Fuzzy Math at AremisSoft?

AremisSoft(AREM Quote - Cramer on AREM - Stock Picks) issued a press release after 8 p.m. EDT Thursday, reiterating that its contract with the Bulgarian National Health Insurance Fund is $37.5 million not $3.75 million, as some government officials there claim.

However, a close read of the convoluted press release (check it out here) and an accompanying statement from the head of the Bulgarian National Health Insurance Fund raises still more questions about the actual size of the contract. That's important because investors only care about money a company can bank on -- not what a company may get. Based on what has been disclosed by AremisSoft and what the company says is a statement from Dr. Boyko Penkov, who heads the National Health Insurance Fund, the only money the contract guarantees AremisSoft will receive is $3.7 million plus $255,000 for an "intermediate system." The rest, or much of the rest, it appears, is subject to other conditions, approvals and competitive bidding.

The software company issued the press release after its stock was halted all day on the Nasdaq Thursday.

AremisSoft has repeatedly touted its contract to automate the Bulgarian health care system as worth $37.5 million, but on Wednesday this column quoted officials from the Bulgarian Ministry of Health, the National Health Insurance Fund and the World Bank saying the contract is really worth $3.75 million. The National Health Insurance Fund is the agency that funds Ministry of Health projects in Bulgaria. The World Bank is providing the Health Insurance Fund with most of its money.

Penkov's statement, which itself is ambiguous, is at the bottom of AremisSoft's press release, accessible through a link that says "a photo is available at this URL..." According to the Penkov statement, phases 1 and 2 of the project, and the intermediate system, are valued at more like $3.94 million -- yes, slightly more than the $3.75 million I reported Thursday.

The rest, Penkov says, is subject to World Bank financing, which according to the World Bank must be put up for competitive bids. Penkov says that "Aremisoft is contractually obliged to participate for these phases as well." Penkov could not be reached, despite several phone calls throughout the night Thursday. My reading of his statement suggests that "contractually obliged to participate" could simply mean AremisSoft is required to submit bids. Penkov's statement also seems to say AremisSoft's bid for phases 3 and 4 can't be for more than $4.375 million. The Penkov statement also refers to two "annexes" totaling $29 million that were part of the original contract.

"So," says the Penkov statement, "when you add up the figures, the possible contract value can be up to U.S. [dollars]: 37.5 million." The key word is possible. In other words, AremisSoft has not won, in the traditional sense, a $37.5 million contract.

It's not clear that those annexes are valid. According to the original contract that AremisSoft filed with a prospectus on March 6, 2000, the annexes had to be approved by the Bulgarian National Health Insurance Fund and AremisSoft in the year 2000. No document has been made public to show that the deadline was extended or that the annexes were approved. In addition, in its press release, AremisSoft says the initial contract was signed by Dr. Ilko Semerdjiev, who was director of the National Health Insurance Fund. In an article in Bulgaria's Capital Weekly at the time, Semerdjiev was quoted as saying that "there is no contract for" $37.5 million.

Now for the really confusing part: AremisSoft, in its press release, says it has completed more than $7 million worth of work and last year alone recognized about $7 million from the Bulgarian contract. On a recent conference call with analysts it said another $2 million worth of work was performed during the first quarter of this year. That would seem to bring the total to $9 million. The Penkov statement, near the end, says his country has spent more than $10 million "for the equipment, software and services related to this project." But, according to the original contract, $3.94 million is all that Bulgaria ever committed to. It's unclear what would account for the discrepancy.

AremisSoft officials were not available to clear up the questions. The news release downplayed the importance of the contract to AremisSoft, saying it would account for less than 5% of this year's expected total revenue of $240 million (much of which has been generated through acquisitions). In an apparent swipe at this column and the New York Times, which also raised questions about the Bulgarian contract in an article Thursday, AremisSoft's press release said: "The most recent published information is primarily from persons at the Bulgarian Ministry of Health and elsewhere who possibly do not have a full understanding of the contract. The reporters who quoted these persons never contacted AremisSoft to verify the accuracy of the information and might have unknowingly been part of some political process which they did not understand."

Never contacted AremisSoft? I spoke with Paul Bloom, AremisSoft's chief spokesman; so did the Times. And we both quoted him in our articles. When I called Bloom Thursday night to discuss the press release, he declinded to answer any questions and referred me to AremisSoft President Roys Poyiadjis, who was in Europe and did not answer repeated telephone calls from me.

Not only did we attempt to contact the company, but my associate Brian Harris tried calling and emailing Penkov numerous times last week, but could never get him on the phone and never received a response by email. I tried myself earlier this week and was told flatly that he wouldn't take calls from the press.

When companies aren't up front on something like that, you can't help but wonder what else isn't quite what it appears to be.

And these notes:

The press release says that AremisSoft has received "positive" reviews from the World Bank for its work in Bulgaria. And it includes a link to what it says is a World Bank document "about a similar project being discussed for the government of the Slovak Republic," which ArimisSoft says shows "a high approval rating for the work in Bulgaria for the" National Health Insurance Fund. However, Nick Haazen, the World Bank official overseeing the Bulgarian health project, says the World Bank has never reviewed AremisSoft's work in Bulgaria. And he says the "document" AremisSoft links to is a social security project, not a health project; it has nothing to do with the health fund.

As I noted on the RealMoney.com Columnist Conversation yesterday, the SEC apparently has shown an interest in issues surrounding AremisSoft and has been asking questions. (I hear that from at least one person who was on the receiving end of an SEC call.) SEC officials declined to comment.

After the market closed Thursday Info-Quest, a 19% owner of Aremissoft with two of eight seats on AremisSoft's board, filed a Form 144 to sell 500,000 of its 7.47 million shares. Also, Fenwick Assets, another holder, filed a Form 144 to sell 13,146 shares. (Small amount of shares, maybe, but the timing of the filing is what counts.) Also this morning, former corporate raider Irwin Jacobs filed that he had acquired options giving him the right to purchase up to nearly 8% of AremisSoft's shares outstanding.

Finally, a number of readers have questioned why I don't focus on the fundamentals of AremisSoft, which Lehman Brothers analyst Neil Herman has touted as reason to own the stock. He says it trades at less 10 times his earnings estimate for this year and around 6 times his 2002 estimates. The reason: Valuation is irrelevant if there's uncertainty regarding the quality of earnings. (Remember, at one point, there were those who thought Lernout & Hauspie(LHSPQ Quote - Cramer on LHSPQ - Stock Picks) was cheap, too!)