Business: Software developer Headquarters: Calabasas CEO: Najeeb Ghauri Market Cap: $35 million Dividend Yield: N/A* Total Liabilities: $5.5 million P/E: No earnings Long-Term Debt: $300,000 * Netsol International does not pay dividends. NetSol International seems like an unlikely takeover target. A fashion company called Mirage Holdings Inc. that transformed itself into a software company when it acquired a Pakistani software development firm in 1996 and changed its name, NetSol has rarely recorded a profit. In fact, in the four quarters dating back to March 31, 2000, the company had losses of $5.22 million on sales of $7.39 million. But that didn’t stop a group of stockholders, accompanied by armed guards, from taking over the company’s headquarters in Calabasas briefly and temporarily last month. Nor did it stop the management already in place from getting a temporary restraining order forcing the group out again or a judge in Nevada (where NetSol is incorporated) from naming a receiver to run the company while things are sorted out. The rival shareholder group, led by hedge fund manager Jonathan Iseson and his New York-based Blue Water Partners, says that, after a proxy fight, it now has a majority of NetSol’s outstanding stock and on June 11 elected a new board of directors. Current management, led by CEO Najeeb Ghauri and his three brothers, insist they still control the company and Las Vegas District Judge James Mahan has left it to his appointed receiver, George Schwartz, to straighten it all out. But why all the interest in a company that lost $2.4 million on revenues of $1.9 million in the first quarter of 2001, compared to a loss of $800,000 on revenues of $1.8 million in the same quarter a year earlier? “That’s an interesting question,” said Todd Pitcher, an analyst with the Willow Cove Investment Group. “The core business model turned a lot of people’s heads over the last four months.” NetSol makes financing and leasing software for the automotive industry at facilities it operates in Pakistan. Its primary clients are the European subsidiaries of Volvo AB and Daimler-Chrysler AG, makers of Mercedes-Benz. Pitcher said the low cost of doing business in Pakistan (even lower than in India) and the potential for sales to U.S. car dealers has made NetSol more attractive than it might appear. “There’s an opportunity in Pakistan to get more significant price points than in India,” he said, “and they’ve got some real traction with Volvo and Mercedes-Benz.” That unrealized potential is what led NetSol Shareholders Group LLC to announce a proxy contest for control of the company in late April. “The existing management has had ample time to build the company and make it profitable,” said Cary Burch, a member of the group who also happens to be a member of the previous NetSol board. When the shareholders group announced it had taken control of the company on June 11, Burch was named chairman and chief executive. “(Existing management) has failed to turn a profit,” Burch said, “and the shareholders were very, very vocal about this. Management was very tardy about making changes.” Pitcher said, “Historically, there’s been a trend toward talking about opportunities, but they have never seen any numbers materialize.” Neither Najeeb Ghauri, President Salim Ghauri nor COO Naeem Ghauri returned repeated calls from the Business Journal. NetSol’s stock typically traded at less than $10 a share until Blue Water Partners took a very large position in the company in late 1999. NetSol’s stock reached an all-time high on March 3, 2000 of $80 per share, after opening the day at $47. That attracted the attention of Barron’s magazine, which printed a story last summer about Blue Water’s position with the company. That may have led to an investor lawsuit against Blue Water charging stock manipulation a judge eventually rejected the investor demand that Iseson be removed as portfolio manager and the deterioration of NetSol’s market value. By April 9, 2001, NetSol was trading at $1.43. On July 6, it was $1.65. Burch said he would like to see an eventual compromise between investors and management that would lead to the growth he believes the company is capable of. However, he also added, “I’d like to see the Ghauri brothers recognize their bad decisions.” Pitcher said he believes the conflict could eventually strengthen the company, particularly if the current management views it as “a wakeup call.” “I don’t think this will drive the company into the ground,” Pitcher said. “They’re at the end of the line with a lot of efforts, so it’s moving to almost pure profit.”
