**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ý****  ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEFISCAL YEAR ENDED DECEMBER 31, 2003**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number 000-29793**

 

**ARTEMIS INTERNATIONAL SOLUTIONSCORPORATION**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**             |   | **13-4023714**                          |
|--------------------------|--------|-----------------------------------------|
| (State of Incorporation) |   | (I.R.S. Employer Identification Number) |

 

**4041MacArthur Boulevard, Suite 260, Newport Beach, CA 92660**

(Address of principal executive offices,including zip code)

 

**(949)660-7100**

(Registrant’s telephone, including area code)

 

Securities registered pursuant to Section12(b) of the Act: **NONE**

 

Securities registered pursuant to Section12(g) of the Act:  **Common Stock, $.001par value**

 

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Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý   No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes  o   No  ý

 

The aggregate market valueof the Registrant’s outstanding common stock held by non-affiliates of theRegistrant on June 30, 2003 was approximately $4.0 million.  There were9,965,018 shares of common stock outstanding as of March 15, 2004.

 

 

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**ARTEMIS INTERNATIONAL SOLUTIONS CORP.**

**Annual Report on Form 10-K**

**For the Year Ended December 31, 2003**

 

**TABLE OF CONTENTS**

 
| **Part I**                                     |
|------------------------------------------------|
|                                           |   |   |
| Item 1.                                        | Business |   |
|                                           |   |   |
| Item 2.                                        | Properties |   |
|                                           |   |   |
| Item 3.                                        | Legal Proceedings |   |
|                                           |   |   |
| Item 4.                                        | Submission of Matters to a Vote of Security  Holders |   |
|                                           |   |   |
| **Part II**                                    |
|                                           |   |   |
| Item 5.                                        | Market for Registrant’s Common Equity,  Related Stockholder Matters, and Issuer Purchases of Equity Securities. |   |
|                                           |   |   |
| Item 6.                                        | Selected Financial Data. |   |
|                                           |   |   |
| Item 7.                                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |   |
|                                           |   |   |
| Item 7a.                                       | Quantitative and Qualitative Disclosures  about Market Risk. |   |
|                                           |   |   |
| Item 8.                                        | Financial Statements and Supplementary Data |   |
|                                           |   |   |
| Item 9.                                        | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure |   |
|                                           |   |   |
| Item 9A.                                       | Controls and Procedures |   |
|                                           |   |   |
| **Part III**                                   |
|                                           |   |   |
| Item 10.                                       | Directors and Executive Officers of the  Registrant |   |
|                                           |   |   |
| Item 11.                                       | Executive Compensation |   |
|                                           |   |   |
| Item 12.                                       | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
|                                           |   |   |
| Item 13.                                       | Certain Relationships and Related  Transactions |   |
|                                           |   |   |
| Item 14.                                       | Principal Accountant Fees and Services |   |
|                                           |   |   |
| **Part IV**                                    |
|                                           |   |   |
| Item  15.                                      | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |   |
|                                           |   |   |
| **EXHIBIT INDEX**                              |   |
|                                           |   |   |
| **SIGNATURES**                                 |   |
|                                           |   |   |
| **INDEX TO CONSOLIDATED FINANCIAL STATEMENTS** |   |

 

2

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*ThisReport on Form 10-K contains forward-looking statements that involve risks anduncertainties.  Actual events and results could differ materially fromthose anticipated in these forward-looking statements as a result of certainfactors.  See Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations - Safe Harbor Statement”*

 

**PART I**

 

**Item1.  Business.**

 

**Overview**

 

Artemis International Solutions Corporation andSubsidiaries (“Artemis”, “We”, or the “Company”) is one of the world’s leadingproviders of investment planning and control software and services.  Artemis has been promoting a significantchange in the role of portfolio and project management over recent years. Since1976 we have been helping organizations improve their performance througheffective portfolio, project and resource management.  Improved performance requires continuous alignment of investmentswith strategic business goals, consequently the ability to effectively select,plan, budget and control investment projects becomes the key for optimizingcorporate resources. We believe this creates an even greater requirement forintegrated investment planning and control solutions to support the needs ofvalue creation, visibility, governance, and compliance.

 

The Company has a proud 28-year history ofsuccessfully delivering Enterprise and Project Management solutions to Global2000 customers with the most extensive portfolio and project management needs.  Companies trust Artemis’ software to managetheir business-critical processes. Customers use our software in such key areas as (i) IT Governance andManagement (ii) developing new products such as pharmaceuticals, (iii) helpinggovernmental agencies promote business efficiency through better alignment andallocation of resources, (iv) maintaining nuclear power stations, and (v)managing the Joint Strike Fighter Program for the US government.

 

Our corporate offices are located at 4041 MacArthurBoulevard, Suite 260, Newport Beach, CA 92660 and our telephone number at that address is (949) 660-7100.

 

**Key Business Focus**

 

Throughout 2003 we havefocused on refining our experience and understanding of market needs into asuite of industry optimized solutions that integrate application modules withpackaged consulting services to provide an immediate response to today’sbusiness needs.

 

Our in depth understandingof the business issues encountered within different market environments hasenabled us to fine tune our solutions to address the specific requirements ofmultiple industry sectors including Automotive, Aerospace and Defense, HighTechnology, National and local Government, Energy, Telecommunications,Financial Services and Pharmaceuticals.

 

Artemis investment planningand control solutions (“Solutions”) support value creation for both industryand the public sector by ensuring better alignment of strategy, investmentplanning and project execution.  TheSolutions can be deployed throughout the organization to address specificbusiness needs including; IT management and governance, new productdevelopment, program management, fleet and asset management, power outagemanagement and detailed project management

 

Artemis industry optimizedSolutions are built around our two core software products:

 

•                       Artemis 7, a full web product representing a true merger of Investmentplanning, prioritization and control, Portfolio & organizational budgetingwith Operational project & resource management.  Artemis 7 provides enterprise wide alignment of investments withbusiness strategy without enforcing a single consistent level of processmaturity across the entire organization; and

 

•                       Artemis Views, a web and client server product designed to manageproject based work in organizations with well-established project managementpractices. Artemis Views comprises a series of core modules including: ProjectManagement, Advanced Planning and Resourcing, Earned Value Management, TimeReporting, and Project Analytics.

 

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**Selling and Marketing**

 

Artemis markets itsSolutions through its own direct sales and service organizations with multipleoffice locations in the United States, United Kingdom, France, Finland,Germany, Italy, Japan and the Far East. Additionally, an extensive distributornetwork provides sales and service capabilities in other European countries,Australia, Asia Pacific and Latin America.

 

With over 550,000 usersworldwide, and a global network covering 47 countries, Artemis is unique in theportfolio and project management market in terms of its size, experience,global presence, and innovative solutions. Our international presence not onlyenables us to service global organizations, but provides strong protectionagainst fluctuating market demands that typically affect companies relying onspecific geographies for the majority of their business.  The international dimension of Artemis isclearly reflected by our new web site (www.aisc.com) introduced this year.  This site provides consistent information tothe world in 10 languages, while enabling individual countries to promote theirspecific regional focus.

 

In addition to this strongglobal presence, Artemis marketing and sales effort are supported by:

 

*Marketing Communications*

 

To succeed in its overallvertical marketing and sales strategy, Artemis pursues a very focused approachto marketing communications.  Itparticipates in vertically-oriented trade shows, events, local seminars, workswith industry specific publications, and collaborates regularly with industryanalysts who cover the Portfolio and Project Management sectors.  All marketing communications activities aredesigned to support the solution selling process.

 

*Customer Referrals*

 

Our large installed customerbase, and the strength and high profile nature of Artemis’ referenceablecustomers is an essential ingredient in the Company’s vertical marketingstrategy. Satisfied customers are unique sources of qualified leads and helpwhen securing sales in competitive situations.

 

**Expansion and Strategic Alliances**

 

From a sales perspective,Artemis will seek to continue to consolidate its leadership throughout Europe,while increasing sales in North America. Artemis will establish a program forgrowth in the Japanese market, and selectively extend its presence in emergingmarkets such as China and Australia.  Tosupport our growth within specific industry market segments we have establishedstrategic alliances with a number of specialized consulting companies andsystem integrators.  These include,among others, Unilog, Fujitsu Consulting, DMR Conseil (Quebec), Robbins Gioia.,Conseillen and Agilense.  Our technologyfocused alliances include companies like IBM Corporation, Oracle Corporation,Microsoft Corporation, BEA Systems, Citrix Systems, Sun Microsystems, CategoricSoftware and Toshiba Corporation.

 

**Customers**

 

Artemis providesmission-critical software solutions to hundreds of organizations worldwide,such as ABN AMRO Bank N.V., AMI Semiconductor, Inc., BAE Systems, The BoeingCompany, CSC, Deutsche Bank, EADS, Exelon, France Telecom, First Union NationalBank, The Goldman Sachs Group Inc., The Goodyear Tire and Rubber Company,Lockheed Martin, Italy’s Ministry of Infrastructure, Michelin, Nokia, PfizerInc., Sun Microsystems Inc., Toshiba, the UK Regional Development Agencies,Union Carbide and Unisys.

 

Artemis has added asignificant number of names to its customer base during the past 12 monthsreflecting the success of our new solutions in the public sector,pharmaceuticals and corporate IT management. These include, among others,Bordeaux District Council, Chicago Mercantile Exchange, Telecom Italia, LaPoste, Carbon Trust, UK Metropolitan Police, Generali, and Osaka Gas.

 

Artemis has also consolidatedits role as a major provider in the traditional enterprise program and projectmanagement sector with some of the world’s leading organizations including,Bell Augusta Aerospace, Lockheed Martin, Michelin, British Airports Authority,BAE Systems, Telenor, Sandvik, CSC, Comliet Group, Philips, EADS, Liebherr, TSystems, Toyota and VR-Track.

 

4

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**Intellectual properties**

 

Ourproprietary products are not protected by patents. However, to protect ourintellectual property rights, we license our software products and require ourcustomers to enter into license agreements that impose restrictions on theirability to utilize the software or transfer the software to other users.  Additionally, we seek to avoid disclosure ofour trade secrets through a number of means, including, but not limited to,requiring those persons with access to our proprietary information to executeconfidentiality agreements with us and restricting access to our source code.  In addition, we protect our software,documentation, templates and other written materials under trademark, tradesecret and copyright laws.  Even withall of these efforts, there can be no assurance that such precautions willprovide meaningful protection from competition or that competitors will notindependently be able to develop similar technology.  If, in the future, litigation is necessary to enforce ourintellectual property rights, to protect our trade secrets, or to determine thevalidity and scope of the proprietary rights of others, such litigation couldresult in substantial costs and diversion of resources and could have amaterial adverse effect on our business, operating results and/or financialcondition.  As a result, ultimately, wemay be unable, for financial or other reasons, to enforce our rights under thevarious intellectual property laws as described above.  In addition, the laws of certain countriesin which our products are or may be licensed may not protect our products andintellectual property rights to the same extent as laws of the United States.

 

We believe thatour products do not infringe upon any valid existing proprietary rights ofthird parties.

 

**Competition**

 

Competitioncomes mainly from the portfolio and project management software market, whichincludes companies such as Niku, Primavera and Prosight. Enterprise ResourcePlanning vendors also offer capabilities that can answer some requirements ofour target customers, but such solutions still lag behind our solutions interms of depth. Microsoft continues to offer tools in the project managementdomain that organizations primarily adopt and use for internal developments toanswer some company wide requirements.

 

**Employees**

 

Asof February 29, 2004, Artemis directly employs approximately 382 persons on aworldwide basis; 90 in the United States of America, 245 in Europe, 31 inJapan, and 16 in Asia. Our employees are not represented by labor unions orcollective bargaining agreements, except as may be required by the laws ofcertain foreign jurisdictions.  We havenot experienced any work stoppages anywhere, and consider our relations withour employees worldwide to be good.

 

**Worldwide Revenues**

 

Ourrevenue is segmented by geographic region and is based upon managementresponsibility for such operations.  The following table presentsinformation about the Company’s revenue (net of eliminations) by geographicarea for each of the three years in the period ended December 31, 2003.

 
|          |   | **Year Ended  December 31,** |   |
|---------------|--------|------------------------------|--------|
|          |   | **2003**                     |   | **2002** |   | **2001** |   |
|          |   |                         |   | **(in thousands)** |   |   |   |
| Americas      |   | $                            | 15,642 |   | $ | 28,074 |   | $ | 26,583 |   |
| EMEA (1)      |   | 34,423                       |   | 32,640 |   | 32,179 |   |
| Japan         |   | 6,073                        |   | 6,335 |   | 7,247 |   |
| Asia          |   | 1,153                        |   | 1,615 |   | 1,637 |   |
| Total Revenue |   | $                            | 57,291 |   | $ | 68,664 |   | $ | 67,646 |   |

 

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(1)          Europe, Middle East, and Africa

 

Weincurred research and development expenses of approximately $8.2 million, $7.9million and $9.9 million, respectively for the years ended December 31, 2003,2002 and 2001.

 

5

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**Company History**

 

Asused herein:

 

•                  “Opus360” refers to Opus360 Corporation priorto the closing of certain share exchange transactions described below. Opus360 Corporation was incorporated in August 1998 to provide an integratedweb-based service to streamline the procurement and management of professionalservices.

 

•                  “Legacy Artemis” refers to ArtemisAcquisition Corporation (“Legacy Artemis”), a Delaware corporation and theformer parent Artemis business organization.  Prior to the share exchangetransactions described below, Legacy Artemis was a wholly owned subsidiary ofProha Plc (“Proha”), a Finnish corporation.  Legacy Artemis was adeveloper and supplier of comprehensive project and resource collaborationapplication software products and consulting services.

 

•                  In November 2001 the Company changed its nameto “Artemis International Solutions Corporation” which refers to Opus360Corporation after the closing of certain share exchange transactions describedbelow.

 

InApril 2001, Opus360 and Proha entered into a share exchange agreement (the“Share Exchange Agreement”), pursuant to which, Opus360 exchanged 80% of itspost-transaction outstanding common stock for all of the capital stock ofLegacy Artemis, and 19.9% of two Finnish subsidiaries of Proha, Intellisoft Oyand Accountor Oy.

 

Prohaacquired Legacy Artemis and transferred its interests in several companiesbased in Europe, Asia and the United States to Legacy Artemis in August2000.  In addition, Proha contributed its directly held interests inseveral companies to Artemis in conjunction with the share exchangetransactions effective July 31, 2001.  Each of the “ContributedBusinesses” is reflected as having been contributed by Proha as of the later ofthe date Legacy Artemis was acquired by Proha, or the date these interests wereunder the control of Proha.  These Contributed Businesses are included inthe results of Artemis as of the effective date a majority interest wastransferred to Artemis.

 

Theactive Contributed Businesses and the effective dates of their contribution toLegacy Artemis are as follows:

 
| **Current Company Name**              | ** ** | **Location**    | ** ** | **Contribution  Date** | ** ** |
|---------------------------------------|------------|-----------------|------------|------------------------|------------|
| Artemis Finland Oy                    |       | Finland         |       | August  24, 2000       |       |
| Artemis International  Solutions Ltd. |       | United  Kingdom |       | August  24, 2000       |       |
| Artemis International  Limited        |       | Japan           |       | August  24, 2000       |       |
| PMSoft Asia Pte. Ltd.                 |       | Singapore       |       | December  1, 2000      |       |
| Artemis International  S.p.A.         |       | Italy           |       | December  1, 2000      |       |
| Enterprise Management  Systems Sarl   |       | Italy           |       | December  1, 2000      |       |
| Artemis International Sarl            |       | France          |       | December  1, 2000      |       |
| Solutions International               |       | France          |       | December  1, 2000      |       |
| Artemis International GmbH            |       | Germany         |       | December  1, 2000      |       |

 

Thetransaction was structured in two steps (the “Share Exchange Transaction”)since the number of authorized Opus360 shares needed to be increased to allowfor the issuance of 8 million new shares to Proha in satisfaction of the 80%requirement.  Despite its two step structure, the transaction wasaccounted for upon the consummation of the first closing because Proha gained amajority controlling interest and the voting agreements discussed beloweffectively “locked in” phase two of the transaction.

 

Inconnection with the Share Exchange Agreement, Proha entered into two votingagreements, one with Ari B. Horowitz, (cofounder of Opus360 and member of theArtemis Board of Directors), and one with Opus360.  Pursuant to theseagreements, Mr. Horowitz agreed among other things to cause all of his 133,000shares of Opus360 common stock to be voted in favor of the secondclosing.  Also, Proha agreed among other things to cause all of its 3.0million shares of Opus360’s common stock to be voted in favor of the secondclosing.

 

Asa result of the above voting agreements, there were commitments to vote infavor of the second closing representing approximately 62% of the outstandingcommon stock.  Accordingly, the transaction was not treated as a stepacquisition since Proha obtained a majority controlling and voting interestupon consummation of the first closing.

 

OnJuly 31, 2001, Opus360 consummated the first phase of the share exchange. In connection with the share exchange Opus 360 acquired all of the capitalstock of Legacy Artemis in exchange for approximately 3 million shares ofOpus360’s restricted common stock.  As a result of this exchange, Prohaobtained a controlling ownership and management interest in Opus360. Accordingly, the transaction was accounted for as a reverse acquisition withLegacy Artemis treated as the accounting acquiror and accounted for under thepurchase method of accounting in accordance with the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” The second closing was completed on November 20, 2001 by Opus360’s filing of adefinitive proxy statement with the Securities and Exchange Commission (the“SEC”) containing the required disclosures 

 

6

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and financial information ofthe combined and consolidated companies.  At the second closing, Opus360delivered approximately 5 million additional shares of its restricted commonstock in return for the delivery by Proha of 19.9% of the outstanding commonstock of two Proha subsidiaries. Since completion of the second closing, Prohahas owned approximately 80% of the post-transaction outstanding common stock ofthe Company.

 

InNovember 2002, the Company sold its 19.9% interest in Accountor Oy to PretaxLtd, an unrelated party, for a pretax gain of approximately $0.7 million.

 

InDecember 2002, the Company sold the operations of ABC Technologies Sarl (“ABCTechnologies - France”), a wholly-owned subsidiary of Artemis InternationalSarl, France.  The total proceeds fromthis transaction were approximately $0.4 million.

 

InOctober 2003, the Company entered into an asset purchase agreement for the saleof its Software Productivity Research (“SPR”) operations.  Cash consideration received for the sale ofSPR was $0.3 million.  In addition thebuyer assumed certain SPR liabilities.

###### ** **

###### **Item 2. Properties**

 

Artemisleases all of its United States and international facilities pursuant to leasesthat expire from a month-to-month basis to February 28, 2008. Two of theseleases have single renewal options. Artemis’ corporate headquarters arecurrently located at 4041 MacArthur Blvd, Newport Beach, California. TheCompany also maintains facilities at 1811 Pike Road, Longmont, Colorado, wherethe Company occupies approximately 10,000 square feet of office space.  In addition, the Company maintainsfacilities in various other locations across the United States, Europe andAsia. The Company’s facilities comprise a total of 29,000 square feet in theUnited States and 36,000 square feet in Europe and Asia. We believe our currentfacilities are sufficient for our needs.

 

##### **Item 3.  Legal Proceedings**

 

As previously reported,on April 6, 2001, a putative class action lawsuit captioned Charles Bland vs.Opus360 Corporation, et al., 01 Civ. 2938, was filed in the United StatesDistrict Court for the Southern District of New York (the “Court”). Ten similarputative class actions also were filed in the Court. By Order dated August 10,2001, the Court consolidated all eleven actions, and on September 24, 2001, theplaintiff served a consolidated amended class action complaint (the “AmendedComplaint”). The Amended Complaint was brought on behalf of all persons whoacquired securities of the Company between April 7, 2000, and March 20,2001.  Named as defendants in theAmended Complaint were the Company, ten current and former officers anddirectors of the Company, the underwriters of the Company’s initial publicoffering (“IPO”) and two shareholders who sold stock in a secondary offeringconcurrent with the IPO. The Amended Complaint alleged that, among otherthings, the plaintiff and members of the proposed class were damaged when theyacquired securities of the Company because false and misleading information andmaterial omissions in the registration statement relating to the IPO and thesecondary offering caused the price of the Company’s securities to beartificially inflated.  The AmendedComplaint asserted violations of Sections 11, 12(a)(2), and 15 of theSecurities Act of 1933.  Damages inunspecified amounts and certain rescission rights were sought.

 

In October 2001, the Companyand all other defendants filed motions to dismiss the Amended Complaint.  By Opinion and Order dated October 2, 2002,the Court granted all of the motions and dismissed the Amended Complaint, butgranted plaintiffs leave to serve a second consolidated amended class actioncomplaint (the “Second Amended Complaint”). On October 30, 2002, plaintiffs served their Second Amended Complaint,which contained allegations similar to those in the Amended Complaint.  The defendants, including the Company, movedto dismiss the Second Amended Complaint on December 31, 2002. Before the motionwas heard, the parties reached an agreement in principle to settle all claimsasserted and any claims that could have been asserted in this litigation.

 

On June 18, 2003 the Companyannounced that it had signed an agreement for the settlement and release of allclaims against Artemis and those certain officers and directors and theunderwriters in the Second Amended Complaint. The Court approved the settlement on October 10, 2003.  The settlement became final on November 12,2003. The Company’s insurer covered substantially all of the $550,000 in totalsettlement costs.  The settlement shouldin no event be construed or deemed to be evidence of or an admission orconcession on the part of the Company or any individually named defendantofficer and director with respect to any claim of any fault or liability orwrongdoing or damage whatsoever.

 

7

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**Item 4.****                    ****Submission of Matters to aVote of Security Holders**

 

No matter was submitted to avote of our stockholders during the fourth quarter of 2003.

 

**Part II**

 

**Item 5.       Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

OurCommon Stock was listed on the NASDAQ National Market (“NASDAQ”) under thesymbol “OPUS” from April 4, 2000 until June 29, 2001.  Since June 29,2001, the stock has traded on the NASDAQ – Over-the-Counter Bulletin Board(“OTCBB”).  Effective November 25, 2001, the trading symbol on the OTCBBwas changed to “AISC”.  Subsequent to the Company’s one for twenty-fivereverse stock split on February 7, 2003, the trading symbol was changed to“AMSI”. All information regarding common stock, stock options, warrants andrelated per share amounts has been restated within this annual report toreflect the February 7, 2003 reverse stock split.

 

Rules15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”), impose sales practice and disclosure requirementson certain broker-dealers who engage in certain transactions involving a “pennystock”.  Subject to certain exceptions,a penny stock generally includes any non-Nasdaq equity security that has amarket price of less than $5.00 per share. The market price of our common stock on the OTCBB during the fourteenmonths ended Feburary 29, 2004 has ranged between a high of $2.95 and a low of$1.00 per share, and our common stock is thus deemed to be penny stock forpurposes of the Exchange Act.  Theadditional sales practice and disclosure requirements imposed uponbroker-dealers may discourage them from effecting transactions in our commonstock, which could severely limit the liquidity of our stock and impede thesale of our stock in the secondary market.

 

AtMarch 9, 2004, the number of stockholders of record was approximately 747(excluding beneficial owners and any shares held in street name or bynominees).  The following table sets forth the quarterly high and lowsales prices on bid quotations per share, as retroactively adjusted for theaforementioned reverse stock split.

 
|                               |   | **High** |       | **Low** |       |
|------------------------------------|--------|----------|------------|---------|------------|
| **YEAR  ENDING DECEMBER 31, 2003** |   |     | ** ** |    | ** ** |
| First Quarter                      |   | $        | 2.20       |    | $          | 1.00 |   |
| Second Quarter                     |   | 2.05     |       | 1.35    |       |
| Third Quarter                      |   | 2.45     |       | 1.50    |       |
| Fourth Quarter                     |   | 2.00     |       | 1.35    |       |
| **YEAR  ENDED DECEMBER 31, 2002**  |   |     |       |    |       |
| First Quarter                      |   | $        | 1.53       |    | $          | 0.78 |   |
| Second Quarter                     |   | 1.00     |       | 0.20    |       |
| Third Quarter                      |   | 2.38     |       | 0.25    |       |
| Fourth Quarter                     |   | 1.75     |       | 0.75    |       |
| **YEAR  ENDED DECEMBER 31, 2001**  |   |     |       |    |       |
| First Quarter                      |   | $        | 25.75      |    | $          | 2.35 |   |
| Second Quarter                     |   | 12.25    |       | 1.56    |       |
| Third Quarter                      |   | 3.00     |       | 1.38    |       |
| Fourth Quarter                     |   | 2.25     |       | 1.13    |       |

 

OnMarch 9, 2004, the last sale price of our Common Stock was $1.51 per share.

 

**Dividend Policy**

 

Duringthe nine months ended December 31, 2000, Legacy Artemis paid a cash dividend of$140,000.  We do not anticipate paying cash dividends in the foreseeablefuture. We currently intend to retain future earnings, if any, to financeoperations and the expansion of our business. Any future determination to paycash dividends will be at the discretion of our Board of Directors and will bedependent upon our financial condition, operating results, capitalrequirements, general business conditions, restrictions imposed by financingarrangements, if any, legal and regulatory restrictions on the payment ofdividends and other factors that our Board of Directors deems relevant.

 

8

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InAugust 2003, the Company obtained a revolving credit facility with LaurusMaster Fund Ltd. (“Laurus”). Under the Security Agreement executed in connectionwith the revolving credit facility, the Company may not directly or indirectlydeclare, pay or make any dividend or distribution on any class of its stock,except for indebtedness subordinated to Laurus.

 

TheCompany has granted options to purchase the Company’s Common Stock undervarious plans to employees and directors.  All stock option plans areadministered by the Compensation Committee of the Board of Directors, whichdetermines the terms of the options granted, including the exercise price, thenumber of shares subject to option, and the vesting period.  Optionsgenerally vest over terms of three to five years and have a maximum life of tenyears.

 

Thestock option plans adopted by Opus360 prior to the consummation of the ShareExchange Transactions, and the related stock options continue in full force andeffect.  Even though Legacy Artemis is the acquirer for accountingpurposes in the Share Exchange Transactions, Opus360 as a legal entity survivedthe consummation of such transaction. Options granted under Opus 360 plans areredeemable in the common stock of Artemis. Following is a description of theCompany’s non-stockholder approved stock option plans of Opus 360 and LegacyArtemis prior to the merger, and the status of the plans after July 31, 2001.

 

•                  The 2000 Non-Employee Directors Plan (the“Non-Employee Directors Plan”) provides for automatic, non-discretionary grantsof up to 45,000 non-qualified stock options to non-employee board members.  41,277 options granted under the Non-EmployeeDirectors Plan remain outstanding at December 31, 2003.

 

•                  The Company assumed non-qualified stockoptions granted to certain key former employees of Opus360.  46,983 of these stock options with anexercise price of $250.00 are outstanding and exercisable as of December 31,2003.  The options are exercisable until February 2010.

 

•                  The Company also assumed non-qualified stockoptions granted to other employees of Opus360 who became Artemis employeesafter the Share Exchange Transactions.  At December 31, 2003, 4,173 of theoptions with a weighted average exercise price of $146.25 remained outstanding.

 

**Item6.  Selected Financial Data**

 

Thefollowing selected consolidated financial data should be read in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and the consolidated financial statements and notes theretoincluded elsewhere in this report.  The selected consolidated financialdata are derived from our audited consolidated financial statements, which havebeen prepared assuming that the Company will continue as a going concern. As disclosed in Note 1 to the financial statements, the Company has incurredsubstantial recurring losses from operations and may incur losses in thefuture.  These and other factors as described in Note 1 raise substantialdoubt about the Company’s ability to continue as a going concern.

 
|                                                             |   | **Year Ended  December 31,**                     |   | **Nine  Months  Ended  December 31,** |   | **Year Ended  March 31,** |   |
|------------------------------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------------|--------|---------------------------|--------|
|                                                             |   | **2003**                                         |   | **2002**                              |   | **2001**                  |   | **2000(a)(b)(c)** |   | **2000(c)** |   |
|                                                             |   | **(in thousands, except per common share data)** |   |
| **Summary  of operations data**                                  |   |                                             |   |                                  |   |                      |   |   |   |   |   |
| Revenues                                                         |   | $                                                | 57,291 |                                  | $      | 68,664                    |   | $ | 67,646 |   | $ | 34,822 |   | $ | 49,303 |   |
| Operating income (loss)                                          |   | (8,092                                           | )      | (3,746                                | )      | (66,483                   | )      | (11,398 | ) | 42 |   |
| Net income (loss)                                                |   | (7,891                                           | )      | (3,948                                | )      | (59,764                   | )      | (10,797 | ) | 1,060 |   |
| Basic earnings (loss) per  common share:                         |   | (0.79                                            | )      | (0.40                                 | )      | (6.78                     | )      | (1.40 | ) | 0.14 |   |
| Shares used in computing  basic earnings (loss) per common share |   | 9,965                                            |   | 9,965                                 |   | 8,816                     |   | 7,689 |   | 7,426 |   |
| Diluted earnings (loss)  per common share:                       |   | (0.79                                            | )      | (0.40                                 | )      | (6.78                     | )      | (1.40 | ) | 0.14 |   |
| Shares used in computing  earnings (loss) per common share       |   | 9,965                                            |   | 9,965                                 |   | 8,816                     |   | 7,689 |   | 7,525 |   |
|                                                             |   |                                             |   |                                  |   |                      |   |   |   |   |   |
| **Balance  sheet data:**                                         |   |                                             |   |                                  |   |                      |   |   |   |   |   |
| Cash and cash equivalents                                        |   | 2,593                                            |   | 7,766                                 |   | 5,081                     |   | 3,200 |   | 1,199 |   |
| Working capital deficiency                                       |   | (8,839                                           | )      | (4,964                                | )      | (5,785                    | )      | (2,823 | ) | (2,477 | ) |
| Total assets                                                     |   | 29,060                                           |   | 39,005                                |   | 38,570                    |   | 103,488 |   | 23,421 |   |
| Long-term debt, including  amounts due within one year           |   | 676                                              |   | 1,185                                 |   | 2,618                     |   | 5,546 |   | 9,384 |   |
| Total stockholders’ equity  (deficit)                       |   | (2,471                                           | )      | 5,780                                 |   | 9,582                     |   | 60,905 |   | (996 | ) |
|                                                                  |        |                                                  |        |                                       |        |                           |        |  |  |  |  |  |  |  |  |  |  |

 

9

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(a)     On August 24, 2000 Proha purchased allof the outstanding common stock of Legacy Artemis. The purchase was structuredas a share exchange whereby Proha issued shares of its publicly traded commonstock to Legacy Artemis’ equity holders in exchange for all of Legacy Artemis’common stock. As a result of the transaction Legacy Artemis recorded goodwillof approximately $30.7 million.  Legacy Artemis also recordedapproximately $32.3 million of identifiable intangible assets and anexpense of $2.3 million attributed to in-process research and development.

 

(b)     During the nine months endedDecember 31, 2000, Legacy Artemis paid a cash dividend of $140,000. Noother dividends were declared or paid since Legacy Artemis’s inception.

 

(c)     The independent auditor’s reports relating to(i) the nine months ended December 31, 2000 and (ii) the year ended March 31,2000 are not included herein.

 

**Item7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

Thefollowing discusses the financial condition and results of operations ofArtemis and should be read in conjunction with the consolidated financialstatements and notes thereto included elsewhere in this report.

 

**Safe Harbor Statement**

 

TheManagement’s Discussion and Analysis and other portions of this report include“forward-looking” statements (versus historical facts) that are subject torisks and uncertainties that could cause actual results to differ materiallyfrom those described.  Although we believe our expectations that areexpressed in these forward-looking statements are reasonable, we cannot promisethat our expectations will turn out to be correct.  Our actual resultscould be materially different from and worse than our expectations. Withrespect to such forward-looking statements, the Company invokes the protectionafforded by the Private Securities Litigation Reform Act of 1995.

 

**Overview**

 

ArtemisInternational Solutions Corporation (“Artemis”) is a provider ofenterprise-based portfolio, project and resource management softwaresolutions.  Artemis’ solutions consist of scalable client/server andWeb-based applications, and are supported by consulting services and aninternational distribution network of 59 offices in 47 countries. Artemisservices seven primary vertical markets, (i) Aerospace and Defense, (ii) Energyand Telecom, (iii) Pharmaceuticals, (iv) Government, (v) Financial Services,(vi) Automotive, and (vii) High Technology.

 

***Critical Accounting Policies***

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates.  The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an ongoing basis, we evaluate our estimates,including those related to revenue recognition, the valuation of long-lived andintangible assets, and the amortization of intangible assets.  We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual resultsmay materially differ from these estimates under different assumptions orconditions.  We believe the following critical accounting policies affectour more significant judgments and estimates used in preparation of ourconsolidated financial statements.

 

•      Revenue recognition;

•      Valuation of long-lived and intangibleassets;

•      Amortization of intangible assets;

•      Valuation of deferred tax assets; and

•      Estimation of the allowance for doubtfulaccounts receivable.

 

10

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*Revenuerecognition*

 

TheCompany has adopted Statement of Position, or SOP, 97-2, *Software Revenue Recognition*, whichsupersedes SOP 91-1, *Software RevenueRecognition*, as well as SOP 98-9, *Modificationof* SOP 97-2, *Software RevenueRecognition with Respect to Certain Transactions*, which amends SOP97-2 and supercedes SOP 98-4.  SOP 97-2, as amended, generally requiresrevenue earned on software arrangements involving multiple elements to beallocated to each element based on the relative fair market values of each ofthe elements. The fair value of an element must be based on vendor-specificobjective evidence (“VSOE”) of fair value. Software license revenue allocatedto a software product is recognized upon delivery of the product, or deferredand recognized in future periods to the extent that an arrangement includes oneor more elements that are to be delivered at a future date and for which VSOEhas not been established.  Maintenance and support revenue is recognizedratably over the maintenance term.  First-year maintenance typically issold with the related software license and renewed on an annual basisthereafter. Estimated fair values of ongoing maintenance and supportobligations are based on separate sales of renewals to other customers or uponrenewal rates quoted in the contracts. For such arrangements with multipleobligations, we allocate revenue to each component of the arrangement based onthe estimated fair value of the undelivered elements. Fair value of services,such as consulting or training, is based upon separate sales of these services.The Company at times may enter into multiple-customer contracts in which theCompany allocates revenue based on the number of specified users at eachcustomer, and recognizes revenue upon customer acceptance and satisfying theother applicable conditions of the above described accounting policy.

 

Servicesrevenue is recognized as the service is performed assuming that sufficientevidence exists to estimate the fair value of the services.  Consultingand training services are billed based on contractual hourly rates and revenuesare recognized as the services are performed. Consulting services primarilyconsist of implementation services related to the installation of the Company’sproducts which do not require significant customization to or modification ofthe underlying software code.

 

Significantmanagement judgments and estimates must be made in connection withdetermination of the revenue to be recognized in any accounting period. If wemade different judgments or utilized different estimates for any period,material differences in the amount and timing of revenue recognized couldresult.

 

*Valuation of long-lived and intangible assets*

 

TheCompany’s business combinations were accounted for using the purchase method ofaccounting.  In connection with the reverse acquisition of Opus360, theadoption of SFAS No. 141, *BusinessCombinations* resulted in the allocation of negative goodwill in theamount of approximately $10.5 million as a direct reduction of the acquiredOpus360 non-current assets.  At December 31, 2001, the Company recorded animpairment charge which resulted in the complete write-off of goodwill and apartial write-off of its identifiable intangible assets.  As a result of thecomplete write off of the goodwill at December 31, 2001, the adoption of SFASNo. 144 *Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of*, hadno impact on the amortization expense during 2002.

 

Inaccordance with SFAS No. 144, we assess intangible assets and other long-livedassets for recoverability whenever events or changes in circumstances indicatethat their carrying value may not be recoverable through the estimatedundiscounted future cash flows resulting from the use of the assets.  Ifwe determine that the carrying value of any such assets may not be recoverable,we measure impairment by using the projected discounted cash-flow method inaccordance with SFAS No. 144.

 

*Amortizationof intangible assets*

 

Intangible assets atDecember 31, 2003 consist of acquired customer bases and current coretechnology. Customer bases acquired directly are valued at cost, whichapproximates estimated fair value at the time of purchase.  The costsassigned to intangible assets are being amortized on a straight-line basis overthe estimated useful lives of the assets, which is 42 months from January 1,2002.

 

*Valuationof deferred tax assets*

 

The Company records anestimated valuation allowance on its significant deferred tax assets when,based on the weight of available evidence (including the scheduled reversal ofdeferred tax liabilities, projected future taxable income or loss, andtax-planning strategies), it is more likely than not that some or all of thetax benefit will not be realized.

 

*Allowancefor doubtful accounts receivable*

 

We establish our allowancefor doubtful accounts receivable based on our qualitative and quantitativereview of credit profiles of our customers, contractual terms and conditions,current economic trends and historical payment, return and discount 

 

11

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experience. We reassess theallowance for doubtful accounts each period. If we made different judgments orutilized different estimates for any period, material differences in the amountand timing of revenue recognized could result.

 

**Recent Accounting Pronouncements**

 

 

SFAS No. 146, “Accounting for Costs Associated with Exit and**Disposal Activities,” was issued in June2002 and is effective for exit and disposal activities initiated after December31, 2002.  The Company is complying withSFAS No. 146.

 

SFASNo. 147 relates exclusively to certain financial institutions, and thus doesnot apply to the Company.

 

InNovember 2002, the Financial Accounting Standards Board (the “FASB”) issuedFASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”  FIN No. 45 clarifies that aguarantor is required to recognize, at the inception of a guarantee, aliability for the estimated fair value of the obligation undertaken in issuingthe guarantee.  The initial recognitionand measurement provisions of FIN No. 45 are applicable on a prospective basisto guarantees issued or modified after December 31, 2002, while the disclosurerequirements became applicable in 2002. The Company is complying with the disclosure requirements of FIN No.45.  The other requirements of thispronouncement did not materially affect the Company’s consolidated financialstatements.

 

SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” was issued in December 2002 and is effective for fiscal years ending after December 15, 2002.  SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation.  In addition, this pronouncement amends the disclosure requirements of SFAS 123 to require more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The Company is complying with the disclosure requirements of SFAS No. 148.

 

InJanuary 2003, the FASB issued FIN No. 46, “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51.” The primary objectives of FIN No. 46 are to provide guidance on theidentification of entities for which control is achieved through means otherthan voting rights (variable interest entities, or “VIEs”), and how todetermine when and which business enterprise should consolidate the VIE.  This new model for consolidation applies toan entity for which either: (a) the equity investors do not have a controllingfinancial interest; or (b) the equity investment at risk is insufficient tofinance that entity’s activities without receiving additional subordinatedfinancial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary andall other enterprises with a significant variable interest in a VIE makeadditional disclosures.  As amended inDecember 2003, the effective dates of FIN No. 46 for public entities that arenot small business issuers are as follows: (a) For interests in special-purposeentities (“SPEs”): the first period ended after December 15, 2003; and (b) Forall other types of VIEs: the first period ended after March 15, 2004.  Management has determined that the Companydoes not have any SPEs (as defined), and is presently evaluating the otherpotential effects of FIN No. 46 (as amended) on its consolidated financialstatements.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 onDerivative Instruments**andHedging Activities,” which amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133.  This pronouncement is effective forcontracts entered into or modified after June 30, 2003 (with certainexceptions), and for hedging relationships designated after June 30, 2003.  The adoption of SFAS No. 149 did not have amaterial impact on the Company’s consolidated financial statements.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of**bothLiabilities and Equity.”  SFAS No. 150establishes standards for how a company classifies and measures certain financialinstruments with characteristics of both liabilities and equity, and iseffective for public companies as follows: (i) in November 2003, the FASBissued FASB Staff Position (“FSP”) FAS 150-03 (“FSP 150-3”), which defersindefinitely (a) the measurement and classification guidance of SFAS No. 150for all mandatorily redeemable non-controlling interests in (and issued by)limited-life consolidated subsidiaries, and (b) SFAS No. 150’s measurementguidance for other types of mandatorily redeemable non-controlling interests,provided they were created before November 5, 2003; (ii) for financialinstruments entered into or modified after May 31, 2003 that 

 

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are outside the scope of FSP150-3; and (iii) otherwise, at the beginning of the first interim periodbeginning after June 15, 2003.  TheCompany adopted SFAS No. 150 on the aforementioned effective dates.  The adoption of this pronouncement did nothave a material impact on the Company’s results of operations or financialcondition.

 

In December 2003, the FASB issued a revision of SFAS No. 132, *Employers' Disclosures about Pensions and OtherPostretirement Benefits*. This pronouncement (“SFAS No. 132-R”)expands employers’ disclosures about pension plans and other post-retirementbenefits, but does not change the measurement or recognition of such plansrequired by SFAS No. 87, No. 88. or No. 106. SFAS No. 132-R retains theexisting disclosure requirements of SFAS No. 132, and requires certainadditional disclosures about defined benefit post-retirement plans. The definedbenefit pension plan of the Company’s United Kingdom subsidiary is theCompany’s only defined benefit post-retirement plan. Except as described in thefollowing sentence, SFAS No. 132-R is effective for foreign plans for fiscalyears ending after June 15, 2004; after the effective date, restatement forsome of the new disclosures is required for earlier annual periods. Some of theinterim-period disclosures mandated by SFAS No. 132-R (such as the componentsof net periodic benefit cost, and certain key assumptions) are effective forforeign plans for quarters beginning after December 15, 2003; otherinterim-period disclosures will not be required for the Company until the firstquarter of 2005. The Company is presently evaluating the effect of SFAS No.132-R on its annual and interim-period financial statement disclosures.

 

Other recent accountingpronouncements issued by the FASB (including its Emerging Issues Task Force),the American Institute of Certified Public Accountants, and the SEC did not orare not believed by management to have a material impact on the Company’spresent or future consolidated financial statements.

 

**Results of Operations**

 

Thefollowing table sets forth the unaudited percentage of total revenuesrepresented by certain items in our consolidated statements of operations forthe periods indicated:

 
|                                        |   | **Year ended  December 31,** |   |
|---------------------------------------------|--------|------------------------------|--------|
|                                        |   | **2003**                     |   | **% of  Revenue** |   | **2002** |   | **% of  Revenue** |   | **2001** |   | **% of  Revenue** |   |
|                                        |   |                         |   |   |   | **(in millions)** |   |   |   |   |   |
| Revenue:                                    |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Software                                    |   | $                            | 13.3   |   | 23 |   | $ | 15.1 |   | 22 |   | $ | 15.1 |   | 22 |   |
| Support                                     |   | 16.6                         |   | 29 |   | 15.7 |   | 23 |   | 15.5 |   | 23 |   |
| Services                                    |   | 27.4                         |   | 48 |   | 37.9 |   | 55 |   | 37.0 |   | 55 |   |
|                                        |   | 57.3                         |   | 100 |   | 68.7 |   | 100 |   | 67.6 |   | 100 |   |
|                                        |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenue:                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Software                                    |   | 0.7                          |   | 1 |   | 1.7 |   | 2 |   | 2.5 |   | 4 |   |
| Support                                     |   | 5.1                          |   | 9 |   | 6.4 |   | 9 |   | 6.7 |   | 10 |   |
| Services                                    |   | 20.3                         |   | 35 |   | 24.6 |   | 36 |   | 23.9 |   | 35 |   |
|                                        |   | 26.1                         |   | 45 |   | 32.7 |   | 47 |   | 33.1 |   | 49 |   |
|                                        |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Gross margin                                |   | 31.2                         |   | 55 |   | 36.0 |   | 53 |   | 34.5 |   | 51 |   |
|                                        |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing                       |   | 15.9                         |   | 28 |   | 12.5 |   | 18 |   | 16.8 |   | 25 |   |
| Research and development                    |   | 8.2                          |   | 14 |   | 7.9 |   | 11 |   | 9.9 |   | 15 |   |
| General and administrative                  |   | 11.1                         |   | 19 |   | 15.2 |   | 22 |   | 10.9 |   | 16 |   |
| Amortization expense                        |   | 4.1                          |   | 7 |   | 4.1 |   | 6 |   | 18.8 |   | 28 |   |
| Impairment charge                           |   | —                       |   | — |   | — |   | — |   | 43.4 |   | 64 |   |
| Management fees                             |   | —                       |   | — |   | — |   | — |   | 0.8 |   | 1 |   |
| Acquisition costs                           |   | —                       |   | — |   | — |   | — |   | 0.4 |   | 1 |   |
|                                        |   | 39.3                         |   | 68 |   | 39.7 |   | 57 |   | 101.0 |   | 150 |   |
|                                        |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                              |   | (8.1                         | )      | (13 | ) | (3.7 | ) | (4 | ) | (66.5 | ) | (99 | ) |
|                                        |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Non operating (income)  expense             |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                       |   | 0.2                          |   | — |   | 0.2 |   | — |   | 0.8 |   | 1 |   |
| Equity in loss of  unconsolidated affiliate |   | —                       |   | — |   | 0.2 |   | — |   | 0.9 |   | 1 |   |
| Gain on sale of subsidiary  and investee    |   | (0.4                         | )      | (1 | ) | (1.0 | ) | (1 | ) | — |   | — |   |
| Other (income) expense,  net                |   | (0.6                         | )      | (1 | ) | 0.7 |   | 1 |   | 1.2 |   | 2 |   |
| Foreign exchange (gain)  loss               |   | 0.3                          |   | 1 |   | (0.4 | ) | (1 | ) | 0.2 |   | — |   |
| Non operating (income)  expense, net        |   | (0.5                         | )      | (1 | ) | (0.3 | ) | (1 | ) | 3.1 |   | 4 |   |
|                                        |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expense (benefit)                |   | 0.3                          |   | 1 |   | 0.5 |   | 1 |   | (9.7 | ) | (14 | ) |
| Net loss                                    |   | $                            | (7.9   | ) | (13 | ) | $ | (3.9 | ) | (4 | ) | $ | (59.9 | ) | (89 | ) |

 

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**2003 compared to 2002**

 

**Revenue**

 

*Software Revenue*

 

Softwarerevenue represents fees earned for granting customers licenses to use oursoftware products.  Software revenue decreased $1.8 million or 12% to$13.3 million during 2003 from $15.1 million during 2002.  The decrease in software sales of $1.1million in the US and $.7 million in Germany was due, in part, to spendingconstraints imposed on capital expenditures by our existing customer base.  However, we are currently seeing an increasein customer funding for projects previously planned.  In addition, with the additional functionality of Artemis 7 (formerlyPortfolio Director) and the Views 7 release, we are able to meet the needs ofour clients on a much wider range, thus speeding up the sales cycle.  Therefore, management expects an increase insoftware sales in 2004.

 

*Support Revenue*

 

Supportrevenue consists of fees for providing software updates and technical supportfor our software products.  Support revenue increased $0.9 million or 6%to $16.6 million during 2003 from $15.7 million during 2002.  Thisincrease in support revenue was due to a steady increase in revenues generatedby our foreign subsidiaries such as a: 30% increase in Germany, 9% increase inItaly, 19% increase in Finland and a 47% increase in Asia.  The increase in support revenues in thesecountries was partially offset by a decrease in support revenue in the US by8%.  The Company has also put a renewedemphasis on cultivating the existing customer base by focusing on customersatisfaction.

 

*Services Revenue*

 

Servicesrevenue consists of fees for consulting and training generated by our personneland through subcontracted third-party arrangements.  Services revenuedecreased $ 10.5 million or 28% to $27.4 million during 2003 from $37.9 millionduring 2002.  The decrease in service revenue is a direct result of thenear completion of two very large consulting assignments at two large clientsthat had licensed products in prior periods. These two clients generated $16 million in service revenue in 2002compared to

$5 million in 2003.

 

*Deferred Revenue*

 

Thebalance of deferred revenue decreased $0.8 million to $7.2 million at December31, 2003 from $8.0 million at December 31, 2002.  The decrease is due tothe following:

 
    - Liability for prepaid consulting and support services totaling     $1.0 million was released by one U.S. customer.  Therefore, the Company was able to recognize all of the     deferred revenue in the third quarter of 2003.  This was a significant decrease to the deferred revenue     balance.

 
    - The prepaid software and services totaling $0.5 million by a UK     customer in 2002 was released in 2003 after the services were rendered and     the software criterion was accepted.      This lowered the deferred revenue balance.

 
    - A few large supported customers, who     renewed in December 2003, increased the deferred revenue by $0.3million.

 

**Cost of Revenue**

 

Costof revenue consists primarily of salaries and commissions paid to employees andthird-party expenses principally related to consulting, software maintenanceservices and training services.  To a lesser extent, cost of revenueincludes royalty payments to third parties.  The majority of these costsof revenue are directly related to our support and service revenue.  Totalcost of revenue decreased $6.7 million or 20% to $26.0 million during 2003 from$32.7 million during 2002.  Cost of revenue as a percentage of totalrevenue decreased to 45% during 2003 from 47% during 2002 primarily because theCompany licensed a higher proportion of products with low or no associatedroyalty costs and due to more efficient use of staff in delivering services.  Also contributing to the decrease was thatthird party consultants were used less, reflective of the lower service revenuebase.

 

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**Gross Margin**

 

Theprimary reasons for the increased gross margin on total revenue are improvedefficiencies in the support organization and a reduction in third-partyroyalties through the shift in product mix towards Artemis 7. This waspartially offset by a decrease in gross margin on services revenue due to asharp decline in services revenue in 2003 compared to 2002.  This lowered the utilization rate ofinternal consultants and reduced the retention of higher-margin externalconsultants.

 

**Operating Expenses**

 

*Selling and marketing expenses*

 

Sellingand marketing expenses consist primarily of personnel related costs of ourdirect sales force and marketing staff and the cost of third party marketingprograms, including advertising, trade shows, promotional materials andcustomer conferences.  Selling and marketing expenses increased $3.4million or 27% to $15.9 million during 2003, from $12.5 million during2002.  During 2002, management reduced discretionary selling and marketingexpenses in response to forecasts, which predicted that a challenging economywould cause our customers to delay spending on enterprise wide technologydeployments.  In the latter portion of 2002 management predicted a gradualrecovery in the market for software.  In response to this and to supportthe introduction of our Portfolio solution products, management increased theCompany’s marketing efforts.    In addition, during 2003 the Company realigned its marketingorganization. Part of this change included the creation of a new SolutionsMarketing Team, which focuses on key vertical markets to help provide morerelevant and complete business solutions to customers.  The increase also in part, reflects a changein the classification of key executive salaries and related expenses inaccordance with a change in job emphasis from administration to selling andmarketing (please also see *General andadministrative*below).

 

*Research and development*

 

Research anddevelopment expenses consist primarily of salaries and related costs associatedwith the development of our products. These expenses increased $0.3 million or 3.6% to $8.2 million during2003 from $7.9 million during 2002. This increase is primarily due to increased salaries and small increasesin travel expenses as we endeavor to bring our customers further into theproduct delivery process.  In early 2004,we changed the leadership of our product development organization andconsolidated our Product Management, Development and Tier II Support functionsunder a single structure, Product Operations. Our restructuring will also include a relocation of our Californiandevelopment facility to less costly premises. The main purposes in our restructuring activity were threefold: (1) toalign resources with the strategic goal of unifying and further integratinginterrelated products; (2) to add to our development capacity a variablecomponent for adaptation to dynamic conditions; and (3) to bring ourdevelopment processes closer to our customers, fully committing to acustomer-centric model for solutions development.

 

Specific customer-centricmethodological modifications for research and development have continued toinclude the shortening of internal software development cycles, an iterativeplanning and testing practice, and movement of the feature prioritizationprocess out of development and closer to customers.

 

Webelieve that continued investment in research and development is critical toattaining our strategic objectives and, as a result, we expect that spending onresearch and development in 2004 will remain flat except for cost savingsresulting from the restructuring activities described above.  Our primary focus for 2004 is to continuethe process of evolving our development methodology and to invest in productfunctionality in the following three ways: (1) adding significant new capability; (2) integrating key newarchitectural features and technology; and (3) bringing our suite ofinterrelated products together into a unified solution.

 

*General and administrative*

 

Generaland administrative expenses consist primarily of salaries, wages and related costsfor general corporate functions, including executive, legal, accounting, humanresources and information systems. General and administrative expensesdecreased $4.0 million or 26% to $11.1 million during 2003, from $15.1 millionduring 2002.

 

Thedecrease was primarily due to the following (i) a decrease in insurance feesdue to a reduction in coverage,  (ii) a reduction in office spaceoccupied, including the closure of our Exton, Pennsylvania facility in 2002,(iii) the elimination of payments on former OPUS360 lease agreements throughexpiration or settlement, (iv) the elimination of commitments under long-termphone service contracts due to settlement, (v) a change in the classificationof key executive salaries and related expense in accordance with a change injob emphasis from administration to selling and marketing and (vi) theelimination of salaries paid to duplicative OPUS360 personnel who left Artemisin 2002.

 

15

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*Amortization expense*

 

Amortizationexpense represents the financial statement effect of amortizing intangibleassets acquired in conjunction with Proha’s purchase of Legacy Artemis inAugust 2000.  These assets are being amortized on a straight-line basisover the remaining life of 42 months commencing January 1, 2002. Amortizationexpense remained substantially the same during 2003 at $4.1 million, from $4.2million during 2002.

 

**Non-operating (income) expenses, net**

 

Non-operatingincome/expenses consist of (i) net interest expense, (ii) equity in net lossesof unconsolidated affiliates, (iii) foreign exchange gains or losses, (iv)other (income) expense and (v) gain on sale of subsidiary and investee. The Company earned net non-operating income of approximately $0.5 and $0.3 millionduring 2003 and 2002, respectively.

 

TheCompany accounts for certain investments in other companies under the equitymethod of accounting.  The Company recorded a net gain of $0.3 million in2003 compared to a net loss of unconsolidated affiliates of $0.7 million in2002.

 

InNovember 2002, the Company sold its 19.9% interest in Accountor Oy to anunrelated party.  In December 2002, the Company sold its interest in ABCTechnologies – France to an unrelated party.  Other income for the yearended December 31, 2002 includes pretax gains of $0.7 million and $0.3 millionon the sales of our interests in Accountor Oy and ABC Technologies – France,respectively.

 

InOctober 2003, the Company entered into an asset purchase agreement for the saleof its Software Productivity Research (“SPR”) operations.  Total consideration for the sale of SPR was$0.4 million.

 

Changesin the rate of exchange for British Pound Sterling to United States dollarsresulted in foreign exchange income of $0.9 million and $0.5 million in 2003and 2002, respectively.

 

**Changes in Foreign Exchange Rates**

 

Theeffect of changes in foreign exchange rates for the year ended December 31,2003 compared to 2002 was an increase in revenues and a reduction in operatingloss of approximately $5.5 million and $0.1 million, respectively.

 

**Provision for Income Taxes**

 

TheCompany recorded income tax expense of approximately $0.3 million for the yearended December 31, 2003.  The income tax expense on the pre-tax loss ofapproximately $7.9 million is principally the result of foreign income tax onthe Company’s profitable non-US subsidiaries.

 

 **2002 compared to 2001**

 

**Revenue**

 

*Software Revenue*

 

Softwarerevenue represents fees earned for granting customers licenses to use oursoftware products.  Software revenue remained flat at $15.1 million during2002 and 2001.  Many customers responded to uncertain economic andpolitical conditions in 2001 by delaying or curtailing their technology capitalspending.  In addition, customers restricted their software purchases toessential requirements and reduced investments in software designed toaccommodate projected customer growth.  Consequently, our softwarerevenues declined in the second half of 2001 and the first half of 2002. However, during the second half of 2002, our software revenues started torecover as (1) our customers began to increase their investment purchases and(2) our newer products such as our *PortfolioDirector* and *Viewpoint*gained acceptance in certain European countries, particularly the UK, France,Germany and Italy.

 

*Support Revenue*

 

Supportrevenue consists of fees for providing software updates and technical supportfor our software products.  Support revenue increased $0.2 million or 1%to $15.7 million during 2002 from $15.5 million during 2001.  The increasein support revenues was primarily due to the recovery in our software licensesales in the latter portion of 2002.  That is to say, as the number andsize of 

 

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software licenses increasedduring the latter portion of 2002, our customers’ requirements for technicalsupport and updates of software increased accordingly.

 

*Services Revenue*

 

Servicesrevenue consists of fees for consulting and training generated by our personneland through subcontracted third-party arrangements.  Services revenueincreased $0.9 million or 2% to $37.9 million during 2002 from $37.0 millionduring 2001.  The Company has been able to maintain its service revenuesdespite weak economic conditions through several large follow-on consultingassignments with clients who had licensed our products in prior periods.

 

*Deferred Revenue*

 

Thebalance of deferred revenue increased $2.2 million to $8.0 million at December31, 2002 from $5.8 million at December 31, 2001.  The increase is due tothe following:

 

 

1.               In September 2002 the Company announced thesigning of a $3 million contract for providing the Artemis Portfolio Directorsoftware solution to plan, monitor and control investment projects with eightof the United Kingdom’s Regional Development Agencies.  At December 31,2002, the Company recorded $1.7 million of deferred revenue related to thecontract.

 

2.               Approximately $0.2 million of the increase isdue to changes in foreign currency exchange rates.

 

**Cost of Revenue**

 

Costof revenue consists primarily of salaries and commissions paid to employees andthird-party expenses principally related to consulting, software maintenanceservices and training services.  To a lesser extent, cost of revenueincludes royalty payments to third parties.  The majority of these costsof revenue are directly related to our support and service revenue.  Totalcost of revenue decreased $0.4 million or 1% to $32.7 million during 2002 from$33.1 million during 2001.  Cost of revenue as a percentage of totalrevenue decreased to 47% during 2002 from 49% during 2001 because the Companylicensed a higher proportion of products with low or no associated royaltycosts and due to more efficient use of staff in delivering services.

 

**Gross Margin**

 

Total gross margin for 2002 was $36.0 million, an increase of $1.5million or 4%, from $34.5 million for 2001. Gross margin for 2002 alsoincreased approximately 2 percentage points, to 53% from 51% for 2001,reflecting the aforementioned revenue increases and cost of revenueefficiencies.

 

 **Operating Expenses**

 

*Selling and marketing expenses*

 

Sellingand marketing expenses consist primarily of personnel related costs of ourdirect sales force and marketing staff and the cost of third party marketingprograms, including advertising, trade shows, promotional materials andcustomer conferences.  Selling and marketing expenses decreased $4.3million or 26% to $12.5 million during 2002, from $16.8 million during2001.  The decrease was the result of management’s concentrated efforts toreduce discretionary marketing expenses in a challenging economy.

 

*Research and development*

 

Researchand development expenses consist primarily of salaries and related costsassociated with the development of our products.  These expenses decreased$2.0 million or 20% to $7.9 million during 2002 from $9.9 million during2001.  This decrease is primarily due to increased efficiencies andreduction and reallocation of personnel, as we reacted to general economicconditions during the latter part of 2001 and the first half of 2002.  Inparticular, we changed the leadership of our product development organizationand separated our development, product management, and supportleadership.  Our restructuring also included a reduction in headcount andthe closure of our Exton, Pennsylvania facility.  The main purposes in ourrestructuring activity were threefold: (1) to align resources with thestrategic goal of unifying and further integrating interrelated products; (2)to add to our development capacity a variable component for adaptation todynamic conditions; and (3) to bring our development processes closer to ourcustomers, fully committing to a customer-centric model for solutionsdevelopment.

 

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Specificcustomer-centric methodological modifications for research and development haveincluded the shortening of internal software development cycles, an iterativeplanning and testing practice, and movement of the feature prioritization processout of development and closer to customers.

 

Webelieve that continued investment in research and development is critical toattaining our strategic objectives and, as a result, we expect that spending onresearch and development will remain at current levels during the first sixmonths of 2003.  Our primary focus for 2003 was to continue the process ofevolving our development methodology and to invest in product functionality inthe following three ways:  (1) adding significant new capability; (2) integratingkey new architectural features and technology; and (3) bringing our suite ofinterrelated products together into a unified solution.

 

*General and administrative*

 

Generaland administrative expenses consist primarily of salaries, wages and related costsfor general corporate functions, including executive, legal, accounting, humanresources and information systems. General and administrative expensesincreased $4.2 million or 39% to $15.1 million during 2002, from $10.9 millionduring 2001. The increase was primarily a result of (1) the inclusion ofOpus360 related costs for the full year of 2002 as opposed to five months in2001, (2) costs incurred to enhance the quality of our administrative functionsby adding experienced accountants, legal counsel and management executives and(3) costs incurred as the Company built its corporate infrastructure byintegrating and consolidating operations after the reverse acquisition ofArtemis in July 2001.

 

Legaland accounting fees increased by approximately $0.6 million during 2002 ascompared to 2001.  Fees paid to accountants and auditors increased by $0.5million and investor relations costs increased by $0.1 million.  Theincrease in legal fees represented (1) severance payments made to the Company’sformer legal counsel and (2) costs incurred in the Company’s successful defenseof shareholder lawsuits. The increase in accountant’s fees represents costsincurred to gain the assistance of accountants in establishing proper accountbalances for the newly merged Company in conjunction with the audit of theCompany’s 2001 results and the filing of the Company’s annual report. Accountants also assisted in the development of policies and procedures tosupport accounting and reporting in the Company.

 

  Inresponse to the changes in corporate form brought about by the merger ofOpus360 and Legacy Artemis management undertook an analysis of riskssurrounding the Company’s business and determined that certain insurancecoverage needed to be expanded.  In addition, the Company incurredincreased insurance costs as result of change in the underlying insurancemarkets.

 

*Amortization expense*

 

Amortizationexpense represents the financial statement effect of amortizing intangibleassets acquired in conjunction with Proha’s purchase of Legacy Artemis inAugust 2000.  These assets are being amortized on a straight-line basisover the remaining life of 42 months commencing January 1, 2002. Amortizationexpense decreased $14.6 million or 78% to $4.2 million during 2002, from $18.8million during 2001.  The decrease is due to the reevaluation andwrite-off, in December 2001, of a portion of the intangible assets arising fromthe pushdown accounting of Proha’s August 2000 acquisition of Legacy Artemis.

 

**Non-operating (income) expenses, net**

 

Non-operatingincome/expenses consist of (i) net interest expense, (ii) equity in net lossesof unconsolidated affiliates, (iii) foreign exchange gains or losses, (iv)other expense and (v) minority interest in the operations of an unconsolidated subsidiary. The Company earned net non-operating income of approximately $0.3 millionduring 2002 and incurred net non-operating expense of approximately $3.0million during 2001.

 

Thedecrease in net interest expense to $0.2 million during 2002 from $0.8 millionduring 2001 was due to a decrease in borrowings under the Company’s line ofcredit with Foothill Capital Corporation and a decrease in the Company’s notepayable to Proha.

 

TheCompany accounts for certain investments in other companies under the equitymethod of accounting.  The Company recorded a net loss of unconsolidatedaffiliates $0.7 million for the years 2002 and 2001.

 

In2001 approximately $0.4 million of costs, which were previouslycapitalized in conjunction with the purchase of Legacy Artemis, were determinedto be non-deferrable. Accordingly, the costs were recorded as other expense,net. There were no similar costs during 2002.

 

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InNovember 2002, the Company sold its 19.9% interest in Accountor Oy to anunrelated party.  In December 2002, the Company sold its interest in ABCTechnologies – France to an unrelated party.  Other income for the yearended December 31, 2002 includes pretax gains of $0.7 million and $0.3 millionon the sales of our interests in Accountor OY and ABC Technologies – France,respectively.  There were no comparabletransactions in 2001.

 

Favorablechanges in the rate of exchange for British Pound Sterling to United Statesdollars increased foreign exchange income to $0.4 million in 2002 compared to aforeign exchange loss of $0.2 million in 2001.

 

**Provision for Income Taxes**

 

TheCompany recorded income tax expense of approximately $0.5 million for the yearended December 31, 2002.  The income tax expense on the pre-tax loss ofapproximately $3.5 million is the result of book to tax permanent differencesfor the amortization of intangible assets acquired in the Proha acquisition ofLegacy Artemis.  The valuation allowance for deferred tax assets wasreduced by approximately $0.6 million from 2001 to 2002 as a result of areduction in deferred tax assets, primarily tax net operating losscarryforwards.

 

##### **Liquidityand Capital Resources**

##### ** **

*Cashflows for the year ended December 31, 2003 and 2002*

* *

At December 31, 2003, we had cash of $2.6 million compared to $7.8million at December 31, 2002. 

 

Net cash used in operating activities was $4.0 million in2003 compared to net cash provided by operating activities of $2.1 million in2002. The net cash used in operating activities in 2003 was primaryattributable to the net loss reported for the year of $7.9 million. Operatingcash was further reduced by (i) a $0.7 million decrease in deferred revenue,(ii) a non-cash gain of $0.4 million from sales the sale of non-core operationsof the Company, the proceeds of which are reported as an investing activity,and (iii) a net decrease in accounts payable, accrued liabilities and otherliabilities of $0.3 million. The effects of these items on cash was offset byfactors such as (i) non-cash expenses of $5.1 million in depreciation andamortization related to our fixed assets and intangible assets, (ii) and a $1.0million decrease in trade accounts receivable. Our net loss of $3.9 million in2002 was the primary component that reduced operating cash flow. Operating cash was further reduced by (i) the $4.2 million increase inaccounts receivable and (ii) a non-cash gain of $1.0 million from sales of ourinterests in certain affiliates, the proceeds of which are reported as an investingactivity.  The effects of these items on cash was offset by factors suchas (i) non-cash expenses of $6.2 million in depreciation and amortizationrelated to our fixed assets and intangible assets, (ii) an increase of $3.4million in deferred revenues and (iii) a net increase in accounts payable,accrued liabilities and other liabilities of $1.4 million.

 

Net cash used in investing activities was $0.2 million,with capital equipment purchases of approximately $0.5 million being partiallyoffset by proceeds from the divestiture of non-core operations of the Company.Investing activities in 2002 provided cash of approximately $0.2 million. Our capital equipment purchases were  $1.0 million during 2002represented cash used in investing activities, offset by $1.1 million in cashproceeds received from the sale of our interests in certain affiliates in 2002.

 

Net cash used in financing activities consisted of $0.4million of borrowings against our line of credit, more than offset by principalpayments totaling $0.8 million. The Company uses lines of credit to fundtemporary operating cash requirements and certain financial obligations. Our financing activities in 2002 provided cash of approximately $0.9million.  Fundings under our line of credit, net of repayments were $2.4million during the year ended December 31, 2002.  In addition, we repaid$1.2 million in debt to lenders and $0.3 million on behalf of Proha during yearended December 31, 2002.

##### ** **

*Liquidity and Going Concern Considerations*

 

TheCompany’s continued existence is dependent upon several factors including theCompany’s ability to sell and successfully implement its software solutions.

 

A summary of the Company’sfuture contractual obligations and commercial commitments as of December 31,2003 is as follows:

 
|                         |   | **Year ending  December 31,** |   |
|------------------------------|--------|-------------------------------|--------|
|                         |   | **Total**                     |   | **Less than  1 year** |   | **1 - 3  years** |   | **3 - 5  years** |   | **More than  5 years** |   |
|                         |   |                          |   | **(in thousands)** |   |   |   |
| Long-term debt Obligations   |   | $                             | 675    |   | $ | 352 |   | $ | 35 |   | $ | 24 |   | $ | 265 |   |
| Capital Lease Obligations    |   | 78                            |   | 78 |   | — |   | — |   | — |   |
| Operating Lease  Obligations |   | 7,727                         |   | 3,136 |   | 4,553 |   | 38 |   | — |   |
| Other Long Term  Liabilities |   | 2,834                         |   | — |   | — |   | — |   | 2,834 |   |
|                         |   |                          |   |   |   |   |   |   |   |   |   |
|                         |   | $                             | 11,314 |   | $ | 3,566 |   | $ | 4,588 |   | $ | 62 |   | $ | 3,099 |   |

 

The Company’sprinciple sources of liquidity are cash and cash equivalents, as well asexpected cash flows from operations and the Company’s line of credit.  Cash requirements through the end of fiscalyear 2004 are primarily to fund operations at approximately the same levels asfiscal year 2003 offset by restructuring actions as described furtherbelow.  In the future, the Company mayneed to raise additional funds through public or private financings, or otherarrangements to fund operations, strengthen its global presence or for potentialacquisitions, if any.  Such additionalequity financing may be dilutive to the Company’s stockholders.  The Company’s capital requirements depend onnumerous factors, including the rate of market acceptance of the Company’sproducts and services, the Company’s ability to service its customers, theCompany’s ability to maintain and expand its customer base, the level ofresources required to expand the Company’s marketing and sales organization,research and development activities and other factors.  The Company cannot be assured that anyfinancings or other arrangements will be available in amounts or on termsacceptable to the Company or at all and any new financings or otherarrangements could place operating or other restrictions on the Company.  The Company’s inability to raise capital, ifand when needed, could seriously harm the growth of the business and results ofoperations.

 

The Company’snear and long-term operating strategies focus on promoting its new and existingsoftware and services to increase its revenue and cash flow while betterpositioning the Company to compete under current market conditions.  At December 31, 2003, the Company had unusedcredit lines including overadvance capabilities of $1.5 million based on thefacility with Laurus.

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In August 2003, the Company negotiated theaforementioned $5.0 million credit facility with Laurus, the terms of which areconsidered more favorable to the Company than the Foothill Facility; see theabove discussion of this new borrowing arrangement.  In addition to securing a new facility,management has also taken steps to reduce and defer discretionary spending tomore closely match expenses with actual and projected revenues.  During 2002, management initiatedrestructuring activities to streamline the Company’s operations and to focus onits core expertise in enterprise portfolio and project management.  This entailed reducing the work forceinfrastructure and selling certain non-core assets.  Management believes that cash generated from operations as wellas its current credit facilities will be sufficient to support the Company’sliquidity requirements through December 31, 2004, depending on operatingresults and its short-term financing.

 

During the first quarter of2004, and following the change in management, a number of restructuring actionshave been taken to further reduce the cost base of the company. The target ofthose actions is to assure an operating margin breakeven on a moving forwardbasis from Q2 2004 even if revenue levels remained at 2003 levels.  The target is to rebalance the revenue mixof the company towards higher Software License and Support revenues.

 

The Company has experiencednet losses in each of the three years in the period ended December 31,2003.  At December 31, 2003, the Companyhas an accumulated deficit of $83.0 million and its current liabilitiesexceeded current assets by approximately $10.5 million.  The Company’s independent public accountantshave included a going concern paragraph in their audit report on the December31, 2003 consolidated financial statements which have been prepared assumingthat the Company will continue as a going concern (based upon management’splans discussed above), which contemplates, among other things, the realizationof assets and satisfaction of liabilities in the ordinary course ofbusiness.  Accordingly, the accompanyingconsolidated financial statements do not include any adjustments related to therecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result, should the Company be unableto continue as a going concern.

 

**Off-Balance Sheet Arrangements**

 

Wehave no off-balance sheet arrangements as defined in Regulation S-K303(a)(4)(ii).

 

**Item 7a.****  ****Qualitative and QuantitativeDisclosure About Market Risk**

 

AtDecember 31, 2003, the majority of our cash balances were held primarily in theform of short- term highly liquid investment grade money market funds of majorfinancial institutions.  Due to the short-term nature of our investmentsand the fact that they are marked to market daily, we believe that we are notsubject to any material interest or market rate risks.

 

TheCompany utilizes lines of credit to fund operational cash needs.  TheCompany’s outstanding balance under its line of credit at December 31, 2003 wasapproximately $3.4 million.  The weighted average interest rate for theCompany’s lines of credit during 2003 was 5.6%. We do not believe that we havematerial interest rate risk, however some of our lines of credit have variableinterest rates which are based on commonly used bank interest indexes. We donot believe an immediate 10% increase or decrease in interest rate would have amaterial effect on our consolidated financial position.

 

Weconduct a significant portion of our business in currencies other than theUnited States dollar.  For the yearended December 31, 2003, approximately 73% of our revenues and approximately52% of our operating expenses were denominated in currencies other than ourfunctional currency, the United States dollar. These foreign currencies are primarily Euros, British Pounds, andJapanese Yen.  Changes in the value ofmajor foreign currencies relative to the value of the United States dollarcould potentially adversely affect revenues and operating results.  We donot hedge foreign currencies. As a result, we will continue to experienceforeign currency exchange gains and losses.

 

# **Item 8.**  Financial Statements andSupplementary Data

 

Theinformation required by this item appears in a subsequent section of thisReport.  (See Item 15(a)(1) and (2)).

 

**Item 9.****  ****Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

On January 28,2003, the Company dismissed its independent accountants, KPMG LLP (“KPMG”), andengaged the services of Squar Milner Reehl & Williamson LLP (“SquarMilner”) as the Company’s new independent accountants for its fiscal year endedDecember 31, 2002.  Prior to dismissing KPMGand engaging Squar Milner as the Company’s new independent accountants, theCompany’s audit committee recommended said action, and it was then approved bythe full board of directors.

 

During thefiscal year ended December 31, 2001, and the subsequent period through January28, 2003, there were no disagreements between the Company and KPMG on anymatter of accounting principles or practices, financial statement disclosure,or auditing scope or procedures, which disagreements, if not resolved to KPMG’ssatisfaction, would have caused KPMG to make reference to the subject matter ofthe disagreement in their audit report.

 

The auditreport of KPMG on the consolidated financial statements of the Company as ofand for the fiscal year ended December 31, 2001 did not contain any adverseopinion or disclaimer of opinion, nor was it qualified or modified as to auditscope or accounting principles except that KPMG’s audit report on suchfinancial statements did contain a separate paragraph stating:

 

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“Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As disclosed in Note 1 to thefinancial statements, the Company has incurred substantial recurring lossesfrom operations and at December 31, 2001 the Company’s current liabilitiesexceeded current assets by $5.8 million. These factors as described in Note 1raise substantial doubt about the Company’s ability to continue as a goingconcern. Management’s plans in regards to these matters are also described inNote 1. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.”

 

TheCompany believes that there were no reportable events as defined by Item304(a)(1)(v) of Regulation S-K of the Exchange Act during the year endedDecember 31, 2001, or the subsequent period through January 28, 2003, except asdescribed below:

 

TheCompany requested from KPMG the letter required by Item 304(a)(3) of RegulationS-K of the Exchange Act as to whether KPMG agrees with the statements madeabove.  The letter dated February 5, 2003 from KPMG (the “KPMG letter”)indicated that KPMG reported to the Company’s Audit Committee during 2002certain material weaknesses as reflected in said letter.  The KPMG letterspecifically stated that the material weaknesses identified did not affectKPMG’s audit report on the financial statements of the Company for 2001. In a letter commenting on the KPMG letter, the SEC stated that in their opinionthe aforementioned material weaknesses that are characterized, as “reportableconditions” are reportable events as contemplated by Regulation S-K of theExchange Act.  Therefore, on March 19, 2003, the Company filed with theSEC a Current Report on Form 8-K to report the actions taken by the Company toresolve the material weaknesses listed in the KPMG letter.

 

KPMGsubsequently informed management that it would not authorize the Company toinclude KPMG’s audit report on the Company’s 2001 financial statements in theCompany’s annual report on Form 10-K for 2002.  In response, managementengaged Squar Milner to ”re-audit” the Company’s December 31, 2001consolidated financial statements.

 

Whilethe re-audit by Squar Milner of the Company’s December 31, 2001 consolidatedfinancial statements is now complete, the Company has decided not to file anamendment to its December 31, 2002 Form 10-K as previously disclosed, whichwould require obtaining the consents of certain predecessor auditors tore-issue their reports.  The Company haschosen not to obtain such consents, and instead, the Company has included allrelevant 2001 financial information in this annual report on Form 10-K for theyear ended December 31, 2003. Publishing that information in this report allows us to fileexpeditiously, make public the most current financial information, and tomaximize the Company’s limited staffing and financial resources.

 

**Item9A.  Controls and Procedures**

 

**Evaluation of Controls and Procedures**

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of theExchange Act as of a date (the “Evaluation Date”) within 90 days prior tofiling the Company’s December 31, 2003 Form 10-K.  Based upon that evaluation, the CEO and CFO concluded that, as ofDecember 31, 2003, our disclosure controls and procedures were effective intimely alerting management to the material information relating to us (or ourconsolidated subsidiaries) required to be included in our periodic filings withthe SEC.  Based on their most recentevaluation as of the Evaluation Date, the CEO and the CFO have also concludedthat there are no significant deficiencies in the design or operation ofinternal controls over financial reporting which are reasonably likely toadversely affect the Company’s ability to record, process, summarize and reportfinancial information, and such officers have identified no material weaknessesin the Company’s internal controls over financial reporting.

 

**Changes in Controls and Procedures**

 

Therewere no significant changes made in our internal controls over financialreporting during the quarter ended December 31, 2003 that have materiallyaffected or are reasonably likely to materially affect these controls.  Thus, no corrective actions with regard tosignificant deficiencies or material weaknesses were necessary.

**** ****

****Limitations on the Effectiveness of Internal Control****

 

TheCompany’s management, including the CEO, does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willnecessarily prevent all fraud and material errors.  An internal control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. 

 

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Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations on all internal control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, within the Company have been detected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake.  Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, and/or by management override of the control.  The design of any system of internal controlis also based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions.  Over time, controls may become inadequate becauseof changes in circumstances, and/or the degree of compliance with the policiesand procedures may deteriorate.  Becauseof the inherent limitations in a cost-effective internal control system,financial reporting misstatements due to error or fraud may occur and not bedetected on a timely basis.

**Part III**

 

**Item 10.****        ****Directors and ExecutiveOfficers of the Registrant**

 

The followingtable sets forth the names, ages and positions of all directors and namedexecutive officers. A summary of the background and experience of each of theseindividuals is set forth after the table.

 
| **NAME**            |   | **AGE** |   | **POSITION**                                          |   | **COMMITTEE**          |
|---------------------|--------|---------|--------|-------------------------------------------------------|--------|------------------------|
| Patrick Ternier (1) |   | 48      |   | President and Chief Executive  Officer                |   |                   |
| Robert Stefanovich  |   | 39      |   | Executive Vice President and  Chief Financial Officer |   |                   |
| Charles F. Savoni   |   | 46      |   | Senior Vice President, General  Counsel and Secretary |   |                   |
| Pekka Halonen       |   | 42      |   | Director                                              |   |                   |
| Ari B. Horowitz (2) |   | 35      |   | Director                                              |   |                   |
| Michael Murphy      |   | 46      |   | Director                                              |   | Audit                  |
| Olof Odman          |   | 60      |   | Director                                              |   | Audit and Compensation |
| Pekka Pere          |   | 46      |   | Director                                              |   | Audit                  |
| Steven Yager        |   | 50      |   | Chairman of the Board of  Directors                   |   |                   |

 

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(1)   Effective January 23, 2004, Patrick Ternierreplaced Michael J. Rusert as President and Chief Executive Officer of theCompany, who had resigned.

 

(2)   Mr. Horowitz separated from the Company onApril 14, 2003.  He continues to serveon the Board of Directors.

 

MR. TERNIER was named President and Chief Executive Officer of theCompany on January 23, 2004.  He has held several senior managementpositions within the Company since 1985. From 1992 to January 2004, Mr. Ternier was a Director for both ArtemisInternational France and Artemis International GmbH.  From 1989 to 1991, he served as the Country Manager for ArtemisInternational France.  From 1985 to1988, he served as the Sales and Marketing Manager for Artemis InternationalFrance.  Prior to joining the Company,Mr. Ternier was a Senior Consultant with McDonnell Douglas InformationSystems.  Mr. Ternier holds a Master ofScience Degree and a Bachelor’s Degree in Economic Science from Ecole Centrale.

 

MR.STEFANOVICH was appointed as Executive Vice President and Chief FinancialOfficer of the Company on September 27, 2002.  He has held senior financepositions in both publicly traded and privately held technology companies.Prior to joining Artemis, he held several senior positions, including ChiefFinancial Officer for a publicly traded medical device company and VicePresident for Administration at Science Applications International Corporation,a Fortune 500 company. Mr. Stefanovich was also a member of the SoftwareAdvisory Group and an Audit Manager with Price Waterhouse LLP’s (nowPricewaterhouseCoopers) hi-tech practice in San Jose, CA. He holds a Master inFinance/Accounting and Engineering.

 

MR.SAVONI was appointed as Vice President, General Counsel and Secretary of theCompany on March 18, 2002.  He served as Corporate Attorney, SeniorCorporate Attorney and Assistant General Counsel for Canon Computer Systems,Inc. (“CCSI”) prior to joining Artemis. He handled general corporate matters, including license, distributionand marketing agreements, advising on advertising and marketing materials, andcounseling on employment law matters. Prior to joining CCSI in 1994, he was anassociate for three years with the law firm of Bryan, Cave in LosAngeles.  Mr. Savoni holds a bachelor’s degree from Cornell University, aswell as a Master’s degree in Labor and Industrial Relations from Michigan StateUniversity. He worked for five years in the Human 

 

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Resources department ofHughes Aircraft Company in El Segundo, California, before completing his J.D.at the University of Southern California.

 

MR.HALONEN was elected a director of the Company on March 17, 2003.  Mr.Halonen is currently the Executive Vice President, Corporate Development ofProha Plc.  Prior to joining Proha, Mr. Halonen served as Manager andPartner of PCA Corporate Finance Oy  (1996 to 2001).  From 1994 to1995, he was a Manager of Selin Corporate Finance.  He also was anAssistant Vice President and Manager of Kansallis Bank, Investment BankingDivision (1988-1994).  Mr. Halonen holds a Master of Law Degree fromUniversity of Helsinki as well as a Master of Business Administration fromHelsinki School of Economics.

 

MR. HOROWITZwas elected a director of the Company in July 2001.  He served as Executive Vice President, Corporate Development ofthe Company from July 10, 2001 to April 13, 2003.  He served as Chairman of the Board and Chief Executive Officerfrom April 1999 until July 2001, and as President from November 1999 to January2000.  From June 1998 to March 1999, Mr.Horowitz served as a Senior Managing Partner of USWeb/CKS.  From March 1997 to June 1998, he served asPresident and Chief Financial Officer of Gray Peak Technologies, a networkconsulting company.  From September 1994to March 1997, he served as Chief Financial Officer and as Vice President,Finance and Business Development of ICon CMT Corporation.  From July 1992 until September 1994, Mr.Horowitz was a Principal and Director of Finance and Business Development ofConley Corporation, a developer of storage management software.  Mr. Horowitz currently serves as a directorof NetVendor Systems, a provider of e-markets for the industrial, electronicsand automotive sectors.  He holds aBachelor of Science degree in economics from the University of Pennsylvania.

 

MR.MURPHY was elected a director of the Company on March 17, 2003.  Mr.Murphy is currently the CEO of InQuira, Inc.  Prior to joining InQuira, Mr.Murphy served as an executive at Cambridge Technology Partners (“CTP”), wherehe ran the Western Region. Mr. Murphy later oversaw the sales, marketing,alliances and partner programs. Prior to his tenure at CTP, Mr. Murphy spent 13years with Hewlett Packard. He holds a B.A. in Management from Loyola MarymountUniversity.

 

MR.ODMAN was elected a director of the Company in July 2001.  Since December1999, he has been a member of the Board of Directors of Proha Plc., and iscurrently Chairman of the Proha Plc Board of Directors.  Mr. Odman hasbeen the Managing Director of TNS AB since 1999.  In 1997, Mr. Odmanfounded Metagroup Consulting AB, prior to which he worked as Managing Directorof ICT/Perinet AS (1993-1995), Managing Director of Databloin AB (1980-1992)and Systems Director of Mobil Oil AB (1970-1979).  Mr. Odman is alsoChairman of the Board of Directors of Best Technology AB, Transaction NetworkServices AB, Structur Relocation Svenska AB, Structure International AB, CobnetAB, Metagroup Sweden AB, Metagroup Consulting Sweden AB as well as Golf dePierpont SA.  Mr. Odman holds a Master of Science Degree.

 

MR.PERE was elected a director of the Company in July 2001.  He has beenPresident and Chief Executive Office of Proha Plc since 1984 and is also thefounder of Proha Plc.  Mr. Pere is also the Chairman of the Board ofDirectors of Eficor Ltd, the Vice Chairman of the Board of Directors ofSoftware Entrepreneurs Association and a member of the Board of Directors ofInformation Technology Branch Association.  Mr. Pere was Chairman of theBoard of Directors of Proha Oy from 1984 until 1999.  In addition, Mr.Pere was a founding partner of and consultant for KPMG Wideri Consulting Oy(1985-1991) and a consultant for Finnsystems Oy (1979-1983) as well as actingChairman of the Board of Directors of Metier Management Systems Sweden AB andMetier Management Systems Denmark AS (1991-1994).

 

MR.YAGER was elected as a director of the Company in July 2001 and was its ChiefExecutive Officer and President from August 2001 to January 2002.  InJanuary 2002, he became a Vice Chairman of the Board.  On April 14, 2003,Mr. Yager was elected as Chairman of the Board.  Mr. Yager is Group President, Mergers & Acquisitions of GoresTechnology Group.  Prior to joining the Company in August 2001, Mr. Yagerserved for four years as President and CEO of Artemis InternationalCorporation, which combined with OPUS360 Corporation in July 2001 to formArtemis International Solutions Corporation.  Mr. Yager also served as theexecutive vice president of business development for Medaphis PhysicianServices Corporation, a $300 million subsidiary of Medaphis Corporation. Mr.Yager has held senior sales management and business development positions withBurroughs Corporation and Versyss Incorporated. Mr. Yager earned a bachelor’sdegree in business administration and economics from the University ofMichigan.

 

**AuditCommittee Financial Expert**

 

Underthe definition of “independence” as set forth in NASDAQ Marketplace Rule 4350,the Company does not have a fully independent audit committee.  Since our securities are not currentlylisted on or with a national securities exchange or national securitiesassociation, we are not required to have a fullyindependent audit committee.  In addition,the Company has not designated an audit committee financial expert; instead,the Company relies on the combined expertise and experience of all the membersof the audit 

 

23

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committee.  The Company currently is in the process ofidentifying an independent audit committee financial expert to serve on ouraudit committee and we expect to finalize this process during 2004.

 

***Code of Ethics***

 

TheCompany has adopted a Code of Ethics for its “Senior Financial Officers” (theCompany’s principal executive officer, principal financial officer, principalaccounting officer or controller, and others performing similar functions), aswell as a Code of Business Conduct and Ethics for all its employees.  The Company shall, without charge, provideto any person, upon request, a copy of its Code of Ethics for Senior FinancialOfficers.  All such requests should bemailed to: Artemis International Solutions Corporation, 4041 MacArthur Blvd.,Suite 206, Newport Beach, CA  92660,Attention: Robert Stefanovich, EVP/CFO.

 

Asrequired by SEC rules, the Company will report within five business days thenature of any change or waiver of its Code of Ethics for Senior FinancialOfficers.

 

24

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**Item 11.****   ****Executive Compensation**

 

**COMPENSATION OF EXECUTIVE OFFICERS AND OTHER INFORMATION**

** **

**SUMMARY OF EXECUTIVE COMPENSATION**

 

The following table sets forth for each of the Company’s last three completed fiscal years, the compensation of the Company’s President and Chief Executive Officer (“CEO”) as of December 31, 2003, and the two most highly compensated executive officers other than the CEO as of the same fiscal year end, (collectively, the “Named Executive Officers”).  As defined by the SEC’s rules, no other person was a “most highly compensated executive officer” of the Company at December 31, 2003 or during the year there ended.

 

**SUMMARY COMPENSATION TABLE**

 
|                                   |   | **ANNUAL  COMPENSATION** |   | **LONG TERM  COMPENSATION** |    |
|----------------------------------------|--------|--------------------------|--------|-----------------------------|---------|
| **NAME AND PRINCIPAL  POSITION**       |   | **YEAR**                 |   | **SALARY ($)**              |    | **BONUS ($)  (2)** |   | **OTHER  ANNUAL  COMPENSATION  ($)** |   | **NUMBER OF  SECURITIES  UNDERLYING  OPTIONS (#)** |   | **ALL OTHER  COMPENSATION ($)** |   |
| Michael J. Rusert,                     |   | 2003                     |   | $                           | 283,333 |   | $ | 25,200 |   | * |   | — |   | — |   |
| Former President and                   |   | 2002                     |   | $                           | 256,857 |   | $ | 163,800 |   | * |   | 250,000 |   |   |   |
| Chief Executive Officer (1)            |   | 2001                     |   | —                      |    | — |   | — |   | — |   | — |   |
| Robert Stefanovich,                    |   | 2003                     |   | $                           | 173,333 |   | $ | 8,820 |   | — |   | — |   | — |   |
| Executive Vice                         |   | 2002                     |   | $                           | 68,095  |   | $ | 36,156 |   | — |   | 20,000 |   | — |   |
| President. Chief Financial Officer (3) |   | 2001                     |   | —                      |    | — |   | — |   | — |   | — |   |
| Charles F. Savoni,                |   | 2003                     |   | $                           | 147,833 |   | $ | 5,670 |   | — |   | — |   | — |   |
| Senior Vice President,                 |   | 2002                     |   | $                           | 98,961  |   | $ | 31,378 |   | — |   | 7,000 |   | — |   |
| General Counsel, Secretary (4)         |   | 2001                     |   | —                      |    | — |   | — |   | — |   | — |   |

 

----

*                 Thevalue of personal benefits provided was less than the minimum amount requiredto be reported.

 

(1)          Mr.Rusert was appointed to the position of President and Chief Executive Officereffective January 25, 2002.  He resignedfrom the Company effective January 16, 2004.

 

(2)          Includesbonuses accrued in year of service whether paid during year of service orthereafter.

 

(3)          Mr.Stefanovich became Chief Financial Officer effective on September 27, 2002.

 

(4)          Mr.Savoni became an executive officer of the Company effective March 18, 2002.

 

Pursuant tothe Separation Agreement and Mutual Release that the Company executed with Mr.Rusert effective January 22, 2004, the Company will:  (i) provide Mr. Rusert with severance payments over twelve (12)months, for a total of $285,000; and (ii) pay on Mr. Rusert’s behalf theautomobile lease payments for fifteen (15) months for a total of $19,000.

 

Pursuant to the Employment Agreement in effect between the Company and Mr. Stefanovich, should Mr. Stefanovich be terminated without cause (or should he otherwise resign for a variety of reasons including but not limited to a change-in-control of the Company), then the Company will provide Mr. Stefanovich with severance payments, including health insurance benefits, over twelve (12) months, for a total of $189,000.  Pursuant to the Employment Agreement currently in effect between the Company and Mr. Savoni, should Mr. Savoni be terminated without cause (or should he otherwise resign for a variety of reasons including but not limited to a change-in-control of the Company), then the Company will provide Mr. Savoni with one lump sum severance payment of $116,000.

 

25

 

**SUMMARY OF OPTIONS GRANTS**

 

The Company made no grants of stock options during the fiscal year ended December 31, 2003, to any of the Named Executive Officers.

 

**AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR**

**AND FISCAL YEAR-END OPTION VALUES**

 

The following table sets forth information concerning exercises of stock options during the year ended December 31, 2003, by each of the Named Executive Officers and the value of in-the-money unexercised options at December 31, 2003.

 

** **
| **NAME**            |   | **SHARES  ACQUIRED ON  EXERCISE  (#)** |                               | **VALUE  REALIZED  ($) (1)** |                                   | **NUMBER OF  SECURITIES  UNDERLYING UNEXERCISED  OPTIONS AT FISCAL YEAR END** |            | **VALUE OF  UNEXERCISED IN-THE  MONEY OPTIONS AT FISCAL YEAR END** |            |
|---------------------|--------|----------------------------------------|------------------------------------|------------------------------|----------------------------------------|-------------------------------------------------------------------------------|-----------------|--------------------------------------------------------------------|-----------------|
|                |   |                                   | **EXERCISABLE/UNEXERCISABLE  (#)** |                         | **EXERCISABLE/UNEXERCISABLE  ($) (2)** |                                                                          |
|                |   |                                   |                               |                         |                                   |                                                                          |            |                                                               |            |
| Michael J. Rusert   |   | 0                                      |                               | $                            | 0.00                                   |                                                                          | 124,999/125,001 |                                                               | $16,250/$16,250 |   |
| Robert  Stefanovich |   | 0                                      |                               | $                            | 0.00                                   |                                                                          | 6,667/13,333    |                                                               | $2,533/$5,067   |   |
| Charles F.  Savoni  |   | 0                                      |                               | $                            | 0.00                                   |                                                                          | 2,334/4,666     |                                                               | $887/$1,773     |   |

 

----

(1)           Value realized is based on estimated fair market value of Common Stock on the date of exercise minus the exercise price.

(2)           Value is based on estimated fair market value of Common Stock as of December 31, 2003 ($1.63) minus the exercise price.

 

None of our Named Executive Officers exercisedany of their options during 2003.

 

**COMPANY STOCK PRICE PERFORMANCE**

 

##### **The following performance graphassumes an investment of $100 on April 7, 2000, and compares the change toDecember 31, 2003, in the market prices of the Common Stock with a change to abroad market index (Nasdaq Stock Market – U.S.) and an industry index (Software& Services Index). The Company paid a cash dividend of $140,000 during thenine months ended December 31, 2000 and no dividends thereafter, theperformance of the indexes is shown on a total return (dividend reinvestment)basis. The graph lines merely connect the prices on the dates indicated and donot reflect fluctuations between those dates.**

##### ** **

**COMPARISON OF 45 MONTH CUMULATIVE TOTAL RETURN***

AMONG ARTEMIS INTERNATIONAL SOLUTIONS CORP.,THE NASDAQ STOCK MARKET (U.S.) INDEX

AND THE S & P APPLICATION SOFTWARE INDEX

##### ** **

##### ****

 

 

26

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##### **Item 12.**         Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters

 

V**OTING SECURITIES AND PRINCIPAL HOLDERS THEREOF**

 

The following table sets forth information with respect to beneficial ownership of the Company’s common stock as of March 10, 2004, for (i) each person known by the Company to beneficially own more than 5% of each class; (ii) each director and nominee for director; (iii) each Named Executive Officer; and (iv) all of the Company’s executive officers and directors as a group.  Unless otherwise indicated, the principal address of each of the shareholders below is c/o Artemis International Solutions Corporation, 4041 MacArthur Boulevard, Suite 260, Newport Beach, CA 92660.

 
| **NAME OF BENEFICIAL OWNERS**                                         |   | **TOTAL  AMOUNT OF  SHARES  BENEFICIALLY  OWNED (1)** |       | **PERCENTAGE  OF COMMON STOCK  OWNED** |       |
|-----------------------------------------------------------------------|--------|-------------------------------------------------------|------------|----------------------------------------|------------|
| Proha Plc (2)                                                         |   |                                                  |       |                                   |       |
| Maapallonkuja 1 A                                                     |   | 7,977,062                                             |       | 80                                     | %          |
| FIN-02210 Espoo                                                       |   |                                                  |       |                                   |       |
|                                                                  |   |                                                  |       |                                   |       |
| **Directors and Executive Officers**                                  |   |                                                  | ** ** |                                   | ** ** |
| Pekka Halonen                                                         |   | 0                                                     |       |                                   | *          |
| Ari B. Horowitz (4) (5)                                               |   | 226,738                                               |       | 2.3                                    | %          |
| Michael Murphy                                                        |   | 0                                                     |       |                                   | *          |
| Olof Odman (3) (4) (5)                                                |   | 317                                                   |       |                                   | *          |
| Pekka Pere (3) (4) (5)                                                |   | 317                                                   |       |                                   | *          |
| Charles F. Savoni (5)                                                 |   | 3,267                                                 |       |                                   | *          |
| Robert Stefanovich (5)                                                |   | 6,667                                                 |       |                                   | *          |
| Steven Yager (3) (4) (5)                                              |   | 40,000                                                |       |                                   | *          |
| All directors and executive officers as a  group (8 persons) (6) |   | 277,306                                               |       |                                   |       |

 

27

 

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*               Lessthan 1%

 

(1)          Exceptas indicated in the footnotes to this table and pursuant to applicablecommunity property laws, the Company believes that the persons named in thistable have sole voting and investment power with respect to all shares shown asbeneficially owned by them.

 

(2)          Basedupon information contained in a Form 13D/A dated November 20, 2001, filed withthe SEC by Proha Plc on behalf of itself and related entities, such entitiesown 7,977,062 shares of common stock.

 

(3)          Thisindividual also serves on the board of directors for Proha Plc.

 

(4)          Directordisclaims beneficial ownership of 7,977,062 shares held by Proha Plc, except tothe extent of his stock holding interests in Proha Plc.

 

(5)          Includesthe number of shares that could be acquired within 60 days of March 10, 2004,pursuant to outstanding stock options, as follows: Mr. Horowitz 226,738 commonshares; Mr. Odman, 317 common shares; Mr. Pere 317 common shares; Mr. Yager 40,000common shares; Mr. Stefanovich 6,667 common shares; Mr. Savoni 3,267 commonshares, and of the group 277,306 common shares.

 

(6)          The shares beneficially owned byProha Plc (7,977,062) are not included in this total as the respectiveDirectors disclaimed beneficial ownership per footnote (4) above.

 

Thefollowing table provides information about the Company’s common stock that maybe issued upon the exercise of options under all of our existing equitycompensation plans as of December 31, 2003.  See Notes 1 and 15 to theCompany’s financial statements attached hereto.

 
| **Plan category**                                       |   | **Number of shares  of common stock  to be issued upon  exercise of  outstanding  options** |   | **Weighted average  exercise price of  outstanding  options** |   | **Number of shares of  common stock  remaining available  for future issuance  under equity  compensation plans  (excluding shares in  the first column)** |    |
|---------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity compensation plans  approved by shareholders     |   | 949,350                                                                                     |   | $                                                             | 21.22  |                                                                                                                                                       | 457,336 |   |
| Equity compensation plans  not approved by shareholders |   | 92,433                                                                                      |   | $                                                             | 134.25 |                                                                                                                                                       | —  |   |
| Total                                                   |   | 1,041,783                                                                                   |   | $                                                             | 31.25  |                                                                                                                                                       | 457,336 |   |

##### ** **

##### **28**

##### ****

##### ** **

**Item 13.****        ****Certain Relationships andRelated Transactions**

 

AtDecember 31, 2003 and 2002, the Company had no other receivables due from Prohaand in 2001 had $0.2 million due from Proha, which owns approximately 80% ofthe Company’s outstanding common stock. At December 31, 2003 and 2002, theCompany had other payables to Proha of $0.2 million and $0.1 million,respectively.

 

On March 1, 2004**,** the Company’s wholly-owned subsidiary in Finland,Artemis Finland Oy (“Artemis Finland”), entered into a loan agreement with afinancial institution in the amount of approximately $3.1 million. The loanbecomes due on March 1, 2006 and accrues interest at 0.5 percentage pointsabove the 3-month Euribor rate per annum, which is payable on a quarterlybasis. The loan is secured by cash collateralprovided by Proha equal to the loan amount and a security interest in all ofArtemis Finland’s property and assets. Artemis and Proha have executed a letter of commitment, whereby Prohaagreed to provide the Company sufficient advance notice of its intent to demandthe return of its collateral from the financial institution to give the Companya minimum of 90 days to provide additional collateral, if necessary, or repaythe loan.

 

There areseveral related party agreements in place between Artemis Finland and Proha orits subsidiaries and investees as further described below:

 

•                  During 2002,Artemis Finland incurred $296,000 in fees for certain business consulting,legal and accounting services provided by Proha. In 2001, Artemis Finlandincurred a fee of  $401,000 formanagement services provided by Proha.

 

•                  Additionally,Artemis Finland shares office space with Proha, for which Proha charges ArtemisFinland a share of its office-related costs (“Office Allocation Charge”), suchas rent, utilities, telecommunication costs, office maintenance and certainother business costs. The Office Allocation Charge was $332,000,  $278,000 and  $170,000 for the years ended December 31, 2003, 2002 and 2001,respectively.

 

•                  Accountor Oy, aprovider of accounting and payroll services, which was owned by Proha (80.1%)and Artemis (19.9%) through November 2002 until its sale to an unrelated party,is providing certain bookkeeping, payroll and reporting services (“ServiceCharge”) to Artemis Finland.  TheService Charge was  $78,000, $79,000 and$95,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

•                  Intellisoft Oy,an application service provider, which is owned by Proha (80.1%) and Artemis(19.9%), is providing certain application hosting and other services to ArtemisFinland and its customers (“ASP Services Fee”). The ASP Services Fee was  $247,000, $340,000 and $242,000 for theyears ended December 31, 2003, 2002 and 2001, respectively.

 

•                  Datamar Oy, asubsidiary of Proha (90%), is providing certain project management andprogramming services to Artemis Finland (“Management Programming Fee”). TheManagement Programming Fee charged to Artemis Finland was  $223,000, $326,000 and  $513,000 for the years ended December 31,2003, 2002 and 2001, respectively.

 

•                  Tesnet Group Oy(formerly Intellitest International Oy), a company partially owned by Proha(35%), provides certain software testing services to Artemis Finland (“TestingServices”).  These Testing Services were$219,000, $210,000 and $269,000 for the years ended December 31, 2003, 2002 and2001, respectively.

 

•                  Artemis Finlandis a distributor of software products provided by Safran Software Solutions AS(“Safran”), a Norwegian company wholly owned by Proha. The royalty paid byArtemis Finland to Safran was $46,000, $124,000 and $0 for the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

•                  Artemis Finlandhas provided certain software development services to ProCountor InternationalOy (“ProCountor”), a company majority owned by Proha (63%). Artemis Finland hascharged  $0, $16,000 and $0 toProCountor for such software development services for the years ended December31, 2003, 2002, and 2001, respectively. ProCountor has also provided certainsoftware development services to Artemis Finland Oy during 2003 and charged afee for use of a web-based travel and expense claims program of $11,000 for theyear ended December 2003.

 

•                  Artemis Finlandcooperated with Futura One Oy, a company majority owned by Proha (51%). ArtemisFinland has charged  $0, $16,000 and$27,000 to Futura One for software development services for the years endedDecember 31, 

 

29

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2003, 2002 and2001, respectively. Artemis Finland has also charged  $2,000 to Futura One for accounting services for the year endedDecember 31, 2003.

 

•                  Artemis Finlandalso cooperated with Softagent Oy which is providing certain programmingservices to Artemis Finland (“Programming Fee”). The Programming Fee charged toArtemis Finland was  $29,000, $56,000and  $0 for the years ended December 31,2003, 2002 and 2001, respectively.

 

**Item14.  Principal Accountant Fees and Services**

 

Thefollowing table presents fees for professional audit services rendered bySquar, Milner, Reehl & Williamson LLP (“Squar Milner”) for the annual auditof our consolidated financial statements as of and for the years endedDecember 31, 2003 and 2002 and fees billed for other services rendered bySquar Milner during such periods:

 
|                |   | **For the  years ended  December 31,** |   |
|---------------------|--------|----------------------------------------|--------|
|                |   | **2003**                               |   | **2002** |   |
|                |   | **(in thousands)**                     |   |
| Audit  fees         |   | $                                      | 375    |   | $ | 200 |   |
| Audit  related fees |   | 7                                      |   | 7 |   |
| Tax  fees           |   | 48                                     |   | 45 |   |
| All  other fees     |   | 31                                     |   | — |   |
|                |   |                                   |   |   |   |
| Total  fees         |   | $                                      | 461    |   | $ | 252 |   |

 

 

The 2001re-audit was performed by Squar Milner in 2003.  Fees of $175,000 were incurred by the Company for the 2001re-audit, and are included in the above table for 2003.

 

Audit relatedfees relate to the benefit plan audit. The tax fee relates to the preparation of the Company's taxreturns.  All other fees relate tospecial projects.

 

The Audit Committee has determined that the provision of services tous, other than audit services, is compatible with Squar Milner maintaining itsindependence from us.

 

**Policy on Audit Committee Pre-Approval of Audit andPermissible Non-Audit Services of Independent Auditor**

 

The Audit Committee is responsible for pre-approving all audit andpermitted non-audit services to be performed for us by our independent auditoras outlined in its Audit Committee charter. Prior to engagement of theindependent auditor for each year’s audit, management or the independentauditor submits to the Audit Committee for approval an aggregate request ofservices expected to be rendered during that year, which the Audit Committeepre-approves. During the year, circumstances may arise when it may becomenecessary to engage the independent auditor for additional services not contemplatedin the original pre-approval. In those instances, the Audit Committee requiresspecific pre-approval before engaging the independent auditor.  The Audit Committee does not delegate tomanagement its responsibility to pre-approve services performed by theindependent auditor.

 

 

**Part IV**

 

##### **Item 15.** Exhibits, FinancialStatement Schedules and Reports on Form 8-K

 

**(a)****          ****(1) and (2) Documents filedas part of this Report.**

 
| 1. | Report of Squar, Milner, Reehl & Williamson LLP, Independent  Auditors.                                                                                         |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2. | Consolidated Balance Sheets as of December 31, 2003, 2002 and 2001.                                                                                                 |
| 3. | Consolidated Statements of Operations for  each of the three years in the period ended December 31, 2003.                                                           |
| 4. | Consolidated Statements of Stockholders’  Equity (Deficit) and Comprehensive Income (Loss) for each of the three years  in the period ended December 31, 2003. |
| 5. | Consolidated Statements of Cash Flows for  each of the three years in the period ended December 31, 2003.                                                           |
| 6. | Notes to Consolidated Financial Statements.                                                                                                                         |

 

30

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**(3) Listing of Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                          |   |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3.1.1*          |       | Amended  and Restated Certificate of Incorporation of OPUS360 Corporation.                                                                                                                               |   |
| 3.1.2*          |       | Certificate  of Amendment to the Amended and Restated Certificate of Incorporation of  OPUS360 Corporation.                                                                                              |   |
| 3.1.3           |       | Certificate  of Amendment to the Amended and Restated Certificate of Incorporation of  Artemis International Solutions Corporation.                                                                      |   |
| 3.2*            |       | Amended  and Restated Bylaws of Artemis International Solutions Corporation was filed  as Exhibit 3.1 to the Company’s Form 8-K dated September 13, 2002, and is  hereby incorporated by reference. |   |
| 4.1*            |       | Certificate  for Shares.                                                                                                                                                                                 |   |
| 10.1*           |       | Lease  Agreement dated August 10, 1999, between the Company and Samson Associates,  LLC as amended.                                                                                                      |   |
| 10.2*           |       | Modification  and Extension of Lease dated August 6, 1999, between the Company and Royal  Realty Corp.                                                                                                   |   |
| 10.3*           |       | Employment  Agreement dated April 1, 1999, between the Company and Ari B. Horowitz.                                                                                                                      |   |
| 10.3.1*         |       | Amendment  to Employment Agreement of Ari B. Horowitz dated September 2, 1999.                                                                                                                 |   |
| 10.3.2          |       | Promissory  Note of Ari B. Horowitz. (4)                                                                                                                                                                 |   |
| 10.3.3          |       | Second  Amendment to Employment Agreement of Ari B. Horowitz dated May 1, 2001. (4)                                                                                                                      |   |
| 10.3.4          |       | Third  Amendment to Employment Agreement of Ari B. Horowitz dated July 31, 2001.  (4)                                                                                                                    |   |
| 10.3.5          |       | Fourth  Amendment to Employment Agreement of Ari B. Horowitz dated January 10, 2003.  (4)                                                                                                                |   |
| 10.5*           |       | Loan  and Security Agreement dated May 19, 1999, between Silicon Valley Bank  and the Company.                                                                                                      |   |
| 10.6*           |       | Loan  and Security Agreement dated August 17, 1999, between Silicon Valley Bank and  the Company.                                                                                                        |   |
| 10.7*           |       | Amended  and Restated Registration Rights Agreement dated March 16, 2000, among  the Company and the Security holders parties thereto.                                                              |   |
| 10.8*           |       | The  Company’s 1998 Stock Option Plan.                                                                                                                                                              |   |
| 10.9*           |       | Letter  Agreement dated October 15, 1999, between the Company and J.P. Morgan  Corporation. (3)                                                                                                          |   |
| 10.10*          |       | Letter  Agreement dated November 21, 1999, between the Company and CareerPath.com,  Inc. (3)                                                                                                             |   |
| 10.11*          |       | Standard  Form of *FreeAgent e.office*  services agreement.                                                                                                                                              |   |
| 10.12*          |       | Series  A Securities Purchase Agreement dated December 24, 1998, among the Company  and the signatories thereto.                                                                                         |   |
| 10.13*          |       | Series  B Securities Purchase Agreement dated September 3, 1999, among the Company  and the purchasers of the Series B Convertible Preferred Stock.                                                      |
| 10.14*          |       | Agreement  and Plan of Merger dated May 27, 1999, among the Company, The Churchill  Benefit Corporation, William Bahr and Churchill Acquisition Corp.                                                    |
| 10.15*          |       | Agreement  and Plan of Merger dated January 30, 2000 among the Company, Opus PM  Acquisition Corp., PeopleMover, Inc. and the other parties thereto.                                                |
| 10.16*          |       | Agreement  and Plan of Merger dated January 19, 2000 among the Company, Ithority  Corporation and the other parties thereto.                                                                        |
| 10.17*          |       | Asset  Purchase Agreement dated as of January 12, 2000 among Brainstorm  Interactive, Inc., the Company and the other parties thereto.                                                              |
| 10.18*          |       | Escrow  Agreement dated as of February 24, 2000 among the Company, Suntrust Bank  and James L. Jonassen and Ali Behnam.                                                              |
|                 |            |                                                                                                                                                                                                          |        |  |  |

 

31

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| 10.19*  |   | Escrow  and Pledge Agreement dated as of January 19, 2000 among SunTrust Bank, the  Company and the other parties thereto.                                                                                                       |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20*  |   | Amended  and Restated Employment Agreement dated February 2, 2000, between the Company  and Richard S. Miller.                                                                                                                   |
| 10.20.1 |   | First  Amendment to Amended and Restated Employment Agreement, between the Company  and Richard Miller dated June 21, 2001.(4)                                                                                                   |
| 10.21*  |   | Agreement  between The Churchill Benefit Corporation and Automatic Data Processing.                                                                                                                                              |
| 10.22*  |   | Employment  Agreement dated February 29, 2000, between the Company and Allen Berger.                                                                                                                                        |
| 10.23*  |   | Strategic  Partner Registration Rights Agreement dated February 7, 2000 between the  Company and Lucent Technologies Inc.                                                                                                   |
| 10.24*  |   | The  Company’s 2000 Stock Option Plan.                                                                                                                                                                                      |
| 10.25*  |   | The  Company’s 2000 Stock Option Plan for Non-Employee Directors.                                                                                                                                                           |
| 10.26*  |   | The  Company’s 2000 Employee Stock Purchase Plan.                                                                                                                                                                           |
| 10.27*  |   | Registration  Rights Agreement dated February 24, 2000 between the Company and the PM  Security holders.                                                                                                                         |
| 10.28*  |   | PeopleMover,  Inc. 1999 Stock Incentive Plan.                                                                                                                                                                                    |
| 10.29*  |   | Stock  Purchase Agreement dated February 28, 2000, between the Company and Dell  USA L.P.                                                                                                                                   |
| 10.30*  |   | Form  of Strategic Partner Registration Rights Agreement between the Company and  Dell USA L.P.                                                                                                                                  |
| 10.33*  |   | Amended  and Restated Non-Statutory Option Agreement dated as of February 2, 2000  by and between the Company and Richard S. Miller.                                                                                        |
| 10.34A  |   | Amended  and Restated Promissory Note of Richard S. Miller dated November 21, 2000.(4)                                                                                                                                           |
| 10.35*  |   | Pledge  Agreement between Company and Richard S. Miller.                                                                                                                                                                         |
| 10.35A  |   | Amended  and Restated Pledge Agreement dated as of November 21, 2000 between Company  and Richard S. Miller.(4)                                                                                                                  |
| 10.36*  |   | Form  of Agreement between the Company and the *FreeAgent  e.office* employee.                                                                                                                                                   |
| 10.40   |   | Employment  Agreement dated June 12, 2000 between the Company and Jeanne Murphy  (Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form  10-Q dated June 30, 2000). (1)                                      |
| 10.40.1 |   | First  Amendment to Employment Agreement dated July 31, 2001, between the Company  and Jeanne Murphy.(4)                                                                                                                         |
| 10.41   |   | Employment  Agreement dated September 7, 2000 between the Company and Peter Schwartz  (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form  10-Q dated December 31 2000). (1)                              |
| 10.41.1 |   | First  Amendment to Employment Agreement dated July 31, 2001, between the Company  and Peter Schwartz. (4)                                                                                                                       |
| 10.44   |   | Employment  Agreement dated January 25, 2002, between the Company and Michael J.  Rusert  (Incorporated by reference to Exhibit 10.44 to our Quarterly  Report on Form 10-Q for the Quarterly Period Ended March 31, 2002). |
| 10.44.1 |   | First  Amendment to Employment Agreement between the Company and Michael J. Rusert  dated October 1, 2002. (4)                                                                                                                   |
| 10.44.2 |   | Separation  Agreement and Mutual Release between the Company and Michael J. Rusert.                                                                                                                                              |
| 10.45   |   | Employment  Agreement dated March 1, 2002, between the Company and Charles F. Savoni.  (Incorporated by reference to Exhibit 10.45 to our Quarterly Report on Form  10-Q for the Quarterly Period Ended March 31, 2002.)         |
| 10.45.1 |   | First  Amendment to Employment Agreement between the Company and Charles Savoni  dated October 4, 2002.(4)                                                                                                                       |
| 10.48   |   | Employment  Agreement dated October 9, 2002, between the Company and Robert Stefanovich.(4)                                                                                                                                      |
| 10.48.1 |   | First  Amendment to employment agreement dated October 9, 2002 between the Company  and Robert Stefanovich                                                                                                                       |
| 10.49   |   | Secured  Convertible Note dated August 14, 2003 between the Company and Laurus Master  Fund, Ltd. (2)                                                                                                                            |
| 10.49.1 |   | Amendment  No. 1 to Convertible Note dated December 2, 2003 between the Company and  Laurus Master Fund.                                                                                                                         |
| 10.50   |   | Security  Agreement dated August 14, 2003 between the Company and Laurus Master Fund,  Ltd. (2)                                                                                                                                  |
| 10.51   |   | Common  Stock Purchase Warrant dated August 14, 2003 between the Company and Laurus  Master Fund, Ltd. (2)                                                                                                                       |
| 10.52   |   | Registration  Rights Agreement dated August 14, 2003 between the Company and Laurus Master  Fund, Ltd. (2)                                                                                                                       |
| 14.1    |   | Code  of Business Conduct and Ethics Policy.                                                                                                                                                                                     |
| 14.2    |   | Code  of Ethics For Senior Financial Officers.                                                                                                                                                                                   |
| 24.1    |   | Powers  of Attorney (included on signature page).                                                                                                                                                                                |
| 31.1    |   | Certification  pursuant to Securities Exchange Act Rules 13A-14 and 15D-14 as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                |
| 31.2    |   | Certification  pursuant to Securities Exchange Act Rules 13A-14 and 15D-14 as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                |
| 32.1    |   | Certification  pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                          |
| 32.2    |   | Certification  pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                          |

 

----

*                                         Incorporated by reference to our RegistrationStatement on Form S-1, Registration No. 333-93185.

(1)                                  Incorporated by reference to Artemis’ Reporton Form 10-K for the fiscal year ended December 31, 2001—File No. 000-29793.

 

32

----

 

(2)                                  Incorporated by reference to Artemis’ ReportForm 8-K filed August 21, 2003—File No. 000-29793.

(3)                                  We have been granted confidential treatmentof certain provisions of this exhibit pursuant to Rule 406 of theSecurities Act of 1933. The entire agreement has been filed separately with theSEC.

(4)                                  Incorporated by reference to Artemis’ Reporton Form 10-K for the fiscal year ended December 31,

2002—File No. 000-29793.

 

 

**(b)****                                 ****Reports on Form 8-K filed infourth quarter of 2003:**

 

On November 13, 2003, theCompany filed a Current Report on Form 8-K pursuant to Item 12 regarding thepress release relating to the financial results for the quarter ended September30, 2003.

 

**(c)****                                 ****Exhibits—The response tothis portion of Item 15 is submitted as a separate section of this report**

 

**(d)****                                 ****Financial StatementSchedules**

 

The financial statementschedules required by Item 8 and Item 15 are not included herein because theyare either not applicable, not material, or the information required by such schedulesis included elsewhere in this annual report.

 

33

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Company has duly caused this Report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | **ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION** |
|--------|-------------------------------------------------|
|   |                                            |
|   | /s/  Patrick Ternier                            |   |
|   | Patrick  Ternier,                               |
|   | *Chief Executive Officer*                       |
|   | Date:  March 30, 2004                           |

 

Each person whose signatureappears below hereby constitutes and appoints Patrick Ternier and Robert, S.Stefanovich the lawful attorneys-in-fact and agents of the undersigned, withfull power of substitution and resubstitution, for and in the name, place andstead of the undersigned, in any and all capacities, to sign any and allamendments to this Report, and to file the same, with all exhibits thereto, andother documents in connection therewith, with the Commission, and hereby grantsto such attorneys-in-fact and agents full power and authority to do and performeach and every act and thing requisite and necessary to be done, as fully toall intents and purposes as the undersigned might or could do in person, herebyratifying and confirming all that said attorneys-in-fact and agents, or their substituteor substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Company and in thecapacities and on the dates indicated.

 

** **
| Date:  | March 30, 2004 |   | /s/  Patrick Ternier                                                                                         |   |
|--------|----------------|--------|--------------------------------------------------------------------------------------------------------------|--------|
|   |           |   | Patrick  Ternier, President and Chief Executive Officer (principal executive officer)                        |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2004 |   | /s/  Robert S. Stefanovich                                                                                   |   |
|   |           |   | Robert  S. Stefanovich, Executive Vice President and Chief Financial Officer  (principal accounting officer) |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2004 |   | /s/  Steve Yager                                                                                             |   |
|   |           |   | Steve  Yager, Chairman of the Board                                                                          |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2004 |   | /s/  Michael Murphy                                                                                          |   |
|   |           |   | Michael  Murphy, Director                                                                                    |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2004 |   | /s/  Pekka Halonen                                                                                           |   |
|   |           |   | Pekka  Halonen, Director                                                                                     |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2004 |   | /s/  Ari B. Horowitz                                                                                         |   |
|   |           |   | Ari  B. Horowitz, Director                                                                                   |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2004 |   | /s/  Olof Odman                                                                                              |   |
|   |           |   | Olof  Odman, Director                                                                                        |
|   |           |   |                                                                                                         |
| Date:  | March 30, 2004 |   | /s/  Pekka Pere                                                                                              |   |
|   |           |   | Pekka  Pere, Director                                                                                        |

 

34

----

**ARTEMIS INTERNATIONAL SOLUTIONSCORPORATIONINDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Squar, Milner, Reehl &  Williamson LLP, Independent Auditors                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                    |   |
| Consolidated Balance Sheets for each of the three years ended  December 31, 2003                                                                                   |   |
|                                                                                                                                                                    |   |
| Consolidated Statements of Operations for  each of the three years in the period ended December 31, 2003                                                           |   |
|                                                                                                                                                                    |   |
| Consolidated Statements of Stockholders’  Equity (Deficit) and Comprehensive Income (Loss) for each of the three years  in the period ended December 31, 2003 |   |
|                                                                                                                                                                    |   |
| Consolidated Statements of Cash Flows for  each of the three years in the period ended December 31, 2003.                                                          |   |
|                                                                                                                                                                    |   |
| Notes to Consolidated Financial Statements                                                                                                                              |   |

 

----

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directorsand Stockholders

Artemis InternationalSolutions Corporation and Subsidiaries

 

We have audited theaccompanying consolidated balance sheets of Artemis International SolutionsCorporation and Subsidiaries (the “Company”) as of December 31, 2003,2002, and 2001 and the related consolidated statements of operations,shareholders’ equity (deficit) and comprehensive income (loss) and cash flowsfor each of the three years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company at December 31,2003, 2002, and 2001, and the results of their operations and their cash flowsfor each of the three years in the period ended December 31, 2003 inconformity with accounting principles generally accepted in the United Statesof America.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  As discussed in Note 1, the Company hasnegative working capital of approximately $10.5 million and an accumulateddeficit of approximately $83.0 million at December 31, 2003, andexperienced negative operating cash flow for fiscal 2003. These factors,among others, raise substantial doubt about the Company’s ability to continueas a going concern.  Management’s plans in regard to these matters aredescribed in Note 1.  The consolidated financial statements do not includeany adjustments that might result from the outcome of this uncertainty.

 
| /s/ Squar, Milner, Reehl  & Williamson, LLP |   |
|-------------------------------------------------|--------|
|                                            |
| Newport Beach, California                       |
| March 2, 2004                              |

 

F - 2

----

 

**ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                                                                   |   | **December 31,**                     |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                                                                                   |   | **2003**                                  |   | **2002** |   | **2001** |   |
|                                                                                                                                                                                   |   | **(in  thousands, except share amounts)** |   |
| **ASSETS**                                                                                                                                                                             |   |                                      |   |   |   |   |   |
| Current assets:                                                                                                                                                                        |   |                                      |   |   |   |   |   |
| Cash                                                                                                                                                                                   |   | $                                         | 2,593  |   | $ | 7,766 |   | $ | 5,081 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of approximately $299 at December 31, 2003, $296  at December 31, 2002 and $223 at December 31, 2001 |   | 13,628                                    |   | 14,593 |   | 11,465 |   |
| Other accounts receivable                                                                                                                                                              |   | 839                                       |   | 320 |   | 952 |   |
| Prepaid expenses                                                                                                                                                                       |   | 1,123                                     |   | 1,351 |   | 2,404 |   |
| Other current assets                                                                                                                                                                   |   | 694                                       |   | 1,647 |   | 392 |   |
| Total current assets                                                                                                                                                                   |   | 18,877                                    |   | 25,677 |   | 20,294 |   |
|                                                                                                                                                                                   |   |                                      |   |   |   |   |   |
| Property and equipment, net of accumulated  depreciation and amortization of $7,775, $7,197 and $5,194 at  December 31, 2003, 2002 and 2001, respectively                         |   | 1,192                                     |   | 1,588 |   | 2,725 |   |
| Intangible assets, net of accumulated  amortization of $8,235, $4118 and zero at December 31, 2003, 2002 and  2001, respectively.                                                 |   | 6,520                                     |   | 10,637 |   | 14,755 |   |
| Investment in affiliates and other assets                                                                                                                                              |   | 2,471                                     |   | 1,103 |   | 796 |   |
| Total assets                                                                                                                                                                           |   | $                                         | 29,060 |   | $ | 39,005 |   | $ | 38,570 |   |
|                                                                                                                                                                                   |   |                                      |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ (DEFICIT)  EQUITY**                                                                                                                               |   |                                      |   |   |   |   |   |
|                                                                                                                                                                                   |   |                                      |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                   |   |                                      |   |   |   |   |   |
| Accounts payable                                                                                                                                                                       |   | $                                         | 5,024  |   | $ | 4,468 |   | $ | 5,292 |   |
| Accrued liabilities                                                                                                                                                                    |   | 5,222                                     |   | 6,925 |   | 5,954 |   |
| Accrued payroll and related taxes                                                                                                                                                      |   | 6,682                                     |   | 6,838 |   | 6,678 |   |
| Deferred revenue                                                                                                                                                                       |   | 7,227                                     |   | 7,974 |   | 5,848 |   |
| Line of credit, net                                                                                                                                                                    |   | 3,386                                     |   | 3,486 |   | 1,062 |   |
| Current portion of long-term debt                                                                                                                                                      |   | 352                                       |   | 950 |   | 1,245 |   |
| Total current liabilities                                                                                                                                                              |   | 27,893                                    |   | 30,641 |   | 26,079 |   |
|                                                                                                                                                                                   |   |                                      |   |   |   |   |   |
| Accrued pension and other liabilities                                                                                                                                                  |   | 2,834                                     |   | 1,549 |   | 989 |   |
| Deferred taxes                                                                                                                                                                         |   | 480                                       |   | 800 |   | 547 |   |
| Long-term debt, less current portion                                                                                                                                                   |   | 324                                       |   | 235 |   | 1,373 |   |
| Total liabilities                                                                                                                                                                      |   | 31,531                                    |   | 33,225 |   | 28,988 |   |
|                                                                                                                                                                                   |   |                                      |   |   |   |   |   |
| Commitments and contingencies                                                                                                                                                          |   |                                      |   |   |   |   |   |
|                                                                                                                                                                                   |   |                                      |   |   |   |   |   |
| Stockholders’ (deficit) equity:                                                                                                                                                   |   |                                      |   |   |   |   |   |
| Preferred stock, $0.001 par value,  25,000,000 shares authorized, none issued or outstanding                                                                                           |   | —                                    |   | — |   | — |   |
| Common stock, $0.001 par value, 500,000,000  shares authorized, 9,965,018, 9,964,767 and 9,964,767 shares issued and  outstanding for 2003, 2002 and 2001, respectively.               |   | 10                                        |   | 10 |   | 10 |   |
| Additional paid-in capital                                                                                                                                                             |   | 81,070                                    |   | 80,833 |   | 80,187 |   |
| Accumulated deficit                                                                                                                                                                    |   | (82,991                                   | )      | (75,100 | ) | (71,152 | ) |
| Accumulated other comprehensive income  (loss)                                                                                                                                         |   | (560                                      | )      | 37 |   | 537 |   |
| Total stockholders’ (deficit) equity                                                                                                                                              |   | (2,471                                    | )      | 5,780 |   | 9,582 |   |
| Total liabilities and stockholders’  (deficit) equity                                                                                                                             |   | $                                         | 29,060 |   | $ | 39,005 |   | $ | 38,570 |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

F - 3

----

 

**ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                                    |   | **For the  years ended  December 31,**   |    |
|-------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                    |   | **2003**                                      |    | **2002** |   | **2001** |   |
|                                                                    |   | **(in  thousands, except per share amounts)** |    |
|                                                                    |   |                                          |    |   |   |   |   |
| Revenue:                                                                |   |                                          |    |   |   |   |   |
| Software                                                                |   | $                                             | 13,286  |   | $ | 15,070 |   | $ | 15,105 |   |
| Support                                                                 |   | 16,568                                        |    | 15,690 |   | 15,512 |   |
| Services                                                                |   | 27,437                                        |    | 37,904 |   | 37,029 |   |
|                                                                    |   | 57,291                                        |    | 68,664 |   | 67,646 |   |
| Cost of revenue:                                                        |   |                                          |    |   |   |   |   |
| Software                                                                |   | 677                                           |    | 1,734 |   | 2,522 |   |
| Support                                                                 |   | 5,102                                         |    | 6,389 |   | 6,705 |   |
| Services                                                                |   | 20,250                                        |    | 24,587 |   | 23,870 |   |
|                                                                    |   | 26,029                                        |    | 32,710 |   | 33,097 |   |
|                                                                    |   |                                          |    |   |   |   |   |
| Gross margin                                                            |   | 31,262                                        |    | 35,954 |   | 34,549 |   |
|                                                                    |   |                                          |    |   |   |   |   |
| Operating expenses:                                                     |   |                                          |    |   |   |   |   |
| Selling and marketing                                                   |   | 15,942                                        |    | 12,544 |   | 16,782 |   |
| Research and development                                                |   | 8,152                                         |    | 7,868 |   | 9,894 |   |
| General and administrative                                              |   | 11,142                                        |    | 15,171 |   | 10,879 |   |
| Amortization expense                                                    |   | 4,118                                         |    | 4,117 |   | 18,832 |   |
| Impairment charge                                                       |   | —                                        |    | — |   | 43,430 |   |
| Management fees                                                         |   | —                                        |    | — |   | 806 |   |
| Acquisition costs                                                       |   | —                                        |    | — |   | 409 |   |
|                                                                    |   | 39,354                                        |    | 39,700 |   | 101,032 |   |
|                                                                    |   |                                          |    |   |   |   |   |
| Operating (loss)                                                        |   | (8,092                                        | )       | (3,746 | ) | (66,483 | ) |
|                                                                    |   |                                          |    |   |   |   |   |
| Interest expense, net                                                   |   | 192                                           |    | 194 |   | 826 |   |
| Equity in net (gain) loss of unconsolidated  affiliates                 |   | (260                                          | )       | 650 |   | 734 |   |
| Gain on sale of subsidiaries and investee                               |   | (393                                          | )       | (977 | ) | — |   |
| Other (income) expense, net                                             |   | 669                                           |    | 237 |   | 1,308 |   |
| Foreign exchange (gain) loss                                            |   | (708                                          | )  | (382 | ) | 178 |   |
|                                                                    |   | (500                                          | )       | (278 | ) | 3,046 |   |
|                                                                    |   |                                          |    |   |   |   |   |
| Loss before income taxes and minority interest                          |   | (7,592                                        | )       | (3,468 | ) | (69,529 | ) |
|                                                                    |   |                                          |    |   |   |   |   |
| Income tax expense (benefit)                                            |   | 299                                           |    | 480 |   | (9,670 | ) |
|                                                                    |   |                                          |    |   |   |   |   |
| Loss before minority interest                                           |   | (7,891                                        | )       | (3,948 | ) | (59,859 | ) |
|                                                                    |   |                                          |    |   |   |   |   |
| Minority interest in net losses of unconsolidated  subsidiary           |   | —                                        |    | — |   | 95 |   |
|                                                                    |   |                                          |    |   |   |   |   |
| Net (loss)                                                              |   | $                                             | (7,891  | ) | $ | (3,948 | ) | $ | (59,764 | ) |
|                                                                    |   |                                          |    |   |   |   |   |
| Loss per common share:                                                  |   |                                          |    |   |   |   |   |
| Basic                                                                   |   | $                                             | (0.79   | ) | $ | (0.40 | ) | $ | (6.78 | ) |
| Diluted                                                                 |   | $                                             | (0.79   | ) | $ | (0.40 | ) | $ | (6.78 | ) |
|                                                                    |   |                                          |    |   |   |   |   |
| Weighted average common shares used in computing  loss per common share |   |                                          |    |   |   |   |   |
| Basic                                                                   |   | 9,965                                         |    | 9,965 |   | 8,816 |   |
| Diluted                                                                 |   | 9,965                                         |    | 9,965 |   | 8,816 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F - 4

----

 

**ARTEMISINTERNATIONAL SOLUTIONS CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDER****S’ EQUITY (DEFICIT) ANDCOMPREHENSIVE INCOME (LOSS)**

**For thePeriod January 1, 2000 to December 31, 2003**

 
|                                                                        |   | **Common  Stock  Shares** |   | **Amount** |   | **Investment  in Stock of  Parent  Company** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total** |   |
|-----------------------------------------------------------------------------|--------|---------------------------|--------|------------|--------|----------------------------------------------|--------|----------------------------------|--------|--------------------------|--------|------------------------------------------------------|--------|-----------|--------|
|                                                                        |   | **(in  thousands)**       |   |
| Balance January 1, 2000                                                |   | 7,977                     |   | $          | 8      |                                         | $      | (2,783                           | )      | $                        | 74,570 |                                                 | $      | (11,388   | )      | $ | 498 |   | $ | 60,905 |   |
| Cancellation of stock in Proha                                              |   | —                    |   | —     |   | 2,783                                        |   | (2,783                           | )      | —                   |   | —                                               |   | —    |   |
| Capital contributions-Proha                                                 |   | —                    |   | —     |   | —                                       |   | 425                              |   | —                   |   | —                                               |   | 425       |   |
| Shares of Opus360 outstanding prior to reverse  acquisition deemed acquired |   | 1,988                     |   | 2          |   | —                                       |   | 7,975                            |   | —                   |   | —                                               |   | 7,977     |   |
| Net loss                                                                    |   | —                    |   | —     |   | —                                       |   | —                           |   | (59,764                  | )      | —                                               |   | (59,764   | )      |
| Foreign currency translation adjustment                                     |   | —                    |   | —     |   | —                                       |   | —                           |   | —                   |   | 39                                                   |   | 39        |   |
| Comprehensive loss                                                          |   | —                    |   | —     |   | —                                       |   | —                           |   | —                   |   | —                                               |   | (59,725   | )      |
| Balance December 31, 2001                                              |   | 9,965                     |   | 10         |   | —                                       |   | 80,187                           |   | (71,152                  | )      | 537                                                  |   | 9,582     |   |
| Net loss                                                                    |   | —                    |   | —     |   | —                                       |   | —                           |   | (3,948                   | )      | —                                               |   | (3,948    | )      |
| Foreign currency translation adjustment                                     |   | —                    |   | —     |   | —                                       |   | —                           |   | —                   |   | (500                                                 | )      | (500      | )      |
| Comprehensive loss                                                          |   | —                    |   | —     |   | —                                       |   | —                           |   | —                   |   | —                                               |   | (4,448    | )      |
| Adjustment related to the reverse acquisition of  Opus 360                  |   | —                    |   | —     |   | —                                       |   | 646                              |   | —                   |   | —                                               |   | 646       |   |
| Balance December 31, 2002                                              |   | 9,965                     |   | 10         |   | —                                       |   | 80,833                           |   | (75,100                  | )      | 37                                                   |   | 5,780     |   |
| Net loss                                                                    |   | —                    |   | —     |   | —                                       |   | —                           |   | (7,891                   | )      | —                                               |   | (7,891    | )      |
| Foreign currency translation adjustment                                     |   | —                    |   | —     |   | —                                       |   | —                           |   | —                   |   | (597                                                 | )      | (597      | )      |
| Comprehensive loss                                                          |   | —                    |   | —     |   | —                                       |   | —                           |   | —                   |   | —                                               |   | (8,488    | )      |
| Warrants issued                                                             |   | —                    |   | —     |   | —                                       |   | 237                              |   | —                   |   | —                                               |   | 237       |   |
| Balance December 31, 2003                                              |   | 9,965                     |   | $          | 10     |                                         | $      | —                           |   | $                        | 81,070 |                                                 | $      | (82,991   | )      | $ | (560 | ) | $ | (2,471 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F - 5

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**ARTEMIS INTERNATIONAL SOLUTIONSCORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOW****S**

 
|                                                                                        |   | **For the  years ended  December 31,** |   |
|---------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                        |   | **2003**                                    |   | **2002** |   | **2001** |   |
|                                                                                        |   | **(in  thousands)**                         |   |
| Cash flow from operating activities:                                                        |   |                                        |   |   |   |   |   |
| Net (loss)                                                                                  |   | $                                           | (7,891 | ) | $ | (3,948 | ) | $ | (59,764 | ) |
| Adjustments to reconcile net loss to net  cash provided by or used in operating activities: |   |                                        |   |   |   |   |   |
| Depreciation and amortization                                                               |   | 5,077                                       |   | 6,213 |   | 22,380 |   |
| Minority interest                                                                           |   | —                                      |   | — |   | (95 | ) |
| Equity in net loss (gain) of unconsolidated  affiliate                                      |   | (260                                        | )      | 650 |   | 734 |   |
| Gains on sale of subsidiaries and investee                                                  |   | (393                                        | )      | (977 | ) | — |   |
| Deferred income taxes and other                                                             |   | —                                      |   | — |   | (10,371 | ) |
| Loss on impaired assets                                                                     |   | —                                      |   | — |   | 43,430 |   |
| Disposition of assets                                                                       |   | (91                                         | )      | — |   | — |   |
| Changes in operating assets and  liabilities:                                               |   |                                        |   |   |   |   |   |
| (Increase) decrease in trade accounts receivable                                            |   | 965                                         |   | (3,128 | ) | 7,095 |   |
| (Increase) in prepaid expenses and other  assets                                            |   | (342                                        | )      | (245 | ) | (2,127 | ) |
| Increase (decrease) in deferred revenues                                                    |   | (747                                        | )      | 2,127 |   | (4,402 | ) |
| Increase (decrease) in accounts payable,  and other liabilities                             |   | (338                                        | )      | 1,388 |   | (5,615 | ) |
| Net cash provided by (used in) operating  activities                                        |   | (4,020                                      | )      | 2,080 |   | (8,735 | ) |
|                                                                                        |   |                                        |   |   |   |   |   |
| Cash flow from investing activities:                                                        |   |                                        |   |   |   |   |   |
| Capital expenditures, net                                                                   |   | (473                                        | )      | (959 | ) | (841 | ) |
| Proceeds from sale of subsidiaries and  investee                                            |   | 289                                         |   | 1,121 |   | — |   |
| Cash provided by former parent contribution  of subsidiaries                                |   | —                                      |   | — |   | 1,048 |   |
| Cash provided from acquisitions                                                             |   | —                                      |   | — |   | 14,535 |   |
| Net cash provided by (used in) investing  activities                                        |   | (184                                        | )      | 162 |   | 14,742 |   |
|                                                                                        |   |                                        |   |   |   |   |   |
| Cash flow from financing activities:                                                        |   |                                        |   |   |   |   |   |
| Net borrowings on lines of credit                                                           |   | 403                                         |   | 2,424 |   | 2,747 |   |
| Payments of debt and capital leases                                                         |   | (775                                        | )      | (1,481 | ) | (6,332 | ) |
| Net cash provided by (used in) financing  activities                                        |   | (372                                        | )      | 943 |   | (3,585 | ) |
|                                                                                        |   |                                        |   |   |   |   |   |
| Effect of exchange rate changes on cash                                                     |   | (597                                        | )      | (500 | ) | (542 | ) |
|                                                                                        |   |                                        |   |   |   |   |   |
| Net (decrease) increase in cash                                                             |   | (5,173                                      | )      | 2,685 |   | 1,880 |   |
|                                                                                        |   |                                        |   |   |   |   |   |
| Cash at the beginning of the year                                                           |   | 7,766                                       |   | 5,081 |   | 3,201 |   |
|                                                                                        |   |                                        |   |   |   |   |   |
| Cash at the end of the year                                                                 |   | $                                           | 2,593  |   | $ | 7,766 |   | $ | 5,081 |   |

 

See accompanying notes to consolidatedfinancial statements for discussion of non-cash transactions and disclosure ofcash paid for interest and income taxes.

The accompanying notes are an integral partof these consolidated financial statements.

 

F - 6

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**ARTEMIS INTERNATIONAL SOLUTIONSCORPORATIONNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1.Organization and Summary of Significant Accounting Policies**

 

*Organizationand Description of Business*

 

ArtemisInternational Solutions Corporation and Subsidiaries, (*“Artemis”* or the *“Company”*) is a provider ofenterprise-based portfolio, project and resource management softwaresolutions.  Artemis’ solutions consist of scalable client/server andWeb-based applications, and are supported by consulting services and aninternational distribution network of 50 offices in 47 countries. Artemisservices key vertical markets such as (i) Aerospace and Defense, (ii) Energyand Telecom, (iii) Pharmaceuticals, (iv) Government, (v) FinancialServices (vi) Automotive and (vii) High Technology.

 

Asused herein:

 

•                  “Opus360” refers to Opus360 Corporation priorto the closing of certain share exchange transactions described below. Opus360 Corporation was incorporated on August 17, 1998 under the laws ofthe State of Delaware to provide an integrated web-based service to streamlinethe procurement and management of professional services.

 

•                  “Legacy Artemis” refers to ArtemisAcquisition Corporation, a Delaware corporation and the parent corporation ofthe Artemis business organization.  Prior to certain share exchangetransactions described below, Legacy Artemis was a wholly owned subsidiary ofProha Plc (“Proha”), a Finnish corporation. Legacy Artemis was a developer andsupplier of comprehensive, project and resource collaboration applicationsoftware products and consulting services.  Proha acquired Legacy Artemison August 24, 2000, and subsequently contributed its interests in theentities listed in the table below to Legacy Artemis (the “ContributedBusinesses”).

 

•                  In November 2001 the Company changed itsname to “Artemis International Solutions Corporation”, which refers to Opus360Corporation after the closing of certain share exchange transactions describedbelow.

 

OnAugust 24, 2000 Proha purchased all of the outstanding common stock ofLegacy Artemis. The purchase was structured as a share exchange whereby Prohaissued shares of its publicly traded (Helsinki Exchange) common stock to LegacyArtemis’ equity holders in exchange for all of Legacy Artemis’ common stock.The purchase price was $50 million, less post-closing adjustments ofapproximately $6 million. The purchase price adjustments were determinedsubsequent to the effective date of the transaction, and as a result, Legacy Artemis’former shareholders were required to contribute to Legacy Artemis $6 million ofthe Proha stock. These contributions have been recorded on a net of tax basis,as additional paid-in capital and as an offsetting reduction in stockholders’equity, similar to treasury stock, as an investment in the stock of the parentcompany. Subsequent to the receipt of the Proha shares, Legacy Artemis sold aportion of these shares, resulting in a gain of $518,000, net of taxes of$304,000, which has been recorded as additional paid-in capital. AtDecember 31, 2000, the Company held 392,036 shares of Proha, recorded at$2,783,000, net of deferred income taxes of $1,634,000.  In 2001, Prohacancelled these shares, which was treated as a reduction of additional paid incapital.

 

Asa result of the transaction described in the preceding paragraph, LegacyArtemis recorded goodwill of approximately $30.7 million with acorresponding increase in additional paid-in capital. Legacy Artemis alsorecorded approximately $32.3 million of identifiable intangible assets and$2.3 million of in-process research and development (“R&D”)expense.  The aforementioned intangible assets were pushed down to thefinancial statements of Legacy Artemis, with a corresponding increase ofadditional paid-in capital.  The in-process R&D expense recordedduring the nine months ended December 31, 2000 resulted from an allocationof purchase price to the two projects under development by the Company inAugust 2000; such projects were not considered to have reachedtechnological feasibility at that date.  Such R&D expense was alsopushed down to the financial statements of Legacy Artemis.  As a result ofthe contribution by Proha to the Company of Proha’s interest in several foreigncompanies, goodwill and identifiable intangible assets of approximately $10.2million and $7.7 million, respectively, were also recorded during the ninemonths ended December 31, 2000.

 

F - 7

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Asnoted above, Proha acquired Legacy Artemis in August 2000.  Prohasubsequently transferred its interests in several companies based in Europe,Asia and the United States to Legacy Artemis.  In addition, Prohacontributed its directly held interests in several companies to Artemis in conjunctionwith the share exchange transactions effective December 2000.  Eachof the “Contributed Businesses” is reflected as having been contributed byProha as of the later of the date Legacy Artemis was acquired by Proha or thedate these interests were under the control of Proha, Legacy Artemis’parent.  These Contributed Businesses are included in the results ofArtemis as of the effective date a majority interest was transferred toArtemis.

 

The active ContributedBusinesses and the effective dates of their contribution to Legacy Artemis byProha were as follows:

 
| **Current Company Name**             |   | **Location**    |   | **Contribution  Date** |   |
|--------------------------------------|--------|-----------------|--------|------------------------|--------|
| Artemis Finland OY                   |   | Finland         |   | August 24,  2000  |   |
| Artemis International Solutions Ltd. |   | United  Kingdom |   | August 24,  2000  |   |
| Artemis International Limited        |   | Japan           |   | August 24,  2000  |   |
| PMSoft Asia Pte. Ltd.                |   | Singapore       |   | December 1,  2000 |   |
| Artemis International S.p.A.         |   | Italy           |   | December 1,  2000 |   |
| Enterprise Management Systems Sarl   |   | Italy           |   | December 1,  2000 |   |
| Artemis International Sarl           |   | France          |   | December 1,  2000 |   |
| Solutions International              |   | France          |   | December 1,  2000 |   |
| Artemis International GmbH           |   | Germany         |   | December 1,  2000 |   |

 

*TheProha/Opus 360 Share Exchange Transactions*

 

InApril 2001, Opus360 and Proha entered into a share exchange agreement (“theShare Exchange Agreement”) pursuant to which, upon completion of thetransactions contemplated under such agreement (“the Share ExchangeTransactions’’), Opus360 exchanged 80% of its post-transaction outstandingcommon stock for all of the capital stock of Legacy Artemis, and 19.9% of twoFinnish subsidiaries of Proha, Accountor OY (see Note 2) and IntellisoftOY.  As a result of the Share Exchange Transactions, Proha owns 80% of theoutstanding common stock of Artemis.

 

Thetransaction was structured in two steps since the number of authorized Opus360shares needed to be increased to allow for the issuance of 8.0 million newshares to Proha.  Despite its two step structure, the transaction wasaccounted for upon the consummation of the first closing because Proha gained amajority controlling interest and the voting agreements discussed beloweffectively “locked in” phase two of the transaction.

 

Inconnection with the Share Exchange Agreement, Proha entered into two votingagreements, one with Ari B. Horowitz, (cofounder of Opus360 and member of theArtemis Board of Directors), and one with Opus360.  Pursuant to theseagreements, Ari B. Horowitz agreed among other things to cause all of his133,000 shares of Opus360 common stock to be voted in favor of the secondclosing.  Also, Proha agreed among other things to cause all of its 3.0million shares of Opus360’s common stock to be voted in favor of the secondclosing.

 

Asa result of the above voting agreements, there were commitments to vote infavor of the second closing representing approximately 62% of the outstandingcommon stock.  Accordingly, the transaction was not treated as a stepacquisition since Proha obtained a majority controlling and voting interestupon consummation of the first closing.

 

OnJuly 31, 2001, Opus360 consummated the first phase of the transactioncontemplated by the Share Exchange Agreement.  In connection with thisAgreement, Opus360 acquired all of the capital stock of Legacy Artemis, inexchange for approximately 3.0 million shares of Opus360’s restricted commonstock.  As a result of this exchange, Proha obtained a controllingownership and management interest in Opus360.  Accordingly, thetransaction was accounted for as a reverse acquisition with Legacy Artemis treatedas the accounting acquirer and accounted for under the purchase method ofaccounting in accordance with the provisions of Statement of FinancialAccounting Standards (“SFAS”) 141, *BusinessCombinations*.  The second closing was completedNovember 20, 2001 by Opus360’s filing of a definitive proxy statement withthe Securities and Exchange Commission (“SEC”) containing the requireddisclosures and financial information of the combined and consolidatedcompanies.  At the second closing, Opus360 delivered approximately 5.0million additional shares of its restricted common stock in return for thedelivery by Proha of 19.9% of the outstanding shares of the two Prohasubsidiaries. Upon completion of the second closing, Proha owned approximately80% of the post-transaction outstanding common stock of the Company.

 

Allinformation regarding equity instruments and related per share amounts has beenrestated within this annual report to reflect the effects of the reverse mergertransaction described above.

 

F - 8

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*Basis ofPresentation*

 

Accountingprinciples generally accepted in the United States of America (“GAAP”) requirein certain circumstances that a company whose shareholders retain the majorityvoting interest, governing body and senior management in the combined businessto be treated as the acquiror for financial reporting purposes. As a result ofthe Share Exchange Transactions, Proha, the former shareholder of LegacyArtemis, holds a majority interest in the Company, governing body and seniormanagement in the combined Company.  Accordingly, for accounting purposesthe transaction has been treated as a reverse acquisition in which LegacyArtemis is deemed to have purchased Opus360, although Opus360 (which changed itsname to Artemis International Solutions Corporation on November 20, 2001)remains the legal parent company and the registrant for SEC reporting purposes.

 

Theconsolidated financial statements included herein represent the historicalfinancial statements of Legacy Artemis, as the accounting acquirer, and theacquisition of Opus360 has been accounted for under the purchase method ofaccounting.  The assets acquired and liabilities assumed of Opus360, asthe legally acquired entity, are recorded at their estimated fair values atJuly 31, 2001.  The excess of the estimated fair values of theidentifiable net assets over the purchase price is treated as negativegoodwill. Negative goodwill is first applied to reduce the assigned value ofidentifiable non-current assets other than long-term investments in marketablesecurities and deferred tax assets, until those assets are reduced to zero.

 

*Liquidityand Going Concern Considerations*

 

TheCompany’s continued existence is dependent upon several factors including theCompany’s ability to sell and successfully implement its softwaresolutions.  The Company has experienced net losses in each of the threeyears in the period ended December 31, 2003.  At December 31,2003, the Company has an accumulated deficit of $83.0 million and its currentliabilities exceeded current assets by approximately $10.5 million.

 

Asummary of the Company’s future contractual obligations and commercialcommitments as of December 31, 2003 is as follows:

 
|                                               |   | **Year  ending December 31,** |   |
|----------------------------------------------------|--------|------------------------------------|--------|
|                                               |   | **2004**                           |   | **2005** |   | **2006** |   | **2007** |   | **2008-  thereafter** |   | **Total** |   |
|                                               |   | **(in  thousands)**                |   |
| Long-term debt                                     |   | $                                  | 352    |   | $ | 19 |   | $ | 8 |   | $ | 8 |   | $ | 289 |   | $ | 676 |   |
| Obligations under non-cancellable operating leases |   | 3,136                              |   | 2,783 |   | 1,611 |   | 158 |   | 38 |   | 7,727 |   |
|                                               |   | $                                  | 3,488  |   | $ | 2,803 |   | $ | 1,620 |   | $ | 165 |   | $ | 327 |   | $ | 8,403 |   |

 

Othercash requirements through the end of fiscal year 2004 are primarily to fundoperations at approximately the same levels as fiscal year 2003.  In thefuture, the Company may need to raise additional funds through public or privatefinancings, or other arrangements to fund our operations or potentialacquisitions, if any. The Company currently has no plans to affect any otherofferings. The Company cannot be assured that any financings or otherarrangements will be available in amounts or on terms acceptable to the Companyor at all, and any new financings or other arrangements could place operatingor other restrictions on the Company.  The Company’s inability to raisecapital when needed could seriously harm the growth of the business andadversely affect future results of operations.

 

TheCompany’s near and long-term operating strategies focus on promoting its newand existing software and services to increase its revenue and cash flow whilebetter positioning the Company to compete under current market conditions AtDecember 31, 2003, the Company had unused credit lines and overadvances of$1.1 million.  The Company generated negative operating cash flow for thequarter and year ended December 31, 2003.

 

EffectiveJune 30, 2003 the Company paid off its Note Payable and $2.0 million Lineof Credit (the “Foothill Facility”) held with Wells Fargo Foothill and obtaineda bridge loan of $3.5 million from Proha to cover short-term cash needs untilthe Company was able to enter into a new asset-based lending facility.  In August of 2003, the Companynegotiated a new $5.0 million credit facility, the terms of which areconsidered more favorable to the Company than the Foothill Facility; see Note19 for a detailed discussion of the terms of this new borrowingarrangement.  In addition to securing anew facility, management has also taken some immediate steps to reduce anddefer discretionary spending to more closely match expenses with actual andprojected revenues.  During 2002,management initiated restructuring activities to streamline the Company’soperations and to focus on its core expertise in enterprise portfolio andproject management.  This entailedreducing the work force and selling certain non-core assets.  Further

 

F - 9

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restructuring activities are expected to focus on increasingefficiencies within the Company’s global infrastructure.  The Company may also seek additional capitalresources to fund strategic initiatives and further strengthen its globalpresence.  Such additional equityfinancing may be dilutive to the Company’s stockholders.  The Company’s capital requirements depend onnumerous factors, including the rate of market acceptance of the Company’sproducts and services, the Company’s ability to service its customers, theCompany’s ability to maintain and expand its customer base, the level ofresources required to expand the Company’s marketing and sales organization,research and development activities and other factors.  Management believes that cash generated fromoperations as well as its current credit facilities will be sufficient tosupport the Company’s liquidity requirements through December 31, 2004,depending on operating results and the level of acceptance of its products, itscosts and its short-term financing.

 

TheCompany’s independent public accountants have included a going concernparagraph in their report on the December 31, 2003 consolidated financialstatements which have been prepared assuming that the Company will continue asa going concern (based upon management’s plans discussed above), whichcontemplates, among other things, the realization of assets and satisfaction ofliabilities in the ordinary course of business.  Accordingly, the accompanyingconsolidated financial statements do not include any adjustments related to therecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result, should the Company be unableto continue as a going concern.

 

*ReverseStock Split*

 

OnFebruary 7, 2003, the Company effected a one for twenty-five reverse stocksplit of its outstanding common stock. All information regarding common stock,stock options, warrants and related per share amounts has been restated withinthis annual report to reflect the reverse stock split, except for certaindisclosures relating to Proha/Opus 360 Share Exchange Transactions discussedabove.

 

*Reclassifications*

 

Certainprior period information has been reclassified to conform to the current periodpresentation.

 

*Principlesof Consolidation*

 

Theaccompanying consolidated financial statements include the accounts of ArtemisInternational Solutions Corporation and its majority owned subsidiaries. Allmaterial intercompany transactions and balances have been eliminated inconsolidation. Equity investments in which Artemis owns at least 20% of thevoting securities, or exercises significant influence over (either individuallyor in concert with its parent, Proha) are accounted for using the equitymethod.  Investments in which the Company owns less than 20% and is notable to exercise significant influence over the investee are accounted forunder the cost method of accounting.

 

*Use ofEstimates*

 

Thepreparation of financial statements in accordance with GAAP requires managementto make estimates and assumptions regarding revenue recognition, and therecoverability of intangible assets that affect the reported amounts of assetsand liabilities, the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenue andexpenses during the reporting period.  Actual results could differ fromthose estimates.  Significant estimates include valuation of deferred taxassets, allowance for uncollectible accounts receivable, revenue recognition,valuation and useful economic lives of intangible assets, accrued pensionliabilities and certain other liabilities.

 

*RevenueRecognition*

 

TheCompany has adopted Statement of Position, or SOP, 97-2, *Software Revenue Recognition*, whichsupersedes SOP 91-1, *Software RevenueRecognition*, as well as SOP, 98-9, *Modificationof* SOP 97-2, *Software RevenueRecognition with Respect to Certain Transactions*, which amends SOP97-2 and supercedes SOP 98-4.  SOP 97-2, as amended, generally requiresrevenue earned on software arrangements involving multiple elements to beallocated to each element based on the relative estimated fair market value ofeach of the elements. The estimated fair value of an element must be based onvendor-specific objective evidence (“VSOE”). Software license revenue allocatedto a software product is recognized upon delivery of the product or deferredand recognized in future periods to the extent that an arrangement includes oneor more elements that are to be delivered at a future date and for which VSOEhas not been established.  Maintenance and support revenue is recognizedratably over the maintenance term.  First-year maintenance typically issold with the related software license and renewed on an annual basisthereafter. Estimated fair values of ongoing maintenance and supportobligations are based on separate sales of renewals to other customers or uponrenewal rates quoted in the contracts. For such arrangements with multipleobligations, we allocate revenue to each component of the arrangement based onthe estimated fair value of the undelivered elements. Fair value of services,such as consulting or training, is based upon separate sales of these services.The Company at times may enter into multiple-customer contracts in which theCompany allocates revenue based on the number of specified users at eachcustomer, and recognizes revenue upon customer acceptance and satisfying theother applicable conditions of the above described accounting policy.

 

F - 10

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Servicesrevenue is recognized as the service is performed assuming that sufficientevidence exists to estimate the fair value of the services.  Consultingand training services are billed based on contractual hourly rates and revenuesare recognized as the services are performed. Consulting services primarilyconsist of implementation services related to the installation of the Company’sproducts which do not require significant customization to or modification ofthe underlying software code.

 

Significantmanagement judgments and estimates must be made in connection withdetermination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period,material differences in the amount and timing of revenue recognized couldresult.

 

*Cost ofRevenues*

 

Costof software revenue primarily reflects the manufacture expense and royalties tothird party developers, which are recognized upon delivery of the product or infuture periods to the extent that an arrangement includes one or more elementsthat are to be delivered at a future date and for which VSOE has not beenestablished.  Cost of support includes (i) sales commissions and salariespaid to employees who provide first and second level support to clients and(ii) fees paid to consultants, which are recognized as the services areperformed.  Sales commissions are expensed as incurred.  The costs incurredfor implementation, customer support and training of the Company’s clientsusing internal or external resources are recorded as cost of services revenuewhen the services are performed.

 

*SoftwareDevelopment Costs*

 

Thecosts incurred to develop computer software products to be sold or otherwisemarketed are charged to expense until technological feasibility of the producthas been established. Once technological feasibility of related softwareproducts has been established, computer software development costs arecapitalized and reported at the lower of amortized cost or estimated netrealizable value. When a product is ready for general release, its capitalizedcosts are amortized using the straight-line method of amortization over aperiod not to exceed three years. Company management believes thattechnological feasibility is not established until a beta version of theproduct exists. Historically, costs incurred during the period from when a betaversion is available until general release have not been material. Accordingly,during the years ended December 31, 2003, 2002 and 2001 no software costshave been capitalized.

 

*Allowancefor Doubtful Accounts Receivable*

 

Weestablish our allowance for doubtful accounts receivable based on ourqualitative and quantitative review of credit profiles of our customers,contractual terms and conditions, current economic trends and historicalpayment, return and discount experience. We reassess the allowance for doubtfulaccounts each period. If we made different judgments or utilized differentestimates for any period, material differences in the amount and timing ofrevenue recognized could result.

 

*Propertyand Equipment*

 

Propertyand equipment are stated at cost less accumulated depreciation. Depreciation and amortization are calculated using the straight-line methodover the shorter of the estimated useful lives of the related assets, generallyranging from three to five years, or the remaining lease term whenapplicable.  Gains and losses on disposals are included in results ofoperations at amounts equal to the difference between the book value of thedisposed assets and the proceeds received upon disposal. Expenditures forreplacements and leasehold improvements are capitalized, while expenditures formaintenance and repairs are expensed as incurred.

 

*IntangibleAssets*

 

Intangibleassets at December 31, 2003 consist of acquired customer bases and currentcore technology. Customer bases acquired directly are valued at cost, whichapproximates estimated fair value at the time of purchase.   The costs assigned to intangible assets arebeing amortized on a straight-line basis over the estimated useful lives of theassets, which is 42 months from January 1, 2002.  Management believesthat the straight-line method is appropriate for the Company’s customer list,given the caliber and nature of its customer relationships.  Substantiallyall intangible assets remaining at December 31, 2003 will be fullyamortized by July 2005, assuming no impairment adjustments or futurechanges in their estimated useful lives.

 

Intangibleassets are reviewed at least annually for impairment to ensure they areappropriately valued.  Conditions that may indicate an impairment issueexists include an economic downturn or a change in the assessment of futureoperations.  Where applicable, an appropriate interest rate is utilized,based on appropriate economic factors, risk and cost of capital.

 

Foradditional information, see the discussion of SFAS No. 144 in “Impairment ofLong-Lived Assets” immediately below.

 

F - 11

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*Impairmentof Long-Lived Assets*

 

TheCompany periodically evaluates the carrying value of its long-lived assetsunder the provisions of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  SFAS No.144 addresses financial accounting and reporting for the impairment or disposalof long-lived assets, and supersedes SFAS No. 121, *Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of*, and the accounting and reportingprovisions of Accounting Principles Board (“APB”) Opinion No. 30, *Reporting the Effects of the Disposal of a Segment ofa Business, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions*, for the disposal of a segment of a business (aspreviously defined in that Opinion).  SFAS No. 144 also amends AccountingResearch Bulletin No. 51, *ConsolidatedFinancial Statements*, to eliminate the exception to consolidation ofa subsidiary of which control is likely to be temporary.  The Companyadopted SFAS No. 144 commencing January 1, 2002, and it did not have amaterial effect on the financial position or results of operations.

 

SFASNo. 144 requires impairment losses to be recorded on long-lived assets used inoperations, including amortizable intangible assets when indicators ofimpairment are present.  In the event a condition is identified that mayindicate an impairment issue, an assessment is performed using a variety ofmethodologies, including analysis of undiscounted future cash flows, estimatesof sales proceeds and independent appraisals.  If such assets areimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the asset exceeds the estimated fair market value of theassets.  Assets to be disposed of are reported at the lower of thecarrying value or estimated fair market value, less cost to sell.  Duringthe year ended December 31, 2001, the Company recorded impairment chargesof approximately $43 million.  No such impairment charges were recordedduring the years ended December 31, 2003 or December 31, 2002. (See Note 5).

 

*Translationof Foreign Currencies*

 

Artemisuses the U.S. dollar as it functional currency.  Assets and liabilities offoreign subsidiaries are translated into U.S. dollars at year-end exchangerates, and revenues and expenses are translated at average rates prevailingduring the year or other period presented. In accordance with SFAS 52, *Foreign Currency Translation*, translationadjustments are included as a component of stockholders’ equity/deficit. TheCompany recorded a foreign exchange loss of $0.2 million, a foreign exchangegain of $0.4 million and a foreign exchange loss of $0.3 million for the yearsended December 31, 2001, 2002 and 2003, respectively.

 

*IncomeTaxes*

 

TheCompany accounts for income taxes under the provisions of SFAS No. 109, *Accounting for Income Taxes*.  SFASNo. 109 requires recognition of deferred tax liabilities and assets for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns.  Under this method deferred taxliabilities and assets are determined based on the difference between thefinancial statement and tax bases of assets and liabilities using enacted taxrates for the year in which the differences are expected to reverse  (SeeNote 10).

 

*Valuationof Deferred Tax Assets*

 

TheCompany records an estimated valuation allowance on its significant deferredtax assets when, based on the weight of available evidence (including thescheduled reversal of deferred tax liabilities, projected future taxable incomeor loss, and tax-planning strategies), it is more likely than not that some orall of the tax benefit will not be realized.

 

*Stock-BasedEmployee Compensation*

 

TheCompany has several stock-based employee compensation plans, which aredescribed more fully in Note 15.  The Company accounts for those plansunder the recognition and measurement principles of APB Opinion No.25, *Accounting for Stock Issued to Employees*,and related interpretations.  No stock-based employee compensation cost isreflected in the accompanying statements of operations as all options grantedunder those plans had an exercise price equal to or greater than the marketvalue of the underlying common stock on the date of grant.  For disclosurepurposes only, the fair value of all stock options granted to employees isestimated using the Black-Scholes option-pricing model

 

The following tableillustrates the effect on net loss and loss per common share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 *Accounting for Stock-Based Compensation*for all of its stock-based employee compensation plans.

 

F - 12

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|                                                                                                |   | **For the  years ended  December 31,** |    |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                                                |   | **2003**                                    |    | **2002** |   | **2001** |   |
|                                                                                                |   | **(in  thousands, except per share data)**  |    |
|                                                                                                |   |                                        |    |   |   |   |   |
| Net loss as reported                                                                                |   | $                                           | (7,891  | ) | $ | (3,948 | ) | $ | (59,764 | ) |
| Less: Total stock-based employee  compensation expense determined under Black-Scholes pricing model |   | (5,207                                      | )       | (5,660 | ) | (3,298 | ) |
| Pro forma net loss                                                                                  |   | $                                           | (13,098 | ) | $ | (9,608 | ) | $ | (63,062 | ) |
|                                                                                                |   |                                        |    |   |   |   |   |
| Basic and diluted loss per common share                                                             |   |                                        |    |   |   |   |   |
| As reported                                                                                         |   | $                                           | (0.79   | ) | $ | (0.40 | ) | $ | (6.78 | ) |
| Pro forma                                                                                           |   | $                                           | (1.31   | )  | $ | (0.96 | ) | $ | (7.15 | ) |
|                                                                                                     |        |                                             |         |  |  |  |  |  |  |  |  |

 

The Companydid not grant any stock options to its employees in 2003. The 2003 column ofthe above table reflects employee stock options which were granted in prioryears and vested during the year ended December 31, 2003.

 

The following weightedaverage assumptions were used in the table above:

 
|                    |   | **For the  years ended  December 31** |   |
|-------------------------|--------|--------------------------------------------|--------|
|                    |   | **2002**                                   |   | **2001** |   |
| Annual dividends        |   | zero                                       |   | zero |   |
| Expected volatility     |   | 180                                        | %      | 65 | % |
| Risk free interest rate |   | 4.5                                        | %      | 4.5 | % |
| Expected life           |   | 5 years                                    |   | 5 years |   |

 

*SegmentInformation*

 

TheCompany discloses information regarding segments in accordance with SFAS No.131 *Disclosure about Segments of anEnterprise and Related Information.*  SFAS No. 131 establishesstandards for reporting of financial information about operating segments inannual financial statements and requires reporting selected information aboutoperating segments in interim financial reports.  The Company is managed,and financial information is developed on a geographical basis, rather than aproduct line basis.  Thus, the Company has provided segment information ona geographical basis (see Note 11).

 

*ComprehensiveIncome/Loss*

 

TheCompany reports comprehensive income/loss in accordance with SFAS No. 130, *Reporting Comprehensive Income.*  SFASNo. 130 establishes standards for the reporting and display of comprehensiveincome/loss and its components.  SFAS No. 130 requires unrealized holdinggains and losses, net of related tax effects, on available for sale securitiesto be included in comprehensive income/loss until realized.  Translationgains or losses are also included in comprehensive income/loss in theaccompanying consolidated statements of stockholders’ equity (deficit) andcomprehensive income (loss).

 

*PostemploymentBenefits*

 

TheCompany records postemployment benefits in accordance with SFAS No. 87, *Employers’ Accounting for Pensions*. The Company discloses postemployment benefits in accordance with SFAS No. 132, *Employers’ Disclosure about Pensions and OtherPostemployment Benefits.*  SFAS No. 132 establishes standards foremployers who provide benefits to former or inactive employees after employmentbut before retirement.  Postemployment benefits include, but are notlimited to, salary continuation, supplemental employment benefits anddisability related benefits.

 

*Earnings/Loss per Common Share*

 

TheCompany calculates earnings or loss per common share in accordance with SFASNo. 128, *Earnings Per Share*. Accordingly, basic loss per common share excludes dilution for potentiallydilutive securities and is computed by dividing net loss available to commonshareholders by the weighted average number of common shares outstanding forthe period. Diluted earnings per

 

F - 13

----

 

common share reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock.

 

*SignificantRecent Accounting Pronouncements*

 

SFASNo. 146, “Accounting for Costs Associated with Exit and**Disposal Activities,” was issued in June 2002and is effective for exit and disposal activities initiated afterDecember 31, 2002.  The Company iscomplying with SFAS No. 146.

 

SFASNo. 147 relates exclusively to certain financial institutions, and thus doesnot apply to the Company.

 

InNovember 2002, the Financial Accounting Standards Board (the “FASB”)issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  FIN No. 45clarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the estimated fair value of the obligationundertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN No. 45 areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002, while the disclosure requirements became applicable in2002.  The Company is complying with thedisclosure requirements of FIN No. 45. The other requirements of this pronouncement did not materially affectthe Company’s consolidated financial statements.

 

SFASNo. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,an amendment of FASB Statement No. 123,” was issued in December 2002 andis effective for fiscal years ending after December 15, 2002.  SFAS 148 provides alternative methods oftransition for a voluntary change to the fair value method of accounting forstock-based employee compensation.  Inaddition, this pronouncement amends the disclosure requirements of SFAS 123 torequire more prominent disclosure in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The Company is complying with the disclosurerequirements of SFAS No. 148.

 

InJanuary 2003, the FASB issued FIN No. 46, “Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51.”  The primary objectives of FIN No. 46 are to provide guidance onthe identification of entities for which control is achieved through meansother than voting rights (variable interest entities, or “VIEs”), and how todetermine when and which business enterprise should consolidate the VIE.  This new model for consolidation applies toan entity for which either: (a) the equity investors do not have a controllingfinancial interest; or (b) the equity investment at risk is insufficient tofinance that entity’s activities without receiving additional subordinatedfinancial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary andall other enterprises with a significant variable interest in a VIE makeadditional disclosures.  As amended inDecember 2003, the effective dates of FIN No. 46 for public entities thatare not small business issuers are as follows: (a) For interests inspecial-purpose entities (“SPEs”): the first period ended afterDecember 15, 2003; and (b) For all other types of VIEs: the first periodended after March 15, 2004. Management has determined that the Company does not have any SPEs (asdefined), and is presently evaluating the other potential effects of FIN No. 46(as amended) on its consolidated financial statements.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendments of Statement 133 onDerivative Instruments**andHedging Activities,” which amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities under SFAS No. 133.  This pronouncement is effective forcontracts entered into or modified after June 30, 2003 (with certainexceptions), and for hedging relationships designated after June 30, 2003.  The adoption of SFAS No. 149 did not have amaterial impact on the Company’s consolidated financial statements.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of**bothLiabilities and Equity.”  SFAS No. 150establishes standards for how a company classifies and measures certainfinancial instruments with characteristics of both liabilities and equity, andis effective for public companies as follows: (i) in November 2003, theFASB issued FASB Staff Position (“FSP”) FAS 150-03 (“FSP 150-3”), which defersindefinitely (a) the measurement and classification guidance of SFAS No. 150for all mandatorily redeemable non-controlling interests in (and issued by)limited-life consolidated subsidiaries, and (b) SFAS No. 150’s measurementguidance for other types of mandatorily redeemable non-controlling interests,provided they were created before November 5, 2003; (ii) for financialinstruments entered into or modified after May 31, 2003 that are outside thescope of FSP 150-3; and (iii) otherwise, at the beginning of the first interimperiod beginning after June 15, 2003. The Company adopted SFAS No. 150 on the aforementioned effectivedates.  The adoption of thispronouncement did not have a material impact on the Company’s results ofoperations or financial condition.

 

In December2003, the FASB issued a revision of SFAS No. 132, *Employers’ Disclosures about Pensions and Other Postretirement Benefits*.This pronouncement (“SFAS No. 132-R”) expands employers’ disclosures aboutpension plans and other post-retirement benefits, but does not change themeasurement or recognition of such plans required by SFAS No. 87, No. 88. orNo. 106. SFAS No. 132-R retains the existing disclosure requirements of SFASNo. 132, and requires certain additional disclosures about defined benefitpost-retirement plans. The defined benefit pension plan of the Company’s UnitedKingdom subsidiary is the Company’s only defined benefit post-retirement plan.Except as described in the following sentence, SFAS No. 132-R is effective forforeign plans for fiscal years ending after June 15, 2004; after the effectivedate, restatement for some of the new disclosures is required for earlierannual periods. Some of the interim-period disclosures mandated by SFAS No.132-R (such as the components of net periodic benefit cost, and certain keyassumptions) are effective for foreign plans for quarters beginning afterDecember 15, 2003; other interim-period disclosures will not be required forthe Company until the first quarter of 2005. The Company is presentlyevaluating the effect of SFAS No. 132-R on its annual and interim-periodfinancial statement disclosures.

 

Otherrecent accounting pronouncements issued by the FASB (including its EmergingIssues Task Force), the American Institute of Certified Public Accountants, andthe SEC did not or are not believed by management to have a material impact onthe Company’s present or future consolidated financial statements.

 

F - 14

----

 

##### **Note 2. Acquisitions and Divestitures**

 

*Proha/LegacyArtemis/Merger*

 

Goodwillof $30.7 million resulting from the acquisition of Legacy Artemis by Proha onAugust 24, 2000 was pushed down to the financial statements of LegacyArtemis, with a corresponding increase in additional paid-in capital. This goodwill represented the excess of the purchase price paid over theestimated fair value of tangible and identifiable intangible net assetsacquired in business combinations. Identifiable intangible assets of $32.3million resulting from the acquisition of the Company by Proha onAugust 24, 2000 were also pushed down to Legacy Artemis, with anoffsetting increase in additional paid-in capital.  Goodwill andintangible assets of $10.2 million and $7.7 million, respectively, were recordedduring the nine months ended December 31, 2000 as a result of thecontribution by Proha to the Company of Proha’s interests in ProjektihallintoProha Oy, Enterprise Management Systems Sarl, Artemis International S.p.A.,Solutions International SA, Artemis International Gmbh and ArtemisInternational Sarl.

 

Atthe date the Company was acquired by Proha, the Company had two projects indevelopment: Release 5 of the Company’s Views product line and PortfolioDirector. Neither of these projects was considered to have reachedtechnological feasibility at the acquisition date.  Approximately $2.3million of the purchase price consisted of in-process research and developmentexisting at August 24, 2000, which was pushed down to Legacy Artemisfinancial statements and recorded as research and development expense for thenine months ended December 31, 2000.

 

*Opus360/Proha Merger*

 

Asnoted above, in April 2001, Opus360 and Proha entered into the ShareExchange Agreement, pursuant to which, upon completion of the transactions contemplatedunder such agreement, Opus360 exchanged 80% of its post-transaction outstandingcommon stock for all of the capital stock of Legacy Artemis, and 19.9% of twoFinnish subsidiaries of Proha, Intellisoft OY and Accountor OY.  As aresult of the Share Exchange Transactions more fully described in Note 1, Prohaowns 80% of the outstanding common stock of Artemis.

 

Thepurchase price was determined using 80% of the market value (marketcapitalization) of Opus360’s interest in the post-merger combined entity, basedon the five day average closing share price of the Opus 360 common stock forthe two days prior to, the day of, and the two days subsequent to theannouncement and approval of the transaction, April 11, 2001.  Theassets acquired and liabilities assumed from Opus360, as the acquired entity,were recorded at their estimated fair values at July 31, 2001.

 

Theexcess of the estimated fair values of the identifiable net assets over thepurchase price was treated as negative goodwill, which was applied to reducethe value assigned to certain non-current assets.

 
|                                                                     |   | **Purchase  Price  Allocation**              |   |
|--------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                     |   | **(in  thousands,  except per share  data)** |   |
| Outstanding shares prior to Share Exchange  Transactions                 |   | 1,994                                        |   |
| Average closing price per share                                          |   | $                                            | 5.00   |   |
| Market value                                                             |   | 9,971                                        |   |
| Percentage of shares issued to acquirer                                  |   | 80                                           | %      |
| Market value issued to acquiror per Share Exchange  Agreement            |   | $                                            | 7,977  |   |
|                                                                     |   |                                         |   |
| Estimated fair value of net assets acquired                              |   | $                                            | 19,224 |   |
| Less market value issued to acquiror per Share  Exchange Agreement       |   | (7,977                                       | )      |
| Excess of estimated fair value of net assets  acquired over market value |   | 11,247                                       |   |
| Less acquisition costs                                                   |   | (747                                         | )      |
| Negative goodwill allocated                                              |   | $                                            | 10,500 |   |

 

Inthe opinion of management, the book value of liabilities and current assets acquiredat July 31, 2001 represents estimated fair value as they are generally liquidin nature.  The July 31, 2001 book valueof purchased software approximates fair value because it was acquired from anunrelated party in May 2001.  The July31, 2001 estimated fair value of capitalized software (relating to completedtechnology) and other noncurrent assets was based on an independentvaluation   The third-party valuationfirm also provided an opinion on the estimated fair value of the restrictedcommon stock issued by Opus360; such value was used to measure the purchaseprice in the Share Exchange Transactions.  Estimated fair value of netassets acquired principally consisted of the following:

 

F - 15

----

 
|                                      |   | **July 31,  2001** |   |
|-------------------------------------------|--------|-------------------------|--------|
|                                      |   | **(in  thousands)**     |   |
| Cash                                      |   | $                       | 13,555 |   |
| Prepaid expenses and other current assets |   | 1,269                   |   |
| Property, plant and equipment             |   | 7,631                   |   |
| Purchased software                        |   | 2,036                   |   |
| Capitalized software                      |   | 2,214                   |   |
| Other assets                              |   | 782                     |   |
| Total assets                              |   | 27,487                  |   |
| Current liabilities                       |   | (8,194                  | )      |
| Other liabilities                         |   | (69                     | )      |
| Net assets                                |   | $                       | 19,224 |   |

 

*PurchasePrice Allocation*

 

Negativegoodwill of approximately $10.5 million has been allocated on a pro-ratabasis to property and equipment ($6.3 million), purchased software ($1.5million), capitalized software ($1.9 million) and other assets ($0.6 million).

 

*Pro formainformation*

 

Thefollowing unaudited pro forma condensed financial data combine the historicalcombined and consolidated statements of operations of Legacy Artemis andOpus360, giving effect to the Share Exchange Transactions using the purchasemethod of accounting. The historical statements of operations for LegacyArtemis and Opus360 have been adjusted to conform the pro-forma financialstatement presentation of the combined companies. The pro forma combinedcondensed financial data for the years ended December 31, 2001 and 2000reflect the transaction as if it had occurred on January 1, 2000.

 
|                                                  |   | **Year ended  December 31,**                       |   |
|-------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                  |   | **2001**                                                |   | **2000** |   |
|                                                  |   | **(In  thousands, except per share data)  (unaudited)** |   |
| **Condensed combined statement of  operations data:** |   |                                                    |   |   |   |
| Revenues                                              |   | $                                                       | 69,372 |   | $ | 77,858 |   |
| Net loss                                              |   | (80,956                                                 | )      | (71,905 | ) |
| Basic and diluted loss per common share               |   | $                                                       | (0.32  | ) | $ | (0.29 | ) |

 

*Sale ofAccountor Oy*

 

InNovember 2002, the Company sold its 19.9% interest in Accountor Oy toPretax Ltd, an unrelated party.  Under the terms of the sale, theCompany’s gross proceeds were $0.8 million less transaction costs and purchasecommitments (net of reimbursements) of approximately $0.1 million.  TheCompany’s investment in Accountor Oy was carried at less than $0.1 million atthe time of sale.  Accordingly, the Company’s other income for the yearended December 31, 2002 includes a pretax gain of $0.7 million on the saleof Accountor Oy.  During 2003,subsequent events occurred that caused adjustments to the purchase price, asprovided in the original agreements. The result is the Company’s other income for the year endedDecember 31, 2003 includes a reduction to the 2002 pretax gain of $0.1 millionon the sale of Accountor Oy.  The finalpretax gain on the sale of Accountor Oy is $0.6 million.

 

*Sale ofABC Technologies- France*

 

InDecember 2002, the Company sold its interest in ABC Technologies – Franceto an unrelated party.  Under the terms of the sale, the Company collectedproceeds of approximately $0.3 million in 2003. Based in Paris, France, ABCTechnologies - France was managed by Artemis’ French subsidiary.  TheCompany’s investment in ABC Technologies was carried at approximately zero atthe time of sale.  Accordingly, the Company’s other income for the yearended December 31, 2002 includes a pretax gain of $0.3 million on the saleof ABC Technologies - France.  Based on achieving certain milestones, anadditional $0.1 million of contingent consideration was recorded during theyear ended December 31, 2003.

 

*Sale ofAssets of Software Productivity Research*

 

InOctober 2003, the Company entered into an asset purchase agreement for thesale of its Software Productivity Research (“SPR”) operations.  Cash consideration received for the sale ofSPR was $0.3 million.  In addition thebuyer assumed certain SPR liabilities.

 

F - 16

----

 

**Note 3.Trade Accounts Receivable**

 

AtDecember 31, 2003, 2002 and 2001, the breakdown of trade accountsreceivable was as follows:

 
|                         |   | **December 31,** |   |
|------------------------------|--------|-----------------------|--------|
|                         |   | **2003**              |   | **2002** |   | **2001** |   |
|                         |   | **(in  thousands)**   |   |
| Americas                     |   | $                     | 1,938  |   | $ | 3,354 |   | $ | 1,633 |   |
| EMEA                         |   | 10,101                |   | 9,477 |   | 7,557 |   |
| Japan                        |   | 1,383                 |   | 1,483 |   | 1,884 |   |
| Asia                         |   | 206                   |   | 279 |   | 391 |   |
| Total trade receivables, net |   | $                     | 13,628 |   | $ | 14,593 |   | $ | 11,465 |   |

 

Changesin the allowance for doubtful accounts receivable were as follows:

 
|                                       |   | **For the  years ended  December 31,** |   |
|--------------------------------------------|--------|---------------------------------------------|--------|
|                                       |   | **2003**                                    |   | **2002** |   | **2001** |   |
|                                       |   | **(in  thousands)**                         |   |
| Beginning balance                          |   | $                                           | (296   | ) | $ | (223 | ) | $ | (138 | ) |
| Provision for doubtful accounts receivable |   | (79                                         | )      | (157 | ) | (140 | ) |
| Write-offs                                 |   | 76                                          |   | 84 |   | 55 |   |
|                                       |   |                                        |   |   |   |   |   |
| Ending balance                             |   | $                                           | (299   | ) | $ | (296 | ) | $ | (223 | ) |

 

# **Note 4. Property and Equipment**

 

Propertyand equipment consist of the following:

 
|                                           |   | **December 31,** |   |
|------------------------------------------------|--------|-----------------------|--------|
|                                           |   | **2003**              |   | **2002** |   | **2001** |   |
|                                           |   | **(in  thousands)**   |   |
| Computer hardware                              |   | $                     | 5,402  |   | $ | 5,968 |   | $ | 5,452 |   |
| Computer software                              |   | 1,615                 |   | 1,442 |   | 1,598 |   |
| Leasehold improvements                         |   | 336                   |   | 341 |   | 354 |   |
| Furniture and fixtures                         |   | 1,255                 |   | 964 |   | 409 |   |
| Other                                          |   | 359                   |   | 70 |   | 108 |   |
|                                           |   | 8,967                 |   | 8,785 |   | 7,921 |   |
| Less accumulated depreciation and amortization |   | (7,775                | )      | (7,197 | ) | (5,194 | ) |
| Total                                          |   | $                     | 1,192  |   | $ | 1,588 |   | $ | 2,725 |   |

 

**Note 5.Intangible Assets**

 

Identifiableintangible assets consist of the following:

 
|                          |   | **December 31,** |   |
|-------------------------------|--------|-----------------------|--------|
|                          |   | **2003**              |   | **2002** |   | **2001** |   |
|                          |   | **(in  thousands)**   |   |
| Customer base                 |   | $                     | 9,163  |   | $ | 9,163 |   | $ | 9,163 |   |
| Current technologies          |   | 5,592                 |   | 5,592 |   | 5,592 |   |
|                          |   | 14,755                |   | 14,755 |   | 14,755 |   |
| Less accumulated amortization |   | (8,235                | )      | (4,118 | ) | — |   |
| Total                         |   | $                     | 6,520  |   | $ | 10,637 |   | $ | 14,755 |   |

 

F - 17

----

 

Intangibleassets are amortized on a straight-line basis over their expected useful livesof forty two months. During the fourth quarter of 2001, the Company evaluatedthe carrying values of its goodwill and identifiable intangible assets. An impairment charge of  $43.4 million was recorded in the year endedDecember 31, 2001.  Specifically, the significant decline in businessactivity generally and in software license revenues following the terroristattacks on New York City and Washington, DC, as well as the Company’s fourthquarter operating and cash flow losses, required an adjustment to the carryingvalue of long-lived assets.  Using discounted cash flow projections ofexpected returns from these assets, the Company determined that the carryingvalue of its goodwill and identifiable intangible assets should be reduced toapproximately $14.8 million.  During the years ended December 31,2003, 2002 and 2001 approximately $4.1 million, $4.1 million, and $18.8 million,respectively, of goodwill and intangible assets was amortized. Amortization expense incurred in 2001 was prior to the aforementionedimpairment of intangible assets in December 2001.  EffectiveJanuary 1, 2002, the Company established a new cost basis for itsintangible assets in accordance with SFAS No. 144, and began amortization ofsuch assets over management’s new estimated useful economic life of forty-twomonths.  Accordingly, the pre-January 1, 2002 accumulated amortization has been excluded from the tablein the preceding paragraph.

 

The Company’s proprietary products are not protected by patents.  However, to protect the Company’sintellectual property rights, the Company licenses its software products andrequires its customers to enter into license agreements that imposerestrictions on their ability to utilize the software or transfer the softwareto other users.  Additionally, theCompany seeks to avoid disclosure of its trade secrets through a number of means,including, but not limited to, requiring those persons with access to theCompany’s proprietary information to execute confidentiality agreements withthe Company and restricting access to the Company’s source code.  In addition, the Company protects itssoftware, documentation, templates and other written materials under trademark,trade secret and copyright laws.  Evenwith all of these efforts, there can be no assurance that such precautions willprovide meaningful protection from competition or that competitors will notindependently be able to develop similar technology.  If, in the future, litigation is necessary to enforce theCompany’s intellectual property rights, to protect the Company’s trade secrets,or to determine the validity and scope of the proprietary rights of others,such litigation could result in substantial costs and diversion of resourcesand could have a material adverse effect on the Company’s business, operatingresults and/or financial condition.  Asa result, ultimately, the Company may be unable, for financial or otherreasons, to enforce its rights under the various intellectual property laws asdescribed above.  In addition, the lawsof certain countries in which the Company’s products are or may be licensed maynot protect the Company’s products and intellectual property rights to the sameextent as laws of the United States.

 

The Company believes that its products do not infringe upon any validexisting proprietary rights of third parties.

 

 **Note 6. Debt**

 

InJune 2003, the Company paid off its Note Payable and line of credit withWells Fargo Foothill (“Foothill”) and declined the option to extend theunderlying Loan and Security Agreement with Foothill.  At December 31, 2003 and 2002, the note payable to Foothillwas zero and $0.7 million, respectively.

 

InAugust 2003, the Company agreed to issue a convertible note to LaurusMaster Fund, Ltd. (“Laurus”) who has extended a revolving line of credit for upto $5 million (the “Laurus Note”) to the Company.  At December 31,2003, the Laurus Note bore interest at a rate of 5%.  The Laurus Note has a three-year renewable term.  Borrowingsunder the Laurus Note are secured by an interest in the Company’s US and UnitedKingdom eligible accounts receivable, equipment, general intangibles (excludingintellectual property rights), inventories, negotiable collateral, and anyother assets that come into the possession of the Company. Borrowings under theline of credit are subject to maintenance of certain covenants includingminimum current ratio, tangible net worth, trailing twelve month EarningsBefore Interest, Taxes, Depreciation and Amortization, coverage of interest andprincipal payments and capital expenditure limitations.

 

SeeNote 19 for additional information regarding the Laurus Note.

 

F - 18

----

 

Interest paid for the year ended 2003, 2002 and 2001 was approximately$0.1 million, $0.2 million and $0.8 million, respectively.

 
|                                                                                                                                                                           |   | **December 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                                                                                                                           |   | **2003**              |   | **2002** |   | **2001** |   |
|                                                                                                                                                                           |   | **(in  thousands)**   |   |
|                                                                                                                                                                           |   |                  |   |   |   |   |   |
| Liability to Foothill Capital Corporation.                                                                                                                                     |   | $                     | — |   | $ | 683 |   | $ | 1,766 |   |
|                                                                                                                                                                           |   |                  |   |   |   |   |   |
| Note payable to Proha. Interest rate of 4%  annually which is payable on demand.                                                                                               |   | 177                   |   | 130 |   | 423 |   |
|                                                                                                                                                                           |   |                  |   |   |   |   |   |
| Finland government installment loans,  average effective interest rate of 2.3%, 3.6% and 4.2% for 2003, 2002 and  2001, respectively, payable through September 25, 2006. |   | 324                   |   | 245 |   | 161 |   |
|                                                                                                                                                                           |   |                  |   |   |   |   |   |
| Bank Societe Generale term loan due through  December 31, 2003, average effective interest rate of 4.0% for 2002 and  4.3% for 2001.                                      |   | —                |   | 127 |   | 173 |   |
|                                                                                                                                                                           |   |                  |   |   |   |   |   |
| Other long-term liabilities                                                                                                                                                    |   | 175                   |   | — |   | 95 |   |
|                                                                                                                                                                           |   | $                     | 676    |   | $ | 1,185 |   | $ | 2,618 |   |
| Less current portion of long term debt                                                                                                                                         |   | (352                  | )      | (950 | ) | (1,245 | ) |
| Long term debt, less current portion                                                                                                                                           |   | $                     | 324    |   | $ | 235 |   | $ | 1,373 |   |

 

**Note 7.Commitments**

 

TheCompany leases certain facilities and equipment under non-cancelable operatinglease agreements. Rent expense for the years ended December 31, 2003, 2002and 2001 was approximately $3.9 million, $4.2 million and $3.2 million,respectively.

 

Futureminimum rental commitments for the above operating leases are as follows:

 
| **Year ending  December 31,** |   | **(in  thousands)** |   |
|------------------------------------|--------|---------------------|--------|
| 2004                               |   | $                   | 3,136  |   |
| 2005                               |   | 2,783               |   |
| 2006                               |   | 1,611               |   |
| 2007                               |   | 158                 |   |
| 2008 & Thereafter              |   | 38                  |   |
| Total                              |   | $                   | 7,727  |   |

 

Subsequentto year-end, the Company announced the replacement of its CEO and president.The Company is currently engaged in additional restructuring activities toreduce the corporate infrastructure, streamline the business operations andreorganize product operations. On February 29, 2004, the Company accruedapproximately $323,000 in severance and other expenses related to the actionsdescribed above.

 

TheCompany has employment agreements and arrangements with its executive officersand certain other key employees. The agreements generally continue untilterminated by the executive or the Company, and provide for severance payments,bonuses or other benefits under certain circumstances.

 

F - 19

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**Note 8.Loss Per Common Share**

 

The following table setsforth the computation of basic and diluted loss per common share:

 
|                                                 |   | **For the  years ended  December 31,**   |   |
|------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                 |   | **2003**                                      |   | **2002** |   | **2001** |   |
|                                                 |   | **(in  thousands, except per share amounts)** |   |
| Numerator:                                           |   |                                          |   |   |   |   |   |
| Net loss                                             |   | $                                             | (7,891 | ) | $ | (3,948 | ) | $ | (59,764 | ) |
|                                                 |   |                                          |   |   |   |   |   |
| Denominator:                                         |   |                                          |   |   |   |   |   |
| Weighted average outstanding shares of common  stock |   | 9,965                                         |   | 9,965 |   | 8,816 |   |
| Dilutive effect of stock options and warrants        |   | —                                        |   | — |   | — |   |
| Common stock and equivalents                         |   | 9,965                                         |   | 9,965 |   | 8,816 |   |
|                                                 |   |                                          |   |   |   |   |   |
| Loss per common share                                |   |                                          |   |   |   |   |   |
| Basic                                                |   | $                                             | (0.79  | ) | $ | (0.40 | ) | $ | (6.78 | ) |
|                                                 |   |                                          |   |   |   |   |   |
| Diluted                                              |   | $                                             | (0.79  | ) | $ | (0.40 | ) | $ | (6.78 | ) |

 

Dilutedloss per common share for the years ended December 31, 2003, 2002 and 2001does not include the effect of stock options and warrants (see Note 15) sincetheir effect would be anti-dilutive.  Options and warrants outstanding atDecember 31, 2003, 2002 and 2001 approximated 1.2 million, 1.3 million and630,000, respectively.

 

**Note 9.Benefit Plans**

 

TheCompany has a defined contribution plan (“the Plan”) which qualifies underSection 401(k) of the Internal Revenue Code of 1986, as amended. The Plancovers all U.S. employees. Employees may contribute up to 15% of their annualcompensation. Employer contributions vest to the participants incrementallyover a period of five years. Company contributions to the Plan were zero duringthe years ended December 31, 2003 and 2002 and $0.1 million during theyear ended December 31, 2001.

 

TheCompany also has a defined benefit pension plan covering the employees of itsUnited Kingdom subsidiary. Company contributions are determined based upon apercentage, as determined by an actuary, of an eligible employee’s annualsalary.  Company contributions to the defined benefit pension plan duringthe years ended December 31, 2003, 2002 and 2001 were $0.2 million, $0.2million and $0.1 million, respectively.

 

Netdefined benefit pension cost included the following components:

 
|                                           |   | **For the  years ended  December 31,** |   |
|------------------------------------------------|--------|---------------------------------------------|--------|
|                                           |   | **2003**                                    |   | **2002** |   | **2001** |   |
|                                           |   | **(in  thousands)**                         |   |
| Service cost (benefits earned during the year) |   | $                                           | 175    |   | $ | 162 |   | $ | 180 |   |
| Interest cost on projected benefit obligation  |   | 356                                         |   | 322 |   | 320 |   |
| Expected return on plan assets                 |   | (286                                        | )      | (351 | ) | (374 | ) |
|                                           |   | $                                           | 245    |   | $ | 133 |   | $ | 126 |   |

 

F - 20

----

 

Otherpension data follows:

 
|                                           |   | **For the  years ended  December 31,** |   |
|------------------------------------------------|--------|---------------------------------------------|--------|
|                                           |   | **2003**                                    |   | **2002** |   | **2001** |   |
|                                           |   | **(in  thousands)**                         |   |
| Change in Benefit Obligation                   |   |                                        |   |   |   |   |   |
| Benefit obligation at beginning of year        |   | $                                           | 6,281  |   | $ | 5,022 |   | $ | 5,399 |   |
| Exchange Rate                                  |   | 871                                         |   | 599 |   | (159 | ) |
| Service cost                                   |   | 175                                         |   | 162 |   | 180 |   |
| Interest Cost                                  |   | 356                                         |   | 322 |   | 320 |   |
| Plan participant’s cost                   |   | 96                                          |   | 94 |   | 120 |   |
| Actuarial gain                                 |   | 929                                         |   | 197 |   | (808 | ) |
| Benefits paid                                  |   | (187                                        | )      | (115 | ) | (30 | ) |
| Benefit obligation at end of year              |   | $                                           | 8,521  |   | $ | 6,281 |   | $ | 5,022 |   |
|                                           |   |                                        |   |   |   |   |   |
| Change in Plan Assets                          |   |                                        |   |   |   |   |   |
| Fair value of plan assets at beginning of year |   | $                                           | 4,108  |   | 4,405 |   | 4,698 |   |
| Exchange Rate                                  |   | 367                                         |   | 498 |   | (139 | ) |
| Actual return on plan assets                   |   | (856                                        | )      | (975 | ) | (393 | ) |
| Employer contribution                          |   | 225                                         |   | 200 |   | 148 |   |
| Plan participants’ contributions          |   | 96                                          |   | 94 |   | 120 |   |
| Benefits paid                                  |   | (187                                        | )      | (114 | ) | (30 | ) |
| Fair value of plan assets at end of year       |   | $                                           | 3,753  |   | $ | 4,108 |   | $ | 4,405 |   |

 
|                                |   | **December 31,**   |   |
|-------------------------------------|--------|--------------------|--------|
|                                |   | **2003**           |   | **2002** |   | **2001** |   |
|                                |   | **(in thousands)** |   |
| **Reconciliation of Funded Status** |   |               |   |   |   |   |   |
| Funded Status                       |   | $                  | (4,768 | ) | $ | (2,172 | ) | $ | (617 | ) |
| Unrecognized net actuarial loss     |   | —             |   | — |   | — |   |
| Unrecognized prior service cost     |   | —             |   | — |   | — |   |
| Accrued benefit cost                |   | $                  | (4,768 | ) | $ | (2,172 | ) | $ | (617 | ) |

 

 

Aspermitted by SFAS No. 87, *Employers’Accounting for Pensions,*actuarial gains and losses are generallynot amortized to pension expense in the period in which they arise when thegain/loss is not yet included in the market-related value of plan assets. GAAP allows such deferral accounting in any period in which thebeginning-of-the-year unrecognized actuarial net gain or loss does not exceedthe greater of 10% of the projected benefit obligation or the market-relatedvalue of plan assets.

 

Forthe years ended December 31, 2003, 2002 and 2001, the Company’s definedbenefit pension plan was eligible for the deferral accounting described in thepreceding paragraph.  Thus pension expense for such years does not includeany amortization of the actuarial net change in the market-related value ofplan assets.

 

Theprimary actuarial assumptions used in determining the above benefit obligationamounts were as follows:

 
|                                 |   | **For the  years ended  December 31,** |   |
|--------------------------------------|--------|---------------------------------------------|--------|
|                                 |   | **2003**                                    |   | **2002** |   | **2001** |   |
| Discount Rate                        |   | 5                                           | %      | 6 | % | 6 | % |
| Increase in Future Compensation      |   | 5                                           | %      | 4 | % | 5 | % |
| Annual Rate of Return on Plan Assets |   | 7                                           | %      | 7 | % | 8 | % |

 

# **Note 10. Income Taxes**

 

Thecomponents of the income tax expense (benefit) are presented below:

 
|                    |   | **For the  years ended  December 31,** |   |
|-------------------------|--------|---------------------------------------------|--------|
|                    |   | **2003**                                    |   | **2002** |   | **2001** |   |
|                    |   | **(in  thousands)**                         |   |
| Current                 |   | $                                           | 648    |   | $ | 226 |   | $ | 702 |   |
| Deferred taxes          |   | (349                                        | )      | 254 |   | (10,372 | ) |
|                    |   |                                        |   |   |   |   |   |
| Total expense (benefit) |   | $                                           | 299    |   | $ | 480 |   | $ | (9,670 | ) |

 

F - 21

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Forthe year ended December 31, 2003, current income tax expense consists ofapproximately $0.7 million of foreign expense and approximately $0.4 million ofstate benefits.  The difference between the total expected tax (benefit)using the federal statutory rate of 34% and the actual tax expense (benefit)for the years ended December 31, 2003, 2002 and 2001 is accounted for asfollows:

 
|                                                          |   | **For the  years ended  December 31,** |   |
|---------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                          |   | **2003**                                    |   | **2002** |   | **2001** |   |
|                                                          |   | **(in  thousands)**                         |   |
| Expected federal income tax benefit at  statutory rate of 34% |   | $                                           | (2,581 | ) | $ | (1,179 | ) | $ | (23,460 | ) |
| Effect of permanent differences                               |   | (95                                         | )      | 1,447 |   | 11,550 |   |
| State income tax expense (net of federal  benefit)            |   | 24                                          |   | 133 |   | (1,248 | ) |
| Acquired temporary differences                                |   | —                                      |   | — |   | (6,646 | ) |
| Other                                                         |   | (344                                        | )      | 539 |   | 489 |   |
| Change in valuation allowance                                 |   | 3,295                                       |   | (611 | ) | 9,380 |   |
| Foreign tax differential                                      |   | —                                      |   | 151 |   | 265 |   |
|                                                          |   |                                        |   |   |   |   |   |
| Income tax expense (benefit)                                  |   | $                                           | 299    |   | $ | 480 |   | $ | (9,670 | ) |

 

Loss before income taxes andminority interest is analyzed as follows:

 
|                                                  |   | **For the  years ended  December 31,** |   |
|-------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                  |   | **2003**                                    |   | **2002** |   | **2001** |   |
|                                                  |   | **(in  thousands)**                         |   |
| Domestic                                              |   | $                                           | (7,654 | ) | $ | (2,276 | ) | $ | (63,325 | ) |
| Foreign                                               |   | 62                                          |   | (1,192 | ) | (6,204 | ) |
| Total loss before income taxes and minority  interest |   | $                                           | (7,592 | ) | $ | (3,468 | ) | $ | (69,529 | ) |

 

F - 22

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Thecomponents of the net accumulated deferred income tax assets/(liabilities) asof December 31, 2003, 2002 and 2001 are as follows:

 

|                                      |   | **December 31,** |   |
|-------------------------------------------|--------|-----------------------|--------|
|                                      |   | **2003**              |   | **2002** |   | **2001** |   |
|                                      |   | **(in thousands)**    |   |
| Deferred tax assets:                      |   |                  |   |   |   |   |   |
| Net operating loss carryforwards          |   | $                     | 9,035  |   | $ | 7,099 |   | $ | 8,849 |   |
| Stock option expense                      |   | 2,129                 |   | 2,129 |   | 2,129 |   |
| Expenses based on issue of stock options  |   | 752                   |   | 752 |   | 752 |   |
| Accumulated depreciation and amortization |   | —                |   | 2,000 |   | 2,142 |   |
| Allowance for doubtful accounts           |   | 27                    |   | 118 |   | 449 |   |
| Accrued expenses                          |   | 315                   |   | 401 |   | 349 |   |
|                                      |   | 12,258                |   | 12,499 |   | 14,670 |   |
| Deferred tax liabilities:                 |   | (380                  | )      | (4,236 | ) | (5,543 | ) |
| Subtotal                                  |   | 11,878                |   | 8,263 |   | 9,127 |   |
| Valuation allowance                       |   | (12,358               | )      | (9,063 | ) | (9,674 | ) |
| Net deferred tax liability                |   | $                     | (480   | ) | $ | (800 | ) | $ | (547 | ) |

 

Thecomponents of deferred tax liabilities at December 31, 2003, 2002 and 2001relate primarily to the recording of non-deductible identifiable intangibleassets from the acquisition of Legacy Artemis by Proha in August 2000 andthe contribution of businesses to Legacy Artemis by Proha inDecember 2000.

 

Incometaxes paid for the years ended December 31, 2003, 2002 and 2001 were lessthan $0.1 million for each of the reporting periods.  The Company has aU.S. federal tax net operating loss carryforward (“NOL”) of approximately $23million at December 31, 2003 that begin expiring in 2009 and U.S. stateNOL’s with expiration dates ranging from five to 20 years.  Foreign NOL’sthat may be allowed under the tax laws in applicable foreign countries are notsignificant.

 

Theutilization of some or all of the domestic NOL’s may be severely restricted nowor in the future by the change in ownership provisions of Section 382 ofthe Internal Revenue Code of 1986, as amended. In addition, utilization of theCompany’s California NOLs for years beginning in 2002 and 2003 has beensuspended under state law.

 

F - 23

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**Note 11:Segment and Geographic Information**

 

Incomefrom operations is assigned by region based upon management responsibility forsuch items.  The Company has redesigned its management responsibilities inearly 2004 to cover four geographic areas: Americas, EMEA (Europe, Middle East,and Africa), Japan, and Asia.  Eachgeographic area is managed by an executive vice president of the Company.  The following table presents informationabout the Company’s operations by geographic area for each of the years endedDecember 31, 2003, 2002 and 2001:

 

**Twelve Months Ended December 31, 2003**

 
| **(in thousands)**      |   | **Americas** |    | **EMEA** |   | **Japan** |   | **Asia** |   | **Total** |   |
|-------------------------|--------|--------------|---------|----------|--------|-----------|--------|----------|--------|-----------|--------|
| Revenue:                |   |         |    |     |   |      |   |     |   |      |   |
| Software                |   | $            | 2,652   |     | $      | 9,009     |   | $        | 1,157  |      | $      | 468 |   | $ | 13,286 |   |
| Support                 |   | 5,275        |    | 9,241    |   | 1,751     |   | 301      |   | 16,568    |   |
| Services                |   | 7,715        |    | 16,173   |   | 3,165     |   | 384      |   | 27,437    |   |
| Total revenue           |   | 15,642       |    | 34,423   |   | 6,073     |   | 1,153    |   | 57,291    |   |
|                    |   |         |    |     |   |      |   |     |   |      |   |
| Cost of revenue:        |   |         |    |     |   |      |   |     |   |      |   |
| Software                |   | 134          |    | 369      |   | 149       |   | 25       |   | 677       |   |
| Support                 |   | 1,577        |    | 2,892    |   | 522       |   | 111      |   | 5,102     |   |
| Services                |   | 5,246        |    | 12,968   |   | 1,718     |   | 318      |   | 20,250    |   |
| Total cost of revenue   |   | 6,957        |    | 16,229   |   | 2,389     |   | 454      |   | 26,029    |   |
|                    |   |         |    |     |   |      |   |     |   |      |   |
| Gross margin            |   | 8,685        |    | 18,194   |   | 3,684     |   | 699      |   | 31,262    |   |
|                    |   |         |    |     |   |      |   |     |   |      |   |
| Operating income (loss) |   | $            | (10,265 | )        | $      | 1,047     |   | $        | 1,374  |      | $      | (248 | ) | $ | (8,092 | ) |

 

**Twelve Months Ended December 31, 2002**

 
| **(in thousands)**      |   | **Americas** |   | **EMEA** |   | **Japan** |   | **Asia** |   | **Total** |   |
|-------------------------|--------|--------------|--------|----------|--------|-----------|--------|----------|--------|-----------|--------|
| Revenue:                |   |         |   |     |   |      |   |     |   |      |   |
| Software                |   | $            | 3,746  |     | $      | 9,332     |   | $        | 1,612  |      | $      | 380 |   | $ | 15,070 |   |
| Support                 |   | 5,726        |   | 8,027    |   | 1,733     |   | 204      |   | 15,690    |   |
| Services                |   | 18,602       |   | 15,281   |   | 2,990     |   | 1,031    |   | 37,904    |   |
| Total revenue           |   | 28,074       |   | 32,640   |   | 6,335     |   | 1,615    |   | 68,664    |   |
|                    |   |         |   |     |   |      |   |     |   |      |   |
| Cost of revenue:        |   |         |   |     |   |      |   |     |   |      |   |
| Software                |   | 228          |   | 1,183    |   | 305       |   | 18       |   | 1,734     |   |
| Support                 |   | 1,901        |   | 3,122    |   | 1,360     |   | 6        |   | 6,389     |   |
| Services                |   | 11,454       |   | 10,795   |   | 2,294     |   | 44       |   | 24,587    |   |
| Total cost of revenue   |   | 13,583       |   | 15,100   |   | 3,959     |   | 68       |   | 32,710    |   |
|                    |   |         |   |     |   |      |   |     |   |      |   |
| Gross margin            |   | 14,491       |   | 17,540   |   | 2,376     |   | 1,547    |   | 35,954    |   |
|                    |   |         |   |     |   |      |   |     |   |      |   |
| Operating income (loss) |   | $            | (6,155 | )        | $      | 1,774     |   | $        | 328    |      | $      | 307 |   | $ | (3,746 | ) |

 

F - 24

----

 

**Twelve Months Ended December 31, 2001**

 
| **(in thousands)**      |   | **Americas** |    | **EMEA** |   | **Japan** |   | **Asia** |   | **Total** |   |
|-------------------------|--------|--------------|---------|----------|--------|-----------|--------|----------|--------|-----------|--------|
| Revenue:                |   |         |    |     |   |      |   |     |   |      |   |
| Software                |   | $            | 3,795   |     | $      | 9,094     |   | $        | 1,875  |      | $      | 341 |   | $ | 15,105 |   |
| Support                 |   | 5,814        |    | 7,648    |   | 1,907     |   | 143      |   | 15,512    |   |
| Services                |   | 16,974       |    | 15,437   |   | 3,465     |   | 1,153    |   | 37,029    |   |
| Total revenue           |   | 26,583       |    | 32,179   |   | 7,247     |   | 1,637    |   | 67,646    |   |
|                    |   |         |    |     |   |      |   |     |   |      |   |
| Cost of revenue:        |   |         |    |     |   |      |   |     |   |      |   |
| Software                |   | 179          |    | 1,515    |   | 767       |   | 61       |   | 2,522     |   |
| Support                 |   | 2,195        |    | 2,945    |   | 1,586     |   | (21      | )      | 6,705     |   |
| Services                |   | 10,339       |    | 10,833   |   | 2,273     |   | 425      |   | 23,870    |   |
| Total cost of revenue   |   | 12,713       |    | 15,293   |   | 4,626     |   | 465      |   | 33,097    |   |
|                    |   |         |    |     |   |      |   |     |   |      |   |
| Gross margin            |   | 13,870       |    | 16,886   |   | 2,621     |   | 1,172    |   | 34,549    |   |
|                    |   |         |    |     |   |      |   |     |   |      |   |
| Operating income (loss) |   | $            | (63,680 | )        | $      | (2,172    | )      | $        | 62     |      | $      | (693 | ) | $ | (66,483 | ) |

 

Identifiableassets are assigned by region based upon management responsibility for suchitems.  The following table presents information about the Company’sidentifiable assets by geographic region:

 
|         |   | **December 31,** |   |
|--------------|--------|-----------------------|--------|
|         |   | **2003**              |   | **2002** |   | **2001** |   |
|         |   |                  |   | **(in thousands)** |   |   |   |
| Americas     |   | $                     | 10,477 |   | $ | 19,366 |   | $ | 22,200 |   |
| EMEA         |   | 15,929                |   | 16,342 |   | 12,659 |   |
| Japan        |   | 2,160                 |   | 2,313 |   | 2,721 |   |
| Asia         |   | 494                   |   | 984 |   | 990 |   |
| Consolidated |   | $                     | 29,060 |   | $ | 39,005 |   | $ | 38,570 |   |

 

See Note 13 for disclosuresregarding major customers.

 

**Note 12.Other Related Party Transactions**

 

AtDecember 31, 2003 and 2002, the Company had no other receivables due fromProha and in 2001 had $0.2 million due from Proha, which owns approximately 80%of the Company’s outstanding common stock. At December 31, 2003 and 2002,the Company had other payables to Proha of $0.2 million and $0.1 million,respectively.

 

OnMarch 1, 2004**,** theCompany’s wholly-owned subsidiary in Finland, Artemis Finland Oy (“ArtemisFinland”), entered into a loan agreement with a financial institution in theamount of approximately $3.1 million. The loan becomes due on March 1,2006 and accrues interest at 0.5 percentage points above the 3-month Euriborrate per annum, which is payable on a quarterly basis. The loan is secured bycash collateral provided byProha equal to the loan amount and a security interest in all of ArtemisFinland’s assets.  Artemis and Prohahave executed a letter of commitment, whereby Proha agreed to provide theCompany sufficient advance notice of its intent to demand the return of itscollateral from the financial institution to give the Company a minimum of 90days to provide additional collateral, if necessary, or repay the loan.

 

There are several related party agreements in place between ArtemisFinland and Proha or its subsidiaries and investees as further described below:

 

During 2002, Artemis Finland incurred $296,000 in fees for certainbusiness consulting, legal and accounting services provided by Proha. In 2001,Artemis Finland incurred a general management fee of  $401,000 for management services provided by Proha.

 

Additionally, Artemis Finland shares office space with Proha, for whichProha charges Artemis Finland a share of its office-

 

F - 25

----

 

related costs (“Office Allocation Charge”), such as rent, utilities,telecommunication costs, office maintenance and certain other business costs.The Office Allocation Charge was $332,000, $278,000 and  $170,000 for the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

Accountor Oy, a provider of accounting and payroll services, which wasowned by Proha (80.1%) and Artemis (19.9%) through November 2002 until itssale to an unrelated party, is providing certain bookkeeping, payroll andreporting services (“Service Charge”) to Artemis Finland.  The Service Charge was  $78,000, $79,000 and $95,000 for the yearsended December 31, 2003, 2002 and 2001, respectively.

 

Intellisoft Oy, an application service provider, which is owned byProha (80.1%) and Artemis (19.9%), is providing certain application hosting andother services to Artemis Finland and its customers (“ASP Services Fee”). TheASP Services Fee was  $247,000, $340,000and $242,000 for the years ended December 31, 2003, 2002 and 2001,respectively.

 

Datamar Oy, a subsidiary of Proha (90%), is providing certain projectmanagement and programming services to Artemis Finland (“Management ProgrammingFee”). The Management Programming Fee charged to Artemis Finland was  $223,000, $326,000 and  $513,000 for the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

Tesnet Group Oy (formerly Intellitest International Oy), a companypartially owned by Proha (35%), provides certain software testing services toArtemis Finland (“Testing Services”). These Testing Services were $219,000, $210,000 and $269,000 for theyears ended December 31, 2003, 2002 and 2001, respectively.

 

Artemis Finland is a distributor of software products provided bySafran Software Solutions AS (“Safran”), a Norwegian company wholly owned byProha. The royalty paid by Artemis Finland to Safran was $46,000, $124,000 and$0 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

Artemis Finland has provided certain software development services toProCountor International Oy (“ProCountor”), a company majority owned by Proha(63%). Artemis Finland has charged  $0,$16,000 and $0 to ProCountor for such software development services for theyears ended December 31, 2003, 2002 and 2001, respectively. ProCountor hasalso provided certain software development services to Artemis Finland Oyduring year 2003 and charged a fee for use of a web-based travel and expenseclaims program of $11,000 for the year ended December 2003.

 

Artemis Finland cooperated with Futura One Oy, a company majority ownedby Proha (51%). Artemis Finland has charged $0, $16,000 and $27,000 to Futura One for such software developmentservices for the years ended December 31, 2003, 2002 and 2001,respectively. Artemis Finland has also charged $2,000 to Futura One for accounting services for the year endedDecember 31, 2003.

 

Artemis Finland also cooperated with Softagent Oy which is providingcertain programming services to Artemis Finland (“Programming Fee”). TheProgramming Fee charged to Artemis Finland was $29,000, $56,000 and  $0 for theyears ended December 31, 2003, 2002 and 2001, respectively.

 

AtDecember 31, 2003, 2002 and 2001, the Company maintained the followingequity holdings in joint ventures, which are accounted for under the equitymethod, with the exception of Scandinavia and the Netherlands, which areaccounted for under the cost method.  The Company records its equityinterest in losses first to the investment balance, then against loans oradvances receivable.

 
|                           |   |              |   | **At  December 31, 2003** |   | **for the  year ended  December 31,2003** |   |
|--------------------------------|--------|-------------------|--------|--------------------------------|--------|------------------------------------------------|--------|
|                           |   | **Percent  Held** |   | **Investment**                 |   | **Total  Investee  Assets**                    |   | **Artemis  Receivable** |   | **Total  Investee  Revenue** |   | **Investor  Net Income  (Loss)** |   |
|                           |   |              |   |                           |   |                                           |   | **(in  thousands)** |   |   |   |   |   |
| Metier Scandinavia AS (Norway) |   | 9.9               | %      | $                              | 44     |                                           | $      | 3,871 |   | $ | 2,242 |   | $ | 5,170 |   | $ | 593 |   |
| Metier Plancon BV              |   | 11.8              | %      | 121                            |   | 73                                             |   | 13 |   | 341 |   | (65 | ) |
| DA Management Solutions        |   | 29.0              | %      | 4                              |   | —                                         |   | — |   | — |   | — |   |
| Changepoint France             |   | 40.0              | %      | 344                            |   | 629                                            |   | 700 |   | 229 |   | (268 | ) |
| Other Distributors             |   | 0                 | %      |                           |   | —                                         |   | 74 |   | — |   | — |   |
|                           |   |              |   | $                              | 513    |                                           | $      | 4,573 |   | $ | 3,029 |   | $ | 5,740 |   | $ | 260 |   |

 

F - 26

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|                                           |   |              |   | **At December 31, 2002** |   | **for the year ended  December 31, 2002** |   |
|------------------------------------------------|--------|-------------------|--------|-------------------------------|--------|------------------------------------------------|--------|
|                                           |   | **Percent  Held** |   | **Investment**                |   | **Total  Investee  Assets**                    |   | **Artemis  Receivable** |   | **Total  Investee  Revenue** |   | **Investor  Net Income  (Loss)** |   |
|                                           |   |              |   | **(in thousands)**            |   |
| Metier Scandinavia AS (Norway)                 |   | 9.9               | %      | $                             | 44     |                                           | $      | 4,081 |   | $ | 221 |   | $ | 3,783 |   | $ | 800 |   |
| Metier International Holdings BV (Holland)     |   | 19.0              | %      | 121                           |   | 960                                            |   | 58 |   | 3,356 |   | (4 | ) |
| Accountor Oy (See note 2) & Intellisoft Oy |   | 19.9              | %      | —                        |   | 714                                            |   | — |   | 1,011 |   | (536 | ) |
| DA Management Solutions                        |   | 29.0              | %      | 4                             |   | —                                         |   | — |   | — |   | — |   |
| Changepoint France                             |   | 40.0              | %      | 204                           |   | 909                                            |   | — |   | 660 |   | (910 | ) |
| Other Distributors                             |   | 0                 | %      | —                        |   | —                                         |   | 143 |   | — |   | — |   |
|                                           |   |              |   | $                             | 373    |                                           | $      | 6,664 |   | $ | 422 |   | $ | 8,810 |   | $ | (650 | ) |

 
|                                       |   |              |   | **At December 31, 2001** |   | **for the year ended  December 31, 2001** |   |
|--------------------------------------------|--------|-------------------|--------|-------------------------------|--------|------------------------------------------------|--------|
|                                       |   | **Percent  Held** |   | **Investment**                |   | **Total  Investee  Assets**                    |   | **Artemis  Receivable** |   | **Total  Investee  Revenue** |   | **Investor  Net Income  (Loss)** |   |
|                                       |   |              |   | **(in thousands)**            |   |
| Metier Scandinavia AS (Norway)             |   | 9.9               | %      | $                             | 44     |                                           | $      | 3,536 |   | $ | 233 |   | $ | 3,035 |   | $ | 415 |   |
| Metier International Holdings BV (Holland) |   | 19.0              | %      | 121                           |   | 1,325                                          |   | 89 |   | 3,517 |   | 110 |   |
| Accountor Oy & Intellisoft Oy          |   | 19.9              | %      | 168                           |   | 1,671                                          |   | — |   | 5,222 |   | (396 | ) |
| DA Management Solutions                    |   | 29.0              | %      | 4                             |   |                                           |   |   |   | — |   | — |   |
| Changepoint France                         |   | 40.0              | %      | —                        |   | 763                                            |   | 394 |   | 626 |   | (863 | ) |
| Other Distributors                         |   | 0                 | %      |                          |   | —                                         |   | 353 |   | — |   | — |   |
|                                       |   |              |   | $                             | 337    |                                           | $      | 7,295 |   | $ | 1,069 |   | $ | 12,400 |   | $ | (734 | ) |

 

In September 2000, ArtemisInternational France Sarl (“Artemis France”) entered into a joint ventureagreement (the “Agreement”) with the Canadian company, Changepoint Corporation(“Changepoint”) and established the joint venture, Changepoint France Sarl(“Changepoint France”).  Artemis Franceand Changepoint own 40% and 60% of Changepoint France, respectively.  The Agreement provides for a put and calloption for Artemis France to sell and Changepoint to purchase the 40% interestheld by Artemis France under certain conditions.  Management is considering exercising its put option to sell its40% interest in Changepoint France to Changepoint for an amount equal to itscash and investment in Changepoint France. As of December 31, 2003 the total investment, including receivables andloans due to Artemis France was $1.7 million.

 

**Note 13.Concentration of Credit Risk**

 

Duringthe years ended December 31, 2003, 2002 and 2001, one client, LockheedMartin Corporation, accounted for approximately $5.7 million (about 10%), $12.3million (about 18%) and $8.1 million (about 12%), respectively, of consolidatedrevenue.  Substantially all of this revenue was generated in the UnitedStates.

 

|                         |   | **December 31,** |   |
|------------------------------|--------|-----------------------|--------|
|                         |   | **2003**              |   | **2002** |   | **2001** |   |
|                         |   |                  |   | **(in thousands)** |   |   |   |
| Americas                     |   | $                     | 1,938  |   | $ | 3,354 |   | $ | 1,633 |   |
| EMEA                         |   | 10,101                |   | 9,477 |   | 7,557 |   |
| Japan                        |   | 1,383                 |   | 1,483 |   | 1,884 |   |
| Asia                         |   | 206                   |   | 279 |   | 391 |   |
| Total trade receivables, net |   | $                     | 13,628 |   | $ | 14,593 |   | $ | 11,465 |   |

 

TheCompany generally does not require collateral from its customers.

 

**Note 14.Stockholders’ Equity**

 

Prohacontributed various subsidiaries, valued at $0.4 million to Legacy Artemis onJanuary 3, 2001. During the year ended December 31, 2001, Prohacancelled shares it had issued to Legacy Artemis, resulting in a decrease ofapproximately $2.8 million in additional paid in capital.

 

OnJuly 31, 2001, the date Opus360 was acquired by Legacy Artemis, Opus360had approximately 2 million shares of common stock outstanding. Stockholders’equity has been retroactively restated to reflect the shares issued by Opus360in connection with the Share Exchange Agreement (See Note 1). The retroactivelyrestated shares reflect the combined amount of shares issued to Proha inconnection with both the first tranche of approximately 3.0 million shares andthe second tranche of approximately 5 million

shares totalingapproximately 8.0 million shares. The shares newly issued by Opus360 werevalued at approximately $8.0 million and represented the purchase price.

 

TheCompany’s aggregate common shares outstanding on a retroactively restated basisat December 31, 2003 of approximately 10 million includes the historicalOpus360 2.0 million shares and the additional Opus360 shares issued inconnection with the acquisition.  (See Notes 1 and 2.)

 

Duringthe year ended December 31, 2002 the Company recovered certain notes andaccounts receivable, carried at approximately $0.6 million, which had beenwritten off prior to the Company’s reverse merger transaction.  Since therecovered amounts had not been included in the calculation of net assets inconjunction with the original accounting for the merger, the recoveries wererecorded as adjustments to the Company’s additional paid in capital.

 

Duringthe year ended December 31, 2003 the Company entered into a SecurityAgreement, Secured Convertible Note, Registration Rights Agreement and CommonStock Purchase Warrant, with Laurus; see Note 19.  These warrants resulted in an increase in additional paid incapital of $0.2 million.

 

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**Note 15.Stock Options and Warrants:**

 

*StockOptions*

 

TheCompany has granted options to purchase the Company’s restricted common stockunder various plans to employees and directors.  All stock option plansare administered by the Compensation Committee of the Board of Directors, whichdetermines the terms of the options granted, including the exercise price, thenumber of shares subject to option, and the vesting period.  Optionsgenerally vest over terms of three to five years and have a maximum life of tenyears.

 

Thestock option plans adopted by Opus360 prior to the consummation of the ShareExchange Transactions, and the related stock options continue in full force andeffect.  Even though Legacy Artemis is the acquiror for accountingpurposes in the Share Exchange Transactions, Opus360 as a legal entity survivedthe consummation of such transaction. Options granted under Opus 360 plans areredeemable in the common stock of Artemis. The following description of theCompany’s stock option plans reflects the stock option plans of Opus 360 andLegacy Artemis prior to the merger, and the status of the following plans afterJuly 31, 2001.

 

•                  The 1998 Stock Option Plan (the “1998 Plan”)provided for the issuance of 0.2 million options.  Options granted,exercised or cancelled under the plan are 0.2 million, 35,500 and 0.2 million,respectively, leaving approximately 0.2 million options available under theplan and 40,000 outstanding as of December 31, 2003.  As options become available due tocancellation and forfeiture, they are added to the pool of options availablefor grant under the 2000 Stock Option Plan.

 

•                  The 2000 Stock Option Plan (the “2000 Plan”)provides for the granting of incentive and non-qualified stock options toemployees, board members and advisors.  When the 2000 Plan was adopted inMarch of 2000 it provided for the issuance of 0.3 million options. However, the 2000 Plan includes scheduled increases in options available forgrant equal to 5% of the Company’s outstanding common stock to a maximum of 1.2million options.  On January 1, 2003 the 2000 Plan reached themaximum of 1.2 million options available for grant.  In addition, 0.2million options granted under the 1998 Plan and subsequently cancelled areavailable for grant under the 2000 Plan.  Options granted, exercised andcancelled under the 2000 Plan are 0, 619 and 360,000 respectively, leaving460,000 options available under the 2000 Plan, including the cancelled 1998Plan options, and approximately 900,000 options outstanding as ofDecember 31, 2003.

 

•                  The 2000 Non-Employee Directors’ Plan (the“Non-Employee Directors Plan”) provides for automatic, non-discretionary grantsof up to 45,000 non-qualified stock options to non-employee boardmembers.  Approximately 1,000 options have been cancelled and 41,000options granted under the Non-Employee Directors Plan remain outstanding atDecember 31, 2003.

 

•                  The Company assumed non-qualified stockoptions granted to certain key former employees of Opus360.  Approximately47,000 of these stock options with an exercise price of $250 are outstandingand exercisable as of December 31, 2003.  The options are exercisableuntil February 2010.

 

•                  The Company also assumed non-qualified stockoptions granted to other employees of Opus360 who became Artemis employees afterthe Share Exchange Transactions.  At December 31, 2003, approximately4,000 of the options with a weighted average exercise price of $146.25 remainedoutstanding.

 

*Warrants*

 

Therewere 127,588 warrants to purchase Company common stock outstanding andexercisable at December 31, 2003. Of those, 125,000 warrants, with exercise prices of $3.41, $4.10, and$4.78 per share, respectively were issued to Laurus (see Note 19).  The warrant permits Laurus to purchase up to50,000, 50,000, and 25,000 shares of the Company’s restricted common stock forthe respecting exercise prices stated above. The warrant exercise prices and the number of shares underlying thewarrant are subject to anti-dilution adjustments for stock splits, combinationsand dividends.    The term of thewarrants is ten years.  The exerciseprices of the remaining warrants range from $20.75 to $46.25 and they expire in2004 through 2006.

 

Thefollowing tables summarize information concerning outstanding options andwarrants at December 31, 2003:

 

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|                                  |   | **Stock  Options  and Warrants** |   | **Weighted  Average  Exercise  Price** |   |
|---------------------------------------|--------|----------------------------------|--------|----------------------------------------|--------|
|                                  |   | **(In thousands)**               |   |                                   |   |
| Outstanding at December 31, 2001 |   | 630                              |   | $                                      | 71.01  |   |
| Granted                               |   | 836                              |   | 1.43                                   |   |
| Exercised                             |   | —                           |   | —                                 |   |
| Cancelled                             |   | (156                             | )      | 51.49                                  |   |
| Outstanding at December 31, 2002 |   | 1,310                            |   | 28.88                                  |   |
| Granted                               |   | 125                              |   | 3.95                                   |   |
| Exercised                             |   | (3                               | )      | 1.50                                   |   |
| Cancelled                             |   | (263                             | )      | 19.37                                  |   |
| Outstanding at December 31, 2003 |   | 1,169                            |   | 28.33                                  |   |
|                                  |   |                             |   |                                   |   |
| Exercisable at December 31, 2001 |   | 413                              |   |                                   |   |
| Exercisable at December 31, 2002 |   | 466                              |   |                                   |   |
| Exercisable at December 31, 2003 |   | 712                              |   |                                   |   |
|                                       |        |                                  |        |                                        |        |  |

 
|                          |   | **Options  and Warrants Outstanding**                |   | **Options  and Warrants**                           |   |
|-------------------------------|--------|------------------------------------------------------|--------|-----------------------------------------------------|--------|
|                          |   |                                                 |   | **Weighted**                                        |   |   |   | **Exercisable** |   |
| **Range of  Exercise Prices** |   | **Number  Outstanding  at  December 31,  2003** |   | **Average  Remaining  Contractual  Life  in Years** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable  at  December 31,  2003** |   | **Weighted  Average  Exercise  Price** |   |
|                          |   |                                                 |   | **(In  thousands)**                                 |   |   |   |   |   | **(In  thousands)** |   |   |   |
| $                             | — |                                                 | $      | 27.50                                               |   | 1,016 |   | 5.4 |   | $ | 2.24 |   | 561 |   | $ | 2.90 |   |
| 27.50                         |   | 55.00                                                |   | 3                                                   |   | 4.7 |   | 39.19 |   | 3 |   | 39.14 |   |
| 55.00                         |   | 82.50                                                |   | 8                                                   |   | 6.7 |   | 70.89 |   | 7 |   | 71.76 |   |
| 82.50                         |   | 110.00                                               |   | 36                                                  |   | 6.6 |   | 94.40 |   | 36 |   | 94.40 |   |
| 110.00                        |   | 137.50                                               |   | 3                                                   |   | 6.4 |   | 123.50 |   | 3 |   | 123.50 |   |
| 220.00                        |   | 247.50                                               |   | 9                                                   |   | 6.2 |   | 227.75 |   | 8 |   | 227.75 |   |
| 247.50                        |   | 275.00                                               |   | 94                                                  |   | 6.1 |   | 260.19 |   | 94 |   | 260.23 |   |
|                          |   |                                                 |   | 1,169                                               |   | 5.5 |   | 28.33 |   | 712 |   | 45.37 |   |
|                               |        |                                                      |        |                                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 16.Contingencies/Litigation**

 

As previously reported, on April 6, 2001, a putative class actionlawsuit captioned Charles Bland vs. Opus360 Corporation, et al., 01 Civ. 2938,was filed in the United States District Court for the Southern District of NewYork (the “Court”). Ten similar putative class actions also were filed in theCourt. By Order dated August 10, 2001, the Court consolidated all elevenactions, and on September 24, 2001, the plaintiff served a consolidatedamended class action complaint (the “Amended Complaint”). The Amended Complaintwas brought on behalf of all persons who acquired securities of the Companybetween April 7, 2000, and March 20, 2001.  Named as defendants in the Amended Complaint were the Company,ten current and former officers and directors of the Company, the underwritersof the Company’s initial public offering (“IPO”) and two shareholders who soldstock in a secondary offering concurrent with the IPO. The Amended Complaintalleged that, among other things, the plaintiff and members of the proposedclass were damaged when they acquired securities of the Company because falseand misleading information and material omissions in the registration statementrelating to the IPO and the secondary offering caused the price of theCompany’s securities to be artificially inflated. The Amended Complaintasserted violations of Sections 11, 12(a)(2), and 15 of the Securities Act of1933.  Damages in unspecified amountsand certain rescission rights were sought.

 

In October 2001, theCompany and all other defendants filed motions to dismiss the AmendedComplaint.  By Opinion and

 

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Order dated October 2,2002, the Court granted all of the motions and dismissed the Amended Complaint,but granted plaintiffs leave to serve a second consolidated amended classaction complaint (the “Second Amended Complaint”).  On October 30, 2002, plaintiffs served their Second AmendedComplaint, which contained allegations similar to those in the AmendedComplaint.  The defendants, includingthe Company, moved to dismiss the Second Amended Complaint on December 31,2002.  Before the motion was heard, theparties reached an agreement in principle to settle all claims asserted and anyclaims that could have been asserted in this litigation.

 

OnJune 18, 2003 the Company announced that it had signed an agreement forthe settlement and release of all claims against Artemis and those certainofficers and directors and the underwriters in the Second AmendedComplaint.  The Court approved thesettlement on October 10, 2003. The settlement became final onNovember 12, 2003. The Company’s insurer covered substantially all of the$550,000 in total settlement costs. The settlement should in no event beconstrued or deemed to be evidence of or an admission or concession on the partof the Company or any individually named defendant officer and director withrespect to any claim of any fault or liability or wrongdoing or damagewhatsoever.

 

**Note 17.Quarterly Financial Data (Unaudited)**

 

Thefollowing table sets forth certain unaudited quarterly consolidated financialdata for each of the eight quarters in the two-year period endedDecember 31, 2003.  In the opinion of the Company’s management, thisunaudited information has been prepared on the same basis as the auditedconsolidated financial statements contained herein and includes alladjustments, consisting only of normal recurring adjustments, necessary topresent fairly the information set forth therein when read in conjunction withthe consolidated financial statements and notes thereto.  The operatingresults for any quarter are not necessarily indicative of results for anyfuture period.

 

|                                                              |   | **Quarter  Ended**                         |   |
|-------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                              |   | **Dec. 31  2003**                          |   | **Sept. 30  2003** |   | **Jun. 30  2003** |   | **Mar. 31  2003** |   |
|                                                              |   | **(In  thousands, except per share data)** |   |
| **Consolidated  Statement of Operations Data:**                   |   |                                       |   |   |   |   |   |   |   |
| Revenues                                                          |   | $                                          | 13,961 |   | $ | 13,667 |   | $ | 13,468 |   | $ | 16,195 |   |
| Operating loss                                                    |   | (1,949                                     | )      | (1,639 | ) | (3,669 | ) | (835 | ) |
| Net loss                                                          |   | (1,605                                     | )      | (1,376 | ) | (4,002 | ) | (908 | ) |
| Basic loss per common share:                                      |   |                                       | (0.16  | ) |   | (0.14 | ) |   | (0.40 | ) |   | (0.09 | ) |
| Shares used in computing basic and diluted  loss per common share |   | 9,965                                      |   | 9,965 |   | 9,965 |   | 9,965 |   |

 

|                                                                         |   | **Quarter  Ended**                         |   |
|------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                         |   | **Dec. 31  2002**                          |   | **Sept. 30  2002** |   | **Jun. 30  2002** |   | **Mar. 31  2002** |   |
|                                                                         |   | **(In  thousands, except per share data)** |   |
| **Consolidated  Statement of Operations Data:**                              |   |                                       |   |   |   |   |   |   |   |
| Revenues                                                                     |   | $                                          | 19,546 |   | $ | 15,790 |   | $ | 17,592 |   | $ | 15,736 |   |
| Operating income (loss)                                                      |   | 16                                         |   | (1,788 | ) | (334 | ) | (1,640 | ) |
| Net income (loss)                                                            |   | 554                                        |   | (1,786 | ) | (603 | ) | (2,113 | ) |
| Basic earnings (loss) per common share:                                      |   |                                       | 0.06   |   |   | (0.18 | ) |   | (0.06 | ) |   | (0.21 | ) |
| Shares used in computing basic and diluted  earnings (loss) per common share |   | 9,965                                      |   | 9,965 |   | 9,965 |   | 9,965 |   |

 

 

**Note 18.Report on Audit of the Company’s December 31, 2001 Financial Statements**

 

OnJanuary 28, 2003, the Company dismissed its independent accountants, KPMGLLP (“KPMG”), and engaged the services of Squar Milner Reehl & WilliamsonLLP (“Squar Milner”) as the Company’s new independent accountants for itsfiscal year ended December 31, 2002.  The Audit Committee of theCompany’s Board of Directors approved the dismissal of KPMG and the appointmentof Squar Milner.  The dismissal was not due to a difference of opinionwith respect to any accounting principles or practices, financial statementdisclosures, audit scope or audit procedure.  Rather, KPMG was dismissedbecause fees charged to the Company were considered excessive and the level ofservice provided to the Company was considered unsatisfactory.

 

KPMGsubsequently informed management that it would not authorize the Company toinclude KPMG’s audit report on the Company’s 2001 financial statements in theCompany’s annual report on Form 10-K for 2002.  In response, managementlabeled all 2001 financial statements and related data included in itsDecember 31, 2002 Form 10-K as “unaudited.”  In addition, management

 

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engaged Squar Milnerto ”re-audit” the Company’s December 31, 2001 consolidated financialstatements.  While the re-audit by SquarMilner of the Company’s December 31, 2001 consolidated financialstatements is now complete, the Company has decided not to file an amendment toits December 31, 2002 Form 10-K as previously disclosed, which wouldrequire obtaining the consents of certain predecessor auditors to re-issuetheir reports.  The Company has chosennot to obtain such consents, and instead, the Company has included all relevant2001 financial information in this annual report on Form 10-K for the yearended December 31, 2003. Publishing that information in this report allows the Company both, tofile expeditiously and make public the most current financial information, andto maximize the Company’s limited staffing and financial resources.

 

**Note19. Long-Term Debt and Revolving Credit Facility**

 

InJune 2003, the Company paid off its Note Payable and Line of Credit heldwith Foothill and declined the option to extend the underlying Loan andSecurity Agreement with Foothill.

 

OnJune 30, 2003, the Company obtained a bridge loan of $3.5 million fromProha, accruing interest at 4.75% per annum, which was fully repaid by theCompany during the quarter ended September 30, 2003.

 

On August 14, 2003, theCompany entered into a Security Agreement, Secured Convertible Note,Registration Rights Agreement and Common Stock Purchase Warrant, withLaurus.  Such agreements were filed withthe SEC under cover of Form 8-K dated August 15, 2003.  Pursuant to the agreements, the Companyreceived a $5.0 million revolving credit facility in the form of a three-yearConvertible Note secured by a security interest in all of the Company’sproperty and assets located in the United States (US) and the United Kingdom(UK), except for intellectual property rights. Borrowings under the revolving credit facility are based on the balanceof eligible trade accounts receivable reported by the Company’s operatingentities in the US and the UK. Advances on the Convertible Note may be repaidat the Company’s option, in cash or through the issuance of the Company’sshares of restricted common stock.  Forthe first six months, the Convertible Note will bear interest at a rate equalto the greater of (i) the Prime Rate (as defined) plus three quarters of a percent,or (ii) 5% per annum.  Thereafter, theinterest rate will be the Prime Rate less zero to 1,250 basis points dependingon the average fair market value (as defined) of the Company’s common stock. Inaddition, the Company is required to pay a collateral management payment of0.075% of the average aggregate outstanding balance during the month plus anunused line payment of 0.40% per annum. The Laurus credit facilityautomatically renews every three years unless cancelled by the Company orLaurus. An early termination fee of up to $100,000 will be payable if thefacility is terminated prior to August 13, 2006.   The facility also provides the Company the flexibility to accessadditional funds above what is available based upon eligible trade accounts receivable(“Overadvances”). Overadvances accrue interest at a rate of 0.25% per month. AtDecember 31, 2003, the outstanding balance under the revolving creditfacility was $3.5 million, of which $2.1 million is considered Overadvances.The net proceeds were used to repay a bridge loan provided by Proha and forgeneral working capital needs.

 

On August 20, 2003 andSeptember 29, 2003, the Company received waiver letters from Laurusextending the Overadvance through November 28, 2003, in exchange for$63,000 in cash. On December 2, 2003, the Company agreed with Laurus tofurther extend the Overadvances through February 28, 2004, in exchange foramending the Secured Convertible Note as described further below. The Companyhas not repaid the Overadvances on the due date and is currently in discussionwith Laurus to further extend such Overadvances.

 

Under the originalagreements, Laurus has the right to convert all or any portion of theoutstanding principal amount and/or accrued interest and fees due and payableinto shares of the Company’s restricted common stock at a conversion price of$2.73 per share (the Fixed Conversion Price). The Fixed Conversion Price may only be adjusted upwards and upon certainconditions. Conversion rights limit Laurus’ beneficial ownership in the Companyto 2.5%.  If the Company’s common stocktrades on a principal market at a price greater than $3.14 or 115% of the FixedConversion Price for at least eleven consecutive trading days, the Company hasthe option to require conversion of all or a portion of the outstandingprincipal amount and/or accrued interest and fees due at the Fixed ConversionPrice.  This right is subject to certaintrading volume limitations and the 2.5% beneficial ownership limitation notedabove. The Fixed Conversion Price is subject to anti-dilution adjustments forstock splits, combinations and dividends.

 

On December 2, 2003,the Company amended the Secured Convertible Note (“Amendment No.1”) in exchangefor extending the time to repay the Overadvances through February 28,2004.  Under Amendment No.1 the Companywaived the Fixed Conversion Price at which Laurus can convert the debt toreceive the first 190,000 shares of common stock, setting the conversion priceto $1.45 per share and resetting  thefixed conversion price for conversion thereafter to $1.81 per share.

 

Also under the originalagreements, the Company was obligated to file a registration statement with theSEC by September 15, 2003 to register the Company’s restricted commonstock, which may be issued as described herein. The Company is currentlyseeking a waiver from Laurus to extend such filing date, and may incurliquidated damages (maximum: 2% of the original principal amount of $5 millionfor each thirty-day period beyond the contractual deadline) as a result of thedelinquent filing of such registration statement.  Because of this technical default, the Company has reported itsentire $3.5 million indebtedness to Laurus as a current liability at

 

F - 31

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December 31, 2003.  If and when an appropriate waiver isreceived from Laurus, such liability will be re-classified as long-term; thecontractual due date is August 2006.

 

Inconjunction with the original transaction, Laurus was paid a fee of $175,000and received a ten-year transferable warrant to purchase a maximum of 125,000shares of the Company’s restricted common stock.  The estimated fair value of the warrant of approximately $237,000has been treated as additional interest expense and is being amortized over thethree-year life of the revolving credit facility, unless soonerterminated.  The fair value ofthe warrant was estimated based on the following assumptions: expectedvolatility: 272%; dividends: zero; risk free interest rate: 2.6%; and expectedlife of the warrant: 5 years.  The warrant permits Laurus to purchase up to50,000, 50,000, and 25,000 shares of the Company’s restricted common stock atexercise prices of $3.41, $4.10, and $4.78 per share, respectively.   The warrant exercise price and the numberof shares underlying the warrant are subject to anti-dilution adjustments forstock splits, combinations and dividends. Loan proceeds have been allocated to the Laurus warrant using the relativefair value method of APB No. 14.

 

OnMarch 1, 2004**,** theCompany’s wholly-owned subsidiary in Finland, Artemis Finland Oy (“ArtemisFinland”), entered into a loan agreement with a financial institution in theamount of approximately $3.1 million. The loan becomes due on March 1,2006 and accrues interest at 0.5 percentage points above the 3-month Euriborrate per annum, which is payable on a quarterly basis. The loan is secured bycash collateral provided byProha equal to the loan amount and security interest in substantially all ofArtemis Finland’s assets.  Artemis andProha have executed a letter of commitment, whereby Proha agrees to provide theCompany sufficient advance notice of its intent to demand the return of itscollateral from the financial institution to give the Company a minimum of 90days to provide additional collateral, if necessary, or repay the loan.

 

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