##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 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
incorporation or organization)
    
    (I.R.S. Employer Identification
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. YesþNoo Indicate by check whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). YesoNoþ As of May 2, 2005, the Registrant had 14,615,422 outstanding shares of common stock.




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APPLIX, INC. Form 10-Q For the Quarterly Period Ended March 31, 2005 Table of Contents PageNo.Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II  Other Information
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23Signature
    
    
    24Ex-10.25 First Loan Modification AgreementEx-10.26 Summary of 2005 Management Incentive PlanEx-31.1 Section 302 Certification of C.E.O.Ex-31.2 Section 302 Certification of C.F.O.Ex-32.1 Section 906 Certification of C.E.O.Ex-32.2 Section 906 Certification of C.F.O.
  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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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)
 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,362
    
    
    $
    15,924Short-term investments
    
    
    2,976
    
    
    
    Accounts receivable, less allowance for doubtful accounts of $266 and $227, respectively
    
    
    4,412
    
    
    
    6,171Other current assets
    
    
    1,217
    
    
    
    1,207Deferred tax assets
    
    
    485
    
    
    
    496Total current assets
    
    
    26,452
    
    
    
    23,798Restricted cash
    
    
    400
    
    
    
    400Property and equipment, net
    
    
    557
    
    
    
    580Other assets
    
    
    679
    
    
    
    687Intangible asset, net of accumulated amortization of $1,000 and $938, respectively
    
    
    500
    
    
    
    562Goodwill
    
    
    1,158
    
    
    
    1,158TOTAL ASSETS
    
    $
    29,746
    
    
    $
    27,185LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    893
    
    
    $
    795Accrued expenses
    
    
    4,999
    
    
    
    5,177Accrued restructuring expenses, current portion
    
    
    77
    
    
    
    112Deferred revenues
    
    
    8,816
    
    
    
    8,421Total current liabilities
    
    
    14,785
    
    
    
    14,505Accrued restructuring expenses, long term portion
    
    
    241
    
    
    
    261Other long term liabilities
    
    
    157
    
    
    
    181Commitments and contingencies (Note 6)Stockholders equity:Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstandingCommon stock, $.0025 par value; 30,000,000 shares authorized; 14,615,422 and 14,290,584 shares issued and outstanding, respectively
    
    
    36
    
    
    
    36Additional paid-in capital
    
    
    56,126
    
    
    
    54,348Accumulated deficit
    
    
    (40,062
    )
    
    
    (40,673
    )Accumulated other comprehensive loss
    
    
    (1,537
    )
    
    
    (1,473
    )Total stockholders equity
    
    
    14,563
    
    
    
    12,238TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    29,746
    
    
    $
    27,185
 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 EndedMarch 31,2005
    
    
    2004Revenues:Software
license
    
    $
    3,447
    
    
    $
    3,767Professional services and maintenance
    
    
    4,201
    
    
    
    3,616Total revenues
    
    
    7,648
    
    
    
    7,383Cost of revenues
    
    
    981
    
    
    
    1,229Gross margin
    
    
    6,667
    
    
    
    6,154Operating expenses:Sales and marketing
    
    
    3,395
    
    
    
    2,513Product development
    
    
    1,151
    
    
    
    1,326General and administrative (includes $15 of stock-based
compensation for the three months ended March 31, 2005
and 2004, respectively)
    
    
    1,361
    
    
    
    1,608Amortization of an acquired intangible
asset
    
    
    63
    
    
    
    63Total operating expenses
    
    
    5,970
    
    
    
    5,510Operating income
    
    
    697
    
    
    
    644Non-operating (expense) income:Interest and other (expense) income, net
    
    
    (20
    )
    
    
    147Income before income taxes
    
    
    677
    
    
    
    791Provision for income taxes
    
    
    46
    
    
    
    27Income from continuing operations
    
    
    631
    
    
    
    764Discontinued operations:Loss from discontinued operations
    
    
    (20
    )
    
    
    (26
    )Net income
    
    $
    611
    
    
    $
    738Net income (loss) per share, basic and diluted:Continuing operations, basic
    
    $
    0.04
    
    
    $
    0.06Continuing operations, diluted
    
    $
    0.04
    
    
    $
    0.05Discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )Net income per share, basic
    
    $
    0.04
    
    
    $
    0.05Net income per share, diluted
    
    $
    0.04
    
    
    $
    0.05Weighted average number of shares outstanding:Basic
    
    
    14,456
    
    
    
    13,466Diluted
    
    
    16,417
    
    
    
    15,010
 See accompanying Notes to Condensed Consolidated Financial Statements. 4




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Applix, Inc. 
 Condensed Consolidated Statements of Cash Flows (In thousands)
 Three Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    611
    
    
    $
    738Adjustments to reconcile net income to net cash provided
by (used in) operating activities:Depreciation
    
    
    68
    
    
    
    183Amortization
    
    
    63
    
    
    
    195Provision for doubtful accounts
    
    
    45
    
    
    
    41Non-cash stock compensation expense
    
    
    15
    
    
    
    15Changes in operating assets and liabilities:Decrease in restricted cash
    
    
    
    
    
    
    417Decrease in accounts receivable
    
    
    1,574
    
    
    
    902(Increase) decrease in prepaid and other current assets
    
    
    (31
    )
    
    
    111Increase (decrease) in accounts payable
    
    
    117
    
    
    
    (5
    )Decrease in accrued expenses
    
    
    (47
    )
    
    
    (659
    )Decrease in accrued restructuring expenses
    
    
    (55
    )
    
    
    (3,096
    )Decrease in other liabilities
    
    
    (27
    )
    
    
    (10
    )Increase (decrease) in deferred revenues
    
    
    547
    
    
    
    (39
    )Cash provided by (used in) operating activities
    
    
    2,880
    
    
    
    (1,207
    )Cash flows from investing activities:Property and equipment expenditures
    
    
    (43
    )
    
    
    (25
    )Purchases of short-term investments
    
    
    (2,976
    )
    
    
    Cash used in investing activities
    
    
    (3,019
    )
    
    
    (25
    )Cash flows from financing activities:Proceeds from issuance of common stock to affiliate
    
    
    
    
    
    
    3,000Proceeds from issuance of common stock under stock plans
    
    
    825
    
    
    
    1,356Proceeds from notes receivable
    
    
    892
    
    
    
    231Cash provided by financing activities
    
    
    1,717
    
    
    
    4,587Effect of exchange rate changes on cash
    
    
    (140
    )
    
    
    61Increase in cash and cash equivalents
    
    
    1,438
    
    
    
    3,416Cash and cash equivalents at beginning of period
    
    
    15,924
    
    
    
    9,241Cash and cash equivalents at end of period
    
    $
    17,362
    
    
    $
    12,657Supplemental disclosure of cash flow informationCash paid for income tax
    
    $
    170
    
    
    $
    108
 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. The Companys
products represent one principal business segment, which the Company reports as its continuing
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 month period ended March 31,
2005 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2005. 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, 2004. Use of Estimates The preparation of financial statements and accompanying notes in conformity with accounting
principles generally accepted in the United States of America 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. Actual results could differ from those
estimates. Estimates and assumptions in these financial statements relate to, among other items,
the useful lives of fixed assets, capitalized software costs and their realizability, intangible
assets, domestic and foreign income tax liabilities, valuation of deferred tax assets, the
allowance for doubtful accounts and accrued liabilities. 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:  
    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; 6




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
    Collectibility is probable; and
    Vendor specific objective evidence of fair value exists for all undelivered elements,
typically maintenance and professional services. The Company 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 software license
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 and in
certain instances, professional services. 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 sold 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. 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 7




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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 of 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 accounts for it 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 the
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 $121,000 and $245,000 for the three months ended March 31, 2005 and
2004, respectively. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments, including money market
accounts, with a remaining maturity of three months or less at time of purchase. Cash and cash
equivalents are carried at amortized cost, which approximates their fair value. Cash equivalents
totaled $17,362,000 and $15,924,000 at March 31, 2005 and December 31, 2004, respectively. Restricted cash of $400,000 at March 31, 2005 and December 31, 2004 represents the required
collateral on the Companys lease of its headquarters located in Westborough, Massachusetts. Short-term Investments Short-term investments are classified as available for sale and recorded at market value
using the specific identification method. Unrealized gains and losses are included in accumulated
other comprehensive income (loss), net of tax effects. Realized gains or losses are determined
based on the specific identified cost of the securities. Any unrealized losses that are considered
to be other than temporary are charged immediately to the income statement. 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, 8




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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 would have been adjusted to the pro forma amounts
presented below (in thousands, except for per share amounts): Three Months EndedMarch 31,2005
    
    
    2004Net income as reported
    
    $
    611
    
    
    $
    738Add: Total stock-based employee compensation
expense included in reported net income, net
of related tax effects
    
    
    15
    
    
    
    15Deduct: Total stock-based employee
compensation expense not included in reported
net income, determined under fair value based
method for all awards, net of related tax
effects
    
    
    (448
    )
    
    
    (591
    )Pro forma net income
    
    $
    178
    
    
    $
    162Net income per share:Basic  as reported
    
    $
    0.04
    
    
    $
    0.05Diluted  as reported
    
    $
    0.04
    
    
    $
    0.05Basic  pro forma
    
    $
    0.01
    
    
    $
    0.01Diluted  pro forma
    
    $
    0.01
    
    
    $
    0.01Weighted average number of shares outstanding:Basic
    
    
    14,456
    
    
    
    13,466Diluted
    
    
    15,898
    
    
    
    14,591
 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: 2005
    
    
    2004Expected life (years)
    
    
    4
    
    
    
    4Expected stock price volatility
    
    
    94.8
    %
    
    
    81.7
    %Risk free interest rate
    
    
    3.57
    %
    
    
    2.77
    %
 New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123R, Share-Based Payment(SFAS No. 123R). SFAS No. 123R is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation,and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS No. 123R requires
entities to recognize stock compensation expense for awards of equity instruments to employees
based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R was
effective for the first interim or annual reporting period beginning after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission (SEC) announced the adoption of a
rule that defers the required effective date of SFAS No. 123R. The SEC rule provides that SFAS No.
123R is now effective for registrants as of the beginning of the first fiscal year beginning after
June 15, 2005, instead of at the beginning of the first quarter after June 15, 2005, delaying the
required change until January 1, 2006. The Company is currently assessing the impact of SFAS No.
123R and considering the valuation models available; however, we anticipate that the adoption will significantly increase recorded compensation expense. 3. Net Income (Loss) Per Share 9




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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. Dilutive net income (loss) is
computed using the weighted average number of common shares outstanding during the period, plus the
dilutive effect, if any, of potential incremental common shares, determined through the application
of the treasury stock method under SFAS No. 128 Earnings Per Share to the stock options
outstanding during the period. Three Months EndedMarch 31,2005
    
    
    2004(In thousands, exceptper share data)Numerator:Income from continuing operations
    
    $
    631
    
    
    $
    764Loss from discontinued operations
    
    
    (20
    )
    
    
    (26
    )Net income
    
    $
    611
    
    
    $
    738Denominator:Denominator for basic net income per share Weighted shares outstanding
    
    
    14,456
    
    
    
    13,466Dilutive effect of assumed exercise of stock options
    
    
    1,961
    
    
    
    1,544Denominator for diluted net income (loss) per share
    
    
    16,417
    
    
    
    15,010Basic net income (loss) per shareContinuing operations
    
    $
    0.04
    
    
    $
    0.06Discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )Total net income per share
    
    $
    0.04
    
    
    $
    0.05Diluted net income (loss) per shareContinuing operations
    
    $
    0.04
    
    
    $
    0.05Discontinued operations
    
    $
    (0.00
    )
    
    $
    (0.00
    )Total net income per share
    
    $
    0.04
    
    
    $
    0.05
 Common stock equivalents (stock options) of 90,119 and 635,588 were excluded from the
calculation of diluted earnings per share for the three months ended March 31, 2005 and 2004,
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. Short-Term Investments The Companys short-term investments were as follows: March 31, 2005(In thousands)Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDebt securities
    
    $
    2,977
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    2,976Total
    
    $
    2,977
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    2,976
 As of March 31, 2005, all short-term investments mature in less than one year. 5. Comprehensive Income (Loss) Components of comprehensive income (loss) include net income and certain transactions that
have generally been reported in the consolidated statements of stockholders equity. Other
comprehensive loss includes gains and losses from foreign currency translation adjustments and
unrealized gains and losses on investments. 10




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Three Months EndedMarch 31,(In thousands)2005
    
    
    2004Net income
    
    $
    611
    
    
    $
    738Other comprehensive loss
    
    
    (64
    )
    
    
    (61
    )Total comprehensive income
    
    $
    547
    
    
    $
    677
 6. Commitments and Contingencies Contingencies From time to time, the Company is subject to routine litigation and proceedings in the
ordinary course of business. The Company is not aware of any pending litigation to which the
Company is or may be a party to, that the Company believes could have a material adverse impact on
its consolidated results of operations or financial condition. 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. In connection with this
investigation, the Company is subject to indemnification obligations to certain former executives. The Company is currently undergoing an unclaimed abandoned property (UAP) audit by the
Commonwealth of Massachusetts. During the fourth quarter of 2004, the Company recorded a provision
of approximately $300,000 based on its estimated exposure relating to the UAP audit. However, it is
possible that additional provisions may be required in future periods if it becomes probable that
the actual results from the ultimate disposition of the UAP audit differ from this estimate. 7. Restructuring Expenses In the second quarter of 2004, the Company adopted a plan of restructuring to reduce operating
costs. Under this plan, the Company 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. Restructuring charges accrued and unpaid at March 31, 2005, including current and long term
portions of $77,000 and $241,000, respectively, were as follows: Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Restructuring
    
    
    
    
    
    
    March 31,2004
    
    
    Expenses
    
    
    Payments
    
    
    2005Facility exit costs
    
    $
    373,000
    
    
    
    
    
    
    $
    (55,000
    )
    
    $
    318,000Total
    
    $
    373,000
    
    
    
    
    
    
    $
    (55,000
    )
    
    $
    318,000
 8. Discontinued Operations 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 March 31, 2005 and 2004 included costs of $20,000 and $26,000, respectively. These costs
primarily relate to legal and accounting costs associated with the dissolution of the VistaSource
business in Europe. 11




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9. Bank Credit Facility In April 2005, the Company renewed its credit facility, which provides for loans and other
financial accommodations, with Silicon Valley Bank (SVB). The renewed credit facility is a
domestic working capital line of credit with an interest rate equal to the prime interest rate and
is in the aggregate principal amount of up to the lesser of: (i) $3,000,000; and (ii) an amount
based upon a percentage the Companys qualifying domestic accounts receivable. The facility will
expire in March 2007. 10. Notes Receivable from Stock Purchase Agreements In September 2000, the Company sold 256,002 shares of common stock to certain company
executives. The purchase of such shares was funded by loans from the Company to the executives
evidenced by full-recourse promissory notes due and payable on July 31, 2005. Interest on the
promissory notes was calculated on the unpaid principal balance at a rate of 6% per year,
compounded annually until paid in full. In the event that the executive sold any shares prior to
July 31, 2005, the net proceeds from such sale would have become immediately due and payable
without notice or demand. In the event the executive left the Company, voluntarily or for cause,
the loan would have become immediately due and payable. Repayment terms were extended to the
original maturity date for several employees who subsequently left the Company. The aggregate
principal amount of the notes totaled $1,120,000 at December 31, 2002. Certain of these loans had
been past due for some time, and subsequent to December 31, 2002, in connection with a severance
arrangement the Company forgave one of the loans. As a result of the foregoing, consistent with
EITF 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and
FASB Interpretation 44, for accounting purposes only, the Company has characterized all of the
notes as non-recourse. In this regard, the accounting for these notes has been treated as a
repurchase of stock and the issuance of options. During the year ended December 31, 2002, the
Company recorded a charge of $964,000 for the difference between the amounts due on the loans,
including accrued interest of $128,000, and the fair value of the underlying stock at December 31,
2002. In February 2004, the Company collected approximately $231,000 as part of the settlement of
three of the outstanding executive loans. As of December 31, 2004 and 2003, there were no amounts
reflected on the Companys Consolidated Balance Sheets as owed on these notes for accounting
purposes only. In February 2005, the Company collected approximately $892,000 as part of the
repayment of the remaining outstanding executive loans. The repayment was accounted for as an
option exercise in accordance with the provisions of EITF 95-16, Accounting for Stock Compensation
Arrangements with Employer Loan Features under APB Opinion No. 25. As of March 31, 2005, there
were no amounts outstanding for any of the executive loans. 
 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 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 12




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##### Table of Contents



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. 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 2004 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,
2004, to Note 2 to the consolidated financial statements for the year ended December 31, 2004,
contained within the Companys Annual Report on Form 10-K for the year ended December 31, 2004, and
to Note 2 to the unaudited condensed consolidated financial statements contained in this Quarterly
Report on Form 10-Q. RESULTS OF OPERATIONS Three Months Ended March 31, 2005 and 2004 Revenues Three Months Ended March 31,Percent
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    of2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue(In thousands, except percentages)Software License Revenues
    
    $
    3,447
    
    
    
    45
    %
    
    $
    3,767
    
    
    
    51
    %Professional Services Revenues
    
    
    466
    
    
    
    6
    %
    
    
    465
    
    
    
    6
    %Maintenance Revenues
    
    
    3,735
    
    
    
    49
    %
    
    
    3,151
    
    
    
    43
    %Total Professional Services and Maintenance Revenues
    
    
    4,201
    
    
    
    55
    %
    
    
    3,616
    
    
    
    49
    %Total Revenues
    
    $
    7,648
    
    
    
    100
    %
    
    $
    7,383
    
    
    
    100
    %
 Total revenues for the three months ended March 31, 2005 were $7,648,000, compared to
$7,383,000 for the three months ended March 31, 2004. Total revenues for three months ended March
31, 2005 increased 4%, which includes the favorable impacts of foreign currency exchange rate
fluctuations, from the same period in the prior year. When expressed at constant foreign currency
exchange rates, total revenues were flat for the three months ended March 31, 2005 compared to
the same period in the prior year. 13




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##### Table of Contents



Software License Revenues Software license revenues decreased by $320,000 to $3,447,000, or 45% of total revenues, for
the three months ended March 31, 2005, from $3,767,000, or 51% of total revenues, for the three
months ended March 31, 2004. The decrease in software license revenue resulted from several
factors, including closure rates, competition on several larger deals and the need for more
extensive proofs of concept, which have the effect of lengthening the sales cycles. The decrease in software license
revenues was also attributable to the transitional impact from organizational changes in the North
American sales operations made in the second half of 2004. The decrease was partially offset by
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 $100,000 for the three months ended March 31, 2005. Domestic license revenues decreased by $93,000 to $1,145,000 for the three months ended March
31, 2005 from $1,238,000 for the three months ended March 31, 2004. International license revenues
decreased by $227,000 to $2,302,000 for the three months ended March 31, 2005 from $2,529,000 for
the three months ended March 31, 2004. 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 and Maintenance Professional services and maintenance revenues increased by 16% to $4,201,000 for the three
months ended March 31, 2005 as compared to $3,616,000 for the three months ended March 31, 2004.
During the three months ended March 31, 2005, maintenance revenues increased $584,000 to
$3,735,000, compared to $3,151,000 for the three months ended March 31, 2004, and professional
services revenues were consistent at $466,000 for the three months ended March 31, 2005 compared
to $465,000 for the three months ended March 31, 2004. The increase in maintenance revenue was
primarily attributable to the increase in the customer installed base from 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 effect of
foreign currency exchange rate fluctuations was an increase to professional service and maintenance
revenues of approximately $122,000 for the three months ended March 31, 2005. The Company expects
maintenance revenues to continue to increase due to strong customer maintenance renewal rates. Cost of Revenues Three Months Ended March 31,2005
    
    
    
    
    
    
    2004(In thousands, except percentages)Cost of Software License Revenues
    
    $
    23
    
    
    
    
    
    
    $
    206Cost of Professional Services Revenues
and Maintenance Revenues:Cost of Professional Services Revenues
    
    
    410
    
    
    
    
    
    
    
    347Cost of Maintenance Revenues
    
    
    548
    
    
    
    
    
    
    
    676Total
    
    
    958
    
    
    
    
    
    
    
    1,023Total Cost of Revenues
    
    $
    981
    
    
    
    
    
    
    $
    1,229Gross Margin:
    
    
    
    
    
    
    (A
    )
    
    
    
    
    
    
    (A
    )Software License
    
    $
    3,424
    
    
    
    99
    %
    
    $
    3,561
    
    
    
    95
    %Professional Services and Maintenance:Professional Services
    
    
    56
    
    
    
    12
    %
    
    
    118
    
    
    
    25
    %Maintenance
    
    
    3,187
    
    
    
    85
    %
    
    
    2,475
    
    
    
    79
    %Total
    
    
    3,243
    
    
    
    77
    %
    
    
    2,593
    
    
    
    72
    %Total Gross Margin
    
    $
    6,667
    
    
    
    87
    %
    
    $
    6,154
    
    
    
    83
    %
 14




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##### Table of Contents



Cost of Software License Revenues Cost of software license revenues consist 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 March 31, 2005 and 5% for the three months ended March 31, 2004. The decrease in
these percentages and corresponding improvement in software license gross margin was primarily due
to a decrease of $132,000 in the amortization of capitalized software development costs and a
decrease of $29,000 in third-party software royalties paid by the Company for the three months
ended March 31, 2005, compared to the same period 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 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 $65,000 to $958,000 for the three months ended March 31, 2005 from $1,023,000 for the
three months ended March 31, 2004. Gross margin of professional services and maintenance revenues increased to 77% for
the three months ended March 31, 2005 as compared to 72% for the three months ended March 31, 2004.
The improvements in gross margins were primarily due to 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 Three Months Ended March 31,Percent of
    
    
    
    
    
    
    Percent of2005
    
    
    Revenues
    
    
    2004
    
    
    Revenues(In thousands, except percentages)Sales and marketing
    
    $
    3,395
    
    
    
    44
    %
    
    $
    2,513
    
    
    
    34
    %Product development
    
    
    1,151
    
    
    
    15
    %
    
    
    1,326
    
    
    
    18
    %General and administrative
    
    
    1,361
    
    
    
    18
    %
    
    
    1,608
    
    
    
    22
    %Amortization of acquired intangible asset
    
    
    63
    
    
    
    1
    %
    
    
    63
    
    
    
    1
    %Total operating expenses
    
    $
    5,970
    
    
    
    78
    %
    
    $
    5,510
    
    
    
    75
    %
 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 $882,000 to
$3,395,000 for the three months ended March 31, 2005 from $2,513,000 for the three months ended
March 31, 2004. Sales and marketing expenses as a percentage of total revenues were 44% and 34% for
the three months ended March 31, 2005 and 2004, respectively. The increase in sales and marketing
expenses for the three months ended March 31, 2005 was primarily due to an increase in staffing in
sales and marketing, including the Companys direct sales force and presales technical staff, as
well as an increased investment in marketing programs, advertising and lead generation activities. 15




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##### Table of Contents



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. There were no software development costs that qualified for
capitalization during the three months ended March 31, 2005 or 2004. Product development costs not
meeting the requirements of capitalization are expensed as incurred. Product development expenses decreased $175,000 to $1,151,000 for the three months ended March
31, 2005 from $1,326,000 for the three months ended March 31, 2004. These expenses represent 15% of
total revenues for the three months ended March 31, 2005, as compared to 18% of total revenues for
the three months ended March 31, 2004. The decrease in product development expenses was primarily
due to a slight decrease in staffing. 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
(including costs under indemnification obligations to former executives) 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 $247,000, to $1,361,000, or 18%
of total revenues, for the three months ended March 31, 2005 from $1,608,000, or 22% of total
revenues, for the three months ended March 31, 2004. The decrease was primarily due to lower legal
costs associated with the SEC investigation and a reduction in allocated rent expense for three
months ended March 31, 2005, resulting from the Companys restructuring of its UK
office lease in 2004. The Company will continue to closely monitor general and administrative
costs. 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 for the three months March 31,
2005 and 2004. The amortization expense will continue to be ratably amortized through the first
quarter of 2007. Interest and Other (Expense) Income, Net Interest and other (expense) income, net consists primarily of interest income, interest
expense and gains and losses on foreign currency exchange fluctuations. Interest and other (expense) income, net decreased to an expense of $20,000 for the three
months ended March 31, 2005, as compared to income of $147,000 for the three months ended March 31,
2004. The decrease was mainly due to unfavorable foreign currency exchange rate fluctuations on
intercompany balances denominated in the Companys foreign subsidiaries local currencies,
primarily the Companys Australian intercompany balances, resulting in a net loss on foreign
currency exchange of approximately $97,000 in the three months ended March 31, 2005 as compared to
a net gain on foreign currency exchange of approximately $142,000 in the comparable period in 2004.
This decrease was partially offset by an increase of approximately $73,000 in interest income for
the three months ended March 31, 2005 as compared to the comparable period in 2004 due to higher
interest rates earned on higher average cash and short-term investments balances. 16




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##### Table of Contents



Provision for Income Taxes The provision for income taxes represents the Companys federal and state income tax
obligations as well as foreign tax provisions. For the three months ended March 31, 2005 and 2004,
provisions for income taxes were $46,000 and $27,000, respectively. The effective tax rates were significantly less than the U.S. federal statutory rate primarily
as a result of the anticipated utilization of domestic net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES The Company currently derives its liquidity and capital resources primarily from the Companys
cash flow from operations. The Companys cash and cash equivalents balances were $17,762,000 and
$16,324,000 as of March 31, 2005 and December 31, 2004, respectively, which includes restricted
cash of $400,000 as of each respective period. The Companys days sales outstanding (DSO) in accounts receivable was 52 days
as of March 31, 2005, compared with 59 days as of December 31, 2004. Cash provided by the Companys operating activities was $2,880,000 for the three months ended
March 31, 2005, compared to cash used in operating activities of $1,207,000 for the three months
ended March 31, 2004. Cash provided by operating activities was primarily due to net income of
$611,000, coupled with strong cash collections on its accounts receivable for the three months
ended March 31, 2005. Cash used in investing activities totaled $3,019,000 for the three months ended March 31, 2005
compared to cash used in investing activities of $25,000 for the three months ended March 31, 2004.
Cash used in investing activities consisted primarily of the Companys purchase of approximately
$2,976,000 of short-term investments during the three months ended March 31, 2005. Cash provided by financing activities totaled $1,717,000 for the three months ended March 31,
2005, which consisted of $825,000 of proceeds received from the issuance of stock under the
Companys stock plans and $892,000 of proceeds from the repayment of notes receivable. This
compares to total cash provided in financing activities of $4,587,000 for the three months ended
March 31, 2004, which consisted of proceeds of $3,000,000 from the Companys sale of its common
stock, at fair market value, to a member of the Companys Board of Directors, along with another
investor who is related to the Board member, $1,356,000 from the issuance of stock under the
Companys stock plans and $231,000 from the repayment of notes. Cash paid for income taxes by the Company was $170,000 and $108,000 for the three months ended
March 31, 2005 and 2004, respectively. The increase was primarily due an increase in federal income
taxes paid. In April 2005, the Company renewed its credit facility, which provides for loans and other
financial accommodations, with Silicon Valley Bank (SVB). The renewed credit facility is a
domestic working capital line of credit with an interest rate equal to the prime interest rate and
is in the aggregate principal amount of up to the lesser of: (i) $3,000,000; and (ii) an amount
based upon a percentage the Companys qualifying domestic accounts receivable. The facility will
expire in March 2007. The Company has contractual obligations for capital leases, operating leases and purchase
obligations that were summarized in a table of Contractual Obligations set forth in Item 7 of the
Companys Annual Report on Form 10-K for the year ended December 31, 2004. There have been no
material changes to the contractual obligations of the Company, outside of the ordinary course of
the Companys business, since December 31, 2004. The Company does not have any off-balance sheet financing or unconsolidated special purpose
entities. For the three months ended March 31, 2005 and the year ended December 31, 2004, the Company
achieved operating profitability and generated positive operating cash flow. The Company, however,
incurred operating losses and negative cash flows for the last several years prior to 2004. As of
March 31, 2005, the Company had an accumulated deficit of $40.1 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 SVB credit facility. The availability of borrowings under the
Companys credit facility 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 17




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##### Table of Contents



Companys 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.   18




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##### Table of Contents



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. Although we were profitable in the first quarter of 2005 and 2004, we incurred losses from
continuing operations for the last several years prior to 2004. We could incur operating losses and
negative cash flows in the future because of costs and expenses relating to brand development,
marketing and other promotional activities, continued development of our information technology
infrastructure, expansion of product offerings and development of relationships with other
businesses. There can be no assurance that we will continue to achieve a profitable level of
operations in the future. We believe, based upon our current business plan, that our current cash, cash equivalents and
short-term investments, 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
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; 19




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
    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. 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
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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. BECAUSE WE DEPEND IN PART ON THIRD-PARTY SYSTEMS INTEGRATORS TO PROMOTE, SELL AND IMPLEMENT 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. 21




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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, the Euro and the 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 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 Companys primary
foreign currency exposures relate to its short-term intercompany balances with its foreign
subsidiaries, primarily the Australian dollar. The Companys 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. For the three
months ended March 31, 2005, the Company recorded a net loss on foreign exchange of approximately
$97,000 in its Consolidated Statement of Operations, primarily due to unfavorable movements in the
Australian dollar exchange rate. Based on foreign currency exposures existing at March 31, 2005, a
10% unfavorable movement in foreign exchange rates related to the British pound, Euro, Australian
dollar, and Swiss franc would result in an approximately $658,000 loss to earnings. The Company has
currently not engaged in activities to hedge these exposures. At March 31, 2005, the Company held $17,362,000 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 of March 31, 2005. The term 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), means
controls and other procedures of a company that are designed to ensure that information required to
be disclosed by a 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. Disclosure controls and procedures include, without limitation, controls and procedures
deigned to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to the companys
management, including its principal executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosures. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of the
Companys disclosure controls and procedures as of March 31, 2005, the Companys chief executive
officer and chief financial officer concluded that, as of such date, the Companys disclosure
controls and procedures were effective at the reasonable assurance level. 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 March 31, 2005 that
has materially affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 22




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PART II. OTHER INFORMATION 
 ITEM 5. OTHER INFORMATION Rider 23 On April 14, 2005, the Company renewed its credit facility relating to domestic working
capital, which provides for loans and other financial accommodations, with Silicon Valley Bank
(SVB). The renewed credit facility is a domestic working capital line of credit with an interest
rate equal to the prime interest rate and is in the aggregate principal amount of up to the lesser
of: (i) $3,000,000 and (ii) an amount based upon a percentage of the Companys qualifying domestic
accounts receivable. The facility will expire in March 2007. The foregoing description of the credit facility is qualified
in its entirety by reference to
the First Loan Modification Agreement, which is attached hereto as Exhibit 10.25 and by
by reference to the Loan and Security Agreement which is attached as
Exhibit 10.16 to  the Companys Annual Report on Form 10-K for the
year ended December 31, 2004, both of which are incorporated herein by reference. 
 ITEM 6. EXHIBITS (a) Exhibits ExhibitNumber
    
    Description10.25
    
    First Loan Modification Agreement, dated April 14, 2005 between the Registrant and
Silicon Valley
Bank.10.26
    
    Summary of 2005 Management Incentive Plan for Executive Officers of Applix, Inc.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial
Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange
Act of 1934, as amended.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    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.
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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: May 16, 2005
    
    /s/ Milton A. AlpernMilton A. AlpernChief Financial Officer and Treasurer (DulyAuthorized Officer and Principal Financial andAccounting Officer)
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EXHIBIT INDEX ExhibitNumber
    
    Description10.25
    
    First Loan Modification Agreement, dated April 14, 2005 between the Registrant and
Silicon Valley
Bank.10.26
    
    Summary of 2005 Management Incentive Plan for Executive Officers of Applix, Inc.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial
Officer pursuant to Rule 13a-14(a)/Rule
15d-14(a) of the Securities Exchange
Act of 1934, as amended.32.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    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.
 25