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 JUNE 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 July 24,
1999 was 13,530,051 shares.
<PAGE>2
AREMISSOFT CORPORATION
INDEX
<TABLE>
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PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as at
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the three months and six months ended June 30, 1999
and June 30, 1998 4
Consolidated Statements of Cash Flows 5
for the six months ended June 30, 1999 and June 30,1998
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 15
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 17
tem 5--Other Information 17
Item 6--Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE>3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AREMISSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
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AS AT JUNE 30 AS AT DEC. 31
1999 1998
(Note 1)
--------------- -------------
ASSETS
Current Assets
Cash and cash equivalents 4,844 149
Accounts receivable, less allowances for doubtful accounts
of $639 at Dec 31,1998 and June 30,1999 16,195 16,166
Other receivables 953 903
Inventory 1,090 787
Deposit paid on service and maintenance contracts 975 3,531
Prepaid expenses and other assets 1,862 1,135
Total Current Assets 25,919 22,671
Loan receivable -related party 1,898 1,886
Property and equipment, net 2,155 1,774
Purchased and developed software, net of accumulated
Amortization of $6,075 and $5,951 at Dec. 31, 1998 and
June 30, 1999 respectively. 1,160 1,284
Intangible assets, net of accumulated amortization of $13,036
and $12,860 at Dec. 31, 1998 and June 30, 1999 respectively 161 337
Total assets 31,293 27,952
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable 2,756 3,669
Accrued payroll taxes 526 586
Accrued value added taxes 300 1,649
Accrued income taxes 3,702 2,059
Current portion of capital lease obligations 45 55
Other accrued expenses 1,575 2,946
Bank loans and short term demand facility - 15,530
Deferred revenue 5,347 6,693
Total Current Liabilities 14,251 33,187
Long-term debt 7,908 -
Loan and accrued interest payable -related party - 1,781
Capital lease obligations, less current portion 87 93
Total liabilities 22,246 35,061
Stockholders' equity (deficit)
Series-A convertible preferred stock, par value $0.001; authorized 2,100
shares; no shares issued and outstanding, 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 Dec. 31, 1998 and June 30, 1999 14 10
Additional paid-in-capital 39,971 27,107
Accumulated deficit (28,865) (32,201)
Accumulated other comprehensive income (loss) (2,073) (2,025)
Total stockholders' equity (deficit) 9,047 (7,109)
Total liabilities and stockholders' equity (deficit) 31,293 27,952
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
AREMISSOFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C> <C> <C>
For three months ended For six months ended
June 30 June 30
----------------------- ---------------------
1999 1998 1999 1998
------ ------- ------- --------
Revenues
Software licenses 8,890 6,535 14,250 10,643
Maintenance and services 6,590 4,876 12,864 9,439
Hardware and other 1,262 895 2,740 2,320
Total revenues 16,742 12,306 29,854 22,402
Cost of revenues
Software licenses 1,061 640 1,777 1,120
Maintenance and services 2,059 1,140 4,046 2,397
Hardware and other 884 596 1,921 1,735
Amortization of purchased software and
Capitalized software development costs 62 17 124 34
Total cost of revenues 4,066 2,393 7,868 5,286
Gross Profit 12,676 9,913 21,986 17,116
Operating Expenses
Sales and marketing 5,774 4,549 10,639 8,450
Research and development 1,197 2,661 2,646
General and administrative 1,496 1,069 2,684 2,138
Amortization of intangible assets 88 24 176 48
Total operating expenses 8,555 6,792 16,160 13,282
Profit from operations 4,121 3,121 5,826 3,834
Other income (expense) :
Interest expense, net 341 475 848 932
Income before income taxes 3,780 2,646 4,978 2,902
Income tax expense 1,247 1,031 1,642 1,131
Net income $2,533 $1,615 $3,336 $1,771
Basic net income per share $0.20 $0.16 $0.28 $0.18
Diluted net income per share $0.20 $0.16 $0.28 $0.18
Basic weighted average shares outstanding 12,589 10,000 11,849 9,641
Diluted weighted average shares outstanding 12,604 10,015 11,864 9,656
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>5
AREMISSOFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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For six months ended June 30
------------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 3,336 1,771
Adjustments to reconcile net income to net cash
provided (used) in operating activities:
Depreciation 615 402
Amortization and write-off of capitalized software and - -
Intangible assets 300 82
Changes in assets and liabilities:
Accounts receivable (29) (4,547)
Other receivables (50) (2,559)
Inventory (303) 12
Deposits paid on service and maintenance contract 2,556 -
Prepaid expenses and other assets (727) 178
Accounts Payable (913) 1,673
Deferred revenue (1,346) 3,320
Accrued taxes payable 234 (1,925)
Other accrued expenses (1,371) (2,178)
Net cash provided (used) in operating activities 2,302 (3,767)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (996) (594)
Capitalized software development costs - (38)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 12,868 9,302
Principal repayments of short-term borrowings (7,622) 137
Loan from related party (1,793) -
Principal payments of capital lease obligations (16) (111)
Short-term demand facility - (1,507)
Net cash provided by financing activities 3,437 7,821
Net increase in cash & cash equivalents 4,743 3,422
Effect of foreign currency exchange rates on cash and
cash equivalents (48) (202)
Cash and cash equivalents, at beginning of period 149 239
Cash and cash equivalents, at end of period $4,844 $3,459
Supplemental disclosure:
Interest paid $848 $932
</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 six-month period ended June 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>
<S> <C> <C>
For Six Months Ended
June 30
1999 1998
Numerator used for both basic and diluted earnings (loss) per share $3,336 $1,771
Denominator for basic earnings per share;
Weighted average shares outstanding 11,849 9,641
Denominator for diluted earnings per share:
Denominator for basic earnings per share 11,849 9,641
Effect of dilutive securities:
Warrants 15 15
Preferred stock - -
11,864 9,656
Basic net income per share $0.28 $0.18
Diluted net income per share $0.28 $0.18
</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 for the six months ended June 30, 1999 and 1998 are as
follows (in thousands)
<TABLE>
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1999 1998
---- ----
Net income $ 3,336 $ 1,771
Foreign currency translation adjustments (48) (202)
------ ------
Comprehensive income $3,288 $1,569
</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>
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MANUFACTURING HEALTHCARE HOSPITALITY CONSTRUCTION OTHER TOTAL
--------------- ----------- ------------ ------------- ------- ---------
Segmental analysis for the six
months ended June 30, 1999
Revenues from external customers $9,823 $8,716 $7,761 $2,431 $1,123 $29,854
Depreciation and amortization 177 185 180 38 335 915
Profit (loss) from operations 3,261 1,101 1,587 323 (446) 5,826
Total segment assets 13,886 7,284 7,539 1,342 1,242 31,293
Segmental analysis for the six
months ended June 30, 1998
Revenues from external customers 6,317 7,460 5,869 2,128 628 22,402
Depreciation and amortization 89 106 91 21 177 484
Profit (loss) from operations 2,113 880 873 204 (236) 3,834
Total segment assets 13,880 7,457 6,710 1,403 697 30,147
</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.
<TABLE>
<S> <C> <C> <C> <C>
Revenues Long-Lived Assets
---------- -------------------
June 30,1999 June 30, 1998 June 30,1999 June 30,1998
------------ ------------- ------------ ------------
United Kingdom 17,342 16,802 2,383 2,047
Rest of Europe 7,355 2,654 449 404
United States 1,178 1,006 120 108
Asia 1,035 717 514 809
Rest of World 2,944 1,223 10 0
29,854 22,402 3,476 3,368
</TABLE>
<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 Condensed 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.
<PAGE>10
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
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. 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 36.05% to $16.74 million for the three months ended
June 30, 1999 from $12.31 million for the three months ended June 30, 1998. For
the six-months ended June 30, 1999, the total revenue increased 33.26% to $29.85
million from $ 22.40 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 36.04% to $8.89 million for the three months
ended June 30, 1999 from $6.54 million for the three months ended June 30, 1998.
For the six-months ended June 30, 1999, the software license revenue increased
33.89% to $14.25 million from $10.64 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
remained at 53.10% for the three months ended June 30, 1999 and June 30, 1998.
For the six-months ended June 30, 1999, as a percentage of total revenue,
license revenue increased to 47.73% from 47.51% during the comparable period in
1998.
Maintenance and service contract revenues increased 35.15% to $6.59 million for
the three months ended June 30, 1999 from $4.88 million for the three months
ended June 30, 1998. For the six-months ended June 30, 1999, the maintenance and
service revenue increased 36.29% to $12.86 million from $9.44 million during the
comparable period in 1998. This is result of the increase in the number of
<PAGE>11
installed customers and the growth in software license revenues. As a percentage
of total revenues, maintenance and service contract revenues decreased to 39.36%
for three months ended June 30, 1999 from 39.62% for 1998. For the six-months
ended June 30, 1999, as a percentage of total revenue, maintenance and service
contract revenue increased to 43.09% from 42.13% during the comparable period in
1998.
Hardware and other revenues increased 41.01% to $1.26 million for the three
months ended June 30, 1999 from $0.90 million for the three months ended June
30, 1998. For the six-months ended June 30, 1999, the hardware and other revenue
increased 18.10% to $2.74 million from $2.32 million during the comparable
period in 1998. As a percentage of total revenues, hardware and other revenues
increased to 7.54% for the three months ended June 30, 1999 from 7.27% for the
three months ended June 30, 1998. For the six-months ended June 30, 1999, as a
percentage of total revenue, hardware and other revenues decreased to 9.18% from
10.36% 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 69.91% to $4.07 million for the three months ended
June 30, 1999 from $2.39 million for the three months ended June 30, 1998. For
the six-months ended June 30, 1999, the total cost of revenue increased 48.85%
to $7.87 million from $ 5.29 million during the comparable period in 1998. As a
percentage of total revenues, cost of revenues increased to 24.29% for the three
months ended June 30, 1999 from 19.45% for the three months ended June 30, 1998.
For the six-months ended June 30, 1999, as a percentage of total revenue, cost
of revenue increased to 26.35% from 23.60% during the comparable period in 1998.
Software license cost increased 65.78% to $1.06 million for the three months
ended June 30, 1999 from $0.64 million for the three months ended June 30, 1999.
For the six-months ended June 30, 1999, the software license cost increased
58.66% to $1.78 million from $1.12 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 6.33% for the three
months ended June 30, 1999 from 5.20% for the period ended June 30, 1998. For
the six-months ended June 30, 1999, as a percentage of total revenue, license
cost increased to 5.95% from 5.00% during the comparable period in 1998.
Maintenance and service contract cost increased 80.61% to $2.06 million for the
three months ended June 30, 1999 from $1.14 million for the three months ended
June 30, 1998. For the six months ended June 30, 1999, the maintenance and
service contract cost increased 68.79% to $4.05 million from $2.40 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
12.30% for the three months ended June 30, 1999 from 9.26% for 1998. For the six
months ended June 30, 1999, as a percentage of total revenue, maintenance and
service contract cost increased to 13.55% from 10.70% during the comparable
period in 1998.
Hardware and other cost increased 48.32% to $0.88 million for the three months
ended June 30, 1999 from $0.60 million for the three months ended June 30, 1998.
For the six months ended June 30, 1999, the hardware and other cost increased
10.72% to $1.92 million from $1.74 million during the comparable period in 1998.
As a percentage of total revenues, hardware and other cost increased to 5.28%
for the three months ended June 30, 1999 from 4.84% for the three months ended
June 30, 1998. For the six months ended June 30, 1999, as a percentage of total
revenue, hardware and other cost decreased to 6.43% from 7.74% during the
<PAGE>12
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 26.93% to $5.77 million for
the three months ended June 30, 1999 from $4.55 million for the three months
ended June 30, 1998. For the six-months ended June 30, 1999, the sales and
marketing cost increased 25.91% to $10.64 million from $8.45 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 34.49%
for three months ended June 30, 1999, from 36.97% for the three months ended
June 30, 1998. For the six months ended June 30, 1999, as a percentage of total
revenue, sales and marketing cost decreased to 35.64% from 37.72% 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 increased to 4.09% to $1.20 million for the
three months ended June 30, 1999 from $1.15 million for the three months ended
June 30, 1998. For the six months ended June 30, 1999, the research and
development expense increased to 0.57% to $2.66 million from $2.65 million
during the comparable period in 1998. As a percentage of total revenues,
research and development expenses decreased to 7.15% for the three months ended
June 30, 1999 from 9.35% for the three months ended June 30, 1998. For the six
months ended June 30, 1999, as a percentage of total revenue, research and
development expenses decreased to 8.91% from 11.81% during the comparable period
in 1998.
General and Administrative
General and administrative expenses increased 39.94% to $1.50 million for the
three months ended June 30, 1999 from $1.07 million for the three months ended
June 30, 1998. . For the six months ended June 30, 1999, the general and
administrative cost increased 25.54% to $2.68 million from $2.14 million during
the comparable period in 1998. As a percentage of total revenues, general and
administrative expenses increased to 8.94% for the three months ended June 30,
1999 from 8.69% for the three months ended June 30, 1998. For the six months
ended June 30, 1999, as a percentage of total revenue, general and
administrative expenses decreased to 8.99% from 9.54% 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
28.21% to $0.34 million for the three months ended June 30, 1999 from $0.48
million for the three months ended June 30, 1998 . For the six months ended June
30, 1999, the net interest expense decreased 9.01% to $0.85 million from $0.93
million during the comparable period in 1998. This 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 six months ended June 30, 1999 of
$1.64 million. There was a provision for income taxes for $1.13 million for the
six months ended June 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 June 30, 1999, and
although certain subsidiaries generated taxable income in the period ending June
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
June 30, 1999, the Company had $ 4.84 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 6 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 $2.30 million for the six
months ended June 30, 1999. This surplus was primarily due to decrease in
deposits and increased sales. The Company had operating cash flow deficits of
$3.77 million for the six months ended June 30, 1998. Operating cash flow is
affected by seasonality, among other factors.
Accounts receivable increased to $16.20 million at June 30, 1999 from $14.00
million at June 30, 1998. Accounts receivable at December 31, 1998 was $ 16.17
million. The average days sales outstanding was 98 days compared to 113 days for
the period June 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 $2.96 million at June 30, 1998 to approximately
$4.53 million at June 30, 1999.
The Company utilized cash for investing activities of $1.00 million and $0.63
million for the six-months ended June 30, 1999 and June 30, 1998 respectively.
Cash provided by financing activities was approximately $3.44 million and $7.82
million for the six months ended June 30, 1999 and June 30, 1998, respectively.
Financing activities for the six months of 1998 primarily consisted of a private
placement in February 1998 of approximately 1,294,500 shares of Common Stock,
<PAGE>14
the net proceeds of which were $9.3 million. Financing activities for the six
months ended June 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 has also begun 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 June 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 June 30, 1999 in connection
with Year 2000 compliance were approximately $772,000, of which approximately
$123,000, $186,000, $126,000 and $40,000 were incurred in 1996, 1997, 1998 and
for the six months ended June 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 $40,000 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.
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
<PAGE>16
Company's interest expense. However, at June 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.
On April 22, 1999, the Securities and Exchange Commission declared effective the
Company's registration statement on Form s-1, SEC File No. 333-58351,
registering 3,300,000 shares of the Company's Common Stock and an additional
330,000 shares of the Company's Common Stock to cover the underwriter's
over-allotment option (the "Shares"). The public offering of the Shares
commenced on April on April 22, 1999, and the closing of the offering occurred
on April 27, 1999. The Company issued 3,300,000 shares of its Common Stock in
connection with the initial public offering. The Company then issued an
additional 230,000 shares in connection with the exercise of the underwriter's
over-allotment option on June 9, 1999. Consequently, in connection with the
Company's public offering, the Company offered and sold a total of 3,530,000
shares of its Common Stock for an aggregate offering price of $17.65 million.
The offering terminated with the exercise of the underwriter's over-allotment
option on June 9, 1999.
The Company's public offering was underwritten by Cruttenden Roth Incorporated.
Underwriting discounts and commissions were approximately $1.77 million.
Expenses for multiple road shows were approximately $350,000. Other expenses
which included, but are not limited to, accounting fees, legal fees, printing
costs, and direct expenses related to the offering of the Shares were
approximately $2.66 million for a total expenses of the offering of
approximately $4.78 million. Net proceeds from the public offering, after
deducting the expenses of the offering, were $12.87 million.
The Company has used the net proceeds of the public offering to repay $7.62
million of the Company's borrowing under the Company's bank credit facilities
and to repay $1.79 million of the Company's indebtedness to a an officer and
director of the Company. The Company repaid indebtedness to improve the
Company's balance sheet and reduce interest expense associated with the
Company's debt. The remaining proceeds from the Company's public offering will
be used for working capital and general corporate purposes.
Item 3: DEFAULTS UPON SENIOR SECURITIES.
None
<PAGE>17
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>18
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: July 28, 1999
_____________ /s/ DR. LYCOURGOS KYPRIANOU
___________________________________
Dr. Lycourgos Kyprianou
Chairman & Chief Executive Officer
Date: July 28, 1999
________________
/s/ ROYS POYIADJIS
___________________________________
Roys Poyiadjis
President & Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999 FOR AREMISSOFT CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,084,000
<SECURITIES> 2,760,000
<RECEIVABLES> 16,195,000
<ALLOWANCES> 639,000
<INVENTORY> 1,090,000
<CURRENT-ASSETS> 25,919,000
<PP&E> 2,155,000
<DEPRECIATION> 615,000
<TOTAL-ASSETS> 31,293,000
<CURRENT-LIABILITIES> 14,251,000
<BONDS> 0
0
0
<COMMON> 14,000
<OTHER-SE> 9,033,000
<TOTAL-LIABILITY-AND-EQUITY> 31,293,000
<SALES> 29,854,000
<TOTAL-REVENUES> 29,854,000
<CGS> 7,868,000
<TOTAL-COSTS> 24,028,000
<OTHER-EXPENSES> 2,490,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 848,000
<INCOME-PRETAX> 4,978,000
<INCOME-TAX> 1,642,000
<INCOME-CONTINUING> 4,978,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,533,000
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.28
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