<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
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 04-2781676
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
112 Turnpike Road, Westboro, Massachusetts 01581
(Address of principal executive offices)
(508) 870-0300
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Registrant had 10,257,978 shares of Common Stock, $.0025 par value,
outstanding at November 9, 1998.
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APPLIX, INC.
INDEX
Page No.
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Part I - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the three months ended September 30, 1998 and 1997 4
Consolidated Statements of Operations
for the nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
APPLIX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,805 $ 7,639
Short-term investments 13,248 13,729
Accounts receivable, less allowance for doubtful accounts
of $432 and $531 at September 30, 1998 and
December 31, 1997, respectively 12,449 12,147
Other current assets 2,757 2,872
Deferred tax asset 2,273 2,623
-------- --------
Total current assets 37,532 39,010
Property and equipment, at cost 12,752 11,279
Less accumulated amortization and depreciation (8,787) (7,268)
-------- --------
Net property and equipment 3,965 4,011
Capitalized software costs, net of accumulated
amortization of $1,978 and $1,368 at September 30, 1998
and December 31, 1997, respectively 481 478
Other assets 656 866
-------- --------
Total assets $ 42,634 $ 44,365
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,315 $ 2,676
Accrued liabilities 5,285 5,550
Deferred revenue 7,183 8,152
-------- --------
Total current liabilities 13,783 16,378
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized Common
stock, $.0025 par value; 30,000,000 shares
authorized; 10,535,073 and 10,344,063 shares issued at
September 30, 1998 and December 31, 1997,
respectively 26 26
Capital in excess of par value 41,635 40,959
Accumulated deficit (11,344) (11,923)
Treasury stock, 278,698 shares, at cost (933) (933)
Foreign currency translation adjustment (533) (142)
-------- --------
Total stockholders' equity 28,851 27,987
-------- --------
Total liabilities and stockholders' equity $ 42,634 $ 44,365
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<TABLE>
<CAPTION>
APPLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
License revenue $ 7,708 $ 8,409
Service revenue 4,306 3,791
------- -------
Total revenue 12,014 12,200
Cost of license revenue 811 799
Cost of service revenue 2,025 1,666
------- -------
Gross margin 9,178 9,735
Operating expenses:
Selling and marketing 6,210 6,745
Research and development 2,084 2,100
General and administrative 831 884
------- -------
Total operating expenses 9,125 9,729
------- -------
Operating income 53 6
Interest income, net 235 243
------- -------
Net income before income taxes 288 249
Provision for income taxes 107 93
------- -------
Net income $ 181 $ 156
======= =======
Basic earnings per share (see Note C) $ 0.02 $ 0.02
======= =======
Diluted earnings per share (see Note C) $ 0.02 $ 0.01
======= =======
Weighted average common and common equivalent shares outstanding:
Basic 10,225 10,008
======= =======
Diluted 10,348 11,319
======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<TABLE>
<CAPTION>
APPLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
License revenue $24,859 $ 24,268
Service revenue 12,057 10,715
------- --------
Total revenue 36,916 35,001
Cost of license revenue 2,177 2,404
Cost of service revenue 6,025 4,916
------- --------
Gross margin 28,714 27,681
Operating expenses:
Selling and marketing 19,147 20,686
Research and development 6,629 6,645
General and administrative 2,775 2,730
------- --------
Total operating expenses 28,551 30,061
------- --------
Operating income (loss) 163 (2,380)
Interest income, net 757 717
------- --------
Net income (loss) before income taxes 920 (1,663)
Provision for (benefit from) income taxes 342 (619)
------- --------
Net income (loss) $ 578 $ (1,044)
======= ========
Basic earnings (loss) per share (see Note C) $ 0.06 $ (0.10)
======= ========
Diluted earnings (loss) per share (see Note C) $ 0.05 $ (0.10)
======= ========
Weighted average common and common equivalent shares outstanding:
Basic 10,168 9,966
======= ========
Diluted 10,746 9,966
======= ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<TABLE>
<CAPTION>
APPLIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 578 $ (1,044)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,519 1,363
Amortization of capitalized software costs 610 630
Amortization of goodwill 111 339
Provision for doubtful accounts -- 4
Deferred tax asset 350 --
Changes in operating assets and liabilities:
Accounts receivable (302) 1,962
Other assets 214 (344)
Accounts payable (1,361) (1,037)
Accrued liabilities (184) (1,885)
Deferred revenue (969) (93)
-------- --------
Cash provided by (used in) operating activities 566 (105)
Investing activities:
Purchase of property and equipment (1,473) (915)
Capitalized software costs (613) (630)
Purchase of short-term investments (31,184) (10,471)
Maturities of short-term investments 31,665 --
-------- --------
Cash used in investing activities (1,605) (12,016)
Financing activities:
Capital lease borrowings -- 329
Principal payments under capital lease obligations (81) (68)
Proceeds from exercise of incentive stock options and
employee stock purchase plan 677 809
-------- --------
Cash provided by financing activities 596 1,070
Effect of exchange rate changes on cash (391) 10
-------- --------
Net decrease in cash and cash equivalents (834) (11,041)
Cash and cash equivalents at beginning of period 7,639 19,882
-------- --------
Cash and cash equivalents at end of period $ 6,805 $ 8,841
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes $ 81 $ 104
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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APPLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
Applix is a leading provider of software for front office business
applications and office productivity applications. Front office business
applications includes customer relationship management (CRM) and business
intelligence applications. The Company provides cross-platform client/server,
network-centric, webtop and thin-client computing solutions throughout its core
offerings. The Company offers the following array of solutions: Applix
Enterprise, the Company's product offering in the CRM market; Applix TM1, the
Company's real time multi-dimensional analysis software for business
intelligence applications; Applixware, an open suite of desktop and development
tools for accessing, analyzing and communicating information in real time;
Applix Office for UNIX, LINUX, and Windows/NT and Anyware Office for Java-based
desktops; and Applix Anyware, an application development and deployment solution
that leverages Java to customize and deploy Applix's full suite of applications.
B. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles. The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. While the Company believes that the disclosures presented are
adequate to make the information not misleading, these financial statements
should be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
The results of the three month and nine month periods ended September 30,
1998 are not necessarily indicative of the results to be expected for the full
fiscal year.
C. COMPUTATION OF NET INCOME PER COMMON SHARE
Beginning for the year ended December 31, 1997, the Company adopted
Statement of Accounting Standards No. 128 ("FAS 128") which requires the
presentation of Basic and Diluted earnings per share, which replaces primary and
fully diluted earnings per share. Earnings per share have been restated for all
periods presented to reflect the adoption of FAS 128. Basic net income (loss)
per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
using the weighted average number of common shares outstanding during the
period, plus the dilutive effect of common stock equivalents. Common stock
equivalent shares consist of convertible debentures, preferred stock, stock
options and warrants. The dilutive computations do not include common stock
equivalents for the nine month period ended September 30, 1997 as their
inclusion would be antidilutive. Common stock equivalents do have a dilutive
effect for the three month and nine month periods ended September 30, 1998, and
consequently are included in the diluted shares outstanding computation for
those dates.
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<PAGE> 8
APPLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For the quarter ended September 30, 1998 and 1997 (in thousands except per
share data)
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ -------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $181 10,225 $0.02 $156 10,008 $0.02
Effect of Dilutive Securities
common stock options -- 123 -- -- 1,311 $0.01
---- ------ ----- ---- ------ -----
Diluted EPS
Income Available to Common
Stockholders $181 10,348 $0.02 $156 11,319 $0.01
==== ====== ===== ==== ====== =====
</TABLE>
D. SHORT-TERM INVESTMENTS
All short-term investments are classified as available-for-sale, and are in
liquid high grade commercial paper. Those investments that are part of the
Company's cash management portfolio with original maturities of three months or
less are reported as cash equivalents.
E. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, Applix adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires companies to classify items of other comprehensive
earnings by their nature in an annual financial statement. Other comprehensive
income or loss includes foreign currency translation adjustments.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
--------------------------- --------------------------
1998 1997 1998 1997
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Net income (loss) $181 $ 156 $ 578 $(1,044)
Other comprehensive income 20 (49) (391) 10
---- ----- ----- -------
Total comprehensive income (loss) $201 $ 107 $ 187 $(1,034)
==== ===== ===== =======
</TABLE>
F. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. The Company is in the process of evaluating the
impact of the new standard on the presentation of the financial statements and
the disclosures therein. The Statement will become effective for fiscal years
beginning after December 15, 1997. The Company will adopt the new standard for
the fiscal year ending December 31, 1998.
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<PAGE> 9
APPLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
statement requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting for
changes in fair value, gains or losses, depends on the intended use of the
derivative and its resulting designation. The statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company will
adopt SFAS 133 for the quarter ending March 31, 2000. The Company is evaluating
SFAS 133 to determine its impact on its consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1997
License revenue decreased 8% to $7,708,000 for the quarter ended September
30, 1998 from $8,409,000 for the quarter ended September 30, 1997. License
revenue from the front office business applications products which consist of
Applix Enterprise and Applix TM1 products increased 12% to $5,483,000 for the
quarter ended September 30, 1998 from $4,893,000 for the same period in 1997.
Applixware license revenue decreased 37% to $2,225,000 for the quarter ended
September 30, 1998 from $3,516,000 for the quarter ended September 30, 1997.
Domestic license revenue decreased 8% to $4,259,000 for the quarter ended
September 30, 1998 from $4,638,000 for the same period in 1997. Applixware
business in the government sector declined 20% to $1,607,000 from $2,018,000.
Revenue from the government sector has fluctuated significantly in the past, and
the Company expects fluctuations to continue. International license revenue
decreased 9% to $3,449,000 from $3,771,000 for the same period in 1997 resulting
from reduced Applixware sales. The Company's future operating results will be
particularly dependent on the continued acceptance of Applix Enterprise and
Applix TM1.
Service revenue increased 14% to $4,306,000 (or 36% of total revenues) from
$3,791,000 (or 31% of total revenues) for the same period in 1997. This increase
was due to increased maintenance revenue from the Company's growing CRM customer
base and the expansion of the Company's consulting service offerings for front
office business applications products.
Gross margin decreased to 76% for September 30, 1998 from 80% for the same
period in 1997. The decrease is primarily related to an increase in Applix
Enterprise revenues, which involve higher costs, as a percentage of total
revenues. License revenue gross margin decreased to 89% from 90% for the same
period in 1997 due to slightly higher royalty costs associated with Applix TM1
product sales. Service revenue gross margin decreased to 53% for the quarter
ended September 30, 1998 from 56% for the prior year period, due to higher
consulting costs for the Enterprise product line.
Selling and marketing expenses, which include domestic sales and marketing
expenses and the cost of the Company's international operations, decreased 8% to
$6,210,000 for the quarter ended September 30, 1998 from $6,745,000 for the
quarter ended September 30, 1997. The expense decrease was primarily due to
decreased staffing and marketing programs. Selling and marketing expenses
decreased as a percentage of total revenues to 52% for quarter ended September
30, 1998 from 55% for quarter ended September 30, 1997. Additionally, the
Company continues to focus its investment in marketing activities toward the
front office business applications sector. The Company expects to maintain
current levels of spending for the remainder of 1998.
Research and development expenses, which consist primarily of employee
salaries, benefits and related expenses, decreased 1% to $2,084,000 for the
quarter ended September 30, 1998 from $2,100,000 for the quarter ended September
30, 1997, and remained at 17% of total revenues for the quarters ended September
30, 1998 and 1997. Total research and development expenses, including
capitalized software costs, were $2,265,000, including $181,000 in capitalized
software development costs,
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<PAGE> 10
or 19% of total revenues for the quarter ended September 30, 1998 compared to
$2,279,000, including $179,000 in capitalized software development costs, or 19%
of total revenues for the quarter ended September 30, 1997.
General and administrative expenses, which include the costs of the
finance, human resources and administrative functions, decreased 6% to $831,000
from $884,000 for the same period in 1997, and remained at 7% of total revenues
for both periods.
Interest income decreased slightly to $235,000 from $243,000 for the
quarter ended September 30, 1997 due to slightly lower interest rates on
investments during the quarter ended September 30, 1998.
The Company recorded a provision for income tax for the quarter ended
September 30, 1998 of $107,000 based on the Company's estimated annual effective
tax rate of 37%, compared to an income tax provision of $93,000 at the same
effective rate for the same period in 1997.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
License revenue increased 2% to $24,859,000 for the nine months ended
September 30, 1998 from $24,286,000 for the nine months ended September 30,
1997. License revenue from the front office business applications products
increased 31% to $15,399,000 for the nine months ended September 30, 1998 from
$11,742,000 for the same period in 1997. Applixware license revenue decreased
25% to $9,461,000 for the nine months ended September 30, 1998 from $12,544,000
for the nine months ended September 30, 1997. Domestic license revenue decreased
18% to $11,649,000 from $14,146,000 for the same period in 1997 primarily as a
result of a decrease in Applixware revenue from the government sector. Revenue
from the government sector decreased 41% to $4,191,000 from $7,137,000 for the
nine months ended September 30, 1997. International license revenue increased
30% to $13,210,000 from $10,140,000 for the same period in 1997 because of
further deployment of Applix Enterprise and Applix TM1 products in Europe and
Asia.
Service revenue increased 13% to $12,057,000 (or 33% of total revenues)
from $10,715,000 (or 31% of total revenues) for the same period in 1997. This
increase was primarily due to increased maintenance revenue from the Company's
growing CRM customer base and the expansion of the Company's consulting services
offerings for the front office business application products.
Gross margin decreased to 78% for the nine months ended September 30, 1998
from 79% for the nine months ended September 30, 1997. License gross margin
increased to 91% from 90% for the same period in 1997 primarily due to the
increase in license revenue. Service gross margin decreased to 50% for the nine
months ended September 30, 1998 from 54% for the nine months ended September 30,
1997, due to the increase in the number of support employees and consultants and
the cost of outside consultants used for the Enterprise product line. The
increase in service revenues as a percentage of total revenues also had a
negative impact on overall gross margin.
Selling and marketing expenses decreased 7% to $19,147,000 for the nine
months ended September 30, 1998 from $20,686,000 for the nine months ended
September 30, 1997. These expenses decreased as a percentage of total revenues
to 52% from 60% for the same period in 1997. The expense decrease was primarily
due to decreased staffing and marketing programs.
Research and development expenses remained stable at $6,629,000 for the
nine months ended September 30, 1998 as compared to $6,645,000 for the nine
months ended September 30, 1997, and decreased as a percentage of total revenue
to 18% for the nine months ended September 30, 1998 from 19% for the nine months
ended September 30, 1997. Total research and development expenses, including
capitalized software costs, were $7,242,000, including $613,000 in capitalized
software costs, or 20% of total revenues for the nine months ended September 30,
1998 and $7,275,000, including $630,000 in capitalized software development
costs, or 21% of total revenues for the nine months ended September 30, 1997.
General and administrative expenses increased 2% to $2,775,000 from
$2,730,000 for the same period in 1997, and remained at 8% of total revenues.
The increase in these expenses was primarily due to an increase in legal fees
relating to certain concluded litigation.
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<PAGE> 11
Interest income increased to $757,000 from $717,000 due to slightly higher
interest rates and higher cash balances available for investments during the
current year.
The Company recorded a provision for income tax for the nine months ended
September 30, 1998 of $342,000 based on the Company's estimated annual effective
tax rate of 37%, compared to an income tax benefit of $619,000 or 37% of the net
loss for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations provided $566,000 in funds for the nine months
ended September 30, 1998. An additional $1,605,000 was used in investing
activities, primarily for the purchase of equipment ($1,473,000), and in
capitalized software costs ($613,000). $596,000 was generated from financing
activities, substantially from the proceeds of the exercise of incentive stock
options and stock purchases pursuant to the Company's employee stock purchase
plan. As of September 30, 1998, the Company had cash, cash equivalents, and
short term investments of $20,053,000 and working capital of $23,751,000.
The Company believes that the funds currently available will be sufficient
to fund the Company's operations at least through the next twelve months. The
Company has no commitments or specific plans for any significant capital
expenditures in 1998.
To date, inflation has not had a material adverse effect on the Company's
operating results.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains a number of forward-looking statements. Any
statements contained herein (including statements to the effect that the Company
or its management "believes", "expects", "anticipates", "plans", and similar
expressions) that are not statements relating to historical matters should be
considered forward-looking statements. There are a number of important factors
that could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below.
During the past several years, the Company has derived the majority of its
revenue from its Applixware product family; however, Applixware sales have been
declining in recent quarters. The Company expanded its product offerings with
the introduction of Applix Enterprise, based on technology acquired in its
acquisition of Target Systems Corporation in late 1995, and Applix TM1, acquired
through its acquisition of Sinper Corporation, in late 1996. In addition, the
Company has developed and introduced the Applix Anyware product line, which
delivers the functionality of Applixware, Applix TM1 and Applix Enterprise to
"thin-client" computing environments (i.e., systems running a Java-enabled
browser such as Netscape Navigator or Microsoft Explorer). The future success of
the Company is substantially dependent upon these newer product lines, and there
can be no assurance that these new product lines will achieve the sales levels
anticipated by the Company. In addition, the short-term financial performance of
the Company will be largely contingent on its ability to continue to generate
substantial revenue and profit from its Applixware product line until its newer
product lines achieve greater revenue and profitability, and there can be no
assurance that the Company will be able to do so. Moreover, the existence of a
number of different product lines presents management, sales and marketing, and
product development challenges, and there can be no assurance that the Company
will be successful in addressing these challenges.
The Company's financial performance will also depend significantly on sales
of the Applix Enterprise product line, which addresses the CRM market. The
Company believes this market is growing rapidly, but the Company is a relatively
new entrant into this market and faces intense competition from larger companies
such as Remedy Corporation, Vantive Corporation, Clarify, Inc., Siebel Systems,
Inc., IBM, and others.
The Company's Applix TM1 product line competes with product offerings from
Oracle Corporation and Hyperion Solutions (formally known as Arbor Software.)
This represents a more competitive environment than the Company has historically
faced in its UNIX market and will likely result in lower prices and lower gross
margins for the Company's products.
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<PAGE> 12
Substantially all of the Applixware licenses sold by the Company are for
use on UNIX operating systems. As a result, the Company's financial performance
is significantly dependent upon the continued market acceptance of this
operating system and continued sales of UNIX-based workstations, particularly by
Sun Microsystems. With newer operating systems that permit 32 bit processing on
the desktop, such as Microsoft Windows/NT and Windows 95, the Company is now
competing directly with vendors of PC software applications such as Microsoft,
Lotus and Corel.
For the Company's Applix TM1 product line, the Company relies significantly
on original equipment manufacturers (OEMs) and value added resellers (VARs) to
distribute products. The Company's revenue is dependent, among other things,
upon the ability of the OEMs and VARs to sell the Company products to end-users.
Factors affecting the ability of these distribution channels to develop and sell
their products include competition, their ability to offer products that meet
user requirements at acceptable prices and overall economic conditions in both
the United States and foreign markets. In addition, there can be no assurance
that OEMs and VARs currently using the Company's software in their products will
continue to use the Company's products and will not select third party's
software products to replace that of the Company. Hyperion Software Corporation,
a significant OEM of the Company's products, has merged with Arbor Software
Corporation. There can be no assurance that the surviving entity will continue
to market and sell the Company's products. The Company's business, results of
operations and financial condition would be materially and adversely affected if
the Company's OEMs and VARs are unsuccessful in selling their products or
discontinue using the Company's software in their products.
The approaching millennium ("Year 2000") could result in challenges related
to the Company's computer software, accounting records and relationships with
suppliers and customers. The Company's management is studying Year 2000 issues
and is seeking to avoid such problems. Based on the Company's review of its
business and operating systems, the Company does not expect to incur material
costs with respect to assessing the remediating Year 2000 problems. However,
there can be no assurance that such problems will not be encountered or that
costs incurred to resolve such problems will not be material.
The Company's quarterly operating results have varied and may continue to
vary significantly depending on factors such as the timing of significant
orders, the timing of new product introductions and upgrades by the Company and
its competitors, and the mix of distribution channels through which the products
are sold. Revenues are particularly difficult to predict because of the sales
cycle of the Company's products, which varies substantially from customer to
customer and industry to industry. A majority of the Company's license revenue
in a quarter is derived from orders received in that quarter. Accordingly,
delays in orders are likely to result in the associated revenue not being
realized by the Company in that period. Moreover, the Company's expense levels
are based in part on expectations of future revenue levels, and a shortfall in
the expected revenue could therefore have a disproportionate adverse effect on
the Company's net income.
Most of the Company's international sales through subsidiaries are
denominated in foreign currencies. Accordingly, a decrease in the value of
foreign currencies relative to the U.S. dollar could result in a significant
decrease in U.S. dollar revenue received by the Company for its international
sales. Due to the number of currencies involved in the Company's international
sales and the volatility of foreign currency exchange rates, the Company cannot
predict the effect of exchange rate fluctuations on future operating results. To
date, foreign currency fluctuations have not had a material effect on the
Company's operating results. The Company has engaged in hedging transactions to
cover its currency translation exposure on intercompany balances for the purpose
of mitigating the effect of foreign currency fluctuations. The international
portion of the Company's business is also subject to a number of inherent risks,
including difficulties in building and managing foreign operations and foreign
reseller networks, difficulties or delays in translating products into foreign
languages, import/export duties and quotas, and unexpected regulatory, economic
or political changes in foreign markets.
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the euro. The participating countries have agreed to
adopt the euro as their common legal currency on that date. The euro will then
trade on currency exchanges and be available for non-cash transactions. The
participating countries will issue sovereign debt exclusively in euros, and will
redenominate outstanding sovereign
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<PAGE> 13
debt. At that time, the participating countries will no longer control their own
monetary policies by directing independent interest rates for the legacy
currencies. Instead, the authority to direct monetary policy, including money
supply and official interest rates for the euro will be exercised by the new
European Central Bank. Following the introduction of the euro, the legacy
currencies are scheduled to remain legal tender in the participating countries
as denominations of the euro between January 1, 1999 and January 1, 2002 (the
"transition period"). During the transition period, public and private parties
may pay for goods and services using either the euro or the participating
country's legacy currency on the "no compulsion, no prohibition" basis. However,
conversion rates no longer will be computed directly from one legacy currency to
another. Instead, a triangular process will apply whereby an amount denominated
in one legacy currency will first be converted into the euro. The resultant
euro-denominated amount will then be converted into the second legacy currency.
At this time, management is in the process of evaluating the impact of the
conversion on the Company.
License revenue from sales (directly or indirectly) to branches or agencies
of the U.S. Government represented approximately 11% and 17% of total license
revenue during the nine months ended
September 30, 1998 and 1997, respectively. The Company typically derives its
government contract revenue from a relatively small number of subcontract awards
which tend to be significant in amount for a company of Applix's size.
Consequently, the Company's government contract revenue is likely to continue to
fluctuate significantly from period to period, and any failure to obtain a
particular subcontract award, or any delay on the part of the government agency
in making the award or ordering products under an awarded contract, could have a
material adverse effect on the financial performance of the Company within a
given period.
YEAR 2000 ISSUES
The Company is currently addressing what is commonly referred to as the
"Year 2000" problem. Many computer programs and systems recognize dates using
two-digit year data (rather than four-digit year data), and therefore may be
unable to determine the correct century for the year. Failure to properly
recognize and process date information may cause such programs and systems to
fail to operate or to operate with erroneous results.
The Company created a company-wide Year 2000 plan to identify and resolve
Year 2000 issues associated with (i) products and services sold by the Company,
(ii) the Company's internal systems and (iii) products and services provided to
the Company by third parties.
The current versions of the Company's products were architected to
generally avoid Year 2000 problems. For example, certain of the current
versions of the Company's products use 4 character years and/or 32-bit integer
internal representation of dates, while others use a sequential dating system
that is not affected by the year 2000. To ensure the functionality of these
products, the Company has performed code review, testing and function
verification. The company believes that all of the current versions of its
products are currently Year 2000 compliant. However, the Company's products are
often used by its customers in systems that contain third party products.
Therefore, even though the current versions of the Company's current products
may be Year 2000 compliant, the failure of such third party products to be Year
2000 compliant, or to properly interface with the Company's products, may
result in operating problems. In addition, although the Company has notified
its customers of the availability of Year 2000 compliant products, certain of
the Company's customers are using non-compliant, older versions of the
Company's products. The Company is encouraging these customers to migrate to
current versions.
The Company has also evaluated its internal information technology
systems for Year 2000 compliance. The Company believes that its principal
internal systems, main servers, principal business databases and external
payroll services are Year 2000 compliant. With respect to those systems that
are not currently Year 2000 compliant, including certain information systems,
e-mail and telephone systems, the Company has completed the identification,
planning and procurement phases, and is currently in the implementation and
testing phases. The Company expects to complete implementation and testing of
these information technology systems at different stages in the remainder of
1998 and throughout 1999.
The Company is investigating each of its significant vendors, suppliers,
financial service organizations and service providers to confirm that the
Company's operations will not be materially adversely affected by the failure
of any such third party to have Year 2000 compliant computer programs. With
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<PAGE> 14
respect to any third party products which the Company distributes with its
products, the Company has sought information from the product manufacturers
regarding such products' Year 2000 status, and, when available, has provided a
reference to such information on the Company's web site. The Company has
directed those customers who use Company products containing third-party
products to the respective product manufacturer for detailed Year 2000 status
information.
The Company's Year 2000 compliance efforts have primarily been
incorporated into its general product development efforts for new product
releases. The Company's additional Year 2000 related expenses, which include
identification, code review, testing, and implementation, have not been
substantial. The Company's total cost related to the Year 2000 compliance has
not been, and is not expected to be, material to the Company's financial
position, results of operations, or cash flows.
The Company currently does not have a contingency plan in the event that
any Year 2000 problems arise in any of the Company's products which it believes
to be Year 2000 compliant, any of the Company's internal systems or any third
party products or services on which the Company relies. The Company intends to
develop an alternative plan should such problems arise.
Although the Company believes that the current versions of its products
are Year 2000 compliant, there can be no assurance that one or more of the
current versions of the Company's products do not contain Year 2000 problems
that could result in material adverse effect to the Company or to its
customers. In addition, the Company does not currently have any information
with regard to Year 2000 compliance or any of its customers. The Company's
results of operations could be materially impacted if its customers encounter
Year 2000 problems unrelated to the Company's products and services.
Because it is in the business of selling software products, the Company's
risk of being subjected to lawsuits relating to Year 2000 issues with its
software products is likely to be greater than that of companies in other
industries. Because computer systems may involve different hardware, firmware,
and software components from different manufacturers, it may be difficult to
determine which component in a computer system is a cause of Year 2000
problem. As a result, the Company may be subject to Year 2000 lawsuits
independent of whether its products and services are Year 2000 compliant. The
outcome of any such lawsuits and the impact on the Company cannot be
determined at this time.
The Company believes that completion of its modifications to its internal
information technology systems will be made on a timely basis. However, there
can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of such modifications. Any such delays or
increased costs could impact the Company's ability to deliver products or
services to its customers and could have a material adverse impact on the
Company's operations and financial results.
There can be no assurance that third party suppliers of products that are
used by the Company will provide Year 2000 compliant products on a timely
basis, or that the Company will be able to procure alternative, Year 2000
compliant products. The failure to obtain such products could have a material
adverse effect on the Company's operations and financial results.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibit filed as a part of this Form 10-Q is the following:
EXHIBIT 27.1: Financial Data Schedule
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<PAGE> 16
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APPLIX, INC.
By: /s/ Gary P. Bouchard
---------------------------------
Gary P. Bouchard
Corporate Controller
(Chief Accounting Officer)
Date: November 16, 1998
-16-
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