UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _______
COMMISSION FILE NUMBER 0-25713
------------------------------
AremisSoft Corporation
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 68-0413929
--------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Goldsworth House
Denton Way
Woking, Surrey GU21 3LG
United Kingdom
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 011-44-1483-885-000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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(Title of Each Class)
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 as 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 __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 14,
2000, as reported on the Nasdaq National Market, was approximately $268,212,792.
Shares of Common Stock held by officers and directors and their affiliated
entities and related persons have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purposes.
As of March 14, 2000, the Registrant had 15,201,595 shares of Common Stock
outstanding.
Documents Incorporated by Reference: None
<PAGE>i
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page of
Report
PART I
ITEM 1. BUSINESS......................................................................................... 1
ITEM 2. PROPERTIES....................................................................................... 22
ITEM 3. LEGAL PROCEEDINGS................................................................................ 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.............................................................................. 23
ITEM 6. SELECTED FINANCIAL DATA.......................................................................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................................ 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................................. 66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 67
ITEM 11. EXECUTIVE COMPENSATION........................................................................... 70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................................................... 74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K......................................................................................... 76
SIGNATURES ................................................................................................. 80
</TABLE>
<PAGE>1
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of these terms or comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined in the section entitled "Risk Factors" and
the risks discussed in our other Securities and Exchange Commission filings,
that may cause our or our industries actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
forward-looking statements.
You should not rely on these forward-looking statements, which reflect
only our opinion as of the date of this report. We do not intend to update any
of these forward-looking statements. You should also carefully review the risk
factors set forth in other reports or documents we file from time to time with
the Securities and Exchange Commission, particularly the quarterly reports on
Form 10-Q and any current reports on Form 8-K.
As used in this report, the terms "we," "us," "our" and "AremisSoft"
mean AremisSoft Corporation and its subsidiaries, unless otherwise indicated.
ITEM 1. BUSINESS
Overview
We develop, market, implement and support enterprise-wide software
applications primarily for mid-sized organizations in the manufacturing,
healthcare, hospitality and construction industries. Our fully-integrated suite
of Internet-enabled products allows our customers to manage and execute
mission-critical functions within their organization, including accounting,
purchasing, manufacturing, customer service, and sales and marketing. The
modular design of our products enables us to provide customers with a
cost-effective scalable solution which can be easily implemented. We focus on
mid-sized organizations with annual revenues of less than $200 million to
capitalize on a market we believe is receptive to our cost-effective solutions
and shorter implementation periods. To date, we have licensed our software
applications to more than 6,000 customers in over twenty countries.
Our software applications use our internally developed three-tiered,
object oriented software architecture, which we call the Aremis architecture.
This architecture enables us to develop software solutions rapidly and
cost-effectively by taking advantage of the common requirements of customers in
our target markets. In addition, we believe that, with 212 developers based in
our facilities in India, we have established a cost-effective model for
implementing, supporting and enhancing our software applications.
In December 1999, we acquired e-nnovations.com, an Internet software
solutions provider located in Bangalore, India. We believe this acquisition is a
key strategic milestone in our development because it enables us to address the
rapidly expanding market opportunities brought about by the Internet. For over
two years, we have partnered with e-nnovations.com and have utilized their
technological capabilities in several large projects. This acquisition enables
us to continue to leverage the diverse technological capabilities of
e-nnovations.com to address our customers' current and future e-business needs.
We believe the e-nnovations.com acquisition will also assist us to develop an
application service provider, or ASP, delivery method to best suit the evolving
requirements of our expanding customer base.
<PAGE>2
Industry Background
Enterprise-wide software applications are designed to help a business
manage and execute its mission-critical operations. They provide an organization
with a strategic resource that can be used to generate and disseminate
mission-critical information, as well as enable it to respond rapidly to
changing market environments and customer needs.
Businesses are increasingly demanding flexible solutions that assist in
the management and execution of mission-critical functions in a continually
changing business environment. In the past, host-centric systems operating on
mainframes or mid-range computers achieved broad market acceptance. Although
these systems served the near-term needs of customers, they lacked the
flexibility necessary to operate in the modern marketplace due to their
inability to accommodate variations in business requirements and technology
infrastructure. As a result, companies like Baan, Oracle, PeopleSoft and SAP
developed more flexible enterprise-wide solutions targeted at Fortune 1000
companies. Although these solutions have undergone significant evolution since
their introduction, they remain very expensive and require significant resources
because they involve lengthy implementation cycles and substantial
customization. Small to mid-sized organizations generally cannot afford and do
not have the information technology resources to purchase, implement and support
these large-scale enterprise-wide systems.
According to Forrester Research, an independent market research firm,
global packaged applications license revenues are estimated to grow from $14
billion in 1998 to over $41 billion by 2003. The international portion of this
market is estimated to grow from $6 billion to over $20 billion, representing an
annual compounded growth rate of approximately 27%. This growth can be
attributed, in part, to a shift among organizations away from developing
enterprise-wide software applications in-house to purchasing these applications
from outside sources. This shift has been fueled by the growing complexity of
new technology, the increasing failure rate of in-house software development
projects, and the difficulty in hiring, training and retaining software
professionals. By outsourcing their software needs, businesses can reduce their
risk of in-house development failures and ensure quicker time to market with new
and increased functionality.
As a result, there is a substantial global market opportunity for
enterprise-wide software applications which cater to mid-sized organizations and
offer:
o ease of integration,
o faster implementation,
o reduced risks associated with business and technological changes,
o lower costs, and
o industry-specific and customized functionality.
The AremisSoft Solution
We focus on mid-sized organizations with limited information technology
resources and a need for cost-effective, modularized software systems that can
be scaled as the company grows. Our solutions provide the following benefits:
Industry-Specific Applications. We offer enterprise-wide
software applications for mid-sized organizations specifically tailored
to four vertical markets: manufacturing, healthcare, hospitality and
construction. Through our industry focus and history of working closely
with customers, we believe we have developed a high level of expertise
<PAGE>3
in industry-specific, complex business processes which enables us to
develop software applications to address our customers' specific needs.
Comprehensive Product Suite. Our comprehensive suite of
products provides our customers with significant flexibility and a wide
range of functions. We utilize a modular approach in configuring our
solutions, drawing upon a broad array of modules that handle various
business functions such as accounting, purchasing, manufacturing,
customer service, and sales and marketing. As a result, our customers
are able to incorporate their business processes into a single system
and add new modules as their business needs increase.
Rapid Implementation and Integration Advantages. The modular
design and object oriented nature of our products, combined with our
vertical market focus and expertise, permits rapid product
implementation. Our software applications are designed to address the
specific needs of our customers so they need only purchase those
applications with the functions they require. This limits the need for
extensive customizing after installation and eliminates implementation
and training time for unnecessary features. Our software products
operate on numerous hardware platforms, are compatible with all major
databases and can be integrated with a variety of Internet
technologies.
Global Service and Support. We provide high quality global
service and support, which we believe is a critical component of our
solution. We offer dedicated product service and support by highly
trained personnel locally and through our software development and
support facilities in India. We believe our investment in worldwide
customer support services and user groups improves communication and
feedback, enhancing customer satisfaction and cultivating long-term
relationships with our customers.
Ease of Migration. Although we encourage our customers to
migrate to our newer products, we also support their use of legacy
products. By providing support for legacy products, we protect our
customers' investment in their existing systems and reduce the costs
and business interruptions associated with mandatory system upgrades.
We believe this is critical to customer satisfaction and improves our
success in transitioning customers to our rejuvenated and new products.
The AremisSoft Strategy
Our business objective is to attain a leadership position as a provider
of enterprise-wide software applications in our target markets. As part of our
business strategy, we intend to continue to:
Focus on Marketing to Mid-sized Organizations. We believe that
the market for providing cost-effective, enterprise-wide software
applications to mid-sized organizations is large and underserved. We
believe our software products are well suited for this market because
they are generally less expensive and have significantly shorter
implementation periods than products marketed to larger businesses,
which typically require implementation periods in excess of one year.
We intend to continue to focus on the mid-sized market which is not
easily penetrated by large software vendors who face difficulties in
tailoring their applications to address the needs of smaller
organizations.
Further Penetrate Targeted Markets. We believe there are
significant opportunities to increase our presence and expand our
customer base within the manufacturing, healthcare, hospitality and
construction industries. We intend to leverage the expertise we have
developed in each of these industries to further penetrate these
markets and to take advantage of the common functionality across these
industries by utilizing our Aremis architecture.
Increase Efficiencies by Using Our Software Development
Facilities in India. We believe our software development and support
facilities in India provide us with a significant competitive advantage
<PAGE>4
in product development, implementation, product rejuvenation and
administrative functions. Our team in India is responsible for research
and development and shares responsibilities for design and
specification with our technical personnel in the United Kingdom. We
also utilize the satellite link that we established between our
operations in India and each of our other offices to increase operating
efficiency and enhance communications throughout our operations. We
intend to increase the use of our operations in India to reduce costs
in other areas of our business including administrative functions.
Provide Internet-Enabled Software Solutions. Through our
recent acquisition of e-nnovations.com, we have enhanced our ability to
provide fully integrated Internet-enabled software solutions. We
anticipate releasing future versions of our software which have
enhanced Internet capabilities, including the delivery of our
applications directly to our customers over the Internet.
Expand on our Technological Expertise. We believe that our
three-tiered object oriented architecture enables us to respond to and
rapidly incorporate new technologies. We intend to continue to invest
in the development of new technologies and products to address evolving
customer requirements. In addition, our technology strategy is focused
on transitioning customers from legacy products to products utilizing
our Aremis architecture.
Expand Sales, Marketing, Support and Service. We believe there
are significant opportunities to expand our market position in our
existing markets by further developing our sales, marketing and support
infrastructure. We sell and support our software products directly in
Argentina, Bulgaria, Germany, India, Ireland, Mexico, the United
Kingdom and the United States and indirectly in 14 additional countries
through value added resellers. We plan to continue to invest
significantly in expanding our sales, marketing, support and services
in these and other geographic regions.
Acquisition Strategy
We believe we have developed a successful and proven acquisition model,
from pre-acquisition due diligence to post-acquisition integration. We believe
our model enables us to integrate acquired products and customers and, over
time, rejuvenate those products and transition those customers to our new
applications. A significant aspect of our growth strategy is, and will continue
to be, the acquisition of complementary businesses to achieve market presence
and increase our customer base. From January 1993 to March 1996, we acquired
eleven businesses, and in December 1999, we acquired e-nnovations.com.
Our acquisition strategy focuses on the corporate, financial and
operational characteristics of a potential business to be acquired. We
extensively consider a potential acquisition's customer base, products and
applications, application environment and operating platform to assess the
potential for rejuvenation utilizing our Aremis architecture.
After we have acquired a business, it is integrated into our
operations. The first step in the integration process is to establish a
satellite link between it and our software development and support facilities in
India. A team within our India facilities immediately assumes responsibility for
product development, finance and administration. As a result, we are able to
reduce staff in the development and administrative functions of the acquired
business.
The next step in the process is to begin rejuvenating the acquired
products and transitioning them to our Aremis architecture. At this point, we
offer customers of the acquired business three choices, to transition to one of
our products, to upgrade to a rejuvenated legacy product or to continue to
utilize the existing legacy product. We are sensitive to the customer's
investment in legacy systems and do not require them to transition to the
rejuvenated products, rather, we continue to support the acquired businesses'
legacy products until all customers are transitioned to one of our rejuvenated
<PAGE>5
or new products. Because the transition process is gradual and, to a large
extent, controlled by the customer, disruption to the customer's operations is
minimized.
The Aremis Architecture
We believe that our Aremis architecture enables us to produce high
quality, scalable enterprise-wide software applications with substantially
reduced development, implementation and maintenance costs. The foundation of our
Aremis architecture is a three-tiered, object-oriented model.
The three tiers of our Aremis architecture consist of presentation,
logic and database. The presentation tier is the interface between the user and
the system which, in the Aremis architecture, is a graphical user interface, or
GUI. The logic tier comprises the applications within each product that interact
with the database tier. The database tier stores mission-critical
enterprise-wide data. A primary advantage of this three-tier structure is that
it allows software programmers to make changes and enhancements to any one tier,
without needing to modify others.
We believe that our Aremis architecture's object orientation provides
us with a significant competitive advantage. We have devoted significant
resources to developing an extensive proprietary software library of
well-defined, reusable business objects which link business rules and policies
to our applications. This object orientation enables our developers to easily
create additional modules or to rapidly adapt existing software to changing
business conditions or requirements. It also facilitates the re-use of
functional applications which are similar across our products and our markets.
We believe that approximately 70% of the objects used within the Aremis
architecture are common across the markets we target. This means that the same
objects can be used in applications across various industries without
substantial modification.
The object orientation of our Aremis architecture also helps to
minimize training costs since our software developers, who are already trained
in the development methods and language, can be assigned to various vertical
markets with little or no additional training. In a similar manner, we can add
modules to a customer's Aremis system with minimal additional cost and training.
Our Aremis architecture encompasses most industry standard database
technologies including:
o Oracle o SQL Server
o Informix o Sybase
This provides our customers with the flexibility to utilize our high quality
data warehouse and data mining applications. Our Aremis architecture is also
based on open, client/server computing technology. This open environment
provides compatibility with other software applications, even among multiple
revision levels of the same or different products. Components of the Aremis
architecture have been implemented on numerous hardware platforms and operating
systems, including:
o Windows NT o Novell
o Windows 95 o Multitasking DOS environments
o UNIX
<PAGE>6
Our Products
We provide customized enterprise-wide software applications for
mid-sized organizations in four principal vertical markets. For each of the last
three years, revenues in each of these markets, as a percentage of our total
revenues, were as follows:
<TABLE>
<S> <C> <C> <C>
1997 1998 1999
---- ---- ----
Manufacturing............................... 22% 32% 35%
Healthcare.................................. 45% 30% 27%
Hospitality................................. 24% 26% 26%
Construction................................ 8% 8% 7%
Other....................................... 1% 4% 5%
---- ---- ----
Total................ 100% 100% 100%
==== ==== ====
</TABLE>
As a result of the acquisitions we completed from January 1993 to March
1996, our customer base is in various stages of transition to products utilizing
our Aremis architecture. Each of our legacy products was originally acquired as
part of an acquisition and subsequently rejuvenated. In the rejuvenation
process, a legacy product is enhanced by incorporating the then current features
of the Aremis architecture appropriate for that product. New customers in each
of our target markets are sold rejuvenated products and updated versions of
products, while existing customers of the acquired businesses are encouraged to
transition to the rejuvenated product line at their own pace. As a result, the
products we sell and support consist of:
o legacy products of acquired businesses that have not been rejuvenated,
o legacy products of acquired businesses that have been
rejuvenated and incorporate features of our Aremis architecture,
and
o new products that incorporate all or a substantial portion of the
features of our Aremis architecture.
We currently sell and support products in each of the following
vertical markets: manufacturing, healthcare, hospitality and construction.
Manufacturing Products
[graphic omitted]
<PAGE>7
Aremis Enterprise is a fully-integrated enterprise-wide management and
control system which provides full enterprise resource planning capabilities and
broad functionality and is compatible with larger enterprise resource planning
systems. Aremis Enterprise consists of nine main application modules and
incorporates features of our Aremis architecture.
MTMS, which operates on UNIX or Windows platforms, is compatible with
larger enterprise resource planning systems. MTMS was acquired in connection
with our acquisition of BEC Group Limited and was subsequently rejuvenated. The
rejuvenated version of MTMS contains the same application modules and programs
as Aremis Enterprise but does not incorporate all features of our Aremis
architecture.
License fees for the Aremis Enterprise and MTMS products range from
approximately $50,000 to $500,000 depending upon the size of a customer and
number of application modules utilized.
The following table describes the main application modules and the
primary customer benefits of Aremis Enterprise and the rejuvenated MTMS
products:
Application Modules Primary Customer Benefits
- - --------------------------------- ----------------------------------
Manufacturing Data Management o Enables the creation of,
and access to, parts details
bills of material, process
routes and any other
resources fundamental to the
control of the manufacturing
process
Production Planning o Assists in the control of
daily targets with inventory
and labor entries
Production Control o Facilitates ordering and
controlling work in progress
Inventory and Stores o Defines and controls
inventory requirements,
records unplanned inventory
movements, tracks inventory
in all stages of the
manufacturing process and
generates product forecasts
Purchasing o Integrates purchase orders,
material requirements
planning, quality control and
purchase invoice validation
Sales o Provides several methods of
entering purchase orders
System Software o Provides the framework upon
which the MTMS customer
implementation is built and
maintained; includes modules
to parameterize system
functions, set defaults and
provide options for creating
and maintaining basic system
data
Quality Control o Enables management of quality
control of raw materials and
finished products
Environment o Contains the control
mechanism to support a range
of database facilities
Healthcare Products
[graphic omitted]
<PAGE>8
Global Clinical System for Windows, commonly referred to as GCS for
Windows, is a navigation system for managing the medical and administrative
tasks that are routinely encountered by physicians, physician groups and
community hospitals. It utilizes many features of our Aremis architecture,
incorporating object-oriented and touch screen technologies. GCS for Windows
consists of nine main application modules.
AMSyS is a DOS-based clinical system we acquired in connection with our
acquisition of Advanced Medical Systems Limited that we subsequently
rejuvenated. The rejuvenated version of AMSyS incorporates primarily the same
application modules as GCS for Windows but in a non-Windows format and operates
alone or in a PC/local area network environment.
Genisyst is a product we acquired in connection with our acquisition of
Genisyst Limited. The rejuvenated version of Genisyst incorporates functionality
similar to GCS for Windows and provides a nondisruptive transition for customers
to GCS for Windows.
License fees for our GCS products range from approximately $20,000 for
single users to $150,000 for multiple user systems, depending upon the number of
application modules utilized. License fees for our other rejuvenated products
vary depending on the product but are generally lower than GCS license fees.
The following table describes the main application modules and their
primary customer benefit of GCS for Windows:
Application Modules Primary Customer Benefits
- - ---------------------------- ---------------------------------------
Administration Manager o Contains all basic patient record
information including name, age,
gender and address
Consultation Manager o Delivers an electronic
patient record to the clinician's
desktop, providing the user with
the significant medical history of
the patient, consultation history,
test results and tests due
Prescription Manager o Provides access to the user's 40
most commonly prescribed drugs, as
well as information on generic
types, preferred drugs, packaging
and costs
Appointment Manager o Creates an appointment
calendar for multiple physicians
across various specialties, tracks
patient visits, prints details and
produces statistical reports for
physicians
Reporting o Generates reports specific to a
practice or health authority, based
on a number of factors including
age, gender and patient profile
Training o Provides state-of-the-art training
techniques from the user's screen
Communications o Enables a facility
to link its system to the NHS
intranet, the local hospital and
the health authority
Word Processing o Allows users to incorporate data
from other modules into letters and
referrals
Dispensing o Facilitates the issuance of drugs
and prescriptions
<PAGE>9
Hospitality Products
[graphic omitted]
Aremis 4.0 Property Management System, commonly referred to as Aremis
4.0 PMS, is a comprehensive client/server hotel property management system that
can be dynamically configured to match a customer's business model. Aremis 4.0
PMS consists of eight main application modules that offer a wide range of
functions for both the front and back office operations in a hotel and
incorporates features of our Aremis architecture. Aremis 4.0 PMS is scalable to
accommodate hotels with more than 500 rooms.
IGS Hotel is a product we acquired in connection with our acquisition
of IGS Leisure Technology Limited. IGS Hotel operates in a DOS format and offers
a wide range of functions for both the front and back office operations in a
hotel. The rejuvenated version of IGS Hotel contains primarily the same
application modules as Aremis 4.0 PMS but does not incorporate all features of
our Aremis architecture.
License fees for IGS Hotel and Aremis 4.0 PMS range from approximately
$11,000 to $1.0 million, depending on the size of a customer and number of
application modules utilized.
The following table describes the main application modules and the
primary customer benefits of Aremis 4.0 PMS and the rejuvenated version of IGS
Hotel:
Application Modules Primary Customer Benefits
- - --------------------------- ----------------------------------
Front Office o Assists hotels in managing
its front office operations
from reservations through
check out
Central Reservations o Provides hotel chains with a
central reservations facility
for each hotel within the
chain
Data Warehousing o Provides a central
information database for
hotel chains and an executive
information system for
management
History & Marketing o Provides hotels with key
profile information on guests
and prospects
Conferencing & Banqueting o Assists hotels in organizing
events and facilitates the
reservation process,
consolidating billing
statements and maintaining
detailed information on
guests and events
Point of Sale (Restaurant & Bar) o Provides automatic and direct
settlement of restaurant and
bar charges onto the
appropriate account;
advanced inventory module
also controls all aspects of
the catering process
<PAGE>10
Application Modules Primary Customer Benefits
- - --------------------------- ----------------------------------
Interfaces o Offers interfaces to a
number of high quality
third-party hardware and
software systems including
room access control systems,
telephone systems, television
systems, mini-bar systems and
in-room fax facilities
AccountMaster o Provides hotels with a
comprehensive range of
management accounting and
reporting software designed
specifically for the
hospitality industry
Construction Products
[graphic omitted]
ViXEN Windows is a fully-integrated Windows-based management and
control system designed specifically for contracting companies across a variety
of industries. It consists of 13 main application modules and incorporates many
features of our Aremis architecture.
ViXEN Plus & ODBC operates on a UNIX platform. The product was acquired
in connection with our acquisition of Briter Computer Systems Limited and was
subsequently rejuvenated. ViXEN Plus & ODBC operates in a multi-user environment
and contains the same application modules as ViXEN Windows but does not
incorporate all features of our Aremis architecture.
License fees for a ViXEN contracting system range from approximately
$80,000 to $500,000 depending on the size of a customer and number of
application modules utilized.
The following table describes the main application modules and the
primary customer benefits of ViXEN Windows and ViXEN Plus:
Application Modules Primary Customer Benefits
- - --------------------------- ----------------------------------
Services and Maintenance o Controls various tasks related to
servicing and maintaining
equipment and facilities,
allowing users to record and
manage numerous customer address
and plant equipment parameters
Job Costing o Records and analyzes costs of
each job; serves as the hub of
the ViXEN contracting system
Purchase Orders o Produces printed orders,
calculates prices and discounts
automatically and records the
value of outstanding orders as
part of work in progress
Estimating o Calculates a quote based on
changes in labor rates, overhead,
task factors, wastage,
allowances, increased cost
percentages and desired profit
margin and performs sensitivity
analysis
<PAGE>11
Application Modules Primary Customer Benefits
- - ---------------------------------- ----------------------------------
Inventory Control o Maintains control of
inventory changes by providing
detailed information on inventory
levels, goods ordered from
suppliers and incoming and
outgoing transactions
Price File Database o Provides instant
access to current prices on
frequently used products for a
variety of purposes, including
estimating, material
requisitions, purchase orders,
inventory control and small works
invoicing
Client Reconciliation o Assists in the recording,
reconciling and accounting for
interim applications, client
certificates, deferred
value-added taxes and discounts
and retentions on contracts
Subcontractor Reconciliation o Provides the same
functionality for subcontractors
as Client Reconciliation
provides for contractors
Sales Ledger o Automatically posts invoices
through the Job Costing module
and performs sales analyses
Purchase Ledger o Logs invoices, validate
input data, specify payment
options, makes automatic payments
and produces invoices and checks
Nominal Ledger o Provides extensive reporting
modules in a variety of formats
based on a user-defined structure
Payroll o Processes the wage and salary
payments of various types of
employees
System Management o Embraces a range of necessary
features, integrating other ViXEN
modules in a UNIX environment
Customers
We primarily focus on mid-sized organizations within the manufacturing,
healthcare, hospitality and construction industries worldwide. As of March 14,
2000, we had licensed software products to over 6,000 customers in over twenty
countries. No one customer accounted for more than 10% of our total revenues in
1999. The following is a representative list of companies in our targeted
markets:
<TABLE>
<S> <C> <C> <C>
Manufacturing Healthcare Hospitality Construction
--------------------------- ----------------------- -------------------------- ----------------------------
ABB Kent Joy BHB Hospital Trust Bass (Toby Inns) CWS Engineering
Services
Alcan Aluminum Birmingham Multifund Cliveden East Midlands Electricity
British Aerospace Blackburn National Forte Limited London Electricity
Health Trust
Fernz Corporation Dudley Multifund Friendly Hotels Midlands Electricity
Nabisco Biscuit Co. Durham Multifund Jarvis Hotels NG Bailey & Co.
Rotork Controls Kingston & Richmond Jurys Hotel Group Norweb Contracting
Spartan Electronics Lambeth & Lewisham Millennium & Copthorne ROMEC
Hotels
Telefon AB LM Ericsson Potteries Healthcare Regal Hotel Group Southern Electric
Tomkins Group South Wales GP Group Thistle Hotels Southwestern Electricity
Watts Industries Europe Southampton Multifund Whitbread (Travel Inn) Yorkshire Electricity
</TABLE>
<PAGE>12
Sales and Marketing
We market our products primarily through a direct sales force organized
around our target markets which enables us to address the specialized needs of
our customers in each of these markets. In the manufacturing and hospitality
industries, we also rely, to a limited extent, on value added resellers to sell
our products.
We have adopted a tailored sales and marketing strategy to develop
demand for our products by creating visibility for us and awareness of our
products. This strategy includes advertisements in leading trade publications,
participation in trade shows and sponsorship of user groups. In addition, we
have developed corporate sales and marketing materials as well as general
financial and technical materials that we distribute to each of our subsidiaries
for inclusion in their sales materials as well as make available on our web
site, thereby promoting a consistent portrayal of our image and products.
The sales cycles for our products vary across each target market
typically ranging from one to 12 months. The average sales cycle for our
manufacturing products is three to nine months, healthcare is one to three
months, hospitality is three to six months, and construction is six to 12
months. The sales cycle depends on many factors, including the size of
customer's organization, the number of individuals involved in the purchasing
decision, whether a potential customer has retained a consultant to assist in a
purchasing decision, the status of a customer's implementation of a hardware
system and the degree of implementation, consulting and training required.
Product Development
Since our inception, we have made substantial investments in research
and development. We are continually designing and developing new generations of
software applications to provide improved performance and enhanced functions
utilizing the most recent proven technology.
We maintain research and development centers in both the United Kingdom
and India. Our operation in the United Kingdom concentrates primarily on new
product design and prototyping using our Aremis architecture. Our software
engineering research division also evaluates and develops new technologies and
methodologies for the future benefit of our broad range of products. These
include hand held, imaging, Internet/intranet, voice activation, touchscreen and
multimedia technologies. Coding, integration and testing are performed at our
software development and support facilities in India, where employees are
divided into teams for each target market. Our teams in India also focus on
incorporating enhancements and error corrections to existing products.
Use of the software development and support facilities in India
provides us with access to highly skilled software engineers. In contrast, the
available pool of appropriately skilled software professionals in Europe and the
United States is limited. In addition, the cost of recruiting and training
software developers in C++ and Java is substantially greater in Europe and North
America. We believe our facilities in India provide us with a significant
advantage over our competitors in Western Europe and the United States, even
with the additional communications and management overhead associated with
remote development.
Customer Service and Support
We provide service and support to our customers to promote rapid and
efficient implementation. Our service and support offerings include:
Installations and Training. Installations are planned and overseen by
specialized project managers in accordance with customer requirements and
pre-installation consultation is provided when necessary. We offer a
fully-integrated training program to support customer implementation of our
products to help ensure successful installations.
<PAGE>13
Customer Support. In addition to local support provided on a daily
basis, we provide a high level of customer support through our software
development and support facilities in India. Support and product information are
also provided through our web page. In addition, through user groups in the
United Kingdom and North America, we seek feedback to enhance the support and
development of our products as well as our brand.
Business Review Services. We provide a business review service to
ensure that our customer organizations recognize and respond to market trends.
These reviews assess the factors influencing the performance of a customer's
business with respect to the management of required information services. As
part of the service, we produce a comprehensive report containing
recommendations for improvement and the related costs and benefits.
Proprietary Rights and Licensing
Our success is dependent upon our proprietary technology and other
intellectual property. We have submitted an application for federal registration
of the AremisSoft tradename, trademark and logo with the United States Patent
and Trademark Office. We have not registered any copyrights nor have we received
or applied for any patents for our products, technology or other intellectual
property. We rely primarily on the protection provided by applicable copyright,
trademark and trade secret laws, as well as confidentiality procedures and
licensing arrangements, to establish and protect our rights to our software. We
also enter into confidentiality agreements with some employees, distributors and
customers and limit access to and distribution of the source codes for our
products and other proprietary technology.
We enter into license arrangements that provide for the nonexclusive
license of our software. These license agreements generally allow the use of our
software solely by the customer for internal purposes without the right to
sublicense or transfer the software to third parties. These licenses generally
are perpetual, but subject to termination for breach or on notice, and contain
confidentiality and nondisclosure provisions, a limited warranty covering the
software, and indemnification for the customer from any infringement action
related to the software.
Competition
The enterprise-wide software applications market, including the market
for client/server-based systems, is intensely competitive and rapidly changing.
The competition that we encounter varies across and within each vertical market
depending upon, among other things, the customer's size and specific system
requirements. There are many factors that affect competition in the software
applications market, including a vendor's responsiveness to customer needs and
the quality of customer support as well as a product's architecture,
functionality, speed of implementation, ease of integration, performance,
features, reliability, breadth of distribution and price. Although some factors
are applicable to each vertical market, others are unique to specific markets or
take on greater relative importance.
In the manufacturing industry, the principal factors include the ease
of implementation of a product and its functions, customer service, training and
price. Our main competitors in the manufacturing industry include:
o Epicor o QAD
o Fourth Shift o Symix
o Glovia
<PAGE>14
In the healthcare industry in the United Kingdom, the principal factors
affecting competition are the ability to produce applications to market in
relatively short periods of time, compliance with the requirements of primary
care groups, compliance with the National Health Service specifications, access
to reliable software support, system implementation and maintenance costs. Our
main competitors in the healthcare industry include:
o EMIS o Microtest Europe
o Exeter Systems o PCTI Solutions
o GPASS o Seetec
o In Practice o Torex
o Medical Care Systems
In the hospitality industry, the principal factors include the
functionality of the product, the ease of implementation, the return on the
customer's investment, customer service, training and price. Our main
competitors in the hospitality industry in the United Kingdom and Europe are
Innsite and MICROS Systems.
In the construction industry, the principal factors include the ability
to collect marketing data, produce accurate invoicing, profit control and
purchasing information, as well as price. Our main competitors in the
construction industry are:
o Database o FCG Computer Systems
o Estimation o Misys
Healthcare Regulations
The healthcare industry in the United Kingdom is regulated by the
National Health Service, commonly referred to as the NHS, a government agency.
Health authorities ensure that the healthcare services provided meet the needs
of residents in their designated areas.
Our healthcare products sold in the United Kingdom are regulated by the
NHS through an accreditation process. The requirements for accreditation ensure
that computer systems provide consistent core functions and conform to NHS
standards.
A new Information Management and Technology Strategy is expected to be
published by the NHS. The strategy will set the information technology standards
for the future including specifications for primary care groups. The purpose of
the strategy is to ensure that all primary care groups have in place an
auditable clinical system with the ability to provide management information.
Primary care groups are groups of physicians who combine practices to manage a
budget for staff, provide hospital referrals, drug costs, community nursing
services and management costs. The NHS recently recommended that major
investments in information technology systems to support primary care groups
should not be made before the strategy is published. As a result, we anticipate
that we will continue to experience delays in customer purchases of our
healthcare products pending such publication.
The strategy is expected to be the basis for drafting an updated
requirements for accreditation. In the future, the NHS is expected to only
reimburse primary care groups for purchases of information technology systems
that meet its accreditation criteria.
Employees
As of December 31, 1999, we had 535 full-time employees. Of these
employees, 241 are based in our offices in the United Kingdom, 115 are based in
our software development and support facility in New Delhi, India and 97
employees are based in our software and development facility in Bangalore,
India. The remaining 82 employees are in various facilities in other locations.
<PAGE>15
None of our employees is represented by any collective bargaining agreements and
we have never experienced a work stoppage. We consider our relationship with our
employees to be good and we have not experienced any interruptions of operations
due to labor disagreements.
All of our employees in India are full-time employees. We do not employ
contractors or fixed term temporary personnel in India. In order to retain key
personnel, we operate a number of incentive programs, including subsidized
housing, car allowances, and overseas allowances and bonuses for employees
working on special projects. Currently, we utilize a three-shift system at our
facilities in India, thereby allowing us to ensure key projects are delivered on
time and to specification and facilitating customer access to our software
staff.
Risk Factors
In addition to other information in this report, the following risk factors
should be considered in evaluating our business and us.
We have a history of losses and we could suffer losses in the future.
Until the second half of 1997, we incurred substantial losses. Our losses
were $1.6 million for 1997 and $15.3 million for 1996. As of December 31, 1999,
we had an accumulated deficit of $18.9 million. Although we have operated
profitability since the third quarter of 1997, we cannot assure you that we will
sustain profitability on a quarterly or annual basis in the future. We expect to
continue to incur increasing cost of revenues, research and development, sales
and marketing and general and administrative expenses. If we are to continue to
sustain profitability given our planned expenditure levels, we will need to
generate and sustain increased revenues.
Our quarterly operating results may fluctuate causing volatility, or
decline in the market price of our common stock.
Our revenues, gross margins and other operating results have fluctuated
significantly in the past and may vary significantly from quarter to quarter.
These fluctuations may be due to a number of factors, many of which are beyond
our control. These factors include (i) the relatively long sales cycles for our
products, (ii) the size and timing of our licensing transactions, (iii) the
timing of release, proper operation and market acceptance of our rejuvenated
products, product enhancements or new products, (iv) changes in the budget
cycles of our customers, (v) seasonality of our customers' technology purchases,
and (vi) foreign currency exchange rates.
The timing of our revenue recognition can be affected by many factors,
including the timing of a contract's execution and delivery, a customer's
acceptance and our post-delivery obligations with respect to the installation
and implementation of our products. As a result, the time between contract
execution and the satisfaction of the criteria necessary for revenue recognition
can be lengthy and unpredictable and, consequently, may affect our revenues. As
a result, it is possible that in some future quarters our results of operations
may fall below the expectations of some securities analysts and investors. In
that event, the trading price of our stock may likely be materially and
adversely affected.
We may acquire other companies' products, technologies or businesses that
could be difficult to integrate, disrupt our business and dilute stockholder
value.
As part of our strategy, we expect to continue to pursue acquisitions
of other businesses, products and technologies. In connection with an
acquisition, we may pay cash, issue stock or incur debt. Our stockholders will
be diluted if we finance acquisitions by incurring convertible debt or issuing
equity securities. In addition, we may be required to incur expenses related to
goodwill and other intangible asset amortization.
<PAGE>16
Acquisitions of companies and businesses also involve numerous other
risks, including (i) difficulties in the assimilation of the operations,
technologies, (ii) products and personnel of the acquired business, (iii)
diversion of our management's attention from other business concerns, (iv) risks
of entering markets in which we have no or limited direct experience, and (v)
the potential loss of key employees of the acquired business.
From 1993 through 1996, we acquired eleven companies with aggregate
annual revenues in the last fiscal year prior to acquisition of approximately
$24.2 million and we recently acquired e-nnovations.com which had revenues of
approximately $3.1 million in 1999. Our acquisition strategy is focused on
acquisitions that are potentially larger in scope and size than any of our
previous acquisitions and we cannot assure you that we will successfully
integrate an acquisition of this size into our operations. Although we currently
have no agreement, understanding or arrangement with respect to any future
acquisitions, we continually evaluate acquisition opportunities. Any future
acquisition may also disrupt our ongoing business, divert the attention of our
management and employees from day to day operations and increase our operating
expenses.
Failure to manage our growth may seriously harm our ability to deliver
products in a timely manner, fulfill existing customer commitments and attract
and retain new customers.
We have grown rapidly in the last five years, with total revenues
increasing from $21.4 million in 1995 to $73.4 million in 1999. Our growth has
placed a significant strain on our management, operations and financial
resources. Our recent expansion has resulted in substantial growth in the number
of our employees, the scope of our operating and financial reporting systems and
the geographic area of our operations. This growth has placed, and will continue
to place, a significant strain on our managerial, operational and financial
resources. Accordingly, our future operating results will depend on our ability
to continue to implement and improve our operational and customer support
systems and to expand, train and manage our employee base. We cannot assure you
that we will be able to manage our expansion successfully, and our inability to
do so may seriously harm our ability to deliver products in a timely manner,
fulfill existing customer commitments and attract and retain new customers.
We must successfully develop new products and keep pace with rapid
technological change to remain competitive.
The market for our products is characterized by rapid technological
changes, evolving industry standards in computer hardware and software
technology, changes in customer requirements and frequent new product
introductions and enhancements. Our future success will depend upon our ability
to continue to enhance our current product line and to develop and introduce new
products that keep pace with technological developments, satisfy increasingly
sophisticated customer requirements and achieve market acceptance. We cannot
assure you that we will be successful in developing and marketing, on a timely
and cost-effective basis, fully functional product enhancements or new products
that respond to technological advances by others. We can also not assure you
that our new or enhanced products will achieve market acceptance. Our customers
utilize a wide variety of hardware, software, database and networking platforms.
As a result, we must continue to support and maintain our products on a variety
of these platforms. In particular, we must continue to anticipate and respond
adequately to advances in other software and desktop computer operating systems
like Microsoft Windows.
We may not succeed in penetrating the e-business and application service
provider markets.
We may not have the resources, skills and product offerings that will
be required to successfully penetrate the e-business and application service
provider markets. To succeed in these markets, we must continue to (i) develop
expertise in marketing and selling Internet-based applications and services,
(ii) develop and cultivate new sales channels to market our applications to
prospective customers, and (iii) hire, train and integrate new technical and
sales personnel.
<PAGE>17
The e-business and application service provider markets that we may
attempt to penetrate may not become substantial commercial markets for our
applications or may not evolve in a manner that will enable our applications to
achieve broad market acceptance.
Undetected errors may increase our costs and impair the market acceptance
of our products and technology.
Our products and technology have occasionally contained, and may in the
future contain, undetected errors when first introduced or when new versions are
released. Our customers integrate our products and technology into systems and
products that they develop themselves or acquire from other vendors. As a
result, when problems occur in equipment or a system into which our products or
technology have been incorporated, it may be difficult to identify their cause.
Regardless of the source of these errors, we must divert the attention of our
engineering personnel from our research and development efforts to address the
errors. We cannot assure you that we will not incur warranty or repair costs, be
subject to liability claims for damages related to product errors or experience
delays as a result of these errors In the future. Any insurance policies that we
have may not provide sufficient protection should a claim be asserted. Moreover,
the occurrence of errors, whether caused by our products or technology or the
products of another vendor, may result in significant customer relations
problems and injury to our reputation and may impair the market acceptance of
our products and technology.
We may be subject to product liability claims from product defects, which
may harm our operating results.
If our products malfunction or suffer from design defects, we may also
be subject to product liability claims. Our license agreements with our
customers typically contain provisions designed to limit our exposure to
liabilities arising from product liability claims. We also maintain errors and
omissions liability insurance in the amount of $6.0 million for damages as a
result of product defects or errors. However, we cannot assure you that the
provisions in our license agreements limiting our liability will be enforceable
under international, federal, state or local laws and judicial decisions or that
our insurance coverage will be sufficient to cover all losses resulting from
product defects or errors. To the extent our insurance is insufficient to cover
any losses we may incur, our operating results will suffer.
Competition in the markets for our products and technology is intense. We
may not be able to compete effectively in these markets and we may lose market
share to our competitors.
The markets for our enterprise-wide software applications are intensely
competitive and we expect competition to intensify in the future. We may not be
able to compete effectively in these markets and we may lose market share to our
competitors. Our principal competitors for products sold to customers in the
manufacturing industry include Epicor, Fourth Shift, QAD and Symix. We also
believe that large enterprise software vendors, like Baan, Oracle, PeopleSoft
and SAP, are increasing their marketing efforts to mid-sized organizations in
the manufacturing industry. In the healthcare industry, our principal
competitors include EMIS, GPASS, In Practice and TOREX. In the hospitality
industry, our principal competitors are Innsite and MICROS Systems. In the
construction industry, our competitors include Database, Estimation and FCG
Computer Systems. In addition, we face indirect competition from suppliers of
customized enterprise-wide software applications with highly customized software
and from the internal information technology departments of large organizations
who develop their own systems.
Many of our competitors have greater resources than we do. This may limit
our ability to compete effectively and may discourage customers from purchasing
our products.
Many of our competitors have greater financial, personnel and other
resources than we do, which may limit our ability to compete effectively. These
competitors may be able to respond more quickly to new or emerging technologies
or changes in customer requirements. These competitors may also (i) benefit from
greater economies of scale, (ii) benefit from longer operating histories and
name recognition, (iii) offer more aggressive pricing, and (iv) devote greater
<PAGE>18
resources to the promotion of their products. Any of these advantages may
discourage customers from purchasing our products. If we are unable to compete
successfully against our existing or potential competitors, our revenues and
margins will decline.
We face a risk from increased competition as a result of acquisitions of
competitors by large software companies.
We believe the fragmented nature of the enterprise-wide software
applications market will result in future acquisitions of competitors by large
software companies or strategic alliances, which will lead to significant
consolidation in our industry. As a result, we may face an increase in
competition from larger companies and new entrants to the industry which could
harm our business and cause our stock price to decline.
Our ability to acquire complementary businesses and products may be harmed
by the increasing consolidation in our markets.
Increasing consolidation in our markets may require us to compete with
other software companies for strategic acquisition opportunities. We have
acquired complementary businesses and products in the past and we expect to
continue to pursue similar opportunities in the future. As competition in our
markets has increased, a number of our competitors have been acquired or have
entered into strategic alliances. A continuation of this trend may require us to
compete with other software companies for attractive acquisition opportunities
and may lead to fewer opportunities and increased acquisition costs which will
harm our acquisition strategy.
Our lengthy sales and implementation cycles may cause fluctuations in our
operating results, which could cause our stock price to decline.
Sales of our products require an extensive marketing effort because
decisions to purchase these products generally involve the evaluation of the
product by a significant number of a potential customer's personnel in various
functional and geographic areas. Our products are generally used for division-
or enterprise-wide purposes and involve significant capital outlays by customers
and relatively complex installations. Potential customers generally commit
significant resources to evaluate available enterprise-wide software
applications and require us to provide a significant level of education about
the use and benefits of our products. As a result, our sales cycle averages
between one and 12 months from initial contact to execution of a license
agreement. Our ability to forecast the timing and amount of specific sales is
limited, and the delay or failure to complete one or more large license
transactions could cause our operating results to fall below the expectations of
securities analysts and investors and cause our stock price to decline.
We are dependence on our key personnel, particularly Dr. Lycourgos K.
Kyprianou, our founder and chief executive officer. Any loss of the services of
our key personnel would harm our business.
Our future success depends to a large extent on the continued services
of our senior management and key personnel. In particular, we are highly
dependent on the services of Dr. Lycourgos K. Kyprianou, our founder and chief
executive officer. If we were to lose the services of Dr. Kyprianou or other key
personnel, our ability to manage operations and generate revenues would be
harmed.
Our failure to retain and attract qualified personnel could harm our
business.
Our products require sophisticated research and development, sales and
marketing, and technical customer support. Our success depends on our ability to
attract, train and retain qualified personnel in each of these areas.
Competition for personnel in all of these areas is intense and we may not be
able to hire sufficient personnel to achieve our goals or support the
anticipated growth in our business. The market for the highly-trained personnel
we require is very competitive, due to the limited number of people available
<PAGE>19
with the necessary technical skills and understanding of our products and
technology. If we fail to attract and retain qualified personnel, our business
will suffer.
Our limited ability to protect our intellectual property and proprietary
rights may harm our competitiveness.
Our success is substantially dependent upon the protection of our
internally developed technology, including our Aremis architecture. Our
profitability could suffer if third parties infringe upon our intellectual
property rights or misappropriate our technology and other assets. To protect
our rights to our intellectual property, we rely on the protection provided by
applicable copyright, trademark and trade secret laws, confidentiality
procedures and licensing arrangements to establish and protect our proprietary
rights. We have a trademark application pending, but do not currently hold any
patents or registered copyrights. Despite our efforts, it may be possible for
unauthorized third parties to copy portions of our products or reverse engineer
or obtain and use information that we regard as proprietary. Policing
unauthorized use of our software is difficult and, while we are unable to
determine the extent to which piracy of our products exists, software piracy can
be expected to be a problem. In addition, the laws of some countries, including
India and the United Kingdom, do not protect our proprietary rights to the same
extent as do the laws of the United States. Any failure by us to protect our
intellectual property could result in competitors offering products
incorporating the same or similar technology which could reduce demand for our
products. Further, litigation to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others could result in substantial costs and diversion of
resources.
Our products may infringe on the intellectual property rights of others,
which could increase our costs and negatively affect our profitability.
We expect that enterprise-wide software applications will increasingly
be subject to claims of infringement relating to software codes as the number of
products and competitors in our industry segment grows and the functionality of
products overlaps. We do not currently have liability insurance to protect
against the risk of third party intellectual property infringement claims. Any
claim, with or without merit and whether or not insured against, could be
time-consuming, result in costly litigation and require us to enter into royalty
and licensing agreements. These royalty or licensing agreements, if required,
might not be available on terms that are acceptable to us. An infringement
claim, even if not meritorious, could result in the expenditure of significant
resources and could negatively affect our profitability.
We occasionally enter into fixed price service contracts, which may lead to
lower margins and harm our operating results.
We offer a combination of enterprise-wide software applications,
implementation and support services to our customers. We have, from time to
time, entered into fixed-price service contracts that require us to provide
support services for a fixed price regardless of our actual costs incurred in
fulfilling our support service obligations. Revenues attributable to fixed-price
service contracts were approximately 11% of our total revenues for 1997,
approximately 11% of our total revenues for 1998 and approximately 14% of our
total revenues for 1999. Our inability to successfully complete these contracts,
as budgeted, could lead to lower operating margins and reduced revenues and
profits.
Our results of operations may be adversely impacted by currency
fluctuations.
We currently have operations in Argentina, Bulgaria, Germany, India,
Ireland, Mexico, the United Kingdom and the United States and independent
distributors in 14 additional countries. A significant portion of our revenues
is received in currencies other than the United States dollar, primarily in the
British pound. We also anticipate receiving substantial future payments in
Bulgarian Leva relating to our work with the Bulgarian National Health Insurance
Fund and other customers in Bulgaria. Because our financial statements are
reported in United States dollars, fluctuations of the British pound and other
<PAGE>20
currencies against the United States dollar have caused, and will continue to
cause, us to recognize foreign currency transaction gains or losses, which may
be material to our operations and impact our reported financial condition and
results of operations.
We face risks associated with doing business in international markets.
Our principal executive offices are located in the United Kingdom.
Revenues from our operations outside of the United States accounted for
approximately 97% of our total revenues in 1999. We expect that a significant
portion of revenues for the foreseeable future will be derived outside the
United States. We are subject to risks inherent in international business
activities, including (i) difficulties in collecting accounts receivable and
longer collection periods, (ii) changing and conflicting regulatory
requirements, (iii) potentially adverse tax consequences, (iv) tariffs and
general export restrictions, (v) difficulties in staffing and managing foreign
operations, (vi) political instability, (vii) reduced protection for
intellectual property rights in some countries, and (viii) fluctuations in
currency exchange rates.
The tax benefits that we currently receive in India may be lost if we fail
to satisfy specified conditions.
We maintain development and support facilities in New Delhi and
Bangalore, India. As of March 14, 2000, we had approximately 40% of our
workforce in India. As a means of encouraging foreign investment, the Indian
government provides tax incentives and exemptions from regulatory restrictions.
Among the benefits that directly affect us are tax holidays (temporary
exemptions from taxation on operating income) and liberalized import and export
duties. The current tax holiday to which we are entitled expires in March 2001.
To be eligible for these tax benefits, we must continue to meet specified
conditions including continuing to operate in a qualified software technology
park and exporting sales of at least 75% of our inventory turnover. Our failure
to meet these conditions could result in cancellation of the benefits or a
requirement to pay damages in an amount as later determined by the Indian
government and customs duty on plant, machinery, equipment, raw materials,
components and consumables. In addition, goods, raw materials and components for
production imported by our offices in India are generally exempt from the levy
of a customs duty. These tax benefits could be discontinued or modified in the
future which could significantly harm our operations in India.
Our operating results may be harmed by changing conditions in India.
Although wage costs in India are significantly lower than in the United
States, the United Kingdom and similar markets for comparably skilled software
engineering and other technical personnel, wages in India are increasing at a
faster rate than in the United States and the United Kingdom. In the past, India
has experienced significant inflation and shortages of foreign exchange, and has
been subject to civil unrest and acts of terrorism. Although the effect of
inflation on our financial statements for the periods discussed in this report
has been insignificant, increases in inflation in the future or changes in
interest rates, taxation or other social, political, economic or diplomatic
developments could harm our operating results.
Our products for the healthcare industry are subject to government
regulations and specifications that can be difficult to satisfy. Our efforts to
satisfy these regulations and specifications may cause the prices of our
products to increase substantially, which may adversely affect sales.
Our products designed for the healthcare industry in the United Kingdom are
regulated by the National Health Service, a governmental agency commonly
referred to as the NHS, through a product accreditation procedure. While our
healthcare products currently meet NHS specifications for information systems,
these requirements are expected to be updated pursuant to the NHS' new
Information Management and Technology Strategy. The new mandatory specifications
are expected to require that all information technology systems in the United
Kingdom's healthcare marketplace conform with one another. Although we are
currently modifying our healthcare industry products in anticipation of the
proposed specifications, we may not meet all of these specifications or, if we
<PAGE>21
meet them, our related costs may be substantial and make the cost of our
healthcare products prohibitive for our customers. In addition, we have
experienced and expect to continue to experience a decrease in purchases of our
existing healthcare products as organizations in the healthcare industry in the
United Kingdom postpone purchases pending release of final regulations and
specifications. These regulations and specifications, as well as future changes
to NHS specifications for information systems, could harm our revenues from
healthcare related products.
It may be difficult to enforce a U.S. judgment against us, our officers and
directors and some of the experts named in this report, or to assert U.S.
securities laws claims in the United Kingdom and to serve process on
substantially all of our officers and directors and these experts.
A majority of our directors, all of our executive officers and some of the
experts named in this report are nonresidents of the United States. A
substantial portion of our assets and all or a substantial portion of the assets
of these officers and experts are located outside of the United States. As a
result, it may be difficult to effect service of process within the United
States with respect to matters arising under the United States securities laws
or to enforce, in United States courts, judgments predicated upon civil
liability under U.S. securities laws. It also may be difficult to enforce in the
United Kingdom, in original actions or in actions for enforcement of judgments
of U.S. courts, civil liabilities predicated upon U.S. securities laws.
Dr. Kyprianou owns a large percentage of our voting stock and has
significant influence over matters requiring shareholder approval, which could
delay or prevent a change of control.
As of March 14, 2000, Dr. Kyprianou will beneficially own approximately
47.5% of the outstanding common stock. In connection with the private placement
with Info-quest, an information technology company listed on the Athens Stock
Exchange, Dr. Kyprianou and Info-quest entered into a voting agreement. As a
result of the voting agreement, Dr. Kyprianou's beneficial ownership includes
shares held by Info-quest. The voting agreement requires Dr. Kyprianou to vote
his shares to elect board representatives of Info-quest and Info-quest is
similarly required to vote its shares for the board representatives nominated by
our board of directors. In addition, the agreement provides that each of Dr.
Kyprianou and Info-quest vote their shares by mutual agreement on all other
matters. As a result, these stockholders may, as a practical matter, be able to
substantially influence all matters requiring stockholder approval which could
delay or prevent a change of control.
Our common stock price has been volatile in the past and may be volatile in
the future.
The market price of our common stock is highly volatile and may be subject
to significant fluctuations in response to actual or anticipated variations in
quarterly operating results and other factors. From the time of our initial
public offering through March 14, 2000, the closing price of our common stock
reported on the Nasdaq National market has ranged from $3 ? to $46 ? per share.
In addition, the stock market in general, and the market for technology related
stocks in particular, has experienced extreme volatility that often has been
unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance.
Provisions of our corporate documents and Delaware law could deter
takeovers which may prevent you from receiving a premium for your shares.
Provisions of our certificate of incorporation, bylaws and Delaware law
could delay, defer or prevent a change in our control. Our board of directors
has the authority to issue up to 15,000,000 shares of preferred stock and to fix
the rights, preferences, privileges and restrictions of those shares, including
voting rights, without any further vote or action by the stockholders. The
rights of our common stockholders could be adversely affected by the rights of
preferred stockholders in the future. In addition, we are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which prohibits us from engaging in a "business combination" with an "interested
<PAGE>22
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner under Delaware law. The ability
of our board of directors to issue shares of preferred stock without further
stockholder approval, as well as the anti-takeover provisions of Delaware law,
could have the effect of delaying, deferring or preventing a change in control,
even if doing so would be beneficial to our stockholders.
ITEM 2. PROPERTIES
We lease various facilities which house our administration, sales,
marketing, support and research and development functions. The following table
sets forth information concerning our principal facilities as of December 31,
1999:
<TABLE>
<S> <C> <C> <C>
Lease Approximate
Location Function Expiration Square Footage
---------------------------------- ----------------------------------- -------------- ----------------
Blackburn, United Kingdom ....... Manufacturing Division 2010 12,000
Bangalore, India ............... Internet, Workflow, 2002 11,700
Research and Development
New Delhi, India................. Research and Development, 2001 7,620
Customer Support
Woking, United Kingdom........... Principal Executive Offices 2012 7,430
Hitchin, United Kingdom.......... Healthcare Division 2000 7,125
Alton, United Kingdom............ Construction Division 2005 4,500
Westmont, New Jersey............. Manufacturing Division 2000 4,200
Nicosia, Cyprus.................. Administration 2004 4,000
</TABLE>
We also have relatively small leaseholdings elsewhere in Argentina,
Bulgaria, Germany, India, Ireland, Mexico, the United Kingdom and the United
States which expire on various dates from 2000 through 2013. We believe that our
current facilities will be sufficient to meet our needs for the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this report, we are not party to any legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
<PAGE>23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock began trading publicly on the Nasdaq National Market
on April 22, 1999 and is traded under the symbol AREM. The following table shows
the high and low per share closing prices of our common stock for the periods
indicated.
<TABLE>
<S> <C> <C>
1999 High Low
---- ---- ---
Second quarter, beginning April 22, 1999.................$ 5-3/32 $ 3-7/8
Third quarter............................................$ 14-1/4 $ 5
Fourth quarter...........................................$ 32-1/2 $11-7/8
2000
----
First quarter, through March 14, 2000....................$ 46-1/8 $27-1/4
</TABLE>
On March 14, 2000, the closing price of the common stock on the Nasdaq
National Market was $37-3/8 per share, and there were approximately 105 holders
of record of the common stock.
We have never declared or paid any cash dividends on our capital stock.
We currently intend to retain any future earnings for funding growth and we
therefore do not expect to pay any dividends in the foreseeable future.
Recent Sales of Unregistered Securities
For the year ended December 31, 1999, we have sold and issued the
following securities:
1) In March 1999, we changed our corporate domicile from Nevada to
Delaware pursuant to a merger agreement. In connection with the merger, the
board of directors declared a 1.711772-for-one reverse stock split prior to the
effectiveness of the merger. Pursuant to the merger agreement, each outstanding
share of common stock and option and warrant to purchase common stock of our
predecessor automatically became one share of our common stock and an option or
warrant to purchase our common stock, and the corporate existence of our
predecessor ceased. We relied on the exemption from registration contained in
Rule 145(a)(2) of the Securities Act.
2) In April 1999, we issued a warrant to purchase 330,000 shares of our
common stock with an exercise price of $7.50 per share to Roth Capital Partners,
Inc., formerly known as Cruttenden Roth Incorporated, the underwriter for our
initial public offering.
3) We granted non-qualified stock options to our officers and
directors, outside of the 1998 Stock Option Plan, in the aggregate amount of
800,000 shares.
4) We granted an aggregate of 1,488,800 shares of our common stock to
our employees, officers and directors under our 1998 Stock Option Plan.
5) In October 1999, we issued 1,600,000 shares of our common stock to
Info-quest, a Greek corporation, for an aggregate purchase price of $17,600,000.
<PAGE>24
The sales and issuances of the shares of common stock and options and warrants
to purchase common stock since March 1999 were made by us in reliance upon the
exemptions from registration provided under Section 4(2) of the Securities Act.
The offers and sales were made to accredited investors as defined in Rule 501(a)
under the Securities Act, no general solicitation was made by us or any person
acting in our behalf; the securities sold were subject to transfer restrictions,
and the certificates for those shares contained an appropriate legend stating
that they had not been registered under the Securities Act and may not be
offered or sold absent registration or pursuant to an exemption therefrom.
<PAGE>25
ITEM 6. SELECTED FINANCIAL DATA
We have derived the selected consolidated statement of operations data
for the years ended December 31, 1997, 1998 and 1999, and the selected
consolidated balance sheet data as of December 31, 1998, from our consolidated
financial statements included in this report. We have derived the selected
consolidated statement of operations data for the years ended December 31, 1995
and 1996, and the selected consolidated balance sheet data as of December 31,
1995, 1996 and 1997, from consolidated financial statements which are not
included in this report. Please read the selected consolidated financial data
presented below in conjunction with the consolidated financial statements and
notes thereto and other financial information included elsewhere in this report.
The consolidated statement of operations data for the year ended December 31,
1999 includes the operations of e-nnovations.com from December 17, 1999, the
date we acquired that business. The unaudited pro forma consolidated statement
of operations data reflects the combined results of operations of our company
and e-nnovations.com as if we had acquired that business on January 1, 1999. The
unaudited pro forma data is not necessarily indicative of what actually would
have occurred if the acquisition had occurred on January 1, 1999, nor is it
indicative of future operating results.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
Pro Forma
1999
1995 1996 1997 1998 1999 (Unaudited)
-------- --------- --------- --------- ---------- -----------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
Software licenses ...................... $ 6,641 $ 12,052 $ 17,024 $ 26,416 $ 37,224 $ 39,458
Maintenance and services................ 9,426 15,839 18,990 21,680 30,435 30,658
Hardware and other...................... 5,355 6,541 6,360 4,525 5,727 6,187
-------- --------- --------- --------- ---------- -----------
Total revenues..................... 21,422 34,432 42,374 52,621 73,386 76,302
Cost of revenues:.........................
Software licenses....................... 875 1,555 2,079 2,654 4,468 5,118
Maintenance and services................ 2,735 5,393 5,377 5,319 8,620 8,779
Hardware and other...................... 4,829 5,760 5,147 2,817 3,625 4,021
Amortization of purchased software and
Capitalized software development costs. 1,986 2,327 70 265 298 298
Write-off of purchased software costs... 388 -- -- -- -- --
-------- --------- --------- --------- ---------- -----------
Total cost of revenues............. 10,813 15,035 12,673 11,055 17,011 18,216
-------- --------- --------- --------- ---------- -----------
Gross profit.............................. 10,609 19,397 29,701 41,566 56,375 58,086
Operating expenses:.......................
Sales and marketing..................... 10,811 15,182 17,834 21,594 25,518 25,727
Research and development................ 6,428 6,409 6,233 6,207 6,902
5,916
General and administrative.............. 3,442 5,605 5,227 4,868 7,239
7,108
Write-off of offering costs............. -- -- -- 1,592 -- --
Amortization of intangible assets....... 3,176 5,144 97 74 -- 4,603
Profit on disposition of subsidiary..... -- -- -- -- (42) (42)
Write-off of intangible assets.......... -- 505 -- -- -- --
-------- --------- --------- --------- ---------- -----------
Total operating expenses........... 23,857 32,845 29,391 34,335 38,500 44,429
-------- --------- --------- --------- ---------- -----------
Profit (loss) from operations............. (13,248) (13,448) 310 7,231 17,875 13,657
Other income (expense.....................
Interest expense, net..................... (1,284) (1,906) (1,895) (2,030) (661) (661)
-------- --------- --------- --------- ---------- -----------
Income (loss) before income taxes......... (14,532) (15,354) (1,585) 5,201 17,214 12,996
<PAGE>26
Year Ended December 31,
Pro Forma
1999
1995 1996 1997 1998 1999 (Unaudited)
-------- --------- --------- --------- ---------- -----------
Income tax expense (benefit).............. 37 (50) 35 2,026 5,097 5,097
Income (loss) after taxes before
Extraordinary item)..................... $(14,569) $(15,304) $ (1,620) $ 3,175 12,117 7,899
Extraordinary item--gain on debt
Forgiveness............................. -- -- -- -- 1,163 1,163
--------- --------- --------- --------- ---------- ----------
Net income (loss)......................... $(14,569) $(15,304) $ (1,620) $ 3,175 $ 13,280 $ 9,062
========= ========= ========= ========= ========== ==========
Basic earnings (loss) per share before
Extraordinary item...................... $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 0.95 $ 0.62
========= ========= ========= ========= ========== ==========
Diluted earnings (loss) per share before
Extraordinary item...................... $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 0.90 $ 0.59
========= ========= ========= ========= ========== ==========
Basic earnings (loss) per share after
Extraordinary item...................... $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 1.04 $ 0.71
========= ========= ========= ========= ========== ==========
Diluted earnings (loss) per share after
Extraordinary item...................... $ (1.94) $ (2.04) $ (0.21) $ 0.35 $ 0.99 $ 0.68
========= ========= ========= ========= ========== ==========
Weighted average number of shares used
In computing:...........................
Basic earnings (loss) per share.... 7,504 7,504 7,518 9,120 12,762 12,762
Diluted earnings (loss) per share.. 7,504 7,504 7,518 9,135 13,434 13,463
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
As of December 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------- ------------- -------------- -----------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents.......................... $ 255 $ 867 $ 239 $ 149 $ 13,386
Working capital (deficit).......................... (8,244) (15,438) (12,971) (10,516) 17,840
Total assets............................... 22,729 18,449 17,242 27,952 60,944
Long-term debt..................................... 12,453 13,388 10,096 1,781 --
Total stockholders' equity (deficit)....... (12,365) (25,103) (19,534) (7,109) 36,246
</TABLE>
<PAGE>27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with information contained in "Selected Consolidated Financial Data" and our
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report.
Overview
We develop, market, implement and support enterprise-wide software
applications primarily for mid-sized organizations in the manufacturing,
healthcare, hospitality and construction industries. We were founded in Cyprus
in 1978 and initially focused on developing customized enterprise-wide software
applications for international organizations located in the Middle East and Near
East. In 1986, we established our New Delhi, India software development and
support facility to access the skilled Indian labor force and capture cost
efficiencies. We established operations in the United Kingdom in 1992. From 1993
to 1996, we completed eleven acquisitions and established operations in the
United States, Mexico, Argentina and Ireland. By the end of 1996, all operating
entities were consolidated. In 1997, we reorganized as a United States holding
company, changing our domicile from the Netherlands to Nevada. We reincorporated
in Delaware in 1999 in connection with our initial public offering. As of
December 31, 1999, we had 535 full time employees and conducted business in over
twenty countries.
During 1999, we continued to expand our revenues in Europe, primarily
through large contracts in emerging markets in the manufacturing and healthcare
industries. We also experienced a decline in our revenues in the United Kingdom,
primarily in our healthcare division, as customers delayed purchase decisions
earlier in the year while they waited for government adoption of accreditation
procedures for healthcare products under recently adopted specifications.
During the second quarter of 1999, we completed the initial public
offering of our shares of common stock generating net proceeds of approximately
$12.9 million. We used the proceeds to reduce our debt and for other corporate
purposes. In exchange for the early retirement of our indebtedness to a bank,
which occurred in the fourth quarter, we received a discount of approximately
$1.2 million, net of taxes, resulting in a one-time extraordinary gain for the
forgiveness of debt. By the end of 1999, we repaid all of our indebtedness to
banks and other lenders, which we expect will result in lower interest expense
in the year 2000.
During the fourth quarter of 1999, we were awarded two significant
contracts in Bulgaria. One contract was with a private Bulgarian information
technology company, Insyst Electronics, for our manufacturing products and
significant Internet related services. The contract is structured in multiple
phases and we anticipate recognizing revenues from the contract over a fifteen
month implementation period from the day of signing. The estimated value of all
phases under the contract is $9.2 million.
The second contract was with the Bulgarian National Health Insurance
Fund, commonly referred to as the NHIF, in connection with automating the
Bulgarian nationwide healthcare system. The contract is structured in multiple
phases and we anticipate recognizing revenues from the contract over a three
year period from the day of signing, with the later phases subject to the
availability of approximately $20 million in third party lease financing made
available to Bulgaria's general practitioners for the purchase of equipment and
software to be installed in their offices. The estimated value of all phases
under the contract is approximately $37.5 million, with later phases contingent
upon acceptance by the NHIF of the earlier phases and other conditions relating
to our performance. Under the contract, we will install a comprehensive suite of
our Internet-enabled healthcare products to provide financial, patient and
clinical information management and a communications network to link hospitals,
pharmacies, laboratories and general practitioners with the NHIF headquarters
and some regional centers. Initially, we will provide our products to
approximately 5,000 of Bulgaria's 12,000 general practitioners, 500 of its 1,000
<PAGE>28
pharmacies and 30 of its 250 hospitals. The NHIF has agreed to cooperate with us
in processing third party lease financing and has offered the possibility of a
financial guarantee for the lease obligations of their general practitioners.
In October 1999, we divested ourselves of our Cyprus operations in
exchange for approximately $2.6 million in cash to be received in 2000 and
approximately 9.5%, or 4,000,000 shares, of GlobalSoft.com, a recently organized
Cyprus company formed for the purpose of consolidating several Cyprus based
software companies. Dr. Lycourgos K. Kyprianou, our chairman and chief executive
officer, is the chairman of the board of GlobalSoft.com.
In December 1999, we completed our acquisition of e-nnovations.com, an
Internet software solutions provider located in Bangalore, India, for $14.5
million. In connection with the acquisition, we anticipate allocating
approximately $13.8 million to intangible assets, including goodwill, which will
be amortized over a period of three years, or $4.6 million per year.
Revenues
We derive our revenues from software licenses, maintenance and service
contracts and hardware sales. Software license revenues represent both new
licenses and upgrades derived from the licensing and service of industry
upgrades to existing customers. Maintenance and service contract revenues are
primarily derived from the ongoing support of installed software and training,
consulting and implementation services. Hardware sales revenues are derived from
the sale of third-party hardware to customers requiring turnkey solutions. The
sales cycles for our products can vary significantly among customers.
Historically, our sales cycles have ranged from one to 12 months.
For the year ended December 31, 1999, we derived 35% of our revenues
from customers in the manufacturing industry, 27% from customers in the
healthcare industry, 26% from customers in the hospitality industry and 7% from
customers in the construction industry. The remaining 5% of our revenues for the
year ended December 31, 1999, were derived from sales to approximately 1,000
relatively small customers in various industries.
For the year ended December 31, 1999, our revenues were derived from
customers located in the following areas:
Area Percentage of Revenue
-------------------------------------------- ---------------------
United Kingdom ............................. 35%
Other portions of Europe.................... 44%
United States............................... 3%
Asia ....................................... 5%
Rest of world .. ........................... 13%
--------------------
Total................................... 100%
====================
We recognize software license revenue upon execution of a contract and
delivery of software, provided that the license fees are fixed and determinable,
no significant obligations remain, collection of the resulting receivable is
deemed probable and no substantial customization or modification to core
software is required. We recognize software license and service revenues on a
percentage of completion basis when, among other things, customer contracts
<PAGE>29
require substantial customization or modification to our core software in order
to meet the customer's specifications. Maintenance contract revenues are
recognized ratably over the life of the contract, service contract revenues are
recognized in accordance with the terms of the contract and add-on hardware
sales revenues are recognized when the hardware is shipped to the customer. We
believe that our accounting policies are consistent with the guidance provided
by the American Institute of Certified Public Accountants' Statement of Position
(SOP) 97-2, as modified by SOP 98-9, Software Revenue Recognition.
Cost of Revenues
The cost of software license revenues consists primarily of personnel
costs as well as the costs of third-party software, media and freight. The cost
of maintenance and service contract revenues consists primarily of salary,
travel and other personnel costs. In addition, cost of service revenues may
include the cost of outsourcing services when relatively large service contracts
require resources in excess of our resources. In general, our costs are higher
when services are outsourced. Costs incurred as a result of outsourcing were
approximately $320,000 for the year ended December 31, 1997, $18.0 million for
1998 and $12.0 million for 1999. The cost of hardware revenues consists
primarily of the cost of hardware purchased from third parties.
Gross Profit
We generally experience significant differences in profit margins from
software licenses, maintenance and services, and hardware. For example, gross
profit margins for our software licenses were 88% for 1997, 90% for 1998, and
88% for 1999. For maintenance and services, our gross profit margins were 72%
for 1997, 76% for 1998 and 72% for 1999. For hardware, our gross profit margins
were 19% for 1997, 38% for 1998 and 37% for 1999. Our overall gross profit
margin is affected by our relative mix of revenue sources.
Operating Expenses
Sales and marketing expenses consist primarily of sales personnel
costs, advertising and other public relations expenses. Research and development
expenses consist primarily of personnel costs, facility overhead and other
expenses associated with the development of new and enhanced products and
technologies. General and administrative expenses include salaries and benefits
for administrative, executive, finance, legal, human resources, data center,
distribution and internal systems personnel and associated overhead costs, as
well as bad debt, accounting and legal expenses. General and administrative
expenses also include depreciation, which represents the write down of the cost
of property and equipment over their expected useful lives. Amortization of
intangible assets consists of the amortization of customer lists and management
contracts of acquired businesses. Amortization of goodwill resulting from the
December 1999 acquisition of e-nnovations.com was not material in 1999.
We continue to make substantial investments and operational cost
improvements in our sales and marketing, research and development and
administrative infrastructure. From 1997 through 1999, we increased our sales
and marketing staff from 85 employees to 270 employees. During the same period,
we reduced our total research and development and administrative staff from 331
employees to 276 employees. The major impetus behind this transition is the
continuous shift of the research and development and, to a lesser degree,
administrative functions from the United Kingdom to India, where the relative
cost of operations is lower. During this period, our research and development
and administrative personnel in India increased from 115 to 212, while research
and development and administrative personnel in the United Kingdom and other
countries decreased from 216 to 64.
Research and Development
We have several software products which are under development or were
recently released. We expect a number of customers currently using rejuvenated
or legacy products to transition to our new products, which would likely reduce
the number of installed customers of the rejuvenated or legacy products.
<PAGE>30
We capitalize the qualifying costs of developing our software products.
Capitalization of such costs requires that technological feasibility has been
established. We define the establishment of technological feasibility as the
completion of all planning, designing, coding and testing activities that are
necessary to establish products that meet design specifications, including
functions, features and technical performance requirements. Under this
definition, establishing technological feasibility is considered complete only
after the majority of customer testing and customer feedback has been
incorporated into the product functions. Development costs incurred prior to the
establishment of technological feasibility are expensed as incurred. When
software is fully documented and available for unrestricted sale, capitalization
of development costs ceases, and amortization commences and is computed on a
product-by-product basis, based on either a straight-line basis over the
economic life of the product or the ratio of current gross revenues to the total
of current and anticipated future gross revenues, whichever is greater.
Purchased Software
We capitalize as purchased software the costs associated with software
products either purchased from other companies for resale or developed by other
companies under contract with us. The cost of the software is amortized on the
same basis as capitalized software development costs. The amortization period is
re-evaluated quarterly with respect to external factors including, but not
limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.
Currency Translation and Transactions
A significant portion of our business is conducted in currencies other
than United States dollars (the currency into which our historical financial
statements have been prepared). Historically, we have recorded a majority of our
operating expenses in British pounds, and a substantial portion of our research
and development costs in Indian rupees. In addition, during the fourth quarter
of 1999 we were awarded a significant contract with the Bulgarian National
Health Insurance Fund valued at $37.5 million which calls for payment in
Bulgarian Leva. However, we anticipate converting payments made in Bulgarian
Leva into U.S. dollars promptly upon receipt of payments. Our consolidated
balance sheets are translated into U.S. dollars at the exchange rate prevailing
at the balance sheet dates, and the statements of operations and cash flows are
translated into United States dollars at the average exchange rates for the
relevant periods. Gains and losses resulting from translation are included as a
component of accumulated other comprehensive income (loss). Increases in the
exchange rate from British pounds to U.S. dollars used from one year to the next
negatively impact stockholders' equity and decreases in the exchange rate
positively impact stockholders' equity. For example, because the exchange rate
used to translate our balance sheet for the year ended December 31, 1999 was
2.9% higher than the rate used for the year ended December 31, 1998, the
translation adjustment resulted in a decrease in stockholders' equity of
$148,000 for 1999.
Net gains and losses resulting from currency exchange transactions are
included in our statement of operations. We did not incur material net foreign
exchange transaction losses in 1997, 1998 or 1999. Because of the number of
currencies involved, the constant currency exposures and the substantial
volatility of exchange rates, we cannot assure you that we will not experience
currency losses in the future. We cannot predict the effect of exchange rate
fluctuations on our future operating results. We have not previously undertaken
hedging transactions to cover our currency exposure, but may implement programs
to mitigate foreign currency risk exposure in the future as management deems
appropriate.
<PAGE>31
Results of Operations
The following table sets forth, for the periods indicated, the
percentage of revenues represented by each item in our consolidated statements
of operations.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
Revenues:
Software licenses 31% 35% 40% 50% 51%
Maintenance and services 44 46 45 41 41
Hardware and other 25 19 15 9 8
------ ------ ------ ------ ------
Total revenues 100 100 100 100 100
------ ------ ------ ------ ------
Cost of revenues:
Software licenses 4 5 5 5 6
Maintenance and services 13 16 13 10 12
Hardware and other 22 16 12 5 5
Amortization of purchased software and
capitalized software development costs 9 7 -- 1 --
Write-off of purchased software costs 2 -- -- -- --
------ ------ ------ ------ ------
Total cost of revenues 50 44 30 21 23
------ ------ ------ ------ ------
Gross profit 50 56 70 79 77
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing 51 44 42 41 35
Research and development 30 19 15 12 8
General and administrative 16 16 12 9 10
Write-off of offering costs -- -- -- 3 --
Amortization of intangible assets 15 15 -- -- --
Write-off of intangible assets -- 1 -- -- --
------ ------ ------ ------ ------
Total operating expenses 112 95 69 65 53
------ ------ ------ ------ ------
Profit (loss) from operations (62) (39) 1 14 24
Other income (expense):
Interest expense, net (6) (6) (5) (4) (1)
------ ------ ------ ------ ------
Income (loss) before income taxes (68) (45) (4) 10 23
Income tax (expense) -- -- -- (4) (7)
------ ------ ------ ------ ------
Extraordinary gain--gain on debt forgiveness -- -- -- -- 2
------ ------ ------ ------ ------
Net income (loss) (68)% (45)% (4)% 6% 18%
====== ====== ====== ====== ======
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Total revenues increased to $73.4 million for 1999 from $52.6 million
for 1998. This increase was due primarily to higher software license revenues as
a result of an increase in the sale of licenses, and associated maintenance and
service contract revenues, generated by all four divisions.
Software license revenues increased to $37.2 million for 1999 from
$26.4 million for 1998. This increase was due primarily to the growth in the
number of installed customers, increased sales of licenses for our recent
generation of products and price increases. As a percentage of total revenues,
software license revenues were 51% for 1999 and 50% for 1998, reflecting our
strategy to increase our software license revenues, which provide higher
margins, as a percentage of total revenues.
Maintenance and service contract revenues increased to $30.4 million
for 1999 from $21.7 million for 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 remained
the same at 41% for both 1999 and 1998.
<PAGE>32
Hardware and other revenues increased to $5.7 million for 1999 from
$4.5 million for 1998. As a percentage of total revenues, hardware and other
revenues decreased to 8% for 1999 from 9% for 1998, reflecting our strategy to
reduce the sale and installation of third-party hardware which has lower margins
than software licenses.
Cost of Revenues
Total cost of revenues increased to $17.0 million for 1999 from $11.1
million for 1998. As a percentage of total revenues, total cost of revenues
increased to 23% for 1999 from 21% for 1998.
The cost of software license revenues increased to $4.5 million for
1999 from $2.7 million for 1998. As a percentage of total revenues, the cost of
software license revenues increased to 6% in 1999 compared to 5% for 1998. The
increase from 1998 to 1999 was primarily the result of increased software
license revenues in 1999.
The cost of maintenance and service revenues increased to $8.6 million
for 1999 from $5.3 million for 1998. As a percentage of total revenues, the cost
of maintenance and service revenues increased to 12% for 1999 from 10% for 1998.
This increase was primarily due to the use of outside personnel in certain
regions until our operations in these regions are firmly established.
The cost of hardware and other revenues increased to $3.6 million for
1999 from $2.8 million for 1998. As a percentage of total revenues, the cost of
hardware and other revenues was 5% for 1999 and 5% for 1998.
Sales and Marketing
Our sales and marketing expenses increased to $25.5 million for 1999
from $21.6 million for 1998, primarily due to the expansion of sales and
marketing activities principally in Europe. As a percentage of total revenues,
sales and marketing expenses decreased to 35% for 1999, from 41% for 1998,
primarily due to increased efficiencies in our sales and marketing operations.
Research and Development
Research and development expenses decreased to $5.9 million for 1999
from $6.2 million for 1998. As a percentage of total revenues, research and
development expenses decreased to 8% for 1999 from 12% for 1998. This decrease
was primarily due to cost savings resulting from the shifting of research and
development functions from the United Kingdom to India and a significant portion
of the planned expenditures relating to our new generation of software products
having been incurred in prior accounting periods.
General and Administrative
General and administrative expenses increased to $7.1 million for 1999
from $4.9 million for 1998. As a percentage of total revenues, general and
administrative expenses increased to 10% for 1999, from 9% for 1998.
Net Interest Expense
Net interest expense reflects interest on our credit facilities, as
reduced by interest income on cash balances. Net interest expense decreased to
$0.7 million for 1999 from $2.0 million for 1998, primarily due to repayment of
all long and short-term debts.
<PAGE>33
Income Taxes
There was a provision for income taxes recorded for 1999 of $5.1
million. We recorded a provision for income taxes of $2.0 million for 1998. The
increase in income taxes resulted from the increase in our profitability in
1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Total revenues increased to $52.6 million for 1998 from $42.4 million
for 1997. This increase was due primarily to higher software license revenues as
a result of an increase in the sale of licenses and associated maintenance and
service contract revenues, principally generated by the manufacturing and
hospitality divisions, which were partially offset by a slight decrease in
revenues from the healthcare division. The decrease in healthcare related
revenues was likely attributable to delayed purchasing decisions by existing and
potential customers pending release of new regulations in the United Kingdom
healthcare industry.
Software license revenues increased to $26.4 million for 1998 from
$17.0 million for 1997. This increase is primarily due to the growth in the
number of installed customers, increased sales of licenses for our recent
generation of products and price increases. As a percentage of total revenues,
software license revenues increased to 50% for 1998 from 40% for 1997,
reflecting our strategy to increase our higher margin software license revenues
as a percentage of total revenues.
Maintenance and service contract revenues increased to $21.7 million
for 1998 from $19 million for 1997, 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 declined to 41% for
1998 from 45% for 1997, primarily as a result of our increased sales of higher
margin software licenses.
Hardware and other revenues decreased to $4.5 million for 1998 from
$6.4 million for 1997. As a percentage of total revenues, hardware and other
revenues decreased to 9% for 1998 from 15% for 1997, reflecting our strategy to
reduce the sale and installation of lower margin third-party hardware.
Cost of Revenues
Total cost of revenues decreased to $11.1 million for 1998 from $12.7
million for 1997. As a percentage of total revenues, total cost of revenues
decreased to 21% for 1998 from 30% for 1997. This decrease was primarily the
result of an increase in sales of higher margin products.
The cost of software license revenues increased to $2.7 million for
1998 from $2.1 million for 1997. As a percentage of total revenues, the cost of
software license revenues was 5% for both 1998 and 1997. The increase in cost of
revenues from 1997 to 1998 was primarily the result of increased software
license revenues in 1998. Although the cost of software license revenues
increased from 1997 to 1998, the significant increase in software license
revenues for 1998 resulted in a 2.2% increase in gross profit on software
license revenues for 1998.
The cost of maintenance and service revenues decreased to $5.3 million
for 1998 from $5.4 million for 1997. As a percentage of total revenues, the cost
of maintenance and service revenues decreased to 10% for 1998 from 13% for 1997.
This decrease was primarily due to increased efficiencies in the delivery of
maintenance and other services. The decrease in the cost of maintenance and
service revenues from 1997 to 1998 resulted in a 3.5% increase in gross profit
on maintenance and service revenues for 1998.
<PAGE>34
The cost of hardware and other revenues decreased to $2.8 million for
1998 from $5.1 million for 1997. As a percentage of total revenues, the cost of
hardware and other revenues decreased to 5% for 1998 from 12% for 1997. This
decrease was primarily attributable to a decrease in hardware sales generally,
which was partially offset by the sale of hardware with higher margins. The
decrease in cost of hardware and other revenues from 1997 to 1998 resulted in a
19% increase in gross profit on hardware and other revenues for 1998.
Sales and Marketing
Our sales and marketing expenses increased to $21.6 million for 1998
from $17.8 million for 1997, 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 41% for
1998, from 42% for 1997, primarily due to increased efficiencies in our sales
and marketing operations.
Research and Development
Research and development expenses were $6.2 million for both 1998 and
1997. As a percentage of total revenues, research and development expenses
decreased to 12% for 1998 from 15% of revenues for 1997. The decrease was
primarily due to cost savings resulting from the shifting of research and
development functions from the United Kingdom to India and a significant portion
of the planned expenditures relating to our new generation of software products
having been incurred in prior accounting periods.
General and Administrative
General and administrative expenses decreased to $4.9 million for 1998
from $5.2 million for 1997. As a percentage of total revenues, general and
administrative expenses decreased to 9% for 1998 from 12% for 1997. This
decrease reflects the effect of our cost cutting and cost control measures,
including the closure of our office at Dukes Court, Central Woking, England,
during the fourth quarter of 1997. The decrease was partially offset by a one
time charge in 1998 reflecting severance payments to four individuals in the
aggregate amount of approximately $500,000.
Write-off of Offering Costs
In July 1998, we filed a registration statement in connection with our
initial public offering. Securities and Exchange Commission Staff Accounting
Bulletin, Topic 5:A (Expenses of Offering), deems that a postponement of the
offering process for greater than 90 days be treated as an aborted offering and
that all related costs be expensed. Accordingly, we wrote-off approximately $1.6
million in costs associated with our initial public offering in 1998.
Net Interest Expense
Net interest expense reflects interest on our credit facilities, as
reduced by interest income on cash balances. Net interest expense increased to
$2.0 million for 1998 from $1.9 million for 1997, primarily due to a slight
increase in amounts outstanding under our credit facilities.
Income Taxes
There was a provision for income taxes recorded for 1998 of $2.0
million. We recorded a provision for income taxes of $35,000 for 1997. The
increase in income taxes resulted from the increase in our profitability in
1998.
<PAGE>35
Liquidity and Capital Resources
We have funded our operations since inception primarily through
borrowings under bank credit facilities, private placements of equity and debt
securities, equity contributions by our principal stockholder and our initial
public offering. In April 1999, we sold 3,300,000 shares of our common stock in
our initial public offering, generating net proceeds of approximately $12.9
million. In June 1999, we sold 230,000 shares of our common stock and generated
approximately $1.1 million in connection with the exercise of a portion of the
over-allotment option granted to the underwriters of our initial public
offering. In October 1999, we sold 1,600,000 shares of our common stock to
Info-quest in a private placement, generating net proceeds of approximately
$16.2 million. As of December 31, 1999, we had approximately $13.4 million of
cash and cash equivalents and no short-term borrowings and a working capital
surplus of approximately $17.8 million.
We may, from time to time, consider acquisitions of complementary
businesses, products or technologies, which may require additional financing. In
addition, continued growth in our business may, from time to time, require
additional capital. We cannot assure you that additional capital will be
available to us 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 our stockholders.
We had an operating cash flow surplus of $13.1 million for 1999. This
was primarily due to an increase in our revenue and the related net income. We
had operating cash flow deficits of $6.7 million and $4.0 million for 1998 and
1997, respectively. Operating cash flow is affected by seasonality, among other
factors, and is often disproportionately higher in our third and fourth quarters
than in the first two quarters of the year.
Accounts receivable increased to $18.1 million for 1999 from $16.2
million for 1998. The increase in accounts receivable in 1999 was primarily the
result of a greater number of significant contracts in 1999. These more
significant contracts have, by their terms, a longer period for payment, which
is customary in the industry. As of December 31, 1999, the average days revenue
outstanding was 90 compared to 112 for 1998. Accounts receivable increased to
$16.2 million as of December 31, 1998, from $9.5 million as of December 31,
1997.
We had an allowance for doubtful accounts of $507,000 for 1999 and
$639,000 for 1998. We had $765,000 and $452,000 of write-offs in 1999 and 1998,
respectively. Due to our growth, we do not believe that historical write-offs
are necessarily indicative of future write-offs. We review the adequacy of the
allowance for doubtful accounts based primarily on a review of aged receivables,
with special attention paid to amounts over 90 days old. At December 31, 1999,
the allowance for doubtful accounts was $765,000, which management believes is
adequate to cover our receivable balance at December 31, 1999.
Accrued payroll taxes decreased to approximately $574,000 for 1999 from
$586,000 for 1998.
We utilized cash for investing activities of $17.6 million, $2.6
million and $1.0 million for 1999, 1998 and 1997, respectively. During these
periods, we experienced significant growth and invested in property and
equipment. During the fourth quarter of 1999, we acquired e-nnovations.com for
approximately $14.5 million.
Cash provided by financing activities was $18.1 million, $9.1 million
and $4.5 million for 1999, 1998 and 1997, respectively. Financing activities for
1999 primarily consisted of the initial public offering and a private placement
in October 1999. The net proceeds from the issuance of shares during the period
were $30.2 million. We used $13.9 million of the proceeds for payment of long
and short term borrowings. Financing activities for 1998 primarily consisted of
a private placement in February 1998 of approximately 1,294,500 shares of our
common stock, the net proceeds of which were $9.3 million. We used $2.9 million
of those proceeds for the repayment of long term borrowings in 1998. Financing
activities for 1997 primarily consisted of a private placement of equity
securities in the aggregate amount of $6.4 million, of which approximately $2.0
million was used to repay bank indebtedness.
<PAGE>36
As of December 31, 1999, we had no outstanding indebtedness under
our bank credit facilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rates
A significant portion of our business is transacted in currencies other
than the United States dollar. Our functional currency is the British Pound and
the functional currency of our non-United Kingdom subsidiaries are their local
currencies. As a result, we are subject to exposure from movements in foreign
currency exchange rates, specifically the U.S. dollar/British pound, the U.S.
dollar/Bulgarian Leva and the British pound/Bulgarian Leva exchange rates. We do
not use derivative financial instruments for speculative trading purposes, nor
do we hedge our foreign currency exposure to manage our foreign currency
fluctuation risk.
Interest Rate Sensitivity
In the past, our exposure related to adverse movements in interest
rates was primarily derived from the variable rate on our bank credit
facilities. As of the year ended December 31, 1999, we had repaid all of our
indebtedness to banks and other lenders. Therefore, we believe we are not
currently exposed to any market risks related to interest rate sensitivity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
AremisSoft Corporation
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................37.
Consolidated Balance Sheets........................................................38.
Consolidated Statements of Operations..............................................39.
Consolidated Statements of Changes in Stockholders' Equity (Deficit)...............40.
Consolidated Statements of Cash Flows..............................................41.
Notes to Consolidated Financial Statements.........................................42.
e-nnovations.com
Independent Auditors' Report.......................................................56.
Consolidated Balance Sheets........................................................57.
Consolidated Statements of Operations..............................................58.
Consolidated Statements of Changes in Stockholders' Equity.........................59.
Consolidated Statements of Cash Flows..............................................60.
Notes to Consolidated Financial Statements.........................................61.
Unaudited Pro Forma Condensed Combined Financial Information.......................64.
Notes to the Unaudited Pro Forma Condensed Combined Financial Information..........66.
</TABLE>
<PAGE>37
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
AremisSoft Corporation
We have audited the accompanying consolidated balance sheets of
AremisSoft Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
AremisSoft Corporation at December 31, 1999 and 1998, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ PANNELL KERR FORSTER
London, England
March 2, 2000
<PAGE>38
AremisSoft Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31,
1998 1999
--------- -------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 149 $ 13,386
Accounts receivable, less allowances for doubtful accounts of $639 and $507 at
December 31, 1998 and 1999, respectively.......................................................... 16,166 18,115
Accounts receivable-- disposition proceeds........................................................... -- 2,592
Other receivables.................................................................................... 903 705
Inventory............................................................................................ 787 1,603
Deposits paid on service and maintenance contracts................................................... 3,531 3,712
Prepaid expenses and other assets.................................................................... 1,135 2,423
--------- ---------
Total current assets:...................................................................... 22,671 42,536
--------- ---------
Loan receivable -- related party..................................................... 1,886 --
Investments.......................................................................................... -- 1,803
Property and equipment, net................................................ 1,774 1,847
Purchased and developed software, net of accumulated amortization of $6,075 and
$5,893 at December 31, 1998 and 1999, respectively................................................ 1,284 948
Intangible assets, net of accumulated amortization of $13,036 and $11,534 at
December 31, 1998 and 1999, respectively........................................................... 337 13,810
--------- ---------
Total assets............................................................................... $ 27,952 $ 60,944
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................................................... $ 3,669 $ 6,910
Accrued payroll taxes................................................................................ 586 574
Accrued value added taxes............................................................................ 1,649 1,055
Accrued income taxes................................................................................. 2,059 6,572
Current portion of capital lease obligations......................................................... 55 24
Other accrued expenses............................................................................... 2,946 2,371
Bank loans and short-term demand facility............................................................ 15,530 --
Deferred revenue..................................................................................... 6,693 7,190
---------- ----------
Total current liabilities.................................................................. 33,187 24,696
---------- ----------
Loan and accrued interest payable-related party...................................................... 1,781 --
Capital lease obligations, less current portion...................................................... 93 2
---------- ----------
Total liabilities.......................................................................... 35,061 24,698
---------- ----------
Stockholders' equity (deficit):
Series-A convertible preferred stock, par value $0.001 authorized 2,100 shares; no
shares issued and outstanding at December 31, 1998 and 1999, respectively -- --
Series-B convertible preferred stock, par value $0.001 authorized 3,500 shares; no
shares issued and outstanding at December 31, 1998 and 1999, respectively -- --
Common stock, par value $0.001: authorized 85,000 shares; 10,000 and 15,193
shares issued and outstanding at December 31, 1998 and 1999, respectively 10 15
Additional paid-in capital........................................................................... 27,107 57,325
Accumulated deficit.................................................................................. (32,201) (18,921)
Accumulated other comprehensive income (loss)........................................................ (2,025) (2,173)
---------- ----------
Total stockholders' equity (deficit)....................................................... (7,109) 36,246
---------- ----------
Total liabilities and stockholders' equity................................................. $ 27,952 $ 60,944
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>39
AremisSoft Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1997 1998 1999
----------- ----------- -----------
(in thousands, except per share data)
Revenues:
Software licenses........................................................... $ 17,024 $ 26,416 $ 37,224
Maintenance and services.................................................... 18,990 21,680 30,435
Hardware and other.......................................................... 6,360 4,525 5,727
----------- ----------- -----------
Total revenues......................................................... 42,374 52,621 73,386
Cost of revenues:
Software licenses........................................................... 2,079 2,654 4,468
Maintenance and services.................................................... 5,377 5,319 8,620
Hardware and other.......................................................... 5,147 2,817 3,625
Amortization of purchased software and capitalized software
development costs......................................................... 70 265 298
----------- ----------- -----------
Total cost of revenues................................................. 12,673 11,055 17,011
----------- ----------- -----------
Gross profit.................................................................. 29,701 41,566 56,375
Operating expenses:
Sales and marketing......................................................... 17,834 21,594 25,518
Research and development.................................................... 6,233 6,207 5,916
General and administrative.................................................. 5,227 4,868 7,108
Write-off of offering costs................................................. -- 1,592 --
Amortization of intangible assets........................................... 97 74 --
Profit on disposition of subsidiary......................................... -- -- (42)
----------- ----------- -----------
Total operating expenses............................................... 29,391 34,335 38,500
----------- ----------- -----------
Profit from operations........................................................ 310 7,231 17,875
Other income (expense):
Interest expense, net....................................................... 1,895 2,030 661
----------- ----------- -----------
Income (loss) before income taxes............................................. (1,585) 5,201 17,214
Income tax expense............................................................ 35 2,026 5,097
----------- ----------- -----------
Income (loss) after taxes before extraordinary item........................... (1,620) 3,175 12,117
Extraordinary item-- gain on debt forgiveness................................. -- -- 1,163
----------- ----------- -----------
Net income (loss)............................................................. $ (1,620) $ 3,175 $ 13,280
=========== ========== ===========
Basic earnings (loss) per share before extraordinary item..................... $ (0.21) $ 0.35 $ 0.95
=========== ========== ===========
Diluted earnings (loss) per share before extraordinary item................... $ (0.21) $ 0.35 $ 0.90
=========== ========== ===========
Basic earnings (loss) per share after extraordinary item...................... $ (0.21) $ 0.35 $ 1.04
=========== ========== ===========
Diluted earnings (loss) per share after extraordinary item.................... $ (0.21) $ 0.35 $ 0.99
=========== ========== ===========
Basic weighted average shares outstanding..................................... 7,518 9,120 12,762
Diluted weighted average shares outstanding................................... 7,518 9,135 13,463
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>40
AremisSoft Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulated Total
Preferred Stock Common Stock Additional Other Stockholders'
---------------- --------------- Paid-in Accumulated Comprehensive Equity Comprehensive
Shares Amount Shares Amount Capital Deficit Income (loss) (Deficit) Income (loss)
------ -------- ------- -------- ---------- ----------- -------------- ----------- -------------
(in thousands)
Balance at December
31, 1996.............. -- $ -- 7,504 $ 8 $ 11,364 $ (33,756) $ (2,719) $ (25,103) $ (18,042)
Issuance of common
stock in connection
With the
acquisition of the
net assets of Juno.... -- -- 65 -- -- -- -- -- --
Issuance of Series A
preferred stock,
net of costs of $609.. 1,137 1 -- -- 6,403 -- -- 6,404 --
Net loss................ -- -- -- -- -- (1,620) -- (1,620) (1,620)
Currency translation
adjustment............ -- -- -- -- -- -- 785 785 785
------ -------- ------- -------- ---------- ----------- -------------- ----------- -------------
Balance at December
31, 1997.............. 1,137 1 7,569 8 17,767 (35,376) (1,934) (19,534) (835)
Issuance of common
stock, net of costs
of $1,046............. -- -- 1,294 1 9,340 -- -- 9,341 --
Conversion of
preferred stock
into common stock.....(1,137) (1) 1,137 1 -- -- -- -- --
Net income.............. -- -- -- -- -- 3,175 -- 3,175 3,175
Currency translation
adjustment.......... -- -- -- -- -- -- (91) (91) (91)
------ -------- ------- -------- ---------- ----------- -------------- ----------- -------------
Balance at December
31, 1998.............. -- -- 10,000 10 27,107 (32,201) (2,025) (7,109) 3,084
Issuance of common
stock in connection
With public and
private issuance,
net of costs of
$3,878................. -- -- 5,130 5 29,681 -- -- 29,686 --
Issuance of common
stock in connection
with the conversion
of a promissory note... -- -- 63 -- 537 -- -- 537 --
Net income............... -- -- -- -- -- 13,280 -- 13,280 13,280
Currency translation
adjustment............. -- -- -- -- -- -- (148) (148) (148)
------ -------- ------- -------- ---------- ----------- -------------- ----------- -------------
Balance at December
31, 1999.............. -- $ -- 15,193 $ 15 $ 57,325 $(18,921) $ (2,173) $ 36,246 $ 13,132
====== ======== ======= ======== ========== =========== ============== =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>41
AremisSoft Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1997 1998 1999
---------- ---------- ----------
(in thousands)
Cash flows from operating activities:
Net income (loss)............................................................ $(1,620) $ 3,175 $ 13,280
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation............................................................... 977 695 1,093
Amortization of capitalized software and intangible assets................. 167 339 298
Gain on disposition of subsidiary.......................................... -- -- (42)
Extraordinary item......................................................... -- -- (1,163)
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable........................................................ 2,933 (6,602) (6,477)
Other receivables.......................................................... (461) (226) (129)
Inventory.................................................................. 163 295 (723)
Deposits paid on service and maintenance contracts......................... -- (3,531) (283)
Prepaid expenses and other assets.......................................... (2,595) 1,059 (1,210)
Accounts payable........................................................... 788 (622) 3,867
Deferred revenue........................................................... (5,726) 937 692
Accrued taxes payable...................................................... 1,242 (647) 4,298
Other accrued expenses..................................................... 103 (1,611) (447)
---------- ---------- ----------
Net cash provided by (used in) operating activities...................... (4,029) (6,739) 13,054
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (684) (373) (1,355)
Capitalized software development costs....................................... (515) (325) --
Loan to related party (net).................................................. -- (1,886) (1,781)
Payment for acquisition, net of cash acquired................................ -- -- (14,537)
Proceeds from disposal of property and equipment............................. 228 4 82
---------- ---------- ----------
Net cash used in investing activities.................................... (971) (2,580) (17,591)
---------- ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of stock.......................................... 6,404 9,341 30,223
Principal payments of long-term borrowings................................... (2,040) (2,850) (9,204)
Long-term borrowing.......................................................... 33 511 --
Loan from related party...................................................... -- 1,781 1,886
Principal payments of capital lease obligations.............................. (55) (30) (61)
Short-term demand facility................................................... 186 372 (4,705)
---------- ---------- ----------
Net cash provided by financing activities................................ 4,528 9,125 18,139
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents......................... (472) (194) 13,602
Effect of foreign currency exchange rates on cash and cash equivalents....... (156) 104 (365)
Cash and cash equivalents, at beginning of year.............................. 867 239 149
---------- ---------- ----------
Cash and cash equivalents, at end of year.................................... $ 239 $ 149 $ 13,386
========== ========== ==========
Supplemental disclosure:
Interest paid............................................................ $ 1,900 $ 2,188 $ 1,390
Assets acquired under capital leases..................................... $ 138 $ 34 $ --
Investment acquired in connection with disposition of subsidiary......... $ -- $ -- $ 1,803
Conversation of promissory note and accrued interest into 62,759 shares of
common stock......................................................... $ -- $ -- $ 537
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>42
AremisSoft Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Significant Acounting Policies
Nature of Operations
AremisSoft Corporation ("AremisSoft") develops, markets, implements and
supports enterprise-wide applications software targeted to mid-sized
organizations in the manufacturing, healthcare, hospitality and construction
industries.
Organization and Basis of Presentation
In October 1997, AremisSoft, under its previous name of Juno
Acquisitions, Inc., a Nevada corporation ("Juno"), entered into a Plan and
Agreement of Reorganization (the "Plan") with LK Global Information Systems,
B.V. ("LK Global"), a company incorporated in The Netherlands. Under the terms
of the Plan, Juno acquired all of the issued and outstanding common stock of LK
Global in exchange for 7,503,920 shares of its common stock (the "1997
Acquisition"). Prior to the 1997 Acquisition, Juno had no significant
operations.
LK Global was accounted for as the acquirer and as the surviving
accounting entity because the former stockholder of LK Global received
approximately 99% of the voting rights in the combined corporation. The shares
issued by Juno have been accounted for as if those shares comprised the
historical share capital of LK Global. The outstanding capital stock of Juno, at
the date of the 1997 Acquisition, has been accounted for as shares issued by LK
Global to acquire the net assets of Juno.
Because LK Global is the accounting survivor, the financial statements
presented for all periods are those of LK Global and its subsidiaries
(collectively, the "Company") with a change in name to AremisSoft Corporation
shortly after the 1997 reorganization. All inter-company accounts and
transactions are eliminated in consolidation.
During 1999, AremisSoft reincorporated in Delaware. As a result of this
reincorporation, shareholders of the Nevada corporation have effectively become
shareholders of the newly formed Delaware corporation.
Revenue Recognition
The Company derives its revenue primarily from software licenses,
maintenance and service contracts and hardware sales. Software license revenues
are mainly derived from the licensing and service of industry-specific software
applications, primarily the sale of upgrades to existing customers. Maintenance
and service contract revenues are primarily derived from ongoing support of
installed software, and training, consulting and implementation services.
Hardware sales revenues are primarily derived from the sale of third-party
hardware to customers requiring turnkey solutions.
Software license revenues consist of sales of software licenses which,
for periods subsequent to December 31, 1997, are recognized in accordance with
the American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, "Software Revenue Recognition." Under SOP 97-2, software license
revenues are recognized upon execution of a contract and delivery of software,
provided that the license fee is fixed and determinable, no significant
production, modification or customization of the software is required and
collection is considered probable by management. When contracts do require
significant production, modification or customization of software, the Company
recognizes revenue under the percentage of completion method. During 1999,
software license revenues were recognized in accordance with SOP 97-2, as
modified by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition
<PAGE>43
with respect to Certain Transactions." The Company believes it is in compliance
with SOP 97-2, as modified by SOP 98-9.
The Company also enters into arrangements with customers to use
multiple copies of software products under site license agreements. If all other
criteria for recognition of revenue are met, revenue is recognized upon delivery
of the product.
Product sales to distributors are not recognized until the products
have been shipped to the end-user. Maintenance contract revenues are recognized
ratably over the life of the contract. Service contract revenues are recognized
in accordance with the terms of the contract and add-on hardware sales revenues
are recognized when the hardware is shipped to the customer. The Company does
not enter into sales contracts, either for direct sales or with distributors,
which include provisions for rights of return. In addition, the Company does not
enter into price protection agreements or inventory balancing agreements with
distributors.
Fees earned during 1999 from contracts accounted for under the
percentage of completion method amounted to approximately $10.2 million, while
billed and unpaid receivables due under these contracts amounted to
approximately $2.0 million at December 31, 1999. Fees earned during 1998 from
contracts accounted for under the percentage of completion method amounted to
approximately $9.2 million, while billed and unpaid receivables due under these
contracts amounted to approximately $5.0 million at December 31, 1998. These
contracts involved substantial modification and customization of the Company's
core software, Aremis 4.0 architecture, in industries where the Company did not
have a fully developed "off the shelf" software product to offer the customer.
These contracts typically provide for defined milestone objectives with payment
when the milestone is achieved and the customer has accepted delivery. There
were no amounts included in accounts receivable relating to unbilled amounts or
retainage. Prior to 1998, the Company did not receive any revenues from
agreements which required contract accounting.
Foreign Currency
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 exchange 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.
International Operations
The Company currently has operations in the United Kingdom, the United
States, Argentina, Mexico, India, Ireland, Bulgaria and Cyprus and independent
distributors in 14 additional countries. A significant portion of the Company's
revenues are received in currencies other than the United States dollar (the
currency into which the Company's historical financial statements have been
translated), primarily British pounds. As a result, a portion of the Company's
sales are subject to certain risks, including adverse developments in the
foreign political and economic environment, trade barriers, managing foreign
operations and potentially adverse tax consequences. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's financial condition or results of operations in the future.
<PAGE>44
Cash Equivalents
Cash equivalents consist of highly liquid investments with
insignificant interest rate risk and a maturity date of three months or less
when purchased. They are carried at cost which approximates fair value.
Inventory
Inventory is comprised of finished goods held for resale and
maintenance parts. Finished goods held for resale are stated at the lower of
cost or net realizable value. Cost is determined on a first-in first-out basis,
and includes all direct costs incurred and attributable production overheads.
Net realizable value is based on estimated selling price net of completion and
disposal costs. Maintenance parts are valued at cost and are depreciated over a
three-year period.
Purchased and Developed Software
The Company capitalizes the qualifying costs of developing its software
products. Capitalization of such costs requires that technological feasibility
has been established. The Company defines the establishment of technological
feasibility as the completion of all planning, designing, coding and testing
activities that are necessary to establish products that meet design
specifications, including functions, features and technical performance
requirements. In most instances the Company may arrange for customer testing and
considers the customers' feedback in determining if feasibility is established.
Development costs incurred prior to the establishment of technological
feasibility are expensed as incurred. When the software is fully documented and
available for unrestricted sale, capitalization of development costs ceases, and
amortization commences and is computed on a product-by-product basis, based on
either a straight-line basis over the economic life of the product or the ratio
of current gross revenues to the total of current and anticipated future gross
revenues, whichever is greater.
The Company capitalizes as purchased software the costs associated with
software products either purchased from other companies for resale or developed
by other companies under contract with the Company. The cost of the software is
amortized on the same basis as capitalized software development costs. The
amortization period is re-evaluated quarterly with respect to certain external
factors including, but not limited to, technological feasibility, anticipated
future gross revenues, estimated economic life and changes in software and
hardware technologies.
The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenues, estimated economic life and changes in software and hardware
technologies. Realization of capitalized software costs is subject to the
Company's ability to market its software products in the future and generate
cash flows sufficient to support future operations.
Intangible Assets
Goodwill and other intangible assets consisting of customer lists and
management employment agreements related to acquired businesses are being
amortized over periods of three to five years. Amortization of intangibles
amounted to $97,000, $74,000 and $0 for the years ended December 31, 1997, 1998
and 1999 respectively.
<PAGE>45
Property and Equipment
Property and equipment is recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets as
follows:
Leasehold improvements................shorter of the lease term or economic life
Fixtures and equipment................three to five years
Motor vehicles........................four years
Impairment of Long-lived Assets
In the event that facts and circumstances indicate that the carrying
value of an asset may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated fair market value of the
asset would be compared to the asset's carrying value to determine if a
write-down to the lower of carrying value or market value is required.
Offering Costs
In July 1998, the Company filed an S-1 Registration Statement in
connection with an initial public offering ("IPO") of its common stock. As a
result of a delay in the registration process, the Company wrote off
approximately $1.6 million in offering costs in 1998. Offering costs incurred in
1999 were capitalized and have been offset against the proceeds from the
offering.
Accounting for Stock Based Compensation
Employee stock options are accounted for under Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25), which
requires recognition of expense when the option price is less than the fair
value of the stock at the date of grant.
The Company generally awards options for a fixed number of shares at an
option price equal to the fair value at the date of grant. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standard (SFAS) No. 123 "Accounting for Stock-Based Compensation" (SFAS 123).
Income Taxes
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to net
operating loss carryforwards and differences between the financial statement
carrying amounts of existing assets and liabilities, and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recorded at their estimated realizable value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
<PAGE>46
Certain estimates used by management are particularly susceptible to
significant changes, such as the recoverability and amortization periods of
purchased and developed software and intangible assets. Management believes that
the estimates used are adequate based on the information currently available.
Net Income (Loss) Per Common Share
SFAS No. 128 "Earnings per share" requires the presentation of basic
and diluted earnings per share. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding for the period. The diluted net income (loss) per share data
is computed using the weighted average number of shares of common stock
outstanding plus the dilutive effects of common stock equivalents.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1997 1998 1999
--------- ---------- ---------
Numerator used for basic and diluted earnings (loss) per share:
Income (loss) before extraordinary item......................... $ (1,620) $ 3,175 $ 12,117
Extraordinary item.............................................. -- -- 1,163
--------- ---------- ---------
Net income (loss)............................................... $ (1,620 $ 3,175 $ 13,280
========= ========== =========
Denominator for basic earnings (loss) per share:
Weighted average shares outstanding............................. 7,518 9,120 12,762
========= ========== =========
Denominator for diluted earnings (loss) per share:
Denominator for basic earnings (loss) per share................. 7,518 9,120 12,762
Effect of dilutive securities:
Warrants and options......................................... -- 15 701
--------- ---------- ---------
Weighted average shares outstanding............................. 7,518 9,135 13,463
========= ========== =========
Basic earnings (loss) per share:
Before extraordinary item......................................... $ (0.21) $ 0.35 $ 0.95
Extraordinary item................................................ -- -- 0.09
--------- ---------- ---------
After extraordinary item.......................................... $ (0.21) $ 0.35 $ 1.04
========= ========== =========
Diluted earnings (loss) per share:
Before extraordinary item......................................... $ (0.21) $ 0.35 $ 0.90
Extraordinary item................................................ -- -- 0.09
--------- ---------- ---------
After extraordinary item.......................................... $ (0.21) $ 0.35 $ 0.99
========== ========== =========
</TABLE>
Fair Value of Financial Instruments
In the opinion of management the carrying amounts for the Company's
financial instruments which include cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses approximate fair values.
Estimates are not necessarily indicative of the amounts which could be
realized or would be paid in a current market exchange. The effect of using
different market assumptions and/or estimation methodologies may be material to
the estimated fair value amount.
<PAGE>47
2. Inventory
Inventory consists of the following (in thousands):
December 31,
-----------------
1998 1999
------- -------
Finished goods held for resale............................. $ 287 $1,321
Maintenance parts.......................................... 500 282
-------- ------
$ 787 $1,603
======== ======
3. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
-----------------
1998 1999
------- -------
Fixtures and equipment..................... $5,652 $ 5,833
Motor vehicles............................. 360 81
Leasehold improvements..................... 288 280
------- -------
6,300 6,194
Less accumulated depreciation.............. (4,526) (4,347)
------- -------
$1,774 $ 1,847
======= =======
At December 31, 1998 and 1999, the Company held property and equipment
with a net book value of $98,000 and $27,000, respectively, under capital
leases.
Depreciation expense was $977,000, $695,000 and $1,093,000 for the
years ended December 31, 1997, 1998 and 1999, respectively.
4. Bank Loans Payable
Bank loans payable at December 31, 1998, all of which is collateralized
and fully guaranteed, consists of the following (in thousands):
<TABLE>
<S> <C>
Description
Loan payable to bank, interest payable quarterly at 3% over bank base rate, principal due in
monthly installments of $10.................................................................. $ 187
Loan payable to bank, interest payable quarterly at 3% over Sterling LIBOR plus 1/16% associated
costs, principal due in quarterly installments of $146....................................... 1,019
Loan payable to bank, interest payable quarterly at 3% over Sterling LIBOR plus 1/16% associated
costs, principal due in quarterly installments of $85........................................ 768
Loan payable to bank, interest payable quarterly at 3% over Sterling LIBOR inclusive of associated
costs, principal due in quarterly installments of $119....................................... 714
Loan payable to bank, interest payable monthly at 4% over Sterling LIBOR plus
variable associated funding costs, averaging 1/32% in 1998, principal due
in equal annual installments of $1,872...................................................... 7,487
Loan payable to bank, interest payable at 12% per annum........................................... 35
Short term demand facility-- bears interest at the lending banks base rate plus the applicable
margin....................................................................................... 5,320
-------
Total....................................................................... $ 15,530
========
</TABLE>
<PAGE>48
During 1999 all of the above loans were repaid primarily from the proceeds of
the Company's initial public offering. Management negotiated a settlement with
the lender whereby approximately $1,163,000 (net of tax) of principal
indebtedness was forgiven. This amount has been reflected as an extraordinary
item in the accompanying consolidated statement of operations. The lending
bank's base rate ranged between 6.25% and 7.5% and Sterling LIBOR ranged between
6.6% and 7.9% during the year ended December 31, 1999.
5. Acquisitions and Dispositions
Acquisition
In December 1999, the Company acquired all the issued and outstanding
common stock of e-nnovations.com in exchange for approximately $14.5 million in
cash. The acquisition has been accounted for using the purchase method of
accounting. The operations of e-nnovations.com are included in the accompanying
consolidated financial statements from the date of acquisition. e-nnovations.com
is an Internet software solutions provider. The excess of purchase price over
net assets acquired amounted to approximately $13.8 million and has been
temporarily allocated to goodwill. Management is currently evaluating the
allocation of goodwill to certain identifiable intangible assets. Amortization
of goodwill and identifiable intangible assets are expected to be provided on a
straight line basis over three years. Amortization expense in 1999 was not
material.
The aggregate estimated fair value of the assets and liabilities of the
acquired business and the aggregate consideration paid is as follows (in
thousands):
Net current assets (including cash of $2).................. $ 603
Property and equipment..................................... 126
Intangible assets.......................................... 13,810
-------
$14,539
=======
Consideration paid:
Cash consideration......................................... $ 14,539
Disposition
In October 1999, the Company disposed of its Cyprus operations in
exchange for approximately $2.6 million in cash to be received in 2000 and
approximately 4 million shares of common stock (representing a 9.5% interest) in
GlobalSoft.com. GlobalSoft.com is a software development company with operations
in Cyprus and Eastern Europe. GlobalSoft.com was formed in 1999 by the
acquisition of AremisSoft (Cyprus) Ltd as well as six other unrelated Cyprus
entities. The Company's CEO is also the chairman of the board of GlobalSoft.com.
A summary of the exchange transactions is as follows (in thousands):
Net assets disposed off............................................. $ 4,353
Estimated fair value of shares of GlobalSoft.com(1)................. $ 1,803
Cash to be received................................................. 2,592
-------
4,395
Gain on disposal.................................................... $ 42
=======
- - ------------
(1) The value of the GlobalSoft.com shares at the date of acquisition was
estimated at $0.45 per share based upon similar sales of GlobalSoft.com
common stock to third parties. At December 31, 1999, the Company accounts
for this investment under the cost method.
<PAGE>49
The Cyprus operations included in the accompanying 1998 and 1999
consolidated statements of operations are as follows (in thousands, except per
share amounts):
Year Ended
December
31,
---------------
1998 1999
------ -------
Revenues.............................................. $ 810 $ 669
Net income............................................ 285 286
Basic earnings per share.............................. 0.03 0.02
Diluted earnings per share............................ 0.03 0.02
The following unaudited pro forma results of operations for the year
ended December 31, 1999 assume that the acquisition of e-nnovations.com and
disposition of Cyprus had occurred on January 1, 1999 (in thousands, except per
share amounts):
Revenues......................................................... $75,633
Net income....................................................... 8,776
Basic earnings per share after extraordinary item................ 0.69
Diluted earnings per share after extraordinary item.............. 0.65
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisition and disposition had occurred on
January 1, 1999, nor is it indicative of future operating results.
6. Capital Lease Obligations
The Company has entered into various non-cancelable capital lease
agreements for items of property and equipment. Annual payments for the years
ending December 31, 2000 and 2001 are as follows (in thousands):
2000............................................................. $ 27
2001............................................................. 3
-----
30
Less amount representing interest................................ 4
-----
26
Less current portion............................................. 24
-----
$ 2
=====
7. Commitments
Operating Leases
The Company leases office space, equipment and motor vehicles under
non-cancelable operating leases which expire on various dates through 2012. As
of December 31, 1999 required future minimum rentals to be paid are as follows
(in thousands):
2000........................................................... $ 1,201
2001........................................................... 797
2002........................................................... 626
2003........................................................... 421
2004........................................................... 378
Thereafter..................................................... 2,831
-------
$ 6,254
=======
<PAGE>50
Rent expense for the years ended December 31, 1997, 1998 and 1999 amounted
to approximately $1.9 million, $2.0 million and $1.4 million, respectively.
Registration rights
In connection with the private placement to third party investors of the
Company's common stock and convertible notes in 1998, the investors were granted
registration rights. Pursuant to their registration rights, the holders thereof
may require the Company to register under the Securities Act all or a portion of
their shares at the Company's expense. In addition, if the Company proposes to
register any of its securities either for its own account or the account of
others these investors are entitled to include their shares in the registration
at the Company's expense.
Employment Agreements
The Company has entered into employment agreements with its Chief Executive
Officer (CEO) and its President which expire on June 1, 2001. Each of the
employment agreements may be terminated by the Company or the employee without
cause (as defined in the employment agreements) upon 30 days notice, or for
cause without notice. Under the terms of the CEO's employment agreement, he is
entitled to minimum annual compensation of $350,000 in 2000 and $400,000 in
2001. Under the terms of the President's employment agreement, he is entitled to
minimum annual compensation of $300,000 in 2000 and $350,000 in 2001. Under
their employment agreements, each is entitled to receive a severance benefit
equal to one times annual compensation if terminated without cause and 2.99
times his annual compensation if terminated without cause within 180 days after
a "change in control" (as defined). The CEO and the President are also entitled
to bonuses (estimated at $600,000 in 1999) based on a bonus plan adopted by the
compensation committee at its December 1999 meeting.
During the third and fourth quarters of 1998, the Company's president
made loans to the Company in the aggregate principal amount of approximately
$1.7 million. The loans were reflected in a promissory note dated December 31,
1998, bearing interest at the rate of LIBOR plus 2% per annum and was repaid in
1999.
In May 1998, the Company loaned $2.6 million to its CEO, which was
evidenced by a promissory note in order to provide temporary liquidity to the
CEO. The loan accrued interest at the rate of LIBOR plus 2% per annum and was
repaid in November 1999.
Employee Benefit Plans
The Company has various defined contribution retirement plans for
qualified employees. Contributions made under the plans were $328,000, $311,000
and $115,000 in 1997, 1998 and 1999, respectively.
<PAGE>51
8. Income Tax
The Company's principal subsidiaries are not resident in the United
States for tax purposes. Income (loss) from operations before income taxes and
extraordinary items included the following:
<TABLE>
<S> <C> <C> <C>
Year Ended
December 31,
--------------------------------
1997 1998 1999
-------- ---------- --------
US income (loss).............................................. $ (103) $ (1,917) $ (816)
Foreign income (loss)......................................... (1,482) 7,118 18,030
-------- ---------- --------
$ (1,585) $ 5,201 $17,214
========= ========== ========
The provision for income taxes was estimated as follows:
Income taxes estimated to be payable (refundable) currently
US Federal.................................................. $ 23 $ 963 $ (519)
US state and local.......................................... 11 (1) 6
Foreign..................................................... 1 1,064 5,610
-------- ---------- --------
$ 35 $ 2,026 $5,097
========= ========== ========
A reconciliation of the provision for income taxes compared with the
amounts at the US federal statutory rate is as follows:
Year Ended
December 31,
--------------------------------
1997 1998 1999
-------- ---------- --------
Tax at statutory rate......................................... $ (539) $ 1,769 $5,853
Differences in tax rates...................................... 48 (9) (627)
Non-deductible expenses....................................... 733 499 841
Valuation allowance on operating loss......................... (207) 147 (496)
Prior years over accrued and other............................ -- (380) (474)
-------- ---------- --------
Income tax expense............................................ $ 35 $ 2,026 $5,097
======== ========== ========
</TABLE>
The Company's deferred tax assets as of December 31, 1998 and 1999
primarily consisted of the following (in thousands):
<TABLE>
<S> <C> <C>
December 31,
-------------------
1998 1999
-------- --------
Loss carry forwards....................................................... $ 3,083 $ 2,523
Equipment................................................................. 675 806
Other..................................................................... 290 223
-------- --------
4,048 3,552
Valuation allowance....................................................... (4,048) (3,552)
-------- --------
Total deferred tax assets............................................... $ -- $ --
======== ========
</TABLE>
<PAGE>52
Estimated net operating loss carryforwards at December 31, 1999 and their
expiration dates are shown below:
Expiration Net operating
Country of jurisdiction dates loss
- - ----------------------- ------------- -----------
United Kingdom............................ No expiration $ 8,410
United States............................. 2005-2018 $ 76
The Company has recorded a valuation allowance to offset the entire
deferred tax asset where it is more likely than not that the asset will not be
realized.
The Indian government, as a means of encouraging foreign investment,
provides significant tax incentives and exemptions to regulatory restrictions.
Certain of these benefits that directly affect the Company include, among
others, tax holidays (temporary exemptions from taxation on operating income)
and liberalized import and export duties. The current tax holiday to which the
Company is subject expires in 2001. To be eligible for certain of these tax
benefits, the Company must continue to meet certain conditions such as continued
operation in a qualifying software technology park and export sales of at least
75% of inventory turnover. A failure to meet such conditions could result in the
cancellation of the benefits or a requirement to pay damages in an amount to be
determined by the Indian government and customs duty on plant, machinery,
equipment, raw materials, components and consumables. With respect to duties,
subject to certain conditions, goods, raw materials and components for
production imported by the Company's offices in India are exempt from the levy
of a customs duty. No assurances can be given that such tax benefits will be
continued in the future or at their current levels.
9. Stockholders' Equity
Stock Split
In 1999, the Board of Directors approved a 1.711772-for-1 reverse stock
split of issued and outstanding common shares. All shares, per share and warrant
information in the accompanying financial statements has been restated to
reflect the effect of the split.
Common and Preferred Stock
During 1999, the Company completed an initial public offering of its
common stock and sold additional shares in a private placement whereby 5,130,000
shares of common stock were issued in exchange for approximately $30.2 million
in cash, net of issuance costs. The private placement occurred in October 1999
and resulted in $17.6 million in proceeds through the issuance of 1.6 million
shares to a related entity. This related entity also acquired an additional 1.2
million shares of the Company's common stock from an entity controlled by the
Company's CEO. At December 31, 1999, this related entity owned over 20% of the
Company's outstanding stock.
The Company is authorized to issue 85,000,000 shares of common stock,
par value $0.001 per share, and 15,000,000 shares of preferred stock, par value
$0.001 per share, two series of which have been designated as follows: 2,100,000
shares of Series A convertible preferred stock and 3,500,000 shares of Series B
convertible preferred stock.
The Company's Series A and Series B convertible preferred stock rank
pari passu except with respect to the right to receive dividends. In respect of
dividends, Series A holders are entitled to a non-cumulative cash dividend of
$0.40 per share per annum and Series B holders are entitled to a non-cumulative
cash dividend of $0.50 per share per annum, each commencing on September 1,
1998. In a liquidation, the preferred stock ranks in preference to the common
stock as to repayment of par value, and ratably with the common stock
thereafter.
<PAGE>53
The preferred stock is convertible at the rate of one share of
preferred stock for one share of common stock at the option of the holder. The
preferred stock is not redeemable. There are provisions to protect the preferred
holders from dilution in events such as subdivision or combination of the common
stock, the payment of stock dividends or distributions of other securities or
other reclassifications, exchanges or substitutions. The preferred stock votes
with the common stock on an as-converted basis.
On October 10, 1997, in connection with the Plan and Agreement of
Reorganization referred to in note 1, the Company offered its Series A
convertible preferred stock in a private placement. As a result of the private
placement 1,137,000 shares of the Series A convertible preferred stock were
issued and the Company received proceeds of approximately $6.4 million (net of
costs of $609,000), including shares issued to various parties in lieu of
commissions and finders' fees related to the private placement. In June 1998,
all of the outstanding Series A preferred stock was converted into common stock.
Upon conversion, all holders of the Company's Series A convertible preferred
stock waived their right to receive dividends as described above. At December
31, 1998 and 1999 there were no preferred shares outstanding.
Warrants
In connection with the issuance of its Series A convertible preferred
stock, the Company issued warrants to purchase an aggregate of 51,117 shares of
common stock. The warrants were issued in payment of finders' fees in connection
with the offering. Such warrants have an exercise price of $8.56 per share, are
assignable and expire on April 10, 2000. At the time of issuance management
determined that the value of the warrants was not material to the financial
statements.
During 1999 the Company issued warrants to purchase up to 330,000
shares of common stock at an exercise price of $7.50 per share to the
underwriters of the April 1999 IPO. The warrants are exercisable beginning April
27, 2000 and expire on April 22, 2003.
Convertible Promissory Note
In December 1998, the Company executed a convertible promissory note
(the "Note") in the principal amount of $500,000, which bears interest at the
rate of 8% per annum. The Note was issued, and the proceeds received, in January
1999. The Note converts into shares of the Company's common stock, at the option
of the holder at $8.56 per share. These securities were sold to one accredited
investor and a fee of 10% of the principal amount of the Note was paid as a
finder's fee. Management has evaluated the Note's beneficial conversion feature
and determined that its value was not be material to the basic financial
statements. In December 1999, the promissory note and accrued interest thereon
was converted into 62,759 shares.
Stock Option Plan
In October 1997, the Company adopted the "1998 Stock Option Plan",
which provides for awards in the form of options, including incentive stock
options ("ISOs") and non-statutory stock options ("NSOs"). Employees, directors,
consultants and advisors of the Company will be eligible for the grant of NSOs,
while only employees will be eligible for the grant of ISOs. Options will have a
term of up to ten years from the date of grant. In addition, the Company granted
options outside the 1998 Stock Option Plan. As of December 31, 1999, there were
2,288,000 options to purchase common stock outstanding.
<PAGE>54
A summary of the Company's stock option activity during 1999, and
related information follows:
<TABLE>
<S> <C> <C>
1999
---------------------------------------
Number of Weighted
options Average exercise
(in thousands) Price
---------------- -----------------
Outstanding at the beginning of year.............. -- --
Granted........................................... 2,288 $ 7.86
Outstanding at the end of year.................... 2,288 $ 7.86
Exercisable at end of year........................ 802 $ 9.08
</TABLE>
The exercise price of options outstanding as of December 31, 1999 ranged
from $5 to $14. The weighted average remaining contractual life of those options
is 4.5 years.
Options granted under the stock option plan are accounted for under APB 25,
and since options have been granted at prices equal to the fair value of the
Company's common stock on the date of grant, no compensation has been recognized
for the option grants. Had compensation cost for the plan been determined based
upon estimated fair value of the options at the grant dates consistent with FASB
123, pro forma net income after extraordinary item would have been approximately
$8.1 million or $0.64 per share-basic and $0.60 per share-diluted. The weighted
average fair value of options granted during 1999 is estimated to be $3.63 per
option assuming the following: no dividend yield, risk free interest rate of 6%,
an expected term of the option of 3 years, and an expected weighted average
volatility of 43%.
10. Segment Reporting Information
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.
<PAGE>55
Summarized financial information concerning the Company's reportable
segments is shown in the following table:
SEGMENTAL ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Manufacturing Healthcare Hospitality Construction Other Total
------------- ---------- ----------- ------------ ------- ---------
(in thousands)
Revenues from external customers............ $9,587 $18,909 $10,190 $3,318 $ 370 $ 42,374
Depreciation and amortization............... 258 318 167 59 342 1,144
Profit (loss) from operations............... 182 325 322 231 (750) 310
Total segment assets........................ 4,105 4,250 4,129 749 4,009 17,242
SEGMENTAL ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 1998
Manufacturing Healthcare Hospitality Construction Other Total
------------- ---------- ----------- ------------ ------- ---------
(in thousands)
Revenues from external customers............ $ 16,635 $15,990 $13,799 $4,421 $1,776 $ 52,621
Depreciation and amortization............... 189 216 207 43 379 1,034
Profit (loss) from operations............... 3,993 1,461 1,914 429 (566) 7,231
Total segment assets........................ 12,514 6,682 6,337 1,301 1,118 27,952
SEGMENTAL ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 1999
Manufacturing Healthcare Hospitality Construction Other Total
------------- ---------- ----------- ------------ ------- ---------
(in thousands)
Revenues from external customers............ $ 25,485 $19,988 $19,180 $5,305 $ 3,428 $ 73,386
Depreciation and amortization............... 321 352 328 74 316 1,391
Profit (loss) from operations............... 8,913 3,454 4,943 928 (363) 17,875
Total segment assets........................ 17,950 13,434 13,706 3,375 12,479 60,944
</TABLE>
The following table represents revenue by country based on country of
customer domicile and long-lived assets by country based on the location of the
assets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Revenue Long-lived Assets
--------------------------------- --------------------------------
Year Ended December 31, December 31,
--------------------------------- --------------------------------
1997 1998 1999 1997 1998 1999
--------- --------- ---------- --------- --------- ---------
United Kingdom................... $ 39,057 $ 31,100 $ 25,779 $ 1,649 $ 2,008 $ 1,645
Rest of Europe................... 1,002 13,069 32,073 1,109 577 400
United States.................... 1,840 1,517 2,272 107 111 105
Asia............................. 475 1,800 3,719 752 687 16,243
Rest of world.................... -- 5,135 9,543 20 12 15
--------- --------- ---------- --------- --------- ---------
$ 42,374 $ 52,621 $73,386 $ 3,637 $ 3,395 $ 18,408
========= ========= ========== ========= ========= =========
</TABLE>
11. Subsequent Event
Proposed Public Offering
The Company plans to file a registration statement with the Securities
and Exchange Commission for the sale of 2,800,000 shares of common stock
(excluding the underwriters' over-allotment option).
<PAGE>56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
e-nnovations.com Pvt Ltd
We have audited the accompanying consolidated balance sheets of
e-nnovations.com Pvt Ltd as of December 31, 1998 and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997, 1998
and 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
e-nnovations.com Pvt Ltd at December 31, 1998 and 1999, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Pannell Kerr Forster
Nicosia, Cyprus
March 14, 2000
<PAGE>57
E-NNOVATIONS.COM PVT LTD
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31,
-----------------------
1998 1999
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 24,600 $ 2,137
Accounts receivable, less allowances for doubtful accounts...................................... 250,182 400,098
Other receivables............................................................................... 33,813 --
Inventory....................................................................................... 92,871 115,050
Prepaid expenses and other assets............................................................... 72,893 113,484
--------- ---------
Total current assets.................................................................... 474,359 630,769
--------- ---------
Property and equipment, net....................................................................... 34,914 126,125
--------- ---------
Total assets............................................................................ $509,273 $756,894
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 48,155 $ 9,354
Deferred revenue................................................................................ 24,976 --
Bank loans and short-term demand facility....................................................... 28,374 --
--------- ---------
Total current liabilities............................................................... 101,505 9,354
--------- ---------
Long-term debt.................................................................................... 64,492 --
--------- ---------
Total liabilities....................................................................... 165,997 9,354
========= =========
Stockholders' equity:
Share capital................................................................................... 244 244
Additional paid up capital...................................................................... 58,617 58,617
Accumulated reserves............................................................................ 284,415 688,679
--------- ---------
Total stockholders' equity.............................................................. 343,276 747,540
--------- ---------
Total liabilities and stockholders' equity.............................................. $ 509,273 $ 756,894
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>58
E-NNOVATIONS.COM PVT LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C>
Year Ended
December 31,
------------------------------------------
1997 1998 1999
------------ ------------ -------------
Revenues:
Software licenses............................................................... $ 323,793 $ 720,276 $ 2,342,527
Maintenance and services........................................................ 94,299 152,496 233,802
Hardware and other.............................................................. 37,257 68,496 482,714
--------- --------- ------------
Total revenues.......................................................... 455,349 941,268 3,059,043
Cost of revenues:
Software licenses............................................................... 93,000 162,329 728,804
Maintenance and services........................................................ 57,672 84,458 167,132
Hardware and other.............................................................. 18,593 32,381 416,413
--------- --------- ------------
Total cost of revenues.................................................. 169,265 279,168 1,312,349
--------- --------- ------------
Gross profit:
Software licenses............................................................... 230,793 557,947 1,613,723
Maintenance and services........................................................ 36,627 68,038 66,670
Hardware and other.............................................................. 18,664 36,115 66,301
--------- --------- ------------
Total gross profit...................................................... 286,084 662,100 1,746,694
Operating expenses:
Sales and marketing............................................................. 83,330 62,942 218,961
Research and development........................................................ 124,742 224,167 985,949
General and administrative...................................................... 49,906 63,811 137,520
--------- --------- ------------
Total operating expenses................................................ 257,978 350,920 1,342,430
--------- --------- ------------
Profit from operations............................................................ 28,106 311,180 404,264
Other income (expenses):
Interest income................................................................. -- -- --
Interest expenses............................................................... (5,376) (9,111) --
--------- --------- ------------
Income before income taxes........................................................ 22,730 302,069 404,264
Income tax expense................................................................ -- -- --
--------- --------- ------------
Net income........................................................................ $ 22,730 $ 302,069 $ 404,264
========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>59
E-NNOVATIONS.COM PVT LTD
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C>
Share Capital Total
------------------ Additional Accumulated Stockholders'
Shares Amount Paid up Capital Reserves Equity
------ ------ --------------- ---------- -------------
Balance at December 31, 1996.................... 105 $244 $ 58,617 $ (40,384) $ 18,477
Net income.................................... -- -- -- 22,730 22,730
------ ------ --------------- ---------- -------------
Balance at December 31, 1997.................... 105 244 58,617 (17,654) 41,207
Net income.................................... -- -- -- 302,069 302,069
------ ------ --------------- ---------- -------------
Balance at December 31, 1998.................... 105 244 58,617 284,415 343,276
Net income.................................... -- -- -- 404,264 404,264
------ ------ --------------- ---------- -------------
Balance at December 31, 1999.................... 105 $244 $ 58,617 $ 688,679 $ 747,540
====== ====== =============== ========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>60
E-NNOVATIONS.COM PVT LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
------------------------------------
1997 1998 1999
---------- ----------- ----------
Cash flows from operating activities:
Net income....................................................................... $ 22,730 $ 302,069 $ 404,264
Adjustments to reconcile net income to cash provided by (used in)
operating activities
Depreciation................................................................... 14,203 16,415 62,318
Changes in assets and liabilities:
Increase in current assets.................................................. (81,999) (344,417) (178,873)
Increase in current liabilities............................................. 36,383 44,925 (92,151)
---------- ----------- ----------
Net cash provided by (used in) operating activities....................... (8,683) 18,992 195,558
Cash flows from investing activities:
Purchases of property and equipment.............................................. (26,496) (23,970) (153,529)
---------- ----------- ----------
Net cash used in investing activities..................................... (26,496) (23,970) (153,529)
Cash flows from financing activities:
Proceeds (repayment) of loan..................................................... 33,256 31,236 (64,492)
---------- ----------- ----------
Net cash provided by (used in) financing activities....................... 33,256 31,236 (64,492)
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents............................. (1,923) 26,258 (22,463)
Effect of foreign currency exchange rates on cash and cash equivalents........... -- -- --
Cash and cash equivalents, at beginning of the year............................ 265 (1,658) 24,600
---------- ----------- ----------
Cash and cash equivalents, at end of the year.................................. $ (1,658) $ 24,600 $ 2,137
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>61
E-NNOVATIONS.COM PVT LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Significant Accounting Policies
Nature of Operations
e-nnovations.com Pvt Ltd is an Internet software solutions provider and
it develops, markets, implements and supports enterprise-wide applications
software targeted to mid-sized organizations.
Organization and Basis of Presentation
The financial statements have been prepared under the historical cost
convention, in accordance with the generally accepted accounting principles in
the United States.
All expenses are accounted for on accrual basis.
Revenue Recognition
The Company derives its revenue primarily from software licenses,
maintenance and service contracts and hardware sales. Software license revenues
are mainly derived from the licensing and service of industry-specific software
applications, primarily the sale of upgrades to existing customers. Maintenance
and service contract revenues are primarily derived from ongoing support of
installed software, and training, consulting and implementation services.
Hardware sales revenues are primarily derived from the sale of third-party
hardware to customers requiring turnkey solutions.
Software license revenues consist of sales of software licenses which,
are recognized in accordance with the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 97-2, "Software Revenue Recognition."
Under SOP 97-2, software license revenues are recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management. When
contracts do require significant production, modification or customization of
software, the Company recognizes revenue under the percentage of completion
method. In 1999, software license revenues were recognized in accordance with
SOP 97-2, as modified by SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition with respect to Certain Transactions." The Company believes it is
currently in compliance with SOP 97-2, as modified by SOP 98-9.
Foreign Currency
The functional currency of the Company and its subsidiaries is the
Indian Rupee. 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".
Net gains and losses resulting from foreign exchange transactions are
included in the consolidated statements of operations.
Cash Equivalents
Cash equivalents consist of highly liquid investments with
insignificant interest rate risk and a maturity date of three months or less
when purchased. They are carried at cost, which approximates fair value.
<PAGE>62
Inventory
Inventory is comprised of finished goods held for resale and
maintenance parts. Finished goods held for resale are stated at the lower of
cost or net realizable value. Cost is determined on a first-in first-out basis,
and includes all direct costs incurred and attributable production overheads.
Net realizable value is based on estimated selling price net of completion and
disposal costs. Maintenance parts are valued at cost and are depreciated over a
three-year period.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets as
follows:
Leasehold improvements............ shorter of the lease term or economic life
Fixtures and equipment............ three to five years
Motor vehicles.................... four years
Impairment of Long-lived Assets
In the event that facts and circumstances indicate that the carrying
value of an asset may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated fair market value of the
asset would be compared to the asset's carrying value to determine if a
write-down to the lower of carrying value or market value is required.
Income Taxes
The Indian government, as a means of encouraging exports, provides
significant tax incentives and exemptions. Certain of these benefits that
directly affect the Company include, among others, tax holidays (temporary
exemptions from taxation on operating income) and liberalized import and export
duties.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
2. Inventory
Inventory consists of the following (in thousands):
December 31,
-------------------
1998 1999
------ -------
Finished goods held for resale............. $ 79 $ 81
Maintenance parts.......................... 14 34
------ -------
$ 93 $ 115
====== =======
<PAGE>63
3. Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
-------------------
1998 1999
------ -------
Fixtures and equipment.................... $ 158 $ 303
Motor vehicles............................ -- 8
------ -------
158 311
Less accumulated depreciation............. 123 185
------- -------
$ 35 $ 126
======= =======
Depreciation expense was $14, $16 and $62 for the years ended December
31, 1997, 1998 and 1999, respectively.
4. Segment Reporting Information
The following table represents revenue by country based on country of
customer domicile and long-lived assets by country based on the location of the
assets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Revenue Long-lived Assets
--------------------------------------- ----------------------------------
Year Ended December 31, December 31,
--------------------------------------- ----------------------------------
1997 1998 1999 1997 1998 1999
---------- ---------- ------------- ---------- ---------- ----------
Europe......................... $ 268,491 $ 470,634 $ 764,761 $ 2,105 $ 5,237 $ 25,225
Asia........................... 119,503 329,444 1,835,426 25,254 29,677 100,900
Rest of world.................. 67,355 141,190 458,856 -- -- --
--------- --------- ------------- -------- -------- ---------
$ 455,349 $ 941,268 $ 3,059,043 $ 27,359 $ 34,914 $ 126,125
========= ========= ============= ======== ======== =========
</TABLE>
<PAGE>64
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information for
AremisSoft Corporation (the "Company") set forth below gives effect to the
acquisition of e-nnovations.com Pvt Ltd ("e-nnovations.com"). The historical
financial information set forth below has been derived from, and is qualified by
reference to, the financial statements of the Company and e-nnovations.com and
should be read in conjunction with those financial statements and the notes
thereto included elsewhere herein. The unaudited pro forma condensed combined
financial information presents the combined results of operations of the
companies for the year ended December 31, 1999, giving effect to the Company's
acquisition of e-nnovations.com as if such acquisition had been consummated as
of January 1, 1999 under the purchase method of accounting. The information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The unaudited pro forma
condensed combined financial information does not purport to represent what the
consolidated results of operations or financial condition of the Company would
actually have been if the e-nnovations.com acquisition had in fact occurred on
January 1, 1999 nor does it purport to be indicative of the consolidated results
of operations or financial condition of the Company that may be achieved in the
future.
<PAGE>65
<TABLE>
<S> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Year Ended December 31, 1999
------------------------------------------------------------------------
Pro Forma Pro Forma
AremisSoft e-nnovations.com Combined Adjustments Combined
------------ ----------------- ---------- ------------ ----------
(In thousands, except per share data)
Revenues:
Software licenses.................................... $ 37,224 $ 2,343 $ 39,567 $ (109) $ 39,458
Maintenance and services............................. 30,435 234 30,669 (11) 30,658
Hardware and other................................... 5,727 483 6,210 (23) 6,187
------------ ----------------- ---------- ------------ ----------
Total revenues............................. 73,386 3,059 76,445 (143) 76,302
------------ ----------------- ---------- ------------ ----------
Cost of revenues:
Software licenses.................................... 4,468 729 5,197 (79) 5,118
Maintenance and services............................. 8,620 167 8,787 (8) 8,779
Hardware and other................................... 3,625 416 4,041 (20) 4,021
Amortization of purchased software and
capitalized software development cost.............. 98 -- 298 -- 298
------------ ----------------- ---------- ------------ ----------
Total cost of revenues..................... 17,011 1,312 18,323 (107) 18,216
------------ ----------------- ---------- ------------ ----------
Gross profit......................................... 56,375 1,747 58,122 (36) 58,086
------------ ----------------- ---------- ------------ ----------
Operating expenses:
Sales and marketing.................................. 25,518 219 25,737 (10) 25,727
Research and development............................. 5,916 986 6,902 -- 6,902
General and administrative........................... 7,108 137 7,245 (6) 7,239
Profit on disposition of subsidiary.................. (42) -- (42) -- (42)
Amortization of intangible assets.................... -- -- -- 4,603 4,603
------------ ----------------- ---------- ------------ ----------
Total operating expenses................... 38,500 1,342 39,842 4,587 44,429
------------ ----------------- ---------- ------------ ----------
Profit from operations............................... 17,875 404 18,279 (4,622) 13,657
Other income (expense):
Interest expense, net.............................. 661 -- 661 -- 661
------------ ----------------- ---------- ------------ ----------
Income before income taxes........................... 17,214 404 17,618 (4,622) 12,996
Income tax expense................................... 5,097 -- 5,097 -- 5,097
------------ ----------------- ---------- ------------ ----------
Income after taxes before extraordinary item......... 12,117 404 12,521 (4,622) 7,899
Extraordinary item-gain on debt forgiveness........ 1,163 -- 1,163 -- 1,163
------------ ----------------- ---------- ------------ ----------
Net income........................................... $ 13,280 $ 404 $ 13,684 $ (4,622) $ 9,062
============ ================= ========== ============ ==========
Basic earnings per share before extraordinary item...
$ 0.95 $ 0.62
============ ==========
Diluted earnings per share before extraordinary item.
$ 0.90 $ 0.59
=========== ==========
Basic earnings per share after extraordinary item....
$ 1.04 $ 0.71
=========== ==========
Diluted earnings per share after extraordinary item..
$ 0.99 $ 0.68
=========== ==========
Basic weighted average shares outstanding............ 12,762 12,762
Diluted weighted average shares outstanding.......... 13,405 13,405
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
condensed combined financial information.
<PAGE>66
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
In December 1999, the Company acquired all the issued and outstanding
common stock of e-nnovations.com in exchange for approximately $14.5 million in
cash. The acquisition has been accounted for using the purchase method of
accounting. The operations of e-nnovations.com are included in the historical
consolidated financial statements of the Company from the date of acquisition.
The excess of purchase price over net assets acquired amounted to approximately
$13.8 million and has been temporarily allocated to goodwill. Management is
currently evaluating the allocation of goodwill to certain identifiable
intangible assets. Amortization of goodwill and identifiable intangible assets
is being provided on a straight line basis over three years. An adjustment has
been made to the unaudited pro forma condensed combined financial information to
record $4,603,000 of amortization expense in 1999.
The accompanying historical financial statements of the Company include
the operations of e-nnovations.com from December 17, 1999, the date of
acquisition. The accompanying historical financial information of
e-nnovations.com reflect the operations of e-nnovations.com for the full 1999
year. Accordingly, a pro forma adjustment has been made to exclude 14 days of
operations of e-nnovations.com included in both entities historical figures.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>67
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists our current executive officers, directors
and other key employees:
<TABLE>
<S> <C> <C>
Name Age Position(s)
- - ---------------------------- ----- ----------------------------------------------------------
Dr. Lycourgos K. Kyprianou 45 Chairman of the Board and Chief Executive Officer
Roys Poyiadjis 34 President and Vice Chairman of the Board
Michael A. Tymvios 37 Chief Financial Officer
Noel R. Voice 58 Chief Operating Officer, Secretary and Director
M.C. Mathews 35 General Manager of Group Software Development and Director
Barry J. Crowe 55 General Manager of Manufacturing Systems
Dennis Badman 53 General Manager of Healthcare Systems
Michael J. Gadbury 52 General Manager of Hospitality Systems
Brian Rogers 59 General Manager of Construction Systems
Dann V. Angeloff 64 Director
George H. Ellis 51 Director
H. Tate Holt 48 Director
Theodoros Fessas 48 Director
George Papadopoulos 53 Director
John Malamas 52 Director
</TABLE>
Dr. Lycourgos K. Kyprianou has served as our chairman of the board and
chief executive officer since October 1997 and has served as chairman of the
board and managing director of our subsidiaries and predecessors since 1978. Dr.
Kyprianou is the sole founder of our worldwide business, including our software
development and support facility in India. Dr. Kyprianou received a bachelor of
science degree with first class honors in computer science from the University
of London and a doctorate in philosophy (computer science) from Cambridge
University.
Roys Poyiadjis has served as our president and vice chairman of the board
since June 1998 and our chief financial officer from October 1998 through
September 1999. From 1997 to 1998, Mr. Poyiadjis served as a partner of Alpha
Capital Limited, an investment banking firm primarily focused on investments in
technology companies. From 1995 to 1996, he served as a director of Lehman
Brothers International Ltd. and from 1993 to 1995 he served as an associate with
Morgan Stanley & Co. International Limited. Mr. Poyiadjis received a bachelor of
science (honors) degree in communications engineering from the University of
Kent and a masters degree in business administration from the London Business
School.
<PAGE>68
Michael A. Tymvios has served as our chief financial officer and senior
vice president of finance since September 1999. From 1991 to 1999, Mr. Tymvios
was a partner at Morison International, a certified public accounting firm.
Prior to joining Morison International, he was a senior manager at Deloitte
Haskins & Sells. He is a chartered certified accountant and a fellow member of
the Chartered Association of Certified Accountants of the United Kingdom. Mr.
Tymvios received a bachelor of science (honors) degree in economics from the
University of Athens.
Noel R. Voice has served as a director since June 1998 and as our chief
operating officer and secretary since October 1997. From 1992 to 1997, he served
as the senior vice president of administration of our United Kingdom operations.
From 1987 to 1992, he was founder and managing director of Noble Marketing Ltd.,
a sales and marketing consulting firm. From 1987 to 1989, he was managing
director of Cara Consulting Ltd., a United Kingdom hotel systems company.
M.C. Mathews has served as a director since April 1999 and has served as
our general manager of group software development since October 1997. Since
1995, he has served as the managing director of software engineering of LK
Global Software Engineering (India) Private Limited, one of our subsidiaries.
From 1992 to 1995, he served as our group project manager. Prior to joining us
in 1990, Mr. Mathews was employed as a programmer with Alphabetics Ltd., an IBM
distributor in India. Mr. Mathews received a bachelor of science (honors) degree
from Kerala and a masters of science degree in physics from Delhi Universities.
Barry J. Crowe has served as our general manager of manufacturing systems
since October 1997. Since 1995, Mr. Crowe served as project manager, account
manager and managing director of one of our subsidiaries, LK Global
Manufacturing Systems (UK) Limited. From 1992 to 1995, he was a managing
director of BEC Group Limited, a manufacturing computer systems company that we
acquired. From 1988 to 1991, he served as a consultant for the BM Group, plc, a
construction company. Mr. Crowe is a chartered structural engineer.
Dennis Badman has served as our general manager of healthcare systems since
May 1999 and a senior manager of healthcare systems since August 1998. From 1994
to 1998, Mr. Badman served as general manager of LK Global Field Engineering,
one of our subsidiaries. From 1989 to 1994, he served as the regional manager of
Misys Computer Maintenance.
Michael Gadbury has served as our general manager of hospitality systems
since October 1997. From 1996 to 1998, he served as director of international
business development of LK Global Hospitality Systems (UK) Limited, one of our
subsidiaries, From 1993 to 1996, he served as our managing director. From 1984
to 1993, he was a managing director of IGS Leisure Technology Limited, a hotel
computer systems company we acquired.
Brian Rogers has served as our general manager of construction systems
since October 1997. Since 1995, he has served as managing director of LK Global
Construction Systems (UK) Limited, one of our subsidiaries. From 1978 to 1995,
Mr. Rogers served as managing director for Briter Computer Systems Limited, a
manufacturing computer systems company that was acquired by LK Global
Construction Systems (UK) Limited, one of our subsidiaries.
Dann V. Angeloff has served as a director since April 1999. Mr. Angeloff is
the founder and president of The Angeloff Company, a corporate financial
advisory firm, a position he has held since 1976. He also currently serves as a
director of Public Storage, Inc., a New York Stock Exchange listed company,
Nicholas/Applegate Growth Equity Fund, top jobs.net, plc, a company quoted on
the Nasdaq National Market and various private companies. Mr. Angeloff is a
former trustee of the University of Southern California and is a university
counselor. He received a bachelor of science degree in business administration
and a masters degree in finance from the University of Southern California.
<PAGE>69
George H. Ellis has served as a director since April 1999. Mr. Ellis
currently serves as executive vice president and chief operating officer of the
Communities Foundation of Texas and is a founder and managing director of
Chaparral Ventures, Ltd. Since 1996, he has provided consulting services to
various technology related companies, and serves on the board of directors of
Neon Systems, Inc., and several private companies. From 1986 to 1996, he was the
chief financial officer of Sterling Software, Inc., a New York Stock Exchange
listed company. Mr. Ellis is a certified public accountant and attorney. He
received a bachelor of science degree in accounting from Texas Tech University
and a juris doctor degree from the Southern Methodist University School of Law.
H. Tate Holt has served as a director since April 1999. Since 1990, Mr.
Holt has been president of Holt & Associates, a growth management consulting
firm. From 1987 to 1990, he served as a senior vice president of Automatic Data
Processing (ADP). Prior to 1987, Mr. Holt held positions in various senior
sales, marketing and general management positions at IBM, Triad Systems
Corporation and ADP. Mr. Holt is also a director of DBS Industries, Inc. and
Onsite Energy Corporation. Mr. Holt received a bachelor of arts degree from
Indiana University.
Theodoros Fessas has served as a director since November 1999. Since 1981,
Mr. Fessas has been a majority shareholder and president of several companies,
including Info-quest, that comprise the QUEST Group, a diversified information
technology and communications enterprise, headquartered in Athens, Greece. Prior
to that, Mr. Fessas worked in the construction industry as an independent
engineer while also serving as a scientific associate with the thermodynamics
faculty of Metsovio University. Mr. Fessas received a bachelors of science
degree in mechanical engineering from National Technical University of Athens
and a master of science degree in thermodynamics from Birmingham University,
England.
George Papadopoulos has served as a director since November 1999. Mr.
Papadopoulos was appointed as the managing director of Info-quest in February
2000. From 1977 to January 2000, he was the general manager of Info-quest. From
1995 to 1996, he served as the general manager of Decision System Integration, a
subsidiary of Info-quest, and from 1985 to 1995, he was a founder and managing
director of ABC Systems and Software. Mr. Papadopoulos received a degree in
agricultural engineering from the University of Thessaloniki and a bachelors of
arts degree in economics from the University of Athens.
John Malamas has served as a director since November 1999. Since 1987, Mr.
Malamas has served as the corporate administrator and finance manager of the
QUEST Group. Mr. Malamas worked as a financial manager in various Greek and
multinational companies from 1973 to 1987 when he joined the QUEST Group. From
1990 to 1992, he served as the general manager of Com-Quest. Mr. Malamas
received a bachelors degree in business administration from University of
Pireus.
Board of Directors
Our board of directors consists of ten members, all of whom are elected for
one-year terms at each annual meeting of stockholders. Holders of shares of
common stock have no right to cumulative voting in the election of directors.
Consequently, at each annual meeting, a majority of the stockholders are able to
elect all of the directors.
Committees of the Board of Directors
Audit Committee
The audit committee of the board of directors makes recommendations
regarding the retention of independent auditors, reviews the scope of the annual
audit undertaken by our independent auditors and the progress and results of
their work, and reviews our financial statements, internal accounting and
auditing procedures and corporate program to ensure compliance with applicable
laws. The members of the audit committee are Messrs. Angeloff, Ellis and Holt.
<PAGE>70
Compensation Committee
The compensation committee of the board of directors reviews and approves
executive compensation policies and practices, reviews salaries and bonuses for
our officers, administers our 1998 Stock Option Plan and other benefit plans,
and considers other matters as may, from time to time, be referred to them by
the board of directors. The current members of the compensation committees are
Dr. Kyprianou and Messrs. Poyiadjis, Angeloff, Ellis and Holt.
Compensation of the Board of Directors
Our directors who are not also our employees or employees of one of our
subsidiaries receive $20,000 per year plus $1,000 for each board meeting
attended and $1,000 for each committee meeting attended. Directors do not
receive any other cash compensation for services as a director. All directors
are reimbursed for their expenses incurred in attending meetings. Each outside
director also receives, for each year of service as a director, options to
purchase 20,000 shares of common stock. All options are granted at an exercise
price equal to the fair market value of the common stock on the date of grant
and vest at the rate of 33 1/3% per year commencing on the grant date.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by or paid to our
chairman of the board and chief executive officer for 1997, 1998 and 1999 and
our two other highest paid executive officers whose total salary and bonuses for
1999 exceeded $100,000. No other executive officer's total annual compensation
for services rendered in all capacities for 1997, 1998 and 1999 exceeded
$100,000.
<TABLE>
<S> <C> <C> <C> <C> <C>
Summary Compensation Table
Long-Term
Compensation
Awards
Securities
-------------
Annual Compenation (1) All Other Underlying
------------------------------- ------------ --------------
Name and Principal Position Year Salary Bonus Compensation Options
- - ---------------------------------------- ------ --------- --------- ------------- --------------
Dr. Lycourgos K. Kyprianou(2)........... 1999 $250,000 $300,000 -- 700,000
Chairman of the Board and 1998 $250,000 $200,000 -- --
Chief Executive Officer 1997 $250,000 $200,000 -- --
Roys Poyiadjis ......................... 1999 $200,000 $300,000 -- 700,000
President and Vice Chairman of -- --
The Board
Noel R. Voice........................... 1999 $100,000 $ 50,000 -- 60,000
Chief Operating Officer, General
Manager of Healthcare Systems
and Secretary
- - --------------------------------------
</TABLE>
(1) As translated into United States dollars based upon the average conversion
rate in effect during each fiscal year.
(2) Does not include payment of business related expenses of $250,000 in each
of 1997 and 1998.
<PAGE>71
Option Grants in 1999
---------------------
The following table provides information relating to stock options
granted during the year ended December 31, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Individual Grants
---------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Total Annual Rates of Stock
Securities Options Price Appreciation For
Underlying Granted to Option Terms
Options Employees Exercise Price Expiration -------------------------
Name Granted (#) In Fiscal Year Per Share Date 5% 10%
- - ------------------------ ------------ ---------------- -------------- ----------- ------------ -----------
Dr. Lycourgos Kyprianou 400,000 17.48% $ 5.00 04/22/04 $552,563 $1,221,020
300,000 13.11 $10.875 09/01/04 901,369 1,991,789
Roys Poyiadjis 200,000 8.74 $ 5.00 04/22/04 276,282 $ 610,510
500,000 21.85 $10.875 09/01/04 1,502,281 3,319,648
Noel R. Voice 30,000 1.31 $ 5.00 04/22/04 41,442 $ 91,577
30,000 1.31 $10.875 09/01/04 90,137 199,179
</TABLE>
The exercise price of each option was equal to the fair market value of
our common stock on the date of the grant. Percentages shown under "Percent of
Total Options Granted to Employees in the Last Fiscal Year" are based on an
aggregate of 2,288,800 options granted to our employees under the 1998 Stock
Option Plan and outside of this plan during the year ended December 31, 1999.
Potential realizable value is based on the assumption that our common
stock appreciates at the annual rate shown, compounded annually, from the date
of grant until the expiration of the five-year term. These numbers are
calculated based on Securities and Exchange Commission requirements and do not
reflect our projection or estimate of future stock price growth. Potential
realizable values are computed by:
o Multiplying the number of shares of common stock subject to a given option
by the exercise price,
o Assuming that the aggregate stock value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the entire
five-year term of the option, and
o Subtracting from that result the aggregate option exercise price.
Fiscal Year End Option Values
The following table sets forth for each of the executive officers named
in the Summary Compensation Table the number and value of exercisable and
unexercisable options for the year ended December 31, 1999.
<TABLE>
<S> <C> <C> <C> <C>
Number of Securities Value of Unexercised
Underlying Unsecured Options In-The-Money Options
At December 31. 1999 at December 31, 1999
------------------------------------ ------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - ---------------------------- --------------- ----------------- ------------------ ---------------
Dr. Lycourgos Kyprianou 133,333 266,667 $ 3,666,657.50 $ 7,333,342.50
150,000 150,000 3,243,750.00 3,243,750.00
Roys Poyiadjis 66,666 133,334 1,833,315 3,666,685
250,000 250,000 5,406,250 5,406,250
Noel R. Voice 10,000 20,000 275,000 550,000
15,000 15,000 324,375 324,375
</TABLE>
<PAGE>72
Amounts shown under the column "Value of Unexercised In-The-Money Options
at December 31, 1999," represent the difference between the fair market value of
the shares of common stock underlying the options at December 31, 1999, $32.50
per share (the closing price on the last trading of 1999, as reported by the
Nasdaq National Market) less the corresponding exercise price of such options.
1998 Stock Option Plan
In October 1997, our board of directors adopted the 1998 Stock Option Plan,
which provides for awards in the form of options, including incentive stock
options and nonqualified stock options. Our directors, officers, employees and
consultants are eligible for the grant of nonqualified stock options, while only
our employees are eligible for the grant of incentive stock options. Options can
have a term of up to ten years from the date of grant.
The 1998 Stock Option Plan is administered by our compensation committee.
The consideration for each award under the 1998 Stock Option Plan is established
by the compensation committee, but in no event can the option exercise prices
for incentive stock options be less than 100% of the fair market value of the
common stock on the date of grant. Awards for employees have such terms and are
exercisable in such manner and at a time as the compensation committee
determines, subject to the terms of the plan.
Our board of directors may amend the 1998 Stock Option Plan as desired
without further action by our stockholders except as required by applicable law.
The 1998 Stock Option Plan will continue in effect, unless terminated by our
board of directors, for a term of ten years expiring in October 2007.
As of December 31, 1999, options to purchase 1,487,950 shares of common
stock were outstanding under the 1998 Stock Option Plan at a weighted exercise
price of $6.2382 per share. In addition, we granted options outside the 1998
Stock Option Plan to purchase 800,000 shares of common stock at an exercise
price of $10.875 per share. In February 2000, we granted options outside the
1998 Stock Option Plan to purchase an additional 750,000 shares of common stock
at an exercise price of $35.00 per share.
Employment Agreements
We have entered into employment agreements with Dr. Kyprianou and Mr.
Poyiadjis. The employment agreements for Dr. Kyprianou and Mr. Poyiadjis expire
on June 1, 2001. Each of the employment agreements may be terminated by us or
the employee without cause (as defined in the employment agreements) upon 30
days notice, or for cause without notice. Under the terms of Dr. Kyprianou's
employment agreement, Dr. Kyprianou is entitled to minimum annual compensation
of $350,000 in 2000 and $400,000 in 2001. Under the terms of Mr. Poyiadjis'
employment agreement, Mr. Poyiadjis is entitled to minimum annual compensation
of $300,000 in 2000 and $350,000 in 2001. Under their employment agreements, Dr.
Kyprianou and Mr. Poyiadjis are each entitled to receive a severance benefit
equal to one times his annual compensation if terminated without cause and 2.99
times his annual compensation if terminated without cause within 180 days after
a change in control. Each of these agreements also contain provisions
prohibiting each of Dr. Kyprianou and Mr. Poyiadjis from competing with us
during the term of their employment. The employment agreements with Dr.
Kyprianou and Mr. Poyiadjis also provide that we will indemnify them for any
losses, costs, damages or expenses incurred as a direct consequence of the
discharge of their duties or by reason of their status as our agents.
Dr. Kyprianou and Mr. Poyiadjis are also entitled to bonuses based on a
bonus plan adopted by the compensation committee at its December 1999 meeting.
Under this plan, Dr. Kyprianou and Mr. Poyiadjis are each entitled to receive a
bonus based on our ability to meet earnings per share targets, as established by
the board of directors or compensation committee. The bonus can be up to three
times their 2000 annual salaries, but cannot exceed $1.4 million individually.
In 1999, the compensation committee awarded each of Dr. Kyprianou and Mr.
Poyiadjis a $300,000 bonus.
<PAGE>73
Compensation Committee Interlocks and Insider Participation
The compensation committee of the board of directors consists of five
directors including Dr. Kyprianou, our chief executive officer, and Mr.
Poyiadjis, our president. A majority of the members of the compensation
committee are non-employee directors and none of our executive officers serve on
the board of directors or compensation committee of any other entities.
In May 1998, we loaned approximately $2.6 million to Dr. Kyprianou. The
loan accrued interest at the rate of LIBOR plus 2% per annum and was repaid in
November 1999.
During the third and fourth quarters of 1998, Mr. Poyiadjis made loans to
us in the aggregate amount of approximately $1.7 million. The loans were
reflected in a promissory note that accrued interest at the rate of LIBOR plus
2%. We repaid the loan in May 1999.
Limitation of Liability and Indemnification Matters
We have adopted provisions in our certificate of incorporation that limit
the liability of our directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under Delaware law. Delaware law provides that directors of a company will not
be personally liable for monetary damages for breach of their fiduciary duty as
directors, except for liability:
o for any breach of their duty of loyalty to the company or its stockholders,
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o that arises under Section 174 of the Delaware General Corporation Law for
unlawful payment of dividends or unlawful stock repurchases or redemptions,
or
o for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation and bylaws also provide for
indemnification of our directors and officers to the fullest extent permitted by
Delaware law. We have entered into separate indemnification agreements with some
of our directors and officers that could require us, among other things, to
indemnify such persons against some liabilities that may arise by reason of
their status or service as directors or officers and to advance their expenses
as a result of any proceeding against them as to which they could be
indemnified. We believe that the limitation of liability provision in our
certificate of incorporation and the indemnification agreements facilitate our
ability to continue to attract and retain qualified individuals to serve as
directors and officers.
<PAGE>74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The percentage of beneficial ownership for the following table is based
on 15,201,595 shares of common stock outstanding as of March 14, 2000.
Unless otherwise indicated, the address for each listed stockholder is:
c/o AremisSoft Corporation, Goldsworth House, Denton Way, Woking, Surrey GU21
3LG, United Kingdom. To our knowledge, except as indicated in the footnotes to
this table or pursuant to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to the shares of
common stock indicated.
<TABLE>
<S> <C> <C>
Name of Beneficial Owner Number of Shares Percent
- - ---------------------------------------- ---------------- ---------
Dr. Lycourgos K. Kyprianou(1)........... 7,637,379 48.90%
Info-quest S.A.(2) ..................... 7,220,713 47.50
AL. Pantou 25
Athens 17671 Greece
Roys Poyiadjis(3)....................... 1,162,953 7.46
Michael A. Tymvios...................... 10,000 *
Noel R. Voice........................... 35,000 *
M.C. Mathews............................ 35,000 *
Dann V. Angeloff........................ 40,000 *
George H. Ellis......................... 25,000 *
H. Tate Holt............................ 20,000 *
All directors and executive officers as a
group (8 persons)...................... 8,965,332 55.54
</TABLE>
- - -------------------------------------
(1) Represents shares held by LK Global (Holdings) N.V., for which Dr.
Kyprianou has sole voting and investment power, and includes 3,732,923
shares held by Info-quest S.A. which is a party to a voting agreement with
LK Global Holdings N.V. and Dr. Kyprianou.
(2) Represents 3,487,790 shares held by LK Global (Holdings) N.V., which is a
party to a voting agreement with Info-quest.
(3) Represents shares held by Onyx Capital, Inc. for which Mr. Poyiadjis has
sole voting and investment power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Info-Quest Private Placement
In October 1999, we raised approximately $17.6 million in a private
placement of 1.6 million shares of our common stock to Info-quest S.A.
Concurrent with the private placement, Info-quest acquired an additional 1.2
million shares of our common stock from LK Global (Holdings) N.V., a company
controlled by Dr. Kyprianou, our chief executive officer. In connection with
this private placement, we agreed to increase the size of our board of directors
to ten and nominate three representatives of Info-quest to our board of
directors so long as Info-quest holds twenty percent or more of our outstanding
common stock. If we increase the size of our board of directors or Info-quest
sells a portion of its shares, the number of directors it may nominate will be
adjusted in accordance with the agreement. As a result of the private placement
and concurrent purchase from LK Global (Holdings) N.V., Info-quest's holdings of
our common stock exceeded twenty percent of the outstanding common stock. In
accordance with the agreement, in November 1999 we increased the size of our
board to ten directors and appointed three representatives of Info-quest:
Messrs. Fessas, Papadopolous and Malamas.
<PAGE>75
We also granted Info-quest preemptive rights to acquire from us at
anytime we make further issuances of our equity or convertible debt securities
an amount of our securities necessary to maintain, after any future issuance,
its percentage of ownership in us immediately before the issuance.
Info-quest may require us to register under the Securities Act all or a
portion of its shares at our expense. In addition if we propose to register any
of our securities either for our own account or the account of others,
Info-quest is entitled to include their shares in the registration at our
expense. However, Info-quest agreed not to sell or transfer any of the shares
sold it by us until October 2000 without our prior written consent if, after
giving affect to the sale, Info-quest would hold less than twenty percent of our
outstanding common stock. Finally, Info-quest granted us a right of first
refusal with respect to any of the shares sold to it by us that it decides to
sell in the future.
In connection with the private placement to Info-quest in October 1999,
Info-quest entered into a voting agreement with LK Global (Holdings) N.V., a
company controlled by Dr. Kyprianou, our chief executive officer, in which
Info-quest and LK Global (Holdings) agreed to vote all of our shares owned by
them for a slate of directors, seven of which are nominated by us and three of
which are nominated by Info-quest, for a total of ten directors. Pursuant to the
voting agreement, both parties shall also agree on the voting of their shares on
all other matters. If Info-quest and LK Global (Holdings) cannot agree on the
voting of their shares for any particular matter, neither of the parties will
vote their shares on that matter.
Officer Loans
During the third and fourth quarters of 1998, Mr. Poyiadjis, our
president, made loans to us in the aggregate principal amount of approximately
$1.7 million. The loans were reflected in a promissory note dated December 31,
1998, bearing interest at the rate of LIBOR plus 2% per annum. We repaid the
loan in May 1999 and the largest aggregate amount outstanding under the note at
any time during 1999 was $1.8 million. The purpose of the loans made by Mr.
Poyiadjis was to provide us with additional working capital.
On May 15, 1998, we loaned $2.6 million to Dr. Kyprianou, our chief
executive officer, which was evidenced by a promissory note. The loan was made
to Dr. Kyprianou in order to provide temporary liquidity to Dr. Kyprianou. The
loan accrued interest at the rate of LIBOR plus 2% per annum. Dr. Kyprianou
repaid the loan in November 1999 and the largest aggregate amount outstanding
under the note at any time during 1999 was $1.9 million.
For a description of the employment and indemnification agreements we
have entered into with some of our directors and executive officers, please see
Item 10 of this report entitled "Executive Compensation."
Registration Rights
In connection with the private placement to third party investors of
our common stock and a convertible note in 1998, we granted the investors
registration rights. Pursuant to their registration rights, the holders thereof
may require us to register all or a portion of their shares at our expense. In
addition, if we propose to register any of our securities either for our own
account or the account of others, these investors are entitled to include their
shares in the registration at our expense.
We have also entered into registration rights agreements with each of
Dr. Kyprianou and Mr. Poyiadjis, who, as of March 14, 2000, beneficially own in
the aggregate 4,267,410 shares of our common stock of which 4,071,980 shares are
subject to the registration rights agreements, exclusive of the shares of
Info-quest which Dr. Kyprianou may be deemed to beneficially own as a result of
the voting agreement. Under these agreements, Dr. Kyprianou and Mr. Poyiadjis
each have the right to require us to use our best efforts to register all or a
portion of their 4,071,980 shares at our expense. In addition, if we propose to
register any of our securities either for our own account or the account of
<PAGE>76
others, Dr. Kyprianou and Mr. Poyiadjis are entitled to include their shares at
our expense. Dr. Kyprianou and Mr. Poyiadjis' registration rights are assignable
to parties who agree to be bound by the terms of registration rights.
In connection with our initial public offering in April 1999, we issued
warrants to Roth Capital Partners, Inc., formerly known as Cruttenden Roth
Incorporated. The warrants are exercisable beginning April 27, 2000 and the
holders have the right, subject to limitations, to require us to register the
shares of our common stock issuable upon exercise of the warrants. The expense
of one registration which is requested by Roth Capital Partners, Inc. will be
borne by us. All expenses of any subsequent registration shall be borne by them.
If we propose to register any of our securities either for our own account or
the account of others, the holders are also entitled to include their shares at
our expense.
For a description of the registration rights granted to Info-quest, see
"Info-quest Private Placement" above.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The financial statements, as set forth under Item 8, are filed as part
of this report on Form 10-K.
2. Schedules II - Valuation and Qualifying Accounts for the year ended
December 31, 1999 and 1998 are included herein and all other schedules
are omitted, as the required information is inapplicable or the
information is presented in the consolidated financial statements or
the related notes.
(b) Report on Form 8-K
On March 6, 2000, we filed with the Securities and Exchange Commission
a Form 8-K/A amending a Form 8-K dated December 30, 1999 regarding the
completion of the acquisition of ennovations.com. The purpose of the
amendment was to file the financial information required by Item 7 of
Form 8-K.
(c) Exhibit Index
Number Description of Document
2.1 Agreement of Merger between the Registrant and AremisSoft
Corporation, a Nevada corporation dated March 5, 1999(1)
2.2 Plan and Agreement of Reorganization between AremisSoft
Corporation, a Nevada corporation and LK Global Information
Systems, B.V.(1)
2.3 Addendum to the Plan and Agreement of Reorganization
between AremisSoft Corporation, a Nevada
corporation and LK Global Information Systems, B.V.(1)
3.1 Certificate of Incorporation of the Registrant(1)
3.2 Bylaws of the Registrant(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Form of Warrant to purchase Common Stock(1)
10.1 1998 Stock Option Plan(1)
10.2 Form of Incentive Stock Option Agreement(1)
10.3 Form of Nonqualified Stock Option Agreement(1)
10.4 Employment Agreement with Dr. Lycourgos K. Kyprianou,
Chairman of the Board and Chief Executive Officer(1)
10.5 Employment Agreement with Roys Poyiadjis, President and
Vice Chairman of the Board(1)
<PAGE>77
10.6 Indemnification Agreement between the Registrant and Dr.
Lycourgos K. Kyprianou(1)
10.7 Indemnification Agreement between the Registrant and
Roys Poyiadjis(1)
10.8 Convertible Promissory Note made by the Registrant in favor
of Arthur Sterling and Marie Sterling(1)
10.9 Registration Rights Agreement between the Registrant and Dr
Lycourgos K. Kyprianou(1)
10.10 Registration Rights Agreement between the Registrant and Roys
Poyiadjis(1)
10.11 Form of Registration Rights Agreement between the
Registrant and investors in the Registrant's October 1997
private placement(1)
10.12 Form of Registration Rights Agreement between the Registrant
and investors in the Registrant's February 1998 private
placement(1)
10.13 Stock Purchase Agreement between the Registrant and
Info-quest SA(1)
10.14 Contracts between the Registrant and the National Health
Insurance Fund of Bulgaria(1)
10.15 Share Purchase Agreement between the Registrant and
e-nnovations.com(2)
21.1 Subsidiaries of the Registrant(1)
27.1 Financial Data Schedule
- - ---------------
(1) Previously filed with the Registrant's Registration Statement on Form S-1
(No. 333-31768) filed on March 6, 2000.
(2) Incorporated by reference to the Registrant's Form 8-K filed on December
29, 1999
<PAGE>78
REPORT OF PANNELL KERR FORSTER, INDEPENDENT AUDITORS, ON SCHEDULE II
We have audited the consolidated financial statements of AremisSoft
Corporation as of December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999 and have issued our report thereon dated
March 2, 2000 (included elsewhere in this report). Our audits also included the
financial statement schedules listed in Item 8 of this report. These schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ PANNELL KERR FORSTER
London, England
March 5, 2000
<PAGE>79
SCHEDULE II
AREMISSOFT CORPORATION VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Add Items
Charged to
Balance at Costs and Exchange Balance at
Description Beginning of Period Expenses Difference Deductions End of Period
- - ----------- ------------------- -------- ---------- ---------- -------------
Year Ended December 31, 1997
Allowance for doubtful accounts $484 $560 $(16) $ 57 $971
Year Ended December 31, 1998
Allowance for doubtful accounts 971 110 10 452 639
Year Ended December 31, 1999
Allowance for doubtful accounts 639 652 19 765 507
</TABLE>
<PAGE>80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 AREMISSOFT CORPORATION
By: /s/ DR. LYCOURGOS K. KYPRIANOU
---------------------------
Dr. Lycourgos K. Kyprianou,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons, which include the principal
executive officer, the principal financial officer and a majority of the board
of directors on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Date
- - ------------------------------------ ---------------
/s/ DR. LYCOURGOS K. KYPRIANOU March 30, 2000
- - ------------------------------------
Dr. Lycourgos K. Kyprianou,
Chairman of the Board and
Chief Executive Officer
/s/ ROYS POYIADJIS March 30, 2000
- - -----------------------------------
Roys Poyiadjis,
President and Vice Chairman of the Board
/s/ MICHAEL TYMVIOS March 30, 2000
- - -----------------------------------
Michael Tymvios,
Chief Financial Officer
/s/ DANN V. ANGELOFF March 30, 2000
- - -----------------------------------
Dann V. Angeloff,
Director
/s/ GEORGE H. ELLIS March 28, 2000
- - -----------------------------------
George H. Ellis,
Director
<PAGE>81
/s/ TATE HOLT March 28, 2000
- - ----------------------------------
Tate Holt,
Director
/s/ NOEL VOICE March 28, 2000
- - -----------------------------------
Noel Voice,
Director
/s/ M.C. MATHEWS March 29, 2000
- - -----------------------------------
M.C. Mathews,
Director
/s/ THEODOROS FESSAS March 30, 2000
- - -----------------------------------
Theodoros Fessas,
Director
/S/ GEORGE PAPADOPOULOS March 30, 2000
- - -----------------------------------
George Papadopoulos,
Director
/s/ JOHN MALAMAS March 30, 2000
- - -----------------------------------
John Malamas,
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 FOR AREMISSOFT CORPORATION AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,386
<SECURITIES> 0
<RECEIVABLES> 18,622
<ALLOWANCES> (507)
<INVENTORY> 1,603
<CURRENT-ASSETS> 42,536
<PP&E> 6,194
<DEPRECIATION> (4,347)
<TOTAL-ASSETS> 60,944
<CURRENT-LIABILITIES> 24,696
<BONDS> 2
0
0
<COMMON> 15
<OTHER-SE> 36,231
<TOTAL-LIABILITY-AND-EQUITY> 60,944
<SALES> 42,951
<TOTAL-REVENUES> 73,386
<CGS> 8,093
<TOTAL-COSTS> 17,011
<OTHER-EXPENSES> 38,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 661
<INCOME-PRETAX> 17,214
<INCOME-TAX> 5,097
<INCOME-CONTINUING> 5,097
<DISCONTINUED> 0
<EXTRAORDINARY> 1,163
<CHANGES> 0
<NET-INCOME> 13,280
<EPS-BASIC> 1.04
<EPS-DILUTED> .99
</TABLE>
