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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 June 30, 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
Suite 260, 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 July 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
June 30, 2002(unaudited) and December 31,
2001 1
Consolidated Statements of Operations (unaudited)
for the three months and the six months
ended June 30, 2002 and June 30, 2001 2
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2002
and June 30, 2001 3
Notes to the Consolidated Financial Statements
(unaudited) 4-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Change in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Securities Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Artemis International Solutions Corporation
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 December 31, 2001
(unaudited)
(In thousands, except share amounts)
Assets
Current assets:
Cash $ 5,193 $ 5,081
Trade accounts receivable, less allowance for doubtful accounts of
$345 at June 30, 2002 and $223 at December 31, 2001 16,845 13,088
Other accounts receivable 806 952
Prepaid expenses 2,355 2,528
Other current assets 264 268
-------------- --------------
Total current assets 25,463 21,917
Property and equipment, net of depreciation of $6,398 at June 30,
2002 and $5,194 at December 31, 2001 1,924 2,725
Other intangible assets, net of amortization and writeoffs of $2,059 at
June 30, 2002 and $25,286 at December 31, 2001 12,696 14,755
Deferred taxes 18 --
Investment in affiliates and other assets 424 796
-------------- --------------
Total assets $ 40,525 $ 40,193
============== ==============
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 5,083 $ 5,292
Short-term line of credit 2,743 1,062
Current portion of long-term debt 1,305 1,245
Deferred revenue 9,923 7,471
Accrued liabilities 5,865 5,954
Accrued payroll and taxes 7,003 6,678
-------------- --------------
Total current liabilities 31,922 27,702
Deferred taxes 547 547
Long-term debt, less current portion 729 1,421
Accrued pension and other liabilities 727 941
-------------- --------------
Total liabilities 33,925 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 (73,868) (71,152)
Accumulated other comprehensive income 271 537
-------------- --------------
Total stockholders' equity 6,600 9,582
-------------- --------------
Total liabilities and stockholders' equity $ 40,525 $ 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 For the Six
Months Ended June 30, Months Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Software $ 3,157 $ 3,263 $ 6,309 $ 8,027
Support 4,119 3,590 8,092 7,864
Services 10,316 10,069 18,927 18,571
----------- ----------- ----------- -----------
17,592 16,922 33,328 34,462
----------- ----------- ----------- -----------
Cost of revenue:
Software 440 423 925 876
Support 1,518 1,772 3,195 3,700
Services 6,253 6,470 11,995 12,381
----------- ----------- ----------- -----------
8,211 8,665 16,115 16,957
----------- ----------- ----------- -----------
Gross margin 9,381 8,257 17,213 17,505
Operating expenses
Selling and marketing 3,012 4,112 5,724 8,553
Research and development 1,978 2,652 4,042 5,002
General and administrative 3,675 1,676 7,335 3,788
Amortization expense 1,050 4,135 2,086 8,296
Management fees -- 403 -- 806
----------- ----------- ----------- -----------
9,715 12,978 19,187 26,445
----------- ----------- ----------- -----------
Operating loss (334) (4,721) (1,974) (8,940)
Interest expense, net 55 208 81 335
Equity in loss of unconsolidated affiliate 46 -- 71 106
Other (income) expense (10) (175) 143 (57)
Foreign exchange (gain) loss (143) -- 77 46
----------- ----------- ----------- -----------
(52) 33 372 430
----------- ----------- ----------- -----------
Loss before income taxes (282) (4,754) (2,346) (9,370)
Income tax (benefit) expense 321 (33) 370 151
----------- ----------- ----------- -----------
Loss before minority interest (603) (4,721) (2,716) (9,521)
Minority interest in (earnings) losses of -- (95) -- (95)
unconsolidated subsidiary
----------- ----------- ----------- -----------
Net loss $ (603) $ (4,626) $ (2,716) $ (9,426)
=========== =========== =========== ===========
Basic and diluted net loss per share $ (0.00) $ (0.02) $ (0.01) $ (0.05)
=========== =========== =========== ===========
Weighted average common shares used in
computing basic and diluted net loss per share 249,125 199,424 249,125 199,424
See accompanying notes to consolidated financial statements
2
Artemis International Solutions Corporation
Consolidated Statements of Cash Flows
For The Six Months Ended
------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
Cash flow from operating activities:
Net loss $ (2,716) $ (9,426)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,262 8,402
Minority interest -- (95)
Deferred income taxes and other -- --
Changes in operating assets and liabilities
(Increase) decrease in trade accounts receivable (3,611) 1,741
(Increase) decrease in prepaid expenses and other assets 531 (1,266)
Increase (decrease) in deferred revenues 2,449 (1,155)
Increase (decrease) in accounts payable (209) (920)
Increase (decrease) in accrued expense and other liabilities (423) (1,094)
------------- -------------
Net cash provided by (used in) operating activities (717) (3,813)
------------- -------------
Cash flow from investing activities:
Capital expenditures, net (402) --
Cash provided by former parent contribution of subsidiaries -- 848
------------- -------------
Net cash provided by (used in) investing activities (402) 848
------------- -------------
Cash flow from financing activities:
Funding from debt and lines of credit 1,741 2,217
Payments of debt and capital leases (692) (370)
------------- -------------
Net cash (used in) provided by financing activities 1,049 1,847
------------- -------------
Effect of exchange rate changes on cash 182 (108)
------------- -------------
Net increase (decrease) in cash 112 (1,226)
Cash at the beginning of the period 5,081 3,200
------------- -------------
Cash at the end of the period $ 5,193 $ 1,974
============= =============
Interest paid $ 123 $ 392
Taxes paid $ 378 $ 108
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
4
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 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
5
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.
(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. As of
January 1, 2002, these companies were merged into Artemis International
Solutions Corporation.
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 June 30, 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. Amounts previously "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
6
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 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 22.5 million and 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 first quarter ended March 31, 2002, the Company
granted 14,742,550 options with an exercise price of $0.06 per share and during
the second quarter ended June 30, 2002, the Company granted an additional
5,329,650 options with an exercise price of $0.05 per share. The exercise prices
were equal to the fair market values on the date of the 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
7
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.
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 June 30, 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:
8
Three months ended
June 30,
2002 2001
--------- ----------
Reported Net Loss:
Reported net loss $ (603) $ (4,626)
Less: goodwill amortization
-- 2,134
--------- ----------
Adjusted net loss $ (603) $ (2,492)
Basic and diluted loss per share:
Reported net loss $ (0.00) $ (0.02)
Goodwill amortization
-- 0.01
--------- ----------
Adjusted net loss per share $ (0.00) $ (0.01)
--------- ----------
Six months ended
June 30,
2002 2001
--------- ----------
Reported Net Loss:
Reported net loss $ (2,716) $ (9,426)
Less: goodwill amortization
-- 4,294
--------- ----------
Adjusted net loss $ (2,716) $ (5,132)
Basic and diluted loss per share:
Reported net loss $ (0.01) $ (0.05)
Goodwill amortization
-- 0.02
--------- ----------
Adjusted net loss per share $ (0.01) $ (0.03)
--------- ----------
At June 30, 2002, the Company had net intangible customer base and
technology assets of $7.8 million and $4.9 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 commencing January 1, 2002,
and it did not have a material effect on the financial position or results of
operations.
9
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 Six months ended
June 30, June 30,
2002 2001 2002 2001
-------------------------------- ---------------------------------
Numerator:
Net loss $ (603) $ (4,626) $ (2,716) $ (9,426)
-------------------------------- ---------------------------------
Denominator:
Weighted average shares 249,125 199,424 249,125 199,424
-------------------------------- ---------------------------------
-------------------------------- ---------------------------------
Basic and diluted net loss per share $ (0.00) $ (0.02) $ (0.01) $ (0.05)
-------------------------------- ---------------------------------
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 and the six months ended June
30, 2002 and 2001 are as follows:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------- ---------------------------------
Net loss $ (603) $ (4,626) $ (2,716) $ (2,716)
Translation adjustment (385) (670) (266) (1,271)
--------------------------------- ---------------------------------
Comprehensive net loss $ (988) $ (5,296) $ (2,982) $ (10,697)
--------------------------------- ---------------------------------
10
Note 4. Segment and Geographic Information
The following table presents information about the Company's operations by
geographic area:
Three Months Ended June 30, 2002
US UK Japan France Germany Italy Finland Asia Elimination Total
-----------------------------------------------------------------------------------------------------------
Revenue
Software $ 823 $ 605 $ 417 $ 476 $ 143 $ 555 $ 453 $ 59 $ (374) $ 3,157
Support 1,453 890 427 768 334 206 244 48 (251) 4,119
Services 5,704 777 738 675 319 907 936 307 (47) 10,316
-----------------------------------------------------------------------------------------------------------
Total Revenue $ 7,980 $ 2,272 $ 1,582 $ 1,919 $ 796 $ 1,668 $ 1,633 $ 414 $ (672) $ 17,592
Cost of revenue:
Software $ 114 $ 19 $ 93 $ 73 $ 5 $ 6 $ 129 $ 1 $ -- $ 440
Support 441 265 364 87 63 205 75 18 -- 1,518
Services 3,054 395 493 502 267 661 722 159 -- 6,253
-----------------------------------------------------------------------------------------------------------
Total cost of revenue $ 3,609 $ 679 $ 950 $ 662 $ 335 $ 872 $ 926 $ 178 $ -- $ 8,211
-----------------------------------------------------------------------------------------------------------
Gross margin $ 4,371 $ 1,593 $ 632 $ 1,257 $ 461 $ 796 $ 707 $ 236 $ (672) $ 9,381
-----------------------------------------------------------------------------------------------------------
Total operating expense 5,081 1,561 507 973 434 307 731 121 -- 9,715
-----------------------------------------------------------------------------------------------------------
Operating income (loss) $ (710) $ 32 $ 125 $ 284 $ 27 $ 489 $ (24) $ 115 $ (672) $ (334)
-----------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2001
US UK Japan France Germany Italy Finland Asia Elimination Total
-----------------------------------------------------------------------------------------------------------
Revenue
Software $ 832 $ 889 $ 426 $ 267 $ 278 $ 314 $ 383 $ 141 $ (267) $ 3,263
Support 1,505 781 476 550 327 193 67 59 (368) 3,590
Services 4,807 631 844 992 219 996 1,264 419 (103) 10,069
-----------------------------------------------------------------------------------------------------------
Total Revenue $ 7,144 $ 2,301 $ 1,746 $ 1,809 $ 824 $ 1,503 $ 1,714 $ 619 $ (738) $ 16,922
Cost of revenue:
Software $ 102 $ 76 $ 82 $ 25 $ 3 $ 4 $ 117 $ 14 $ -- $ 423
Support 588 291 395 170 80 142 59 47 -- 1,772
Services 2,908 312 579 795 216 682 761 217 -- 6,470
-----------------------------------------------------------------------------------------------------------
Total cost of revenue $ 3,598 $ 679 $ 1,056 $ 990 $ 299 $ 828 $ 937 $ 278 $ -- $ 8,665
-----------------------------------------------------------------------------------------------------------
Gross margin $ 3,546 $ 1,622 $ 690 $ 819 $ 525 $ 675 $ 777 $ 341 $ (738) $ 8,257
-----------------------------------------------------------------------------------------------------------
Total operating exp 7,407 1,658 816 641 444 308 1,444 260 -- 12,978
-----------------------------------------------------------------------------------------------------------
Operating income (loss) $ (3,861) $ (36) $ (126) $ 178 $ 81 $ 367 $ (667) $ 81 $ (738) $ (4,721)
-----------------------------------------------------------------------------------------------------------
11
Six Months Ended June 30, 2002
US UK Japan France Germany Italy Finland Asia Elimination Total
----------------------------------------------------------------------------------------------------
Revenue
Software $ 1,536 $ 1,345 $ 807 $ 744 $ 525 $ 611 $ 1,193 $ 182 $ (634) $ 6,309
Support 2,912 1,516 846 1,418 650 385 740 98 (473) 8,092
Services 10,140 1,377 1,520 1,430 607 1,646 1,743 552 (88) 18,927
----------------------------------------------------------------------------------------------------
Total Revenue $14,588 $ 4,238 $ 3,173 $ 3,592 $ 1,782 $ 2,642 $ 3,676 $ 832 $ (1,195) $ 33,328
Cost of revenue:
Software $ 206 $ 65 $ 181 $ 146 $ 5 $ 11 $ 310 $ 1 $ -- $ 925
Support 919 527 754 251 132 454 155 3 -- 3,195
Services 5,936 832 1,047 1,079 523 1,136 1,420 22 -- 11,995
----------------------------------------------------------------------------------------------------
Total cost of revenue $ 7,061 $ 1,424 $ 1,982 $ 1,476 $ 660 $ 1,601 $ 1,885 $ 26 $ -- $ 16,115
----------------------------------------------------------------------------------------------------
Gross margin $ 7,527 $ 2,814 $ 1,191 $ 2,116 $ 1,122 $ 1,041 $ 1,791 $ 806 $ (1,195) $ 17,213
----------------------------------------------------------------------------------------------------
Total operating expense 9,872 3,101 1,030 1,771 838 587 1,427 561 -- 19,187
----------------------------------------------------------------------------------------------------
Operating income (loss) $(2,345) $ (287) $ 161 $ 345 $ 284 $ 454 $ 364 $ 245 $ (1,195) $ (1,974)
----------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2001
US UK Japan France Germany Italy Finland Asia Elimination Total
----------------------------------------------------------------------------------------------------
Revenue
Software $ 2,574 $ 1,988 $ 687 $ 1,095 $ 358 $ 848 $ 895 $ 216 $ (634) $ 8,027
Support 2,914 1,519 1,014 1,058 637 366 802 136 (582) 7,864
Services 8,304 1,557 1,723 1,875 424 2,175 1,868 815 (170) 18,571
----------------------------------------------------------------------------------------------------
Total Revenue $13,792 $ 5,064 $ 3,424 $ 4,028 $ 1,419 $ 3,389 $ 3,565 $ 1,167 $ (1,386) $ 34,462
Cost of revenue:
Software $ 106 $ 184 $ 130 $ 68 $ 20 $ 24 $ 294 $ 50 $ 876
Support 1,172 588 784 449 161 303 148 95 3,700
Services 4,957 865 1,123 1,647 424 1,496 1,428 441 12,381
----------------------------------------------------------------------------------------------------
Total cost of revenue $ 6,235 $ 1,637 $ 2,037 $ 2,164 $ 605 $ 1,823 $ 1,870 $ 586 $ -- $ 16,957
----------------------------------------------------------------------------------------------------
Gross margin $ 7,557 $ 3,427 $ 1,387 $ 1,864 $ 814 $ 1,566 $ 1,695 $ 581 $ (1,386) $ 17,505
----------------------------------------------------------------------------------------------------
Total operating exp 15,294 3,403 1,511 1,314 898 656 2,833 536 -- 26,445
----------------------------------------------------------------------------------------------------
Operating income (loss) $(7,737) $ 24 $ (124) $ 550 $ (84) $ 910 $(1,138) $ 45 $ (1,386) $ (8,940)
----------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
------------- -----------------
Identifiable Assets
USA $ 23,534 $ 29,955
United Kingdom 2,781 2,473
Japan 2,272 2,892
France 3,426 3,243
Other 8,512 8,108
Eliminations - (6,478)
---------- -----------
Consolidated $ 40,525 $ 40,193
---------- -----------
12
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 June 30, 2002 and 2001
Revenue
For the quarter ended June 30, 2002, total revenue was $17.6 million, an
increase of $0.7 million or 4% from total revenue of $16.9 million for the
quarter ended June 30, 2001. This increase was due to increases in support and
services revenues of $0.5 and $0.3, respectively, only partially offset by a
$0.1 decrease in total software license revenue.
Cost of Revenue
Cost of revenue for the quarter ended June 30, 2002, decreased to $8.2
million, a decrease of $0.4 million or 5% from the $8.6 million for the quarter
ended June 30, 2001. The change was primarily a function of the lower direct
support and services costs resulting from increased productivity on the part of
the Company's internal support organization and services consultants.
Gross Profit
Total gross profit for the quarter ended June 30, 2002 was $9.4 million, an
increase of $1.1 million, or 13%, from the $8.3 million for the quarter ended
June 30, 2001. Gross profit margin for the 2002 period also increased
approximately 4.3 percentage points, to 53% from 49% for the three months in
2001, reflecting the aforementioned revenue increases and cost of revenue
efficiencies.
Operating Expenses
Operating expenses for the quarter ended June 30, 2002, were $9.7 million,
a decrease of $3.3 million or 25% from the $13.0 million for the quarter ending
June 30, 2001. Operating expenses for the quarter ended June
13
30, 2001 included amortization of goodwill and intangible assets of $4.1
million, 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 carrying value of the remaining intangible assets.
Selling and marketing: Selling and marketing expenses for the quarter ended
June 30, 2002, were $3.0 million, a decrease of $1.1 million or 27% from the
$4.1 million for the quarter ended June 30, 2001. This decrease was the result
of managements' concentrated efforts to reduce discretionary expenses in a
challenging economy.
Research and development: Research and development expenses for the quarter
ended June 30, 2002 decreased $0.7 million to $2.0 million, from the $2.7
million for the quarter ended June 30, 2001, largely due to increased efficiency
and reduction/reallocation of personnel.
General and administrative: General and administrative expenses for the
quarter ended June 30, 2002, were $3.7 million, an increase of $2.0 million or
118% from the $1.7 million for the quarter ended June 30, 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. This increase is
mitigated somewhat by the absence in the most recent quarter of any separately
identified manangement fees; $0.4 million in the quarter ended June 30, 2001.
Operating Loss
Operating loss for the quarter ended June 30, 2002 was $0.3 million, a
decrease of $4.4 million from the loss of $4.7 million for the same period in
2001. The improvement is almost entirely a result of the lower amortization
costs, aided by the combined effect of higher revenues and improved gross
margins. (See Note 1(i)).
Non-operating (Income)/Expenses
Non-operating (income)/expenses, consisting primarily of net interest
expense and other non-operating expenses, were less than $0.1 million in both
the quarters ended June 30, 2002 and 2001.
Six Months Ended June 30, 2002 and 2001
Revenue
For the six months ended June 30, 2002, total revenue was $33.3 million, a
decrease of 3% from total revenue of $34.5 million for the period ended June 30,
2001. This decrease is due to the $1.7 million decrease in software license
revenues in the current period, partially offset by minor increases in support
and services revenues. 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 six
months ended June 30, 2001, the company recorded one such transaction in excess
of $1.0 million that was not replicated in the period ended June 30, 2002.
Support Revenues increased slightly, $0.2 million, to
14
$8.1 million. Services Revenues for the six months ended June 30, 2002, also
increased slightly to $18.9 million from $18.6 million in the June 30, 2001
period.
Cost of Revenue
Cost of revenue for the period ended June 30, 2002, decreased to $16.1
million, a decrease of $0.8 million or 5% from $16.9 million in the period ended
June 30, 2001. The change was primarily a function of increased productivity on
the part of the Company's internal support organization and services
consultants.
Gross Profit
Total gross profit for the period ended June 30, 2002 was $17.2 million, an
absolute decrease of $0.3 million, or 2%, from the $17.5 million for the period
ended June 30, 2001. However, the gross profit margin for the 2002 period
increased one percentage point, to 52%, from 51% for the 2001 six month' period,
due primarily to the proportionately greater reduction in the costs of revenues.
Operating Expenses
Operating expenses for the period ended June 30, 2002, were $19.2 million,
a decrease of $7.3 million or 27% from the $26.5 million for the six months
ending June 30, 2001. Operating expenses for the period ended June 30, 2001
included amortization of goodwill and intangible assets of $8.3, as well as
management fees to Legacy Artemis' former parent of approximately $0.8 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 elimination of the management fee
payable to Proha.
Selling and marketing: Selling and marketing expenses for the period ended
June 30, 2002, were $5.7 million, a decrease of $2.8 million or 33% from the
$8.5 million for the period ended June 30, 2001. This decrease was the result of
managements' conscious efforts to reduce discretionary expenses in the face of a
depressed economy.
Research and development: Research and development expenses for the six
months ended June 30, 2002 decreased to $4.0 million, from the $5.0 million for
the period ended June 30, 2001, largely due to increased development
efficiencies and reduction/reallocation of personnel.
General and administrative: General and administrative expenses for the
period ended June 30, 2002, were $7.3 million, an increase of $3.5 million or
92% from the $3.8 million for the comparable June 30, 2001 period. 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 period ended June 30, 2002 was $2.0 million, a
decrease of $7.0 million from the loss of $9.0 million for the same period of
2001. The improvement is almost entirely a result of the lower amortization and
15
management costs, offset by the combined effect of lower revenues and cost of
revenues (See Note 1(i)).
Non-operating Expenses
Non-operating expenses, consisting of net interest expense and other
non-operating expenses, were $0.1 million lower in current half year, primarily
as a result of lower average borrowings and average interest rates for the same
period.
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 six months ended June 30, 2002 and 2001, net cash used in
operations was $0.7 million and $3.8 million, respectively.
For the six months ended June 30, 2002, the $0.7 million cash used in
operations was primarily due to the net loss of $2.7 million adjusted for
non-cash depreciation of tangible and intangible assets of $3.3 million, and a
$(1.3) net change, primarily increased levels of accounts receivable, in
operating assets and liabilities. For the six months ended June 30, 2001, the
Company's net loss was $9.4 million, which was reduced by non-cash depreciation
and amortization expenses of $8.4 million and a net change in operating assets
and liabilities of $(2.7) million.
Capital expenditures in the six months ended June 30, 2002 used $0.4
million of cash flows. The $0.8 million cash provided by investing activities
for the six months ended June 30, 2001 resulted from cash provided by entities
that were contributed by Proha, the former parent of Legacy Artemis.
Net cash provided by financing activities was $1.0 million for the six
months ended June 30, 2002 compared to net cash provided by financing activities
of $1.8 million for the six months ended June 30, 2001. During the six months
ended June 30, 2002, the Company drew $1.7 million and repaid $0.7 million of
debt to Foothill and other lenders. During the six months ended June 30, 2001,
the Company had drawings, primarily against the Foothill revolving credit
facility, of $2.2 million and repaid $0.4 million of debt.
The Company uses lines of credit to fund temporary operating cash
requirements and certain financial obligations. The Company's outstanding
balance under its lines of credit at June 30, 2002 was $2.7 million. Long term
debt, including the current portion, totaled $2.0 million at June 30, 2002. The
Company's Foothill lending agreement includes various financial covenants with
which the Company has periodically been in non-compliance. Foothill has waived
compliance with these covenants at March 31, 2001. The Company is in default at
June 30, 2002, but has requested a continuation of this waiver.
Interest paid under all borrowings was approximately $0.1 million for the
six months ended June 30, 2002 and $0.4 million for the six months ended June
30, 2001.
16
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. Worldwide staffing levels
were reduced approximately 7 percent in support of this effort. 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.
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 June 30, 2002 is as follows:
Less than After
Total 1 year 2 - 3 years 4 - 5 years 5 years
- -----------------------------------------------------------------------------------------------------------------
Long-term debt $ 2,034 $ 1,163 $ 707 $ 41 $ 123
Operating leases 6,347 3,793 2,409 145 -
- -----------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 8,381 $ 4,956 $ 3,116 $ 186 $ 123
- -----------------------------------------------------------------------------------------------------------------
Related Party Transactions
At June 30, 2002 and December 31, 2001, the Company had other receivables
and payables of $0.0 and $.4 million and $.2 and $.4 million, respectively, to
Proha, who holds approximately 80% of the Company's outstanding Common Stock.
At June 30, 2002 and December 31 2001, the Company maintained 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 June 30, 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.
17
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.
Exhibit No. Exhibit Description
- ----------- -------------------
EX-99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
EX-99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
None.
18
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: August 14, 2002 Artemis International Solutions Corporation
(Registrant)
/s/ Peter Schwartz
------------------
Executive Vice President and
Chief Financial Officer
(Signature)
19