UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2004

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                to               

Commission file number 000-29793

ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION

(Exact name of Registrant as specified in its charter)

4041 MacArthur Boulevard, Suite 401, Newport Beach, CA 92660

(Address of principal executive offices, including zip code)

(949) 660-6500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 par value

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No o

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

There were 9,965,018 shares of common stock outstanding as of November 5, 2004.

ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2004

TABLE OF CONTENTS

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ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements

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ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

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ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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ARTEMIS INTERNATIONAL SOLUTIONS CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(all tabular amounts in thousands except per share amounts)

Note 1. Organization

Artemis International Solutions Corporation, including its subsidiaries (“Artemis”, or the “Company”), is one of the world’s leading providers of investment planning and control software and services.  Since 1976 the Company has been helping organizations improve their performance through portfolio, project and resource management.

Customers use the Company’s software and services in such key areas as (i) IT management and governance, (ii) developing new products such as pharmaceuticals, (iii) helping governmental agencies promote business efficiency through better alignment and allocation of resources, (iv) maintaining nuclear power stations and (v) managing the Joint Strike Fighter program for the US government.  The Company has an international distribution network in over 44 countries.

Note 2.  Basis of Presentation and Going Concern Considerations

The accompanying condensed consolidated financial statements of Artemis, which include the accounts of its wholly-owned subsidiaries for the three and nine month periods ended September 30, 2004 and 2003 and the related footnote information are unaudited and have been prepared on a basis substantially consistent with the Company’s audited consolidated financial statements as of December 31, 2003 contained in the Company’s annual report on Form 10-K/A, as filed with the Securities and Exchange Commission (“SEC”) on July 16, 2004 (the “Annual Report”).  All significant intercompany transactions have been eliminated.  Equity investments in which Artemis owns at least 20% of the voting securities, or exercises significant influence over, (either individually or in concert with Proha) are accounted for using the equity method.  Investments in which the Company owns less than 20% or is not able to exercise significant influence over the investee are accounted for under the cost method of accounting.

The Company’s independent public accountants have included a “going concern” explanatory paragraph in their audit report on the December 31, 2003 consolidated financial statements, which have been prepared assuming that the Company will continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  At September 30, 2004, the Company’s current liabilities exceeded current assets by $3.6 million and the Company reported a cash balance of $6.4 million. Operating cash flow was negative $6.3 million for the nine months ended September 30, 2004. The Company has taken a number of actions to improve its financial strength and cash availability. On June 16, 2004, the Company completed a private placement of $9.0 million of convertible preferred stock (see Note 13) significantly strengthening the Company’s financial position. Proceeds from the financing will be used for (i) working capital, (ii) the repayment of debt and (iii) to strengthen the Company’s financial position.

Prior to the private placement, the Company entered into a $5.0 million asset-based lending facility with Laurus Master Fund, Ltd (“Laurus”) in August 2003 (see Note 9) to increase the Company’s financial flexibility.  In addition to the aforementioned facility, the Company’s wholly-owned subsidiary in Finland, Artemis Finland Oy (“Artemis Finland”), entered into a loan agreement with a financial institution in the amount of approximately $3.1 million to cover its short-term cash needs. The Company also has other lending facilities available to certain of its subsidiaries, such as in Japan and France.

In addition to the lending facilities available to the Company, management has taken other steps to reduce and defer discretionary spending to more closely match expenses with actual and projected revenues. In late 2002, the Company decided to start divesting certain non-core investments and operations to focus on its core expertise in enterprise portfolio and project management. This resulted in the sale of its 19.9% interest in Accountor Oy (Finland), ABC Technologies Sarl (France) and its Software Productivity Research operations (US) in November 2002, December 2002 and October 2003, respectively. During 2003, the Company also initiated discretionary restructuring activities that included workforce reductions and other cost reductions to respond to the weakening of certain of the Company’s markets, increased operating losses and negative cash flow from operations. Because some of the Company’s key operating metrics did not improve in late 2003, the Company adopted a nondiscretionary restructuring plan (see Note 11) that was implemented and communicated to the employees affected by the related workforce reductions during the nine months ended September 30, 2004.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto contained in the Company’s Annual Report.  In the opinion of management, the

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accompanying unaudited condensed consolidated financial statements contain all adjustments (which, except as described elsewhere herein, consisted only of normal recurring adjustments) which management considers necessary to present fairly the financial position of the Company at September 30, 2004 and the results of operations and cash flows for the nine months ended September 30, 2004 and 2003.  The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results anticipated for the entire year ending December 31, 2004.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions regarding revenue recognition, and the recoverability of intangible assets that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Note 3.  Stock-Based Employee Compensation

The Company has several stock-based employee compensation plans, which are accounted for under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No.25, Accounting for Stock Issued to Employees , and related interpretations.  No stock-based employee compensation cost is reflected in the statements of operations as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.  Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of FASB Statement No. 123, provides alternative methods for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation as described in SFAS No. 123 Accounting for Stock-Based Compensation . This standard also requires additional disclosure related to stock-based employee compensation in annual and interim financial reports.

The following table illustrates the effect on loss and loss per common share as if the Company had applied the fair value recognition provisions of SFAS No. 123 for all of its stock-based employee compensation plans.

Effective April 15, 2004, the board of directors granted (subject to stockholder approval) 891,000 options to executive management and other key employees to purchase common stock of the Company at $1.35 per share (the market value on the date of grant). 370,000 of these options vest as follows: 1/3 on the grant date, and 1/3 twelve months and 24 months, respectively, after the date of grant. The remaining 521,000 options vest as follows:  ¼ on the grant date, and ¼ twelve months, 24 months and 36 months, respectively, after the date of grant subject to achieving certain annual performance objectives.

For disclosure purposes only, the fair-value of all stock options granted to employees is estimated using the Black-Scholes option pricing model using the following weighted average assumptions: expected volatility 132%, risk-free interest rate 4.5%, expected life 5 years, no dividends.

Note 4.  Significant Recent Accounting Pronouncements

Neither the Financial Accounting Standards Board (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants nor the SEC have issued any significant accounting pronouncements since the Company filed its June 30, 2004 Form 10-Q that are believed by management to have a material impact on the Company’s present or future consolidated financial statements.

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Note 5. Basic and Diluted Loss Per Common Share

The Company calculates earnings or loss per common share in accordance with SFAS No. 128, Earnings Per Share.  Accordingly, basic loss per common share excludes dilution for potentially dilutive securities and is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

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

Note 6. Comprehensive Loss

Comprehensive loss consists of net income or loss, adjusted for other increases or decreases affecting stockholders’ equity / deficit that are excluded in the determination of net income or loss.  The Company has restated its comprehensive loss for the three and nine months ended September 30, 2003 consistent with the restatement of certain calendar 2003 consolidated financial statements included in the Company’s Annual Report. The restatement was made to correct the foreign currency translation adjustment related to the Company’s investment in Changepoint France. Such adjustment did not affect the Company’s previously reported net loss for any of the quarters in 2003. The calculation of comprehensive loss for the three and nine months ended September 30, 2004 and 2003 is as follows:

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Note 7. Segment and Geographic Information

Income from operations is assigned by region based upon management responsibility.  The Company has assigned its management responsibilities to cover four geographic areas:  Americas, EMEA (Europe, Middle East and Africa), Japan, and Asia.  Each geographic area is managed by an executive vice president of the Company.  The following unaudited table presents financial information about the Company’s operations by geographic region:

Three Months Ended September 30, 2004

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Nine Months Ended September 30, 2004

Nine Months September 30, 2003

Identifiable assets are also assigned by region based upon management responsibility.  There have been no material changes in identifiable assets by reportable segment since the filing of the Company’s Annual Report with the SEC.

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Note 8. Commitments and Contingencies

It is possible that the transaction involving the Laurus Restructuring (see Note 9) may be integrated with the Preferred Series A Financing (see Note 13) and thus may be in violation of Section 5 of the Securities Act of 1933, as amended. Our counsel and we believe that each of these transactions were exempt from registration and should not be integrated. If it were ultimately determined that the amended Laurus transaction is required to be integrated with the Preferred Series A offering, Laurus may have the right to rescind such transaction and we may be liable for penalties and/or damages in an amount that is not presently determinable.

On January 23, 2004, the Company announced the appointment of Patrick Ternier as President and Chief Executive Officer.   We have an employment agreement with Mr. Ternier who is entitled to receive a targeted annual base salary of $285,000 per year and is eligible for a targeted bonus of $200,000, subject to the achievement of certain annual performance criteria set by the Compensation Committee (applicable to fiscal year ending December 31, 2004).  In addition, Mr. Ternier is entitled to receive an annual car allowance of up to $18,000.  If the agreement is terminated for cause, Mr. Ternier is entitled only to receive that portion of his base salary owed through the date of termination.  If events that constitute a change in control of the Company occur, or if the agreement is terminated without cause, Mr. Ternier would be entitled, (i) to receive payment continuation of his base salary for a twelve month period, and (ii) to receive any incentive bonus payment earned but not yet paid as of the termination date. In addition, all options granted which have not vested at the date of termination would immediately vest. The agreement also contains certain restrictions on competition. 

Additionally, the Company has granted Mr. Ternier in his first year of employment as President and Chief Executive an Initial Grant of 250,000 stock options to purchase shares of common stock at an exercise price equal to the fair market value of the common stock as of the grant date.  One third of the Initial Grant of options vest on the grant date and the balance vest in equal increments on the first two anniversaries of the grant date.  Commencing in the second year, Mr. Ternier is eligible to receive additional option grants (which may have a different vesting schedule), based on meeting certain annual performance criteria as recommended by the Compensation Committee and approved by the Board.

The Company is a party to a number of legal claims arising in the ordinary course of its business.  The Company believes the ultimate resolution of these claims will not have a material effect on its financial position, results of operations or cash flows.

Note 9. Long-Term Debt and Revolving Credit Facility

Laurus Credit Facility

On August 14, 2003, the Company entered into an agreement with Laurus and received a $5.0 million revolving credit facility (the “Laurus Facility”) in the form of a three-year convertible note (the “Secured Convertible Note”) secured by an interest in all of the Company’s property and assets located in the United States (US) and the United Kingdom (UK), except for intellectual property rights.  Borrowings under the Laurus Facility are based on the balance of eligible trade accounts receivable reported by the Company’s operating entities in the US and the UK. The Laurus Facility automatically renews every three years unless cancelled by the Company or Laurus.

The Company used $2.2 million of the net proceeds of a $9.0 million private placement of convertible preferred stock completed on June 16, 2004 (see Note 13), to reduce the amount outstanding under the Laurus Facility. At June 30, 2004, the outstanding balance under the Laurus Facility was $1.3 million, of which $0.5 million represents past due over-advances. The Company has since restructured and amended the Laurus Facility as described further below, whereby the amount outstanding was increased to $1.5 million of which no portion is considered an over-advance.

The Company has received waiver letters from Laurus extending the due date of the over-advances through November 28, 2003, in exchange for $63,000 in cash. On December 2, 2003, the Company agreed with Laurus to further extend the over-advances through February 28, 2004, in exchange for amending the Secured Convertible Note.

On July 30, 2004, the Company and Laurus agreed to restructure and amend the revolving credit facility and replaced the Secured Convertible Note of up to $5.0 million with a Secured Convertible Minimum Borrowing Note (the “Minimum Borrowing Note”) in the amount of $1.5 million and a Secured Revolving Note of up to $3.5 million (collectively the “Laurus Restructuring”).  The Minimum Borrowing Note is due on August 26, 2006 and is convertible into common stock of the Company at the option of the holder at the following prices: 190,000 shares at $1.45 per share, 190,000 shares at $1.81 per share, and 342,646 shares at $2.57 per share.  As of the date of this report none of the amount outstanding under the Minimum Borrowing Note has been converted into common stock of the Company.   Thereafter, the conversion price adjusts

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to 105% of the average closing market price of the Company’s common stock for the five trading days immediately preceding each additional borrowing (in serialized $1.5 million increments) under the Minimum Borrowing Note.  Loans exceeding $1.5 million may be available to the Company, based on a formula set forth in the original Minimum Borrowing Note.  All of the aforementioned conversion prices are subject to downward adjustment under certain conditions.  Under the terms of the related agreement, conversion of the Minimum Borrowing Note into the Company’s common stock may not result in beneficial ownership by Laurus (including shares issuable because of outstanding warrants that are exercisable within sixty days of any determination date) of more than 2.5% of the Company’s outstanding common stock.  The Minimum Borrowing Note has a 30% prepayment penalty. Any loans under the Secured Revolving Note are convertible only in an event of default. The Company had no loans outstanding under the Secured Revolving Note as of the date of this report.

Absent an event of default as defined, the post-February 15, 2004 interest rate on both of the July 2004 amended Laurus notes described above is (except as explained in this paragraph) the greater of the Wall-Street-Journal prime rate plus 0.75% (the “adjustable interest rate”) or 5%.  After the Company’s November, 2004 registration statement is declared effective by the SEC (see below), the adjustable interest rate may be periodically reduced based on certain defined differences between the average market price of the Company’s common stock and the conversion prices set forth above, provided that such market price is at least 130% of the applicable conversion price.  The maximum contractual adjustment would reduce the discounted interest rate to the prime rate minus 1.25%.

Under the original agreements, the Company was obligated to file a registration statement with the SEC by September 15, 2003 to register the Company’s common stock underlying the Laurus Facility. The Company was delinquent in filing such registration statement and was subject to potential liquidated damages as a result of this delinquency. As part of the Laurus Restructuring, the Company received a waiver from Laurus with respect to their rights and remedies for the failure to file the registration statement timely. In consideration for such waiver, the Company has agreed to pay a penalty of $75,000.  The Company has further agreed with Laurus to reset the filing date to August 29, 2004, with the filing to be declared effective by November 29, 2004 should the SEC review such registration statement.  On August 24, 2004 the Company filed an amendment to an existing registration statement on Form S-1 including the common stock underlying the Laurus Restructuring. Based on comments received from the SEC, the Company filed a separate registration statement to register the common stock underlying the Laurus Restructuring on November 3, 2004. Should the Company fail to meet the effectiveness deadline, the Company would be subject to a liquidated damages claim equal to approximately $30,000 for any 30-day delay (prorated for partial periods).  

The indebtedness to Laurus at September 30, 2004 has been re-classified from a current liability to long-term debt as a result of the Laurus Restructuring.

Related Party Loan

On March 1, 2004, Artemis Finland entered into a loan agreement with a financial institution in the amount of approximately $3.1 million. The loan was due on March 1, 2006 and accrues interest at 0.5 percentage points above the 3-month Euribor rate per annum, which is payable on a quarterly basis. The loan is secured by cash collateral provided by Proha Plc, the Company’s parent company based in Finland (“Proha”), equal to the loan amount and a security interest in substantially all of Artemis Finland’s assets.  Artemis and Proha have executed a letter of commitment, whereby Proha agrees to provide the Company sufficient advance notice of its intent to demand the return of its collateral from the financial institution to give the Company a minimum of ninety days to provide additional collateral, if necessary, or repay the loan.  On October 11, 2004, the Company received a notification from Proha declaring its intent to demand the return of the $3.1 million provided to the financial institution as collateral. Under this notification, the Company is required to repay the loan by January 10, 2005. The Company is currently reviewing alternatives, such as repaying the loan through available funds or through seeking additional funding, or by replacing the collateral provided by Proha with additional collateral from the Company.

Note 10. Benefit Plans

The Company has a defined contribution plan (“the Plan”) which qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended. The Plan covers all U.S. employees, who may contribute up to 15% of their annual compensation. Employer contributions vest to the participants incrementally over a period of five years. Company contributions to the Plan were zero during the nine months ended September 30, 2004 and 2003.

The Company also has a defined benefit pension plan covering the employees of its UK subsidiary. Company contributions are determined based upon a percentage, as determined by an actuary, of an eligible employee’s annual salary.  Company contributions to the defined benefit pension plan during the year ended December 31, 2003 were $0.2 million.  The

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projected contribution for the year ending December 31, 2004 is $0.3 million. There were no significant 2004 changes in the key assumptions used in determining the projected contribution compared to those used for 2003.

Net defined benefit pension cost included the following components:

Note 11.  Restructuring Costs

In response to a decline in certain key operating metrics such as total revenue, operating margin and revenue per employee the Company adopted a non-discretionary restructuring plan that resulted in a workforce reduction and other cost reductions (collectively, the “Restructuring”) intended to strengthen the Company’s competitive position and future operating performance. The Company has implemented the Restructuring during the nine months ended September 30, 2004.  The Company’s total charge related to this Restructuring is approximately $2.0 million, of which approximately $0.7 million was recognized as an expense in the third quarter of 2004 and is reported in the Condensed Statement of Operations as “Restructuring Charge”.

The Restructuring Charge recognized in the first nine months of 2004 is comprised primarily of: (i) severance pay (including related payroll taxes) and associated one-time employee termination costs related to the reduction of the Company’s workforce; (ii) the closure and consolidation of offices; (iii) relocation costs resulting from organizational realignments; and (iv) professional fees incurred to improve the competitive position of the Company.  The Company accounts for the costs associated with exiting an activity, including costs associated with the reduction of the Company’s workforce, in accordance with SFAS 146.  The following table summarizes the Company’s Restructuring-related expenses incurred during the first nine months of 2004: