<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, 1999
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 10,909,235 SHARES OF COMMON STOCK, $.0025 PAR VALUE,
OUTSTANDING AT NOVEMBER 8, 1999.
<PAGE> 2
APPLIX, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998 3
Unaudited Consolidated Statements of Operations
for the three months ended September 30, 1999 and 1998 4
Unaudited Consolidated Statements of Operations
for the nine months ended September 30, 1999 and 1998 5
Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
------------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 11,289 $ 17,404
Short-term investments 16,577 4,041
Accounts receivable, less allowance for doubtful accounts
of $582 and $566 at September 30, 1999 and
December 31, 1998, respectively 12,416 14,032
Other current assets 3,186 2,832
Deferred tax asset 2,595 2,595
-------- --------
Total current assets 46,063 40,904
Property and equipment, at cost 13,795 12,931
Less accumulated amortization and depreciation (10,557) (9,315)
-------- --------
Net property and equipment 3,238 3,616
Capitalized software costs, net of accumulated
amortization of $2,757 and $2,159 at September 30, 1999
and December 31, 1998, respectively 457 470
Other assets 529 623
-------- --------
Total assets $ 50,287 $ 45,613
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,156 $ 1,995
Accrued liabilities 6,902 6,852
Deferred revenue 7,984 7,191
-------- --------
Total current liabilities 17,042 16,038
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized
Common stock, $.0025 par value; 30,000,000 shares
authorized; 11,150,493 and 10,551,338 shares issued at
September 30, 1999 and December 31, 1998, respectively 28 26
Capital in excess of par value 43,580 41,689
Accumulated deficit (8,839) (10,736)
Treasury stock, 306,198 and 278,698 shares, at cost at
September 30, 1999 and December 31, 1998, respectively (1,078) (933)
Accumulated other comprehensive loss (446) (471)
-------- --------
Total stockholders' equity 33,245 29,575
-------- --------
Total liabilities and stockholders' equity $ 50,287 $ 45,613
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 4
APPLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
License revenue $ 8,359 $ 7,708
Service revenue 6,207 4,306
------- -------
Total revenue 14,566 12,014
Cost of license revenue 573 811
Cost of service revenue 3,441 2,025
Gross margin 10,552 9,178
Operating expenses:
Selling and marketing 5,906 6,210
Research and development 2,516 2,084
General and administrative 1,089 831
------- -------
Total operating expenses 9,511 9,125
------- -------
Operating income 1,041 53
Interest income, net 304 235
------- -------
Net income before income taxes 1,345 288
Provision for income taxes 498 107
------- -------
Net income $ 847 $ 181
======= =======
Basic earnings per share (see Note C) $ 0.08 $ 0.02
======= =======
Diluted earnings per share (see Note C) $ 0.07 $ 0.02
======= =======
Weighted average common and common equivalent shares
outstanding:
Basic 10,660 10,225
======= =======
Diluted 12,288 10,348
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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APPLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
License revenue $24,387 $24,859
Service revenue 17,276 12,057
------- -------
Total revenue 41,663 36,916
Cost of license revenue 1,623 2,177
Cost of service revenue 9,658 6,025
------- -------
Gross margin 30,382 28,714
Operating expenses:
Selling and marketing 17,415 19,147
Research and development 7,233 6,629
General and administrative 3,519 2,775
------- -------
Total operating expenses 28,167 28,551
------- -------
Operating income 2,215 163
Interest income, net 795 757
------- -------
Net income before income taxes 3,010 920
Provision for income taxes 1,113 342
------- -------
Net income $ 1,897 $ 578
======= =======
Basic earnings per share (see Note C) $ 0.18 $ 0.06
======= =======
Diluted earnings per share (see Note C) $ 0.16 $ 0.05
======= =======
Weighted average common and common equivalent shares
outstanding:
Basic 10,535 10,168
======= =======
Diluted 11,707 10,746
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 6
APPLIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 1,897 $ 578
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,242 1,519
Amortization of capitalized software costs 598 610
Amortization of goodwill 94 111
Deferred tax asset -- 350
Changes in operating assets and liabilities:
Accounts receivable 1,616 (302)
Other current assets (354) 214
Accounts payable 161 (1,361)
Accrued liabilities 138 (184)
Deferred revenue 793 (969)
-------- --------
Cash provided by operating activities 6,185 566
Investing activities:
Purchase of property and equipment (864) (1,473)
Capitalized software costs (585) (613)
Purchase of short-term investments (33,979) (31,184)
Maturities of short-term investments 21,443 31,665
-------- --------
Cash used in investing activities (13,985) (1,605)
Financing activities:
Proceeds from exercise of incentive stock options and
employee stock purchase plans 1,893 677
Purchase of treasury stock (145) --
Principal payments under capital lease obligations (88) (81)
-------- --------
Cash provided by financing activities 1,660 596
Effect of exchange rate changes on cash 25 (391)
-------- --------
Net decrease in cash and cash equivalents (6,115) (834)
Cash and cash equivalents at beginning of period 17,404 7,639
-------- --------
Cash and cash equivalents at end of period $ 11,289 $ 6,805
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes $ 88 $ 81
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 7
APPLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
Applix is a leading provider of software solutions for front office
business applications (FOBA) and decision support environment. Front office
business applications include customer relationship management (CRM) and
business intelligence applications. The Company offers the following array of
solutions: Applix Enterprise, which is the Company's product offering in the CRM
market, and Applix TM1, which is the Company's real time multi-dimensional
analysis software for business intelligence applications. The Company's decision
support family of products includes the following: Applix Office for UNIX, LINUX
and Windows/NT; 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. 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, 1998.
The results of the nine month period ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year.
C. COMPUTATION OF NET EARNINGS PER COMMON SHARE
Basic net earnings per share is computed using the weighted average number
of common shares outstanding during the period. Dilutive net earnings per share
is computed using the weighted average number of common shares outstanding
during the period, plus the dilutive effect of potential common stock which
consists of stock options.
The following table sets forth the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(in thousands except per share data) Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic:
Net income $ 847 $ 181 $ 1,897 $ 578
Weighted average shares outstanding 10,660 10,225 10,535 10,168
Net income per common share $ 0.08 $ 0.02 $ 0.18 $ 0.06
Assuming Dilution:
Net income $ 847 $ 181 $ 1,897 $ 578
Weighted average shares outstanding 10,660 10,225 10,535 10,168
Net effect of dilutive stock options 1,628 123 1,172 578
------- ------- ------- -------
Total 12,288 10,348 11,707 10,746
Net income per common share $ 0.07 $ 0.02 $ 0.16 $ 0.05
</TABLE>
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<PAGE> 8
APPLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. SHORT-TERM INVESTMENTS
All short-term investments are classified as available-for-sale, and are in
liquid high-grade commercial paper with original maturities beyond three months
and less than twelve months. Securities are marked to market and the resulting
unrealized gains and losses have been insignificant.
E. COMPREHENSIVE INCOME OR LOSS
Other comprehensive income or loss includes foreign currency translation
adjustments.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
--------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 847 $ 181 $1,897 $ 578
Other comprehensive
income/(loss) 45 20 25 (391)
------ ------ ------ ------
Total comprehensive income $ 892 $ 201 $1,922 $ 187
====== ====== ====== ======
</TABLE>
F. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardized the
disclosure requirements for pensions and other postretirement benefits and is
effective for the Company's fiscal year ending December 31, 1999. SFAS No. 132
relates to disclosure only and will not affect the Company's financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not expect SFAS No.
133 to have a material effect on its financial position or result of operations.
G. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
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<PAGE> 9
APPLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. REPORTABLE SEGMENTS
The Company operates in two business segments which offer different
products and services. A summary of the Company's operations by business segment
for the three and nine months ended September 30, 1999 and September 30, 1998 is
as follows:
<TABLE>
<CAPTION>
(in thousands) Front Office
Business
Applixware* Applications Consolidated
<S> <C> <C> <C>
Three months ended Sept 30, 1999
Revenue 3,866 10,700 14,566
Operating income/(loss) 1,542 (501) 1,041
Nine months ended Sept 30, 1999
Revenue 14,751 26,912 41,663
Operating income/(loss) 7,452 (5,237) 2,215
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Front Office
Business
Applixware* Applications Consolidated
<S> <C> <C> <C>
Three months ended Sept 30, 1998
Revenue 4,376 7,638 12,014
Operating income/(loss) 2,323 (2,270) 53
Nine months ended Sept 30, 1998
Revenue 16,148 20,768 36,916
Operating income/(loss) 8,070 (7,907) 163
</TABLE>
*Decision support products
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<PAGE> 10
APPLIX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1998
Total revenue increased 21% to $14,566,000, for the quarter ended September
30, 1999 from $12,014,000 for the quarter ended September 30, 1998. Overall,
license revenue increased 8% to $8,359,000 for the quarter ended September 30,
1999 from $7,708,000 for the quarter ended September 30, 1998. License revenue
from the front office business applications products (FOBA), which consist of
Applix Enterprise and Applix TM1 products, increased 20% to $6,598,000 for the
quarter ended September 30, 1999 from $5,484,000 for the same period in 1998.
Applixware license revenue decreased 21% to $1,760,000 for the quarter ended
September 30, 1999 from $2,225,000 for the quarter ended September 30, 1998.
Domestic license revenue decreased 25% to $3,184,000 for the quarter ended
September 30, 1999 from $4,259,000 for the same period in 1998. International
license revenue increased 50% to $5,175,000 for the quarter ended September 30,
1999 from $3,449,000 for the same period in 1998. License revenue in the
government sector decreased 25% to $1,198,000 for the quarter ended September
30, 1999 from $1,607,000 for the same period in 1998. Revenue from government
customers has fluctuated significantly in the past, and the Company expects the
fluctuations to continue. The Company's future operating results will be
particularly dependent on the continued acceptance of Applix Enterprise and
Applix TM1.
Service revenue increased 44% to $6,207,000 for the quarter ended September
30, 1999 (or 43% of total revenues) from $4,306,000 (or 36% of total revenues)
for the same period in 1998. This increase was due to increased maintenance
revenue from the Company's growing customer relationship management (CRM)
customer base and the expansion of the Company's consulting service offerings
for FOBA products.
Gross margin decreased to 72% for the three months ended September 30, 1999
from 76% for the same period in 1998. The decrease in gross margin is primarily
the result of the quarterly increase in the consulting revenue component of
service revenue, which has a significantly lower gross margin than license
revenue, as a percentage of total revenue. The Company's future investment in
the consulting portion of the business will continue to put downward pressure on
the gross margins for the remainder of the year. License revenue gross margin
increased to 93% for the quarter ended September 30, 1999 from 89% for the
quarter ended September 30, 1998. Service revenue gross margin decreased to 45%
for the quarter ended September 30, 1999 from 53% for the same period in 1998.
Selling and marketing expenses, which include domestic sales and marketing
expenses and the cost of the Company's international operations, decreased 5% to
$5,906,000 for the quarter ended September 30, 1999 from $6,210,000 for the
quarter ended September 30, 1998. Selling and marketing expenses decreased as a
percentage of total revenue to 41% for the quarter ended September 30, 1999 from
52% for the quarter ended September 30, 1998. The decrease was primarily due to
lower costs associated with higher installation work performed by outside
developers, decreased spending in marketing programs and lower costs from the
consolidation of our North American FOBA sales efforts in the second quarter.
Research and development expenses, which consist primarily of employee
salaries, benefits and related expenses, increased 21% to $2,516,000 for the
quarter ended September 30, 1999 from $2,084,000 for the quarter ended September
30, 1998 and were 17% of total revenue for the quarter ended September 30, 1999
and 17% of total revenue for the quarter ended September 30, 1998. The increase
in total spending is attributable to development efforts associated with the
integrating of our CRM products and our business analytics and expanding our
internet-based functionality in our FOBA products. Total research and
development expenses, including capitalized software costs, increased to
$2,718,000, including $202,000 in capitalized software development costs, or 19%
of total revenues for
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<PAGE> 11
the quarter ended September 30, 1999 from $2,265,000, including $181,000 in
capitalized software development costs, or 19% of total revenue for the quarter
ended September 30, 1998.
General and administrative expenses, which include the costs of the
finance, human resources and administrative functions, increased 31% to
$1,089,000 for the quarter ended September 30, 1999 from $831,000 for the same
period in 1998, and were 7% of total revenue for both September 30, 1999 and
1998.
Interest income increased to $304,000 from $235,000 due to more funds
available for investments during the three months ended September 30, 1999.
The Company recorded a provision for income tax for the quarter ended
September, 30, 1999 of $498,000 based on the Company's estimated annual
effective tax rate of 37%, compared to an income tax provision of $107,000 at
the same effective rate for the same period in 1998.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1998
Total revenue increased 13% to $41,663,000 for the nine months ended
September 30, 1999 from $36,916,000 for the nine months ended September 30,
1998. Overall, license revenue decreased 2% to $24,387,000 for the nine months
ended September 30, 1999 from $24,859,000 for the same period in 1998. License
revenue from the FOBA products increased 5% to $16,113,000 for the nine months
ended September 30, 1999 from $15,399,000 for the nine months ended September
30, 1998. Applixware license revenue decreased 13% to $8,273,000 for the nine
months ended September 30, 1999 from $9,461,000 for the nine months ended
September 30, 1998. Domestic license revenue decreased 29% to $8,288,000 for the
nine months ended September 30, 1999 from $11,649,000 for the same period in
1998. International license revenue increased 22% to $16,099,000 for the nine
months ended September 30, 1999 from $13,210,000 in the same period in 1998,
resulting primarily from a 59% increase in FOBA revenue. Revenue from the
government sector decreased 6% to $3,936,000 for the nine months ended September
30, 1999 from $4,191,000 for the same period in 1998.
Service revenue increased 43% to $17,276,000 (or 41% of total revenues)
from $12,057,000 (or 33% of total revenues) for the same period in 1998. 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 the front office business application products.
Gross margin decreased to 73% for the nine months ended September 30, 1999
from 78% for the nine months ended September 30, 1998. The decrease is primarily
related to an increase in service revenue, which has a significantly lower gross
margin than license revenue, as a percentage of total revenue. License revenue
gross margin increased to 93% for the nine months ended September 30, 1999 from
91% for the same period in 1998. Service revenue gross margin decreased to 44%
for the nine months ended September 30, 1999 from 50% for the nine months ended
September 30, 1998 as a result of the increase in the consulting revenue
component of service revenue, which has a significantly lower gross margin.
Selling and marketing expenses decreased 9% to $17,415,000 for the nine
months ended September 30, 1999 from $19,147,000 for the nine months ended
September 30, 1998. The decrease was primarily due to decreased staffing which
resulted from the consolidation of the sales department as a result of the
Company's focus on a combined front office business solutions and on indirect
channels. Selling and marketing expenses decreased as a percentage of total
revenue to 42% for the nine months ended September 30, 1999 from 52% in the same
period in 1998.
Research and development expenses increased 9% to $7,233,000 for the nine
months ended September 30, 1999 from $6,629,000 for the nine months ended
September 30, 1998 and decreased slightly as a percentage of total revenue to
17% for the nine months ended September 30, 1999 from 18% for the nine months
ended September 30, 1998. Total research and development expenses, including
capitalized software development costs, were $7,818,000, including $585,000 in
capitalized software costs, or 19% of total revenue for the nine months ended
September 30, 1999 and $7,242,000, including $613,000 in capitalized software
development costs, or 20% to total revenue for the nine months ended September
30, 1998.
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<PAGE> 12
General and administrative expenses increased 27% to $3,519,000 for the
nine months ended September 30, 1999 from $2,775,000 for the same period in
1998, and were 8% of total revenue for the nine months ended September 30, 1999
and 1998.
Interest income increased to $795,000 from $757,000 due to more funds
available for investments during the nine months ended September 30, 1999.
The Company recorded a tax provision for income tax for the nine months
ended September 30, 1999 of $1,113,000 based on the Company's estimated annual
effective tax rate of 37%, compared to a tax provision of $342,000 at the same
effective rate for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated $6,185,000 for the nine months
ended September 30, 1999. The components are Net income of $1,897,000,non-cash
charges from depreciation and amortization of $1,934,000 and changes in working
capital of $2,354,000. As part of the investing activities of the Company, a
large portion of the Company's cash and cash equivalents were moved to short
term investments because of rising interest rates. The Company purchased
$33,979,000 in high-grade commercial paper while having maturities of
$21,443,000 during the nine months ended September 30, 1999. The Company
purchased property and equipment for upgrades, replacements and additional
back-up systems during the period for $864,000 and made continued investments in
capitalized software costs of $585,000. The Company generated $1,660,000 in
financing activities. The proceeds from the exercise of incentive stock options
and stock purchase plans amounted to $1,893,000.
The Company established a stock repurchase plan in April 1999 where the
Board of Directors authorized the repurchase of up to $5 million of the
Company's outstanding common stock. These shares can be purchased on the open
market at the discretion of management based upon market price, business
conditions and other investment alternatives. During the first nine months of
1999, the Company repurchased $145,000 worth of shares.
As of September 30, 1999, the Company had cash, cash equivalents, and short
term investments of $27,866,000 and working capital of $29,021,000.
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 1999.
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) relating to future events or conditions should be considered
forward-looking statements. There are a number of important factors that could
cause actual events or the Company's actual operating results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below.
In the several years preceding 1997, the Company derived the majority of
its revenue from its Applixware product family; however, Applixware sales have
been declining in recent years. 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 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
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<PAGE> 13
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 Clarify, IBM, Onyx Software, Oracle, Remedy Corporation, Siebel Systems,
Vantive Corporation, and others.
The Company's Applix TM1 product line competes with product offerings from
Oracle, Hyperion Solutions (formally known as Arbor Software) and Microsoft.
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.
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 Microsoft Windows/NT and Windows 98 on the desktop, the
Company is now competing directly with vendors of PC software applications such
as Corel, IBM, Microsoft, and Star Office Systems (now owned by Sun
Microsystems).
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's 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 those of the Company. Hyperion
Solutions, which had been a significant OEM of the Company's TM1 products, has
merged with Arbor Software Corporation, and is offering a product using Arbor's
OLAP technology and has ceased purchasing 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 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 the latter half of the 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 are
difficult to adjust in the short term, and a shortfall in the expected revenue
for a particular quarter would therefore have a disproportionate adverse effect
on the Company's net income for that quarter.
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
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<PAGE> 14
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 established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries agreed to adopt the euro as
their common legal currency on that date. The euro now trades on currency
exchanges and is available for non-cash transactions. The participating
countries issue sovereign debt exclusively in euros, and have redenominated
outstanding sovereign debt. The participating countries 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, is exercised by the new
European Central Bank. 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 are no longer
computed directly from one legacy currency to another. Instead, a triangular
process applies 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. The currency will be handled in the
same manner as other functional currencies.
License revenue from sales (directly or indirectly) to branches or agencies
of the U.S. Government represented approximately 9% , 8%, 21%, and 20% of total
license revenue during the first nine months of 1999 and the years ended 1998,
1997, and 1996, 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 has 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 which is covered
under maintenance agreements.
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
-14-
<PAGE> 15
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, the Company has completed the identification,
planning and procurement phases, and has substantially implemented and tested
those systems.
The Company has completed the investigation 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 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 a material adverse effect to the Company or to its customers. In
addition, the Company does not currently have complete information with regard
to Year 2000 compliance of 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 a Year 2000
problem. As a result, the Company may be subjected 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.
-15-
<PAGE> 16
APPLIX, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company exports products to diverse geographic areas. Most of the
Company's international sales through subsidiaries are denominated in foreign
currencies. 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 exposure on intercompany balances for the
purpose of mitigating the effect of foreign currency fluctuations.
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
-16-
<PAGE> 17
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/ Edward Terino
-------------------------------------
Edward Terino
Chief Financial Officer
Date: November 15, 1999
-17-
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