UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _________
Commission File number 000-29793
Artemis International Solutions Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4023714
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4041 MacArthur Boulevard, Newport Beach, CA 92660
(Address of Principal Executive Offices) (Zip Code)
949-660-7100
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of April 30, 2002.
Common Stock 249,124,566
(Class) (Outstanding Shares)
Artemis International Solutions Corporation
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 2002(unaudited) and December 31,
2001 1
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2002
and March 31, 2001 2
Consolidated Statements of Cash Flows(unaudited)
for the three months ended March 31, 2002
and March 31, 2001 3
Notes to the Consolidated Financial Statements
(unaudited) 4-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Change in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Securities Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Artemis International Solutions Corporation
Item 1. Financial Statements
Artemis International Solutions Corporation
Consolidated Balance Sheets
March 31, 2002 December 31, 2001
(unaudited)
(In thousands, except share amounts)
Assets
Current assets:
Cash $ 3,482 $ 5,081
Trade accounts receivable, less allowance for doubtful
accounts of $270 at March 31, 2002 and $223 at
December 31, 2001 14,614 13,088
Other accounts receivable 673 952
Prepaid expenses 2,359 2,528
Other current assets 234 268
-------- --------
Total current assets 21,362 21,917
Property and equipment, net of depreciation of $5,734 at
March 31, 2002 and $5,194 at December 31, 2001 2,217 2,725
Other intangible assets, net of amortization and
writeoffs of $26,322 at
March 31, 2002 and $25,286 at December 31, 2001 13,726 14,755
Deferred taxes 16 --
Investment in affiliates and other assets 506 796
-------- --------
Total assets $ 37,827 $ 40,193
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,849 $ 5,292
Short-term line of credit 777 1,062
Current portion of long-term debt 1,494 1,245
Deferred revenue 9,187 7,471
Accrued liabilities 5,822 5,954
Accrued payroll and taxes 6,163 6,678
-------- --------
Total current liabilities 28,292 27,702
Deferred taxes 547 547
Long-term debt, less current portion 731 1,421
Accrued pension and other liabilities 669 941
-------- --------
Total liabilities 30,239 30,611
-------- --------
Stockholders' equity:
Preferred shares, $0.001 par value, 25,000,000 shares
authorized -- --
Common stock, $0.001 par value, 500,000,000 shares
authorized, 249,124,566 issued and outstanding 249 249
Additional paid-in capital 79,948 79,948
Accumulated deficit (73,265) (71,152)
Accumulated other comprehensive income 656 537
-------- --------
Total stockholders' equity 7,588 9,582
-------- --------
Total liabilities and stockholders' equity $ 37,827 $ 40,193
======== ========
See accompanying notes to consolidated financial statements
1
Artemis International Solutions Corporation
Consolidated Statements of Operations
(in thousands except, per share amounts)
For the Three Months Ended March 31,
-------------------------------------------
2002 2001
-------------------------------------------
(unaudited) (unaudited)
Revenue:
Software $ 3,152 $ 4,764
Support 3,973 4,274
Services 8,611 8,502
--------- ---------
15,736 17,540
Cost of revenue:
Software 485 453
Support 1,677 1,928
Services 5,742 5,911
--------- ---------
7,904 8,292
--------- ---------
Gross margin 7,832 9,248
Operating expenses
Selling and marketing 2,712 4,441
Research and development 2,064 2,350
General and administrative 3,660 2,112
Amortization expense 1,036 4,161
Management fees -- 403
--------- ---------
9,472 13,467
--------- ---------
Operating loss (1,640) (4,219)
Interest expense, net 26 127
Equity in loss of unconsolidated
affiliates 25 106
Other expense 153 118
Foreign exchange loss 220 46
--------- ---------
424 397
--------- ---------
Loss before income taxes (2,064) (4,616)
Income tax expense 49 184
--------- ---------
Net loss $ (2,113) $ (4,800)
========= =========
Basic and diluted net loss per share $ (0.01) $ (0.02)
========= =========
Weighted average common shares used in
computing basic and diluted net loss
per share 249,125 199,424
See accompanying notes to consolidated financial statements
2
Artemis International Solutions Corporation
Consolidated Statements of Cash Flows
For The Three Months Ended
--------------------------------------------------
March 31, 2002 March 31, 2001
--------------------------------------------------
Cash flow from operating activities:
Net loss $(2,113) $(4,800)
Adjustments to reconcile net loss to net cash provided
provided by operating activities:
Depreciation and amortization 1,569 4,224
Minority interest -- (95)
Deferred income taxes and other -- 591
Changes in operating assets and liabilities
(Increase) decrease in trade accounts
receivable (1,247) 663
(Increase) decrease in prepaid expenses and
other assets 477 (616)
Increase (decrease) in deferred revenues 1,716 (568)
Increase (decrease) in accounts payable (443) (680)
Increase (decrease) in accrued expense and
other liabilities (789) 117
------- -------
Net cash provided by (used in) operating activities (830) (1,164)
------- -------
Cash flow from investing activities:
Capital expenditures, net (31) --
Cash provided by former parent contribution of
subsidiaries -- 848
------- -------
Net cash provided by (used in) investing activities (31) 848
------- -------
Cash flow from financing activities:
Funding from debt and lines of credit -- 706
Payments of debt and capital leases (726) (355)
------- -------
Net cash (used in) provided by financing activities (787) 351
------- -------
Effect of exchange rate changes on cash (12) (601)
------- -------
Net increase (decrease) in cash (1,599) (566)
Cash at the beginning of the period 5,081 3,200
------- -------
Cash at the end of the period $ 3,482 $ 2,634
======= =======
See accompanying notes to consolidated financial statements
3
Artemis International Solutions Corporation
Notes to the Consolidated Financial Statements
(Unaudited)
(all tabular amounts in thousands except per share amounts)
Note 1. Organization and Summary of Accounting Policies
(a) Organization and Description of Business
Opus360 Corporation was incorporated on August 17, 1998, under the laws
of the State of Delaware and on November 20, 2001, changed its name to "Artemis
International Solutions Corporation". In April 2001, Opus360 Corporation and
Proha Plc ("Proha"), a Finnish corporation, entered into a Share Exchange
Agreement (the "Share Exchange Agreement") pursuant to which, upon completion of
the transactions contemplated under such agreement (the "Share Exchange
Transactions"), Opus360 Corporation would exchange 80% of its post-transaction
outstanding Common Stock for all of the capital stock of Artemis Acquisition
Corporation ("Legacy Artemis"), a Delaware corporation, and 19.9% of two Finnish
subsidiaries of Proha, Intellisoft OY and Accountor OY.
As used herein, "Opus360" refers to Opus360 Corporation prior to the
closing of the Share Exchange Transactions, "Artemis International" or the
"Company" refers to Opus360 Corporation after the closing of the Share Exchange
Transactions and Legacy Artemis refers to Artemis Acquisition Corporation, the
parent corporation of the Artemis business organization and the entity treated
as the accounting acquiror in the Share Exchange Transactions as more fully
described below.
Legacy Artemis is a developer and supplier of comprehensive, project
and resource collaboration application software products and consulting
services, with operations in 27 countries.
On August 24, 2000, Legacy Artemis was acquired by Proha PLC ("Proha"),
a Finnish corporation.
Subsequent to December 31, 2000, Proha entered into one or more
agreements to contribute its interests in the following entities to Legacy
Artemis (the "Contributed Businesses"):
- Projektihallinto Proha Oy (now known as Artemis Finland Oy)
("Artemis Finland"), a wholly owned Finnish subsidiary of
Proha. This interest was held by Proha on the date (August 24,
2000) that Legacy Artemis was acquired by Proha and accounted
for under the purchase method of accounting.
- Minority interests of 19.9% in each of Accountor Oy and
Intellisoft Oy, two other wholly owned Finnish subsidiaries of
Proha. Proha held these interests on the date (August 24,
2000) that Legacy Artemis was acquired by Proha. These
companies are included in the financial results of the Company
under the equity method of accounting.
- Majority interests in Enterprise Management Systems Srl,
Artemis International S.p.A., Solutions International SA,
Artemis International GMBH and Artemis International Sarl.
These majority interests were acquired by Proha as of December
1, 2000. Prior to December 1, 2000, Legacy Artemis held
minority interests in each of these entities, and they were
accounted for under the equity method. After the purchase of
the majority interests on December 1, 2000, each of these
entities was wholly owned through the combined
4
ownership interest of Proha and Legacy Artemis, except for
Artemis International GMBH, which continued to be owned
43.2% by entities outside of the parent company controlled
group. The remaining 43.2% interest in Artemis International
GMBH was contributed in January 2002. Each of the Contributed
Businesses is reflected as having been contributed by Proha
as of the later of the date Legacy Artemis was acquired by
Proha or the date these interests were under the control of
Proha, Legacy Artemis' parent.
(b) Acquisitions
In April 2001, Opus360 and Proha Plc ("Proha"), a Finnish corporation,
entered into a Share Exchange Agreement ("Agreement") pursuant to which, upon
completion of the transactions contemplated under the agreement, Opus360 would
exchange 80% of its authorized common stock for all the capital stock of Artemis
Acquisition Corporation ("Legacy Artemis"), a Delaware corporation and 19.9% of
two Finnish subsidiaries of Proha, Intellisoft OY and Accountor OY.
The transaction was structured in two steps since the number of
authorized Opus360 shares needed to be increased to allow for the issuance of a
total amount of 199 million new shares to Proha in satisfaction of the 80%
requirement. Despite its two step structure, the transaction was accounted for
upon the consummation of the first closing because Proha gained a majority
controlling interest and the voting agreements discussed below effectively
"locked in" the second step.
In connection with the Share Exchange Agreement, Proha entered into two
voting agreements, one with Ari Horowitz and one with Opus360. Pursuant to these
agreements, Ari Horowitz agreed among other things to cause all of his 3,333,351
shares of Opus360 common stock to be cast in favor of the second closing. Also,
Proha has agreed among other things to cause all its 73,938,702 shares of
Opus360's common stock to be cast in favor of the second closing.
As a result of the agreements, there were commitments to vote in favor
of the second closing representing approximately 62.44% of the outstanding
common stock. Accordingly, the transaction was not treated as a step acquisition
since Proha obtained a majority controlling and voting interest upon
consummation of the first closing.
On July 31, 2001, Opus360 consummated the first phase of the
transaction contemplated by the Share Exchange Agreement. In connection with
this Agreement, the OPUS360 acquired all of the capital stock of Legacy Artemis,
a wholly owned subsidiary of Proha, in exchange for approximately 74 million
shares of Opus360's common stock. As a result of this exchange, Proha obtained a
controlling ownership and management interest in Opus360. Accordingly, the
transaction was accounted for as a reverse acquisition with Legacy Artemis
treated as the accounting acquirer and accounted for under the purchase method
of accounting in accordance with the provisions of SFAS 141. The second closing
was completed November 20, 2001 by Opus360's filing of a Definitive Proxy
Statement with the SEC containing the required disclosures and financial
information of the combined and consolidated companies. At the second closing,
Opus360 delivered approximately 125 million additional shares of the Opus360's
common stock in return for the delivery by Proha of 19.9% of the outstanding
shares of the two Proha subsidiaries. Upon completion of the second closing,
Proha owns approximately 80% of the post-transaction outstanding common stock of
the Company.
5
(c) Basis of Presentation
Accounting principles generally accepted in the United States require
in certain circumstances that a company whose shareholders retain the majority
voting interest, governing body and senior management in the combined business
to be treated as the acquiror for financial reporting purposes. As a result of
the Share Exchange Transactions, Proha, the former shareholder of Legacy
Artemis, will hold a majority interest in the Company, the board of directors
and senior management of the combined company. Accordingly, for accounting
purposes the transaction has been treated as a reverse acquisition in which
Legacy Artemis is deemed to have purchased Opus360, although Opus360 (which
changed its name to Artemis International Solutions Corporation on November 20,
2001) remains the legal parent entity and the registrant for Securities and
Exchange Commission ("SEC") reporting purposes.
The consolidated financial statements included herein represent the
historical financial statements of Legacy Artemis, as the accounting acquiror,
and the acquisition of Opus360 has been accounted for under the purchase method
of accounting. The accounts of Legacy Artemis include its wholly owned
subsidiaries: Artemis Acquisition Corporation, Artemis Holdings, Inc., Artemis
International Corporation, Software Productivity Research, Inc., and Artemis
International Corporation Systems Limited for all periods presented.
The Company's independent public accountants have included a "going
concern" explanatory paragraph in their audit report accompanying the 2001
consolidated financial statements which have been prepared assuming that the
Company will continue as a going concern. The Company has incurred substantial
recurring losses from operations since inception, and at March 31, 2002, the
Company's current liabilities exceeded current assets by $6.5 million. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
All material intercompany transactions and balances have been
eliminated in consolidation.
(d) Reclassifications and restatements
Certain prior period information has been reclassified to conform to
the current period presentation. "Accounts payable-parent" totals have been
incorporated in "accounts payable", and "other accrued liabilities" have been
combined with "accrued payroll and taxes."
(e) Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions regarding revenue recognition, and the recoverability
of goodwill and intangible assets that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(f) Impairment of Long-Lived Assets
During the fourth quarter of 2001, the Company evaluated the carrying
values of its goodwill and intangible assets. An impairment charge of $43.4
million was recorded in the year ending December 31, 2001. Specifically, the
significant decline in business activity generally and software license revenue
following the terrorist attacks on New York City and Washington, DC, as well as
the Company's fourth quarter period operating and cash flow losses, required an
adjustment to the carrying value of the Company's long-lived assets. Using
discounted cash flow projections of expected returns from these assets, the
Company determined that the carrying value of its goodwill and intangible assets
should be reduced to approximately $14.8 million.
(g) Stock Options
The following description of the Company's stock option plans reflects
the stock option plans of former Opus 360, which are still issued and
outstanding. In March 2000, the Company adopted the (1) 2000 Stock Option
6
Plan (the "2000 Plan"), which provides for the granting of non-qualified and
incentive stock options to employees, board members and advisors (2) the 2000
Non-Employee Directors' Plan (the "Non-Employee Directors Plan"), which provides
for automatic, non-discretionary grants, of non-qualified stock options to
non-employee board members, as defined, and (3) the 2000 Employee Stock Purchase
Plan (the "ESPP"), which permits eligible employees to acquire, through payroll
deductions, shares of the Company's common stock. The 2000 Plan and the
Non-Employee Directors Plan authorize the granting of up to 10.0 million and up
to 1.1 million options, respectively, and provide for option terms not to exceed
ten years. The ESPP authorizes the issuance of up to 2.8 million shares to
participating employees. The Company's 1998 Stock Option Plan authorized the
granting of up to 6.2 million options and provided for option terms not to
exceed ten years. During the quarter ended March 31, 2002 the Company granted
14,735,050 options with exercise prices of $0.06. The exercise price was equal
to the fair market value on the date of grant.
(h) Basic and Diluted Net Loss per Share
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards ("Statement") No. 128, Computation of Earnings
Per Share. Accordingly, basic net loss per share excludes dilution for
potentially dilutive securities and is computed by dividing net loss available
to common shareholders by the weighted average number of common shares
outstanding for the period.
(i) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
as well as all purchase method business combinations completed after June 30,
2001. Statement No. 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. Statement No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. Statement No.
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with Statement No. 144, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company adopted Statement No. 141 for the July 31, 2001 combination
of Opus360 and Legacy Artemis. Statement No. 141 requires that the purchase
method of accounting be used and prohibits the use of the pooling-of-interests
method of accounting for business combinations completed on or after July 1,
2001. Statement No. 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain specified criteria. Statement No. 142 requires that the Company identify
reporting units for purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing recognized intangible
assets and cease amortization of intangible assets with an indefinite useful
life.
The Company's business combinations were accounted for using the
purchase method of accounting. In connection with the reverse acquisition of
Opus360, the adoption of Statement No. 141 resulted in the allocation of
negative goodwill in the amount of approximately $10.5 million as a direct
reduction of the acquired Opus360 non-current assets.
7
At December 31, 2001, the Company had recorded an impairment charge
under Statement No. 121 which resulted in the complete write-off of goodwill and
a partial write-off of its other identifiable intangible assets. As a result of
the complete write off of the goodwill at December 31, 2001, the adoption of
Statement No. 142 had no impact on the amortization expense during the quarter
ended March 31, 2002. The Company has re-evaluated and determined that the
classification and useful lives utilized for its other intangible assets,
"customer base" and "current technologies", are consistent with management's
best estimate. Had the Company been accounting for its goodwill under Statement
No. 142 for all periods presented, the Company's net loss and net loss per basic
and diluted share would have been as follows:
Three months ended
March 31,
2002 2001
---------- --------
Reported net loss: $ (2,113) $(4,800)
Less: goodwill amortization 2,086
========== ========
Adjusted net loss $ (2,113) $(2,714)
Basic and diluted loss per share:
Reported net loss $ (.01) $ (.02)
Goodwill amortization .01
========== ========
Adjusted net loss per share $ (.01) $ (.01)
========== ========
At March 31, 2002, the Company had gross intangible customer base and
technology assets of $27.1 million and $7.6 million, net of accumulated
amortization of $18.5 million and $2.4 million, respectively. The estimated
annual amortization for each of fiscal years 2002, 2003 and 2004 is $4.0
million and $2.7 million in fiscal year 2005.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Statement No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets, and supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that Opinion).
Statement No. 144 also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of Statement No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The Company adopted Statement No. 144 in the current quarter, and it
did not have a material effect on the financial positions and results of
operations.
8
Note 2. Basic and Diluted Net Loss Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three months ended
March 31,
2002 2001
---------- --------
Numerator:
Net loss $ (2,113) $(4,800)
========== ========
Denominator:
Basic and diluted loss per share weighted
average shares 249,125 199,424
========== ========
Basic and diluted net loss per share $ (.01) $ (.02)
========== ========
Note 3. Other Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income or loss, adjusted
for other increases or decreases affecting stockholders' equity that are
excluded in the determination of net income (loss). The calculation of
comprehensive income (loss) for the three months ended March 31, 2002 and 2001
are as follows:
Three months ended
March 31,
2002 2001
---------- --------
Net loss $ (2,113) $ (4,800)
Cumulative translation adjustment 119 (601)
---------- ---------
Comprehensive net loss $ (1,994) $ (5,401)
========== =========
9
Note 4. Segment and Geographic Information
The following table presents information about the Company's operations
by geographic area:
Three Months Ended March 31, 2002
US UK Japan France Germany Italy Finland Asia Elimination Total
----------------------------------------------------------------------------------------------------------------
Revenue
Software $ 713 $ 740 $ 390 $ 268 $ 382 $ 56 $ 740 $ 123 $ (260) $ 3,152
Support 1,459 626 419 650 316 179 496 50 (222) 3,973
Services 4,436 600 782 755 288 739 807 245 (41) 8,611
----------------------------------------------------------------------------------------------------------------
Total Revenue $ 6,608 $ 1,966 $ 1,591 $ 1,673 $ 986 $ 974 $ 2,043 $ 418 $ (523) $ 15,736
Cost of revenue:
Software $ 92 $ 46 $ 88 $ 73 $ - $ 5 $ 181 $ - $ - $ 485
Support 442 262 390 164 69 249 80 21 - 1,677
Services 2,564 437 554 577 256 475 698 181 - 5,742
----------------------------------------------------------------------------------------------------------------
Total cost of
revenue $ 3,098 $ 745 $ 1,032 $ 814 $ 325 $ 729 $ 959 $ 202 $ - $ 7,904
----------------------------------------------------------------------------------------------------------------
Gross margin $ 3,510 $ 1,221 $ 559 $ 859 $ 661 $ 245 $ 1,084 $ 216 $ (523) $ 7,832
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Total operating
expense 5,145 1,540 523 798 404 280 696 86 - 9,472
----------------------------------------------------------------------------------------------------------------
Operating income
(loss) $(1,635) $ (319) $ 36 $ 61 $ 257 $ (35) $ 388 $ 130 $ (523) $ (1,640)
----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2001
US UK Japan France Germany Italy Finland Asia Elimination Total
----------------------------------------------------------------------------------------------------------------
Revenue
Software $ 1,729 $ 1,099 $ 261 $ 828 $ 80 $ 534 $ 512 $ 75 $ (354) $ 4,764
Support 1,401 738 538 508 310 173 735 77 (206) 4,274
Services 3,462 926 879 883 205 1,179 636 396 (64) 8,502
----------------------------------------------------------------------------------------------------------------
Total Revenue $ 6,592 $ 2,763 $ 1,678 $ 2,219 $ 595 $ 1,886 $ 1,883 $ 548 $ (624) $ 17,540
Cost of revenue:
Software $ 77 $ 108 $ 48 $ 43 $ 17 $ 20 $ 104 $ 36 $ - $ 453
Support 525 297 389 279 81 161 148 48 - 1,928
Services 2,202 553 544 852 208 814 514 224 - 5,911
----------------------------------------------------------------------------------------------------------------
Total cost of
revenue $ 2,804 $ 958 $ 981 $ 1,174 $ 306 $ 995 $ 766 $ 308 $ - $ 8,292
----------------------------------------------------------------------------------------------------------------
Gross margin $ 3,788 $ 1,805 $ 697 $ 1,045 $ 289 $ 891 $ 1,117 $ 240 $ (624) $ 9,248
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Total operating
expense 7,742 1,745 695 673 454 348 1,534 276 - 13,467
----------------------------------------------------------------------------------------------------------------
Operating income
(loss) $(3,954) $ 60 $ 2 $ 372 $ (165) $ 543 $ (417) $ (36) $ (624) $ (4,219)
----------------------------------------------------------------------------------------------------------------
10
December 31,
March 31, 2002 2001
----------------- ------------------
Identifiable Assets
USA $ 40,512 $ 47,271
United Kingdom 4,842 5,458
Japan 2,526 2,892
France 3,262 3,246
Other 8,260 8,779
Eliminations (21,575) (27,453)
----------------- ------------------
Consolidated $ 37,827 $ 40,193
----------------- ------------------
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Act of 1934, as amended. Such statements are based
upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical facts may be deemed to be
forward-looking statements. For example, words such as "may", "will", "should",
"estimates", "predicts", "potential", "continue", "strategy", "believes",
"expects", "anticipates", "plans", "intends", and similar expressions are
intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Important factors that could cause actual
results to differ materially from those expressed or implied by these
forward-looking statements are detailed in the documents filed by the Company
with the Securities and Exchange Commission including but not limited to those
discussed under the caption "Risk Factors" in the Company's Annual Report on
Form 10-K filed with the SEC on April 16, 2002.
Results of Operations
Three Months Ended March 31, 2002 and 2001
Revenue
For the quarter ended March 31, 2002, total revenue was $15.7 million,
a decrease of 10% from total revenue of $17.5 million for the quarter ended
March 31, 2001. This decrease is almost entirely due to the $1.6 million
decrease in software license revenues in the current period. The quarter ended
March 31, 2001, was the last quarter of the Company's former fiscal year. The
final quarter is typically the period when many of the larger licensing
transactions that have been developed during the year are signed, the products
shipped and the revenue recorded. In the quarter ended March 31, 2001, the
company recorded one such transaction in excess of $1.0 million that was not
replicated in the quarter ended March 31, 2002. Support Revenues also decreased
slightly, $0.3 million, to $4.0 million, but continued to constitute 25% of
total revenue. Services Revenues for the quarter ending March 31, 2002,
increased slightly to $8.6 million from $8.5 million in the quarter ending March
31, 2001.
Cost of Revenue
Cost of revenue for the quarter ended March 31, 2002,
decreased to $7.9 million, a decrease of $0.4 million or 5% from the $8.3
million for the
11
quarter ended March 31, 2001. The change was primarily a function of the lower
direct support and services costs resulting from, in the first instance, lower
revenues, and in the second, increased productivity on the part of the Company's
internal consultants.
Gross Profit
Total gross profit for the quarter ended March 31, 2002 was $7.8
million, a decrease of $1.4 million, or 15%, from the $9.2 million for the
quarter ended March 31, 2001. Gross profit margin for the 2002 period declined
three percentage points, to 50% from 53%, for the three months in 2001 due to
the reduction in higher margin software revenues.
Operating Expenses
Operating expenses for the quarter ended March 31, 2002, were $9.5
million, a decrease of $4.0 million or 30% from the $13.5 million for the
quarter ending March 31, 2001. Operating expenses for the quarter ended March
31, 2001 included amortization of goodwill and intangible assets of $4.2, as
well as management fees to Legacy Artemis' former parent of approximately $0.4
million. The reevaluation in December 2001 of goodwill and intangible assets
arising from the pushdown accounting of Proha's August 2000 acquisition of
Legacy Artemis resulted in the write off of all goodwill and significantly
reduced the carry value of the remaining intangible assets.
Selling and marketing: Selling and marketing expenses for the quarter
ended March 31, 2002, were $2.7 million, a decrease of $1.7 million or 39% from
the $4.4 million for the quarter ended March 31, 2001. This decrease was the
result of managements' conscious efforts to reduce discretionary expenses in a
challenging selling environment.
Research and development: Research and development expenses for the
quarter ended March 31, 2002 decreased slightly to $2.1 million, from the $2.4
million for the quarter ended March 31, 2001, largely due to increased
efficiency and reduction/reallocation of personnel.
General and administrative: General and administrative expenses for the
quarter ended March 31, 2002, were $3.7 million, an increase of $1.6 million or
73% from the $2.1 million for the quarter ended March 31, 2001. The increase in
general and administrative expenses reflects the combination and continuation of
Legacy Artemis and Opus360 costs, as well as the additional legal and auditing
expenses incurred as a more diversified public company.
Operating Loss
Operating loss for the quarter ended March 31, 2002 was $1.6 million, a
decrease of $2.6 million from the loss of $4.2 million for the same period in
2001. The improvement is almost entirely a result of the lower amortization
costs, offset by the combined effect of lower revenues and other costs (see
Note 1(i)).
Non-operating Expenses
Non-operating expenses, consisting primarily of net interest expense
and other non-operating expenses, were $0.4 million in both the quarters ended
March 31, 2002 and 2001. Higher foreign exchange losses in the Company's non-US
operations during the March 31, 2002 quarter were balanced by lower average
borrowings and average interest rates for the same period.
12
Liquidity and Capital Resources
Legacy Artemis has historically funded operations through internal cash
flow and loans from Computer Sciences Corporation, the shareholders of Legacy
Artemis, the shareholders of Software Productivity Research and Foothill Capital
Corporation ("Foothill").
For the three months ended March 31, 2002 and 2001, net cash used in
operations was $0.8 million and $1.2 million, respectively.
For the three months ended March 31, 2002, the $0.8 million cash used
in operations was primarily due to the net loss of $2.1 million adjusted for
non-cash amortization of goodwill and depreciation of $1.6 million, and a $(0.3)
net change in operating assets and liabilities. For the three months ended March
31, 2001, the Company's net loss was $4.8 million, which was reduced by non-cash
expenses and tax benefits of $4.7 million and a net change in operating assets
and liabilities of $(1.1) million, or net cash used in operations of $1.2
million.
No cash was provided by investment activities for the three months
ended March 31, 2002. The $0.8 million cash provided by investing activities for
the three months ended March 31, 2001 resulted from cash provided by entities
that were contributed by Proha, the former parent of Legacy Artemis. Capital
expenditures in both periods were less than $0.1 million.
Net cash used in financing activities was $0.7 million for the three
months ended March 31, 2002 compared to cash provided by financing activities of
$0.4 million for the three months ended March 31, 2001. During the three months
ended March 31, 2002, the Company repaid $0.7 million of debt, to Foothill and
other lenders. During the three months ended March 31, 2001, the Company
received financing of $0.7 million and repaid $0.3 million of debt.
The Company utilizes lines of credit to fund temporary operating cash
requirements and certain financial obligations. The Company's outstanding
balance under its lines of credit at March 31, 2002 was $0.8 million. The
Company's Foothill lending agreement includes various financial covenants with
which the Company has periodically been in non-compliance. Foothill has waived
the compliance with these covenants at December 31, 2001. The Company is in
default at March 31, 2002, but has requested a continuation of this waiver.
Interest paid under all borrowings was less than $0.1 million for the
three months ended March 31, 2002 and $0.1 million for the three months ended
March 31, 2001.
The Company's near and long-term operating strategies focus on
promoting its new and existing software and services to increase its revenue and
cash flow while better positioning the Company to compete under current market
conditions. The Company has also tasked its operating units to achieve a five
percent year over year reduction in operating expenses. In addition, in the
fourth quarter of fiscal year 2001, the Company took a number of actions to
reduce on-going costs, including deferring development, marketing and sales
support for its Workforce Procurement and Workforce Management product lines.
Additionally, all operations were tasked to achieve a five percent
year-over-year reduction in operating expenses. Worldwide staffing levels were
reduced approximately 7 percent in support of this effort. At March 31, 2002,
the Company had unused credit lines of up to $2.7 subject to maintaining certain
receivables' aging and levels. At March 31, 2002, the Company's capacity based
on these measures was approximately $1.2 million. Management feels that they
have sufficient flexibility in fixed, semi-fixed and variable costs to fund its
operations for the foreseeable future with the aforementioned sources of funds
to continue as a going concern.
13
The Company's consolidated financial statements has been prepared
assuming that the Company will continue as a going concern based upon
management's plans discussed above. Accordingly, the consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
A summary of our future contractual obligations and commercial
commitments as of March 31, 2002 is as follows:
Less than After
Total 1 year 2 - 3 years 4 - 5 years 5 years
------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 2,225 $ 1,494 $ 731 $ - $ -
Operating leases 6,989 3,886 2,930 173 -
------------------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 9,214 $ 5,350 $ 3,661 $ 173 $ -
------------------------------------------------------------------------------------------------------------------------------
Related Party Transactions
At March 31, 2002 and December 31, 2001, the Company had other
receivables and payables of $.1 and $.4 million and $.2 and $.4 million,
respectively, to Proha, who holds approximately 80% of the Company's outstanding
Common Stock.
At March 31, 2002 and December 31 2001, the Company maintained the
equity holdings in joint ventures, which are accounted for under the equity
method, with the exception of Metier Scandinavia AS(Norway), Metier Plancom
BV(Netherlands) and DA Management Solutions(Finland) which are accounted for
under the cost method. The Company records its equity interest in losses first
to the investment balance, then against loans or advances.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
At March 31, 2002, the majority of the Company's cash balances were
held primarily in the form of short-term highly liquid investment grade money
market securities. As a result, the Company's interest income may be sensitive
to changes in the general level of interest rates. However, due to the
short-term nature of its investments, the Company believes that it is not
vulnerable to any material interest or market rate risks.
14
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
There has been no changes from those described in the Company's Annual
Report on Form 10-K filed with the SEC on April 16, 2002.
Item 2. Change in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits. The following documents are filed as part of this report:
10.44 Employment Agreement dated January 25, 2002 between the
Company and Michael Rusert
10.45 Employment Agreement dated March 1, 2002 between the Company
and Charles Savoni
b. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 21, 2002 Artemis International Solutions Corporation
(Registrant)
/s/ Peter Schwartz
------------------
Executive Vice President and
Chief Financial Officer
(Signature)
16