<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 JUNE 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 10,632,324 SHARES OF COMMON STOCK, $.0025 PAR VALUE,
OUTSTANDING AT AUGUST 6, 1999.
<PAGE> 2
APPLIX, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
Part I - Financial Information
Item 1. Consolidated Financial Statements:
<S> <C> <C>
Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998 3
Unaudited Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Operations
for the six months ended June 30, 1999 and 1998 5
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 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 4. Submission of Matters to a Vote of Security Holders 16
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>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,082 17,404
Short-term investments 16,437 4,041
Accounts receivable, less allowance for doubtful accounts
of $593 and $566 at June 30, 1999 and
December 31, 1998, respectively 13,477 14,032
Other current assets 2,378 2,832
Deferred tax asset 2,595 2,595
------- -------
Total current assets 42,969 40,904
Property and equipment, at cost 13,398 12,931
Less accumulated amortization and depreciation (10,089) (9,315)
------- -------
Net property and equipment 3,309 3,616
Capitalized software costs, net of accumulated
amortization of $2,548 and $2,159 at June 30, 1999
and December 31, 1998, respectively 464 470
Other assets 561 623
------- -------
Total assets $47,303 $45,613
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,480 $ 1,995
Accrued liabilities 6,390 6,852
Deferred revenue 8,258 7,191
------- -------
Total current liabilities 16,128 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; 10,815,670 and 10,551,338 shares issued at
June 30, 1999 and December 31, 1998, respectively 27 26
Capital in excess of par value 42,402 41,689
Accumulated deficit (9,686) (10,736)
Treasury stock, 306,198 and 278,698 shares, at cost at
June 30, 1999 and December 31, 1998, respectively (1,077) (933)
Accumulated other comprehensive loss (491) (471)
------- -------
Total stockholders' equity 31,175 29,575
------- -------
Total liabilities and stockholders' equity $47,303 $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
----------------------------
JUNE 30, JUNE 30,
1999 1998
------- -------
<S> <C> <C>
License revenue $ 8,545 $ 8,264
Service revenue 5,607 4,019
------- -------
Total revenue 14,152 12,283
Cost of license revenue 525 721
Cost of service revenue 3,106 2,036
------- -------
Gross margin 10,521 9,526
Operating expenses:
Selling and marketing 6,001 6,343
Research and development 2,404 2,252
General and administrative 1,342 851
------- -------
Total operating expenses 9,747 9,446
------- -------
Operating income 774 80
Interest income, net 265 251
------- -------
Net income before income taxes 1,039 331
Provision for income taxes 384 123
------- -------
Net income $ 665 $ 208
======= =======
Basic earnings per share (see Note C) $ 0.06 $ 0.02
======= =======
Diluted earnings per share (see Note C) $ 0.06 $ 0.02
======= =======
Weighted average common and common equivalent shares outstanding:
Basic 10,502 10,163
======= =======
Diluted 11,290 10,806
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 5
APPLIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
1999 1998
-------------------------------
<S> <C> <C>
License revenue $16,028 $17,151
Service revenue 11,070 7,751
------- -------
Total revenue 27,098 24,902
Cost of license revenue 1,050 1,366
Cost of service revenue 6,217 4,000
------- -------
Gross margin 19,831 19,536
Operating expenses:
Selling and marketing 11,509 12,937
Research and development 4,717 4,545
General and administrative 2,431 1,944
------- -------
Total operating expenses 18,657 19,426
------- -------
Operating income 1,174 110
Interest income, net 491 523
------- -------
Net income before income taxes 1,665 633
Provision for income taxes 615 235
------- -------
Net income $ 1,050 $ 398
======= =======
Basic earnings per share (see Note C) $ 0.10 $ 0.04
======= =======
Diluted earnings per share (see Note C) $ 0.09 $ 0.04
======= =======
Weighted average common and common equivalent shares outstanding:
Basic 10,471 10,140
======= =======
Diluted 11,197 10,874
======= =======
</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>
SIX MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
1999 1998
------------------------------
<S> <C> <C>
Operating activities:
Net income $ 1,050 $ 398
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 774 945
Amortization of capitalized software costs 389 429
Amortization of goodwill 62 77
Deferred tax asset -- 350
Changes in operating assets and liabilities:
Accounts receivable 555 137
Other current assets 454 280
Accounts payable (515) (927)
Accrued liabilities (405) (1,014)
Deferred revenue 1,067 (1,398)
------- -------
Cash provided by (used in) operating activities 3,431 (723)
Investing activities:
Purchase of property and equipment (467) (1,123)
Capitalized software costs (383) (432)
Purchase of short-term investments (25,844) (23,515)
Maturities of short-term investments 13,448 21,636
------- -------
Cash used in investing activities (13,246) (3,434)
Financing activities:
Proceeds from exercise of incentive stock options and
employee stock purchase plans 714 411
Purchase of treasury stock (144) --
Principal payments under capital lease obligations (57) (53)
------- -------
Cash provided by financing activities 513 358
Effect of exchange rate changes on cash (20) (411)
------- -------
Net decrease in cash and cash equivalents (9,322) (4,210)
Cash and cash equivalents at beginning of period 17,404 7,639
------- -------
Cash and cash equivalents at end of period $ 8,082 $ 3,429
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes $ 70 $ 38
======= =======
</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 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 six month period ended June 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 common stock equivalents. Common
stock equivalent shares consist 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 Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
Basic:
<S> <C> <C> <C> <C>
Net income $ 655 $ 208 $ 1,050 $ 398
Weighted average shares outstanding 10,502 10,163 10,471 10,140
Net income per common share $ 0.06 $ 0.02 $ 0.10 $ 0.04
Assuming Dilution:
Net income $ 655 $ 208 $ 1,050 $ 398
Weighted average shares outstanding 10,502 10,163 10,471 10,140
Net effect of dilutive stock options 788 643 726 734
------- ------- ------- -------
Total 11,290 10,806 11,197 10,874
Net income per common share $ 0.06 $ 0.02 $ 0.09 $ 0.04
</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 June 30 Six Months Ended June 30
--------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 655 $ 208 $1,050 $ 398
Other comprehensive loss (5) (264) (20) (411)
----- ----- ------ -----
Total comprehensive
income/(loss) $ 650 $ (56) $1,030 $ (13)
===== ===== ====== =====
</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.
-8-
<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 six months ended June 30, 1999 and June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
(in thousands) Front Office
Business
Applixware Applications Consolidated
---------- ------------ ------------
<S> <C> <C> <C>
Three months ended June 30, 1999
Revenue 6,189 7,963 14,152
Operating income/(loss) 3,543 (2,769) 774
Six months ended June 30, 1999
Revenue 10,886 16,212 27,098
Operating income/(loss) 5,910 (4,736) 1,174
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Front Office
Business
Applixware Applications Consolidated
---------- ------------ ------------
<S> <C> <C> <C>
Three months ended June 30, 1998
Revenue 4,854 7,429 12,283
Operating income/(loss) 2,091 (2,011) 80
Six months ended June 30, 1998
Revenue 11,772 13,130 24,902
Operating income/(loss) 5,842 (5,732) 110
</TABLE>
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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 JUNE 30, 1999 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1998
Total revenue increased 15% to $14,152,000, for the quarter ended June
30, 1999 from $12,283,000 for the quarter ended June 30, 1998. Overall, license
revenue increased 3% to $8,545,000 for the quarter ended June 30, 1999 from
$8,264,000 for the quarter ended June 30, 1998. License revenue from the front
office business applications products, which consist of Applix Enterprise and
Applix TM1 products decreased 19% to $4,542,000 for the quarter ended June 30,
1999 from $5,609,000 for the same period in 1998. The decrease was primarily due
to the loss of a large OEM relationship in Q3 1998. Applixware license revenue
increased 51% to $4,003,000 for the quarter ended June 30, 1999 from $2,655,000
for the quarter ended June 30, 1998 primarily due to a significant European
order recorded in the second quarter of 1999. Domestic license revenue decreased
9% to $3,053,000 for the quarter ended June 30, 1999 from $3,362,000 for the
same period in 1998. International license revenue increased 12% to $5,492,000
for the quarter ended June 30, 1999 from $4,902,000 for the same period in 1998,
resulting from an 87% increase in Applixware revenue which was partially offset
by a 18% decrease in front office business applications revenue resulting from
reduced volume in the Asia Pacific region. License revenue in the government
sector increased 9% to $633,000 from $580,000. 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 40% to $5,607,000 for the quarter ended June
30, 1999 (or 40% of total revenues) from $4,019,000 (or 33% of total revenues)
for the same period in 1998. This increase was due to increased maintenance
revenue from the Company's growing customer relationship management (CRM)
customer base and the expansion of the Company's consulting service offerings
for front office business application products.
Gross margin decreased to 74% for June 30, 1999 from 78% 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 service margins for the
remainder of the year. License revenue gross margin increased to 94% for the
quarter ended June 30, 1999 from 91% for the quarter ended June 30, 1998.
Service revenue gross margin decreased to 45% for the quarter ended June 30,
1999 from 49% 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 $6,001,000 for the quarter ended June 30, 1999 from $6,343,000
for the quarter ended June 30, 1998. Selling and marketing expenses decreased as
a percentage of total revenue to 42% for the quarter ended June 30, 1999 from
52% for the quarter ended June 30, 1998. The decrease was primarily due to
higher costs incurred in 1998 relating to the introduction of a new release of
Applix Enterprise and the associated customer conversion costs combined with the
decreased spending in marketing programs in the second quarter of 1999 as
compared to the second quarter of 1998.
Research and development expenses, which consist primarily of employee
salaries, benefits and related expenses, increased 7% to $2,404,000 for the
quarter ended June 30, 1999 from $2,252,000 for the quarter ended June 30, 1998
and were 17% of total revenue for the quarter ended June 30, 1999 and 18% of
total revenue for the quarter ended June 30, 1998. Total research and
development expenses, including capitalized software costs, increased to
$2,600,000, including $196,000 in capitalized software development costs, or 18%
of total revenues for the quarter ended June 30, 1999 from $2,464,000, including
$212,000 in capitalized software development costs, or 20% of total revenue for
the quarter ended June 30, 1998.
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<PAGE> 11
General and administrative expenses, which include the costs of the
finance, human resources and administrative functions, increased 58% to
$1,342,000 for the quarter ended June 30, 1999 from $851,000 for the same period
in 1998, and increased to 9% of total revenue for June 30, 1999 from 7% of total
revenue for June 30, 1998. The increase in general and administrative expenses
was primarily the result of higher payroll related cost, recruiting costs, and
information technology costs related to Y2K readiness incurred in the quarter.
Interest income increased slightly to $265,000 from $251,000 due to more
funds available for investments during the three months ended June 30, 1999.
The Company recorded a provision for income tax for the quarter ended
June 30, 1999 of $384,000 based on the Company's estimated annual effective tax
rate of 37%, compared to an income tax provision of $123,000 at the same
effective rate for the same period in 1998.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
Total revenue increased 9% to $27,098,000 for the six months ended June
30, 1999 from $24,902,000 for the six months ended June 30, 1998. Overall,
license revenue decreased 7% to $16,028,000 for the six months ended June 30,
1999 from $17,151,000 for the same period in 1998. License revenue from the
front office business applications products decreased 4% to $9,515,000 for the
six months ended June 30, 1999 from $9,915,000 for the six months ended June 30,
1998. Applixware license revenue decreased 10% to $6,513,000 for the six months
ended June 30, 1999 from $7,236,000 for the six months ended June 30, 1998.
Domestic license revenue decreased 31% to $5,104,000 for the six months ended
June 30, 1999 from $7,391,000 for the same period in 1998. International license
revenue increased 12% to $10,924,000 for the six months ended June 30, 1999 from
$9,760,000 in the same period in 1998, resulting primarily from a 14% increase
in front office business applications revenue. Revenue from the government
sector decreased 16% to $2,171,000 for the six months ended June 30, 1999 from
$2,583,000 for the same period in 1998.
Service revenue increased 43% to $11,070,000 (or 41% of total revenues)
from $7,751,000 (or 31% 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 six months ended June 30, 1999
from 78% for the six months ended June 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 slightly to 93% for the six months ended June 30, 1999
from 92% for the same period in 1998. Service revenue gross margin decreased to
44% for the six months ended June 30, 1999 from 48% for the six months ended
June 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 11% to $11,509,000 for the six
months ended June 30, 1999 from $12,937,000 for the six months ended June 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 six
months ended June 30, 1999 from 52% in the same period in 1998.
Research and development expenses increased 4% to $4,717,000 for the six
months ended June 30, 1999 from $4,545,000 for the six months ended June 30,
1998 and decreased as a percentage of total revenue to 17% for the six months
ended June 30, 1999 from 18% for the six months ended June 30, 1998. Total
research and development expenses, including capitalized software costs, were
$5,100,000, including $383,000 in capitalized software costs, or 19% of total
revenue for the six months ended June 30, 1999 and $4,977,000, including
$432,000 in capitalized software development costs, or 20% to total revenue for
the six months ended June 30, 1998.
General and administrative expenses increased 25% to $2,431,000 for the
six months ended June 30, 1999 from $1,944,000 for the same period in 1998, and
was 9% of total revenue for the six months ended June 30, 1999 compared to 8%
for the same period in 1998.
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<PAGE> 12
Interest income decreased to $491,000 for the six months ended June 30,
1999 from $523,000 for the same period in 1998 due to slightly lower interest
rates on investments.
The Company recorded a tax provision for income tax for the six months
ended June 30, 1999 of $615,000 based on the Company's estimated annual
effective tax rate of 37%, compared to a tax provision of $235,000 at the same
effective rate for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's profitable operations and non-cash depreciation and
amortization generated a significant portion of cash in the amount of $3,431,000
for the six months ended June 30, 1999. 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 $25,844,000 in high-grade commercial paper while having maturities of
$13,448,000 during the six months ended June 30, 1999. The Company purchased
property and equipment for upgrades, replacements and additional back-up systems
during the period for $467,000 and made continued investments in capitalized
software costs of $383,000. The Company generated $513,000 in financing
activities. The proceeds from the exercise of incentive stock options and stock
purchase plans amounted to $714,000. The Company established a stock repurchase
plan 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, market price,
business conditions and other investment alternatives. During the quarter, the
Company repurchased 27,500 shares for $144,000.
As of June 30, 1999, the Company had cash, cash equivalents, and short
term investments of $24,519,000 and working capital of $26,841,000.
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 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.
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<PAGE> 13
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.
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 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
-13-
<PAGE> 14
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 6% , 8%, 21%, and 20%
of total license revenue during the first six 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 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 and
e-mail, 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 throughout 1999.
-14-
<PAGE> 15
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 7, 1999, the
following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
PROPOSAL FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. Election of Directors
Alain Hanover 8,615,411 N.A. N.A.
2. Amendment to Company's
1994 Equity Incentive Plan 2,862,405 1,060,800 78,026
3. Amendment to Company's
1995 Employee Stock
Purchase Plan 3,274,428 648,568 78,235
4. Ratification of
PricewaterhouseCoopers LLP
as independent auditors 9,087,701 107,937 25,779
N.A. (Not Applicable)
</TABLE>
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: August 13, 1999
-17-
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 8,082
<SECURITIES> 16,437
<RECEIVABLES> 14,070
<ALLOWANCES> (593)
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<CURRENT-ASSETS> 42,969
<PP&E> 13,398
<DEPRECIATION> (10,089)
<TOTAL-ASSETS> 47,303
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0
0
<COMMON> 27
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<TOTAL-LIABILITY-AND-EQUITY> 47,303
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<INCOME-PRETAX> 1,665
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