Did AremisSoft Really Get a $37.5 Million Contract From Bulgaria?

This column was originally published May 16 at 4:33 p.m. EDT

For the better part of a year and a half, AremisSoft (AREM Quote), a highly acquisitive, $123 million enterprise software company, has been bragging about a $37.5 million contract with the Bulgarian Ministry of Health "to automate" Bulgaria's health care system. But is the $37.5 million contract really worth just $3.75 million? According to government officials in Bulgaria and an official with the World Bank, which is funding the project: Yes.

This is just the latest in the evolving saga of AremisSoft, which has been the focus of a growing number of shorts-sellers, all of whom share the concern that something doesn't appear to add up.

The company responded today, issuing a press release blasting the "circulation of a specious anonymous 'short report' and other spurious and unsubstantiated rumors the company believes are being disseminated by short-sellers in an apparent attempt to create fear and uncertainty in the company's shareholder base and to depress the price of the company's shares." That follows a press release yesterday that heralded the purchase of stock by one of AremisSoft's two CEOs. That,in turn, coincided with a 13D filing by one-time raider Irwin L. Jacobs, indicating he had accumulated options to purchase 5.76% of the company. At the same time, a William Blair analyst decided to downgrade the stock to "not rated" because she couldn't get a firm handle on the conflicting information she has been hearing.

Among the issues: That $37.5 million contract.

Here's the story:

On Dec. 17, 1999, AremisSoft issued a press release claiming to have signed the $37.5 million Bulgarian contract. It said the contract was "initiated" by the National Health Insurance Fund of Bulgaria, which funds the health care system. AremisSoft said the contract would be recognized over an 18- to 24-month "installation period" beginning in January 2000.

In a report that same day, Paul Bloom, then an analyst at Cruttenden Roth and now AremisSoft's executive vice president of corporate development (and chief spokesman), said the project was backed by the World Bank. He added in that report that the World Bank has put "the necessary funds in escrow."

Bloom and others have subsequently referred to the $37.5 million contract numerous times. On a March 28 conference call from SG Cowen's Global Tech Conference in Cannes, France, Bloom said: "The $37.5 million [contract] is the first phase of a two to three hundred million dollar program which is multiple years, and that would be to install the systems you see here in all the different hospitals and pharmacies and labs." Two days later, on AremisSoft's investor's day conference call from Sofia, Bulgaria, Bloom reiterated the value of the entire project. Saurabh Singhania, AremisSoft's project manager in Bulgaria, added that AremisSoft is "recruiting more people, increasing our manpower in order to be ready to take on the next phases, which are much wider in terms of complexity, technology, and the scope of work involved ... phase three and four." Singhania said he expects phase three "to be awarded sometime later this year."

The contract is also mentioned in AremisSoft's SEC filings. In its 10-K for 1999, the company said the $37.5 million 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." One year later in its 10-K, the company said: "During 2000, we continued our performance under two significant contracts in Bulgaria, one with a private company and the other with Bulgaria's National Health Insurance Fund. We have completed certain phases under both contracts and continue to perform under the terms of each contract." There were no further details. (It's often a red flag when a company doesn't include the same details from one 10-K to the next.)

The rub: Konstantine Andreev, who is with the National Health Insurance Fund, told me this morning that AremisSoft must be mistaken about the size of its contract. "Replace the comma," he says, "and you get $3.75 million. It's not $37.5 million. It's $3.75 million. Three million, seven-hundred and fifty thousand dollars." That was confirmed later this morning by Denitsa Sacheva, chief of staff of the Ministry of Health, who told me: "AremisSoft has only one contract, and it's for $3.7 to $3.8 million dollars." She said that at the time, the entire amount earmarked for building the information-technology system over five years was about $40 million (in U.S. dollars), "and it's hard to spend all of that in the first phase." She further says that AremisSoft's claim of a $37.5 million contract resulted in something of a scandal in Bulgaria. "They thought we were doing something illegal with their money." As far back as a year ago, she adds, Dr. Boyko Penkov, currently head of the Insurance Fund, complained about the figure in a letter to AremisSoft. She says she has no idea what the outcome of the complaint was, but "at the present, we're stuck because we need that software system" that AremisSoft has promised to install as part of the $3.75 million contract.

The World Bank official responsible for dealing with health care in Bulgaria, Nick Haazen, gave a similar story to my associate, Mark Martinez, and me in separate interviews. Why would the World Bank know? Because it's responsible for $63.3 million that is expected to be loaned to the Insurance Fund, which is overseeing the development of Bulgaria's health system. The World Bank, Haazen said, must approve all contracts that will be paid from the loan. Could there have been a separate project with the Insurance Fund that Haazen doesn't know about? That's always possible, he says, "But it would've shown up in their financial statements, and we get their financial statements."

Haazen says that he, too, was told by the Ministry of Health that the contract was $3.75 million. Other than that, he says, AremisSoft has sent the Health Insurance Fund a "letter of expression" saying that it is very interested in getting the rest of the business. But to be eligible for funding from the World Bank, the bidding has to be competitive. "We've made it clear that AremisSoft will have to stand in line and compete," Haazen says. How many other bidders are there? "Lots." He added that the bidding process could take months. He also said the business AremisSoft is bidding for is for between $13 million and $15 million.

What about the money that then-analyst Bloom, writing in 1999, said was "in escrow" at the World Bank? "That's absolutely incorrect," Haazen says. "There is no money in escrow. The project wasn't approved by the board [of the World Bank] until June 22, 2000; the project was not declared effective by the board until Oct. 18, 2000."

What does Bloom say? I left a message for him midday Tuesday and sent two emails during the day urging him to return my call. He returned my call from Boston last night at 11:08 p.m. EDT. He explained his familiarity with the contract and with the company, which he says was taken public while he was at Cruttenden Roth; he was the analyst covering the company at the time. In fact, he says, while covering AremisSoft, he wrote the press release announcing the contract in question. What was he doing writing the press release while he was an analyst? "I was helping them out," he says.

As we started to talk about the contract, he volunteered that the figures for the size of the contract, found on the World Bank's Web site, don't jibe with AremisSoft's $37.5 million number because "it's a contract that was translated into English." But he adds that the contract "was reviewed by our outside counsel" and subsequently was reviewed as part of a secondary offering by attorneys at Salomon Smith Barney, the deal's lead underwriter. "They obviously wouldn't have let this [the description of the contract] in the prospectus ... unless they reviewed the whole contract." Indeed, the contract is included as an appendix to the prospectus and it refers to a contract price of 7 million Leva -- Bulgarian currency, which Sacheva says was equal to $3.75 million at the time. The stock offering, however, was cancelled.

What about the World Bank's contention that the contract is being put up for competitive bids, and that it doesn't know about a $37.5 million contract? And what about the World Bank's claim that it has no money in escrow? Bloom told me there's definitely an explanation, but that he doesn't have the answers and will have to get them from others. In fact, he says, he'll have to contact AremisSoft officials in India to get the answers. (He said that's where AremisSoft's emerging markets operations are based.) Aren't there others in the company who know the details of the deal? Doesn't Bloom know the details of the deal? After all, he has been talking about it for well over a year -- he wrote the original press release! He said that he simply doesn't have the details, and added: "You're missing the whole story..." He then went on to explain why AremisSoft's software is so good.

I forwarded a list of questions to Bloom. He said he'd get back to me when he gets the answers, but added that he'd be flying to the West Coast today, so would be out of touch for a good deal of the day.

When he does get me the answers, I'll pass them along to you.

The stock, which has been very volatile and traded as low as $8.75 in April, closed down $1.65 to $13.28 Wednesday.