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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 June 30, 2004 OR [  ]
    
    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(State or other jurisdiction of
incorporation or organization)
    
    04-2781676(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. Yes [X] No [  ] Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [  ] No [X] As
of August 11, 2004, the Registrant had 14,312,499 outstanding shares of common stock.




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APPLIX, INC. Form 10-Q For the Quarterly Period Ended June 30, 2004 Table of Contents PageNo.Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003
    
    
    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
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II  Other Information
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 6. Exhibits and Reports on Form 8-K
    
    
    26Signature
    
    
    27Ex-10.20 Retention AgreementEx-10.21 2004 Equity Incentive PlanEx-10.22 Form of Incentive Stock Option AgreementEx-10.23 Form of Nonstatutory Stock Option AgreementEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
  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) June 30,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,175
    
    
    $
    9,241Accounts receivable, less allowance for doubtful accounts of $226 and $252, respectively
    
    
    4,049
    
    
    
    5,715Other current assets
    
    
    2,176
    
    
    
    2,125Total current assets
    
    
    19,400
    
    
    
    17,081Restricted cash
    
    
    400
    
    
    
    817Property and equipment, at cost
    
    
    13,229
    
    
    
    13,404Less: accumulated amortization and depreciation
    
    
    (12,492
    )
    
    
    (12,431
    )Net property and equipment
    
    
    737
    
    
    
    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 $813 and $688, respectively
    
    
    687
    
    
    
    812Other assets
    
    
    648
    
    
    
    843TOTAL ASSETS
    
    $
    23,030
    
    
    $
    21,949LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,374
    
    
    $
    1,083Accrued expenses
    
    
    5,471
    
    
    
    6,657Accrued restructuring expenses
    
    
    
    
    
    
    3,400Deferred revenues
    
    
    7,225
    
    
    
    8,060Total current liabilities
    
    
    14,070
    
    
    
    19,200Long term liabilities
    
    
    230
    
    
    
    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; 14,600,147 and 13,272,379
shares issued, respectively
    
    
    36
    
    
    
    33Additional paid-in capital
    
    
    55,346
    
    
    
    50,497Accumulated deficit
    
    
    (44,186
    )
    
    
    (45,375
    )Accumulated other comprehensive loss
    
    
    (1,157
    )
    
    
    (1,539
    )10,039
    
    
    
    3,616Less: treasury stock, 357,627 shares at cost
    
    
    (1,309
    )
    
    
    (1,361
    )Total stockholders equity
    
    
    8,730
    
    
    
    2,255TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    23,030
    
    
    $
    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
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Software license
    
    $
    3,692
    
    
    $
    2,658
    
    
    $
    7,459
    
    
    $
    5,349Professional services and maintenance
    
    
    3,571
    
    
    
    3,284
    
    
    
    7,187
    
    
    
    7,426Total revenues
    
    
    7,263
    
    
    
    5,942
    
    
    
    14,646
    
    
    
    12,775Cost of revenues:Software license
    
    
    178
    
    
    
    420
    
    
    
    384
    
    
    
    832Professional services and maintenance
    
    
    950
    
    
    
    1,191
    
    
    
    1,973
    
    
    
    2,925Total cost of revenues
    
    
    1,128
    
    
    
    1,611
    
    
    
    2,357
    
    
    
    3,757Gross margin
    
    
    6,135
    
    
    
    4,331
    
    
    
    12,289
    
    
    
    9,018Operating expenses:Sales and marketing (includes $0 and $23 of
stock-based compensation for the three and
six months ended June 30, 2004 and 2003,
respectively)
    
    
    2,645
    
    
    
    2,773
    
    
    
    5,158
    
    
    
    5,480Product development
    
    
    1,229
    
    
    
    1,353
    
    
    
    2,555
    
    
    
    2,890General and administrative (includes $15 and
$103 of stock-based compensation for the
three months ended June 30, 2004 and 2003,
respectively, and $30 and $147 of stock-based
compensation for the six months ended June
30, 2004 and 2003, respectively)
    
    
    1,488
    
    
    
    2,052
    
    
    
    3,096
    
    
    
    4,280Compensation expense related to acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    583Restructuring credit
    
    
    (27
    )
    
    
    
    
    
    
    (27
    )
    
    
    Amortization of an acquired intangible asset
    
    
    62
    
    
    
    62
    
    
    
    125
    
    
    
    125Total operating expenses
    
    
    5,397
    
    
    
    6,240
    
    
    
    10,907
    
    
    
    13,358Operating income (loss)
    
    
    738
    
    
    
    (1,909
    )
    
    
    1,382
    
    
    
    (4,340
    )Non-operating income (loss):Interest and other (loss) income, net
    
    
    (181
    )
    
    
    431
    
    
    
    (34
    )
    
    
    605Net gain from sale of CRM business (Note 5)
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    7,922Income (loss) before taxes
    
    
    557
    
    
    
    (1,556
    )
    
    
    1,348
    
    
    
    4,187Provision for income taxes
    
    
    88
    
    
    
    115
    
    
    
    115
    
    
    
    764Income (loss) from continuing operations
    
    
    469
    
    
    
    (1,671
    )
    
    
    1,233
    
    
    
    3,423Loss from discontinued operations
    
    
    (18
    )
    
    
    (23
    )
    
    
    (44
    )
    
    
    (56
    )Net income (loss)
    
    $
    451
    
    
    $
    (1,694
    )
    
    $
    1,189
    
    
    $
    3,367Net income (loss) per share, basic and diluted:Continuing operations basic
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.09
    
    
    $
    0.27Continuing operations diluted
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.08
    
    
    $
    0.27Discontinued operations basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    (0.00
    )
    
    $
    (0.00
    )Net income (loss) per share basic
    
    $
    0.03
    
    
    $
    (0.14
    )
    
    $
    0.09
    
    
    $
    0.27Net income (loss) per share diluted
    
    $
    0.03
    
    
    $
    (0.14
    )
    
    $
    0.08
    
    
    $
    0.27Weighted average number of shares outstanding:Basic
    
    
    14,209
    
    
    
    12,523
    
    
    
    13,864
    
    
    
    12,465Diluted
    
    
    15,776
    
    
    
    12,523
    
    
    
    15,434
    
    
    
    12,688
 See accompanying Notes to Condensed Consolidated Financial Statements. 4




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Applix, Inc. 
 Condensed Consolidated Statements of Cash Flows
(In thousands) Six Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    1,189
    
    
    $
    3,367Adjustments to reconcile net income to net cash used in operating activities:Depreciation
    
    
    340
    
    
    
    493Amortization
    
    
    390
    
    
    
    584Provision for doubtful accounts
    
    
    (26
    )
    
    
    93Gain on sale of CRM business
    
    
    
    
    
    
    (7,922
    )Deferred gain on sale of subsidiary
    
    
    (195
    )
    
    
    Non-cash stock compensation expense
    
    
    30
    
    
    
    Non-cash restructuring credit
    
    
    (27
    )
    
    
    Changes in operating assets and liabilities:Decrease in restricted cash
    
    
    417
    
    
    
    Decrease in accounts receivable
    
    
    1,476
    
    
    
    1,784Decrease (increase) in prepaid and other current assets
    
    
    132
    
    
    
    (758
    )Decrease (increase) in accounts payable
    
    
    294
    
    
    
    (182
    )Decrease in accrued expenses
    
    
    (861
    )
    
    
    (2,219
    )Decrease in accrued restructuring expenses
    
    
    (3,400
    )
    
    
    Decrease in other liabilities
    
    
    (31
    )
    
    
    (Decrease) increase in deferred revenues
    
    
    (733
    )
    
    
    1,009Cash used in operating activities
    
    
    (1,005
    )
    
    
    (3,751
    )Cash flows from investing activities:Property and equipment expenditures
    
    
    (173
    )
    
    
    (125
    )Net proceeds from sale of CRM business
    
    
    
    
    
    
    5,525Proceeds from sale of subsidiary
    
    
    195
    
    
    
    Cash provided by investing activities
    
    
    22
    
    
    
    5,400Cash flows from financing activities:Proceeds from issuance of common stock to affiliate
    
    
    3,000
    
    
    
    Proceeds from issuance of common stock under stock plans
    
    
    1,494
    
    
    
    335Payment on short-term borrowing
    
    
    
    
    
    
    (237
    )Proceeds from notes receivable
    
    
    232
    
    
    
    Cash provided by financing activities
    
    
    4,726
    
    
    
    98Effect of exchange rate changes on cash
    
    
    191
    
    
    
    (577
    )Increase in cash and cash equivalents
    
    
    3,934
    
    
    
    1,170Cash and cash equivalents at beginning of period
    
    
    9,241
    
    
    
    8,389Cash and cash equivalents at end of period
    
    $
    13,175
    
    
    $
    9,559Supplemental disclosure of cash flow informationCash paid for income tax
    
    $
    408
    
    
    $
    402Cash 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 six month period ended June 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, we
evaluate our estimates. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances. Actual results could differ from those estimates or
assumptions. 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, accrued expenses, deferred revenue and certain post-closing
adjustments and transaction costs related to the sale of the Companys CRM
Business. 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; 6




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
    
    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. 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 7




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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 $258,000 and $171,000 for the three months ended June 30, 2004 and
2003, respectively. Revenue recorded for amounts collected by the Company and
remitted to the indirect channel partners for such renewals aggregated $503,000
and $326,000 for the six months ended June 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. 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 would have
been adjusted to the pro forma amounts presented below (in thousands, except
for per share amounts): 8




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    451
    
    
    $
    (1,694
    )
    
    $
    1,189
    
    
    $
    3,367Add: Total stock-based employee compensation
expense included in reported net income, net
of related tax effects
    
    
    15
    
    
    
    103
    
    
    
    30
    
    
    
    147Deduct: 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
    
    
    (172
    )
    
    
    (379
    )
    
    
    (744
    )
    
    
    (1,126
    )Pro forma net income (loss)
    
    $
    294
    
    
    $
    (1,970
    )
    
    $
    475
    
    
    $
    2,388Net income (loss) per share:Basic  as reported
    
    $
    0.03
    
    
    $
    (0.14
    )
    
    $
    0.09
    
    
    $
    0.27Diluted  as reported
    
    $
    0.03
    
    
    $
    (0.14
    )
    
    $
    0.08
    
    
    $
    0.27Basic  pro forma
    
    $
    0.02
    
    
    $
    (0.16
    )
    
    $
    0.03
    
    
    $
    0.19Diluted  pro forma
    
    $
    0.02
    
    
    $
    (0.16
    )
    
    $
    0.03
    
    
    $
    0.19Weighted average number of shares outstanding:Basic
    
    
    14,209
    
    
    
    12,523
    
    
    
    13,864
    
    
    
    12,465Diluted
    
    
    15,776
    
    
    
    12,523
    
    
    
    15,434
    
    
    
    12,688
 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
    
    
    79.4
    %
    
    
    80.6
    %Risk free interest rate
    
    
    3.47
    %
    
    
    2.04
    %
 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): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Numerator:Income (loss) from continuing operations
    
    $
    469
    
    
    $
    (1,671
    )
    
    $
    1,233
    
    
    $
    3,423Loss from discontinued operations
    
    
    (18
    )
    
    
    (23
    )
    
    
    (44
    )
    
    
    (56
    )Net income (loss)
    
    $
    451
    
    
    $
    (1,694
    )
    
    $
    1,189
    
    
    $
    3,367Denominator:Denominator for basic net income (loss) per share 
weighted average number of shares outstanding
    
    
    14,209
    
    
    
    12,523
    
    
    
    13,864
    
    
    
    12,465Dilutive effect of assumed exercises of stock options
    
    
    1,567
    
    
    
    
    
    
    
    1,570
    
    
    
    223Denominator for diluted net income (loss) per share
    
    
    15,776
    
    
    
    12,523
    
    
    
    15,434
    
    
    
    12,688
 The Company had an additional 632,020 and 2,287,277 and 630,042 and
2,284,160 of common stock equivalents (stock options) outstanding which would
have been anti-dilutive for the three and six months ended June 30, 2004 and
2003, respectively, which were not included in the calculation of diluted net
income (loss) per share as the stock option exercise price exceeded the average
market price for the respective periods. 9




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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 income (loss) includes
gains and losses from foreign currency translation adjustments. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In thousands)
    
    (In thousands)2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    451
    
    
    $
    (1,694
    )
    
    $
    1,189
    
    
    $
    3,367Other comprehensive income (loss)
    
    
    443
    
    
    
    (246
    )
    
    
    382
    
    
    
    (601
    )Total comprehensive income (loss)
    
    $
    894
    
    
    $
    (1,940
    )
    
    $
    1,571
    
    
    $
    2,766
 5. Net Gain from Sale of CRM Business In the first quarter of 2003, the Company completed the sale of the 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. iET
paid $4,250,000 of the purchase price in cash at the initial closing
and paid an additional $1,500,000 in cash on March 17, 2003 upon the completion
of the closing of the sale of certain assets of the Companys Germany subsidiary, Applix
GmbH. During the period of the initial closing and completion of the Companys
Germany subsidiary asset sale closing, Applix GmbH continued to resell the CRM software
products sold to iET, and to provide professional services and maintenance
support under a resellers agreement between the Company and iET. The Companys results for three and six months ended June 30, 2004 and the
three months ended June 30, 2003 included no CRM revenues and for the six
months ended June 30, 2003 included CRM license revenues of $253,000 and CRM
professional services and maintenance revenues of $999,000. In the first quarter of 2003, the Company recorded a net gain before tax
of $8,000,000, which includes net cash consideration of $5,525,000, which
reflects $262,000 paid back to iET, and $3,552,000 of net liabilities assumed
by iET less transaction costs of $1,077,000. In the second quarter of 2003, the Company recorded an adjustment to
accrue for additional transactions costs, a change in estimates, of $78,000 to
reduce the net gain from the sale of the CRM Business and paid back to iET an
additional $225,000 of the total cash consideration received due to
post-closing adjustments. The purchase price is subject to certain post closing adjustments relating
to the net working capital as set forth in the Asset Purchase Agreement between
the Company and iET, dated January 21, 2003 and therefore the net gain from the
sale of the CRM business is subject to additional adjustments. 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. On June 16, 2003, the Company announced that is was the subject of an
investigation by the Securities and Exchange Commission 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. 10




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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 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 and benefit of 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
estimates. The restructuring charge was fully paid as of June 30, 2004. The accrued restructuring expenses, as well as the Companys 2004
adjustments and payments made against accruals are detailed as follows: Balance at
    
    
    
    
    
    
    
    
    
    Balance at
    
    
    
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    
    
    
    Payments
    
    March 31,
    
    
    
    
    
    Payments
    
    June 30,2003
    
    Adjustment
    
    Made
    
    2004
    
    Adjustment
    
    Made
    
    2004Payment to landlord for
abandoned space
    
    $
    3,000,000
    
    
    $
    
    
    
    $
    (3,000,000
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Professional service fees
    
    
    400,000
    
    
    
    (50,000
    )
    
    
    (46,000
    )
    
    
    304,000
    
    
    
    (27,000
    )
    
    
    (277,000
    )
    
    
    Total cash components
    
    $
    3,400,000
    
    
    $
    (50,000
    )
    
    $
    (3,046,000
    )
    
    $
    304,000
    
    
    $
    (27,000
    )
    
    $
    (277,000
    )
    
    $
    
 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
unit. The Companys results of operations for the three months and six months
ended June 30, 2004 and 2003 included costs of $18,000 and $23,000, and $44,000
and $56,000, 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 is in the aggregate principal amount 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 is in the aggregate principal amount 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 June 30, 2004,
there were no amounts outstanding under these two credit facilities. 10. Employee Termination Costs On February 27, 2003, the Company entered into a severance agreement with
an executive of the Company. Pursuant to this agreement, the Company has agreed
to pay the executive 15 months of salary and provide the executive certain
medical benefits during the 15-month period after his termination. In addition,
the Company forgave all outstanding principal and interest due under a 11




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secured promissory note dated July 30, 2000 in the principal amount of
$225,000, executed pursuant to the Companys Executive Stock Loan Purchase
Program. Pursuant to the severance agreement, the executive transferred to the
Company 51,429 shares of the Companys common stock, which were held by the
Company in treasury as of June 30, 2004 and which stock the executive had
purchased using the funds loaned to the executive pursuant to the secured
promissory note. During the first quarter of 2003, the Company recorded
$356,000 in costs related to the termination of employment of the executive.
The severance amounts were paid in 15 equal monthly installments and, as of
June 30, 2004, the balance was paid in full. 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. As of
June 30, 2004, there was a remaining unpaid balance of $102,000. 11. Stockholders Equity 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
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. 13. Subsequent Events In June 2004, the Company entered into a sublease agreement with a
subtenant for a portion of the Companys UK office lease. As of June 30, 2004,
the Company continued to use the subleased office space and anticipated exit of
the facility in July 2004. At the time of the exit in the third quarter of
2004, the Company anticipates it will record a loss on the exit of the space of
approximately $570,000, which represents the difference between the Companys
contractual lease rate for the subleased space and the sublease rate over the
remaining term of the original lease, discounted by a credit adjusted risk rate
of 8%. 
 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 12




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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 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. This is the first
quarter-to-quarter comparison, since the sale of its CRM Business, in which the Companys quarterly
revenues for the quarters ended June 30, 2004 and 2003 are derived exclusively
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. 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
financial statements. For more information regarding our critical accounting
policies, we refer the reader to the discussion contained in Item 7 under the
heading Critical Accounting Policies and Estimates of our Annual Report on
Form 10-K for the year ended December 31, 2003, Note 1 to the consolidated
financial statements for the year ended December 31, 2003, contained within our
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 Six Months Ended June 30, 2004 and 2003 Revenues (in thousands except percentages)Three Months Ended June 30,
    
    Six Months Ended June 30,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of2004
    
    Revenues
    
    2003
    
    Revenues
    
    2004
    
    Revenues
    
    2003
    
    RevenuesBI/BPM
    
    $
    3,692
    
    
    
    100
    %
    
    $
    2,658
    
    
    
    100
    %
    
    $
    7,459
    
    
    
    100
    %
    
    $
    5,096
    
    
    
    95
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    253
    
    
    
    5
    %Total Software License
Revenues
    
    
    3,692
    
    
    
    51
    %
    
    
    2,658
    
    
    
    45
    %
    
    
    7,459
    
    
    
    51
    %
    
    
    5,349
    
    
    
    42
    %
 13




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(in thousands except percentages)Three Months Ended June 30,
    
    Six Months Ended June 30,Percent of
    

    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of2004
    
    Revenues
    
    2003
    
    Revenues
    
    2004
    
    Revenues
    
    2003
    
    RevenuesBI/BPM
    
    
    123
    
    
    
    100
    %
    
    
    82
    
    
    
    100
    %
    
    
    304
    
    
    
    100
    %
    
    
    137
    
    
    
    75
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    46
    
    
    
    25
    %Total Training Revenues
    
    
    123
    
    
    
    2
    %
    
    
    82
    
    
    
    1
    %
    
    
    304
    
    
    
    2
    %
    
    
    183
    
    
    
    2
    %BI/BPM
    
    
    233
    
    
    
    100
    %
    
    
    635
    
    
    
    100
    %
    
    
    517
    
    
    
    100
    %
    
    
    1,309
    
    
    
    77
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    394
    
    
    
    23
    %Total Consulting Revenues
    
    
    233
    
    
    
    3
    %
    
    
    635
    
    
    
    11
    %
    
    
    517
    
    
    
    4
    %
    
    
    1,703
    
    
    
    13
    %BI/BPM
    
    
    3,215
    
    
    
    100
    %
    
    
    2,567
    
    
    
    100
    %
    
    
    6,366
    
    
    
    100
    %
    
    
    4,981
    
    
    
    90
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    559
    
    
    
    10
    %Total Maintenance Revenues
    
    
    3,215
    
    
    
    44
    %
    
    
    2,567
    
    
    
    43
    %
    
    
    6,366
    
    
    
    43
    %
    
    
    5,540
    
    
    
    43
    %BI/BPM
    
    
    3,571
    
    
    
    100
    %
    
    
    3,284
    
    
    
    100
    %
    
    
    7,187
    
    
    
    100
    %
    
    
    6,427
    
    
    
    87
    %CRM
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    999
    
    
    
    13
    %Total Professional
Services and Maintenance
Revenues
    
    
    3,571
    
    
    
    49
    %
    
    
    3,284
    
    
    
    55
    %
    
    
    7,187
    
    
    
    49
    %
    
    
    7,426
    
    
    
    58
    %Total Revenues
    
    $
    7,263
    
    
    
    100
    %
    
    $
    5,942
    
    
    
    100
    %
    
    $
    14,646
    
    
    
    100
    %
    
    $
    12,775
    
    
    
    100
    %
 Total revenues for the three months ended June 30, 2004 were $7,263,000,
compared to $5,942,000 for the three months ended June 30, 2003. The increase
in total revenues was primarily due to an increase of $1,034,000 in the
Companys software license revenues and an increase of $648,000 in the
Companys maintenance revenues, which was partially offset by a decrease of
$361,000 in professional services revenues. Total revenues for the six months
ended June 30, 2004 were $14,646,000, compared to $12,775,000 for the six
months ended June 30, 2003. Total revenues for three and six
months ended June 30, 2004, increased 22% and 15%, which includes
the favorable impacts of foreign currency exchange rate fluctuations, from the same
periods in prior year. However, total revenues increased
approximately 14% and 6%, respectively, when expressed at constant
foreign currency exchange rates. Software License Revenues Software license revenues increased by $1,034,000 to $3,692,000, or 51% of
total revenues, for the three months ended June 30, 2004, from $2,658,000, or
45% of total revenues, for the three months ended June 30, 2003. Software
license revenues for the three months ended June 30, 2004 and June 30, 2003
were solely from BI/BPM products. For the six months ended June 30, 2004 and
2003, software license revenues increased by $2,110,000 to $7,459,000 or 51% of
total revenues from $5,349,000, or 42% of total revenues,
respectively. The increase was partially due to favorable impacts as
the result of the increased strength of the U.S. dollar against the British
pound, Euro and Australian dollar in 2004 versus the same periods in
2003, 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 software license revenues of approximately $250,000 and $600,000 for the
three and six months ended June 30, 2004, respectively.
The
increase in software license revenues was also due to two and
eight
software license orders greater than $100,000 totaling $903,000 and $1,240,000
in the three and six months ended 2004, respectively. This is compared to three
and six software license deals greater than $100,000 totaling
$394,000 and
$795,000 in the three and six months ended June 30, 2003, respectively. Domestic license revenues increased by $471,000 to $1,164,000 for the
three months ended June 30, 2004 from $693,000 for the three months ended June
30, 2003. International license revenues increased by $563,000 to $2,528,000
for the three months ended June 30, 2004 from $1,965,000 for the three months
ended June 30, 2003. Domestic license revenues increased by $978,000 to
$2,402,000 for the six months ended June 30, 2004 from $1,424,000 for the six
months ended June 30, 2003. International license revenues increased by
$1,132,000 to $5,057,000 for the six months ended June 30, 2004 from $3,925,000
for the six months ended June 30, 2003. 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. Software license revenues as a percentage of total revenues mix was 51%
and 45% for the three months ended June 30, 2004 and 2003, respectively. The
Company continues to make progress towards its target revenue mix of 60%/40%. Professional Services (Consulting and Training) and Maintenance Revenues Professional services and maintenance revenues decreased to 49% of total
revenues, for the three months ended June 30, 2004, compared to 55% of total
revenues for the three months ended June 30, 2003. For the six months ended
June 30, 2004 and 2003 14




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##### Table of Contents



professional services and maintenance revenues were 49% of total revenues
and 58% of total revenues, respectively. During the three months ended June
30, 2004, maintenance revenues increased $648,000 to $3,215,000, compared to
$2,567,000 for the three months ended June 30, 2003, and professional services
decreased $361,000 to $356,000, compared to $717,000 for the three months ended
June 30, 2003. For the six months ended June 30, 2004 maintenance revenues
increased $826,000 to $6,366,000, compared to $5,540,000 during the six months
ended June 30, 2003, and professional services decreased $1,065,000 to $821,000
for the six months ended June 30, 2004, compared to $1,886,000 during the six
months ended June 30, 2003. The increase in maintenance revenues
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 to professional service and
maintenance revenues of
approximately $200,000 and $490,000 for the three and six months
ended June 30, 2004, respectively.
The Company expects maintenance revenues to
continue to increase due to strong customer maintenance renewal rates. The
decreases in professional services revenues was primarily due to the Companys
greater reliance on its partners to perform these services, including its 2004
transition of Pacific Rim professional services, previously performed by the
Company, to its Australian reseller. 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 June 30,
    
    Six Months Ended June 30,2004
    
    
    
    
    
    2003
    
    
    
    
    
    2004
    
    
    
    
    
    2003Cost of Software License
Revenues
    
    $
    178
    
    
    
    
    
    
    $
    420
    
    
    
    
    
    
    $
    384
    
    
    
    
    
    
    $
    832Cost of Professional Services
Revenues
    
    
    234
    
    
    
    
    
    
    
    533
    
    
    
    
    
    
    
    581
    
    
    
    
    
    
    
    1,516Cost of Maintenance Revenues
    
    
    716
    
    
    
    
    
    
    
    658
    
    
    
    
    
    
    
    1,392
    
    
    
    
    
    
    
    1,409Total Cost of Service Revenues
    
    
    950
    
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    1,973
    
    
    
    
    
    
    
    2,925Total Cost of Revenues
    
    $
    1,128
    
    
    
    
    
    
    $
    1,611
    
    
    
    
    
    
    $
    2,357
    
    
    
    
    
    
    $
    3,757Gross Margin:
    
    
    
    
    
    
    (A
    )
    
    
    
    
    
    
    (A
    )
    
    
    
    
    
    
    (A
    )
    
    
    
    
    
    
    (A
    )Software License
    
    $
    3,514
    
    
    
    95
    %
    
    $
    2,238
    
    
    
    84
    %
    
    $
    7,075
    
    
    
    95
    %
    
    $
    4,517
    
    
    
    84
    %Professional Services
    
    
    122
    
    
    
    34
    %
    
    
    184
    
    
    
    26
    %
    
    
    240
    
    
    
    29
    %
    
    
    370
    
    
    
    20
    %Maintenance
    
    
    2,499
    
    
    
    78
    %
    
    
    1,909
    
    
    
    74
    %
    
    
    4,974
    
    
    
    78
    %
    
    
    4,131
    
    
    
    75
    %Total Gross Margin
    
    $
    6,135
    
    
    
    84
    %
    
    $
    4,331
    
    
    
    73
    %
    
    $
    12,289
    
    
    
    84
    %
    
    $
    9,018
    
    
    
    71
    %
 (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 5% for both the three and six
months ended June 30, 2004, compared to 16% for both the three and six months
ended June 30, 2003. The decrease in percentages above and corresponding
improvement in software gross margin was primarily due to a decrease in the
amortization of capitalized software development costs and a decrease in
third-party software royalties. 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
$241,000 to $950,000 for the three months ended June 30, 2004 from $1,191,000
for the three months ended June 30, 2003. For the six months 15




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##### Table of Contents



ended June 30, 2004 and 2003 cost of professional services and maintenance
revenues was $1,973,000 and $2,925,000, respectively. The decreases in the cost
of professional services and maintenance revenues is primarily due to the
Companys decrease in the number of professional service employees transferred
in conjunction with the sale of the CRM Business in the first quarter
of 2003. The decreases
also reflects a decreases in professional service employees in general as the
Company focuses on the utilization of partners for consulting services relating
to its product. As a percentage of professional services and maintenance
revenues, cost of professional services and maintenance revenues improved to
27% for the three months ended June 30, 2004 as compared to 36% for the three
months ended June 30, 2003. For the six months ended June 30, 2004 and 2003,
costs of professional services and maintenance revenues improved to 27% from
39%, respectively. The improvements in gross margins was 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 (in thousands except percentages)Three Months Ended June 30,
    
    Six Months Ended June 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
    
    $
    2,645
    
    
    
    36
    %
    
    $
    2,773
    
    
    
    47
    %
    
    $
    5,158
    
    
    
    35
    %
    
    $
    5,480
    
    
    
    43
    %Product development
    
    
    1,229
    
    
    
    17
    %
    
    
    1,353
    
    
    
    23
    %
    
    
    2,555
    
    
    
    17
    %
    
    
    2,890
    
    
    
    23
    %General and
administrative
    
    
    1,488
    
    
    
    20
    %
    
    
    2,052
    
    
    
    34
    %
    
    
    3,096
    
    
    
    21
    %
    
    
    4,280
    
    
    
    33
    %Compensation
expenses related to
an acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    583
    
    
    
    5
    %Restructuring credit
    
    
    (27
    )
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    (27
    )
    
    
    
    %
    
    
    
    
    
    
    
    %Amortization of
acquired intangible
asset
    
    
    62
    
    
    
    1
    %
    
    
    62
    
    
    
    1
    %
    
    
    125
    
    
    
    1
    %
    
    
    125
    
    
    
    1
    %Total operating
expenses
    
    $
    5,397
    
    
    
    74
    %
    
    $
    6,240
    
    
    
    105
    %
    
    $
    10,907
    
    
    
    74
    %
    
    $
    13,358
    
    
    
    105
    %
 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 decreased $128,000 to $2,645,000 for
the three months ended June 30, 2004 from $2,773,000 for the three months ended
June 30, 2003. Sales and marketing expenses decreased as a percentage of total
revenue to 36% for three months ended June 30, 2004 compared to 47% for the
three months ended June 30, 2003. For the six months ended June 30, 2004 and
2003 sales and marketing expenses decreased $322,000 to $5,158,000, or 35% of
total revenue, from $5,480,000, or 43% of total revenue, respectively. The
decrease in sales and marketing expenses were primarily due to a decrease in
sales and marketing costs relating to the Companys CRM product
and decreases
in sales and marketing employees and their related salaries transferred
in-conjunction with the sale of the CRM Business in the first quarter
of 2003. The decrease was partially offset by unfavorable impacts of
foreign currency exchange rate fluctuations due to the weakness 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 $150,000 and $345,000
for the three and six months ended June 30, 2004, respectively.
The Company anticipates increasing its staffing in sales and marketing,
including its direct sales force and presales technical staff, and making
investments in securing new partner relationships, including OEM relationships.
As a result, there may be an increase in sales and marketing costs in 2004 as
compared to 2003. The Company will, however, continue to closely monitor
discretionary costs. Product Development Expenses Product development expenses include costs associated with the development
of new products, enhancements of existing products 16




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##### Table of Contents



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 $124,000 to $1,229,000 for the
three months ended June 30, 2004 from $1,353,000 for the three months ended
June 30, 2003. These expenses represent 17% of total revenue for the three
months ended June 30, 2004, as compared to 23% of total revenues for the three
months ended June 30, 2003. For the six months ended June 30, 2004 and 2003
product development expenses decreased $335,000 to $2,555,000, or 17% of total
revenue, from $2,890,000, or 23% of total revenue, respectively. 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, and accounting and legal
costs. General and administrative expenses also include legal costs associated
with the Companys investigation by the Securities and Exchange Commission
related to the Companys financial restatements for the fiscal years 2001 and
2002. General and administrative expenses decreased $564,000, to $1,488,000, or
20% of total revenues, for the three months ended June 30, 2004 from
$2,052,000, or 34% of total revenues, for the three months ended June 30, 2003.
For the six months ended June 30, 2004 and 2003 general and administrative
expenses decreased $1,184,000 to $3,096,000, or 21% of total revenue, from
$4,280,000, or 33% 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 second
quarter of 2004 of $225,000, or $900,000 on an annualized basis, resulting from
the Companys restructured headquarters lease. The Company will continue to
closely monitor general and administrative costs. Compensation Expenses Related to An Acquisition Compensation expenses related to an acquisition and amortization of
acquired intangibles consists primarily of contingent cash consideration
relating to the Companys March 2001 acquisition of Dynamic Decisions and the
amortization of identified intangible assets, consisting of customer
relationships, associated with the acquisition. For the three and six months
ended June 30, 2004 and 2003, the Company recorded $0 and $583,000,
respectively, 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 Credit In the second quarter of 2004, the Company recorded a restructuring credit
to its fourth quarter 2003 restructuring charge of its Westborough headquarters
office lease of $27,000, as a change in estimate. Amortization of Acquired Intangible Asset Amortization expense for the customer relationships associated with the
Dynamic Decisions acquisition were $62,000 and $125,000 for each of
the three months and six months ended
June 30, 2004 and 2003, respectively. The amortization expense will continue
to be ratably amortized through the first quarter of 2007. Non-Operating Income 17




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##### Table of Contents



(in thousands except percentages)Three Months Ended June 30,
    
    Six Months Ended June 30,Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of2004
    
    Revenues
    
    2003
    
    Revenues
    
    2004
    
    Revenues
    
    2003
    
    RevenuesInterest and other
income, net
    
    $
    (181
    )
    
    
    -2
    %
    
    $
    431
    
    
    
    7
    %
    
    $
    (34
    )
    
    
    0
    %
    
    $
    605
    
    
    
    5
    %Net gain from sale
of CRM business
    
    
    
    
    
    
    
    %
    
    
    (78
    )
    
    
    -1
    %
    
    
    
    
    
    
    
    %
    
    
    7,922
    
    
    
    62
    %Total
    
    $
    (181
    )
    
    
    -2
    %
    
    $
    353
    
    
    
    6
    %
    
    $
    (34
    )
    
    
    0
    %
    
    $
    8,574
    
    
    
    67
    %
 Interest and Other (Loss) Income, Net Interest and other (loss) income, net decreased to a loss of $181,000 for
the three months ended June 30, 2004, as compared to income of $431,000 for the
three months ended June 30, 2003. Interest and other (loss) income, net
decreased to a loss of $34,000 for the six months ended June 30, 2004, as
compared to income of $605,000 for the six months ended June 30, 2003. The
decrease is primarily due to unfavorable foreign currency exchange rate
fluctuations on intercompany balances denominated in the Companys foreign
subsidiaries local currencies. In particular, the Company recorded a loss of
approximately $385,000 and $300,000 for the three and six months ended June 30,
2004 due to an unfavorable foreign currency exchange rate fluctuation of the
Australian dollar and its related effect on the Companys Australian
intercompany balance. The net loss was partially offset in the second quarter of 2004, by a gain
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. Net Gain from Sale of CRM Business In the first quarter of 2003, the Company completed the sale of the 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. iET paid $4,250,000 of the purchase price in cash at the initial closing
and paid an additional $1,500,000 in cash on March 17, 2003 upon the completion
of the closing of the sale of certain assets of the Companys Germany
subsidiary, Applix GmbH. During the period of the initial closing and
completion of the Companys Germany subsidiary asset sale closing, Applix GmbH
continued to resell the CRM software products sold to iET, and to provide
professional services and maintenance support under a resellers agreement
between the Company and iET. The Companys results for three and six months ended June 30, 2004 and the
three months ended June 30, 2003 included no CRM revenues and for the six
months ended June 30, 2003 included CRM license revenues of $253,000 and CRM
professional services and maintenance revenues of $999,000. In the first quarter of 2003, the Company recorded a net gain before tax
of $8,000,000, which includes net cash consideration of $5,525,000, which
reflects $262,000 paid back to iET and $3,552,000 of net liabilities assumed by
iET less transaction costs of $1,077,000. The purchase price is subject to
certain post closing adjustments relating to the net working capital as set
forth in the Asset Purchase Agreement between the Company and iET, dated
January 21, 2003 and therefore the net gain from the sale of the CRM business
is subject to additional adjustments. In the second quarter of 2003, the Company recorded an adjustment to
accrue for additional transactions costs, a change in estimate, of $78,000 to
reduce the net gain from the sale of the CRM Business and paid back to iET an
additional $225,000 of the total cash consideration received due to
post-closing adjustments. Provision for Income Taxes 18




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##### Table of Contents



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 $88,000 and $115,000 for the three and six months ended June
30, 2004, compared to $115,000 and $764,000 for the three months and six months
ended June 30, 2003. The provision for income taxes for the six months ended
June 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 six
months ended June 30, 2004 and 2003 decreased to 9% from 18%, respectively,
which is primarily due to the additional provision for income taxes recorded
as a result of the sale of the CRM Business and higher taxable income in a
foreign jurisdiction. 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 $3 million, at fair market
value, 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 $1.5 million
from the issuance of the Companys common stock under its stock
plans in the six months ended June 30, 2004. The
Companys cash and cash equivalents balances were $13,575,000 and $10,058,000
as of June 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 50 days as of June 30,
2004, compared with 63 days as of December 31, 2003. Cash used in the Companys operating activities was $1,005,000 for the six
months ended June 30, 2004, compared to cash used in operating activities of
$3,751,000 for the six months ended June 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 $22,000 for the six months ended
June 30, 2004 compared to cash provided by investing activities of $5,400,000
for the six months ended June 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 $4,726,000 for the six
months ended June 30, 2004, which consisted of proceeds of $3,000,000 from the
sale of common stock to two investors described above, $1,494,000 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 $98,000 for the six months ended June 30, 2003, which consisted of proceeds
of $335,000 from the issuance of stock under the Companys stock plans, offset
by net payment of $237,000 owed to a certain bank from the accounts receivable
factoring arrangement. Cash
paid for income taxes by the Company of $408,000 and $402,000 for the
six months ended June 30, 2004 and 2003, respectively. The increase in cash 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
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. In February 2004, a member of the Companys board of directors, along with
another investor, who is related to the Board member, purchased 657,894 shares
of common stock from the Company for $3 million. 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 June 30, 2004, there were no amounts outstanding under these
two credit facilities. 19




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##### Table of Contents



In June 2004, the Company entered into a sublease agreement with a
subtenant for a portion of the Companys UK office lease. As of June 30, 2004,
the Company continued to use the subleased office space and
anticipated exit of the facility in July 2004. At the time of
exit in the third quarter of 2004, the Company
anticipates it will record a loss on the exit of the space of approximately $570,000, which represents the
difference between the Companys contractual lease rate for the subleased space
and the sublease rate over the remaining term of the original lease, discounted
by a credit adjusted risk rate of 8%. As of June 30, 2004, the Company had the following future contractual
commitments: Total
    
    Less Than
    
    1 - 3
    
    4 - 5
    
    AfterYears
    
    1 year
    
    Years
    
    Years
    
    5 YearsNon-cancelable operating leases
    
    $
    5,040,000
    
    
    $
    918,000
    
    
    $
    1,540,000
    
    
    $
    1,502,000
    
    
    $
    1,080,000Non-cancelable capital leases
    
    
    57,000
    
    
    
    34,000
    
    
    
    23,000
    
    
    
    
    
    
    
    Purchase obligations
    
    
    185,000
    
    
    
    185,000
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    5,282,000
    
    
    $
    1,137,000
    
    
    $
    1,563,000
    
    
    $
    1,502,000
    
    
    $
    1,080,000
 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 $275,000 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 six months ended June 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 June
30, 2004, the Company had an accumulated deficit of $44.2 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 are subject to the
maintenance of certain financial covenants and the borrowing limits described
above. The Company believes that its currently available sources of funds 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
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. 20




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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 six months ended
June 30, 2004 and generated positive cash flow for the three and six months
ended June 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, 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 two 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 21




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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. 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; 22




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
    
    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. 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. 23




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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. 24




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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, 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 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 June 30,
2004 and June 30, 2003 was 0.55 British pound, 0.82 Euro, 0.70
Australian dollar and 0.60 British pound, 0.87 Euro, 0.67 Australian
dollar respectively. The weighted average exchange rate per $1.00 U.S. dollar for the three
months ended June 30, 2004 was 0.55 British pound, 0.83 Euro and
0.71 Australian dollars. As compared to the weighted average dollar
for three months ended June 30, 2003 which was 0.62 British
pound, 0.88 Euro and 0.64 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 2004, the Company has reported significant losses of approximately
$300,000 in its Consolidated Financial Statements of Operations due to
unfavorable movements in the Australian dollar exchange rate. Based on foreign currency
exposures existing at June 30, 2004, a 10% unfavorable movement in foreign
exchange rates related to the British pound, Euro, Australian dollar, and Swiss
franc would result in approximately a $512,000 loss to earnings. The Company
has currently not engaged in activities to hedge these exposures. At June 30, 2004, the Company held $13,175,000 in cash equivalents,
excluding $400,000 of restricted cash, consisting primarily of money market
funds and commercial paper with original maturities of three months or less.
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 June 30, 2004. Based on this evaluation, the Companys chief executive
officer and chief financial officer concluded that, as of June 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 June 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Companys Annual Meeting of Stockholders held on May 27, 2004, the
following proposals were adopted by the votes specified below:  1)
    
    Election of two Class I Directors for a term of three years: FOR
    
    WITHHELDBradley D. Fire
    
    
    12,848,952
    
    
    
    438,504John D. Loewenberg
    
    
    13,229,760
    
    
    
    57,696
  Each of the following directors who were not up for reelection at the 2004
Annual Meeting of Stockholders continue to serve as directors since the
2004 Annual Meeting of Stockholders:Peter Gyenes, Alain J. Hanover, Charles F. Kane and David C. Mahoney. 25




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2)
    
    Approval of the Companys 2004 Equity Incentive Plan: FOR
    
    AGAINST
    
    ABSTAIN4,332,839
    
    
    1,511,344
    
    
    
    52,263
  3)
    
    Amend the Companys 2001 Employee Stock Purchase Plan to increase the
number of shares of common stock authorized for issuance from 800,000 to
1,300,000 shares: FOR
    
    AGAINST
    
    ABSTAIN5,028,912
    
    
    829,521
    
    
    
    38,013
  4)
    
    Ratify the selection of Deloitte & Touche LLP as the Companys
independent auditors for the fiscal year ending December 31, 2004: FOR
    
    AGAINST
    
    ABSTAIN13,227,794
    
    
    39,957
    
    
    
    19,705
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ExhibitNumber
    
    Description3.2*
    
    Amended and Restated By-Laws10.20
    
    Retention Agreement between the
Registrant and Michael Morrison, dated as of June 1, 200410.21
    
    2004 Equity Incentive Plan10.22
    
    Form of Incentive Stock Option Agreement for the 2004 Equity Incentive Plan10.23
    
    Form of Nonstatutory Stock Option Agreement for the 2004 Equity Incentive 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*Incorporated by reference from the Registrants Registration Statement on
Form S-8 (File No. 333-117762), as filed
with the Securities and Exchange Commission on July 29, 2004
 (b) Reports on Form 8-K  1.
    
    On April 29, 2004, the Company furnished a Current Report on Form 8-K
under item 12 containing a press release relating to the Companys
financial results for the quarter ended March 31, 2004. 26




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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: August 13, 2004
    
    /s/ Milton A. AlpernMilton A. AlpernChief Financial Officer and Treasurer (Duly AuthorizedOfficer and Principal Financial and Accounting Officer)
 27




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EXHIBIT INDEX ExhibitNumber
    
    Description3.2*
    
    Amended and Restated By-Laws10.20
    
    Retention Agreement between the
Registrant and Michael Morrison, dated as of June 1, 200410.21
    
    2004 Equity Incentive Plan10.22
    
    Form of Incentive Stock Option Agreement for the 2004 Equity Incentive Plan10.23
    
    Form of Nonstatutory Stock Option Agreement for the 2004 Equity Incentive 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*Incorporated by reference from the Registrants Registration
Statement on Form S-8 (File No. 333-117762), as filed
with the Securities and Exchange Commission on July 29, 2004
 28