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 MARCH 31, 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 (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
ORGANIZATION) CODE)
GOLDSWORTH HOUSE
DENTON WAY
WOKING SURREY GU213LG
UNITED KINGDOM
011-44-171-309-1555
(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
GOLDSWORTH HOUSE
DENTON WAY
WOKING SURREY GU213LG
UNITED KINGDOM
011-44-171-309-1555
(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 [ ] No [ X ]
The number of shares outstanding of the Registrant's Common Stock on April 28,
1999 was 13,300,051 shares.
<PAGE>2
AREMISSOFT CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as at 3
March 31, 1999 and December 31, 1998
Consolidated Statements of Operations 4
for the three months ended March 31, 1999
and March 31, 1998
Consolidated Statements of Cash Flows 5
for the three months ended March 31, 1999 and March 31, 1998
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3: Quantitative and Qualitative disclosures about market risk 16
PART II - OTHER INFORMATION
Item 1--Legal Proceedings 17
Item 2--Changes in Securities and Use of Proceeds 17
Item 3--Defaults upon Senior Securities 17
Item 4--Submission of Matters to a Vote of Security Holder 17
Item 5--Other Information 17
Item 6--Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>3
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
AREMISSOFT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C>
AS AT DEC. 31 AS AT MARCH 31
1998 1999
ASSETS (See Footnote 1) (unaudited)
Current Assets
Cash and cash equivalents $149 $1,082
Accounts receivable, less allowances for doubtful accounts of
$971 and $639 at March 31,1998 and 1999, respectively 16,166 14,850
Other receivables 903 942
Inventory 787 1,090
Deposit paid on Service and Maintenance Contracts 3,531 1,005
Prepaid Expenses and other assets 1,135 2,040
-------- ------
Total Current Assets 22,671 21,009
Loan receivable-related party 1,886 1,898
Property and equipment, net 1,774 1,985
Purchased and developed software, net of accumulated
amortization of $5,772 and $6,137 at Dec. 31, 1998 and
March 31, 1999 respectively 1,284 1,222
Intangible assets, net of accumulated amortization of
$12,790 and $13,124 at Dec, 31, 1998 and March 31, 1999,
respectively 337 249
------- -------
Total Assets $27,952 $26,363
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable 3,669 4,814
Accrued payroll taxes 586 510
Accrued value added taxes 1,649 418
Accrued income taxes 2,059 2,059
Current portion of capital lease obligations 55 55
Other accrued expenses 2,946 1,610
Bank loans and short term demand facility 15,530 15,530
Deferred revenue 6,693 5,810
------- ------
Total Current Liabilities 33,187 30,806
Long-term debt - 0
Loan and accrued interest payable -related party 1,781 1,794
Capital lease obligations, less current portion 93 93
------- ------
Total liabilities 35,061 32,693
------ ------
Stockholders' equity (deficit)
Series-A convertible preferred stock, par value $0.001;
authorized 2,100 shares; 1,137 and no shares issued and
outstanding at Dec. 31, 1998 and March 31, 1999 respectively,
liquidating preference at par value - 0
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 issued and outstanding at Dec. 31, 1998 and
March 31, 1999 10 10
Additional paid-in-capital 27,107 27,107
Accumulated deficit (32,201) (31,398)
Accumulated other comprehensive income (2,025) (2,049)
-------- ---------
Total stockholders' equity (deficit) (7,109) (6,330)
-------- ---------
Total liabilities and stockholders' equity (deficit) $27,952 $26,363
------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>4
AREMISSOFT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C> <C>
For three months ended March 31
1998 1999
(Unaudited) (Unaudited)
Revenues
Software Licenses $4,108 $5,360
Maintenance and Services 4,563 6,274
Hardware and other 1,425 1,478
----- --------
Total revenues 10,096 13,112
------ --------
Cost of revenues
Software Licenses 480 716
Maintenance and Services 1,257 1,987
Hardware and other 1,139 1,037
Amortization of purchased software and capitalized software
Development cost 17 62
--------- --------
Total cost of revenues 2,893 3,802
Gross Profit 7,203 9,310
------ ---------
Operating Expenses
Sales and marketing 3,901 4,865
Research and development 1,496 1,464
General and administrative 1,069 1,188
Amortization of intangible assets 24 88
-------- ---------
Total operating expenses 6,490 7,605
------ ---------
Profit from operations 713 1,705
Interest expense, net 457 507
------- ---------
Income before income taxes 256 1,198
Income tax expense 100 395
------ ---------
Net income $ 156 $ 803
------ ---------
Basic net income per share $0.02 $0.08
Diluted net income per share $0.02 $0.08
Basic weighted average shares outstanding 8,281 10,000
Diluted weighted average shares outstanding 9,433 10,015
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>5
AREMISSOFT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
For three months ended March 31
1998 1999
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 156 803
Adjustments to reconcile net income to net cash provided
(used) in operating activities:
Depreciation 230 250
Amortization of capitalized software and intangible assets 41 150
Changes in assets and liabilities:
Accounts receivable (170) 1,316
Other receivables (94) (39)
Inventory (83) (303)
Deposits paid on service and maintenance contracts - 2,526
Prepaid expenses and other assets (1,423) (905)
Accounts Payable (999) 1,145
Deferred revenue 884 (883)
Accrued taxes payable (1,250) (1,307)
Other accrued expenses (917) (1,336)
------- ---------
Net cash provided (used) in operating activities (3,625) 1,417
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (249) (461)
Capitalized software development costs (38) -
Loan to related party (net) - (12)
------- ---------
Net cash (used in) investing activities (287) (473)
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 9,302 -
Principal repayments of long-term borrowings 166 -
Loan from related party - 13
Principal payments of capital lease obligations (104) -
Short-term demand facility (520) -
------- ---------
Net cash provided by financing activities 8,844 13
------- ---------
Net increase(decrease) in cash & cash equivalents 4,932 957
Effect of foreign currency exchange rates on cash and 99 (24)
cash equivalents
Cash and cash equivalents, at beginning of period 239 149
------- --------
Cash and cash equivalents, at end of period $5,270 $1,082
------- --------
Supplemental disclosure:
Interest paid $ 457 $ 507
------- -------
</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 period ended March 31, 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 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):
For three Months Ended
March 31
1998 1999
------- -------
Numerator used for both basic and diluted earnings
(loss) per share 156 803
Denominator for basic earnings per share;
Weighted average shares outstanding 8,281 10,000
Denominator for diluted earnings per share:
Denominator for basic earnings per share 9,433 10,000
Effect of dilutive securities:
Warrants 15 15
Preferred stock 1.137 -
9433 10,015
Basic Earnings (loss) per share $0.02 $0.08
Diluted Earnings (loss) per share $0.02 $0.08
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. The accompanying consolidated financial statements have been
restated to conform to the SFAS No. 130 requirements.
Comprehensive income for the three months ended March 31, 1998 and 1999 are as
follows (in thousands):
1998 1999
------- ------
Net income $ 156 $ 803
Foreign currency translation adjustments (29) (24)
------ ------
Comprehensive income $ 127 $ 779
------ ------
<PAGE>8
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.
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 a 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>
<S> <C> <C> <C> <C> <C> <C>
MANUFACTURING HEALTHCARE HOSPITALITY CONSTRUCTION OTHER TOTAL
Segmental analysis for
the three months ended 3/31/99
Revenues from external customers 4,145 3,984 3,438 1,102 443 13,112
Depreciation and amortization 72 84 80 17 147 400
Profit (loss) from operations 942 344 451 101 (133) 1,705
Total segment assets 11,803 6,302 5,977 1,227 1,054 26,363
Segmental analysis for the
three months ended 3/31/98
Revenues from external customers 2,847 3,362 2,645 959 283 10,096
Depreciation and amortization 50 59 51 12 99 271
Profit (loss) from operations 393 238 88 38 (44) 713
Total segment assets 11,077 5,951 5,355 1,120 556 24,059
</TABLE>
<PAGE>9
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
---------- ------------------
Mar 31, 1998 Mar 31, 1999 Mar 31, 1998 Mar 31, 1999
------------- ------------ ------------- ------------
United Kingdom 7,572 7,748 2,248 1,886
Rest of Europe 1,196 3,257 444 465
United States 454 378 119 124
Asia 323 449 887 532
Rest of World 551 1,280 0 10
10,096 13,112 3,698 3,017
6. SUBSEQUENT EVENT
Public Offering
In April 1999 the Company offered 3.3 million shares of its common stock for
public subscription. The Common Stock has been approved for quotation on the
NASDAQ national market under the symbol "AREM". The initial price to public was
$5 per share and the underwriting discount was $0.4 per share.
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.
<PAGE>10
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. 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
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 access 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 1998. 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).
<PAGE>11
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 29.9% to $13.1 million for the three months ended March
31, 1999 from $10.1 million for the three months ended March 31, 1998. This
increase was due primarily to higher software license revenues as a result of an
increase in the sale of higher margin licenses, and associated maintenance and
service contract revenues.
Software license revenues increased 30.5% to $5.4 million for the three months
ended March 31, 1999 from $4.1 million for the three months ended March 31,
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 40.9% for the three months ended March 31, 1999 from 40.7% for the
period ended March 31, 1998.
Maintenance and service contract revenues increased 37.5% to $6.3 million for
the three months ended March 31, 1999 from $4.6 million for the three months
ended March 31, 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 revenues increased to 47.8% for three
months ended March 31, 1999 from 45.3% for 1998.
Hardware and other revenues increased 3.7% to $1.5 million for the three months
ended March 31, 1999 from $1.4 million for the three months ended March 31,
1998. As a percentage of total revenues, hardware and other revenues decreased
to 11.2% for the three months ended March 31, 1999 from 14.1% for the three
months ended March 31, 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 31.4% to $3.8 million for the three months ended
March 31, 1999 from $2.9 million for the three months ended March 31, 1998. As a
percentage of total revenues, cost of revenues increased to 29.0% for the three
month ended March 31, 1999 from 28.7% for the three months ended March 31, 1998.
Software license cost increased 49.6% to $0.72 million for the three months
ended March 31, 1999 from $0.48 million for the three months ended March 31,
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
<PAGE>12
increased to 5.5% for the three months ended March 31, 1999 from 4.8% for the
period ended March 31, 1998.
Maintenance and service contract Cost increased 58% to $2 million for the three
months ended March 31, 1999 from $1.3 million for the three months ended March
31, 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 15.2% for three months ended
March 31, 1999 from 12.5% for 1998.
Hardware and other Cost decreased 9.0% to $1.04 million for the three months
ended March 31, 1999 from $1.14 million for the three months ended March 31,
1998. As a percentage of total revenues, hardware and other cost decreased to
7.9% for the three months ended March 31, 1999 from 11.3% for the three months
ended March 31, 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 24.7% to $4.9 million for
the three months ended March 31, 1999 from $3.9 million for the three months
ended March 31, 1998, 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 37.1% for three months ended
March 31, 1999, from 38.6% for the three months ended March 31, 1998, primarily
due to increased efficiencies in the Company's sales and marketing operations.
Research and Development
Research and development expenses were $1.5 million for the period ended March
31, 1999 and March 31, 1998. As a percentage of total revenues, research and
development expenses decreased to 11.1% for the three months ended March 31,
1999 from 14.8% of revenues for the three months ended March 31, 1998. The
decrease was primarily due to a significant portion of the planned expenditures
relating to the Company's new generation of software products having been
incurred in prior accounting periods.
General and Administrative
General and administrative expenses increased 11.1% to $1.2 million for the
three months ended March 31, 1999 from $1.1 million for the three months ended
March 31, 1998. As a percentage of total revenues, general and administrative
expenses decreased to 9.1% for the three months ended March 31, 1999 from 10.6%
for the three months ended March 31, 1998. This decrease reflects the effect of
the Company's cost-cutting and cost control measures.
<PAGE>13
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 increased 11%
to $.51 million for the three months ended March 31, 1999 from $.46 million for
the three months ended March 31, 1998, primarily due to an increase in amounts
outstanding under the Company's credit facilities.
Income Tax Provision
There is a provision for income taxes for the three months ended March 31, 1999
of $0.4 million. There was a provision for income taxes for $0.1 million the
three months ended March 31, 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 March 31, 1999,
and although certain subsidiaries generated taxable income in the period ending
March 31, 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. As of March 31, 1999, the
Company had $1.08 million of cash and cash equivalents and $15.53 million in
short-term borrowings. The Company had a working capital deficit of $9.8 million
as of March 31, 1999. In connection with the Company's initial public offering
which closed on April 27, 1999, the Company agreed with its lender to repay $5
million of its short-term borrowings and to restructure the Company's remaining
indebtedness of approximately $9 million as long-term debt, maturing in 2004,
bearing interest at LIBOR plus three percent per annum.
The Company believes that the net proceeds from its initial public offering,
which was declared effective on April 22, 1999, together with existing cash and
cash equivalents, will be sufficient to meet the Company's working capital and
currently planned expenditure requirements for the next 9 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 $1.4 million for the three
months ended March 31, 1999. This surplus was primarily due to a decrease in
receivables and deposits and an increase in accounts payables partially offset
by a decrease in accrued expenses. The Company had an operating cash flow
deficit of $3.6 million for the three months ended March 31, 1998. Operating
cash flow is affected by seasonality, among other factors.
<PAGE>14
Accounts receivable increased to $14.9 million at March 31, 1999 from $9.6
million at March 31, 1998. Accounts receivable as at December 31, 1998 was
$16.2 million. The decrease in accounts receivable as of March 31, 1999 was
primarily the result of a higher collection rate of accounts receivable for the
period. The average days sales outstanding was 102 days for the period March 31,
1998 and 112 for December 31, 1998.
Accrued taxes decreased from $3.5 million at March 31, 1998 to approximately
$2.98 million at March 31, 1999.
The Company utilized cash for investing activities of $0.5 million and $0.3
million for the three months ended March 31, 1999 and March 31, 1998
respectively.
Cash provided by financing activities was approximately $13,000 and $8.8 million
for the three months ended March 31, 1999 and March 31, 1998 respectively.
Financing activities for the 1st quarter of 1998 primarily consisted of a
private placement in February 1998 of approximately 1,294,500 shares of Common
Stock, the net proceeds of which were $9.3 million.
In April 1999, the Company offered 3.3 million shares of its common stock in an
initial public offering. The common stock has been approved for quotation on the
NASDAQ national market under the symbol AREM. The initial price to the public
was $5 per share and the underwriting discount was $0.4 per share. The net
proceeds received by the Company from the sale of the shares of Common Stock
were approximately $12.6 million, after deducting the underwriting discount and
estimated offering expenses payable by the Company.
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.
<PAGE>15
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.
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 March 31, 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 March 31, 1999 in connection
with Year 2000 compliance were approximately $752,000, of which approximately
$123,000, $186,000, $126,000 and $20,000 were incurred in 1996, 1997,1998 and
for the three months period ended March 31, 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 $60,000 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
<PAGE>16
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
Company's interest expense. However, at March 31, 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.
<PAGE>17
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>18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunder duly authorized, in the City of Sacramento, State of
California on May 12, 1999.
AREMISSOFT CORPORATION,
a Delaware Corporation
Date: May 12, 1999
/s/ DR. LYCOURGOS KYPRIANOU
-----------------------------------
Dr. Lycourgos Kyprianou
Chairman & Chief Executive Officer
/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 MARCH 31, 1999 FOR AREMISSOFT CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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