UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 333-58351
AREMISSOFT CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 7372 68-0413929
- ------------------------------- --------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NO)
AREMISSOFT CORPORATION
200 CENTRAL PARK SOUTH, #23-A
NEW YORK, NY 10019
212-765-7383
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DR. LYCOURGOS K. KYPRIANOU
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
AREMISSOFT CORPORATION
200 CENTRAL PARK SOUTH, #23-A
NEW YORK, NY 10019
212-765-7383
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of the Registrant's Common Stock on October 20,
1999 was 15,130,051 shares.
<PAGE>2
AREMISSOFT CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as at September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations the three months and nine months ended
September 30, 1999 September 30, 1998 4
Consolidated Statements of Cash Flows for the nine months ended September
30, 1999 and September 30,1998 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3: Quantitative and Qualitative disclosures about market risk 16
PART II - OTHER INFORMATION
Item 1--Legal Proceedings 16
Item 2--Changes in Securities and Use of Proceeds 16
Item 3--Defaults upon Senior Securities 16
Item 4--Submission of Matters to a Vote of Security Holders 16
Item 5--Other Information 16
Item 6--Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AREMISSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
September 30 December 31
ASSETS 1999 1998
---------------------------
(Note 1)
Current Assets
Cash and cash equivalents $6,537 $149
Accounts receivable, less allowances for doubtful accounts
of $ 639 at December 31, 1998 and September 30,1999 17,746 16,166
Other receivables 1,456 903
Inventory 711 787
Deposits paid on Services and Maintenance Contracts 945 3,531
Prepaid Expenses and other assets 2,213 1,135
----- -----
Total Current Assets 29,608 22,671
Loan receivable -related party 1,898 1,886
Property and equipment, net 1,855 1,774
Purchased and developed software, net of accumulated
amortization of $6,075 and $ 6,257 at December 31, 1998
and September 30, 1999 respectively 1,102 1,284
Intangible assets, net of accumulated amortization of $ 13,036
and $ 13,300 at December 31, 1998 and September 30, 1999, 73 337
respectively ------- -----
Total assets 34,536 27,952
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable 2,862 3,669
Accrued payroll taxes 524 586
Accrued value added taxes 301 1,649
Accrued income taxes 5,306 2,059
Current portion of capital lease obligations 35 55
Other accrued expenses 475 2,946
Bank loans and short term demand facility - 15,530
Deferred revenue 4,793 6,693
----- -----
Total Current Liabilities 14,296 33,187
Long-term debt 7,908 -
Loan and accrued interest payable -related party - 1,781
Capital lease obligations, less current portion 67 93
------ -----
Total liabilities 22,271 35,061
Stockholders' equity (deficit)
Series-A convertible preferred stock, par value $0.001;
authorized 2,100 shares;
Liquidating preference at par value - -
Series-B convertible preferred stock, par value $0.001;
authorized 3,500 shares;
no shares issued and outstanding, liquidating preference at
par value
Common stock, par value $0.001; authorized 75,000 shares;
10,000 shares and 13,530 issued and outstanding at December
31, 1998
and September 30,1999 respectively 14 10
Additional paid-in-capital 39,971 27,107
Accumulated deficit (25,606) (32,201)
Accumulated other comprehensive income (loss) (2,114) (2,025)
------- -------
Total stockholders' equity (deficit) 12,265 (7,109)
------ -------
Total liabilities and stockholders' equity (deficit) $34,536 $27,952
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>4
<TABLE>
<CAPTION>
AREMISSOFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For three months ended For nine months ended
September 30 September 30
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Revenues
Software Licenses $11,071 $7,532 $25,321 $18,175
Maintenance and Services 8,486 5,804 21,350 15,243
Hardware and other 721 532 3,461 2,852
Total revenues 20,278 13,868 50,132 36,270
Cost of revenues
Software Licenses 1,373 735 3,150 1,855
Maintenance and Services 2,732 1,379 6,778 3,776
Hardware and other 566 322 2,487 2,023
Amortization of purchased software and
capitalized software development cost 58 17 182 51
Total cost of revenues 4,729 2,453 12,597 7,705
Gross Profit 15,549 11,415 37,535 28,565
Operating Expenses
Sales and marketing 7,329 5,936 17,968 14,386
Research and development 1,205 1,518 3,866 4,164
General and administrative 1,773 1,269 4,457 3,348
Amortization of intangible assets 88 100 264 241
Total operating expenses 10,395 8,823 26,555 22,139
Profit from operations 5,154 2,592 10,980 6,426
Other income (expense) :
Interest expense, net 290 483 1,138 1,415
Income before income taxes 4,864 2,109 9,842 5,011
Income tax expense 1,605 822 3,247 1,953
Net income $3,259 $1,287 $6,595 $3,058
Basic net income per share 0.24 0.13 0.55 0.31
Diluted net income per share 0.23 0.13 0.54 0.31
Basic weighted average shares 13,530 10,000 12,038 9,762
outstanding
Diluted weighted average shares 14,200 10,015 12,335 9,777
outstanding
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>5
<TABLE>
<CAPTION>
AREMISSOFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For nine months
ended September 30
<S> <C> <C>
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,595 $3,058
Adjustments to reconcile net income to net cash
provided (used) in operating activities:
Depreciation 979 432
Amortization and write-off of capitalized software and
Intangible assets 446 292
Changes in assets and liabilities::
Accounts receivable (1,580) (8,906)
Other receivables (553) (2,027)
Inventory 76 124
Deposits paid on services and maintenance contracts 2,586 -
Prepaid expenses and other assets (1,078) 353
Accounts Payable (807) 4,033
Deferred revenue (1,900) (1,086)
Accrued taxes payable 1,837 (778)
Other accrued expenses (2,491) (2,127)
------- -------
Net cash provided (used) in operating activities 4,110 (6,632)
----- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,060) (585)
Capitalized software development costs - (38)
- ----
Net cash (used in) investing activities (1,060) (623)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 12,868 9,302
Principal repayments of long-term borrowings (7,622) (1,480)
Loan from related party (1,793) -
Principal payments of capital lease obligations (26) (96)
Short-term demand facility - 8
--------- ---------
Net cash provided by financing activities 3,427 7,734
----- -----
Net increase in cash and cash equivalents 6,477 479
Effect of foreign currency exchange rates on cash and
cash equivalents (89) (262)
Cash and cash equivalents, at beginning of period 149 239
------ -----
Cash and cash equivalents, at end of period $6,537 $ 456
------- -----
Supplemental disclosure:
Interest paid $1,138 $ 1,415
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements and notes thereto
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Interim results of operations for the
three-month and nine-month periods ended September 30, 1999 are not necessarily
indicative of operating results for the full fiscal year.
In the opinion of management, all adjustments consisting of normal recurring
entries necessary for the fair presentation of the consolidated financial
position, results of operations, and changes in cash flows for the periods
presented have been included. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The balance sheet at December 31, 1998 has been derived
from the audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Registration Statement on Form S-1, SEC File No. 333-58351, declared
effective on April 22, 1999.
2. FOREIGN CURRENCY TRANSLATION
The functional currency of the Company and its United Kingdom subsidiaries is
the British pound. The functional currencies of the other subsidiaries are their
local currencies.
For reporting purposes, the financial statements are presented in United States
dollars and in accordance with Statement of Financial Accounting Standard No.
52, "Foreign Currency Translation". The consolidated balance sheets are
translated into United States dollars at the exchange rates prevailing at the
balance sheet dates and the statements of operations and cash flows at the
average rates for the relevant periods. Gains and losses resulting from
translation are included as a component of accumulated other comprehensive
income (loss).
Net gains and losses resulting from foreign exchange transactions are included
in the consolidated statements of operations.
<PAGE>7
3. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Basic: In Thousands, except per share data
Net income $3,259 $1,287 $6,595 $3,058
Average shares outstanding 13,530 10,000 12,038 9,762
------ ------ ------ -----
Basic EPS $ 0.24 $ 0.13 $ 0.55 $ 0.31
====== ====== ====== ======
Diluted:
Net income $3,259 $1,287 $6,595 $3,058
8% Convertible debt interest 10 - 30 -
-- - -- -
Totals $3,269 $1,287 $6,625 $3,058
====== ====== ====== ======
Average shares outstanding 13,530 10,000 12,038 9,762
Net effect of dilutive stock options
and warrants based on the treasury
stock method 612 15 239 15
Assumed conversion of 8% convertible debt 58 - 58 -
-- - -- -
Totals $14,200 $10,015 $12,335 $9,777
======= ======= ======= ======
Diluted EPS $ 0.23 $ 0.13 $ 0.54 $ 0.31
====== ====== ====== ======
</TABLE>
4. COMPREHENSIVE INCOME
During June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements.
The Company adopted SFAS No. 130 during 1998. Included within accumulated other
comprehensive income are the cumulative amounts for foreign currency translation
adjustments Comprehensive income (loss) for the nine months ended September 30,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 6,595 $3,058 $ 803 $ 156
Foreign currency translation adjustments (89) (202) (24) (29)
-------- ------- ------ -----
Comprehensive income $ 6,506 $2,856 $779 $127
</TABLE>
5. SEGMENT REPORTING INFORMATION
The Company has adopted SFAS 131 "Disclosure about Segments of an Enterprise and
Related Information" during 1998, which changes the way the Company reports
certain information about its operating segments.
<PAGE>8
The Company develops, markets, implements and supports enterprise-wide
applications software targeted at mid-sized organizations mainly in the
manufacturing, healthcare, hospitality, and construction industries. Management
considers each industry to be a reportable segment, with each industry
representing a strategic business that offers products and services to various
customers. These industries are managed separately because each requires
different product and marketing strategies. Within each industry, the Company
has adopted tailored sales and marketing strategy. This strategy includes
advertisements in leading trade publications, participation in trade shows and
sponsorship of user groups. In addition, the Company has developed corporate
sales and marketing materials as well as general financial and technical
materials that are distributed to each of the Company's subsidiaries for
inclusion in their sales materials, thereby promoting a consistent portrayal of
the Company's image and products. The Company markets its products primarily
through a direct sales force in each of the industries. In the manufacturing and
hospitality industries, the Company also relies, to a limited extent, on
distributors to sell the Company's products.
The accounting policies adopted by each industry are the same as those described
in the summary of significant accounting policies. Management evaluates
performance based on profit/(loss) from operations before interest and income
taxes.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
MANUFACTURING HEALTHCARE HOSPITALITY CONSTRUCTION OTHER TOTAL
Segmental analysis for the
nine months ended September
30, 1999
Revenue from external customers 16,461 13,842 13,199 3,715 2,915 50,132
Depreciation and amortization 280 294 284 64 503 1,425
Profit (loss) from operations 5,713 2,042 2,984 552 (311) 10,980
Total segment assets 15,089 8,237 8,381 1,547 1,282 34,536
Segmental analysis for the
nine months ended September
30, 1998
Revenue from external customers 10,717 11,760 9,469 3,028 1,296 36,270
Depreciation and amortization 142 165 135 33 249 724
Profit (loss) from operations 3,418 1,487 1,466 346 (291) 6,426
Total segment assets 13,762 7,281 6,431 1,380 669 29,523
</TABLE>
The following table represents revenue by country based on country of customer
domicile and long-lived assets by country on the location of the assets.
Revenues Long-Lived Assets
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
----------- ------------- ------------ -------------
United Kingdom 28,581 23,684 1,833 1,937
Rest of Europe 11,646 7,772 605 517
United States 1,972 1,581 117 97
Asia 1,872 1,238 463 783
Rest of World 6,061 1,995 12 0
50,132 36,270 3,030 3,334
<PAGE>9
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Notes to the Interim
Consolidated Financial Statements included in Part I, Item 1, of this report.
All statements, other than historical facts, included in the following
discussion regarding the Company's financial position, business strategy, and
plans of management for future operations are "forward-looking statements."
These statements are based on management's beliefs and assumptions, and on
information currently available to management. Forward looking statements
include, but are not limited to, statements in which words such as "expect",
"anticipate", "intend", "plan", "believe", "estimate", "consider", or similar
expressions are used. Forward looking statements are not guarantees of future
performance. They involve risks, uncertainties, and assumptions, including the
risks discussed under "Risk Factors" in the Company's prospectus included in its
registration statement on Form S-1, SEC File No. 333-58351, all of which are
incorporated herein by reference. The Company's actual results and stockholder
values may differ materially from those anticipated or expressed in these
forward looking statements. Many of the factors that will determine these
results and values are beyond the Company's ability to control or predict.
Readers of this report are cautioned not to put undue reliance on any forward
looking statement. The Company undertakes no obligation to publicly update these
forward looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
AremisSoft develops, markets, implements and supports enterprise-wide
applications software targeted at mid-sized organizations in the manufacturing,
healthcare, hospitality and construction industries (the "Targeted Markets").
The Company's software products help streamline and enhance an organization's
ability to manage and execute mission-critical functions such as accounting,
purchasing, manufacturing, customer service, and sales and marketing. In 1986,
the Company established a software development and support facility in New
Delhi, India, which currently has 116 employees. The Company believes that its
India facility provides significant organizational efficiencies and cost
advantages in software development and support process. AremisSoft products are
designed to be the primary business software that organizations in the Targeted
Markets use to generate and disseminate information across the enterprise in
order to respond rapidly to changing market environments and customer needs. The
Company has licensed its software products to more than 5,000 customers.
The Company strategically focuses on customers in the Targeted Markets with
annual revenues of less than $200 million. Through its concentrated product
focus, AremisSoft believes that it has developed substantial industry expertise
in the Targeted Markets. In addition, the Company has developed a three-tiered,
object-oriented software architecture (the "Aremis Architecture"), which
achieves economies of scale and cost reductions in the software development
process by capitalizing on the common functional requirements of customers
across a variety of industries. The Company believes that the Aremis
Architecture enables it to produce high quality, scalable products with
substantially reduced software development, implementation and maintenance
costs.
In the past five years, the Company has experienced rapid growth, both
internally and through acquisitions, with revenues increasing from $6.4 million
in 1994 to $52.6 million in 1998. During this period, the Company successfully
acquired and integrated the operations of eleven businesses, which were
principally operating in the United Kingdom. In each acquisition, the Company
<PAGE>10
sought to reduce expenses, rejuvenate the existing products of the acquired
business and transition the customers to products that utilize the Aremis
Architecture. The Company's software development and support facility in India
provides the Company accesses to highly skilled technical personnel who are
responsible for rejuvenating the acquired products and developing new products
in a cost-effective manner. The Company markets its software products primarily
through its own sales force and provides product support worldwide through 14
offices in seven countries. To date, the majority of the Company's revenues have
been generated from customers located in the United Kingdom. Such customers
comprised approximately 60% of total revenues for the year ended December 31,
1998 and approximately 57% for the nine months ended September 30, 1999.
Customers using the Company's software products include Southampton Multifund
(healthcare), Birmingham Multifund (healthcare), Telefon AB LM Ericsson
(manufacturing), Nabisco Biscuit Co. (manufacturing), Forte Limited
(hospitality) and London Electricity plc (construction).
The Company's objective is to be a leading provider of enterprise-wide
applications software in the Targeted Markets. The Company's strategy for
achieving this objective includes (i) targeting mid-sized organizations,
including divisions and business units of larger companies, (ii) focusing on
strategic markets, (iii) leveraging the Company's cost-efficient India
operations, (iv) capitalizing on the Company's investment in the Aremis
Architecture, (v) expanding the Company's marketing, sales, support and service
capabilities and (vi) acquiring related software businesses, products or
technologies.
RESULTS OF OPERATIONS
Revenues
Total revenues increased 46.22% to $20.28 million for the three months ended
September 30, 1999 from $13.87 million for the three months ended September 30,
1998. For the nine-months ended September 30, 1999, the total revenue increased
38.22% to $50.13 million from $ 36.27 million during the comparable period in
1998. This increase was due primarily to higher software license revenues as a
result of an increase in the sale of higher margin licenses, associated
maintenance and service contract revenues and hardware and other
revenue.
Software license revenues increased 46.99% to $11.07 million for the three
months ended September 30, 1999 from $7.53 million for the three months ended
September 30, 1998. For the nine-months ended September 30, 1999, the software
license revenue increased 39.32% to $25.32 million from $18.18 million during
the comparable period in 1998. This increase is primarily due to the growth in
the number of installed customers, increased sales of licenses for the Company's
Aremis 4.0 products, and price increases. As a percentage of total revenues,
license revenues increased to 54.60% from 54.31% for the three months ended
September 30, 1999 and September 30, 1998. For the nine-months ended September
30, 1999, as a percentage of total revenue, license revenue increased to 50.51%
from 50.11% during the comparable period in 1998.
Maintenance and service contract revenues increased 46.21% to $8.49 million for
the three months ended September 30, 1999 from $5.80 million for the three
months ended September 30, 1998. For the nine-months ended September 30, 1999,
the maintenance and service revenue increased 40.06% to $21.35 million from
$15.24 million during the comparable period in 1998. This is result of the
increase in the number of installed customers and the growth in software license
revenues. As a percentage of total revenues, maintenance and service contract
revenues remained the same at 41.85% for three months ended September 30, 1999
and 1998. For the nine-months ended September 30, 1999, as a percentage of total
revenue, maintenance and service contract revenue increased to 42.59% from
42.03% during the comparable period in 1998.
Hardware and other revenues increased 35.53% to $0.72 million for the three
months ended September 30, 1999 from $0.53 million for the three months ended
September 30, 1998. For the nine-months ended September 30, 1999, the hardware
and other revenue increased 21.35% to $3.46 million from $2.85 million during
the comparable period in 1998. As a percentage of total revenues, hardware and
other revenues decreased to 3.56% for the three months ended September 30, 1999
from 3.84% for the three months ended September 30, 1998. For the nine-months
ended September 30, 1999, as a percentage of total revenue, hardware and other
revenues decreased to 6.90% from 7.86% during the comparable period in 1998
reflecting the Company's strategy to reduce the sale and installation of lower
margin third-party hardware.
Cost of Revenues
Cost of revenues increased 92.78% to $4.73 million for the three months ended
September 30, 1999 from $2.45 million for the three months ended September 30,
1998. For the nine-months ended September 30, 1999, the total cost of revenue
increased 63.49% to $12.60 million from $ 7.71 million during the comparable
period in 1998. As a percentage of total revenues, cost of revenues increased to
23.32% for the three months ended September 30, 1999 from 17.69% for the three
months ended September 30, 1998. For the nine-months ended September 30, 1999,
as a percentage of total revenue, cost of revenue increased to 25.13% from
21.24% during the comparable period in 1998.
Software license cost increased 86.80% to $1.37 million for the three months
ended September 30, 1999 from $0.74 million for the three months ended September
30, 1999. For the nine-months ended September 30, 1999, the software license
cost increased 69.81% to $3.15 million from $1.86 million during the comparable
period in 1998. This increase is primarily due to the growth in the number of
installed customers, increased sales of licenses for the Company's Aremis 4.0
products. As a percentage of total revenues, license cost increased to 6.77% for
the three months ended September 30, 1999 from 5.30% for the period ended
September 30, 1998. For the nine-months ended September 30, 1999, as a
percentage of total revenue, license cost increased to 6.28% from 5.11% during
the comparable period in 1998.
Maintenance and service contract cost increased 98.11% to $2.73 million for the
three months ended September 30, 1999 from $1.38 million for the three months
ended September 30, 1998. For the nine months ended September 30, 1999, the
maintenance and service contract cost increased 79.50% to $6.78 million from
$3.78 million during the comparable period in 1998, as a result of the increase
in the number of installed customers and the growth in software license
revenues. As a percentage of total revenues, maintenance and service contract
cost increased to 13.47% for the three months ended September 30, 1999 from
9.94% for 1998. For the nine months ended September 30, 1999, as a percentage of
total revenue, maintenance and service contract cost increased to 13.52% from
10.41% during the comparable period in 1998.
Hardware and other cost increased 75.78% to $0.57 million for the three months
ended September 30, 1999 from $0.32 million for the three months ended September
30, 1998. For the nine months ended September 30, 1999, the hardware and other
cost increased 22.94% to $2.49 million from $2.02 million during the comparable
period in 1998. As a percentage of total revenues, hardware and other cost
increased to 2.79% for the three months ended September 30, 1999 from 2.32% for
the three months ended September 30, 1998. For the nine months ended September
30, 1999, as a percentage of total revenue, hardware and other cost decreased to
<PAGE>12
4.96% from 5.58% during the comparable period in 1998, reflecting the Company's
strategy to reduce the sale and installation of lower margin third-party
hardware.
Sales and Marketing
Sales and Marketing expense consist primarily of expenses related to sales and
marketing, personnel, advertising, promotion, trade shows participation and
public relations.
The Company's sales and marketing expenses increased 23.47% to $7.33 million for
the three months ended September 30, 1999 from $5.94 million for the three
months ended September 30, 1998. For the nine-months ended September 30, 1999,
the sales and marketing cost increased 24.90% to $17.97 million from $14.39
million during the comparable period in 1998. This is primarily due to the
expansion of sales and marketing activities principally in the United States and
Europe. As a percentage of total revenues, sales and marketing expenses
decreased to 36.14% for three months ended September 30, 1999, from 42.80% for
the three months ended September 30, 1998. For the nine months ended September
30, 1999, as a percentage of total revenue, sales and marketing cost decreased
to 35.84% from 39.66% during the comparable period in 1998, primarily due to
increased efficiencies in the Company's sales and marketing operations.
Research and Development
Research and development expenses decreased to 20.62% to $1.21 million for the
three months ended September 30, 1999 from $1.52 million for the three months
ended September 30, 1998. For the nine months ended September 30, 1999, the
research and development expense decreased to 7.16% to $3.87 million from $4.17
million during the comparable period in 1998. As a percentage of total revenues,
research and development expenses decreased to 5.94% for the three months ended
September 30, 1999 from 10.95% for the three months ended September 30, 1998.
For the nine months ended September 30, 1999, as a percentage of total revenue,
research and development expenses decreased to 7.71% from 11.48% during the
comparable period in 1998.
General and Administrative
General and administrative expenses increased 39.72% to $1.78 million for the
three months ended September 30, 1999 from $1.27 million for the three months
ended September 30, 1998. For the nine months ended September 30, 1999, the
general and administrative cost increased 33.12% to $4.46 million from $3.35
million during the comparable period in 1998. As a percentage of total revenues,
general and administrative expenses decreased to 8.74% for the three months
ended September 30, 1999 from 9.15% for the three months ended September 30,
1998. For the nine months ended September 30, 1999, as a percentage of total
revenue, general and administrative expenses decreased to 8.89% from 9.23%
during the comparable period in 1998. This decrease reflects the effect of the
Company's cost-cutting and cost control measures.
Net Interest Expense
Net interest expense reflects interest on the Company's credit facilities, as
reduced by interest income on cash balances. Net interest expense decreased
39.96% to $0.29 million for the three months ended September 30, 1999 from $0.48
million for the three months ended September 30, 1998 . For the nine months
ended September 30, 1999, the net interest expense decreased 19.58% to $1.14
million from $1.42 million during the comparable period in 1998. This decrease
was due to the repayment of part of the company's debt facility.
<PAGE>13
Income Tax Provision
There is a provision for income taxes for the nine months ended September 30,
1999 of $3.25 million. There was a provision for income taxes for $1.95 million
for the nine months ended September 30, 1998. The increase in income taxes
resulted from the increase in the Company's profitability in 1999. The company's
effective tax rate was assumed at 33%.
Recoverability of the deferred tax asset has been reviewed at September 30,
1999, and although certain subsidiaries generated taxable income in the period
ending September 30, 1999, no assurances can be given that the level of taxable
income will be sustained at an adequate level in the appropriate subsidiaries.
It must therefore be considered more likely than not that the deferred tax
benefit will not be recognized at this stage.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since inception primarily through
borrowings under bank credit facilities, private placements of equity securities
and equity contributions by its principal stockholder. In April 1999, the
company offered 3.30 million shares of its common stock for public subscription
and in June 1999 another 0.23 million shares were offered from the over
allotment option. The net proceeds received by the company from the sale of
shares of common stock were approximately $12.87 million, net of expenses. As of
September 30, 1999, the Company had $ 6.54 million of cash and cash equivalents
and $7.91 million in long-term borrowings.
The Company believes that the existing cash and cash equivalents, will be
sufficient to meet the Company's working capital and currently planned
expenditure requirements for the next 3 months. The Company may, from time to
time, consider acquisitions of complementary businesses, products or
technologies, which may require additional financing. In addition, continued
growth in the Company's business may, from time to time, require additional
capital. No assurances can be given that additional capital will be available to
the Company at such time or times as such capital may be required or, if
available, that it will be on commercially acceptable terms or would not result
in additional dilution to the Company's stockholders.
The Company had an operating cash flow surplus of $4.11 million for the nine
months ended September 30, 1999. This surplus was primarily due to decrease in
deposits and increased sales. The Company had operating cash flow deficits of
$6.63 million for the nine months ended September 30, 1998. Operating cash flow
is affected by seasonality, among other factors.
Accounts receivable decreased to $17.75 million at September 30, 1999 from
$18.89 million at September 30, 1998. Accounts receivable at December 31, 1998
was $ 16.17 million. The average days sales outstanding was 97 days compared to
142 days for the period September 30, 1998 and 112 for December 31, 1998. The
reduction in the collection days is the result of higher collection of
receivables during the year.
Accrued taxes increased from $4.11 million at September 30, 1998 to
approximately $5.31 million at September 30, 1999. The Company utilized cash for
investing activities of $1.10 million and $0.62 million for the nine-months
ended September 30, 1999 and September 30, 1998 respectively.
Cash provided by financing activities was approximately $3.43 million and $7.73
million for the nine months ended September 30, 1999 and September 30, 1998,
respectively. Financing activities for the nine months of 1998 primarily
consisted of a private placement in February 1998 of approximately 1,294,500
<PAGE>14
shares of Common Stock, the net proceeds of which were $9.3 million. Financing
activities for the nine months ended September 30, 1999 primarily consisted of
proceeds from public issue of $12.87 million, net of expenses, repayment of
short-term borrowing of $7.62 million and repayment of $1.79 million loan to
related party.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's or
its suppliers' and customers' computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. The issue has grown in importance as the use of computers and microchips
has become more pervasive and interdependence between computer systems has
increased. The Company could be materially and adversely affected either
directly or indirectly by the Year 2000 issue. This could occur if any of its
critical computer systems or equipment containing embedded logic fails, if the
local infrastructure (electric power, phone systems, or water system) fails, or
if its significant suppliers or customers are adversely impacted. This could
result in system failures or miscalculations causing disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Failure of the Company to complete testing and renovation of its critical
systems on a timely basis could have a material adverse effect on the Company's
financial condition and operating results, as could Year 2000 compliance
problems experienced by others with whom the Company does business. Because of
the range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the Company's
remediation efforts or the efforts of those with whom it does business not be
successful.
The Company's internal information system is a client/server environment and the
Company believes its internal information system is Year 2000 compliant. The
Company initiated a program and established a committee comprised of senior
executive representatives from its subsidiaries in each of the Targeted Markets
to assess the Year 2000 readiness of its products and operations including its
non-information technology systems. All of the products currently being marketed
by the Company have been assessed and the Company believes they are all Year
2000 compliant. The Company has also developed upgrades for its non-compliant
rejuvenated and legacy products, which are no longer marketed by the Company.
The upgrades developed for such products are being sold to existing customers
that use those products. The Company's IGS Hotel (Version 2) and Hotel Master
products are not, and will not be Year 2000 compliant. The users of these
products have been informed that the products will not be Year 2000 compliant
and the Company does not expect that such noncompliance will have a material
adverse effect on its business or results of operations.
The Company has assessed all of its internal systems including hardware,
software, operating systems, development tools and languages as well as its
facilities and equipment including, among other things, its security devices and
telephone switchboards for Year 2000 compliance. The Company has not identified
any material Year 2000 compliance problems, but will continue to monitor its
information systems. However, no assurances can be given that Year 2000
compliance problems will not eventually occur with respect to the Company's
information systems which, depending on the nature and scope of the problem,
could have a material adverse effect on its business, operating results and
financial condition.
<PAGE>15
The Company had formal communications with critical suppliers to determine the
extent to which their failure to remedy their own Year 2000 compliance problems
would materially affect the Company. Based on representations received from the
Company's critical suppliers and testing results as of September 30, 1999, the
Company believes that its business will not be materially adversely affected by
any Year 2000 noncompliance of its critical suppliers. The Company has also
developed contingency arrangements, which include identifying possible third
party suppliers in the event any of its suppliers, including critical suppliers,
are unable to provide the necessary products or services to the Company as a
result of Year 2000 compliance problems not detected or corrected prior to their
occurrence. No assurances can be given that alternative third-party suppliers
will be successful in meeting the Company's requirements or, if met, that the
terms of the arrangement will be as favorable as those of the Company's current
suppliers, which could increase the Company's expenses and have a material
adverse effect on the Company's business, operating results or financial
condition.
The aggregate costs incurred by the Company as of September 30, 1999 in
connection with Year 2000 compliance were approximately $772,000, of which
approximately $123,000, $186,000, $126,000 and $60,000 were incurred in 1996,
1997, 1998 and for the nine months ended September 30, 1999, respectively. Year
2000 related costs have been funded from the continuing operations of the
Company. The Company estimates that it will incur an additional $20,000 in costs
to complete its Year 2000 compliance efforts.
EURO CONVERSION
In January 1999, the Euro was introduced as the currency of a number of
participating nations in the European Union. Although the United Kingdom is not
currently a participating nation, the introduction of the Euro raises conversion
issues for business transacted with entities in participating nations. The
Company's products either include or have been upgraded to include the Euro and
the Company does not believe that the Euro conversion has had or will have a
material adverse effect on its business. Because the Company's critical internal
systems have been modified to accommodate a conversion to the Euro, the Company
believes it is adequately prepared in the event the United Kingdom converts to
the Euro in the future.
<PAGE>16
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rates
A significant portion of the Company's business is conducted in currencies other
than the United States dollar. As a result, the Company is subject to exposure
from movements in foreign currency exchange rates. The Company does not
currently engage in hedging transactions designed to manage currency fluctuation
risks.
Interest Rate Sensitivity
The Company's exposure related to adverse movements in interest rates is
primarily derived from the variable rate on the Company's credit facilities.
Interest rates on the Company's credit facilities range from either Sterling
LIBOR plus 3% to Sterling LIBOR plus 4% or the lending bank's base rate plus the
applicable margin. Increases in Sterling LIBOR result in increases in the
Company's interest expense. However, at September 30, 1999, an increase of 10%
in Sterling LIBOR would not have a material adverse effect on the Company. The
Company does not currently engage in hedging transactions designed to manage
interest rate fluctuation risks.
PART II - OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
None
Item 2: CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
Item 3: DEFAULTS UPON SENIOR SECURITIES.
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
Item 5: OTHER INFORMATION
None
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
None
<PAGE>17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AREMISSOFT CORPORATION,
a Delaware Corporation
Date: October 20, 1999 /S/ DR. LYCOURGOS KYPRIANOU
Dr. Lycourgos Kyprianou
Chairman & Chief Executive Officer
Date: October 20, 1999 /S/ MICHAEL TYMVIOS
Michael Tymvios
Senior Vice President - Finance
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 FOR AREMISSOFT CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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<PERIOD-END> SEP-30-1999
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0
0
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