"). As of July 19, 2001,
there were 12,618,009 shares of Common Stock outstanding and 551 holders of
record. No shares of Preferred Stock are issued and outstanding. The following
summary of certain provisions of the Company's capital stock describes certain
material provisions of, but does not purport to be complete and is subject to,
and qualified in its entirety by, the Articles of Incorporation, as amended, and
the Bylaws, as amended, of SolutionNet and by the provisions of applicable law.
COMMON STOCK
Subject to the prior rights of the holders of any Preferred Stock, the holders
of outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the Board
may from time to time determine. The shares of Common Stock are not redeemable
or convertible, and the holders thereof will have no preemptive rights or
subscription rights to purchase any securities of the Company. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive pro rata the assets of the Company
26
27
which are legally available for distribution, after payment of all debts and
other liabilities and subject to prior rights of any holders of Preferred Stock
then outstanding. Each outstanding share of Common Stock is entitled to vote on
all matters submitted to a vote of stockholders.
PREFERRED STOCK
The Board may, without further action by the Company's stockholders, from time
to time, direct the issuance of shares of Preferred Stock in series and may, at
the time of issuance, determine the rights, preferences and limitations of each
series. Satisfaction of any dividend preferences of outstanding shares of
Preferred Stock would reduce the amount of funds available for the payment of
dividends on shares of Common Stock. Holders of shares of Preferred Stock may be
entitled to receive a preference payment in the event of any liquidation,
dissolution or winding up of the Company before any payment is made to the
holders of shares of Common Stock. Under certain circumstances, the issuance of
shares of Preferred Stock while providing desirable flexibility in connection
with possible acquisitions, financing and other corporate transactions, may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management. The Board, without
stockholder approval, may issue shares of Preferred Stock with voting and
conversion rights which could adversely affect the holders of shares of Common
Stock.
27
28
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS.
The Company's common stock was quoted on the OTC Bulletin Board ("OTCBB") under
the symbol "SLNN" until November 18, 1999. The Company's common stock is
currently quoted on the Pink Sheets. The Company's common stock is no longer
quoted on the OTCBB because only SEC reporting companies are permitted to be
quoted on the OTCBB. The Company intends to have its common stock quoted on the
OTCBB after it becomes an SEC reporting company, and to apply to have its common
stock quoted for listing on Nasdaq as soon as it satisfies Nasdaq requirements.
The following table sets forth for the periods indicated, the range of high and
low closing bid quotations per share. The Company considers its Common Stock to
be thinly traded and that any reported bid or sale prices may not be a true
market-based valuation of the Common Stock. These quotations represent
inter-dealer prices, without retail markups, markdowns or commissions and may
not necessarily represent actual transactions. These bid quotations have been
adjusted retroactively by the 1 for 40 reverse stock split during the first
quarter of the year ended December 31, 1999.
PRICE PER SHARE
---------------
HIGH LOW
---- ---
Year Ended December 31, 1999
First Quarter .....................................$ 10.00 $ 1.00
Second Quarter ....................................$ 24.50 $ 0.35
Third Quarter .....................................$ 12.00 6.75
Fourth Quarter .................................... 6.75 2.50
Year Ended December 31, 2000
First Quarter .....................................$ 11.50 $ 2.75
Second Quarter .................................... 6.20 4.00
Third Quarter ..................................... 4.00 1.35
Fourth Quarter .................................... 1.75 0.27
Year Ended December 31, 2001
First Quarter .....................................$ 0.78 $ 0.09
Second Quarter ....................................$ 0.90 $ 0.16
On July 19, 2001, there were approximately 551 shareholders of record.
Penny stock regulation broker-dealer practices in connection with transactions
in "penny stocks" are regulated by certain penny stock rules adopted by the
Securities and Exchange Commission. Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or
28
29
quoted on the NASDAQ system). The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the risk associated with the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules generally require that prior to a transaction in a penny
stock, the broker-dealer must make a written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. At the time the Registration
Statement becomes effective and the Company's securities become registered, the
common stock may continue to have a trading price of less than $5.00 per share.
If the Company's Stock is subject to the penny stock rules, investors may find
it more difficult to sell their securities, should they desire to do so.
The Company has not paid, nor does it anticipate paying dividends in the
foreseeable future. The Company has never declared or paid any cash dividends on
the Common Stock. The Company currently intends to retain any earnings to
finance operations and expansion and, therefore, does not anticipate declaring
or paying any cash dividends on the Common Stock in the foreseeable future.
Future cash dividends, if any, will be determined by the Board and will be based
upon the Company's earnings, capital requirements, financial conditions and
other factors deemed relevant by the Board.
There are currently 629,750 shares of Common Stock which are subject to
outstanding options to purchase the Company's Common Stock under the 2001 Equity
Participation Plan.
There are 12,618,009 shares of Common Stock of the Company outstanding, of which
approximately 10,981,184 shares are restricted Common Stock of the Company, of
which approximately 10,981,184 restricted shares are more than two years old
that may be able to be sold under Rule 144(k) under the Securities Act by
non-affiliates of the Company. Additionally 440,500 shares are subject to a
registration rights agreement which permits the holders to cause the Company to
register their shares for sale pursuant to a registration statement filed by the
Company under the Securities Act at any time after the Company becomes a
reporting company under the Securities Exchange Act of 1934.
Except with respect to those shares subject to a registration rights agreement,
there is currently no Common Stock that is being or is proposed to be publicly
offered by the Company, the offering of which could have a material effect on
the market price of the Company's Common Stock.
The Transfer Agent for the shares of common voting stock of the Company is
Corporate Stock Transfer, 3200 Cherry Creek Drive, Suite 430, Denver, CO 80201.
29
30
ITEM 2. LEGAL PROCEEDINGS.
The Company is, from time to time, a party to litigation arising in the normal
course of its business. Management believes that none of these actions,
including the cross-complaint disclosed below, individually or in the aggregate,
will have a material adverse effect on the financial position or result of
operations of the Company.
On December 4, 2000, the Company brought an action entitled SolutionNet
International, Inc. v. Garrett Krause, FutureVest Corporation, Omnimark, Ltd.,
Rancho La Playa Investment Ltd., Wilmington Partners XI LLC, Wilmington Rexford,
Inc., Web Capital Ventures, Inc. and WorldVest Holding Corporation in the
Superior Court of the State of California. On March 29, 2001, the Court
dismissed FutureVest Corporation, Omnimark, Ltd., Rancho La Playa Investment
Ltd. and WorldVest Holding Corporation for lack of jurisdiction. In this
litigation, the Company has alleged that, among other things, Krause breached
fiduciary duties to the Company by issuing 920,000 Company shares and 1,730,000
Company shares to Web Capital (formerly Sara Hallitex) and by issuing 1,500,000
shares of stock to five companies. At the time of the exchange agreement (See
"Item 1: Description of Business - Company History"), Mr. Krause was an officer
and director of SolutionNet and the President of Web Capital. (He was removed as
an officer and director of SolutionNet in August 2000.) Prior to the exchange
agreement, Densmore had entered into an agreement with Web Capital pursuant to
which, among other things, (1) Web Capital was to receive 920,000 restricted
shares of SolutionNet common stock for providing certain services and (2) Web
Capital was to receive 1,730,000 restricted shares of SolutionNet common stock
in connection with arranging the placement of 1,000,000 shares of the Company's
common stock at $2.00 per share. Instead, the Company has alleged that Web
Capital did not provide the requisite services and placed 1,500,000 shares at
$0.66 per share. The Company is seeking the return of the 920,000 and the
1,730,000 shares and compensation from Web Capital and Garrett Krause for
selling more shares for a lower price than was agreed to.
Garrett Krause, Web Capital and certain of the defendants have filed an answer
denying their liability, and Garrett Krause and Web Capital have filed a
cross-complaint for breach of contract and misrepresentation and are seeking
damages in an amount to be determined and punitive damages. The Company believes
such cross-complaint is without merit and intends to defend itself vigorously.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Company has sold securities which were not
registered under the Securities Act of 1933 as follows:
On March 4, 1999, the Company privately placed 44,700 restricted shares
(1,788,000 shares prior to 1 for 40 reverse stock split) to seven persons
(two individuals and
30
31
five entities for an aggregate of $26,600. The two individuals, spouses of
former officers and directors of SolutionNet, and the five entities, controlled
by such officers and directors, were deemed sophisticated by the Company. There
were no underwriters involved in the sales and no commissions were paid in
connection with the private placement. The issuer relied on the exemption from
registration under Section 4(2) of the Securities Act of 1933 (the "Securities
Act").
On March 31, 1999, the Company privately placed 10,500,000 shares to four
persons. 7,750,000 restricted shares were issued to Densmore in connection with
an exchange agreement resulting in Densmore and its 100% owner, Suresh
Venkatachari, obtaining control of the Company. See "Part I - Item 1.
Description of Business - Company History." In connection with the exchange
agreement, Web Capital received 920,000 restricted shares. As noted above, Web
Capital also received 1,730,000 shares in connection with the sale of the
1,502,500 shares. These shares are subject to the litigation described in "Part
II - Item 2. Legal Proceedings." The balance of the shares were issued to the
same two individuals noted above, spouses of former officers and directors of
SolutioNet, who were deemed sophisticated by the Company. The issuer relied on
the exemption from registration under Section 4(2) of the Securities Act.
On April 1 and April 5, 1999, the Company sold 1,502,500 shares to five persons:
FutureVest Corporation, (500,000 shares), Wilmington Partners XI LLC
(500,000 shares), WSY Ltd (250,000 shares), Omnimark Ltd. (250,000 shares),
Omnimark Ltd. (250,000 shares) and Iwona Alami (2,500 shares) for an aggregate
of $991,650. The issuer relied on the exemption from registration under Section
504 of Regulation D of the Securities Act. The shares were placed by
Web Capital. In its litigation against Garrett Krause and Web Capital
(See "Part II - Item 2. Legal Proceedings"), the Company has alleged that
Garrett Krause, the President of Web Capital, breached his fiduciary duty to the
Company by causing the Company, in his capacity as an officer of the Company, to
issue Web Capital 1,730,000 shares in connection with the sale of the 1,502,500
shares.
During the year ended December 31, 2000, the Company privately placed 440,500
restricted shares to five accredited investors who are not U.S. residents or
citizens for an aggregate of $1,762,000. The placement took place outside of the
United States. Commissions of $176,200 were paid to a non-U.S. person for such
placement. The issuer relied on the exemption from registration under Regulation
S and Section 4(2) of the Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
LIMITATIONS ON LIABILITIES AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Articles of Incorporation provide that no director shall be liable to the
Company or any shareholder for monetary damages for breach of fiduciary duty as
a director, except: (a) for any breach of the director's duty of loyalty or its
shareholders; (b) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (c) under Section 302A.559
or 80.A.23 of the Minnesota Business Corporation Act; (d) for any transaction
from which the director derived an improper personal benefit; or (e) for any act
or omission occurring prior to August 25, 1994.
31
32
The Company's Bylaws provide, consistent with Minnesota statutory law, that the
Company shall indemnify a person made or threatened to be made a party to a
proceeding by reason of the former or present official capacity of the person,
against judgments, penalties, fines, including, without limitation, settlements
and reasonable expenses, including attorneys' fees and disbursements, incurred
by the person in connection with the proceeding, if with respect to the acts or
omissions complained of in the proceeding, the person: (a) has not been
indemnified by another organization with respect to the same acts or omissions;
(b) acted in good faith; (c) received no improper personal benefit and Section
302A.255 of the Minnesota Business Corporation Act, if applicable, has been
satisfied; (d) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and (e) in the case of acts or omissions
occurring in the official capacity of a person, such person, depending on the
capacity, must reasonably believe that the conduct was in the best interest of
the Company or must reasonably believe that the conduct was not opposed to the
best interest of the Company. The termination of a proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent does not, of itself, establish that the person does not meet the
criteria set forth herein.
If a person is made or threatened to be made a party to a proceeding, the person
is entitled, upon written request to the Company, to payment or reimbursement by
the Company of reasonable expenses, including attorneys' fees and disbursements,
incurred by the person in advance of the final disposition of the proceeding:
(a) upon receipt by the Company of a written affirmation by the person of a good
faith belief that the criteria for indemnification set forth herein have been
satisfied and a written undertaking by the person to repay all amounts so paid
or reimbursed by the Company, if it is ultimately determined that the criteria
for indemnification have not been satisfied, and (b) after making a
determination that the facts then known to those making the determination would
not preclude indemnification.
PART F/S
32
33
INDEX TO FINANCIAL STATEMENTS
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
PAGE
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001 (unaudited) F-3
Consolidated Statements of Operations for the years ended December 31, 1999 and 2000 and
the six-month periods ended June 30, 2000 and 2001 (unaudited) F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the
years ended December 31, 1999 and 2000 and the six-month
periods ended June 30, 2000 and 2001 (unaudited) F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 2000 and
the six-month periods ended June 30, 2000 and 2001 (unaudited) F-7
Notes to Consolidated Financial Statements F-8
F-1
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
SolutionNet International, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of SolutionNet
International, Inc. and subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the two year period then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
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 our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SolutionNet
International, Inc. and subsidiaries as of December 31, 2000, and the results of
their operations and their cash flows each of the years in the two year period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
Detroit, Michigan
May 31, 2001
F-2
35
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2000
(UNAUDITED)
DECEMBER 31, June 30,
2000 2001
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 521,808 $ 93,005
Accounts receivable - trade, less allowance for doubtful accounts of
$212,780 and $218,723 at December 31, 2000 and June 30, 2001, respectively 1,418,986 1,504,660
Due from related parties (note 6) 585,318 428,110
Deposits and other assets 128,956 109,888
------------ -----------
Total current assets 2,655,068 2,135,663
Property, plant and equipment (note 1):
Computers and office equipment 205,658 216,156
Leasehold improvements 29,081 27,921
Furniture and fixtures 19,448 41,826
------------ -----------
254,187 285,903
Less accumulated depreciation and amortization 157,417 190,504
------------ -----------
Net property, plant, and equipment 96,770 95,399
------------ -----------
Software development costs, less accumulated amortization (note 3) 773,285 726,437
------------ -----------
$ 3,525,123 2,957,499
============ ===========
See accompanying notes to consolidated financial statements.
F-3
36
SOLUTIONNET INTERNATIONAL INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2000
(UNAUDITED)
DECEMBER 31, June 30,
2000 2001
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 63,819 126,297
Current installments of obligations under capital leases (note 2) 34,654 16,553
Trade accounts payable 265,165 283,720
Accrued expenses 136,114 286,498
Income taxes payable (note 4) 1,843 --
Deferred revenue 114,928 117,230
Due to related parties (note 6) 492,540 368,657
----------- -----------
Total current liabilities 1,109,063 1,198,955
Obligations under capital leases, excluding current
installments (note 2) 23,079 22,159
Deferred income taxes (note 4) 577 554
----------- -----------
Total liabilities 1,132,719 1,221,668
----------- -----------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized; none issued and outstanding -- --
Common stock, $0.001 par value, 20,000,000 shares
authorized; 12,618,009 shares issued and outstanding 12,618 12,618
Paid-in capital 2,608,182 2,608,182
Accumulated deficit (230,211) (900,558)
Accumulated other comprehensive income -- foreign currency
translation adjustment 1,815 15,589
----------- -----------
Total stockholders' equity 2,392,404 1,735,831
----------- -----------
$ 3,525,123 2,957,499
=========== ===========
F-4
37
SOLUTIONNET INTERNATIONAL INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999 and 2000
(UNAUDITED)
YEAR ENDED DECEMBER 31 SIX MONTH PERIOD ENDED JUNE 30
---------------------- ------------------------------
1999 2000 2000 2001
---- ---- ---- ----
Revenues:
Software sales 648,973 1,568,391 282,725 243,473
Consulting services 1,604,352 2,106,115 1,085,845 1,261,836
--------- --------- --------- ---------
Total revenues 2,253,325 3,674,506 1,368,570 1,505,309
Costs of revenues:
Costs of software sales 572,829 290,235 98,244 115,139
Costs of consulting services 1,074,047 1,575,926 740,785 885,033
Amortization of software development costs 131,005 343,849 148,218 226,989
--------- --------- --------- ---------
Total cost of revenues 1,777,881 2,210,010 987,247 1,227,161
--------- --------- --------- ---------
Gross profit 475,444 1,464,496 381,323 278,148
Operating expenses
Sales and marketing 315,835 708,927 325,164 332,898
General and administrative 337,233 905,722 195,187 617,296
--------- --------- --------- ---------
Total operating expenses 653,068 1,614,649 520,351 950,194
--------- --------- --------- ---------
Operating loss (177,624) (150,153) (139,028) (672,046)
Other income (expense)
Interest income (expense) (562) (3,805) 86 1,699
Other income (expense) 5,194 24,532 (4,728) -
--------- --------- --------- ---------
Loss before income taxes (172,992) (129,426) (143,670) (670,347)
Income tax expense (benefit) 10,676 (5,211) - -
--------- --------- --------- ---------
Net loss (183,668) (124,215) (143,670) (670,347)
========= ========= ========= =========
Basic loss per share (0.02) (0.01) (0.01) (0.05)
========= ========= ========= =========
Diluted loss per share (0.02) (0.01) (0.01) (0.05)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
38
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Years ended December 31, 1999 and 2000
PREFERRED COMMON PAID-IN STOCK SUBSCRIPTION
STOCK STOCK CAPITAL RECEIVABLE
---------- ---------- ---------- ------------------
Balances at December 31, 1998 $ -- 7,880 72,751 --
Net loss -- -- -- --
Foreign currency translation loss -- -- -- --
Comprehensive loss -- -- -- --
Issuance of 1,547,200 shares, net of
cash expenses of $323,881 -- 1,547 952,822 (260,000)
Issuance of 2,750,000 shares in
connection with ETGI merger (note 7) -- 2,750 (2,750) --
---------- ---------- ---------- ----------
Balances at December 31, 1999 -- 12,177 1,022,823 (260,000)
Net loss -- -- -- --
Foreign currency translation gain -- -- -- --
Comprehensive loss -- -- -- --
Stock subscription payment received 0 -- -- 260,000
Issuance of 440,500 shares, net of cash commission
paid of $176,200 -- 441 1,585,359 --
---------- ---------- ---------- ----------
Balances at December 31, 2000 $ -- 12,618 2,608,182 --
Net loss (unaudited) -- -- -- --
Foreign currency translation gain (unaudited) -- -- -- --
Comprehensive loss (unaudited) -- -- -- --
---------- ---------- ---------- ----------
Balances at June 30, 2001 (unaudited) $ -- 12,618 2,608,182 --
========== ========== ========== ==========
ACCUMULATED
RETAINED OTHER
EARNINGS COMPREHENSIVE TOTAL
(ACCUMULATED INCOME STOCKHOLDERS'
DEFICIT) (LOSS) EQUITY
------------ ------------- -------------
Balances at December 31, 1998 77,672 1,047 159,350
Net loss (183,668) -- (183,668)
Foreign currency translation loss -- (2,566) (2,566)
----------
Comprehensive loss -- -- (186,234)
----------
Issuance of 1,547,200 shares, net of
cash expenses of $323,881 -- -- 694,369
Issuance of 2,750,000 shares in
connection with ETGI merger (note 7) -- -- --
---------- ---------- ----------
Balances at December 31, 1999 (105,996) (1,519) 667,485
Net loss (124,215) -- (124,215)
Foreign currency translation gain -- 3,334 3,334
----------
Comprehensive loss -- -- (120,881)
----------
Stock subscription payment received -- -- 260,000
Issuance of 440,500 shares, net of cash commission
paid of $176,200 -- -- 1,585,800
---------- ---------- ----------
Balances at December 31, 2000 (230,211) 1,815 2,392,404
Net loss (unaudited) (670,347) -- (670,347)
Foreign currency translation gain (unaudited) -- 13,774 13,774
----------
Comprehensive loss (unaudited) -- -- (656,573)
---------- ---------- ----------
Balances at June 30, 2001 (unaudited) (900,558) 15,589 1,735,831
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6
39
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 2000
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
------------------------ -------------------------
1999 2000 2000 2001
---------- ---------- -------------------------
Net loss (183,668) (124,215) (143,670) (670,347)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 163,357 414,551 26,359 267,229
Deferred taxes 5,931 (5,211) --
Change in operating assets:
Accounts receivable-trade (684,957) (573,838) 110,868 (138,646)
Inventories 2,213 -- --
Deposits and other current assets (56,495) (59,034) 23,787 15,793
Software development costs (394,411) (524,630) (138,491) (210,620)
Trade accounts payable 336,006 (1,771,363) (123,644) 27,260
Accrued expenses (75,956) 90,304 37,085 159,704
Deferred revenue -- 115,321 -- 7,037
Income taxes payable (8,059) (7,074) 535 (3,865)
---------- ---------- ---------- -----------
Net cash used in operating activities (896,039) (2,445,189) (207,171) (546,455)
---------- ---------- ---------- -----------
Cash flows from investing activities:
Purchase of equipment (54,362) (40,388) (15,477) (42,784)
---------- ---------- ---------- -----------
Net cash used in investing activities (54,362) (40,388) (15,477) (42,784)
Cash flows from financing activities:
Cash overdraft 29,160 34,641 (29,296) 66,470
Principal payments of capital lease obligations (3,930) (25,882) 22,496 (17,091)
Borrowing from (payments to) related parties 243,954 1,141,493 744,221 122,474
Payment received for stock subscription -- 260,000 -- --
Proceeds from issuance of common stock 694,369 1,585,800 -- --
---------- ---------- ---------- -----------
Net cash provided by (used in) financing activities 963,553 2,996,052 737,421 171,853
---------- ---------- ---------- -----------
Net effect of changes in foreign currency on cash flows 173 (1,992) (3,443) (11,417)
---------- ---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 13,325 508,483 511,330 (428,803)
Cash and cash equivalents at beginning of period -- 13,325 13,325 521,808
---------- ---------- ---------- -----------
Cash and cash equivalents at end of period $ 13,325 521,808 524,655 93,005
========== ========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 562 3,805 2,115 2,882
========== ========== ========== ===========
Cash paid for income taxes $ 12,953 7,641 7,050 3,865
========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
F-7
40
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
SolutionNet International, Inc., a Minnesota corporation (the
"Company" or "SolutionNet"), is a holding company with investee
companies dedicated to the development and marketing of
proprietary, multi-application internet information technology
("IT") solutions. SolutionNet owns 100% of the outstanding shares
of SolutionNet Inc. - British Virgin Islands, incorporated under
the laws of the British Virgin Islands in 1999 ("SolutionNet
BVI"), which owns 100% of the outstanding shares of SolutionNet
(Asia Pacific) Pte. Ltd. Singapore, incorporated under the laws of
Singapore in 1994 ("SolutionNet (Asia Pacific)"). SolutionNet
(Asia Pacific) owns 100% of the shares of SolutionNet (Middle
East) Ltd. ("SolutionNet (Middle East)"), incorporated in the
United Arab Emirates. Neither the holding company, SolutionNet or
SolutionNet BVI, has any operations of its own. SolutionNet (Asia
Pacific) is the principal operating subsidiary of SolutionNet.
SolutionNet (Middle East) had no operations through December 31,
2000.
(B) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the financial
statements of SolutionNet International, Inc. and its wholly owned
subsidiaries, SolutionNet BVI, and indirect wholly owned
subsidiaries SolutionNet (Asia Pacific) and SolutionNet (Middle
East). All significant intercompany balances and transactions have
been eliminated in consolidation.
The statements here are presented in United States dollars to
comply with United States Securities and Exchange Commission
reporting requirements. For purposes of applying Statement of
Financial Accounting Standards No. 52, Foreign Currency
Translation, the functional currency of the Company is the
Singapore dollar. As the effect is substantially the same as using
the current rate as of the dates transactions took place, a
weighted average exchange rate of 0.59309 and 0.57900 United
States dollars to one Singapore dollar has been used to translate
the statements of cash flows and statements of operations for the
years ended December 31, 1999 and 2000, respectively. The current
exchange rate as of December 31, 2000 has been used to translate
the assets and liabilities of the Company. The cumulative
translation difference is shown as accumulated other comprehensive
gain on the accompanying consolidated balance sheet.
The accompanying financial statements as of June 30, 2001 and for
the six-month period then ended were not audited. These
unaudited financial statements include, in the opinion of
management, all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the financial
statements of the period covered.
The Company develops and markets proprietary IT solutions. Its
services consist of consulting (generally providing Company staff
to act as consultants at its customers' facilities) and developing
new software or functions for its customers. The Company markets
its products and services in the Asia Pacific region, the Middle
East and India and has the following geographic concentration of
revenues:
---------------------------------------------------------------------------------------------
Six month period ended June 30, 2000 Six month period ended June 30, 2001
---------------------------------------------------------------------------------------------
Software Consulting Software Consulting
sales services Total sales services Total
---------------------------------------------------------------------------------------------
Asia
Pacific 134,876 1,085,845 1,220,721 89,810 1,261,836 1,351,646
---------------------------------------------------------------------------------------------
India 35,177 - 35,177 91,748 - 91,748
---------------------------------------------------------------------------------------------
Middle
East 112,672 - 112,672 61,915 - 61,915
---------------------------------------------------------------------------------------------
Total 282,725 1,085,845 1,368,570 243,473 1,261,836 1,505,309
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Year ended December 31, 1999 Year ended December 31, 2000
---------------------------------------------------------------------------------------------
Software Consulting Software Consulting
sales services Total sales services Total
---------------------------------------------------------------------------------------------
Asia
Pacific 154,198 1,604,352 1,758,550 1,055,803 2,106,115 3,161,918
---------------------------------------------------------------------------------------------
India 170,951 - 170,951 208,999 - 208,999
---------------------------------------------------------------------------------------------
Middle
East 323,824 - 323,824 303,589 - 303,589
---------------------------------------------------------------------------------------------
Total 648,973 1,604,352 2,253,325 1,568,391 2,106,115 3,674,506
---------------------------------------------------------------------------------------------
The Company considers two segments as its significant reporting
segments: Software Sales and Consulting Services. Management
considers these as their only reporting segments due to the fact
management has identified these as two separate operations in its
internal management of the business and as all significant
revenues can be clearly classified as either of a consulting
nature with hourly or project based billings or as a sale of
software.
(C) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(D) PROPERTY, PLANT, AND EQUIPMENT
Property, and equipment are stated at cost. Equipment under
capital leases is stated at the present value of minimum lease
payments.
F-8
41
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Depreciation on equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Equipment
held under capital leases and leasehold improvements are amortized
straight line over the shorter of the lease term or estimated
useful life of the asset. Useful lives of assets are as follows:
Computers and office equipment 3 years
Leasehold improvements 3 years
Furniture and fixtures 5 years
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This Statement requires long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(F) SOFTWARE DEVELOPMENT COSTS
Costs incurred internally in creating a computer software product
are charged to expense when incurred as research and development
until technological feasibility has been established for the
product. Technological feasibility is established upon completion
of a detail program design or, in its absence, completion of a
working model. Thereafter, all software production costs are
capitalized and subsequently reported at the lower of unamortized
cost or net realizable value. Capitalized costs are amortized
based on current and projected future revenue for each product
with an annual minimum equal to the straight-line amortization
over the remaining estimated economic life of the product (three
years). Amortization of capitalized software development costs was
$131,005 and $343,849 in 1999 and 2000, respectively.
(G) REVENUE RECOGNITION
The Company recognizes revenue in accordance with Statement of
Position 97-2 (SOP 97-2), Software Revenue Recognition, and SEC
Staff Accounting Bulletin 101 (SAB 101), Revenue Recognition.
Revenue from software license sales is recognized upon delivery to
the customer, providing no significant Company obligations remain
and collection of the resulting receivable is probable per
contract accounting. In instances where a significant Company
obligation does exist as may be defined in each specific agreement
such as future delivery upgrades, technical assistance or
customization of the software, recognition is deferred until the
obligation has been satisfied. The ENet Corporate Banking product
generally includes three months of post contract support. Fair
values have been apportioned from the entire arrangement fee to
account for this element. The fair values are based on the price
the customer has to pay when they require additional support upon
the expiration of the stipulated warranty period. The Company
also uses resellers to sell their products. Revenue under reseller
agreements is recognized upon shipment of licenses, providing no
significant Company obligations remain and collectibility is
probable. Arrangements with resellers normally include a post
contract support (PCS) element, which consists of telephone
support and onsite support as necessary. As the PCS element is for
three months and no specified upgrades are expressed either
implicity or explicity, the Company recognizes revenue related to
the PCS component upon delivery of the software. Maintenance
revenue is deferred and recognized on a pro rata basis over the
life of the related agreement. The unrecognized portion of
maintenance revenue is included in deferred revenue.
Revenue from other sources, principally training and consulting,
is recognized in the period in which the services are rendered.
(H) ADVERTISING
Advertising is expensed as incurred. Expenses relating to
advertising were $22,418 and $15,242 in 1999 and 2000,
respectively.
(I) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
F-9
42
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, accounts receivable,
trade accounts payable, and related-party receivables/payables
approximates fair value because of the short-term maturity of
these instruments. The fair value of long-term debt approximate
their carrying value as determined by company management using
available market information.
(K) EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the
calculation of basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. The
Company had no dilutive options, warrants or other convertible
securities outstanding as of December 31, 2000. Stock options
issued on April 26, 2001 do not impact diluted earnings per share
as they were anti-dilutive.
(L) USE OF ESTIMATES
Management of the Company has made estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results
could differ from those estimates.
(2) LEASES
The Company is obligated under various capital leases for certain
computer equipment. At December 31, 2000, the gross amounts of equipment
and related accumulated amortization recorded under capital leases were
as follows:
Computer equipment $ 92,159
Less accumulated amortization 32,880
----------
$ 59,279
==========
Amortization of assets held under capital leases is included with
depreciation expense.
The Company also has noncancelable operating leases primarily for office
space. Rental expense for operating leases (except those with lease
terms of a month or less that were not renewed) during 1999 and 2000 was
approximately $66,068 and $130,239, respectively.
F-10
43
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future
minimum capital lease payments as of December 31, 2000 are:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
--------- -----------
2001 $ 39,305 143,715
2002 26,483 95,810
--------- -----------
Total minimum lease payments 65,788 $ 239,525
===========
Less amount representing interest 8,055
---------
Present value of net minimum capital lease
payments 57,733
Less current installments of obligations
under capital leases 34,654
---------
Obligations under capital leases, excluding current
installments $ 23,079
=========
(3) COMPUTER SOFTWARE DEVELOPMENT COSTS
The following represents costs capitalized and amortized related to
software developed for sale to outside customers which has demonstrated
technological feasibility:
1999 2000
---------- ----------
Balance at beginning of year $ 353,256 617,717
Additions 394,411 524,630
Amortization expense (131,005) (343,849)
Foreign currency adjustment included in other comprehensive
income 1,055 (25,213)
---------- ----------
Balance at end of year $ 617,717 773,285
========== ==========
F-11
44
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(4) INCOME TAXES
Total income tax (benefit) expense for the years ended December 31, 1999
and 2000 were allocated as follows:
Income tax expense (benefit) consists of:
1999 2000
----------- ----------
Current - foreign $ 4,666 222
Deferred - foreign 6,010 (5,433)
----------- ----------
$ 10,676 (5,211)
=========== ==========
Income tax expense (benefit) was $10,676 and $(5,211) for the years
ended December 31, 1999 and 2000, respectively, and differed from the
amounts computed by applying the U.S. Federal income tax rate of 34% to
loss before income taxes as a result of the following:
1999 2000
---------- -----------
o
Computed "expected" tax expense (benefit) $ (58,817) (42,233)
Increase (reduction) in income taxes resulting from:
Permanent Differences 6,635 26,180
Increase in valuation allowance 51,492 12,490
Other 6 (1,405)
Foreign tax rate differential 11,360 (243)
---------- -----------
$ 10,676 (5,211)
========== ===========
F-12
45
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 are presented below.
Deferred tax assets:
Net operating loss carryforwards $ 78,271
Less valuation allowance (78,271)
----------
Net deferred tax assets -
----------
Deferred tax liabilities:
Property and equipment depreciation differences 577
----------
Total gross deferred liabilities 577
----------
Net deferred tax liability $ 577
==========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. In order to fully realize
the deferred tax assets, the Company will need to generate future
taxable income.
Utilization of net operating loss carryforwards may be limited under
provisions of the Internal Revenue Code.
(5) BUSINESS AND CREDIT CONCENTRATIONS
During the years ended December 31, 1999 and 2000, respectively, the
Company generated approximately 42% and 29% of revenues from two
customers. Accounts receivable due from these customers at December 31,
2000 were $138,436 representing approximately 7.4% of the total.
(6) RELATED PARTY TRANSACTIONS
During the year ended December 31, 2000, SolutionNet (Asia Pacific)
entered into a consulting agreement (which replaced an earlier agreement
entered into in April 1999) with Netsavvy Solutions PVT LTD, a
corporation organized under the laws of the Commonwealth of India
("Netsavvy"), and also entered into a "recruitment" agreement with
Netsavvy dated October 1, 2000. Under the consulting agreement, Netsavvy
agrees to design, develop and support certain software (including Enet -
Corporate Internet Banking and EMI - Electronic Medical Info and to
provide technical support for and maintenance of the software. Under the
recruitment agreement, Netsavvy agrees to retain recruiters to recruit
IT consultants. The CEO of the Company is a director of Netsavvy and
owns 35% of the outstanding shares of NetSavvy. In addition, the Company
performs development services for and has sold software (for resale to a
third party customer) to Netsavvy.
F-13
46
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
During the year ended December 31, 2000, SolutionNet (Asia Pacific)
entered into a supply agreement with GVMS Online Pte. Ltd., a
corporation organized under the laws of the Republic of Singapore
("GVMS"). Under the supply agreement, SolutionNet (Asia Pacific)
developed a global voice mail system for GVMS. Two employees of the
Company are directors of GVMS and each owns 50% of the outstanding
shares of GVMS.
During the year ended December 31, 2000, SolutionNet (Asia Pacific) made
interest-free loans to SolutionNet (Europe), a corporation organized
under the laws of the United Kingdom. The CEO of the Company is a
director and owner of 50% of the outstanding shares of SolutionNet
(Europe).
The following is a summary of related party amounts as of December 31,
2000 and for the two year period then ended:
December 31, June 30,
2000 2001
------------- ----------
Receivable due from SolutionNet (Europe) $ 97,675 96,373
Due from GVMS 105,496 76,872
Due from Netsavvy 273,919 221,380
Due from other affiliated companies 108,228 33,485
----------- ---------
585,318 428,110
=========== =========
Due to directors 4,753 12,588
Due to Netsavvy 461,497 356,069
Other amounts payable 26,290 --
----------- --------
$ 492,540 368,657
=========== ========
Six month
Year ended December 31 period ended
---------------------------- June 30
1999 2000 2000 2001
------------ ----------- -------- --------
Sales to Netsavvy $ -- $ 173,700 -- 100,000
Services provided to Netsavvy -- 133,899 133,899 --
Services provided to GVMS -- 132,762 -- --
Product development charges and related
recruiting and expenses from Netsavvy 80,317 137,711 61,300 --
Purchases from Netsavvy 321,457 297,000 137,000 182,682
============ =========== ======= =======
(7) MERGER WITH ETG INTERNATIONAL, INC.
SolutionNet was incorporated under the laws of the State of Minnesota
under the name of ETG International, Inc. ("ETGI") on August 25, 1994.
Pursuant to an exchange agreement, in April 1999 ETGI (which had changed
its name to SolutionNet, but was an inactive company) by way of
exchange, issued (i) shares constituting a majority of its outstanding
shares to Densmore Group Limited, a corporation incorporated under the
laws of the British Virgin Islands ("Densmore") and (ii) acquired all of
the outstanding shares of SolutionNet BVI, and thereby control of
SolutionNet (Asia Pacific). Densmore had owned all of the outstanding
shares of SolutionNet BVI.
For financial reporting purposes, the merger with ETGI described above
was considered to be a reverse acquisition involving a shell company and
accordingly, the operating entity, SolutionNet BVI, was determined to be
the acquiring enterprise.
F-14
47
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
The historical consolidated financial statements of SolutionNet BVI are
presented as the historical financial statements of the Company for the
period prior to the ETGI merger. The merger combination was accounted
for under the purchase method of accounting. The results of operations
of SolutionNet (ETGI) are included in the accompanying consolidated
financial statements only from the date of the merger. The historical
equity of SolutionNet BVI is reflected as the consolidated equity of the
Company prior to the merger retroactively restated to reflect the number
of shares received in the business combination.
(8) LITIGATION
The Company is, from time to time, a party to litigation arising in the
normal course of its business. Management believes none of these
actions, including the cross-complaint disclosed below, individually or
in the aggregate, will have a material adverse effect on the financial
position or result of operations of the Company.
On December 4, 2000, the Company brought an action entitled SolutionNet
International, Inc. v. Garrett Krause (Krause) et al in the Superior
Court of the state of California. In this litigation, the Company has
alleged that, among other things, Krause breached fiduciary duties to
the Company by issuing without authority 2,650,000 Company shares to Web
Capital (formerly known as Sara Hallitex Corporation) and by issuing
1,500,000 shares of stock to his affiliates without authorization. The
Company has stated in its pleadings any Company stock in the possession
of Krause and/or his affiliates and/or proceeds from the sale of such
stock are impressed with a constructive trust for the benefit of the
Company. The Company is seeking the return of the stock illegally issued
and/or the proceeds from all sales of the stock illegally issued plus
punitive damages.
Garrett Krause, Web Capital and certain of the defendants have filed an
answer denying their liability, and Garrett Krause and Web Capital have
filed a cross-complaint for breach of contract and misrepresentation and
are seeking damages in an amount to be determined and punitive damages.
The Company believes such cross-complaint is without merit and intends
to defend itself vigorously. There is no estimate which can be made at
this time related to potential liability arising from this litigation
and therefore none is reflected on the balance sheet. The outcome of the
litigation could produce a material adverse financial statement impact.
(9) BASIC LOSS PER SHARE
Basic loss per share ("EPS") were computed by dividing net loss by
10,186,097 and 12,183,156, the weighted-average number of shares of
common stock outstanding during the years ended December 31, 1999 and
2000, respectively. Diluted EPS would not differ from basic EPS, as the
Company has no securities or other contracts to issue common stock that
would have a potentially dilutive effect on the EPS calculation.
(10) COMMON STOCK
There are 12,618,009 shares of common stock of the Company outstanding
as of December 31, 2000, and which, due to their issuance more than two
years ago, could be sold under Rule 144(k) under the
F-15
48
SOLUTIONNET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
Securities Act (except to the extent they are held by affiliates of the
Company). Additionally 440,500 shares are subject to registration rights
agreements which permit the holders to cause the Company to register
their shares for sale pursuant to a registration statement filed by the
Company under the Securities Act at any time after the Company becomes a
reporting company under the Securities Exchange Act of 1934.
(11) SUBSEQUENT ADOPTION OF EQUITY PARTICIPATION PLAN
On April 26, 2001, the Board of Directors approved and adopted
SolutionNet's 2001 Equity Participation Plan (the "Equity Participation
Plan"). The Equity Participation Plan reserves 1,500,000 shares of
Common Stock of the Company for issuance thereunder.
The Equity Participation Plan authorizes the Compensation Committee or
the Board of Directors ("Committee") to grant incentive and
non-statutory stock options as well as restricted stock. Officers,
consultants, and other employees (including employee directors) of
SolutionNet and its subsidiaries and affiliates are eligible to receive
awards under the Equity Participation Plan. In the event of a stock
dividend, stock split, reorganization, merger, or similar corporate
transaction (other than a change in control), the Committee is
authorized to make appropriate adjustments to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the Equity Participation Plan or with respect to an
outstanding award. In the event of a change in control, each option
granted shall become exercisable as to all shares covered thereby
immediately prior to the consummation of such change in control and the
restrictions included in any restricted stock grant shall be deemed
rescinded and terminated.
The Equity Participation Plan may be wholly or partially amended or
modified, suspended or terminated at any time from time to time by the
Committee, except as may be prohibited by laws or regulations governing
such actions.
On April 26, 2001, under the Equity Participation Plan, 629,750 options
were granted to employees and officers of the Company. These options
were issued at $0.27 per share which approximated market value on that
date. The options vest over a 30 month period with 33.33% vesting six
months after the grant date and the remainder vesting over the
subsequent two years.
F-16
49
PART III
ITEM 1. INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT NAME
-------------- ------------
2.1 Articles of Incorporation, filed with the Minnesota
Secretary of State on March 22, 1999(1)
2.2 Articles of Merger dated September 20, 1994(2)
2.3 Amended Articles of Incorporation, filed with the Minnesota
Secretary of State on March 22, 1999(1)
2.4 Bylaws of SolutionNet International, Inc.(1)
3.1 Common Stock Certificate(1)
6.1 Lease Agreement by and between SR Singapore, Pte., Ltd. and
CLD Land Pte. Ltd., relating to property located at No. 1
Shenton Way, #22-06/09, Singapore 068803(1)
6.2 2001 Equity Participation Plan(1)
6.3 Form of Stock Option Agreement(1)
6.4 Employment Agreement - Suresh Venkatachari(1)
6.5 Employment Agreement - Murali Natarajan(1)
6.6 Employment Agreement - Karthikeyan Raman(1)
6.7 Form of Service Agreement between SolutionNet (Asia Pacific)
and Deutsche Bank(2)
6.8 Professional Services Agreement between SolutionNet (Asia
Pacific) and Deutsche Bank(2)
6.9 Professional Services Agreement between SolutionNet (Asia
Pacific) and Hewlett-Packard Singapore Pte Ltd(2)
6.10 Supply Agreement between SolutionNet (Asia Pacific) and GVMS
Online Pte Ltd.(2)
6.11 Distributorship Agreement between SolutionNet (Asia Pacific)
and Netsavvy Solutions PVT LTD(2)
33
50
6.12 Consultancy Agreement between SR Singapore Pte Ltd and
Netsavvy Solutions PVT LTD(2)
6.13 Loan Agreement between SolutionNet (Asia Pacific) and
SolutionNet (Europe)(2)
8.1 Share-Exchange Agreement(1)
8.2 Supplemental Agreement(1)
-------------------
(1) Filed with the original Form 10-SB on June 26, 2001.
(2) Filed with Amendment No. 1 to Form 10-SB on August 13, 2001.
ITEM 2. DESCRIPTION OF EXHIBITS.
See Item 1 above.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOLUTIONNET INTERNATIONAL, INC.
Date: September 17, 2001 By: /s/ Suresh Venkatachari
-------------------------------
Suresh Venkatachari, President
34
51
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT NAME
-------------- ------------
2.1 Articles of Incorporation, filed with the Minnesota
Secretary of State on March 22, 1999(1)
2.2 Articles of Merger dated September 20, 1994(2)
2.3 Amended Articles of Incorporation, filed with the Minnesota
Secretary of State on March 22, 1999(1)
2.4 Bylaws of SolutionNet International, Inc.(1)
3.1 Common Stock Certificate(1)
6.1 Lease Agreement by and between SR Singapore, Pte., Ltd. and
CLD Land Pte. Ltd., relating to property located at No. 1
Shenton Way, #22-06/09, Singapore 068803(1)
6.2 2001 Equity Participation Plan(1)
6.3 Form of Stock Option Agreement(1)
6.4 Employment Agreement - Suresh Venkatachari(1)
6.5 Employment Agreement - Murali Natarajan(1)
6.6 Employment Agreement - Karthikeyan Raman(1)
6.7 Form of Service Agreement between SolutionNet (Asia Pacific)
and Deutsche Bank(2)
6.8 Professional Services Agreement between SolutionNet (Asia
Pacific) and Deutsche Bank(2)
6.9 Professional Services Agreement between SolutionNet (Asia
Pacific) and Hewlett-Packard Singapore Pte Ltd(2)
6.10 Supply Agreement between SolutionNet (Asia Pacific) and GVMS
Online Pte. Ltd.(2)
6.11 Distributorship Agreement between SolutionNet (Asia Pacific)
and Netsavvy Solutions PVT LTD(2)
52
6.12 Consultancy Agreement between SR Singapore Pte Ltd and
Netsavvy Solutions PVT LTD(2)
6.13 Loan Agreement between SolutionNet (Asia Pacific) and
SolutionNet (Europe)(2)
8.1 Share-Exchange Agreement(1)
8.2 Supplemental Agreement(1)
(1) Filed with the original Form 10-SB on June 26, 2001.
(2) Filed with Amendment No. 1 to Form 10-SB on August 13, 2001.