UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File number 000-29793
Opus360 Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4023714
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
39 W. 13th Street, NY, NY 10011
(Address of Principal Executive Offices) (Zip Code)
212-687-1086
Registrant's Telephone Number, Including Area Code
----------------------------------------------
Former address
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of July 31, 2001.
Common Stock 123,751,242
(Class) (Outstanding Shares)
Opus360 Corporation
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000 1
Consolidated Statements of Operations for the three and
six months ended June 30, 2001 and June 30, 2000 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and June 30, 2000 3
Notes to the Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 12-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21-22
Item 2. Change in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Securities Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
a. Exhibits
Item 1. Financial Statements
Opus360 Corporation and Subsidiaries
Consolidated Balance Sheet
June 30, December 31,
2001 2000
(unaudited)
------------- -------------
Assets
Cash and cash equivalents $ 15,636,000 $ 35,835,000
Accounts receivable, net of allowances 700,000 5,510,000
Prepaid expenses 1,107,000 6,742,000
Other current assets 290,000 906,000
------------- -------------
Total current assets 17,733,000 48,993,000
Property and equipment, net 7,725,000 9,513,000
Goodwill, net of amortization -- 26,801,000
Deferred costs and other assets 5,199,000 2,325,000
------------- -------------
Total assets $ 30,657,000 $ 87,632,000
============= =============
Liabilities and Stockholders' Deficit
Accounts payable $ 1,546,000 $ 5,189,000
Accrued expenses 2,403,000 2,643,000
Accrued wages -- 3,721,000
Deferred revenue 1,901,000 2,484,000
Line of credit 928,000 1,163,000
Other current liabilities 190,000 517,000
------------- -------------
Total current liabilities 6,968,000 15,717,000
Capital lease obligation 78,000 140,000
Total liabilities 7,046,000 15,857,000
------------- -------------
Stockholders equity:
Common stock, $0.001 par value, 150,000,000 shares authorized,
50,088,736 and 49,697,994 issued and outstanding,
respectively 50,000 50,000
Paid-in capital 187,126,000 192,310,000
Stock subscription receivable (215,000) (215,000)
Treasury stock (166,000) (31,000)
Deferred compensation (2,211,000) (12,017,000)
Accumulated deficit (160,970,000) (106,385,000)
Accumulated and other comprehensive loss (3,000) (3,000)
Notes receivable for common stock issuances -- (1,934,000)
------------- -------------
Total stockholders' equity 23,611,000 71,775,000
------------- -------------
Commitments and contingencies -- --
Total liabilities and stockholders' deficit $ 30,657,000 $ 87,632,000
============= =============
See accompanying notes to consolidated financial statements
1
Opus360 Corporation and Subsidiaries
Consolidated Statement of Operations
(Unaudited)
For The Three Months Ended For The Six Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
License revenue $ -- $ 1,110,000 $ 14,000 $ 1,271,000
Services, FreeAgent and other revenue 186,000 1,191,000 1,713,000 2,007,000
------------ ------------ ------------ ------------
Total revenue 186,000 2,301,000 1,727,000 3,278,000
------------ ------------ ------------ ------------
Cost of revenue 248,000 438,000 813,000 1,182,000
------------ ------------ ------------ ------------
Gross profit (62,000) 1,863,000 914,000 2,096,000
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing, exclusive of $9,000 and $94,000 for the
three months ended and $22,000 and $189,000 for the six months
ended respectively, reported below as amortization of 1,581,000 6,508,000 5,273,000 15,168,000
equity-based compensation
Product development, exclusive of $138,000 and $146,000 for the
three months ended and $283,000 and $748,000 for the six months
ended respectively, reported below as amortization of 3,059,000 6,303,000 6,529,000 14,062,000
equity-based compensation
General and administrative, exclusive of $3,539,000 and $1,294,000
for the three months ended and $4,276,000 and $4,261,000 for the
six months ended respectively, reported below as amortization of 8,243,000 4,572,000 10,391,000 7,274,000
equity-based compensation
Depreciation and amortization of goodwill 746,000 3,979,000 4,910,000 6,647,000
Amortization of equity-based compensation 3,686,000 1,534,000 4,581,000 5,198,000
Impairment charge -- -- 22,968,000 --
Loss on disposition -- -- 1,402,000 --
------------ ------------ ------------ ------------
Total operating expenses 17,315,000 22,896,000 56,054,000 48,349,000
------------ ------------ ------------ ------------
Loss from operations (17,377,000) (21,033,000) (55,140,000) (46,253,000)
Net interest income 217,000 1,017,000 638,000 1,219,000
------------ ------------ ------------ ------------
Loss from operations before income taxes (17,160,000) (20,016,000) (54,502,000) (45,034,000)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net Loss $(17,160,000) $(20,016,000) $(54,502,000) $(45,034,000)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.35) $ (0.42) $ (1.10) $ (1.48)
============ ============ ============ ============
Weighted average common shares used in computing basic and
diluted net loss per share 49,498,613 47,164,648 49,742,965 30,331,712
============ ============
Pro forma basic and diluted net loss per share $ (0.41) $ (1.02)
============ ============
Weighted average common shares used in computing pro forma
basic and diluted net loss per share 48,819,258 44,225,443
============ ============
See accompanying notes to consolidated financial statements
2
Opus360 Corporation
Consolidated Statement of Cash Flow
(Unaudited)
Six Months Ended
June 30 June 30
------------ ------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net Loss $(54,502,000) $(45,034,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,910,000 6,647,000
Amortization of equity-based compensation 4,581,000 5,198,000
Other non-cash expenses associated with equity issuances 4,835,000 964,000
Write-off of loan 1,966,000 --
Impairment charge 22,968,000 --
Loss on disposition 991,000 --
Changes in operating assets and liabilities:
Account receivables 987,000 (2,518,000)
Prepaid expenses and other current assets 4,892,000 (564,000)
Other assets (3,785,000) 1,502,000
Accounts payable and accrued expenses (3,668,000) 1,002,000
Other liabilities (173,000) (665,000)
Deferred Revenues (583,000) 4,248,000
------------ ------------
37,921,000 15,814,000
------------ ------------
Net cash used in operating activities $(16,581,000) $(29,220,000)
------------ ------------
Cash flows from investing activities:
Capitalization of product development expenses (1,044,000)
Purchase of mxConnect software (2,179,000)
Purchase of property and equipment (67,000) (6,023,000)
Decrease (Increase) in short term investments -- 26,912,000
Cash provided by (used in) connection with acquistion of subsidiaries -- (975,000)
Cash used in acquisition of other assets -- (1,577,000)
------------ ------------
Net cash provided by (used in) investing activities $ (3,290,000) $ 18,337,000
------------ ------------
Cash flows from financing activities:
Net proceeds from loans 1,750,000
Repayment of loans (235,000) (109,000)
Net proceeds from issuance of common stock 42,000 77,086,000
Repurchase of treasury stock (135,000) (3,000)
------------ ------------
Net cash provided by financing activities $ (328,000) $ 78,724,000
------------ ------------
Net increase (decrease) in cash $(20,199,000) $ 67,841,000
Cash:
Beginning of period $ 35,835,000 $ 1,326,000
------------ ------------
End of period $ 15,636,000 $ 69,167,000
============ ============
See accompanying notes to consolidated financial statements
3
Opus360 Corporation and Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(all tabular amounts in thousands except per share amounts)
Note 1. Organization and Summary of Accounting Policies
(a) Organization and Description of Business
Opus360 Corporation ("Opus360" or the "Company") was incorporated on
August 17, 1998, under the laws of the State of Delaware. Opus 360 is currently
down business under the name "Artemis International Solutions Corporation".
Opus360 provides internet-based enterprise software that enables
businesses to procure and manage professional services, consultants and systems
integration services.
The Company's continued existence is dependent upon several factors
including the Company's ability to successfully complete the proposed
combination with the Artemis subsidiaries ("Artemis") of Proha Plc ("Proha") and
integrate its operations with those of Artemis. The Company's existence is also
dependent upon its ability to sell and successfully implement its software
solutions. The Company has experienced recurring net losses since it commenced
operations on August 17, 1998. At June 30, 2001 the Company has an accumulated
deficit of $161 million. The Company has not achieved profitability and expects
to continue to incur net losses for the year ended December 31, 2001. Receipt of
fees for its labor procurement and management software solutions is essential to
the Company's business model. The Company's software products are delivered over
the Internet and compete with traditional recruiting and project-based work
search methods. The Company may not be able to achieve the level of sales growth
required to generate enough cash to fund its operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's near and long-term operating strategies focus on promoting
its Workforce360 software and services to increase revenue and cash flow while
better positioning the Company to compete under current market conditions. The
Company has also reorganized its sales and marketing units in an effort to
streamline its operations and increase sales efforts.
In the future, the Company may need to raise additional funds through
public or private financings, or other arrangements to fund its operations and
potential acquisitions, if any. The Company currently has no plans to effect any
other offerings, the Company cannot guarantee that such financings or other
arrangements will be available in amounts or on terms acceptable to the Company.
The Company's inability to raise capital when needed could seriously harm the
growth of the business and results of operations.
(b) Basis of Presentation
The unaudited consolidated financial statements have been prepared by the
Company in accordance with generally accepted accounting principles and reflect
all adjustments (all of which are normal and recurring in nature) that, in the
opinion of management, are necessary for a fair presentation of the interim
periods presented. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for any subsequent
quarters or for the entire year ending December 31, 2001. Certain information
4
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted under the Securities and Exchange Commission's ("SEC") rules and
regulations. These unaudited consolidated financial statements and notes
included herein should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 2000, included in the Company's Form 10-K Annual Report filed with the SEC
on March 19, 2001.
The Company has reclassified a portion of its general and administrative
expenses to allocate total costs for overhead and facilities to each of the
functional areas that use the overhead and facilities services based on their
headcount. These allocated charges include facility rent for the Company's
offices, communication charges, equipment leases, and depreciation expense for
office furniture and equipment. Certain amounts in the prior year financial
statements have been reclassified to conform to the current year presentation.
As a result of the Company's disposition of a portion of its FreeAgent.com
segment, the e.office business, during the quarter ended March 31, 2001, the
Company's consolidated balance sheet at June 30, 2001 does not include the
assets, liabilities and stockholders' equity of The Churchill Benefit
Corporation ("Churchill").
(c) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and 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.
(d) Impairment of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows, estimated to be
generated by those assets are less than the assets' carrying value. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair market value of the
assets. Assets to be disposed of are reported at the lower of the carrying value
or fair market value, less cost to sell
On April 11, 2001, the Company executed a definitive agreement with Proha
PLC ("Proha") pursuant to which the Company has agreed to exchange 80% of the
Company's post-transaction outstanding common stock, for 100% of the capital
stock of Proha's Artemis subsidiary and 19.9% of two other Proha subsidiaries,
after which the Company is expected to be renamed Artemis International
Solutions Corporation. The transaction would result in a reverse acquisition for
accounting purposes, and Artemis would be treated as the accounting acquirer. As
a result of the proposed merger the Company reevaluated the recoverability of
the goodwill based on the remaining projected cash flows through the Artemis
acquisition date including the fair value of consideration to be received in
connection with the acquisition by Artemis. Based on this
5
analysis the Company determined that goodwill was not recoverable and recorded
an impairment charge in the amount of $22.7 million. In addition a charge of
$0.3 million was recorded to reduce the net current valuation of the Company's
personal and corporate computer equipment. These charges were reported in the
quarter ended March 31, 2001.
Note 2. Prepaid Expenses
During the quarter, the Company wrote-off a previously recorded prepaid
expense for customer advisory services to be provided by Lucent Technologies,
Inc.'s ("Lucent") officials. The asset was recorded in February 2000 and
December 2000 in connection with the granting of warrants to Lucent. Lucent was
obligated to serve on the Company's Customer Advisory Board, provide substantial
advice and client references. The relationship with Lucent was managed by
Richard S. Miller the Company's former President and Chief Operating Officer.
During the quarter, Mr. Miller terminated his employment with the Company and
his Lucent counterpart has been reassigned as part of a larger reorganization.
The Company has reevaluated its strategic relationship with Lucent, including
the value of the prepaid expense and concluded that the asset should be written
off. During the quarter the Company also expensed approximately $1.5 million in
prepaid advertising, which had been accrued during the fourth quarter of 1999 in
exchange for an equity issuance. The write-off was predicated by the termination
of the agreement between the Company and the advertising provider whereby all
parties were released from their obligations under the original agreement
Note 3. Accounts Receivable, net:
At June 30, 2001 and December 31, 2000 the breakdown of accounts
receivable was as follows:
June 30, December 31,
2001 2000
------- -------
Billed receivables $ 1,079 $ 4,646
Unbilled receivables 195 1,192
------- -------
1,274 5,838
Less allowance for doubtful receivables (574) (328)
------- -------
Total $ 700 $ 5,510
======= =======
6
Changes in the allowance for doubtful receivables were as follows:
June 30, December 31,
2001 2000
------ ------
Beginning balance $ (328) $ 0
Provision for doubtful receivables (448) (328)
Write-offs 202 0
------ ------
Ending balance $ (574) $ (328)
====== ======
Note 4. Lines of Credit
In February 2000 and June 2000, the Company borrowed $1.1 million and $0.7
million, respectively, as part of a $1.8 million equipment line of credit (the
"Facility") with a bank. The annual interest rate on the Facility is equal to
the bank prime rate plus 1.25%. The Company is in compliance with the covenants
under the Facility, and the outstanding balance under the Facility line at June
30, 2001 is $0.9 million with an interest rate of 10.75% per annum.
Note 5. Commitments
Asset Purchase Agreement
On May 24, 2001 the Company completed its acquisition of the assets of
Mirronex Technologies Inc. ("Mirronex") pursuant to the Asset Purchase Agreement
entered into with Mirronex on March 16, 2001 and amended on May 10, 2001. In
accordance with the terms of the agreement, the Company acquired Mirronex's
mxConnect software technology and recorded an asset in the amount of $2.2
million. The cash purchase price was reduced by a $0.9 million secured loan made
to Mirronex in December 2000 and during the quarter ended March 31, 2001.
Advertising Agreements:
In December 1999 and during the first and second quarter of 2000, the
Company entered into several agreements with various media companies and their
affiliated Internet sites pursuant to which the parties agreed to promote their
respective content, products and services, jointly develop various co-branded
websites and feature the Company's services within those co-branded sites. The
Company agreed to spend in the aggregate a minimum of $0.2 million in
development costs, approximately $12.4 million in advertising through March
2005, and an additional $2.0 million in integration fees. In addition the terms
of the agreements allowed the Company to share in the revenue generated on some
co-branded sites.
In October 2000, the Company restructured several of its co-branding
and advertising agreements. Under the revised agreements, the Company has agreed
to purchase an aggregate of $6.3 million in advertising from various media
companies and their affiliated Internet sites through September 2002.
Approximately $3.6 million of the advertising commitment is contingent on the
delivery of a specified number of monthly impressions, which if not delivered
can result in a termination of the commitment. As of June 30, 2001, the Company
has purchased and expensed $3.5 million of the $6.3 million advertising
commitment. The Company will expense the remaining advertising commitment of
7
$2.8 million upon the delivery of the required amount of advertising
impressions.
During the quarter ended June 30, 2001, the Company expensed approximately
$1.5 million in prepaid advertising accrued during the fourth quarter of 1999 in
exchange for an equity issuance. The agreement between the Company and the
advertising provider was terminated and all parties were released from their
obligations under the original agreement.
Note 6. Income Taxes
The Company has not recorded a provision for income tax expenses, as it
has incurred net operating loss for each period since inception.
Note 7. Basic and Diluted Net Loss Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three months ended
June 30,
2001 2000
----------- --------
Numerator:
Net loss $ (17,160) $(20,016)
=========== ========
Denominator:
Basic and diluted loss per share weighted
average shares 49,499 47,165
=========== ========
Basic and diluted net loss per share $ (0.35) $ (0.42)
=========== ========
Six months ended
June 30,
2001 2000
----------- --------
Numerator:
Net loss $ (54,502) $(45,034)
=========== ========
Denominator:
Basic and diluted loss per share weighted
average shares 49,743 30,332
=========== ========
Basic and diluted net loss per share $ (1.10) $ (1.48)
=========== ========
For the three months and six months ended June 30, 2001 and June 30, 2000
basic and diluted net loss per share excludes the effect of 405,631 escrowed
shares and $850,000 of contingently issuable shares of common stock in
connection with the acquisition of Churchill. These shares were cancelled during
the quarter ended March 31, 2001. Diluted net loss for the three and six months
ended June 30, 2001 and June 30, 2000 does not include the effect of
8
options and warrants to purchase 15,540,848 and 11,559,589 shares of common
stock, respectively or 235,419 and 423,271, respectively, unvested escrowed
shares of common stock issued to former shareholders of Ithority and
PeopleMover.
Pro forma basic and diluted loss per share is computed by assuming the
conversion of all convertible preferred stock into common stock as if such
shares were outstanding from their respective dates of issuance. The basic and
diluted loss per share for the three and six months ended June 30, 2001 includes
the conversion of the convertible preferred stock, which occurred on the
Company's initial public offering date of April 7, 2000. The following table
sets forth the computation of the Company's pro forma basic and diluted loss per
share (in thousands, except per share amounts):
Three months ended
June 30,
2001 2000
-------- --------
Numerator:
Net loss $(17,160) $(20,016)
======== ========
Denominator:
Weighted average shares 49,499 47,165
Assumed conversion of preferred stock
Series A 0 820
Series B 0 834
-------- --------
49,499 48,819
======== ========
Basic and diluted net loss per share $ (0.35)
=========
Pro forma basic and diluted net loss per share $ (0.41)
========
Six months ended
June 30,
2001 2000
-------- --------
Numerator:
Net loss $(54,502) $(45,034)
======== ========
Denominator:
Weighted average shares 49,743 30,332
Assumed conversion of preferred stock
Series A 0 6,622
Series B 0 7,271
-------- --------
49,743 44,225
======== ========
Basic and diluted net loss per share $ (1.10)
=========
Pro forma basic and diluted net loss per share $ (1.02)
========
9
Note 8. Stockholders' Equity
Stock Options:
In March 2000, the Company adopted the (1) 2000 Stock Option Plan (the
"2000 Plan"), which provides for the granting of non-qualified and incentive
stock options to employees, board members and advisors (2) the 2000 Non-Employee
Directors' Plan (the "Non-Employee Director Plan"), which provides for
automatic, non-discretionary grants, of non-qualified stock options to
non-employee board members, as defined, and (3) the 2000 Employee Stock Purchase
Plan (the "ESPP"), which permits eligible employees to acquire, through payroll
deductions, shares of the Company's common stock. The 2000 Plan and the
Non-Employee Director Plan authorize the granting of up to 10.0 million and up
to 1.1 million options, respectively, and provide for option terms not to exceed
ten years. The ESPP authorizes the issuance of up to 2.8 million shares to
participating employees. The Company's 1998 Stock Option Plan authorized the
granting of up to 6.2 million options and provided for option terms not to
exceed ten years. During the quarter ended June 30, 2001 the Company granted
approximately 385,000 options with exercise prices ranging from $0.11 to $0.29.
During the quarter ended June 30, 2001 the Company reduced the amount of
the deferred compensation it had previously recorded by approximately $3.0
million, representing the unamortized deferred compensation for employees who
were issued stock options and are no longer employed by the Company.
The Company expects to amortize unamortized deferred compensation expense
of approximately $2.2 million at June 31, 2001, as follows (in thousands):
For the six months ending December 31, 2001 $ 695
For the year ending December 31, 2002 $ 1,294
For the year ending December 31, 2003 $ 222
During the quarter ended June 30, 2001, the Company has not recorded any
additional deferred compensation as all grants were made to employees at fair
market value.
During the quarter ended June 30, 2001, the Company recorded an expense
for the write-off of a loan made to Richard S. Miller, its former President and
Chief Operating Officer in connection with the exercising of stock options by
Mr. Miller on March 23, 2000.
Note 9. Subsequent Events
On July 31, 2001, the Company completed the first step of its proposed
combination with the Artemis subsidiaries ("Artemis") of Proha Plc ("Proha")
pursuant to the definitive agreement signed on April 11, 2001 with Proha, a
provider of project and resource collaboration solutions that is listed on the
NM-list of the Helsinki Exchange. Under the terms of the definitive agreement,
as it was amended on July 10, 2001, Artemis, the project management and
10
collaboration subsidiary of Proha, will combine with Opus360, which is expected
to be renamed Artemis International Solutions Corporation. In conjunction with
this first closing, the Company issued approximately 74 million shares of common
stock to Proha in return for 100% of the stock of Artemis. The combination will
be accounted for as a reverse merger, a purchase by Artemis of Opus360, under
FASB Statement No. 141, Business Combinations. The agreement as amended may be
terminated by either party if shareholder approval is not received. However,
since Proha has already obtained approval from their shareholders during the
quarter ended June 30, 2001, and as a result of the July 31 stock issuance is
now the majority shareholder of the Company it is unlikely that this termination
event will occur. The proposed combination, after completion of the second step
of the transaction, will result in the issuance in the aggregate of new shares
representing 80% of the post-transaction issued and outstanding common stock in
exchange for the stock of Proha's Artemis subsidiary and 19.9% of the stock of
two other Proha subsidiaries. The transaction will be treated for accounting
purposes as a reverse acquisition of Opus360.
In the event that the second closing does not occur, the Company is
required to return to Proha approximately 63 percent of the Artemis stock, and
Proha is required to deliver to the Company approximately 7.4 percent of the
outstanding shares of two Proha subsidiaries. In any event, Proha will retain
the approximately 74 million shares of the Company's common stock (representing
approximately 60 percent of the post-transaction outstanding common stock of the
Company) received at the first closing. As a result of owning approximately 60%
of the post-transaction outstanding common stock, Proha has sufficient voting
power to grant the stockholder approval required for the second closing.
Pursuant to a Voting Agreement entered into at the first closing, Proha is
contractually committed to (i) vote the shares of common stock owned by Proha
for the purpose of effecting the stockholders approval, (ii) vote against any
alternative transaction and certain extraordinary transactions involving a
reorganization of Opus360 or a sale of all or substantially all of the assets of
the Company and (iii) vote against any action that would adversely affect the
transactions contemplated by the Share Exchange Agreement.
Note 10. Contingencies
Rescission Offer:
As of June 30, 2001, the Company has granted options to purchase
approximately 97,125 shares of its common stock to its former FreeAgent e.office
employees, which may not have complied with certain federal and state securities
laws.
As disclosed in the Company's Prospectus dated April 7, 2000, the Company
intends to make a rescission offer to all the FreeAgent e.office employees. The
Company intends to file a registration statement with respect to the rescission
offer under applicable federal and state securities laws. In the rescission
offer, the Company will offer to repurchase from the FreeAgent e.office
employees all of the shares issued upon exercise of options by these employees
before the expiration of the rescission offer, at the exercise price paid for
these shares, plus interest at the rate of 10% per year from the date of
issuance until the rescission offer expires. The Company will also offer to
repurchase all of the unexercised options issued to these FreeAgent e.office
employees at 20% of the option exercise price multiplied by the number of shares
subject to such options, plus interest at the rate of 10% per year from the date
of issuance until the rescission offer expires. The rescission offer will expire
approximately 30 days after the effectiveness of the rescission offer
registration statement.
Based on the number of options outstanding as of June 30, 2001, the
Company could be required to pay to these FreeAgent e.office employees up to
approximately $0.1 million, including interest, in connection with the
rescission offer. The applicable securities laws do not expressly provide that a
rescission offer will terminate a purchaser's right to rescind a sale of stock,
which was not registered as required. Accordingly, if any FreeAgent e.office
employees reject the rescission offer, the Company may continue to be
contingently liable for the purchase price of these shares and options, which
may not have been issued in compliance with applicable securities laws. Amounts
related to this contingent liability are not reflected in the accompanying
financial statements.
On April 6, 2001 a lawsuit purporting to be a class action and captioned
CHARLES BLAND VS. OPUS360 CORPORATION, ET AL., 01 Civ. 2938 (the "BLAND Action")
was filed in the United States District Court for the Southern District of New
York. The BLAND Action is brought on behalf of a proposed class of all persons
who acquired securities of the Company between April 7, 2000 and December 6,
2000. Named as defendants in the BLAND Action are the Company, eleven current
and former officers and directors of the Company, the underwriters of the
Company's initial public offering and two shareholders (the "Selling
Shareholders") who sold stock in a secondary offering (collectively with the
initial public offering, the "Offering") concurrent with the initial public
offering.
The amended and restated complaint in the BLAND Action alleges that, among
other things, the plaintiff and members of the proposed class were damaged when
they acquired securities of the Company because false and misleading information
and material omissions in the registration statement relating to the Offering
caused the prices of the Company's securities to be inflated artificially. It
also alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act
of 1933 (the "Securities Act"). Damages in unspecified amounts and certain
rescission rights are sought.
On or about June 5, 2001, an action captioned Kenneth Shives, et al. v.
Bank of America Securities LLC, et al., 01 Civ. 4956 (the "Shives Action") was
filed in the United States District Court for the Southern District of New York.
The complaint in the Shives Action asserts claims against the Company, certain
of its present or former officers and directors (collectively, the "Opus360
Defendants"), two shareholders (the "Selling Shareholders") who sold stock in a
secondary offering and the underwriters that managed the Company's April 2000
Offering, for alleged violations of the federal securities laws (principally
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, and Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934.) The complaint is based on
allegations that the various underwriter defendants engaged in (and involved
other defendants in) a broad scheme to artificially inflate and maintain the
market price of the common stock of various companies named as defendants
(including Opus360), and to cause the named plaintiffs and other members of the
putative class to purchase the stock of those companies at artificially inflated
prices.
On or about July 20, 2001, counsel for the plaintiffs in the Shives Action
and counsel for the Opus360 Defendants and the Selling Shareholders executed
stipulations in which the plaintiffs agreed to drop the Opus360 Defendants and
the Selling Shareholders as defendants in the Shives Action and to dismiss
without prejudice the claims asserted in that action against each of those
defendants. Those stipulations were so ordered by the Court on or about July 24,
2001 and the Opus360 Defendants and the Selling Shareholders are no longer
defendants in the Shives Action.
The Company believes the claims made in the Actions are without merit and
intends to vigorously defend the Actions.
11
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Act of 1934, as amended. Such statements are based
upon current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical facts may be deemed to be
forward-looking statements. For example, words such as "may", "will", "should",
"estimates", "predicts", "potential", "continue", "strategy", "believes",
"expects", "anticipates", "plans", "intends", and similar expressions are
intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Among the important factors that could cause
actual results to differ significantly from those expressed or implied by such
forward-looking statements are the likelihood or effect of completing the
combination with the Artemis subsidiaries ("Artemis") of Proha Plc ("Proha");
our ability to successfully integrate our business with that of Artemis; our
liquidity and access to public markets; our limited operating history and
expectation of future losses; the failure of the Internet to become a proven
recruitment and project search medium; our need to successfully develop
awareness of our brand names; the failure of our products and services to be
accepted in the marketplace; the intense competition in our industry;
technological change; damage to our reputation which could result from
unexpected network interruption; undetected errors or defects in our services;
breaches of our network security or computer viruses; the imposition of new
burdensome government regulations and legal uncertainties regarding the Internet
which could increase our costs or limit our operations; the potential need for
additional financing; the risk that our proprietary rights may not be fully
protected; uncertainties regarding the application of federal tax and employee
benefit laws to our business which could limit our ability to provide benefits
that will attract free agents or serve our clients; the risk that we may be
subject to employment-related claims relating to free agents, or the
organizations that use their services; legal uncertainties regarding the
application of various federal and state laws to our business; legal
uncertainties regarding the outcome of shareholder suits; as well as the other
risk factors affecting the Company detailed from time to time in documents filed
by the Company with the Securities Exchange Commission ("SEC"), including but
not limited to those discussed under the caption "Risk Factors" in our Annual
Report on Form 10-K filed with the SEC on March 19, 2001.
Overview
In October 2000 we launched our second-generation version of the
integrated Opus360 Workforce Platform, now called Workforce360. This version of
our human capital management software will enable large and mid-size
organizations to manage their project-based workforce, procure contingent
workers from preferred vendors and manage independent contractors through our
FreeAgent.com services. Workforce360 consists of two distinct but tightly
integrated modules for Workforce Management and Workforce Procurement. The
Workforce Management module enables professional services organizations to build
and optimize project teams, increase overall workforce utilization and improve
employee retention rates. The Workforce Procurement Module enables buyers and
suppliers of contract labor to automate and streamline hiring processes, reduce
procurement costs, and track the performance of contract labor suppliers.
Workforce360 is an Internet-based software application that
12
can be deployed by our customers or delivered as a hosted solution, which
reduces the cost of hardware, maintenance and updates for our customers. Using
Workforce360 businesses and service providers can efficiently source and deploy,
increase utilization, and lower the cost of administering their project-based
labor.
Results of Operations
We have a short operating history and have incurred substantial losses
since our inception. From the date of our inception in August 1998 through
December 31, 1998, we incurred net losses of $1.1 million. For the year ended
December 31, 1999, we incurred net losses of $29.5 million. For the year ended
December 31, 2000, we incurred net losses of $75.9 million. For the three and
six months ending June 30, 2001, we incurred net losses of $17.2 and $54.5
million, respectively, and as of June 30, 2001, we had an accumulated deficit of
$161 million. Our net losses and resulting accumulated deficit are primarily due
to the costs we incurred to develop our products and services and to expand our
sales and marketing programs.
Because of the prospective valuation established by the pending
combination with Artemis and our analysis of projected cash flows, during the
quarter ended March 31, 2001 we recorded a non-cash impairment charge of $23.0
million to write down the goodwill and other intangibles associated with the
acquisitions of the PeopleMover, Ithority and IndustryInsite.com businesses
completed in the first quarter of 2000 and to decrease the value of computer
equipment and other personal property.
We intend to continue to devote resources to advertising and
brand-marketing programs designed to promote our Workforce360 enterprise
software. We anticipate that we will incur additional salaries and sales
commissions as a result of increased sales personnel and increased sales. Our
marketing and branding programs for our enterprise software will result in an
expanded marketing program for trade shows and customer advisory board meetings.
We believe that these expenses will continue to increase in absolute dollars in
future periods. The increase in sales and marketing costs is expected to be
offset by a decrease in our product development and general and administrative
expenses as we continue to focus on increasing our operating efficiencies while
cutting costs. With the release of the second-generation version of
Workforce360, we anticipate that our product development costs will decrease in
future periods. We expect to incur losses from operations for the foreseeable
future but these losses are expected to decrease significantly as a percentage
of revenue. To the extent these decreases in our operating expenses are not
followed by commensurate increases in our revenue, or if we are unable to adjust
operating expense levels as anticipated, our operating losses may exceed our
expectations for those periods. We cannot be certain that we will ever achieve
or sustain profitability.
Three Months Ended June 30, 2001 and 2000
Revenue
For the quarter ended June 30, 2001 our revenue was $0.2 million from
Application and Procurement Services ("APS") and consisted solely of integration
services revenue of $0.2 million. For the quarter ended June 30, 2000, we had
revenue of $2.3 million of which approximately $0.6 million was derived from our
FreeAgent.com services consisting of initial sign-up fees and monthly fees paid
by our e.office employees as well as sales of advertising
13
sponsorships on FreeAgent.com; and $1.7 million related to the Application and
Procurement Services which consisted of the sale of software licenses and
integration services revenues.
Cost of Revenue
Cost of revenue for the quarter ended June 30, 2001, was $0.2 million, a
decrease of 50% from cost of revenue of $0.4 million for the quarter ended June
30, 2000. This reduction was as a result of the decreased amount of salaries and
wages paid to employees that provide implementation and integration services to
customers who were deploying our enterprise software during the quarter. As we
strive to increase the license sales and implementation fees for our enterprise
software solution, we expect that cost of revenue will continue to increase both
in absolute dollars and percentage terms in future periods. Cost of revenue for
the quarter ended June 30, 2000, was $0.4 million and consisted primarily of
salaries paid to staff who administered our FreeAgent e.Office services, costs
associated with operating the FreeAgent.com website including certain technical
personnel and telecommunications charges and cost of providing integration
services to our customers.
Operating Expenses
Sales and Marketing. Sales and marketing expenses for the quarter ended
June 30, 2001 were $1.6 million, excluding $0.001 million reflected as equity
based compensation below, a decrease of 75% from sales and marketing expenses of
$6.5 million for the quarter ended June 30, 2000. This decrease was primarily
attributable to the decline in marketing and advertising expenses for our
Workforce360 enterprise software and FreeAgent.com website, as well as a decline
in salaries and benefits paid to a reduced sales and marketing staff. As we
focus our resources on advertising and building brand-awareness for our
Workforce360 enterprise software and increase our sales efforts to coincide with
the release of enhanced software solutions, our sales and marketing costs may
increase, primarily due to salaries and commissions paid to our sales and
marketing associates.
Product Development. Product development expenses for the quarter ended
June 30, 2001 were $3.1 million, excluding $0.1 million reflected as equity
based compensation below, a decrease of 51% from product development expenses of
$6.3 million for the quarter ended June 30, 2000. The decrease was primarily
attributable to a lower amount in salaries and benefits paid to our reduced
product development staff and a reduction in the fees paid to our third party
consultants. While we believe that continued investment in product development
is critical to attaining our strategic objective, we expect our product
development expenses to decline in future periods as our products achieve
stability and our processes are refined.
General and Administrative. General and administrative expenses for the
quarter ended June 30, 2001 were $8.3 million, excluding $3.6 reflected as
equity based compensation below, an increase of 80% over general and
administrative expenses of $4.6 million for the quarter ended June 30, 2000. The
increase was primarily attributable to a write-off of prepaid marketing expenses
and customer advisory services to be provided by Lucent Technologies, Inc.
officials. This write-off was occasioned by the departure of a key officer.
14
During the quarter we also wrote off a loan made to our former President and
Chief Operating Officer. The loan was a non-recourse loan secured by the shares
of the Company stock obtained upon the exercise of an option. These expenses
were offset by cost reductions associated with a decline in the number of
employees and associated general office expenses, rent and utilities, recruiting
fees and professional fees. Salaries and benefits decreased as we reduced our
general and administrative staff. We expect that our general and administrative
expenses will decrease in future periods as we consolidate our office facilities
and become more efficient in managing these expenditures.
Depreciation and Amortization. Depreciation and amortization expenses for
the quarter ended June 30, 2001 were $0.7 million, consisting solely of
depreciation of property and equipment. Depreciation and amortization expense
was $4.0 million in the quarter ended June 30, 2000 and included amortization of
goodwill.
Amortization of Equity-based Compensation. The amortization of
equity-based compensation for the quarter ended June 30, 2001 was $3.7 million
and consisted of deferred compensation expense for options to purchase common
stock granted to employees having exercise prices below the fair market value of
our common stock at the date of grant including a write-off of deferred
compensation expense for terminated employees and deferred compensation expense
for the PeopleMover escrowed shares. Amortization of equity-based compensation
was $1.5 million in the quarter ended June 30, 2000. We will continue to
amortize our equity-based compensation over the vesting period, which is
generally three to four years.
Other Income. Other income for the quarter ended June 31, 2001 was $0.2
million and consisted primarily of interest income from the Company's cash
balances. Interest income was $1.0 million in the quarter ended June 30, 2000.
Income Tax Expense. We have not recorded a provision for income tax
expense as we have incurred substantial losses in every fiscal period since our
inception.
Six Months Ended June 30, 2001 and 2000
Revenue
For the six months ended June 30, 2001 our revenue was $1.7 million of
which $1.3 million was derived from Application and Procurement Services ("APS")
which consisted of integration services revenue of $0.9 million and other
revenue of $0.4 million, including a fee of $0.3 million in mitigation of a
licensee's decision during the third quarter of 2000 to cease implementation of
our product; and $0.4 million from our FreeAgent services consisting of initial
sign-up fees and monthly fees paid by our former e.office employees. For the six
months ended June 30, 2000 we had revenue of $3.3 million of which approximately
$2.4 million related to the Application and Procurement Services which consisted
of the sale of software licenses and integration services revenues; and $0.9
million was derived from our FreeAgent.com services consisting of initial
sign-up fees and monthly fees paid by our e.office employees as well as sales of
advertising sponsorships on FreeAgent.com;
Cost of Revenue
Cost of revenue for the six months ended June 30, 2001, was $0.8 million,
a decrease of 33% from cost of revenue of $1.2 million for the quarter ended
15
June 30, 2000. This reduction was as a result of the decreased amount of
salaries and wages paid to employees that provide implementation and integration
services to customers who were deploying our enterprise software during the
quarter, salaries paid to staff who administer our e.office services and costs
associated with operating the FreeAgent.com website including certain technical
personnel and telecommunications charges. Cost of revenue for the six months
ended June 30, 2000, was $1.2 million and consisted primarily of salaries paid
to staff who administered our FreeAgent e.Office services, costs associated with
operating the FreeAgent.com website including certain technical personnel and
telecommunications charges.
Operating Expenses
Sales and Marketing. Sales and marketing expenses for the six months ended
June 30, 2001 were $5.3 million, excluding $0.02 million reflected as equity
based compensation below, a decrease of 65% from sales and marketing expenses of
$15.2 million for the six months ended June 30, 2000. This decrease was
primarily attributable to the decline in marketing and advertising expenses for
our Workforce360 enterprise software and FreeAgent.com website, as well as a
decline in salaries and benefits paid to a reduced sales and marketing staff.
Product Development. Product development expenses for the six months ended
June 30, 2001 were $6.5 million, excluding $0.3 million reflected as equity
based compensation below, a decrease of 54% from product development expenses of
$14.1 million for the six months ended June 30, 2000. The decrease was primarily
attributable to a lower amount in salaries and benefits paid to our reduced
product development staff and a reduction in the fees paid to our third party
consultants. During the six months ended June 30, 2001, we capitalized
approximately $1.0 million of software development costs.
General and Administrative. General and administrative expenses for the
six months ended June 30, 2001 were $10.4 million, excluding $4.3 reflected as
equity based compensation below, an increase of 42% over general and
administrative expenses of $7.3 million for the six months ended June 30, 2000.
The increase was primarily attributable to a write-off of prepaid marketing
expenses and customer advisory services to be provided by Lucent Technologies,
Inc. officials. This write-off was occasioned by the departure of a key officer.
During the quarter we also wrote off a loan made to our former President and
Chief Operating Officer. The loan was a non-recourse loan secured by the shares
of the Company stock obtained upon the exercise of an option. These expenses
were offset by cost reductions associated with a decline in the number of
employees and associated general office expenses, rent and utilities, recruiting
fees and professional fees. Salaries and benefits decreased as we reduced our
general and administrative staff.
Depreciation and Amortization. Depreciation and amortization expenses for
the six months ended June 30, 2001 were $4.9 million, consisting primarily of
amortization of goodwill of $3.1 million associated with our acquisitions.
Depreciation and amortization expense was $6.6 million for the six months ended
June 30, 2000.
Amortization of Equity-based Compensation. The amortization of
equity-based compensation for the six months ended June 30, 2001 was $4.6
million and
16
consisted of deferred compensation expense for options to purchase common stock
granted to employees having exercise prices below the fair market value of our
common stock at the date of grant including a write-off of deferred compensation
for terminated employees as well as deferred compensation expense for the
PeopleMover escrowed shares. Amortization of equity-based compensation was $5.2
million for the six months ended June 30, 2000.
17
Impairment Charges: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", In March 2001 we determined that
our remaining goodwill associated with the IndustryInsite.com, Ithority, and
PeopleMover acquisitions was not recoverable. We regularly perform reviews to
determine if the carrying value of our goodwill and other intangible assets is
impaired, and as a result of the proposed merger, as described in footnote 1(b)
of the Notes to the Consolidated Financial Statements, we reevaluated the
recoverability of our goodwill based on the remaining cash flow projections
through the acquisition date including the fair value of consideration to be
received in connection with the acquisition. An impairment charge of $23.0
million, which included $22.7 million for goodwill impairment and $0.3 million
for impairment of our computer equipment and other personal property, was
therefore recorded and included in operating results for the six months ended
June 30, 2001.
Loss on Disposition: In March 2001 the Company recorded a loss of $1.4
million relating to the disposition of its e.office business, a back-office and
employment service for independent professionals operated by its former
subsidiary, The Churchill Benefit Corporation. In accordance with the provisions
of SAB Topic 5-Z and APB Opinion No.30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", the Company has
included the loss on disposition of the e.office business as an item of loss
from operations for the six months ended June 30, 2001.
Other Income. Other income for the six months ended June 30, 2001 was $0.6
million and consisted primarily of interest income from cash balances. Interest
income was $1.2 million for the six months ended June 30, 2000.
Income Tax Expense. We have not recorded a provision for income tax
expense as we have incurred substantial losses in every fiscal period since our
inception.
Liquidity and Capital Resources
We have funded our operations from inception primarily by the sale of our
equity securities, including net proceeds of approximately $132.6 million
through June 30, 2001. In April 2000, we completed our initial public offering
and concurrent private placement to Dell USA L.P., raising approximately $75.1
million net of offering costs.
Cash used in operating activities for the six months ended June 30, 2001
was $16.6 million, primarily due to our net loss of $54.5 million, adjusted for
various non-cash charges including an impairment charge, a non-cash loss on
disposition, a non-cash loan loss reserve, non-cash compensation and
depreciation and amortization, and changes in operating assets and liabilities.
Cash used in operating activities for the six months ended June 30, 2000 totaled
$29.2 million. We expect to decrease our working capital needs quarter to
quarter through more targeted marketing and advertising, better workforce
management and a reduction in general and administrative expenses.
Cash used in investment activities for the six months ended June 30, 2001
totaled $3.3 million of which $1.0 million was used to fund software development
costs that were capitalized and $2.2 million was used to fund the purchase of
software technology. We used $0.1 million during the quarter to acquire property
and equipment. Cash provided by investing activities for the
18
six months ended June 30, 2000 was $18.3 million. The sale of short-term
investments provided cash of $26.9 million, and we used $6 million to acquire
property and equipment. Our acquisition of a subsidiary and other assets
utilized $2.6 million.
Net cash used in financing activities for the six months ended June 30,
2001 was $0.3 million of which $0.2 million was used to repay loans and $0.1
million was used to repurchase stock. Cash provided by financing activities for
the six months ended June 30, 2000 was $78.7 million of which $75.1 million
resulted from our initial public offering and private concurrent placement. The
remaining $3.6 million resulted from exercises of issued and outstanding options
and warrants and net proceeds from loans.
The accompanying financial statements have been prepared assuming that
Opus360 will continue as a going concern. Our history of net losses and negative
cash flows from operations as well as projected additional losses raises
substantial doubt about our ability to continue as a going concern. In the
future, we may need to raise additional funds through public or private
financings, or other arrangements to fund our operations and potential
acquisitions, if any. We currently have no plans to affect any other offerings.
We cannot assure you that any financings or other arrangements will be available
in amounts or on terms acceptable to us or at all and any new financings or
other arrangements could place operating or other restrictions on us. Our
inability to raise capital when needed could seriously harm the growth of our
business and results of operations. If additional funds are raised through the
issuance of equity securities, the percentage ownership of our stockholders
would be reduced. Furthermore, these equity securities could have rights,
preferences or privileges senior to our common stock.
As a result of our issuing options to FreeAgent and e.office employees
under circumstances that may not have complied with the registration
requirements of the Securities Act, we intend to make a rescission offer to
these employees, and we may have a contingent liability of up to $0.1 million.
Recent Accounting Pronouncements
On March 31, 2000 the Financial Accounting Standards Board issued FASB
interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25 (FIN 44). FIN 44
generally applies prospectively to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after July 1, 2000, except for the provision related to
repricings and the definition of an employee which apply to awards issued after
December 15, 1998. To the extent that events covered by FIN 44 occur after the
applicable date but prior to July 1, 2000, the effects of applying FIN 44 shall
be recognized on a prospective basis. Accordingly, no adjustments shall be made
upon initial application of FIN 44 to financial statements for periods prior to
July 1, 2000. The Company has determined that the adoption of FIN 44 did not
have a material effect on the Company's operating results.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, or SFAS No. 133, "Accounting for
Derivative Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
19
quarters of fiscal years beginning June 15, 2000. We did not engage in any
derivative instruments or hedging activities during the quarter, and the
statement did not have any effect on the Company's operating results.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately, and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
As of the date of adoption, the Company does not have unamortized goodwill
subject to the transition provisions of Statements 141 and 142 and the adoption
of these statements is not expected to have any effect on the Company's
operating results. Amortization expense related to goodwill was $12 million for
the year ended December 31, 2000.
Qualitative and Quantitative Disclosure About Market Risk
At June 30, 2001, the majority of our cash balances were held primarily in
the form of short-term highly liquid investment grade corporate and government
securities. As a result, our interest income may be sensitive to
20
changes in the general level of U.S. interest rates. However, due to the
short-term nature of our investments and the fact that we generally hold these
investments until their maturity dates, we believe that we are not subject to
any material interest or market rate risks.
The Company utilizes lines of credit to purchase equipment and to back
certain financial obligations. The Company's outstanding balance under its lines
of credit at June 30, 2001 was $0.9 million. The Company will repay an aggregate
amount of $1.1 million, including interest, for its two lines of credit, which
mature on February 2003 and June 2003, respectively.
21
ADDITIONAL INFORMATION
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 6, 2001 a lawsuit purporting to be a class action and captioned
CHARLES BLAND VS. OPUS360 CORPORATION, ET AL., 01 Civ. 2938 (the "BLAND Action")
was filed in the United States District Court for the Southern District of New
York. The BLAND Action is brought on behalf of a proposed class of all persons
who acquired securities of the Company between April 7, 2000 and December 6,
2000. Named as defendants in the BLAND Action are the Company, eleven current
and former officers and directors of the Company, the underwriters of the
Company's initial public offering and two shareholders (the "Selling
Shareholders") who sold stock in a secondary offering (collectively with the
initial public offering, the "Offering") concurrent with the initial public
offering.
The amended and restated complaint in the BLAND Action alleges that, among
other things, the plaintiff and members of the proposed class were damaged when
they acquired securities of the Company because false and misleading information
and material omissions in the registration statement relating to the Offering
caused the prices of the Company's securities to be inflated artificially. It
also alleges violations of Sections 11, 12(a)(2), and 15 of the Securities Act
of 1933 (the "Securities Act"). Damages in unspecified amounts and certain
rescission rights are sought.
Since the filing of the BLAND Action, ten similar putative class actions
(the "Additional Actions" and together with the BLAND Action, the "Actions")
also have been filed in the United States District Court for the Southern
District of New York. The Additional Actions are brought on behalf of all
persons who acquired securities of the Company between April 7, 2000 and March
20, 2001. Named as defendants in the Additional Actions are the Company, ten
current and former officers and directors of the Company, the underwriters of
the Company's initial public offering and the Selling Shareholders. As in the
BLAND Action, the complaints in the Additional Actions allege false and
misleading information and material omissions in the registration statement
relating to the Offering in purported violation of Sections 11, 12(a)(2), and 15
of the Securities Act. Damages in unspecified amounts and certain rescission
rights are sought.
On or about June 5, 2001, an action captioned KENNETH SHIVES, ET AL. V.
BANK OF AMERICA SECURITIES LLC, ET AL., 01 Civ. 4956 (the "SHIVES Action") was
filed in the United States District Court for the Southern District of New York.
The complaint in the SHIVES Action asserts claims against the Company, certain
of its present or former officers and directors (collectively, the "Opus360
Defendants"), the Selling Shareholders and the underwriters that managed the
Company's April 2000 Offering, for alleged violations of the federal securities
laws (principally Sections 11, 12(a)(2) and 15 of the Securities Act of 1933,
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.) The
complaint is based on allegations that the various underwriter defendants
engaged in (and involved other defendants in) a broad scheme to artificially
inflate and maintain the market price of the common stock of various companies
named as defendants (including Opus360), and to cause the named plaintiffs and
other members of the putative class to purchase the stock of those companies at
artificially inflated prices.
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On or about July 20, 2001, counsel for the plaintiffs in the SHIVES Action
and counsel for the Opus360 Defendants and the Selling Shareholders executed
stipulations in which the plaintiffs agreed to drop the Opus360 Defendants and
the Selling Shareholders as defendants in the SHIVES Action and to dismiss
without prejudice the claims asserted in that action against each of those
defendants. Those stipulations were so ordered by the Court on or about July 24,
2001 and the Opus360 Defendants and the Selling Shareholders are no longer
defendants in the SHIVES Action.
The Company believes the claims made in the Actions are without merit and
intends to vigorously defend the Actions.
Item 2. Change in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K on April 12, 2001 to report:
1. The execution of a Share Exchange Agreement, dated April 11, 2001, by and
among Opus360 Corporation and Proha Plc, pursuant to which the Company is
expected to combine with Artemis Management Systems, Inc.
2. The divestiture by Opus360 of its billing and payroll service formerly
known as e.office to a team consisting of the former management of the
e.office business.
3. The filing by the Company of an appeal of the notice of delisting issued
by the Nasdaq National Market.
4. The filing of a purported class action by a shareholder of the Company,
alleging violations of the federal securities laws in connection with the
Company's initial public offering in April 2000.
The Company also filed a Current Report on Form 8-K on June 29, 2001,
announcing that the Company's common stock had been delisted from the Nasdaq
National Market and would, commencing on June 29, 2001, trade on OTC Bulletin
Board.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date August 14, 2001 Opus360 Corporation
(Registrant)
/s/ Peter Schwartz
------------------------------
Executive Vice President and
Chief Financial Officer
(Signature)
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