##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q x
    
    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 0-25040 APPLIX, INC. 
 (Exact name of registrant as specified in its charter)
 MASSACHUSETTS
    
    04-2781676(State or other jurisdiction of
    
    (I.R.S. Employer Identificationincorporation or organization)
    
    Number)
 289 Turnpike Road, Westborough, Massachusetts 01581
(Address of principal executive offices) (508) 870-0300
(Registrants telephone number) Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or15(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. YesxNoo Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YesoNox As of November 9, 2004, the Registrant had 14,281,600 outstanding shares
of common stock.




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APPLIX, INC. Form 10-Q For the Quarterly Period Ended September 30, 2004 Table of Contents  
 PageNo.Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27Part II  Other Information
    
    
    27Item 6. Exhibits
    
    
    27Signature
    
    
    29EX-10.24 Summary of 2004 Management Incentive Compensation PlanEX-10.25 Stock Option AgreementEX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification
  Applix and TM1 are registered trademarks of Applix, Inc. TM1 Integra,
Applix Interactive Planning, and TM1 Web are trademarks of Applix, Inc. All
other trademarks and company names mentioned are the property of their
respective owners. All rights reserved. Certain information contained in this Quarterly Report on Form 10-Q is
forward-looking in nature. All statements included in this Quarterly Report on
Form 10-Q or made by management of Applix, Inc. (Applix or the Company) and
its subsidiaries, other than statements of historical facts, are
forward-looking statements. Examples of forward-looking statements include
statements regarding Applixs future financial results, operating results,
business strategies, projected costs, products, competitive positions and plans
and objectives of management for future operations. In some cases,
forward-looking statements can be identified by terminology such as may, 
will, should, would, expect, plan, anticipates, intend,
believes, estimates, predicts, potential, continue, or the negative
of these terms or other comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and uncertainties and other
important factors, including those discussed in the section below entitled
Factors that May Affect Future Results. These and many other factors could
affect Applixs future financial and operating results, and could cause actual
results to differ materially from expectations based on forward-looking
statements made in this document or elsewhere by Applix or on its behalf.
Applix does not undertake an obligation to update its forward-looking
statements to reflect future events or circumstances. 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Applix, Inc. 
 Condensed Consolidated Balance Sheets
(In thousands, except share and par value amounts) September 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,328
    
    
    $
    9,241Accounts receivable, less allowance for doubtful accounts of $243 and $252,
respectively
    
    
    4,227
    
    
    
    5,715Other current assets
    
    
    2,001
    
    
    
    2,125Total current assets
    
    
    19,556
    
    
    
    17,081Restricted cash
    
    
    400
    
    
    
    817Property and equipment, at cost
    
    
    13,190
    
    
    
    13,404Less: accumulated amortization and depreciation
    
    
    (12,481
    )
    
    
    (12,431
    )Net property and equipment
    
    
    709
    
    
    
    973Capitalized software costs, net of accumulated amortization of $1,840 and
$1,575, respectively
    
    
    
    
    
    
    265Goodwill
    
    
    1,158
    
    
    
    1,158Intangible asset, net of accumulated amortization of $875 and $688, respectively
    
    
    625
    
    
    
    812Other assets
    
    
    645
    
    
    
    843TOTAL ASSETS
    
    $
    23,093
    
    
    $
    21,949LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,254
    
    
    $
    1,083Accrued expenses
    
    
    5,457
    
    
    
    6,657Accrued restructuring expenses
    
    
    431
    
    
    
    3,400Deferred revenues
    
    
    6,542
    
    
    
    8,060Total current liabilities
    
    
    13,684
    
    
    
    19,200Long term liabilities
    
    
    205
    
    
    
    494Commitments and contingencies (Note 6)
    
    
    
    
    
    
    Stockholders equity:Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and
outstanding
    
    
    
    
    
    
    Common stock, $.0025 par value; 30,000,000 shares authorized; 14,267,970 and
13,220,950 shares issued, respectively, and 14,267,970 and 12,863,323 shares
outstanding, respectively
    
    
    36
    
    
    
    33Additional paid-in capital
    
    
    54,292
    
    
    
    50,497Accumulated deficit
    
    
    (43,770
    )
    
    
    (45,375
    )Accumulated other comprehensive loss
    
    
    (1,354
    )
    
    
    (1,539
    )9,204
    
    
    
    3,616Less: treasury stock, 357,627 shares, at cost as of December 31, 2003
    
    
    
    
    
    
    (1,361
    )Total stockholders equity
    
    
    9,204
    
    
    
    2,255TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    23,093
    
    
    $
    21,949
 See accompanying Notes to Condensed Consolidated Financial Statements. 3




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Applix, Inc. 
 Condensed Consolidated Statements of Operations
(In thousands, except per share amounts) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Software license
    
    $
    3,307
    
    
    $
    3,108
    
    
    $
    10,766
    
    
    $
    8,457Professional services and maintenance
    
    
    3,602
    
    
    
    3,315
    
    
    
    10,789
    
    
    
    10,741Total revenues
    
    
    6,909
    
    
    
    6,423
    
    
    
    21,555
    
    
    
    19,198Cost of revenues:Software license
    
    
    7
    
    
    
    329
    
    
    
    391
    
    
    
    1,161Professional services and maintenance
    
    
    856
    
    
    
    1,164
    
    
    
    2,829
    
    
    
    4,089Total cost of revenues
    
    
    863
    
    
    
    1,493
    
    
    
    3,220
    
    
    
    5,250Gross margin
    
    
    6,046
    
    
    
    4,930
    
    
    
    18,335
    
    
    
    13,948Operating expenses:Sales and marketing (includes $0 of stock-based
compensation for the three months ended September
30, 2004 and 2003, and $0 and $23 of stock-based
compensation for the nine months ended September
30, 2004 and 2003, respectively)
    
    
    2,473
    
    
    
    2,332
    
    
    
    7,631
    
    
    
    7,812Product development
    
    
    1,059
    
    
    
    1,343
    
    
    
    3,614
    
    
    
    4,233General and administrative (includes $15 and $105
of stock-based compensation for the three months
ended September 30, 2004 and 2003, respectively,
and $45 and $252 of stock-based compensation for
the nine months ended September 30, 2004 and
2003, respectively)
    
    
    1,507
    
    
    
    1,723
    
    
    
    4,603
    
    
    
    6,003Compensation expense related to acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583Restructuring expenses
    
    
    604
    
    
    
    
    
    
    
    577
    
    
    
    Amortization of an acquired intangible asset
    
    
    63
    
    
    
    63
    
    
    
    188
    
    
    
    188Total operating expenses
    
    
    5,706
    
    
    
    5,461
    
    
    
    16,613
    
    
    
    18,819Operating income (loss)
    
    
    340
    
    
    
    (531
    )
    
    
    1,722
    
    
    
    (4,871
    )Non-operating income (loss):Interest and other income (loss), net
    
    
    290
    
    
    
    (59
    )
    
    
    256
    
    
    
    546Net (loss) gain from sale of CRM business (Note 5)
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    7,910Income (loss) before taxes
    
    
    630
    
    
    
    (602
    )
    
    
    1,978
    
    
    
    3,585Provision for income taxes
    
    
    178
    
    
    
    
    
    
    
    293
    
    
    
    764Income (loss) from continuing operations
    
    
    452
    
    
    
    (602
    )
    
    
    1,685
    
    
    
    2,821Loss from discontinued operations
    
    
    (36
    )
    
    
    (106
    )
    
    
    (80
    )
    
    
    (162
    )Net income (loss)
    
    $
    416
    
    
    $
    (708
    )
    
    $
    1,605
    
    
    $
    2,659Net income (loss) per share, basic and diluted:Continuing operations basic
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    0.12
    
    
    $
    0.23Continuing operations diluted
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    0.11
    
    
    $
    0.22Discontinued operations basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )Net income (loss) per share basic
    
    $
    0.03
    
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    0.21Net income (loss) per share diluted
    
    $
    0.03
    
    
    $
    (0.06
    )
    
    $
    0.10
    
    
    $
    0.21Weighted average number of shares outstanding:Basic
    
    
    14,243
    
    
    
    12,610
    
    
    
    13,957
    
    
    
    12,508Diluted
    
    
    15,539
    
    
    
    12,610
    
    
    
    15,432
    
    
    
    12,839
 See accompanying Notes to Condensed Consolidated Financial Statements. 4




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Applix, Inc. 
 Condensed Consolidated Statements of Cash Flows
(In thousands) Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    1,605
    
    
    $
    2,659Adjustments to reconcile net income to net cash used in operating activities:Depreciation
    
    
    474
    
    
    
    705Amortization
    
    
    452
    
    
    
    876Provision for doubtful accounts
    
    
    (9
    )
    
    
    22Gain on sale of CRM business
    
    
    
    
    
    
    (7,910
    )Deferred gain on sale of subsidiary
    
    
    (195
    )
    
    
    Non-cash stock compensation expense
    
    
    45
    
    
    
    275Non-cash restructuring credit
    
    
    (27
    )
    
    
    Changes in operating assets and liabilities:Decrease in restricted cash
    
    
    417
    
    
    
    Decrease in accounts receivable
    
    
    1,458
    
    
    
    2,369Decrease (increase) in prepaid and other current assets
    
    
    326
    
    
    
    (425
    )Increase (decrease) in accounts payable
    
    
    174
    
    
    
    (427
    )Decrease in accrued expenses
    
    
    (1,161
    )
    
    
    (3,181
    )Decrease in accrued restructuring expenses
    
    
    (2,969
    )
    
    
    Decrease in other liabilities
    
    
    (86
    )
    
    
    (Decrease) increase in deferred revenues
    
    
    (1,483
    )
    
    
    681Cash used in operating activities
    
    
    (979
    )
    
    
    (4,356
    )Cash flows from investing activities:Property and equipment expenditures
    
    
    (188
    )
    
    
    (148
    )Net proceeds from sale of CRM business
    
    
    
    
    
    
    5,525Proceeds from sale of subsidiary
    
    
    195
    
    
    
    Cash provided by investing activities
    
    
    7
    
    
    
    5,377Cash flows from financing activities:Proceeds from issuance of common stock to affiliate
    
    
    3,000
    
    
    
    Proceeds from issuance of common stock under stock plans
    
    
    1,739
    
    
    
    463Payment on short-term borrowing
    
    
    
    
    
    
    (237
    )Proceeds from notes receivable
    
    
    232
    
    
    
    Cash provided by financing activities
    
    
    4,971
    
    
    
    226Effect of exchange rate changes on cash
    
    
    88
    
    
    
    (666
    )Increase in cash and cash equivalents
    
    
    4,087
    
    
    
    581Cash and cash equivalents at beginning of period
    
    
    9,241
    
    
    
    8,389Cash and cash equivalents at end of period
    
    $
    13,328
    
    
    $
    8,970Supplemental disclosure of cash flow informationCash paid for income tax
    
    $
    518
    
    
    $
    509Cash paid for interest expense
    
    $
    98
    
    
    $
    
 See accompanying Notes to Condensed Consolidated Financial Statements. 5




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APPLIX, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The Company Applix, Inc. (the Company) is a global provider of Business Intelligence
(BI) and Business Performance Management (BPM) solutions, focused on
interactive planning, budgeting and analytics, as well as financial reporting,
which includes Applix TM1 and related modules, such as Applix TM1 Web. The
Companys products represent one principal business segment, which the Company
reports as its continuing operations. Historically, the Company also provided customer relationship management
(CRM) software solutions. The Company sold certain assets relating to its CRM
software solutions (the CRM Business) in the first quarter of 2003 (See Note
5). The Companys operating results reflect the CRM Business up through the
sale of the business, which occurred on January 21, 2003, followed by a March
17, 2003 closing of certain assets relating to the German CRM operations. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America (U.S.) for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC) including instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the U.S. for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended
September 30, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003. Reclassifications Certain prior year financial statement items have been reclassified to
conform to the current year presentation. Use of Estimates The preparation of financial statements and accompanying notes in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and 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. On an ongoing basis,
management evaluates its estimates. Management bases its estimates on
historical experience and on various other assumptions that it believes are
reasonable under the circumstances. Actual results could differ from those
estimates or assumptions. Revenue Recognition The Company generates revenues mainly from licensing the rights to use its
software products and providing services. The Company sells products primarily
through a direct sales force, indirect channel partners and original equipment
manufacturers (OEMs). The Company accounts for software revenue transactions
in accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended. Revenues from software arrangements are recognized
when: 6




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
    
    Persuasive evidence of an arrangement exists, which is typically when
a non-cancelable sales and software license agreement has been signed,
or purchase order has been received;
    
    Delivery has occurred. If the assumption by the customer of the risks
and rewards of its licensing rights occurs upon the delivery to the
carrier (FOB Shipping Point), then delivery occurs upon shipment (which
is typically the case). If assumption of such risks and rewards occurs
upon delivery to the customer (FOB Destination), then delivery occurs
upon receipt by the customer. In all instances, delivery includes
electronic delivery of authorization keys to the customer;
    
    The customers fee is deemed to be fixed or determinable and free of
contingencies or significant uncertainties;
    
    Collectibility is probable; and
    
    Vendor specific objective evidence of fair value exists for all
undelivered elements, typically maintenance and professional services. The Company also uses the residual method under SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements and is recognized as revenue, assuming all other conditions
for revenue recognition have been satisfied. Substantially all of the Companys
product revenue is recognized in this manner. If the Company cannot determine
the fair value of any undelivered element included in an arrangement, the
Company will defer revenue until all elements are delivered, until services are
performed or until fair value of the undelivered elements can be objectively
determined. In circumstances where the Company offers significant and
incremental fair value discounts for future purchases of other software
products or services to its customers as part of an arrangement, utilizing the
residual method the Company defers the value of the discount and recognizes
such discount to revenue as the related product or service is delivered. As part of an arrangement, end-user customers typically purchase
maintenance contracts. Maintenance services include telephone and Web based
support as well as rights to unspecified upgrades and enhancements, when and if
the Company makes them generally available. Substantially all of the Companys
software license revenue is earned from perpetual licenses of off-the-shelf
software requiring no modification or customization. Therefore, professional
services are deemed to be non-essential to the functionality of the software
and typically are for implementation planning, loading of software, training,
building simple interfaces and running test data. In instances where the services are deemed to be essential to the
functionality of the software, both license and service revenues are recognized
together on a percentage of completion basis utilizing hours incurred to date
as a percentage of total estimated hours to complete the project. Revenues from maintenance services are recognized ratably over the term of
the maintenance contract period, which is typically one year, based on vendor
specific objective evidence of fair value. Vendor specific objective evidence
of fair value is based upon the amount charged when maintenance is purchased
separately, which is typically the contracts renewal rate. Revenues from professional services are generally recognized based on
vendor specific objective evidence of fair value when: (1) a non-cancelable
agreement for the services has been signed or a customers purchase order has
been received; and (2) the professional services have been delivered. Vendor
specific objective evidence of fair value is based upon the price charged when
these services are sold separately and is typically an hourly rate for
professional services and a per class rate for training. Revenues for
consulting services are generally recognized on a time and material basis as
services are delivered. Based upon the Companys experience in completing
product implementations, these services are typically delivered within three
months or less subsequent to the contract signing. 7




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The Companys license arrangements with its end-user customers and
indirect channel partners do not include any rights of return or price
protection, nor do arrangements with indirect channel partners typically
include any sell-through contingencies. In those instances where the Company
has granted a customer rights to when-and-if available additional products, the
Company recognizes the arrangement fee ratably over the term of the agreement. Generally, the Companys arrangements with end-user customers and indirect
channel partners do not include any acceptance provisions. In those cases in
which significant uncertainties exist with respect to customer acceptance or in
which specific customer acceptance criteria are included in the arrangement,
the Company defers the entire arrangement fee and recognizes revenue, assuming
all other conditions for revenue recognition have been satisfied, when the
uncertainty regarding acceptance is resolved as generally evidenced by written
acceptance by the customer. The Companys arrangements with indirect channel
partners and end-user customers do include a standard warranty provision
whereby the Company will use reasonable efforts to cure material nonconformity
or defects of the software from the Companys published specifications. The
standard warranty provision does not provide the indirect channel partners or
end-user customer with the right of refund. In very limited instances, the
Company has granted the right to refund for an extended period if the
arrangement is terminated because the product does not meet the Companys
published technical specifications, and the Company is unable to reasonably
cure the nonconformity or defect. Generally, the Company considers that this
warranty provision is not an acceptance provision and therefore accounted for
as a warranty in accordance with Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies. At the time the Company enters into an arrangement, the Company assesses
the probability of collection of the fee and the payment terms granted to the
customer. For end-user customers and indirect channel partners, the Companys
typical payment terms are due within 30 days of invoice date. However, in those
cases where payment terms are greater than 30 days, the Company does not
recognize revenue from the arrangement fee unless the payment is due within 90
days. If the payment terms for the arrangement are considered extended (greater
than 90 days), the Company defers revenue under these arrangements and such
revenue is recognized, assuming all other conditions for revenue recognition
have been satisfied, when the payment of the arrangement fee becomes due. In some instances, indirect channel partners provide first level
maintenance services to the end-user customer and the Company provides second
level maintenance support to the indirect channel partner. The Company accounts
for amounts received in these arrangements in accordance with Emerging Issues
Task Force 99-19, Reporting Revenue Gross as a Principal versus Net as an
Agent. When the Company receives a net fee from the indirect channel partner
to provide second level support to the indirect channel partner, this amount is
recorded as revenue over the term of the maintenance period at the net amount
received because the Company: (1) does not collect the fees from the end-user
customer (2) does not have latitude in establishing the price paid by the
end-user customer for maintenance services and (3) does not have the latitude
to select the supplier providing first level support. However, in circumstances
where the Company renews maintenance contracts directly with the end-user
customers, receives payment for the gross amount of the maintenance fee, has
the ability to select the supplier for first level support, and the Company
believes that it is the primary obligor for first level support to the end
customer, the Company records revenue for the gross amounts received. In such
circumstances, the Company remits a portion of the payment received to the
indirect channel partner to provide first level support to the end-user
customer, and such amounts are capitalized and amortized over the maintenance
period. Revenue recorded for amounts collected by the Company and remitted to
the indirect channel partners for such renewals aggregated $198,000 and
$205,000 for the three months ended September 30, 2004 and 2003, respectively,
and $700,000 and $531,000 for the nine months ended September 30, 2004 and
2003, respectively. Concentrations of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash, cash equivalents and trade receivables.
The Company maintains cash and cash equivalents with high credit quality
financial institutions and monitors the amount of credit exposure to any one
financial institution. The Company extends credit to its customers in the normal course of
business, resulting in trade receivables. The Companys normal credit terms are
30 days. 8




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The Company performs continuing credit evaluations of its customers
financial condition, and although the Company generally does not require
collateral, letters of credit may be required from its customers in certain
circumstances. An allowance for doubtful accounts is provided for accounts
which management believes may not be collected due to a customers financial
circumstance (e.g. bankruptcy), and for all accounts which are 180 days past
due, absent evidence which supports their collectibility. Stock-Based Compensation The Company periodically grants stock options for a fixed number of shares
to employees and directors with an exercise price equal to the fair market
value of the shares at the date of the grant. The Company accounts for stock
option grants to employees and directors using the intrinsic value method.
Under the intrinsic value method, compensation associated with stock awards to
employees and directors is determined as the difference, if any, between the
current fair value of the underlying common stock on the date compensation is
measured and the price the employee or director must pay to exercise the award.
The measurement date for employee awards is generally the date of grant. If stock-based compensation expense had been recorded based on the fair
value of stock awards at the date of grant, the Companys net income (loss)
would have been adjusted to the pro forma amounts presented below (in
thousands, except for per share amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    416
    
    
    $
    (708
    )
    
    $
    1,605
    
    
    $
    2,659Add: Total stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects
    
    
    15
    
    
    
    105
    
    
    
    45
    
    
    
    275Deduct: Total stock-based employee
compensation expense not included in reported
net income (loss), determined under fair
value based method for all awards, net of
related tax effects
    
    
    (324
    )
    
    
    (457
    )
    
    
    (1,062
    )
    
    
    (1,616
    )Pro forma net income (loss)
    
    $
    107
    
    
    $
    (1,060
    )
    
    $
    588
    
    
    $
    1,318Net income (loss) per share:Basic  as reported
    
    $
    0.03
    
    
    $
    (0.06
    )
    
    $
    0.11
    
    
    $
    0.21Diluted  as reported
    
    $
    0.03
    
    
    $
    (0.06
    )
    
    $
    0.10
    
    
    $
    0.21Basic  pro forma
    
    $
    0.01
    
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    0.11Diluted  pro forma
    
    $
    0.01
    
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    0.10Weighted average number of shares outstanding:Basic
    
    
    14,243
    
    
    
    12,610
    
    
    
    13,957
    
    
    
    12,508Diluted
    
    
    15,539
    
    
    
    12,610
    
    
    
    15,432
    
    
    
    12,839
 The fair value for stock option awards is estimated at the date of the
grant using a Black-Scholes option-pricing model, assuming no dividends and the
following assumptions: 2004
    
    2003Expected life (years)
    
    
    4
    
    
    
    4Expected stock price volatility
    
    
    80.6
    %
    
    
    83.7
    %Risk free interest rate
    
    
    3.25
    %
    
    
    3.00
    %
 3. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income per share is computed using the weighted average
number of common shares outstanding during the period, plus the dilutive
effect, if any, of potential common shares, which consists of stock options.
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except for per share amounts): 9




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Income (loss) from continuing operations
    
    $
    452
    
    
    $
    (602
    )
    
    $
    1,685
    
    
    $
    2,821Loss from discontinued operations
    
    
    (36
    )
    
    
    (106
    )
    
    
    (80
    )
    
    
    (162
    )Net income (loss)
    
    $
    416
    
    
    $
    (708
    )
    
    $
    1,605
    
    
    $
    2,659Denominator:Denominator for basic net income (loss) per share 
weighted average number of shares outstanding
    
    
    14,243
    
    
    
    12,610
    
    
    
    13,957
    
    
    
    12,508Dilutive effect of assumed exercises of stock options
    
    
    1,296
    
    
    
    
    
    
    
    1,475
    
    
    
    331Denominator for diluted net income (loss) per share
    
    
    15,539
    
    
    
    12,610
    
    
    
    15,432
    
    
    
    12,839
 Common stock equivalents (stock options) of 1,348,622 and 1,655,410 were
excluded from the calculation of diluted earnings per share for the three
months ended September 30, 2004 and 2003, respectively, and 521,243 and
1,735,352 outstanding stock options were excluded from the calculation of
diluted earnings per share for the nine months ended September 30, 2004 and
2003, respectively, because these options were anti-dilutive as the stock
option exercise price exceeded the average market price for the respective
periods. However, these options could be dilutive in the future. 4. Comprehensive Income (Loss) Components of comprehensive income (loss) include net income (loss) and
certain transactions that have generally been reported in the consolidated
statements of stockholders equity. Other comprehensive (loss) income includes
gains and losses from foreign currency translation adjustments. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands)
    
    (In thousands)2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    416
    
    
    $
    (708
    )
    
    $
    1,605
    
    
    $
    2,659Other comprehensive (loss) income
    
    
    (197
    )
    
    
    (38
    )
    
    
    185
    
    
    
    (639
    )Total comprehensive income (loss)
    
    $
    219
    
    
    $
    (746
    )
    
    $
    1,790
    
    
    $
    2,020
 5. Net Gain from Sale of CRM Business In the first quarter of 2003, the Company sold its CRM Business to iET
Acquisition, LLC (iET), a wholly-owned subsidiary of Platinum Equity
Holdings, LLC for $5,750,000 in cash consideration, of which $487,000 was paid
to iET for net working capital adjustments and $3,552,000 in net assumed
liabilities. The sale excluded approximately $2,800,000 in net accounts
receivable generated from the sale of CRM products and services. Accordingly,
the Company recorded a net gain before tax of $7,910,000, which includes net
cash consideration of $5,263,000 and $3,552,000 of net liabilities assumed by
iET less transaction costs of $905,000. The Companys results for the three and nine months ended September 30,
2004 and the three months ended September 30, 2003 included no CRM revenues,
while the nine months ended September 30, 2003 included CRM license revenues of
$253,000 and CRM professional services and maintenance revenues of $999,000. 6. Commitments and Contingencies Contingencies From time to time, the Company is a party to routine litigation and
proceedings in the ordinary course of business. The Company is not aware of any
current litigation to which the Company is or may be a party that the Company
believes could materially adversely affect its consolidated results of
operations or financial condition. 10




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##### Table of Contents



On June 16, 2003, the Company announced that it was the subject of an
investigation by the SEC related to the restatement of the Companys financial
statements for fiscal years 2001 and 2002. The Company is cooperating fully
with the SEC in this matter. The Company is currently undergoing an unclaimed abandoned property
(UAP) audit by the Commonwealth of Massachusetts. The UAP audit is currently
in a preliminary stage, and based on information to date, no provision has been
made in the accompanying financial statements. However, it is possible that
provisions may be required in future periods if it becomes probable that
amounts could be assessed. 7. Restructuring Expenses During 2004 and 2003, the Company initiated restructuring actions in order
to consolidate some of its operations, enhance operational efficiency and
reduce expenses. In the fourth quarter of 2003, the Company adopted a plan of restructuring
to reduce operating costs. Under this plan, the Company had ceased to use, and
made the determination that it had no future use of or benefit from, certain
space pertaining to its Westborough headquarters office lease. The Company
also commenced negotiations with its landlord to settle amounts related to its
lease in general and the abandoned space in particular. These negotiations were
completed in January 2004, and as a result, the Company was able to estimate
the cost to exit this facility. Additionally, the Company had determined that
it would dispose of certain assets, which were removed from service shortly
after the implementation of the plan. As a result of this restructuring plan,
the Company recorded a restructuring expense for this space of $3,238,000.
Restructuring expense included a $3,000,000 fee paid to the landlord for the
abandoned space, an adjustment of $162,000 to reduce the Companys deferred
rent expense, adjusted transaction costs of $350,000 for professional service
fees (brokerage and legal) and $50,000 in non-cash charges relating to the
disposition of certain assets. In the second quarter of 2004, the Company
recorded a credit to the restructuring charge of $27,000 as a change in
estimate due to lower than anticipated professional service fees. The
restructuring charge was fully paid as of September 30, 2004. The accrued restructuring expenses, as well as the Companys 2004
adjustments, payments and write-offs made against accruals are detailed as
follows: Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    Payments
    
    September 30,2003
    
    Adjustment
    
    and Write-offs
    
    2004Facility exit costs
    
    $
    3,050,000
    
    
    $
    
    
    
    $
    (3,050,000
    )
    
    $
    Professional service fees
    
    
    350,000
    
    
    
    (27,000
    )
    
    
    (323,000
    )
    
    
    Total
    
    $
    3,400,000
    
    
    $
    (27,000
    )
    
    $
    (3,373,000
    )
    
    $
    
 In the second quarter of 2004, the Company adopted a plan of restructuring
to reduce operating costs. Under this plan, the Company had ceased to use, and
made the determination that it had no future use of or benefit from, certain
space pertaining to its UK office lease. In June 2004, the Company entered
into a sublease agreement with a subtenant for a portion of the Companys UK
office lease. In July 2004, upon exiting the space, the Company recorded a
restructuring charge of approximately $604,000. The restructuring charge was
primarily comprised of the difference between the Companys contractual lease
rate for the subleased space and the anticipated sublease rate to be realized
over the remaining term of the original lease, discounted by a credit adjusted
risk rate of 8%. The restructuring charge also consisted of other related
professional services, including legal fees, broker fees and certain build-out
costs, incurred in connection with the exiting of the facility. 11




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##### Table of Contents



Restructuring charges accrued and unpaid at September 30, 2004 were as
follows: Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    Restructuring
    
    
    
    
    
    September 30,2003
    
    Expenses
    
    Payments
    
    2004Facility exit costs
    
    $
    
    
    
    $
    467,000
    
    
    $
    (59,000
    )
    
    $
    408,000Other direct costs
    
    
    
    
    
    
    137,000
    
    
    
    (114,000
    )
    
    
    23,000Total
    
    $
    
    
    
    $
    604,000
    
    
    $
    (173,000
    )
    
    $
    431,000
 8. Discontinued Operations In December 2000, the Board of Directors committed to a plan to dispose of
the operations of the Companys VistaSource business, a discontinued operation.
On March 31, 2001, the Company completed the sale of the VistaSource business,
including all of its domestic and foreign operations. The Companys results of
operations for the three months ended September 30, 2004 and 2003 included
costs of $36,000 and $106,000, respectively, and included costs of $80,000 and
$162,000 for the nine months ended September 30, 2004 and 2003, respectively.
These costs primarily relate to legal and accounting costs associated with
winding down the VistaSource business in Europe. 9. Bank Credit Facilities On March 19, 2004, the Company entered into two credit facilities,
providing for lines of credit, with Silicon Valley Bank (SVB). The first
facility, a domestic working capital line of credit, has an interest rate of
prime plus 1.00% per annum and provides for borrowings of up to the lesser of
(i) $2,000,000 or (ii) an amount based upon a percentage the Companys
qualifying domestic accounts receivable. The second facility, an equipment line
of credit, has an interest rate of prime plus 1.50% per annum and provides for
borrowings of up to $1,000,000. The obligations of the Company to SVB under the
two credit facilities are guaranteed by the Company and certain of its domestic
subsidiaries and are secured by substantially all of the assets of the Company
and such domestic subsidiaries. The two credit facilities will expire on March
18, 2005. As of September 30, 2004, there were no amounts outstanding under
these two credit facilities. 10. Employee Termination Costs In the second quarter of 2004, the Company entered into several severance
agreements with certain employees. Pursuant to their agreements, the Company
has agreed to pay the salary and provide certain benefits including medical,
during their severance period. During the second quarter of 2004, the Company
recorded $115,000 in costs related to these employee terminations. The
severance amounts are to be paid until the end of the severance period which is
scheduled to be completed in the fourth quarter of 2004. As of September 30,
2004, there was a remaining unpaid balance of $2,000. 11. Stockholders Equity Effective July 1, 2004, companies incorporated in Massachusetts became
subject to the Massachusetts Business Corporation Act, Chapter 156D. Chapter
156D provides that shares that are reacquired by a company become authorized
but unissued shares. As a result, Chapter 156D eliminates the concept of
treasury shares. Accordingly, at September 30, 2004, the Company has
redesignated its existing treasury shares, at an aggregate cost of
approximately $1,309,000, as authorized but unissued shares and has allocated
this amount to the common stock par value and additional paid-in capital. On May 27, 2004, the stockholders approved the 2004 Plan previously
adopted by the Board of Directors in the first quarter of 2004. Under the 2004
Plan, up to 1,000,000 shares of common stock (subject to adjustment in the 12




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##### Table of Contents



event of stock splits and other similar events) may be issued pursuant to
awards granted under the 2004 Plan. The 2004 Plan is intended to replace the
1994 Plan, which expired by its terms on April 10, 2004. No additional stock
awards were issued under the 1994 Plan after its expiration. On May 27, 2004, the stockholders approved an amendment to the 2001
Employee Stock Purchase Plan, previously adopted by the Board of Directors in
the first quarter of 2004, increasing the total number of shares reserved for
issuance by an additional 500,000 shares of common stock to an aggregate of
1,300,000 shares of common stock. 12. Deferred Gain In the second quarter of 2004, the Company recorded a gain in other income
of approximately $195,000 relating to the sale of its French subsidiary which
occurred in the second quarter of 2001. The Company received $195,000 from the
buyer, which was held in escrow pending the outcome of a tax audit. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS Overview of the Companys Operations The Company is a global provider of business intelligence (BI) and
business performance management (BPM) solutions, focused on interactive
planning, budgeting, forecasting and analytics as well as financial reporting.
These solutions enable customers to continuously manage and monitor performance
across financial and operational functions within the enterprise, with the
views of past performance, the current state of business, and future
opportunities. The Company sells its products through both a direct sales force and an
expanding network of partners, both domestically and internationally. These
partners provide additional implementation resources, domain expertise and
complementary applications using the Companys software products. The Company
continues to focus its efforts selling and marketing the licensing and
maintenance of its products while increasing the engagement of partners to
provide consulting services on the implementation and integration of its
product. The Company has decided to strategically and tactically focus its efforts,
including development, sales and marketing, on its BI and BPM products. In the
first quarter of 2003, the Company sold its customer relationship management
business (CRM Business) (see Note 5 of the Notes to the Condensed
Consolidated Financial Statements). The Companys operating results reflect the
operations of the CRM Business up through its sale, which occurred on January
21, 2003, followed by a March 17, 2003 closing relating to the German component
of the CRM Business. The Company is currently only selling BPM and BI products
and related services. The Companys 2004 revenues are solely comprised of sales
from its BI/BPM products. CRITICAL ACCOUNTING POLICIES AND ESTIMATES This Managements Discussion and Analysis of Financial Condition and
Results of Operations discusses the Companys condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements 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 revenues and expenses during the reporting period. Management bases
its estimates and assumptions on expected or known trends or events, historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. 13




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##### Table of Contents



Management believes the following critical accounting policies, among
others, involve the more significant judgments and estimates used in the
preparation of its consolidated financial statements.  
    
    Revenue Recognition
    
    Accounts Receivable and Bad Debt
    
    Goodwill and Other Intangible Assets and Related Impairment
    
    Restructuring
    
    Deferred Income Taxes These policies are unchanged from those used to prepare the 2003 annual
consolidated financial statements. For more information regarding the Companys
critical accounting policies, the Company refers the reader to the discussion
contained in Item 7 under the heading Critical Accounting Policies and
Estimates of the Companys Annual Report on Form 10-K for the year ended
December 31, 2003, to Note 1 to the consolidated financial statements for the
year ended December 31, 2003, contained within the Companys Annual Report on
Form 10-K for the year ended December 31, 2003, and to Note 2 to the unaudited
condensed consolidated financial statements contained in this Quarterly Report
on Form 10-Q. RESULTS OF OPERATIONS Three and Nine Months Ended September 30, 2004 and 2003 Revenues (In thousands, except percentages)Three Months Ended September 30,
    
    Nine Months Ended September 30,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of2004
    
    Revenues
    
    2003
    
    Revenues
    
    2004
    
    Revenues
    
    2003
    
    RevenuesBI/BPM
    
    $
    3,307
    
    
    
    100
    %
    
    $
    3,108
    
    
    
    100
    %
    
    $
    10,766
    
    
    
    100
    %
    
    $
    8,204
    
    
    
    97
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    253
    
    
    
    3
    %Total Software
License Revenues
    
    
    3,307
    
    
    
    48
    %
    
    
    3,108
    
    
    
    48
    %
    
    
    10,766
    
    
    
    50
    %
    
    
    8,457
    
    
    
    44
    %BI/BPM
    
    
    104
    
    
    
    100
    %
    
    
    127
    
    
    
    100
    %
    
    
    408
    
    
    
    100
    %
    
    
    264
    
    
    
    85
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    46
    
    
    
    15
    %Total Training
Revenues
    
    
    104
    
    
    
    1
    %
    
    
    127
    
    
    
    2
    %
    
    
    408
    
    
    
    2
    %
    
    
    310
    
    
    
    2
    %BI/BPM
    
    
    216
    
    
    
    100
    %
    
    
    424
    
    
    
    100
    %
    
    
    734
    
    
    
    100
    %
    
    
    1,733
    
    
    
    81
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    394
    
    
    
    19
    %Total Consulting
Revenues
    
    
    216
    
    
    
    3
    %
    
    
    424
    
    
    
    7
    %
    
    
    734
    
    
    
    3
    %
    
    
    2,127
    
    
    
    11
    %BI/BPM
    
    
    3,282
    
    
    
    100
    %
    
    
    2,764
    
    
    
    100
    %
    
    
    9,647
    
    
    
    100
    %
    
    
    7,745
    
    
    
    93
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    559
    
    
    
    7
    %Total Maintenance
Revenues
    
    
    3,282
    
    
    
    48
    %
    
    
    2,764
    
    
    
    43
    %
    
    
    9,647
    
    
    
    45
    %
    
    
    8,304
    
    
    
    43
    %BI/BPM
    
    
    3,602
    
    
    
    100
    %
    
    
    3,315
    
    
    
    100
    %
    
    
    10,789
    
    
    
    100
    %
    
    
    9,742
    
    
    
    91
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    999
    
    
    
    9
    %Total Professional
Services and
Maintenance
Revenues
    
    
    3,602
    
    
    
    52
    %
    
    
    3,315
    
    
    
    52
    %
    
    
    10,789
    
    
    
    50
    %
    
    
    10,741
    
    
    
    56
    %Total Revenues
    
    $
    6,909
    
    
    
    100
    %
    
    $
    6,423
    
    
    
    100
    %
    
    $
    21,555
    
    
    
    100
    %
    
    $
    19,198
    
    
    
    100
    %
 Total revenues for the three months ended September 30, 2004 were
$6,909,000, compared to $6,423,000 for the three months ended September 30,
2003. Total revenues for the nine months ended September 30, 2004 were 14




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##### Table of Contents



$21,555,000, compared to $19,198,000 for the nine months ended September
30, 2003. Revenue for the nine months ended September 30, 2003 includes
$1,252,000 from the Companys CRM Business, which was sold during the first
quarter of 2003. Revenue from the sale of BI/BPM products increased 20% from
$17,946,000 for the nine months ended September 30, 2003 to $21,555,000 for the
period ended September 30, 2004. Total revenues for three and nine months
ended September 30, 2004 increased 8% and 12%, respectively, which includes the
favorable impacts of foreign currency exchange rate fluctuations, from the same
periods in the prior year. When expressed at constant foreign currency
exchange rates, total revenues remained flat for the three month period and
increased 4% for the nine month period ended September 30, 2004 compared to the
same periods in the prior year. Software License Revenues Software license revenues increased by $199,000 to $3,307,000, or 48% of
total revenues, for the three months ended September 30, 2004, from $3,108,000,
or 48% of total revenues, for the three months ended September 30, 2003.
Software license revenues for the three months ended September 30, 2004 and
September 30, 2003 were solely from BI/BPM products. For the nine months ended
September 30, 2004, software license revenues increased by $2,309,000 to
$10,766,000, or 50% of total revenues, from $8,457,000, or 44% of total
revenues, for the nine months ended September 30, 2003. The increase was
partially due to favorable impacts of foreign currency exchange rate
fluctuations in the weighted average values of the British pound, Euro and
Australian dollar in relation to the U.S. dollar. The net effect of foreign
currency exchange rate fluctuations was an increase in software license
revenues of approximately $235,000 and $830,000 for the three and nine months
ended September 30, 2004, respectively. Domestic license revenues decreased by $294,000 to $851,000 for the three
months ended September 30, 2004 from $1,145,000 for the three months ended
September 30, 2003. International license revenues increased by $493,000 to
$2,456,000 for the three months ended September 30, 2004 from $1,963,000 for
the three months ended September 30, 2003. Domestic license revenues increased
by $684,000 to $3,253,000 for the nine months ended September 30, 2004 from
$2,569,000 for the nine months ended September 30, 2003. International license
revenues increased by $1,625,000 to $7,513,000 for the nine months ended
September 30, 2004 from $5,888,000 for the nine months ended September 30,
2003. The decrease in domestic license revenues for the three months ended
September 30, 2004 compared to same period of the prior year was primarily the
result of certain organizational changes in the North American field sales
organization initiated in the second quarter of 2004. The increase in
international license revenues for the three months ended September 30, 2004
compared to the three months ended September 30, 2003 was mainly attributable
to the Companys success in overcoming the traditional seasonality of the third
quarter sales in Europe. The Company markets its products through its direct sales force and
indirect partners. The Company continues to focus on complementing its direct
sales force with indirect channel partners, which consist of original equipment
manufacturers (OEMs), value added resellers (VARs), independent
distributors and sales agents. Professional Services (Consulting and Training) and Maintenance Revenues Professional services and maintenance revenues for the three months ended
September 30, 2004 and 2003 were 52% of total revenues. For the nine months
ended September 30, 2004 and 2003, professional services and maintenance
revenues were 50% of total revenues and 56% of total revenues, respectively.
During the three months ended September 30, 2004, maintenance revenues
increased $518,000 to $3,282,000, compared to $2,764,000 for the three months
ended September 30, 2003, and professional services decreased $231,000 to
$320,000, compared to $551,000 for the three months ended September 30, 2003.
For the nine months ended September 30, 2004, maintenance revenues increased
$1,343,000 to $9,647,000, compared to $8,304,000 during the nine months ended
September 30, 2003, and professional services decreased $1,295,000 to
$1,142,000 for the nine months ended September 30, 2004, compared to $2,437,000
during the nine months ended September 30, 2003. The increase in maintenance
revenue was primarily attributable to the sale of software licenses to new
customers coupled with high rates of renewals of annual maintenance contracts
from the sale of licenses in prior periods. The increase in maintenance
revenues was also partially due to favorable impacts of foreign currency
exchange rate fluctuations in the weighted average values of the British pound,
Euro and Australian dollar in relation to the U.S. dollar. The net 15




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effect of foreign currency exchange rate fluctuations was an increase to
professional service and maintenance revenues of approximately $224,000 and
$796,000 for the three and nine months ended September 30, 2004, respectively.
The Company expects maintenance revenues to continue to increase due to strong
customer maintenance renewal rates. The decreases in professional services
revenue was primarily due to the Companys greater reliance on its partners to
perform these services. The Company will continue to rely primarily on its
partners to provide consulting services, including BI/BPM product
implementations, as the Company focuses on maintenance services, which includes
telephonic support, unspecified product upgrades and bug fixes and patches. Cost of Revenues (In thousands, except percentages)Three Months Ended September 30,
    
    
    
    
    
    Nine Months Ended September 30,2004
    
    
    
    
    
    2003
    
    
    
    
    
    2004
    
    
    
    
    
    2003Cost of Software License Revenues
    
    $
    7
    
    
    
    
    
    
    $
    329
    
    
    
    
    
    
    $
    391
    
    
    
    
    
    
    $
    1,161Cost of Professional Services Revenues and
Maintenance Revenues:Cost of Professional Services Revenues
    
    
    260
    
    
    
    
    
    
    
    517
    
    
    
    
    
    
    
    841
    
    
    
    
    
    
    
    2,033Cost of Maintenance Revenues
    
    
    596
    
    
    
    
    
    
    
    647
    
    
    
    
    
    
    
    1,988
    
    
    
    
    
    
    
    2,056Total
    
    
    856
    
    
    
    
    
    
    
    1,164
    
    
    
    
    
    
    
    2,829
    
    
    
    
    
    
    
    4,089Total Cost of Revenues
    
    $
    863
    
    
    
    
    
    
    $
    1,493
    
    
    
    
    
    
    $
    3,220
    
    
    
    
    
    
    $
    5,250Gross Margin:
    
    
    
    
    
    
    (A
    )
    
    
    
    
    
    
    (A
    )
    
    
    
    
    
    
    (A
    )
    
    
    
    
    
    
    (A
    )Software License
    
    $
    3,300
    
    
    
    100
    %
    
    $
    2,779
    
    
    
    89
    %
    
    $
    10,375
    
    
    
    96
    %
    
    $
    7,296
    
    
    
    86
    %Professional Services and Maintenance:Professional Services
    
    
    60
    
    
    
    19
    %
    
    
    34
    
    
    
    6
    %
    
    
    301
    
    
    
    26
    %
    
    
    404
    
    
    
    17
    %Maintenance
    
    
    2,686
    
    
    
    82
    %
    
    
    2,117
    
    
    
    77
    %
    
    
    7,659
    
    
    
    79
    %
    
    
    6,248
    
    
    
    75
    %Total
    
    
    2,746
    
    
    
    76
    %
    
    
    2,151
    
    
    
    65
    %
    
    
    7,960
    
    
    
    74
    %
    
    
    6,652
    
    
    
    62
    %Total Gross Margin
    
    $
    6,046
    
    
    
    88
    %
    
    $
    4,930
    
    
    
    77
    %
    
    $
    18,335
    
    
    
    85
    %
    
    $
    13,948
    
    
    
    73
    %
 (A) Gross margins calculated as a percentage of related revenues. Cost of Software License Revenues Cost of software license revenues consists primarily of third-party
software royalties, cost of product packaging and documentation materials, and
amortization of capitalized software costs. Cost of software license revenues
as a percentage of software license revenues was less than 1% for the three
months ended September 30, 2004 and 4% for the nine months ended September 30,
2004, compared to 11% and 14% for the three and nine months ended September 30,
2003, respectively. The decrease in the percentages above and corresponding
improvement in software license gross margin was primarily due to decreases of
$230,000 and $424,000 in the amortization of capitalized software development
costs and decreases of $86,000 and $362,000 in third-party software royalties
paid by the Company for the three and nine months ended September 30, 2004,
respectively, compared to the same periods in the prior year. Capitalized
software development costs were fully amortized in the second quarter of 2004. Cost of Professional Services and Maintenance Revenues The cost of professional services and maintenance revenues consists
primarily of personnel salaries and benefits, facilities and information system
costs incurred to provide consulting, training and customer support and
payments 16




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##### Table of Contents



to indirect channel partners to provide first level support to end-user
customers. These payments to indirect channel partners to provide first level
support are generally amortized over the 12-month maintenance support period of
the underlying contract with the end-user customer. Cost of professional
services and maintenance revenues decreased by $308,000 to $856,000 for the
three months ended September 30, 2004 from $1,164,000 for the three months
ended September 30, 2003. Cost of professional services and maintenance
revenues decreased by $1,260,000 to $2,829,000 for the nine months ended
September 30, 2004 from $4,089,000 for the nine months ended September 30,
2003. These decreases reflect a reduction in professional service employees in
general as the Company focuses on the utilization of partners for consulting
services relating to its product. The decrease in the cost of professional
services and maintenance revenues for the nine months ended September 30, 2004
compared to the nine months ended September 30, 2003 was also due to the
Companys decrease in the number of professional service employees as a result
of transfers in conjunction with the sale of the CRM Business in the first
quarter of 2003. Gross margin of professional services and maintenance
revenues increased to 76% for the three months ended September 30, 2004 as
compared to 65% for the three months ended September 30, 2003. For the nine
months ended September 30, 2004 and 2003, gross margin of professional services
and maintenance revenues increased to 74% from 62%, respectively. The
improvements in gross margins were due to, in addition to the lower costs
described above, a change in revenue mix from lower margin consulting revenues
to higher margin maintenance revenues. The Company will continue to focus on
the utilization of partners to deliver consulting services for product
implementations and customization of its products. Operating Expenses (In thousands, except percentages)Three Months Ended September 30,
    
    Nine Months Ended September 30,As a
    
    
    
    
    
    As a
    
    
    
    
    
    As a
    
    
    
    
    
    As aPercent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofTotal
    
    
    
    
    
    Total
    
    
    
    
    
    Total
    
    
    
    
    
    Total2004
    
    Revenues
    
    2003
    
    Revenues
    
    2004
    
    Revenues
    
    2003
    
    RevenuesSales and marketing
    
    $
    2,473
    
    
    
    36
    %
    
    $
    2,332
    
    
    
    36
    %
    
    $
    7,631
    
    
    
    35
    %
    
    $
    7,812
    
    
    
    41
    %Product development
    
    
    1,059
    
    
    
    15
    %
    
    
    1,343
    
    
    
    21
    %
    
    
    3,614
    
    
    
    17
    %
    
    
    4,233
    
    
    
    22
    %General and
administrative
    
    
    1,507
    
    
    
    22
    %
    
    
    1,723
    
    
    
    27
    %
    
    
    4,603
    
    
    
    21
    %
    
    
    6,003
    
    
    
    31
    %Compensation
expenses related to
acquisition
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    583
    
    
    
    3
    %Restructuring
expenses
    
    
    604
    
    
    
    9
    %
    
    
    
    
    
    
    
    %
    
    
    577
    
    
    
    3
    %
    
    
    
    
    
    
    
    %Amortization of
acquired intangible
asset
    
    
    63
    
    
    
    1
    %
    
    
    63
    
    
    
    1
    %
    
    
    188
    
    
    
    1
    %
    
    
    188
    
    
    
    1
    %Total operating
expenses
    
    $
    5,706
    
    
    
    83
    %
    
    $
    5,461
    
    
    
    85
    %
    
    $
    16,613
    
    
    
    77
    %
    
    $
    18,819
    
    
    
    98
    %
 Sales and Marketing Expenses Sales and marketing expenses consist primarily of salaries and benefits,
commissions and bonuses for the Companys sales and marketing personnel, field
office expenses, travel and entertainment, promotional and advertising expenses
and the cost of the Companys international operations, which are sales
operations. Sales and marketing expenses increased $141,000 to $2,473,000 for
the three months ended September 30, 2004 from $2,332,000 for the three months
ended September 30, 2003. Sales and marketing expenses as a percentage of total
revenue remained at 36% for the three months ended September 30, 2004 and 2003.
The increase in sales and marketing expenses for the three months ended
September 30, 2004 was primarily due to an increase in staffing in sales and
marketing, including the Companys direct sales force and presales technical
staff. For the nine months 17




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ended September 30, 2004 and 2003, sales and marketing expenses decreased
$181,000 to $7,631,000, or 35% of total revenue, from $7,812,000, or 41% of
total revenue, respectively. The decrease in sales and marketing expenses for
the nine months ended September 30, 2004 was primarily due to a decrease in
sales and marketing costs related to its CRM product and decreases in sales and
marketing employees and their related salaries as a result of transfers
conjunction with the sale of the CRM Business in the first quarter of 2003. The
Company experienced an unfavorable impact on sales and marketing expenses for
the three and nine month periods ended September 30, 2004 as a result of
foreign currency exchange rate fluctuations due to the strength of the foreign
currencies against the U.S. dollar in the applicable periods in 2004 versus the
same periods 2003 and the related effects on the weighted average values of the
British pound, Euro and Australian dollar in relation to the U.S. dollar. The
net effect of foreign currency exchange rate fluctuations was an increase to
sales and marketing expenses of approximately $132,000 and $478,000 for the
three and nine months ended September 30, 2004, respectively. Product Development Expenses Product development expenses include costs associated with the development
of new products, enhancements of existing products and quality assurance
activities, and consist primarily of employee salaries and benefits, consulting
costs and the cost of software development tools. The Company capitalizes
product development costs during the required capitalization period once the
Company has reached technological feasibility through general release of its
software products. The Company considers technological feasibility to be
achieved when a product design and working model of the software product have
been completed and the software product is ready for initial customer testing.
Capitalized software development costs are then amortized on a
product-by-product basis over the estimated product life of between one to two
years and are included in the cost of software license revenue. Product
development costs not meeting the requirements of capitalization are expensed
as incurred. Product development expenses decreased $284,000 to $1,059,000 for the
three months ended September 30, 2004 from $1,343,000 for the three months
ended September 30, 2003. These expenses represent 15% of total revenue for the
three months ended September 30, 2004, as compared to 21% of total revenues for
the three months ended September 30, 2003. For the nine months ended September
30, 2004, product development expenses decreased $619,000 to $3,614,000, or 17%
of total revenue, from $4,233,000, or 22% of total revenue for the nine months
ended September 30, 2003. The decrease in product development expenses was
primarily due to the transfer of product development employees in conjunction
with the sale of the CRM Business in the first quarter of 2003. The Company
anticipates that it will continue to devote substantial resources to the
development of new products, new versions of its existing products, including
Applix TM1 and related applications. General and Administrative Expenses General and administrative expenses consist primarily of salaries,
benefits and occupancy costs for executive, administrative, finance,
information technology, and human resource personnel, as well as accounting and
legal costs. General and administrative expenses also include legal costs
associated with the investigation by the SEC related to the Companys financial
restatements for the fiscal years 2001 and 2002. General and administrative
expenses decreased $216,000, to $1,507,000, or 22% of total revenues, for the
three months ended September 30, 2004 from $1,723,000, or 27% of total
revenues, for the three months ended September 30, 2003. For the nine months
ended September 30, 2004 and 2003, general and administrative expenses
decreased $1,400,000 to $4,603,000, or 21% of total revenue, from $6,003,000,
or 31% of total revenue, respectively. The decrease was primarily due to lower
executive severance costs, stock-based compensation expenses related to certain
executive stock options and costs associated with the Companys two financial
restatements and related SEC investigation. The decrease was also attributable
to a reduction in rent expense in the three months ended September 30, 2004 of
$225,000, or $900,000 on an annualized basis, resulting from the Companys
restructuring of its headquarters lease in January 2004. The Company will
continue to closely monitor general and administrative costs. Compensation Expenses Related to Acquisition Compensation expenses related to acquisition consists primarily of
contingent cash consideration relating to the Companys March 2001 acquisition
of Dynamic Decisions. For the nine months ended September 30, 2003, the 18




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##### Table of Contents



Company recorded $583,000 for compensation expenses related to the
acquisition of Dynamic Decisions, which includes the impact of foreign currency
exchange rate fluctuations of translating the Australian dollar to the U.S.
dollar. All contingent amounts relating to the Dynamic Decisions acquisition
were paid in 2003 and no further amounts are due. Restructuring Expenses During 2004 and 2003, the Company evaluated and initiated restructuring
actions in order to consolidate portions of its operations, enhance operational
efficiency, and reduce expenses. In the fourth quarter of 2003, the Company adopted a plan of restructuring
to reduce operating costs. Under this plan, the Company had ceased to use, and
made the determination that it had no future use of or benefit from, certain
space pertaining to its Westborough headquarters office lease. The Company
commenced negotiations with its landlord to settle amounts related to its lease
in general and the abandoned space in particular. These negotiations were
completed in January 2004, and as a result, the Company was able to estimate
the cost to exit this facility. Additionally, the Company determined that it
would dispose of certain assets, which were removed from service shortly after
the implementation of the plan. As a result of this restructuring plan, the
Company recorded a restructuring expense for this space of $3,238,000.
Restructuring expense included a $3,000,000 fee paid to the landlord for the
abandoned space, an adjustment of $162,000 to reduce the Companys deferred
rent expense, adjusted transaction costs of $350,000 for professional service
fees (brokerage and legal) and $50,000 in non-cash charges relating to the
disposition of certain assets. In the second quarter of 2004, the Company
recorded a credit to the restructuring charge of $27,000 as a change in
estimate due to lower than anticipated professional service fees. The
restructuring charge was fully paid as of September 30, 2004. The accrued restructuring expenses, as well as the Companys 2004
adjustments, payments and write-offs made against accruals are detailed as
follows: Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    Payments
    
    September 30,2003
    
    Adjustment
    
    and Write-offs
    
    2004Facility exit costs
    
    $
    3,050,000
    
    
    $
    
    
    
    $
    (3,050,000
    )
    
    $
    Professional service fees
    
    
    350,000
    
    
    
    (27,000
    )
    
    
    (323,000
    )
    
    
    Total
    
    $
    3,400,000
    
    
    $
    (27,000
    )
    
    $
    (3,373,000
    )
    
    $
    
 In the second quarter of 2004, the Company adopted a plan of restructuring
to reduce operating costs. Under this plan, the Company had ceased to use, and
made the determination that it had no future use of or benefit from, certain
space pertaining to its UK office lease. In June 2004, the Company entered
into a sublease agreement with a subtenant for a portion of the Companys UK
office lease. In July 2004, upon exiting the space, the Company recorded a
restructuring charge of approximately $604,000. The restructuring charge was
primarily comprised of the difference between the Companys contractual lease
rate for the anticipated subleased space and the sublease rate to be realized
over the remaining term of the original lease, discounted by a credit adjusted
risk rate of 8%. The restructuring charge also consisted of other related
professional services, including legal fees, broker fees and certain build-out
costs, incurred in connection with the exiting of the facility. 19




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##### Table of Contents



Restructuring charges accrued and unpaid at September 30, 2004 were as
follows: Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    Restructuring
    
    
    
    
    
    September 30,2003
    
    Expenses
    
    Payments
    
    2004Facility exit costs
    
    $
    
    
    
    $
    467,000
    
    
    $
    (59,000
    )
    
    $
    408,000Other direct costs
    
    
    
    
    
    
    137,000
    
    
    
    (114,000
    )
    
    
    23,000Total
    
    $
    
    
    
    $
    604,000
    
    
    $
    (173,000
    )
    
    $
    431,000
 Amortization of Acquired Intangible Asset Amortization expense for the acquired intangible asset, customer
relationships, associated with the Dynamic Decisions acquisition in March 2001
was $63,000 and $188,000 for each of the three months and nine months ended
September 30, 2004 and 2003, respectively. The amortization expense will
continue to be ratably amortized through the first quarter of 2007. Non-Operating Income (In thousands, except percentages)Three Months Ended September 30,
    
    Nine Months Ended September 30,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of2004
    
    Revenues
    
    2003
    
    Revenues
    
    2004
    
    Revenues
    
    2003
    
    RevenuesInterest and other
income (loss), net
    
    $
    290
    
    
    
    4
    %
    
    $
    (59
    )
    
    
    -1
    %
    
    $
    256
    
    
    
    1
    %
    
    $
    546
    
    
    
    3
    %Net gain from sale
of CRM business
    
    
    
    
    
    
    
    %
    
    
    (12
    )
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    7,910
    
    
    
    41
    %Total
    
    $
    290
    
    
    
    4
    %
    
    $
    (71
    )
    
    
    -1
    %
    
    $
    256
    
    
    
    1
    %
    
    $
    8,456
    
    
    
    44
    %
 Interest and Other Income (Loss), Net Interest and other income (loss), net consists primarily of interest
income, interest expense and gains and losses on foreign currency exchange
fluctuations. Interest and other income (loss), net increased to income of $290,000 for
the three months ended September 30, 2004, as compared to a loss of $59,000 for
the three months ended September 30, 2003. The increase is primarily due to
favorable foreign currency exchange rate fluctuations on intercompany balances
denominated in the Companys foreign subsidiaries local currencies. In
particular, the Company recorded a gain of approximately $218,000 for the three
months ended September 30, 2004 due to a favorable foreign currency exchange
rate fluctuation of the Australian dollar and its related effect on the
Companys Australian intercompany balances. The increase is also attributable
to the effects of having recorded a loss of approximately $144,000 in the third
quarter of 2003 relating to the sale of the Companys Dutch subsidiary. Interest and other income (loss), net decreased to income of $256,000 for
the nine months ended September 30, 2004, as compared to income of $546,000 for
the nine months ended September 30, 2003. The decrease was primarily due to
the net effect of the gain on the sale of its French subsidiary offset by a
lower gain on foreign currency exchange fluctuations in 2004 compared to 2003.
The Company recorded a gain in the second quarter of 2004 of approximately
$195,000 relating to the sale of its French subsidiary in second quarter of
2001. The Company received $195,000 from the buyer which had been held in
escrow pending the outcome of a tax audit. As noted above, the decrease is
also attributable to the effects of having recorded a loss of approximately
$144,000 in the third quarter of 2003 relating to the sale of the Companys
Dutch subsidiary. Net Gain from Sale of CRM Business In the first quarter of 2003, the Company sold its CRM Business to iET
Acquisition, LLC (iET), a wholly-owned subsidiary of Platinum Equity
Holdings, LLC for $5,750,000 in cash consideration, of which $487,000 was paid
to iET for net working capital adjustments and $3,552,000 in net assumed
liabilities. The sale excluded approximately $2,800,000 in net accounts
receivable generated from the sale of CRM products and services. Accordingly,
the Company recorded a net gain before tax of $7,910,000, which includes net
cash consideration of $5,263,000 and $3,552,000 of net liabilities assumed by
iET less transaction costs of $905,000. 20




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The Companys results for the three and nine months ended September 30,
2004 and the three months ended September 30, 2003 included no CRM revenues,
while the nine months ended September 30, 2003 included CRM license revenues of
$253,000 and CRM professional services and maintenance revenues of $999,000. Provision for Income Taxes The provision for income taxes represents the Companys state and foreign
income tax obligations and amortization of a deferred tax liability related to
the Companys acquisition of Dynamic Decisions. The Companys provision for
income taxes was $178,000 and $293,000 for the three and nine months ended
September 30, 2004, respectively, compared to $0 and $764,000 for the three
months and nine months ended September 30, 2003, respectively. The provision
for income taxes for the nine months ended September 30, 2003 includes $355,000
in foreign income taxes related to the Companys sale of its CRM Business. The
Companys effective income tax rate for the nine months ended September 30,
2004 and 2003 decreased to 15% from 21%, respectively, which is primarily due
to the additional provision for income taxes recorded as a result of the sale
of the CRM Business in 2003 partially offset by an adjustment of approximately
$60,000 recorded in the third quarter of 2004 for income taxes relating to
prior periods for the Australian subsidiary. LIQUIDITY AND CAPITAL RESOURCES The Company currently derives its liquidity and capital resources
primarily from the Companys cash flow from operations. In addition, the
Company sold, at fair market value, $3 million of its common stock in February
2004 to a member of the Companys Board of Directors, along with another
investor who is related to the Board member, and increased its cash balance by
$1.7 million from the issuance of the Companys common stock under its stock
plans in the nine months ended September 30, 2004. The Companys cash and cash
equivalents balances were $13,728,000 and $10,058,000 as of September 30, 2004
and December 31, 2003, respectively, which includes restricted cash of $400,000
and $817,000, respectively. The Companys days sales outstanding (DSO) in
accounts receivable was 55 days as of September 30, 2004, compared with 63 days
as of December 31, 2003. Cash used in the Companys operating activities was $979,000 for the nine
months ended September 30, 2004, compared to cash used in operating activities
of $4,356,000 for the nine months ended September 30, 2003. The decrease in
cash used in operating activities is primarily due to an increase in accounts
receivable collections as a result of higher revenues, a reduction in
expenditures as a result of reduced expenses from the Companys cost
containment efforts and a reduction in expenses due to the sale of the CRM
Business, including reduced salaries from transferred employees. Cash provided by investing activities totaled $7,000 for the nine months
ended September 30, 2004 compared to cash provided by investing activities of
$5,377,000 for the nine months ended September 30, 2003. The decrease in cash
provided by investing activities is primarily a result of the net cash proceeds
of $5,525,000 from the sale of the CRM Business in the first quarter of 2003. Cash provided by financing activities totaled $4,971,000 for the nine
months ended September 30, 2004, which consisted of proceeds of $3,000,000 from
the sale of common stock to two investors described above, $1,739,000 from
issuance of stock under the Companys stock plans and $232,000 from the
repayment of notes receivable. This compares to total cash provided in
financing activities of $226,000 for the nine months ended September 30, 2003,
which consisted of proceeds of $463,000 from the issuance of stock under the
Companys stock plans, offset by net payment of $237,000 owed to a certain bank
from an accounts receivable factoring arrangement. Cash paid for income taxes by the Company of $518,000 and $509,000 for the
nine months ended September 30, 2004 and 2003, respectively. The increase was primarily due an increase in foreign income taxes paid by the
Companys foreign subsidiaries. In January 2004, the Company entered into a lease amendment of its
original lease with its landlord for its Westborough, MA headquarters. The
amendment required the payment of a $3,000,000 restructuring fee to the 21




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##### Table of Contents



landlord, which was paid on January 22, 2004. Per terms of the amendment,
the original lease was amended as follows: 1) a reduction in the amount of
space leased from 49,960 square feet to 24,376 square feet, 2) a reduction in
annual rental payments from approximately $1,400,000 to $550,000, 3) a
reduction in the remaining term of the lease from 9 3/4 years to 7 years, and
4) a reduction in the amount of the required irrevocable standby letter of
credit from $817,000 to $400,000. The payment required pursuant to the release
of excess space was expensed in 2003 as part of the accrued restructuring
expenses. On March 19, 2004, the Company entered into two credit facilities,
providing for loans, with Silicon Valley Bank (SVB). The first facility, a
domestic working capital line of credit, has an interest rate of prime plus
1.00% per annum and provides for borrowings of up to the lesser of (i)
$2,000,000 or (ii) an amount based upon a percentage of the Companys
qualifying domestic accounts receivable. The second facility, an equipment line
of credit, has an interest rate of prime plus 1.50% per annum and provides for
borrowings of up to $1,000,000. The obligations of the Company to SVB under the
two credit facilities are guaranteed by the Company and certain of its domestic
subsidiaries and are secured by substantially all of the assets of the Company
and such domestic subsidiaries. The two credit facilities will expire on March
18, 2005. As of September 30, 2004, there were no amounts outstanding under
these two credit facilities. In June 2004, the Company entered into a sublease agreement with a
subtenant for a portion of the Companys UK office lease. In July 2004, upon
exiting the space, the Company recorded a restructuring charge of approximately
$604,000. The restructuring charge was primarily comprised of the difference
between the Companys contractual lease rate for the subleased space and the
anticipated sublease rate to be realized over the remaining term of the
original lease, discounted by a credit adjusted risk rate of 8%. The
restructuring charge also consisted of other related professional services,
including legal fees, broker fees and certain build-out costs, incurred in
connection with the exiting of the facility. As of September 30, 2004, the Company had the following future contractual
commitments: Less Than
    
    1 - 3
    
    4 - 5
    
    AfterTotal
    
    1 year
    
    Years
    
    Years
    
    5 YearsNon-cancelable operating leases
    
    $
    5,644,000
    
    
    $
    1,164,000
    
    
    $
    1,791,000
    
    
    $
    1,757,000
    
    
    $
    932,000Non-cancelable capital leases
    
    
    49,000
    
    
    
    32,000
    
    
    
    17,000
    
    
    
    
    
    
    
    Purchase obligations
    
    
    162,000
    
    
    
    162,000
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    5,855,000
    
    
    $
    1,358,000
    
    
    $
    1,808,000
    
    
    $
    1,757,000
    
    
    $
    932,000
 The Company does not have any off-balance sheet arrangements with
unconsolidated entities or related parties, and as such, the Companys
liquidity and capital resources are not subject to off-balance sheet risks from
unconsolidated entities. The Company has plans for approximately $200,000 in capital expenditures
for the remainder of 2004, including hardware, software, upgrades and
replacements. The Company may finance these purchases through use of
third-party financing arrangements including its equipment line of credit. For the nine months ended September 30, 2004, the Company achieved
operating profitability and generated positive operating cash flow, before the
payment of previously accrued restructuring expenses relating to its
Westborough headquarters office lease. The Company has, however, historically
incurred operating losses and negative cash flows for the last several years.
As of September 30, 2004, the Company had an accumulated deficit of $43.8
million. Managements plans include increasing revenues and generating positive
cash flows from operations. The Company currently expects that the principal
sources of funding for its operating expenses, capital expenditures and other
liquidity needs will be a combination of its available cash balances, funds
expected to be generated from operations, and the two SVB credit facilities.
The availability of borrowings under the Companys two credit facilities is
subject to the maintenance of certain financial covenants and the borrowing
limits described above. The Company believes that the sources of funds
currently available will be sufficient to fund its operations for at least the
next 12 months. However, there are a number of factors that may negatively
impact the Companys 22




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available sources of funds. The amount of cash generated from or used by
operations will be dependent primarily upon the successful execution of the
Companys business plan, including increasing revenues and reinvesting into its
sales and marketing and field operations. If the Company does not meet its
plans to generate sufficient revenue or positive cash flows, it may need to
raise additional capital or reduce spending. FACTORS THAT MAY AFFECT FUTURE RESULTS OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR
QUARTERLY RESULTS. We may experience significant fluctuations in our future results of
operations due to a variety of factors, many of which are outside of our
control, including:  
    
    demand for and market acceptance of our products and services;
    
    the size and timing of customer orders, particularly large orders, during a particular quarter;
    
    introduction of products and services or enhancements by us and our competitors;
    
    competitive factors that affect our pricing;
    
    the mix of products and services we sell;
    
    the hiring and retention of key personnel;
    
    our expansion into international markets;
    
    the timing and magnitude of our capital expenditures, including costs
relating to the expansion of our operations;
    
    the acquisition and retention of key partners;
    
    changes in generally accepted accounting policies, especially those
related to the recognition of software revenue; and
    
    new government legislation or regulation. We typically receive a majority of our orders in the last month of each
fiscal quarter because our customers often delay purchases of products until
the end of the quarter as our sales organization and our individual sales
representatives strive to meet quarterly sales targets. As a result, any delay
in anticipated sales is likely to result in the deferral of the associated
revenue beyond the end of a particular quarter, which would have a significant
effect on our operating results for that quarter. In addition, most of our
operating expenses do not vary directly with net sales and are difficult to
adjust in the short term. As a result, if net sales for a particular quarter
were below expectations, we could not proportionately reduce operating expenses
for that quarter, and, therefore, that revenue shortfall would have a
disproportionate adverse effect on our operating results for that quarter. If
our operating results are below the expectations of public market analysts and
investors, the price of our common stock may fall significantly. WE MAY NOT BE ABLE TO FULFILL ANY FUTURE CAPITAL NEEDS. We achieved operating profitability for the three and nine months ended
September 30, 2004 and generated positive cash flow for the three and nine
months ended September 30, 2004. The Company has, however, historically
incurred losses from continuing operations for the last several years.
Additionally, we could incur operating losses and negative cash flows in the
future because of costs and expenses relating to brand development, 23




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marketing and other promotional activities, continued development of our
information technology infrastructure, expansion of product offerings and
development of relationships with other businesses. Although we achieved
profitability in the first three quarters of 2004, there can be no assurance
that we will achieve a profitable level of operations in the future. We believe, based upon our current business plan, that our current cash
and cash equivalents, funds expected to be generated from operations and
available credit lines should be sufficient to fund our operations as planned
for at least the next twelve months. However, we may need additional funds
sooner than anticipated if our performance deviates significantly from our
current business plan or if there are significant changes in competitive or
other market factors. If we elect to raise additional operating funds, such
funds, whether from equity or debt financing or other sources, may not be
available, or available on terms acceptable to us. IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR
PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL
SUFFER. The business performance management and business intelligence markets,
including in interactive planning, budgeting and analytics are characterized by
rapid technological change, frequent new product enhancements, uncertain
product life cycles, changes in customer demands and evolving industry
standards. Our products could be rendered obsolete if products based on new
technologies are introduced or new industry standards emerge. Enterprise computing environments are inherently complex. As a result, we
cannot accurately estimate the life cycles of our products. New products and
product enhancements can require long development and testing periods, which
requires us to hire and retain technically competent personnel. Significant
delays in new product releases or significant problems in installing or
implementing new products could seriously damage our business. We have, on
occasion, experienced delays in the scheduled introduction of new and enhanced
products and may experience similar delays in the future. Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We may not successfully identify new product opportunities
and develop and bring new products to market in a timely and cost-effective
manner. ATTEMPTS TO EXPAND BY MEANS OF BUSINESS COMBINATIONS AND ACQUISITIONS MAY NOT
BE SUCCESSFUL AND MAY DISRUPT OUR OPERATIONS OR HARM OUR REVENUES. We have in the past, and may in the future, buy businesses, products or
technologies. In the event of any future purchases, we will face additional
financial and operational risks, including:  
    
    difficulty in assimilating the operations, technology and personnel
of acquired companies;
    
    disruption in our business because of the allocation of resources to
consummate these transactions and the diversion of managements
attention from our core business;
    
    difficulty in retaining key technical and managerial personnel from acquired companies;
    
    dilution of our stockholders, if we issue equity to fund these transactions;
    
    assumption of increased expenses and liabilities;
    
    our relationships with existing employees, customers and business
partners may be weakened or terminated as a result of these
transactions; and
    
    additional ongoing expenses associated with write-downs of goodwill
and other purchased intangible assets. 24




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WE RELY HEAVILY ON KEY PERSONNEL. The loss of any of our members of management, or any of our staff of sales
and development professionals, could prevent us from successfully executing our
business strategies. Any such loss of technical knowledge and industry
expertise could negatively impact our success. Moreover, the loss of any
critical employees or a group thereof, particularly to a competing
organization, could cause us to lose market share, and the Applix brand could
be diminished. WE MAY NOT BE ABLE TO MEET THE OPERATIONAL AND FINANCIAL CHALLENGES THAT WE
ENCOUNTER IN OUR INTERNATIONAL OPERATIONS. Due to the Companys significant international operations, we face a
number of additional challenges associated with the conduct of business
overseas. For example:  
    
    we may have difficulty managing and administering a globally-dispersed business;
    
    fluctuations in exchange rates may negatively affect our operating results;
    
    we may not be able to repatriate the earnings of our foreign operations;
    
    we have to comply with a wide variety of foreign laws;
    
    we may not be able to adequately protect our trademarks overseas due
to the uncertainty of laws and enforcement in certain countries relating
to the protection of intellectual property rights;
    
    reductions in business activity during the summer months in Europe
and certain other parts of the world could negatively impact the
operating results of our foreign operations;
    
    export controls could prevent us from shipping our products into and
from some markets;
    
    multiple and possibly overlapping tax structures could significantly
reduce the financial performance of our foreign operations;
    
    changes in import/export duties and quotas could affect the
competitive pricing of our products and services and reduce our market
share in some countries; and
    
    economic or political instability in some international markets could
result in the forfeiture of some foreign assets and the loss of sums
spent developing and marketing those assets. BECAUSE THE BUSINESS PERFORMANCE MANAGEMENT AND BUSINESS INTELLIGENCE MARKETS
ARE HIGHLY COMPETITIVE, WE MAY NOT BE ABLE TO SUCCEED. If we fail to compete successfully in the highly competitive and rapidly
changing business performance management and business intelligence markets, we
may not be able to succeed. We face competition primarily from business
intelligence firms. We also face competition from large enterprise application
software vendors, independent systems integrators, consulting firms and
in-house IT departments. Because barriers to entry into the software market are
relatively low, we expect to face additional competition in the future. Many of our competitors can devote significantly more resources to the
development, promotion and sale of products than we can, and many of them can
respond to new technologies and changes in customer preferences more quickly
than we can. Further, other companies with resources greater than ours may
attempt to gain market share in the customer analytics and business planning
markets by acquiring or forming strategic alliances with our competitors. 25




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BECAUSE WE DEPEND IN PART ON THIRD-PARTY SYSTEMS INTEGRATORS TO SELL OUR
PRODUCTS, OUR OPERATING RESULTS WILL LIKELY SUFFER IF WE DO NOT DEVELOP AND
MAINTAIN THESE RELATIONSHIPS. We rely in part on systems integrators to promote, sell and implement our
solutions. If we fail to maintain and develop relationships with systems
integrators, our operating results will likely suffer. In addition, if we are
unable to rely on systems integrators to install and implement our products, we
will likely have to provide these services ourselves, resulting in increased
costs. As a result, our results of operation may be harmed. In addition,
systems integrators may develop, market or recommend products that compete with
our products. Further, if these systems integrators fail to implement our
products successfully, our reputation may be harmed. BECAUSE THE SALES CYCLE FOR OUR PRODUCTS CAN BE LENGTHY, IT IS DIFFICULT FOR
US TO PREDICT WHEN OR WHETHER A SALE WILL BE MADE. The timing of our revenue is difficult to predict in large part due to the
length and variability of the sales cycle for our products. Companies often
view the purchase of our products as a significant and strategic decision. As a
result, companies tend to take significant time and effort evaluating our
products. The amount of time and effort depends in part on the size and the
complexity of the deployment. This evaluation process frequently results in a
lengthy sales cycle, typically ranging from three to six months. During this
time we may incur substantial sales and marketing expenses and expend
significant management efforts. We do not recoup these investments if the
prospective customer does not ultimately license our product. OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO PROTECT OUR TRADEMARKS FROM
MISUSE BY THIRD PARTIES. Our collection of trademarks is important to our business. The protective
steps we take or have taken may be inadequate to deter misappropriation of our
trademark rights. We have filed applications for registration of some of our
trademarks in the United States. Effective trademark protection may not be
available in every country in which we offer or intend to offer our products
and services. Failure to protect our trademark rights adequately could damage
our brand identity and impair our ability to compete effectively. Furthermore,
defending or enforcing our trademark rights could result in the expenditure of
significant financial and managerial resources. OUR PRODUCTS MAY CONTAIN DEFECTS THAT MAY BE COSTLY TO CORRECT, DELAY MARKET
ACCEPTANCE OF OUR PRODUCTS AND EXPOSE US TO LITIGATION. Despite testing by Applix and our customers, errors may be found in our
products after commencement of commercial shipments. If errors are discovered,
we may have to make significant expenditures of capital to eliminate them and
yet may not be able to successfully correct them in a timely manner or at all.
Errors and failures in our products could result in a loss of, or delay in,
market acceptance of our products and could damage our reputation and our
ability to convince commercial users of the benefits of our products. In addition, failures in our products could cause system failures for our
customers who may assert warranty and other claims for substantial damages
against us. Although our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product
liability claims, it is possible that these provisions may not be effective or
enforceable under the laws of some jurisdictions. Our insurance policies may
not adequately limit our exposure to this type of claim. These claims, even if
unsuccessful, could be costly and time-consuming to defend. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a multinational corporation, the Company is exposed to market risk,
primarily from changes in foreign currency exchange rates, in particular the
British pound, Euro and Australian dollar. These exposures may change over time
and could have a material adverse impact on the Companys financial results.
Most of the Companys international sales through its subsidiaries are
denominated in foreign currencies. Although foreign currency 26




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exchange rates have fluctuated significantly in recent years, the
Companys exposure to changes in net income, due to foreign currency exchange
rates fluctuations, in the Companys foreign subsidiaries is mitigated to some
extent by expenses incurred by the foreign subsidiary in the same currency. The
exchange rate at September 30, 2004 and September 30, 2003 was 0.55 British
pound, 0.80 Euro, 1.37 Australian dollar and 0.60 British pound, 0.86 Euro,
1.47 Australian dollar, respectively. The weighted average exchange rate per
$1.00 U.S. dollar for the three months ended September 30, 2004 was 0.55
British pound, 0.82 Euro and 1.41 Australian dollars, as compared to the
weighted average dollar for three months ended September 30, 2003 which was
0.62 British pound, 0.89 Euro and 1.52 Australian dollar. The Companys
primary foreign currency exposures relate to its short-term intercompany
balances with its foreign subsidiaries, primarily the Australian dollar. Our
foreign subsidiaries have functional currencies denominated in the Euro,
Australian dollar, British pound and Swiss franc. Intercompany transactions
denominated in these currencies are remeasured at each period end with any
exchange gains or losses recorded in the Companys consolidated statements of
operations. During the third quarter of 2004, the Company has reported gains
of approximately $220,000 in its Consolidated Financial Statements of
Operations due to favorable movements in the Australian dollar exchange rate,
compared to losses of approximately $300,000 recorded in the second quarter of
2004 resulting from unfavorable movements in the Australian dollar exchange
rate. Based on foreign currency exposures existing at September 30, 2004, a
10% unfavorable movement in foreign exchange rates related to the British
pound, Euro, Australian dollar, and Swiss franc would result in an
approximately $843,000 loss to earnings. The Company has currently not engaged
in activities to hedge these exposures. At September 30, 2004, the Company held $13,328,000 in cash equivalents,
excluding $400,000 of restricted cash, consisting primarily of money market
funds. Cash equivalents are classified as available for sale and carried at
fair value, which approximates cost. A hypothetical 10% increase in interest
rates would not have a material impact on the fair market value of these
instruments due to their short maturity and the Companys intention that all
the securities will be sold within one year. 
 ITEM 4. CONTROLS AND PROCEDURES The Companys management, with the participation of the Companys chief
executive officer and chief financial officer, evaluated the effectiveness of
the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act))
as of September 30, 2004. Based on this evaluation, the Companys chief
executive officer and chief financial officer concluded that, as of September
30, 2004, the Companys disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Companys chief executive
officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by the Company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms. No change in the Companys internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fiscal quarter ended September 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 6. EXHIBITS (a) Exhibits ExhibitNumber
    
    Description10.24
    
    Summary of 2004 Management Incentive Compensation Plan10.25
    
    Form of Stock Option Agreement for 2003 Director Equity Plan31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended
 27




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##### Table of Contents



ExhibitNumber
    
    Description31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 28




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##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized. APPLIX, INC.Date: November 15, 2004
    /s/ Milton A. AlpernMilton A. AlpernChief Financial Officer and
Treasurer (Duly Authorized
Officer and Principal Financial
and Accounting Officer) 29




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description10.24
    
    Summary of 2004 Management Incentive Compensation Plan10.25
    
    Form of Stock Option Agreement for 2003 Director Equity Plan31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange Act of 1934, as amended32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 30