This one has the makings of a good novel. Looking for activities that should set off your alarms? How about a wholesale change in the business plan, research reports that are paid for, the absence of audited financial statements and a whole lot of family ties? As we discuss below, Netsol International, Inc. (formerly known as Mirage Holdings, Inc.) has them all.
A FASHION COMPANY – WITH OTHER DESIGNS
Mirage Holdings, Inc. started out in the fashion industry, completing its Initial Public Offering in September 1998. But when fashion proved unfashionable (it didn’t take long), the Company quickly shifted its focus to computer software, a field which is certainly in vogue. Question is – will computer programming prove a better fit for investors than clothing designs from the Indian subcontinent? First, a little history.The Mirage IPO was the first underwriting conducted by Platinum Equities, Inc., a New York City based broker-dealer. According to the Company’s Registration Statement, Mirage specialized in marketing exotic fashions designed in Pakistan and India. After conducting a year long study, the Company had concluded that a market for these products existed among Indians and Pakistanis who had settled in the United States and Canada, as well as among other discerning American consumers who are attracted to "exotic fashion designs." The Company’s goal? To be the dominant supplier of fashions to this specialized market.
If fashion was the Company’s passion, Mirage had nonetheless hedged its bets for the future by acquiring a 10% interest in Network Solutions (PVT) Ltd., a software developer located in Lahore, Pakistan. NOTE: Network Solutions (PVT) Ltd. should not be confused with Network Solutions, the prominent NASDAQ company which is licensed by the United States Department of Commerce as a registrar of internet domain names.
And how did Mirage select Network Solutions (PVT)? Family ties may be instructive. According to the Registration Statement, Najeeb U. Ghauri was the President, Secretary and Director of Mirage. His brother, Salim Ghauri, was CEO, President and a director of Network Solutions (PVT). Two other brothers, Shaheeb Ghauri and Naeem Ghuari, were also identified as directors of Network Solutions (PVT).
GOING PLATINUM
According to its Registration Statement, the Company offered to sell public investors (i) a minimum of 250,000 shares of common stock, and (ii) a maximum of 500,000 shares of common stock and 1,000,000 warrants, at prices of $5.15 per share and $.10 per warrant.The Company, however, wasn’t the only one selling shares. Existing Mirage shareholders were registering 564,065 common shares and 397,000 warrants which had been issued in connection with an April 1997 private placement, at prices of $.50 per share and $.10 per warrant. The Company had used $200,000 of the $290,000 raised in that Private Placement to acquire its interest in Network Solutions (PVT).
More family ties. One of the investors in the Private Placement was Manhattan West, a company that is apparently involved in the financial services industry. (Manhattan West later divested its private placement warrants because of concerns raised by the NASD at the time of the IPO). The prospectus identifies Tariq Kahn as the sole officer and director of Manhattan West. At the time of the offering, his sister, Saikma Khan was the President of Mirage’s wholly owned subsidiary, Mirage Collection, Inc. Mr. Khan’s mother and father were among the selling shareholders at the time of the Mirage IPO.
The relationship between Mirage and Manhattan West did not end there. On February 13, 1997, Manhattan West entered into an agreement to provide business and consulting services to the Company. Its compensation? Mirage would pay Manhattan West’s expenses. Less than two weeks later, on February 26, 1997, Manhattan West loaned $46,997 to the Company and received a promissory note which it could choose to convert into shares of the Company’s common stock at $.50 per share -- that’s 93,994 shares. Based upon the IPO price of $5.15 those shares would be valued at $242,034.55. That makes for quite a nice return.
One thing more. Aica Ghauri, wife of the Company’s President, Najeeb Ghauri, is employed by Manhattan West.
According to the prospectus, most of the proceeds from the offering, between $1,037,675 and $2,214,000, would be used to develop the Company’s fashion business. Of the balance, $147,343 to $365,894 (16.3% of the net proceeds) was earmarked for expanding the Company’s participation in the software industry and a like amount was allocated to market research to determine the viability of entering the entertainment industry.
The financial picture? Mirage entered into public life without a history of financial success. Its audited financial statements for the year ended June 30, 1997, revealed losses of $289,891. The Company’s auditors were concerned. They issued a "going concern" opinion, warning investors that factors were present which raised substantial doubt about the Company’s ability to continue as a going concern.
Did management give the fashion industry a fair chance or was the initial business plan merely a …well a mirage? Decide for yourself. By the end of 1998, no more than four months after the IPO closed, the Company had jettisoned the fashion business and turned instead to information technology. But just who are they now? And what is it that they do?
According to the Company’s Form 10-K annual report, filed in December 1998, Mirage closed on its minimum IPO offering of $1,385,647, on September 16, 1998 (remember that date). After payment of offering expenses the Company received a total of approximately$1,100,000 (the 10-K is inconsistent on this exact dollar figure).
Now you will recall that the Company’s Registration Statement promised investors that up to 16% of those proceeds, or $147,343 would be used to expand the Company’s software interests. Yet on September 15, 1998, one day before the IPO closed, Mirage concluded an agreement to acquire 51% of Network Solutions (PVT), Ltd, and 43% of Netsol U.K. Limited, the sister corporation to Network Solutions (PVT) in exchange for 490,000 shares of Mirage common stock and $500,000 in cash. And just where did the funds come from? The IPO of course. Mirage, it seems, had used almost 50% of the offering proceeds for this acquisition. As the Company belatedly explained in its 10-K filing, the offering had just taken too long and a reallocation of proceeds had become necessary. But the Company did not file a timely amended Registration Statement telling investors how their money would be spent, choosing instead to close the minimum offering, and to continue seeking new investors based upon a Use of Proceeds section in the Registration Statement which earmarked most of the proceeds for the fashion business.
There’s more of course. The Company’s 10-Q quarterly report for the period ended December 31, 1998 indicates that Mirage actually paid $775,000 in cash and 490,000 shares for 51% of Network Solutions and 43% of Netsol (UK). It also states that the Company had continued its public offering by selling 56,667 warrants for $5,667. No further filings by the Company indicate any additional proceeds from the IPO.
On April 23, 1999 the Company filed a Form 8-K with the SEC indicating that it had acquired the remaining interests in Network Solutions (PVT) and Netsol (U.K.) for an additional 4,200,000 shares of Mirage common stock. Public shareholders had now been significantly diluted less than 8 months after the IPO closed.
And what effect did these acquisitions have on the financial condition of Mirage? Noting that the acquisitions had just closed on April 17th, the Company’s 8-K stated that it "is currently impracticable for the Registrant to file the required audited financial statements for this acquisition, as they are en route from overseas. However, the Registrant shall file such financial statements under separate cover of form 8-K as soon as practicable, but no later than sixty days from the date of filing this report."
More than 60 days have passed and no audited financial statements have been filed with the SEC. Just what route do you suppose they’re "en?"
On May 17th the Company did file unaudited financial statements for the quarter ended March 31, 1999. In that 10Q report the Company listed assets including (i) product licenses, renewals enhancements and copyrights valued at $5,120,00; (ii) good will of $3,574,490; and (iii) customer lists worth $1,200,000. It also reflected net sales of $3,421,582 and losses of $933,838. Do these numbers reflect business in the newly acquired companies? Will auditors support the calculations? Perhaps when the audited statements complete their transatlantic journey shareholders and investors will be afforded some insight.
Despite the absence of these financial reports, Netsol has now applied to list its securities on the NASDAQ Small Cap Market. NASDAQ will certainly be interested in the whereabouts of this elusive financial information.
WHAT’S IN A NAME?
Now for a little more confusion.In May 1999 the Company changed its name to Netsol International, Inc. Its operating entities consist of Network Solutions (PVT) Ltd., Netsol (U.K.) and Netsol USA, Inc. When Mirage became Netsol it also changed its trading symbols on the OTC Bulletin Board from "MGHI" to "NTWK" for the common shares and NTWKW for the warrants. The new "NTWK" should not be confused with the old "NTWK". That company (the old NTWK), Network Long Distance Inc, gave up the symbol when it was acquired by IXC Communications for over $120 million in stock in late 1997.
And remember, Network Solutions (PVT) is not the Network Solutions which is listed on the NASDAQ National Market.
Got it?
Okay, you ask, so what does Netsol now do? According to information provided by the Company, Netsol is an international software developer and information technology consulting company. As a software developer it has specialized in the financing and leasing industry, designing software packages for such clients as Mercedes-Benz Leasing (Thailand), Mercedes-Benz Finance Ltd. (Singapore), Mercedes-Benz Finance (Australia); Mercedes-Benz Finance, Ltd. (U.K.), and at least eight other companies around the world.
Netsol notes that it is a Microsoft Certified Service Provider (there are thousands worldwide), an IBM Business Partner (thousands worldwide) and a Lotus Business Partner (thousands worldwide). According to the Company, Netsol was the first Pakistani company to receive an ISO 9001 certification. ISO (the International Organization for Standardization) promulgates guidelines for management systems. The ISO 9001 provides a model for quality assurance in design, development, production, installation and servicing. According to ISO, however, there is no such thing as an "ISO 9001 Certification" because ISO does not grant such certifications. That must be done by an independent auditor. Although such an audit may have been conducted, it is not referred to in any of Netsol’s public filings.
Netsol has recently issued a series of press releases announcing new business initiatives. On April 8th the Company announced a strategic global alliance between Netsol (U.K.) and ICOM Informative, a French software developer, to offer e-commerce consulting services. According to the Company, this "could" result in revenues of over $1,000,000 for Netsol (UK) in the next fiscal year. On June 25th Netsol revised its estimates upward, declaring that revenues for Netsol (UK) from this alliance "could" exceed $2,500,000. The basis for that revision? "Improved sales expectations."
On June 30th Netsol announced its intention to offer networking capabilities to schools in the United Kingdom. The release did not address the status of any agreements for Netsol to provide these networking services.
On July 8th the Company announced that it had entered into a Letter of Intent to acquire a UK based information technology company. Although the Company stated that the acquisition would enhance its efforts to penetrate the UK school market, it declined to disclose any details of the agreement until it has been concluded.
And on July 23rd Netsol announced a "strategic marketing alliance" with 1st Net Technologies, another OTC Bulletin Board company. According to its press release, Netsol expects this alliance "to generate steady revenue streams through 1st Net’s extensive Internet marketing experience." And to "make way for the launch of an e-commerce initiative." But what exactly does this mean? Just what business will the two companies be doing together. Netsol doesn’t say.
Despite the scarcity of details about these arrangements, and Netsol’s limited operating history, Netsol has recently been the focus of several investment reports. Again, there’s more to the story. We first learned of Netsol through something called the OTC Journal Newsletter, an on-line investment newsletter that’s been promoting the stock. Buyers Be Wary -- the OTC Journal Newsletter discloses that it has received $50,0000 and 50,000 shares of Netsol stock for representing the Company for one year. And who owns the OTC Journal Newsletter? Netsol’s new business partners at 1st Net Technologies (through a wholly owned subsidiary called SSP Management, Inc.).
But the OTC Journal Newsletter is not the only proponent of Netsol. Two investment analysts have issued reports recommending the stock. The first? Would you believe that Netsol’s old friends at Manhattan West released a buy recommendation for the stock prepared by Stilton Equity Research. That report neglected to mention any aspect of the relationship between Netsol and Manhattan West. It did disclose that the Company had paid $4,000 to the analyst to prepare the report.
An even more detailed recommendation was published by the investment banking firm of Houlihan, Smith & Company Inc on July 1, 1999. That firm recommended the stock as a Buy, with a 12 month target price of $6.00 per share (the company would be valued at $43 million based upon its outstanding shares). Quite a leap from last year’s $1 million IPO. But what would a Netsol report be without one more wrinkle. Extremely small print at the end of the Houlihan Smith report discloses that the investment firm received cash and stock in consideration for writing the report. (See Editor's Note Below)
AND ALL THOSE SHARES?
Whatever happened to all those shares and warrants in the hands of the selling shareholders? The shares Manhattan West was entitled to upon converting its promissory note? The shares given to the OTC Journal? To Houlihan Smith? Still more shares given to the Netsol attorneys? Well, according to the Company, the public float is now 2,100,000 shares. Since the public bought 250,000 shares from the Company, the rest of that float had to come from somewhere. Since the Company went public its stock has sold at prices ranging as high as $6.00 a share. The warrants? They’ve sold at prices between 35/256ths and 1 _. Netsol didn’t receive much from the sale of its shares and warrants (about $1,100,000 by its own account). So who did?And, for investors, the most important questions can’t be answered until Netsol provides detailed information. Does Netsol have substantial assets, significant revenues, concrete business alliances and the foundation for future growth? Or is it all still a mirage?
EDITOR'S NOTE, MARCH 2, 2000
On July 29, 1999 we published the above article. In that article we referred to a research report on Netsol prepared by the firm of Houlihan, Smith & Company, Inc. on July 1, 1999 and noted that "the Houlihan Smith report discloses that the investment firm received cash and stock in consideration for preparing the report." This was based upon the following language contained in that July 1, 1999 research report prepared by Houlihan, Smith & Company, Inc.: "Houlihan, Smith & Company, Inc. received non-contingent professional fees, and shares of common stock as compensation for the preparation of a corporate due diligence report on Netsol."On February 29, 2000, we were contacted by a representative of Houlihan, Smith & Company, Inc., who advised us that, although Houlihan, Smith & Company "did receive cash and stock compensation for other corporate finance and investment banking services provided to Netsol" the firm was not compensated for writing the July 1st research report. Houlihan, Smith & Co. explains that "[t]he compensation disclosed in [the Netsol] research report specifically pertained to the preparation of [a] corporate due diligence report for Netsol] not the research report." Houlihan, Smith & Company goes on to say that they "also assisted Management of Netsol in preparing a Business Plan completed in August 1999. Additionally we performed certain other financial advisory functions for the Company."
We thank Houlihan, Smith & Company, Inc. for clarifying the reference to compensation contained in their July 1, 1999 research report.
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