The Patrol article:
UPDATE: NETSOL INTERNATIONAL, INC. (NASDAQ: NTWK) – GOING NUTSO AT NETSOL
June 14, 2001
Who’s in charge at NetSol International, Inc? That all depends on whom you ask. A group of dissident shareholders calling themselves The NetSol Shareholders Group, LLC claim that they now control the Company, but the old management team begs to differ. They say that the dissidents haven’t won control of NetSol – at least not yet. And they are charging that the dissident group seized the Company’s headquarters improperly with the help of armed security guards. It gives a whole new meaning to the term “hostile takeover.”
Investors will be looking for some answers later this week when a court in Nevada weighs in with its opinion. NetSol says that the Nevada Court has issued a temporary restraining order (TRO) ousting the dissident shareholders and their new “management team” from NetSol headquarters. According to a press release issued by NetSol on June 12th (and apparently generated by the old management group) “the insurgent shareholder group and the directors it claims to have elected are prohibited from taking any action whatsoever with respect to the company, at least until the court hearing scheduled for Friday, June 15, 2001.”
Bloodless But Not Painless
The Court’s action came quickly on the heels of a June 11th press release (this time apparently coming from the NetSol Shareholders Group) declaring that the NetSol Board of Directors had been expanded from eight to fifteen members, including the seven dissident candidates nominated by The NetSol Shareholders Group. They claimed control of the Company when one of the previous directors, Cary Burch, perhaps influenced by newly Independent Senator Jim Jeffords, switched to the dissident side. Like Senator Jeffords, Burch was rewarded for his move. Burch, the June 11th press release said, would now be Chairman of the Board and interim Chief Executive Officer of NetSol.
The dissidents also claimed that the old management team consisting of Chief Executive Officer Najeeb Ghauri, President Salim Ghauri, Chief Operating Officer Naeem Ghauri, and Corporate Secretary Rick Poole were out, and had been replaced by Burch (as CEO) and dissident director designees Peter Sollenne (as President and COO) and Gregory J. Martin (as Secretary). As if that were not enough, NetSol’s purported new management announced immediate plans to sue former officers and board members (presumably excluding Mr. Burch).
The TRO from the Nevada Court halts the combat for the moment. As a rule, courts do not issue TROs unless they believe that the party seeking that order is likely to prevail. Consequently, the July 12th press release points out that the Nevada Court issued its order after concluding that NetSol “has shown a reasonable probability of success on the merits of its claim, specifically that the defendants are not properly elected members of the Board of Directors of NetSol, and that their purported election violates Nevada law.” The press release doesn’t enumerate those violations of law.
Here’s To Coup
So who is behind the coup, and what makes them think that they can do a better job than existing management? On April 26th a group of unhappy NetSol shareholders announced that they had formed the NetSol Shareholder Group, LLC, “for the purpose of exploring available options [such as] replacing some or all of the current Board of Directors and executive officers of NetSol with a new management team, merging with or being acquired by another corporation, and attracting additional shareholders, business partners or other investors for purposes of generating additional financing to acquire control of the company.” (See Update: NetSol International, Inc. – Revolutionary Developments).
That “exploration” didn’t take long. The next day, April 27th, the NetSol Shareholders Group initiated a hostile takeover of the Company by filing a proxy that sought to replace the existing directors and management team with a slate designated by the dissidents. Leading the dissident charge was Jonathan Iseson who runs a group of hedge funds including Blue Water Master Fund, LP.
Iseson’s emergence as a dissident leader is ironic considering the role played by his Blue Water funds while NetSol shares were soaring from $9 per share in December 1999 to highs of $80 per share in March 2000. Massive purchases by the Iseson group fueled interest in the Company during that period. At the same time Iseson, using the alias “3diesels,” touted the stock vigorously on NetSol’s Raging Bull Message Boards. Without disclosing his true identity, Iseson used Raging Bull to hint at impending developments at NetSol and suggest that the Company was undervalued when compared to its “peers.” (See Update: NetSol International, Inc. – Singing The Blues).
Now Iseson and his associates apparently are disappointed that NetSol didn’t live up to the hype. But what should they really have expected? At its core, despite aspirations to enter myriad hi-tech businesses, NetSol’s principal operations involved the creation of software packages for auto leasing entities - hardly the basis for the Company’s inflated valuation in early 2000.
When NetSol shares began to plummet, one group of Blue Water investors sued Iseson, charging that he, and several associates, had engaged in a "fraudulent, deceptive and manipulative scheme to inflate the value of the funds’ assets through the purchase of NetSol shares at artificially high prices." So perhaps it should come as no surprise that Iseson has been looking for an exit strategy that might salvage some portion of these investments and dispel any lingering rancor among Blue Water investors. Enter The NetSol Shareholders Group.
Showing Them the Gate
Just what does The NetSol Shareholders Group plan to do if they gain control of the Company? The proxy materials suggested that a merger partner was high on the list. Did the dissidents have a particular company in mind? The proxy didn’t say. But some details have emerged that suggest they could have one possible scenario in mind. At least two of the directors proposed by the dissidents are affiliated with an OTC Bulletin Board Company called NetGateway, Inc. – NetGateway Chief Executive Officer Donald Danks and NetGateway Director Shelly Singhal (whose principal occupation is investment banking, most recently with Softbank Investments).
As they began to engineer their hostile takeover of NetSol, the dissident NetSol shareholders entered into an alliance with NetGateway. Some details of that burgeoning relationship are contained in the proxy materials filed by the NetSol Shareholders Group. It seems that several of those dissidents, including the Blue Water group, had cemented their new association by giving NetGateway an option to purchase 300,000 shares of their NetSol common stock. In exchange, those NetSol dissidents received warrants to acquire 300,000 shares of NetGateway.
Why would NetGateway want to become involved with NetSol? Start with this – NetSol – despite the alleged incompetence of its management - is a NASDAQ listed company. NetGateway used to be on NASDAQ, but in January 2001, it was bounced from that exchange when it failed to comply with the NASDAQ listing criteria. Now it trades on the OTC Bulletin Board. Could NetGateway be looking to a merger with NetSol as a way back to NASDAQ? If that’s the case, what’s in it for NetSol?
And why should investors feel confident that the NetGateway team will be an improvement for NetSol? In January 2001, NetGateway fired its auditors, KPMG, LP after they had issued warnings (in 1999 and 2000) that the Company “has suffered recurring losses from operations and a has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern.” NetGateway continues to shuffle auditors. In April 2001, that Company replaced the accounting firm of Grant Thornton LLP with Richard Eisner LLP.
The Devil You Know
All of this may leave investors wondering whether the proposed new management team would be a measurable improvement. Are they likely to manage the Company more successfully than their predecessors? Do they offer a preferable alternative to existing management?
In addition to Iseson and the contingent from financially-challenged NetGateway, the dissident group includes Peter Sollenne, who would serve as NetSol’s President and a member of the Board of Directors. Mr. Sollenne has had a somewhat peripatetic career in recent years, including stints as:
President and Chief Executive Officer of Techna Global Solutions, Inc. since May 2001 (one month);
President of Aces International Inc. from November 2000 to April 2001 (an eight month span);
President and Chief Executive Officer of InQuote.com from May, 2000 to October, 2000 (about six months);
President and Chief Executive Officer of re:Solutions Group, Inc. from December 1998 to May 2000 (about 18 months); and
President of SOS Staffing Services from August 1997 through October 30, 1998.
Does Mr. Sollenne anticipate a longer tenure at NetSol? Or is he likely to put those travellin’ shoes on once again? According to a recent article on Bloomberg.com, Mr. Sollenne departed SOS Staffing shortly after SOS warned of lower than expected revenues and earnings, and that Company’s investment banker, Lehman Brothers, removed a buy rating for SOS shares.
Then there’s Gregory J. Martin, the NetSol Shareholders Group’s designee as corporate secretary. Mr. Martin reportedly served as President of a company called Ice Holdings, Inc., a public shell, for four months beginning in April 20 1997. His resume states that Martin “directed the re-organization of [Ice] into an operational holding company which acquired and helped to grow emerging technology companies.” How did he accomplish that task? According to published reports, during his brief tenure at Ice, Martin made just one acquisition, purchasing Default Management Network, Inc. for $1,500. Shortly thereafter, Ice became delinquent in its public SEC filings.
Lost At Sea?
Recent events have left NetSol in a state of limbo – at least until the Nevada Court speaks on June 15th. Will the Ghauri family remain at the helm of this shaky ship? Or will Iseson and his crew succeed in their efforts to push the Ghauri’s overboard into that deep Blue Water? Either way, its is likely that investors will need plenty of sea-sickness pills. It looks like a rocky voyage, with no end at hand and no destination in sight.
©2001 Stock Patrol.com. All rights reserved.
Kr
Jens
