UPDATE: NETSOL INTERNATIONAL, INC. (NASDAQ SmallCap: NTWK) – GHAURI DAYS
May 21, 2002
Netsol International, Inc. (Nasdaq SmallCap: NTWK) was one of the first companies featured on StockPatrol.com. When we first looked at NetSol in July 1999, the Company had just become public, and was already shifting its focus from the garment industry to information technology. (See Netsol: An Oasis on the Horizon, or Just Another Mirage?) Its management team was dominated by the Ghauri brothers (Naeem, Najeeb and Salim) and a handful of their relatives and associate.
Dot.com’s were still a trendy item in late 1999, and NetSol rode the wave. The Company soon began announcing acquisitions and expansion plans, making it seem like a broad based information technology company. In reality, however, NetSol’s principal business was the development of automobile leasing and financing software. See Netsol – Heart and Sol.
NetSol shares began to rise dramatically, with the help of a Nasdaq Small Cap listing and a steady stream of hype supplied by a group of hedge funds dominated by Blue Water Master Fund L.P and its manager Jonathan Iseson. By March 2000, Blue Water had accumulated almost 24% of the NetSol stock (almost 2 million shares), and NetSol stock had soared as high as $80 a share. See Netsol International, Inc. - Spanning The Globe – And E-Business
But 50% of marriages fail and the union between NetSol and the Blue Water group was no exception. NetSol the company, as opposed to NetSol the stock, never did approach the promoters’ overblown predictions; NetSol seemed to remain a mom-pop store masquerading as a supermarket.
When we last looked at the Company in August 2001, a group of insurgent shareholders led by Iseson and Blue Water, had just staged a proxy contest in a failed in an attempt to dislodge the Ghauris and gain control of the Company. See Netsol International, Inc. – Back In The Saddle Again.
Were there any survivors?
The Ghauri Details
The Ghauri brothers won the battle with Blue Water and its associates, but at what price? The proxy contest may yet prove fatal. NetSol’s auditors say there is substantial doubt about the Company’s ability to continue as a going concern. NetSol concedes that the fight cost the Company more than $500,000 in legal fees and expenses, and adversely affected its relationship with customers, suppliers, and investors. Share prices, which were at $4.80 on April 30, 2001 (one month prior to commencement of the failed proxy fight) are now at 19 cents.
Faced with this bleak outlook, the Company has been trying to reinvent itself – or at least its appearance. NetSol International is now NetSol Technologies, Inc. and while the Ghauris continue to dominate management, they keep shifting roles. Najeeb Ghauri, resigned as Chief Executive Officer in August 2001, but remains on the Board of Directors. Brother Naeem succeeded Najeeb as CEO and resigned from the Board of Directors in August 2001. Now, however, Naeem has returned to the Board, along with a third brother, Salim, who runs NetSol’s Pakistanian subsidiary, NetSol Solutions (Pvt.) Ltd.
NetSol has continued to announce new software development contracts and initiatives – although their economic value remains unclear. These include a partnership with COGENISYS, a private San Diego, California company, “to accelerate the launch of advanced enterprise application automation and assembly resources for global eBusiness initiatives.”
Despite such new projects, NetSol has suffered a series of setbacks, shuttering two divisions that had originally opened with considerable fanfare. In May 2001 the Company abandoned plans to establish a presence in Germany when it sold its German subsidiary, Supernet Aktiengesellschaft (Supernet Ag), back to the original owners. NetSol continued to trim operations in late 2001, when it closed down its United Kingdom-based subsidiary, NetSol Solutions Group, Ltd.
Other operations pose potential ongoing problems. A substantial portion of the Company’s operations (Network Solutions PK, NetSol Private PK and a high speed internet service provider called NetSol Connect) are centered in Pakistan, a region that remains clouded in uncertainty and potential instability in the wake of the September 11th terrorist attacks. NetSol has been promising to construct a “Technology Campus” in Pakistan since early 2000, but the current status, and ultimate fate, of that project remains uncertain.
NetSol’s Form 10-K for the year ended June 30, 2001, projected that the first phase of construction on that campus would be completed in the first half of 2002 – after a delay of over one year. It may have to wait. The Form 10-Q for the quarter ended December 31, 2001 acknowledges the potential impact of global tensions on the Company’s future, stating:
[A]rmed hostilities and further acts of terrorism may directly impact the Company's physical facilities and operations, which are located in North America, Australia and the Southeast Asian Region (including collectively significant subsidiaries located in Pakistan), or those of their customers.…Currently, there are tensions involving Afghanistan, a neighbor of Pakistan. These hostilities and tensions could lead to political or economic instability in Pakistan and a possible adverse effect on operations and future financial performance. These developments will subject the Company's worldwide operations to increased risks and, depending on their magnitude, could have a material adverse effect on the Company's financial position, results of operations or liquidity.
Whether it is the result of global uncertainty, a bloody proxy fight, or simply a failure to meet expectations, NetSol could be in trouble. Net revenues, which were over $2 million for the three months ended December 31, 2000, dropped to about $857,000 for the same three months in 2001. For that same period, gross profits decreased from $1 million to $37,000. The Company attributes the decline in sales to the demise of its UK operations and a downturn in the global economy.
No Guts, No Ghauri
Faced with depressed stock prices, diminished operations and sliding revenues, what is the next step for NetSol? The Company appears ready to dilute its public shareholders. On March 27, 2002, the Company filed a Form S-8 to register 10 million shares of common stock under its 2001 Incentive and Nonstatutory Stock Option Plan. NetSol did not say who would be receiving those shares, but all key employees and consultants are eligible.
The dilution will be substantial. As of February 14, 2002, NetSol had just 15.9 million shares outstanding. In order to accommodate this increase, the Company recently increased its authorized shares from 25 million to 50 million.
One group will not be troubled by this dilution. Blue Water, which once controlled over 2 million shares of NetSol, has bailed out. According to a Form 13-G filed on September 24, 2002, the Blue Water group had reduced its holdings to just 2 shares.
Maybe there were no winners in that proxy fight.
©2002 Stock Patrol.com. All rights reserved.
WE'RE BACK ON PATROL |
