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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ______ to ______
Commission file number: 33-81666
AREMISSOFT CORPORATION
(formerly known as Juno Acquisitions, Inc.)
(Exact name of Registrant as specified in its charter)
NEVADA 13-3690905
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
60 BISHOPSGATE LONDON EC2N 4AJ ENGLAND
(Address of principal executive offices)
(Registrant's telephone number, including area code 011-44-171-3091555
Check 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 such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for at least the
past 90 days.
Yes [ ] No [X]
The number of shares outstanding of registrant's only class of common
stock, as of June 24, 1998, was 17,097,720 shares of its common stock, par value
$0.001 per share.
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AREMISSOFT CORPORATION
Consolidated Balance Sheet
March 31, 1998
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(Note 1) (unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 239 $ 5,270
Accounts receivable 9,458 9,628
Other receivables 670 764
Inventory 1,070 1,153
Prepaid expenses and other assets 2,169 3,592
-------- --------
Total current assets 13,606 20,407
Property and equipment, net 2,040 2,059
Purchased and developed software 764 785
Intangible assets 832 808
-------- --------
Total assets $ 17,242 $ 24,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,244 $ 3,244
Accrued taxes payable 4,887 3,545
Current portion of capital lease obligations 40 39
Other accrued expenses 4,507 3,590
Bank loans and short-term demand facility 7,207 6,687
Deferred revenue 5,692 6,576
-------- --------
Total current liabilities 26,577 23,681
Long-term debt 10,096 10,262
Capital lease obligations, less current portion 103 --
Stockholders' equity (deficit):
Series A convertible preferred stock,
par value $0.001; authorized 2,100
shares; 1,945 shares issued and outstanding
at December 31, 1997 and March 31, 1998;
liquidating preference at par value 2 2
Series B convertible preferred stock, par
value $0.001; authorized 3,500
shares; no shares issued and outstanding
at December 31, 1997 and March 31, 1998;
liquidating preference at par value -- --
Common stock, par value $0.001; authorized
75,000 shares; 12,957 and 15,173 shares
issued and outstanding at December 31, 1997
and March 31, 1998, respectively 13 15
Additional paid-in capital 17,761 27,061
Accumulated deficit (35,376) (35,128)
Cumulative translation adjustment (1,934) (1,834)
-------- --------
Total stockholders' equity (deficit) (19,534) (9,884)
-------- --------
Total liabilities and stockholders' equity (deficit) $ 17,242 $ 24,059
======== ========
</TABLE>
- ----------
Note 1: The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date but does not include all of the
footnotes and information required by generally accepted accounting
principles.
The accompanying notes are an integral part of these consolidated
financial statements.
2
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AREMISSOFT CORPORATION
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
---------
1997 1998
---- ----
(unaudited)
<S> <C> <C>
Revenues:
Software licenses $ 2,787 $ 4,108
Maintenance and services 3,286 4,563
Hardware and other 1,089 1,425
-------- --------
Total revenues 7,162 10,096
Cost of revenues:
Software licenses 350 480
Maintenance and services 974 1,255
Hardware and other 855 1,140
Amortization of purchased software and
capitalized software development costs 17 17
-------- --------
Total cost of revenues 2,196 2,892
-------- --------
Gross profit 4,966 7,204
Operating expenses:
Selling and marketing 3,276 3,900
Research and development 1,560 1,495
General and administrative 1,350 1,080
Amortization of intangible assets 24 24
-------- --------
Total operating expenses 6,210 6,499
-------- --------
Profit (loss) from operations (1,244) 705
Other income (expense):
Interest income 2 28
Interest expense (540) (485)
-------- --------
Income (loss) before income taxes (1,782) 248
Income tax expense (benefit) (10) --
-------- --------
Net income (loss) $ (1,772) $ 248
======== ========
Basic earnings (loss) per share $ (0.14) $ 0.02
======== ========
Diluted earnings (loss) per share $ (0.14) $ 0.02
======== ========
Weighted average number of shares used in computing:
Basic earnings (loss) per share 12,845 14,175
======== ========
Diluted earnings (loss) per share 12,845 16,208
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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AREMISSOFT CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1998
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,772) $ 248
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 240 230
Amortization and write-off of capitalized software and
intangible assets 41 41
Changes in assets and liabilities, net of acquisitions
Accounts receivable (219) (170)
Other receivables (4) (94)
Inventory (25) (83)
Prepaid expenses (23) (1,423)
Accounts payable 136 (999)
Deferred maintenance revenue 443 884
Accrued taxes payable 147 (1,342)
Other accrued expenses 181 (917)
------- -------
Net cash used in operating activities (855) (3,625)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (150) (249)
Capitalized software development costs -- (38)
Payment for acquisitions, net of cash acquired -- --
Proceeds from disposal of property and equipment 150 --
------- -------
Net cash used in investing activities -- (287)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock -- 9,302
Stockholder contribution -- --
Long-term borrowings -- --
Principal payments of long-term borrowings (356) 166
Principal payments of capital lease obligations (4) (104)
Short-term demand facility 248 (520)
------- -------
Net cash provided by (used in) financing
activities (112) 8,844
------- -------
Net increase (decrease) in cash and cash equivalents (967) 4,932
Effect of foreign currency exchange rates on cash
and cash equivalents 353 99
Cash and cash equivalents, at beginning of period 867 239
------- -------
Cash and cash equivalents, at end of period $ 253 $ 5,270
======= =======
Supplemental disclosure:
Interest paid $ 518 $ 457
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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AREMISSOFT CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements and pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the fiscal year ended December 31, 1997.
In the opinion of management, the unaudited consolidated financial
statements contain all adjustments considered necessary to present fairly the
Company's financial position at March 31, 1998, results of operations and cash
flows for the three months ended March 31, 1998 and 1997. The results for the
period ended March 31, 1998, are not necessarily indicative of the results to be
expected for the entire fiscal year ending December 31, 1998.
At March 31, 1998, the Company was not in compliance with certain
financial covenants in the agreements relating to its long-term debt but has
obtained a waiver in respect of all covenants for the period to September 30,
1998, or until the completion of an IPO, whichever occurs first. In the event
that the Company does not complete an IPO by September 30, 1998, in order for
the Company to remain in compliance with any reinstated covenants it must
achieve its operating plan and/or raise additional capital or obtain an
extension of the waiver from the principle lender.
2. SIGNIFICANT ACCOUNTING POLICIES
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 using the translation principles set out in Statement of
Financial Accounting Standard No. 52. The consolidated balance sheets are
translated into United States dollars at the exchange rates prevailing at the
balance sheet dates and the statements of operations and cash flows at the
average rates for the relevant periods. Gains and losses resulting from
translation are accumulated as a separate component of stockholders' equity.
Net gains and losses resulting from foreign exchange transactions are
included in the consolidated statements of operations.
New Accounting Standards
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components.
SFAS 130 requires unrealized gains or losses on the Company's available-for-sale
securities, which currently are reported in stockholders' equity, to be included
in other comprehensive income and the disclosure of total comprehensive income.
The adoption of SFAS 130 is required in 1998 and will not have an impact on the
Company's net income or stockholders' equity.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS 131 is required for
periods beginning after December 15, 1997, though it is not required for interim
financial statements in its initial year of adoption in 1998 and will not have
any impact on the Company's consolidated results of operations, financial
position or cash flows.
Effective January 1, 1998, the Company adopted the American Institute of
Certified Public Accountants' ("AICPA") Statement of Position No. 97-2 "Software
Revenue Recognition" ("SOP 97-2"), which supersedes Statement of Position No.
91-1. SOP 97-2 addresses software revenue recognition matters primarily from a
conceptual level and detailed implementation guidelines have not been issued.
Restatement of prior financial statements is prohibited.
In March 1998, the AICPA issued Statement of Position No. 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition,"
which defers for one year the application of certain provisions of SOP 97-2.
These provisions limit what is considered vendor-specific objective evidence of
the fair value of the various elements in a multiple-element arrangement. All
other provisions of SOP 97-2 remain in effect.
3. SUBSEQUENT EVENTS
Conversion of Preferred Stock
On June 16, 1998, the holders of the Company's Series A preferred stock
converted their shares into common stock.
Proposed Public Offering of Common Stock
Subsequent to March 31, 1998, the Board of Directors authorized the Company
to file a Form S-1 Registration Statement with the SEC in connection with a
planned public offering of its common stock.
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THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS REPORT. THE COMPANY DISCLAIMS AN INTENT OR
OBLIGATION TO PUBLICLY UPDATE THESE "FORWARD-LOOKING" STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE.
All references to the "Company" or "AremisSoft" refer to AremisSoft Corporation,
a Nevada corporation, and its consolidated subsidiaries, except as otherwise
specifically noted herein.
CERTAIN CONSIDERATIONS
LOSS HISTORY; VOLATILITY AND SEASONALITY OF QUARTERLY OPERATING RESULTS
The Company has incurred net losses in the past five fiscal years. For
the years ended December 31, 1997, and December 31, 1996, the Company incurred
net losses of $1,620,000 and $15,304,000, respectively, and, as of December 31,
1997, had an accumulated deficit of $19,534,000. Although the Company achieved
limited profitability during the third and fourth quarters of 1997 and the first
quarter of 1998, no assurances can be given that the Company will sustain
profitability on a quarterly basis or achieve profitability on an annual basis.
See "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's quarterly operating results have varied, sometimes
substantially, in the past, and are expected to vary in the future. These
fluctuations may be caused by a variety of factors, many of which are outside of
the Company's control, including the relatively long sales cycles for the
Company's products, the size and timing of individual licensing transactions,
the timing, proper operation and market acceptance of new products or product
enhancements by the Company or its competitors, the potential for delay or
deferral of customer implementations of the Company's products, changes in
customer budget cycles, seasonality of technology purchases, foreign currency
exchange rates and other general industry and economic conditions. In addition,
the timing of revenue recognition can be affected by many factors, including the
timing of contract execution and delivery, customer acceptance and post-delivery
obligations of the Company related to installation and implementation. As a
result, the time between contract execution and the satisfaction of criteria for
revenue recognition can be lengthy and unpredictable and, consequently, affect
revenues and the Company's operating results in any given quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
A significant portion of the Company's accounts receivable are derived
from licensing arrangements to customers with which the Company does not have a
payment history. In addition, the Company's customers may decide not to honor
contractual obligations for license fees for various reasons including, but not
limited to, changes in their business levels or plans or implementation problems
associated with the Company's products. Although the Company provides reserves
and allowances for such circumstances, no assurances can be given that such
reserves and allowances will be adequate to cover any receivables which are
later determined to be uncollectible, particularly if such receivables are
large. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." In the event one or more customers failed to honor its
contractual obligations and the Company's reserves and allowances were
inadequate, such failure could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's business has experienced and is expected to continue to
experience seasonality due in large part to the buying cycles of its customers.
In recent years, the Company has generally had stronger demand for its products
during the second half of the calendar year. This seasonality is not uncommon in
the computer software industry and typically results in revenues for the first
half of the calendar year being lower than revenues in the second half of the
immediately preceding calendar year. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ASSIMILATION OF ACQUISITIONS
As part of its business strategy to increase its presence in certain
mid-sized organizations in the healthcare, manufacturing, hospitality and
construction industries (the "Vertical Markets") and complement and expand its
existing business and product offerings, the Company expects to continue to
pursue acquisitions of
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other businesses, products of technologies that are complementary to those of
the Company. Although the Company currently has no agreement, understanding or
arrangement with respect to any future acquisitions, the Company evaluates
potential strategic business opportunities, some of which may be material in
size and scope on an ongoing basis. No assurances can be given that any
acquisition by the Company will occur or that any acquisition will not have a
material adverse effect on the Company's business, operating results and
financial condition.
Acquisitions, including those consummated by the Company to date, involve a
number of risks and difficulties, including technology acceptance, expansion
into new geographic markets and business areas, the diversion of management's
attention, the assimilation of the operations and personnel of acquired
businesses and the integration of acquired operations and financial reporting
systems with those of the Company. No assurances can be given that the Company
will successfully integrate the operations of acquired businesses, which could
have a material adverse effect on the Company's business, operating results and
financial condition. Further, possible future acquisitions by the Company could
result in dilutive issuances of debt or equity securities, the incurrence of
additional debt and contingent liabilities, potential reductions in income due
to losses incurred by the acquired business, additional amortization expenses
related to goodwill and other intangible assets, and post-acquisition
restructuring charges, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. The Company has
in the past and may in the future incur significant indebtedness to finance
acquisitions, with associated interest costs, repayment terms and restrictive
covenants.
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in the last five fiscal years,
with total net revenues increasing from $2,670,000, $6,449,000 and $21,422,000
in fiscal 1993, 1994 and 1995, respectively, to $34,432,000 and $42,374,000 in
fiscal 1996 and 1997, respectively. The growth in the Company's business and
expansion of the Company's customer base has placed a significant strain on the
Company's management, operations and financial resources. The Company's recent
expansion has resulted in substantial growth in the number of its employees, the
scope of its operating and financial reporting systems and the geographic area
of its operations, creating increased responsibility for both existing and new
management personnel. The Company's ability to support the growth of its
business will be substantially dependent upon the ability to attract and retain
highly skilled personnel. Accordingly, the Company's future operating results
will depend on the ability of its officers and other key employees to continue
to implement and improve its operational and customer support systems and to
expand, train and manage its employee base. No assurances can be given that the
Company will be able to manage its recent or any future expansion successfully,
and any inability to do so would have a material adverse effect on the Company's
business, operating results and financial condition. See " -- Dependence on Key
Personnel; Need for Additional Qualified Personnel."
To manage its operations, the Company must continuously evaluate the
adequacy of its management structure and its existing procedures including,
among others, its financial and internal controls. No assurances can be given
that the Company's management will adequately anticipate all of the changing
demands that growth may impose on the Company's procedures and structure. Any
failure to adequately anticipate and respond to such changing demands could have
a material adverse effect on the Company's business, operating results and
financial condition.
RAPID TECHNOLOGICAL CHANGE; NEW VERSIONS AND PRODUCTS; RISK OF DEFECTIVE
PRODUCTS
The market for the Company's software 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. The Company's future success will depend upon
its ability to continue to enhance its 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.
The Company's customers utilize a wide variety of hardware, software, database
and networking platforms and, as a result, the Company must continue to support
and maintain its products on a variety of such platforms. In particular, the
Company must continue to anticipate and respond adequately to
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advances in other software and desktop computer operating systems such as
Microsoft Windows and its successors. The Company's future success will depend
upon its ability to address the increasingly sophisticated needs of its
customers by supporting existing and emerging hardware, software, database and
networking platforms and by developing and introducing enhancements to its
products and new products on a timely basis to keep pace with technological
developments, evolving industry standards and changing customer requirements. No
assurances can be given that the Company 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,
or that its new or enhanced products will achieve market acceptance.
The Company has, on occasion, experienced delays in the scheduled
introduction of new versions and new products. In addition, enterprise-wide
applications software products as complex as those offered by the Company may
contain undetected errors or "bugs" when first introduced or as new versions are
released that, despite testing by the Company, are discovered only after a
product has been installed and used by customers. No assurances can be given
that the Company's most current releases or future releases of its products will
not contain significant software errors that could impair the market acceptance
of these products and have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the announcement and
introduction of new products may depress sales of existing products. Further,
problems can be encountered by customers in installing and implementing new
releases or with the performance of the Company's products. Delays in the
introduction of new and enhanced products, or significant problems with the
implementation and installation of new releases could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN INDIA
A significant element of the Company's business strategy is to continue to
develop its offshore software development and support facility in New Delhi,
India. As of March 31, 1998, the Company had approximately 32% of its workforce
in India. 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 2004. To be eligible for certain of these tax
benefits, the Company must continue to meet certain conditions. A failure to
meet such conditions could result in the cancellation of the benefits. 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 at their current levels.
Although wage costs in India are significantly lower than in the United
States, 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 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 inflation rate
for the period discussed in this Report has been insignificant, increases
in inflation in the future could have a material adverse affect on the Company's
business, operating results and financial condition. In addition, changes in
interest rates, taxation or other social, political, economic or diplomatic
developments affecting India in the future could have a material adverse effect
on the Company's business, operating results and financial condition.
On May 13, 1998, the United States imposed immediate economic sanctions
against India, as required under Section 102 of the Arms Export Control Act, in
response to the detonation by India of nuclear devices. Japan and certain other
nations have also announced sanctions against India. Although most of the
current sanctions imposed by the United States restrict the United States from
providing assistance to India and do not directly limit the activities of United
States businesses, the precise ramifications of the sanctions are not expected
to be known for some time. Further, although the current sanctions do not
directly affect United States businesses, additional sanctions could be imposed
which could have a material adverse effect on United
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States businesses with operations, sales or suppliers in India. In addition, one
of these sanctions prohibits the export to India of specific goods and
technology, which may include certain technologies and equipment such as
computers, certain software and fiber optic devices. The United States
Department of Commerce and other agencies are currently preparing guidelines to
clarify the specific technologies that are affected. Although the Company does
not believe its activities are affected by the current sanctions, no assurances
can be given that the Company's technologies will not be included in the
specific technologies that are subject to the sanctions.
COMPETITION
The market for enterprise-wide applications software is intensely
competitive, fragmented, subject to rapid changes and significantly affected by
new product introductions and other market activities of industry participants.
The Company's products are primarily designed for and marketed to mid-sized
organizations in the Vertical Markets. A number of companies offer competitive
products to organizations in the Vertical Markets. In addition, the Company
faces indirect competition from suppliers of customized enterprise-wide
applications software primarily designed for proprietary mainframe and
minicomputer-based systems with highly customized software and the internal MIS
departments of large organizations who develop their own systems. Many of the
Company's present or potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition and a larger installed base of customers than the
Company. As a result, they may be able to respond more quickly than the Company
to new or emerging technologies and to changes in customer requirements, or they
may be able to devote greater resources to the development, promotion and sale
of their products.
The Company's products are currently marketed and sold primarily in the
United Kingdom. The Company's principal competitors in the healthcare industry
in the United Kingdom include Egton Medical Information Services ("EMIS"),
Reuters Group plc ("Reuters"), AAH Meditel, GPASS, HCSL, Exeter Systems, Medical
Care Systems, Microtest Europe Limited, PCTI Solutions Ltd. and Seetec Medical
Systems. Principal competitors in the manufacturing industry include QAD Inc.,
FOURTH SHIFT Corporation ("Fourth Shift"), Symix Systems, Inc. ("Symix"),
DataWorks Corporation ("DataWorks") and MDIS Group plc ("MDIS"). The Company's
principal competitor in the United Kingdom in the hospitality industry is
Innsite Hotel Services Ltd. and in Europe is MICROS-Fidelio International. In
the construction industry, the Company's principal competitors include FCG
Computer Systems/Red Sky Software Ltd., Misys plc, The Database Ltd.,
Engineering Technology Ltd. and Estimation Inc. The Company also believes that
large enterprise software vendors, such as Oracle Corporation ("Oracle"), SAP AG
("SAP"), Baan Company N.V. ("Baan") and PeopleSoft, Inc. ("PeopleSoft") are
increasing their marketing efforts to mid-sized organizations in the
manufacturing sector, one of the Vertical Markets in which the Company competes.
No assurances can be given that the Company will be able to compete successfully
against any of these competitors.
In addition, because the barriers to entry in the enterprise-wide
applications software market are relatively low, additional competitors may
emerge as the market continues to develop and expand. Because the
enterprise-wide applications software market is fragmented, the Company also
anticipates that acquisitions of competitors by large software companies or
strategic alliances will occur and that significant consolidation in the
Company's industry will occur over the next few years. Increased competition
from new entrants to the industry or through strategic acquisitions or alliances
could lead to price erosion, reduced margins or loss of market share, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. Further, the Company's growth strategy has been
and is expected to remain dependent to a significant extent on the Company's
ability to acquire complementary businesses, products or technologies in the
future. Increasing consolidation in the Company's industries will require the
Company to compete with other software companies and alliances for strategic
acquisition opportunities. No assurances can be given that the Company will be
able to successfully identify acquisition opportunities, that any acquisitions
will be successfully consummated and integrated into the Company's operations or
that the Company will be successful in competing for acquisition opportunities.
See "-- Assimilation of Acquisitions."
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GOVERNMENT REGULATION OF HEALTHCARE PRODUCT SPECIFICATIONS
The Company's healthcare products sold in the United Kingdom are regulated
by the National Health Service (the "NHS"), a government agency, through a
product accreditation procedure. While the Company's healthcare products
currently meet NHS specifications for information systems, the requirements are
expected to be updated pursuant to the NHS' new Information Management and
Technology Strategy, which is expected to be published in July 1998. The new
mandatory specifications are expected to be introduced to conform all
information technology systems in the United Kingdom's healthcare marketplace.
Although the Company is currently modifying its healthcare industry products in
anticipation of the proposed product specifications, no assurances can be given
that the Company will be able to meet all such specifications or, if met, that
the related costs will not be substantial or make the cost of the Company's
healthcare products prohibitive for potential customers. In addition, the
Company expects to experience a decrease in the number of purchases of its
existing healthcare products as businesses in the healthcare industry in the
United Kingdom postpone purchases pending release of the final new regulations
and related product specifications. Such regulations and related product
specifications, as well as future changes to NHS specifications for information
systems, could have a material adverse effect on the Company's business,
operating results and financial condition.
LENGTHY SALES AND IMPLEMENTATION CYCLES
The Company's 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 an evaluation of available enterprise-wide applications software
and require the Company to provide a significant level of education about the
use and benefits of the Company's products. Sales of the Company's software
products require an extensive marketing effort because decisions to license such
software generally involve the evaluation of the software by a significant
number of a potential customer's personnel in various functional and geographic
areas, many of which may have specific and conflicting requirements. A variety
of factors over which the Company has little or no control may cause potential
customers to favor a particular supplier or to delay or forego a purchase. As a
result of these or other factors, the sales cycles for the Company's products
can be lengthy and vary among customers and across the Vertical Markets. As a
result of the length of the sales cycle for its products, the Company's 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 have a material
adverse effect on the Company's business, operating results and financial
condition and cause the Company's operating results to vary significantly from
quarter to quarter. See "-- Loss History; Volatility and Seasonality of
Quarterly Operating Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's products are designed to perform or directly affect
business-critical functions across many different functional and geographic
areas of a customer's organization. Consequently, implementation of the
Company's software is subject to delays over which the Company has little or no
control. Delays in the completion of implementation of any of the applications
of its products by the Company can result in delay in revenue recognition and
may result in customer dissatisfaction or damage to the Company's reputation and
could have a material adverse effect on the Company's business, operating
results and financial condition. See "-- Loss History; Volatility and
Seasonality of Quarterly Operating Results."
INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS
The Company currently has operations in the United Kingdom, United States,
Argentina, Mexico, India, Ireland and Cyprus and 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. In the past, the Company has not engaged in hedging transactions
designed to manage currency fluctuation risks but may implement programs to
mitigate foreign currency risk exposure in the future as the Company's
management deems appropriate. Foreign currency transaction gains and losses
arising from normal business operations are
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<PAGE> 11
credited to, or charged against, earnings in the period realized. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to British pounds have caused and will continue to cause
foreign currency transaction gains and losses. Because of the number of
currencies involved, the constantly changing currency exposures and the
substantial volatility of currency exchange rates, no assurances can be given
that the Company will not experience currency losses in the future, nor can
there be any assurances that foreign exchange rate fluctuations will not have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's international operations are subject to other risks inherent
in international business activities, such as the imposition of governmental
controls, export license requirements, restrictions on the export of certain
technology, cultural and language difficulties associated with servicing
customers, the impact of a recessionary environment in economies outside the
United States, reduced protection for intellectual property rights in some
countries, the potential exchange and repatriation of foreign earnings,
political instability, sanctions imposed as a result of violations of
international law or other governmental action, trade restrictions, tariff
changes, localization and translation of products for foreign countries,
difficulties in staffing and managing international operations, difficulties in
collecting accounts receivable and longer collection periods and the impact of
local economic conditions and practices. See "-- Exposure to Regulatory and
General Economic Conditions in India." The Company's success in expanding its
international business will be dependent, in part, on its ability to anticipate
and effectively manage these and other risks. No assurances can be given that
these and other factors will not have a material adverse effect on the Company's
business, operating results and financial condition.
ENFORCEABILITY OF CIVIL LIABILITIES UNDER THE UNITED STATES SECURITIES LAWS
A majority of the Company's directors and substantially all of its
executive officers are non-residents of the United States. A substantial portion
of the assets of the Company and all or a substantial portion of the assets of
such persons are located outside the United States. As a result, it may not be
possible to effect service of process within the United States upon such persons
with respect to matters arising under the United States securities laws or to
enforce against the Company or such persons in United States courts judgments of
United States courts predicated upon civil liability under such securities laws.
Further, there is doubt as to the enforceability in the United Kingdom, in
original actions or in actions for enforcement of judgment of United States
courts, of civil liabilities predicated upon United States securities laws.
DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL QUALIFIED PERSONNEL
The Company's success depends, to a significant extent, upon a limited
number of members of senior management of the Company and other key employees.
Although the Company maintains and is the beneficiary under a key man life
insurance policy in the amount of $3,000,000 on the life of its Chairman of the
Board and Chief Executive Officer, Dr. Lycourgos K. Kyprianou, and maintains
such insurance for certain other key personnel in amounts ranging from $150,000
to $500,000, the loss of the services of Dr. Kyprianou or other key personnel
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company believes that its future operating results will also depend in
significant part on its ability to attract and retain highly skilled technical,
managerial, sales, marketing, service and support personnel. Competition for
such personnel within the software industry is intense. Although the Company has
increased the number of its technical, sales, services and support personnel in
recent years, the Company could experience difficulty in recruiting such
personnel in the future. The Company anticipates that it will need to continue
to increase the size of its direct sales, services and support personnel in
future periods. No assurances can be given that the Company will be successful
in attracting and recruiting qualified personnel. An inability to hire qualified
personnel on a timely basis could have a material and adverse effect on the
Company's business, operating results and financial condition. See
"-- Management of Growth."
11
<PAGE> 12
YEAR 2000 AND EURO COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. In addition, the Euro is expected to be introduced as the
currency of participating nations of the European Union in 1999. A significant
number of the Company's customers are located in participating European Union
countries. As a result, the computer systems or software used by many companies
may need to be upgraded to comply with Year 2000 and Euro requirements. Although
all of the software products currently marketed by the Company are designed to
be Year 2000 and Euro compliant, no assurances can be given that the Company's
software products contain all necessary date code or other applicable
modifications.
The purchasing patterns of customers and potential customers may be
affected by Year 2000 and Euro issues in a variety of ways. Many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 and Euro compliance. Even though the Company believes that
Year 2000 and Euro compliance could create a marketing opportunity for the
Company, the expenditures that potential customers are making may result in
reduced funds available to purchase software products such as those offered by
the Company. Many potential customers may also choose to defer purchasing Year
2000 and Euro compliant products until they believe it is absolutely necessary,
thus resulting in potentially stalled market sales within the industry.
Conversely, Year 2000 and Euro compliance may cause other companies to
accelerate purchases, thereby causing an increase in short-term demand and a
consequent decrease in long-term demand for software products. Additionally,
Year 2000 and Euro compliance could cause a significant number of companies,
including current Company customers, to reevaluate their current enterprise
software needs and, as a result, consider switching to products offered by other
software vendors. Moreover, the Company believes that some customers may be
purchasing the Company's products as an interim solution for Year 2000 or Euro
compliance until their current software vendors reach compliance. No assurances
can be given that such customers will purchase support services from the Company
or that they will upgrade beyond their current version of the Company's software
once their current software suppliers reach compliance. Any of the foregoing
could have a material adverse effect on the Company's business, operating
results and financial condition.
INTELLECTUAL PROPERTY RIGHTS
The Company relies on the protection provided by applicable copyright,
trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect its proprietary rights. Despite the
Company's efforts, which afford only limited protection, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's software is difficult
and, while the Company is unable to determine the extent to which piracy of its
products exists, software piracy can be expected to be a problem. In addition,
the laws of certain countries do not protect the Company's proprietary rights to
the same extent as do the laws of the United States. Accordingly, no assurances
can be given that the Company will be able to protect its proprietary rights
against unauthorized third-party copying or use, which could adversely affect
the Company's competitive position. Further, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company expects that enterprise-wide applications software products
will increasingly be subject to claims of infringement relating to software
codes as the number of products and competitors in the Company's industry
segment grows and the functionality of products overlaps. No assurances can be
given that legal actions claiming copyright or other intellectual property
infringement will not be commenced against the Company, or that the Company
would necessarily prevail in such litigation given the complex technical issues
and inherent uncertainties in intellectual property litigation. Any such claim,
with or without merit, could be time-consuming, result in costly litigation and
require the Company to enter into royalty and licensing
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<PAGE> 13
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. A successful claim
against the Company and the failure of the Company to develop or license a
substitute technology could have a material adverse effect on the Company's
business, operating results and financial condition.
FIXED-PRICE SERVICE CONTRACTS
The Company offers a combination of enterprise-wide applications software,
implementation and support services to its customers. Certain customers have
asked for, and the Company has from time to time entered into, fixed-price
service contracts. These contracts specify certain milestones to be met by the
Company regardless of actual costs incurred by the Company in fulfilling those
obligations. The Company may enter into more fixed-price contracts in the
future. No assurances can be given that the Company will be able to successfully
complete these contracts within budget and the Company's inability to do so
could have a material adverse effect on its business, operating results and
financial condition.
CONTROL BY EXISTING STOCKHOLDERS
As of June 24, 1998, Dr. Kyprianou and other members of management
beneficially own approximately 58.3% of the outstanding Common Stock and have
the power to control all matters submitted for a stockholder vote, including the
election of directors and the approval of significant corporate transactions,
such as mergers, consolidations, sales of all or substantially all of the assets
of the Company and other change in control transactions. Management's
significant equity interest in the Company also may have the effect of making
certain transactions more difficult without their support and may have the
effect of delaying, deferring or preventing a change in control of the Company.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There has been no public market for the Common Stock. No assurances can be
given that an active public market for the Common Stock will develop or be
sustained in the future. The market price of the Common Stock is likely to be
highly volatile and may be subject to significant fluctuations in response to
actual or anticipated variations in quarterly operating results and other
factors, such as announcements of technological innovations, new products or new
contracts by the Company or its competitors, conditions and trends in the
software and other technology industries, adoption of new accounting standards
affecting the software industry, changes in earning estimates or recommendations
by securities analysts, general market conditions or other events. In addition,
equity markets have experienced extreme volatility that has particularly
affected the market prices of equity securities of many high technology
companies and that has been unrelated or disproportionate to the operating
performance of such companies. Broad market fluctuations, as well as economic
conditions generally and in the software industry specifically, may result in
material adverse effects on the market price of the Common Stock. No assurances
can be given that the market price of the Common Stock will not decline in the
future. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. No assurances can be given that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and diversion of management's
attention and resources, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with information
contained in the financial statements appearing in this Report. All statements
other than statements of historical fact included in the following discussion
regarding the Company's financial position, business strategy and plans of
management for future operations are forward-looking statements. The Company's
actual results could differ materially from those anticipated in these forward
looking statements as a result of certain factors, including those set forth
under "Certain Considerations" and elsewhere in this Report.
GENERAL
AremisSoft develops, markets, implements and supports enterprise-wide
applications software targeted to mid-sized organizations in the Vertical
Markets. Its software products provide an array of functions that address the
mission-critical information requirements of customers in the Vertical Markets.
The Company was founded in Cyprus in 1978 as LK Global Information Systems
(Cyprus) Limited and originally focused on developing customized enterprise-wide
applications software for international organizations located in the Middle/Near
East. In 1986, the Company established its New Delhi, India software development
and support facility to access the skilled Indian labor force and capture cost
efficiencies. The Company established operations in the United Kingdom in 1992.
From 1993 to 1996, the Company successfully completed eleven acquisitions and
established operations in the United States, Mexico, Argentina and Ireland. As
of March 31, 1998, the Company had 520 full time employees and operations in
seven countries.
The Company derives its revenues 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 the ongoing support of
installed software and training, consulting and implementation services.
Occasionally, the Company may discount its fees on relatively large service
contracts to remain competitive. Hardware sales revenues are primarily derived
from the sale of third-party hardware to customers requiring turnkey solutions.
The sales cycles for the Company's products can vary widely among customers
and across the Vertical Markets. Historically, the Company's sales cycles have
ranged from three to 12 months. Similar to other enterprise-wide applications
software companies, the Company has experienced and expects to continue to
experience seasonal fluctuations in its operating results. See "Certain
Considerations -- Loss History; Volatility and Seasonality of Quarterly
Operating Results." The Company has generally realized lower revenues in its
first and second fiscal quarters and higher revenues in its third and fourth
fiscal quarters. This is due, in part, to the March 31 fiscal year-end of many
of the Company's customers. During the Company's first fiscal quarter, many
customers have already expended their information technology budgets. As a
result, the Company's third and fourth fiscal quarters generally reflect greater
revenue recognition because of a higher concentration of software system
installations.
The Company recognizes software license and hardware revenues at the time
of the installation, provided no significant obligations remain and collection
of the resulting receivable is deemed probable. Maintenance contract revenues
are recognized ratably over the life of the contract, service contract revenues
are recognized
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<PAGE> 15
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 cost of software license revenues consist primarily of personnel costs
as well as the costs of third-party software, media and freight. The cost of
maintenance and service contract revenues consist 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 the Company's resources. In general, the Company's costs
are higher when services are outsourced. The cost of hardware revenues consist
primarily of the cost of hardware purchased from third parties.
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 tangible fixed assets over their expected useful lives. Amortization of
intangible assets consists of the amortization of customer lists and management
contracts of acquired businesses.
The Company continues to make substantial investments and operational cost
improvements in its sales and marketing, research and development and
administrative infrastructure. From the year ended December 31, 1995 through the
three month period ended March 31, 1998, the Company increased its sales and
marketing staff from 85 employees to 270 employees. During this same period, the
Company reduced its total research and development and administrative staff from
331 employees to 250 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, the Company's research and
development and administrative personnel in India increased from 115 to 165,
while research and development and administrative personnel in the United
Kingdom and other countries decreased from 216 to 85.
A significant portion of the Company's business is conducted in currencies
other than United States dollars (the currency into which the Company's
historical financial statements have been translated). Historically, the Company
has recorded a majority of its operating expenses in British pounds, and a
substantial portion of its research and development costs in Indian rupees.
Because of the number of currencies involved, the constant currency exposures
and the substantial volatility of exchange rates, no assurances can be given
that the Company will not experience currency losses in the future. The Company
cannot predict the effect of exchange rate fluctuations on the Company's future
operating results. The Company has not previously undertaken hedging
transactions to cover its currency exposure, but may implement programs to
mitigate foreign currency risk exposure in the future as management deems
appropriate. See "Certain Considerations -- International Operations and
Currency Fluctuations."
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<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenues represented by each item in the Company's Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------
1997 1998
---- ----
<S> <C> <C>
Revenues:
Software licenses........................... 39% 41%
Maintenance and services.................... 46 45
Hardware and other.......................... 15 14
--- ---
Total revenues......................... 100 100
--- ---
Cost of revenues:
Software licenses........................... 5 5
Maintenance and services.................... 14 13
Hardware and other.......................... 12 11
Amortization of purchased software and
capitalized software development costs.... -- --
--- ---
Total cost of revenues................. 31 29
--- ---
Gross profit................................ 69 71
--- ---
Operating expenses:
Selling and marketing....................... 45 39
Research and development.................... 22 15
General and administrative.................. 19 10
Amortization of intangible assets........... -- --
--- ---
Total operating expenses............... 86 64
--- ---
Profit (loss) from operations................... (17) 7
Interest expense, net........................... 8 5
--- ---
Income (loss) before income taxes............... (25) 2
Income tax expense (benefit).................... -- --
--- ---
Net income (loss)............................... (25)% 2%
=== ===
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998, COMPARED TO MARCH 31, 1997
Revenues
Total revenues increased 40% to $10.1 million for the three months ended
March 31, 1998, from $7.2 million for the three months ended March 31, 1997.
This increase was due primarily to higher software license revenues and
associated maintenance and service contract revenues, principally generated by
the healthcare division, as a result of an increase in the user base of the
Company's Global Clinical Systems ("GCS") software product. During the three
months ended March 31, 1997, revenues from the healthcare market were negatively
impacted by a longer than expected Beta testing period for its GCS product. The
Company believes that the overall increase in total revenues reflects increased
customer preferences for client/server computing.
Software license revenues increased 46% to $4.1 million for the three
months ended March 31, 1998, from $2.8 million for the three months ended March
31, 1997. This increase is primarily due to the growth in the number of
installed customers, greater number of software upgrades and price increases. As
a percentage of total revenues, license revenues increased to 41% for the three
months ended March 31, 1998, from 39% for the three months ended March 31, 1997,
reflecting the Company's strategy to increase its higher margin software license
revenues as a percentage of total revenues.
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<PAGE> 17
Maintenance and service contract revenues increased 39% to $4.6 million for
the three months ended March 31, 1998, from $3.3 million for the three months
ended March 31, 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 45% for the
three months ended March 31, 1998, from 46% for the three months ended March 31,
1997.
Hardware and other revenues increased 27% to $1.4 million for the three
months ended March 31, 1998, from $1.1 million for the three months ended March
31, 1997. As a percentage of total revenues, hardware and other revenues
declined to 14% for the three months ended March 31, 1998, from 15% for the
three months ended March 31, 1997, reflecting the Company's strategy to reduce
the sale and installation of lower margin third-party hardware.
Cost of Revenues
Cost of revenues increased 32% to $2.9 million for the three months ended
March 31, 1998, from $2.2 million for the three months ended March 31, 1997,
primarily due to the increase in total revenues. As a percentage of total
revenues, cost of revenues declined to 29% for the three months ended March 31,
1998, from 31% for the three months ended March 31, 1997, primarily due to an
increase in software license revenues.
Sales and Marketing
The Company's sales and marketing expenses increased 18% to $3.9 million
for the three months ended March 31, 1998, from $3.3 million for the three
months ended March 31, 1997, primarily due to the expansion of sales and
marketing activities in the United States, Mexico and Argentina. As a percentage
of total revenues, sales and marketing expenses declined to 39% for the three
months ended March 31, 1998, from 45% for the three months ended March 31, 1997,
primarily due to a planned reduction in the Company's sales and marketing
personnel in the United Kingdom.
Research and Development
Research and development expenses declined 6% to $1.5 million for the three
months ended March 31, 1998, from $1.6 million for the three months ended March
31, 1997. As a percentage of total revenues, research and development expenses
declined to 15% for the three months ended March 31, 1998, from 22% of revenues
for the three months ended March 31, 1997. This decline was primarily due to (i)
cost savings resulting from the movement of research and development functions
from the United Kingdom to India and (ii) a significant portion of the planned
expenditures relating to the Company's new generation of software products
having been incurred in prior accounting periods.
General and Administrative
General and administrative expenses declined 21% to $1.1 million for the
three months ended March 31, 1998, from $1.4 million for the three months ended
March 31, 1997. As a percentage of total revenues, general and administrative
expenses declined to 10% for the three months ended March 31, 1998, from 19% for
the three months ended March 31, 1997. This decline reflects the effect of the
Company's cost-cutting and cost control measures in 1997, including the closure
of the Company's office at Dukes Court, Central Woking, England, during the
fourth quarter of 1997.
Net Interest Expense
Net interest expense reflects interest on the Company's bank credit
facilities, as reduced by interest income on cash balances. Net interest expense
declined 15% to $457,000 for the three months ended March 31, 1998, from
$538,000 for the three months ended March 31, 1997, primarily due to a reduction
in amounts outstanding under the Company's bank credit facilities.
Income Taxes
There was no provision for income taxes recorded for the three months ended
March 31, 1998, because of the availability of net operating loss carryforwards.
The Company recorded a benefit for income taxes of $10,000 for the three months
ended March 31, 1997.
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<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since inception primarily through
cash generated from operations, borrowings under bank credit facilities, private
placements of equity securities and equity contributions by its principal
stockholder. As of March 31, 1998, the Company had $5.3 million of cash and cash
equivalents and a $4.4 million short-term demand facility. The Company had a
working capital deficit of $3.3 million as of March 31, 1998.
The Company had an operating cash flow deficit of $3.6 million for the
three months ended March 31, 1998. This deficit was primarily due to reductions
in prepaid expenses, accounts payable and accrued income taxes. The Company had
operating cash flow deficits of $4.0 million, $1.3 million and $6.1 million for
1997, 1996 and 1995, respectively. Operating cash flow is affected by
seasonality, among other factors, and is often disproportionately higher in the
Company's third and fourth fiscal quarters than in the first two quarters of its
fiscal year.
Accounts receivable declined to $9.6 million as of March 31, 1998, from
$11.2 million as of March 31, 1997. Accounts receivable declined to $9.5 million
as of December 31, 1997, from $11.0 million as of December 31, 1996. These
declines were primarily due to management's efforts to collect outstanding
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<PAGE> 19
accounts receivable. Accounts receivable days sales outstanding was 86 days as
of March 31, 1998, compared to 142 days as of March 31, 1997, and 80 days as of
December 31, 1997, compared to 115 days as of December 31, 1996. During 1997,
the Company funded $2.6 million of prepaid expenses and $5.7 million of deferred
maintenance revenues from cash flows from operating activities.
The Company utilized cash for investing activities of $287,000 for the
three months ended March 31, 1998, and $1.0 million, $4.1 million and $8.4
million for 1997, 1996 and 1995, respectively. During these periods, the Company
experienced significant growth and invested in property and equipment. In 1996
and 1995, the Company expended $3.3 million and $7.5 million, respectively (net
of cash acquired), to purchase complementary businesses.
Cash provided by financing activities was $8.8 million for the three months
ended March 31, 1998, and $4.5 million, $6.5 million and $14.8 million for 1997,
1996 and 1995, respectively. Financing activities for the three months ended
March 31, 1998, primarily consisted of a private placement of $9.3 million of
equity securities. Financing activities for 1997 primarily consisted of a
private placement of $6.4 million of equity securities and repayment of bank
indebtedness of $2.0 million. In 1996, financing activities primarily consisted
of a stockholder contribution of $5.3 million, long-term borrowings under the
Company's bank credit facilities of $1.9 million, an increase in the short-term
demand facility of $1.3 million and repayment of bank indebtedness of $1.7
million. Financing activities in 1995, primarily consisted of long-term
borrowings of $13.5 million under the Company's bank credit facilities and an
increase in the short-term demand facility of $1.8 million.
As of March 31, 1998, the Company had outstanding indebtedness under its
bank credit facilities of $16.9 million, which included approximately $2.3
million with maturities of one year or less at interest rates ranging from
Sterling LIBOR plus 3% to Sterling LIBOR plus 4% and a $4.4 million short-term
demand facility that bears interest at the lending bank's base rate plus the
applicable margin.
The Company believes that existing cash and cash equivalents will be
sufficient to meet the Company's working capital and currently planned
expenditure requirements for the next twelve months. The Company may, from time
to time, consider acquisitions of complementary businesses, products or
technologies, which may require additional financing. In addition, continued
growth in the Company's business may, from time to time, require additional
capital. No assurances can be given that additional capital will be available
to the Company at such time or times as such capital may be required or, if
available, that it will be on commercially acceptable terms or would not result
in additional dilution to the Company's stockholders.
IMPACT OF THE YEAR 2000 AND EURO COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
or its suppliers' and customers' computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. In addition, in 1999 the Euro is expected to be introduced as the
currency of participating nations of the European Union.
The Company's internal information system is a client/server environment
and the Company believes that its internal software is currently both Year 2000
and Euro compliant. The Company has not yet identified any Year 2000 or Euro
compliance problems but will continue to monitor its information systems for
compliance problems. However, no assurances can be given that Year 2000 or
Euro compliance problems will not eventually occur with respect to the
Company's information systems.
Neither the Company nor its subsidiaries has initiated formal
communications with suppliers to determine the extent to which those third
parties' failure to remedy their own Year 2000 or Euro compliance problems would
materially effect the Company and its subsidiaries. The Company has not received
any indication from its suppliers that Year 2000 or Euro compliance may
materially effect their ability to conduct business and the Company has no
current plans to formally undertake such an assessment.
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PART II.
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders - Not
Applicable
ITEM 5. Other Information
Recent Sales in Unregistered Securities.
Commencing in February 1998, the Company engaged in a private placement
of its Common Stock. The Common Stock was offered only to "accredited investors"
in reliance on the exemption from registration provided by Regulation D. In this
offering, the Company sold 1,580,530 shares of its Common Stock at $6.00 per
share, for an aggregate placement of $9,483,180, less expenses.
ITEM 6. Exhibits and Reports on Form 8-K - None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, duly authorized.
Date: June 30, 1998 AREMISSOFT CORPORATION,
[Formerly Juno Acquisitions Inc.]
/s/ Lycourgos K. Kyprianou
--------------------------------
Dr. Lycourgos K. Kyprianou,
Chief Executive Officer & Treasurer
21
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM S-1 FILED BY AREMISSOFT CORPORATION,
A DELAWARE CORPORATION, WITH THE COMMISSION JULY 1, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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0
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