<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 MARCH 31, 2000
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 11,267,306 SHARES OF COMMON STOCK, $.0025 PAR VALUE,
OUTSTANDING AT MAY 3, 2000.
<PAGE> 2
APPLIX, INC.
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
March 31, 2000 (unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,980 $ 10,321
Short-term investments 15,376 15,155
Accounts receivable, less allowance for doubtful accounts
of $600 and $598 at March 31, 2000 and
December 31, 1999, respectively 13,634 13,971
Other current assets 4,188 3,895
Deferred tax asset 3,001 3,001
-------- --------
Total current assets 45,179 46,343
Property and equipment, at cost 15,464 14,640
Less accumulated amortization and depreciation (11,392) (10,948)
-------- --------
Net property and equipment 4,072 3,692
Capitalized software costs, net of accumulated
amortization of $545 and $2,956 at March 31, 2000
and December 31, 1999, respectively (see Note G) 465 457
Other assets 4,101 4,189
-------- --------
Total assets $ 53,817 $ 54,681
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 2,734 $ 2,587
Accrued liabilities 6,527 7,405
Deferred revenue 8,006 7,896
-------- --------
Total current liabilities 17,267 17,888
Notes payable 1,080 1,080
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized
Common stock, $.0025 par value; 30,000,000 shares
authorized; 11,543,057 and 11,449,300 shares issued at
March 31, 2000 and December 31, 1999, respectively 29 29
Capital in excess of par value 47,689 47,113
Accumulated deficit (9,153) (8,356)
Accumulated other comprehensive loss (578) (556)
Unearned compensation (1,440) (1,440)
Treasury stock, 306,198 shares, at cost (1,077) (1,077)
-------- --------
Total stockholders' equity 35,470 35,713
-------- --------
Total liabilities and stockholders' equity $ 53,817 $ 54,681
======== ========
</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>
THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
2000 1999
-------------- --------------
<S> <C> <C>
License revenue $ 6,422 $ 7,483
Service revenue 5,999 5,463
-------- --------
Total revenue 12,421 12,946
Cost of license revenue 612 525
Cost of service revenue 3,901 3,111
-------- --------
Gross margin 7,908 9,310
Operating expenses:
Selling and marketing 5,863 5,509
Research and development 2,734 2,313
General and administrative 946 1,089
-------- --------
Total operating expenses 9,543 8,911
-------- --------
Operating income (loss) (1,635) 399
Interest income, net 369 227
-------- --------
Net income (loss) before income taxes (1,266) 626
Provision for (benefit from) income taxes (469) 231
-------- --------
Net income (loss) ($ 797) $ 395
======== ========
Basic earnings (loss) per share (see Note C) ($ 0.07) $ 0.04
======== ========
Diluted earnings (loss) per share (see Note C) ($ 0.07) $ 0.04
======== ========
Weighted average common and potential common shares
outstanding:
Basic 11,043 10,439
======== ========
Diluted 11,043 11,111
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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APPLIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) ($ 797) $ 395
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 444 366
Amortization of capitalized software costs 218 201
Amortization of goodwill 88 30
Changes in operating assets and liabilities:
Accounts receivable 337 412
Other current assets (293) 79
Accounts payable 147 (68)
Accrued liabilities (878) (1,130)
Deferred revenue 110 575
-------- --------
Cash (used in) provided by operating activities (624) 860
Investing activities:
Purchase of property and equipment (824) (283)
Capitalized software costs (226) (187)
Purchase of short-term investments (15,376) (14,064)
Maturities of short-term investments 15,155 4,041
-------- --------
Cash used in investing activities (1,271) (10,493)
Financing activities:
Proceeds from exercise of incentive stock options and
employee stock purchase plans 576 615
Principal payments under capital lease obligations -- (29)
-------- --------
Cash provided by financing activities 576 586
Effect of exchange rate changes on cash (22) (15)
-------- --------
Net decrease in cash and cash equivalents (1,341) (9,062)
Cash and cash equivalents at beginning of period 10,321 17,404
-------- --------
Cash and cash equivalents at end of period $ 8,980 $ 8,342
======== ========
</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, Inc. ("Applix" or the "Company") develops, markets and supports
a suite of Internet-based software applications. Applix operates two dedicated
business units. The eBusiness Division focuses on enabling customers to automate
their front office business operations including customer relationship
management and business planning. The Linux Division is a leading provider of
Internet accessible, Linux-based applications and technologies, and is a leading
provider of open source auction services and collaborative open source software
content.
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, 1999.
The results of the three month period ended March 31, 2000 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 and restricted stock.
The following table sets forth the computations of basic and diluted
earnings per share:
(in thousands except per share data) Three Months Ended
---------------------------------
March 31, March 31,
2000 1999
------------- --------------
Basic:
Net income (loss) ($ 797) $ 395
Weighted average shares outstanding 11,043 10,439
Net income (loss) per common share ($ 0.07) $ 0.04
Diluted:
Net income (loss) ($ 797) $ 395
Weighted average shares outstanding 11,043 10,439
Net effect of dilutive stock options -- 672
------- -------
Total 11,043 11,111
Net income (loss) per common share ($ 0.07) $ 0.04
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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.
Three Months Ended
March 31
-------------------
2000 1999
------ ------
Net income (loss) ($ 797) $ 395
----- -----
Other comprehensive loss (22) (15)
Total comprehensive
income (loss) ($ 819) $ 380
===== =====
F. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
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, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133, as amended by SFAS No. 137, 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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101.
"Revenue Recognition in Financial Statements," which is effective no later than
the quarter ending June 30, 2000. SAB 101 clarifies the SEC's views related to
revenue recognition and disclosure. The Company does not believe that the
adoption of SAB 101 will have a material effect on the Company's financial
position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for
an exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
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<PAGE> 8
APPLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. ADJUSTMENT OF FULLY AMORTIZED CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In the quarter ended March 31, 2000, the Company wrote-off $2,629,000
of fully amortized capitalized software development costs. As of December 31,
1999, the Company had $457,000 in capitalized software costs consisting of
$3,413,000 cost, net of accumulated amortization of $2,956,000. As of March 31,
2000, subsequent to the write-off of the fully amortized portion, the Company
had $465,000 in capitalized software costs consisting of $1,010,000 cost, net of
accumulated amortization of $545,000.
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 months ended March 31, 2000 and March 31, 1999 is as follows:
(in thousands)
Linux eBusiness
Division Division Consolidated
----------------------------------------
Three months ended March 31, 2000
Revenue $ 3,144 $ 9,277 $ 12,421
Operating income (loss) 734 (2,369) (1,635)
Three months ended March 31, 1999
Revenue $ 4,697 $ 8,249 $ 12,946
Operating income (loss) 2,367 (1,968) 399
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APPLIX, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
Total revenue decreased 4% to $12,421,000, for the quarter ended March
31, 2000 from $12,946,000 for the quarter ended March 31, 1999. Overall license
revenue decreased 14% to $6,422,000 for the quarter ended March 31, 2000 from
$7,483,000 for the quarter ended March 31, 1999. License revenue from the
eBusiness Division increased 2% to $5,095,000 for the quarter ended March 31,
2000 from $4,973,000 for the same period in 1999. License revenues in the Linux
Division decreased 47% to $1,327,000 for the quarter ended March 31, 2000 from
$2,510,000 for the quarter ended March 31, 1999. The decrease in the Linux
Division license revenues is the result of a 62% decline in sales of the legacy
Applixware for Unix products to $801,000 for the quarter ended March 31, 2000
from $2,129,000 for the same period in 1999. The decline in the legacy
Applixware product license revenue was partially offset by a 38% increase in
sales of the Linux products to $526,000 for the quarter ended March 31, 2000
from $381,000 for the same period in 1999. The Company expects legacy Applixware
for Unix revenues to continue to decline throughout the remainder of 2000.
Domestic license revenue increased 1% to $2,069,000 for the quarter
ended March 31, 2000 from $2,051,000 for the same period in 1999. License
revenue in the government sector decreased 94% to $19,000 for the quarter ended
March 31, 2000 from $318,000 for the same period in 1999. Revenue from
government customers has fluctuated significantly in the past, and the Company
expects the fluctuations to continue. International license revenue decreased
20% to $4,353,000 for the quarter ended March 31, 2000 from $5,432,000 for the
same period in 1999 mainly attributed lower license fees in Europe and Asia
offset by increased license fees in Latin America.
The Company's future license fee revenue growth will be particularly
dependent on the continued acceptance of Applix iEnterprise and Applix iTM1 on a
global basis.
Service revenue increased 10% to $5,999,000 for the quarter ended March
31, 2000 (or 48% of total revenues) from $5,463,000 (or 42% of total revenues)
for the same period in 1999. This increase was due to increased maintenance
revenue from the Company's growing eBusiness customer base and the expansion of
the Company's consulting service offerings for eBusiness products.
Gross margin decreased to 64% for the three months ended March 31, 2000
from 72% for the same period in 1999. The decrease in gross margin is primarily
the result of the quarterly increase in service revenue, which has a
significantly lower gross margin than license revenue, as a percentage of total
revenue. License revenue gross margin decreased to 90% for the quarter ended
March 31, 2000 from 93% for the quarter ended March 31, 1999. Service revenue
gross margin decreased to 35% for the quarter ended March 31, 2000 from 43% for
the same period in 1999, due to an increase in the number of consulting and
support employees servicing the growing customer base and the cost of outside
consultants used for the Applix iEnterprise product line.
Selling and marketing expenses, which include domestic sales and
marketing expenses and the cost of the Company's international operations,
increased 6% to $5,863,000 for the quarter ended March 31, 2000 from $5,509,000
for the quarter ended March 31, 1999. Selling and marketing expenses increased
as a percentage of total revenue to 47% for the quarter ended March 31, 2000
from 43% for the quarter ended March 31, 1999. The increase was primarily due to
increased staffing levels associated with hiring additional sales
representatives in the eBusiness Division and additional spending for marketing
programs in both the eBusiness and Linux Divisions. The Company expects selling
and marketing expenses to continue to increase in absolute dollars and as a
percentage of revenue for the remainder of 2000.
Research and development expenses, which consist primarily of employee
salaries, benefits and related expenses, increased 18% to $2,734,000 for the
quarter ended March 31, 2000 from $2,313,000
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<PAGE> 10
for the quarter ended March 31, 1999 and were 22% of total revenue for the
quarter ended March 31, 2000 and 18% of total revenue for the quarter ended
March 31, 1999. The increase in total spending is attributable to increased
staffing and the cost of outside consultants in both the Linux and eBusiness
Divisions as well as increased investment in the Linux Division product
development and eBusiness internet initiatives. Total research and development
expenses, including capitalized software costs, increased to $2,960,000,
including $226,000 in capitalized software development costs, or 24% of total
revenues for the quarter ended March 31, 2000 from $2,500,000, including
$187,000 in capitalized software development costs, or 19% of total revenue for
the quarter ended March 31, 1999. The Company expects research and development
expenses to continue to increase in absolute dollars and as a percentage of
revenue for the remainder of 2000.
General and administrative expenses, which include the costs of the
finance, human resources and administrative functions, decreased 13% to $946,000
for the quarter ended March 31, 2000 from $1,089,000 for the same period in
1999, and were 8% of total revenue for both March 31, 2000 and 1999 due to lower
compensation costs. The Company expects general and administrative expenses to
increase in absolute dollars and as a percentage of revenue for the remainder of
2000.
Interest income increased to $369,000 from $227,000 due to more funds
available for investments during the three months ended March 31, 2000 as well
as slightly higher interest rates.
The Company recorded a benefit from income taxes for the quarter ended
March 31, 2000 of $469,000 based on the Company's estimated annual effective tax
rate of 37%, compared to an income tax provision of $231,000 at the same
effective rate for the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash, cash equivalents, and short
term investments of $24,356,000 and working capital of $27,912,000. During the
quarter ended March 31, 2000, the Company had a net decrease in cash and cash
equivalents of $1,341,000 from the balance as of December 31, 1999. The Company
used cash for operating activities of $624,000 for the three months ended March
31, 2000. The components were a net loss of $797,000, offset by non-cash charges
from depreciation and amortization of $750,000 and decreased working capital of
$577,000. An additional $1,271,000 was used in investing activities, primarily
for the purchase of fixed assets of $824,000 and capitalized software costs of
$226,000. The fixed asset purchases were related to equipment and facility
expenditures associated with the Linux Division as well as equipment and the
funding of software development capitalized in the eBusiness Division. In
addition, the Company purchased $221,000 in short term investments, net of
maturities. Offsetting the cash used for operating activities and investing
activities, the Company generated $576,000 in 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. 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
2000. To date, inflation has not had a material adverse effect on the Company's
operating results.
FACTORS AFFECTING FUTURE OPERATING RESULTS
An investment in our shares is extremely risky. This section describes
some of the risk factors involved in purchasing our common stock. You should
carefully consider the following factors, in addition to the other
information presented in this Form 10-Q, in evaluating us and our business.
Any of the following risks could seriously harm our business and cause the
trading price of our common stock to decline, which could cause you to lose
all or part of your investment.
Risk Factors Related To Applix, Inc.
-10-
<PAGE> 11
On January 25, 2000, we announced plans to establish the operations of
our Linux Division as a separate subsidiary and to raise capital through a
private placement. On April 18, 2000, the Company announced that it had
created a wholly owned subsidiary for its Linux Division and would provide up
to $6,000,000 in capital to finance the growth of the Linux Division. As a
result, the Linux Division would become an independent company. Planning and
implementing the separation of the Linux Division from Applix has required
and will continue to require the dedication of management resources, and we
expect to incur certain incremental expenses in future periods related to the
separation. These efforts may disrupt our ongoing business activities. These
factors could have an adverse affect on our results of operations or
financial condition. In addition, a significant portion of our operational
and administrative infrastructure represents costs that are fixed.
Accordingly, these costs may represent a greater percentage of sales after
the separation and thus could adversely affect our results of operations.
It is anticipated that Applix will provide transitional services to
support the Linux Division operations once it is spun off. These transitional
services relate to information technology systems, supply chain management,
human resources administration, product order administration, customer
service, buildings and facilities, treasury management, and legal, finance,
and accounting. If Applix does not provide these services at an adequate
level following the spin-off, it may be held liable for losses suffered as a
result by the Linux Division. After the expiration of these various
arrangements, we may not be able to effectively re-deploy the employees
performing these services in a timely manner, and our financial results could
be adversely affected.
We expect to experience significant fluctuations in our future results
of operations due to a variety of factors, many of which are outside of our
control, including:
- demand for and market acceptance of our products and services;
- the size and timing of customer orders, particularly large orders,
some of which represent more than 10% of total revenue during a
particular quarter;
- introduction of products and services or enhancements by us and our
competitors;
- competitive factors that affect our pricing;
- the mix of products and services we sell;
- the hiring and retention of key personnel;
- our expansion into international markets;
- conditions specific to the enterprise information portal market and
other general economic factors;
- the timing and magnitude of our capital expenditures, including costs
relating to the expansion of our operations;
- changes in generally accepted accounting policies, especially those
related to the recognition of software revenue; and
- new government legislation or regulation.
We typically receive 50% to 70% of our orders in the last month of each
fiscal quarter because our customers often delay purchases of products until
the end of the quarter and our sales organization and our individual sales
representatives strive to meet quarterly sales targets. Because a substantial
portion of our costs are relatively fixed and based on anticipated revenue, a
failure to book an expected order in a given quarter will likely not be
offset by a corresponding reduction in costs and, therefore, could adversely
affect our operating results for that quarter. Due to these factors, we
believe that quarter-to-quarter comparisons of our operating results are not
a good indication of our future performance. In future quarters, our
operating results may be below the expectations of public market analysts and
investors. In this event, the price of our common stock may fall
significantly.
-11-
<PAGE> 12
Our collection of trademarks is important to our business. The
protective steps we take or have taken may be inadequate to deter
misappropriation of our trademark rights. We have filed applications for
registration of some of our trademarks in the United States. Effective
trademark protection may not be available in every country in which we offer
or intend to offer our products and services. Failure to protect our
trademark rights adequately could damage our brand identity and impair our
ability to compete effectively. Furthermore, defending or enforcing our
trademark rights could result in the expenditure of significant financial and
managerial resources.
Despite testing by us and our customers, errors may be found in our
products after commencement of commercial shipments. This risk is exacerbated
by the fact that most of the code in our products is developed by independent
parties over whom we exercise no supervision or control. If errors are
discovered, we may have to make significant expenditures of capital to
eliminate them and yet may not be able to successfully correct them in a
timely manner or at all. Errors and failures in our products could result in
a loss of, or delay in, market acceptance of our products and could damage
our reputation and our ability to convince commercial users of the benefits
of our products.
In addition, failures in our products could cause system failures for
our customers who may assert warranty and other claims for substantial
damages against us. Although our license agreements with our customers
typically contain provisions designed to limit our exposure to potential
product liability claims, it is possible that these provisions may not be
effective or enforceable under the laws of some jurisdictions. Our insurance
policies may not adequately limit our exposure to this type of claim. These
claims, even if unsuccessful, could be costly and time consuming to defend.
The computer systems market is characterized by rapid technological
change, frequent new product enhancements, uncertain product life cycles,
changes in customer demands and evolving industry standards. Our products
could be rendered obsolete if products based on new technologies are
introduced or new industry standards emerge.
Enterprise computing environments are inherently complex. As a result,
we cannot accurately estimate the life cycles of our products. New products
and product enhancements can require long development and testing periods,
which requires us to hire and retain increasingly scarce, technically
competent personnel. Significant delays in new product releases or
significant problems in installing or implementing new products could
seriously damage our business. We have, on occasion, experienced delays in
the scheduled introduction of new and enhanced products and may experience
similar delays in the future.
Our future success depends upon our ability to enhance existing
products, develop and introduce new products, satisfy customer requirements
and achieve market acceptance. This process is made more challenging by the
fact that a portion of the software development for our products is done by a
number of developers in the open source community who are not our employees
in this process. We may not successfully identify new product opportunities
and develop and bring new products to market in a timely and cost-effective
manner.
While we have no current agreements or negotiations underway, we have
in the past, and may in the future, make investments in complementary
companies, products or technologies or buy businesses, products or
technologies in the future. In the event of any future purchases, we will
face additional financial and operational risks, including:
- difficulty in assimilating the operations, technology and personnel
of acquired companies;
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<PAGE> 13
- disruption in our business because of the allocation of resources to
consummate these transactions and the diversion of management's
attention from our core business;
- difficulty in retaining key technical and managerial personnel from
acquired companies;
- dilution of our stockholders, if we issue equity to fund these
transactions;
- assumption of operating losses, increased expenses and liabilities;
- harm to our reputation, if the open source development community does
not approve of these transactions;
- our relationships with existing employees, customers and business
partners may be weakened or terminated as a result of these
transactions; and
- additional ongoing expenses associated with amortization of goodwill
and other purchased intangible assets.
We compete intensely with other software companies nationwide to
recruit and hire from a limited pool of qualified personnel. Because our
headquarters are not located in a major metropolitan area, many qualified
candidates may be unwilling to relocate to Westboro, MA and work for us. If
we cannot attract and hire additional qualified sales and marketing,
professional services and software engineering and development personnel, our
business results will suffer.
We intend to hire a significant number of additional research and
development, support, sales and marketing and other personnel during the
remainder of 2000. Competition for these individuals is intense, and we may
not be able to attract, assimilate or retain highly qualified personnel. Our
future success and ability to sustain our revenue growth also depend upon the
continued service of our executive officers and other key engineering, sales,
marketing and support personnel. Competition for qualified personnel in our
industry is extremely intense and characterized by rapidly increasing
salaries, which may increase our operating expenses or hinder our ability to
recruit qualified candidates.
We rely heavily on key personnel throughout the organization. In
particular, the loss of any of Jitendra Saxena, Alan Goldsworthy, Edward
Terino, Bernie Thompson, Barry Zane, and Craig Cervo or any of our staff of
research and development professionals could prevent us from successfully
executing our business strategies. Any such loss of technical knowledge and
industry expertise could negatively impact our success. Moreover, if we
should lose any of these critical employees or a group thereof, particularly
to a competing organization, we could lose market share, and the Applix brand
could be diminished.
As we expand our international operations, we will face a number of
additional challenges associated with the conduct of business overseas. For
example:
- we may have difficulty managing and administering a
globally-dispersed business;
- fluctuations in exchange rates may negatively affect our operating
results;
- we may not be able to repatriate the earnings of our foreign
operations;
- we have to comply with a wide variety of foreign laws with which we
are not familiar;
- we may not be able to adequately protect our trademarks overseas due
to the uncertainty of laws and enforcement in certain countries
relating to the protection of intellectual property rights;
-reductions in business activity during the summer months in Europe and
certain other parts of the world could negatively impact the operating
results of our foreign operations;
- export controls could prevent us from shipping our products into and
from some markets;
- multiple and possibly overlapping tax structures could significantly
reduce the financial performance of our foreign operations;
- changes in import/export duties and quotas could affect the
competitive pricing of our products and services and reduce our market
share in some countries; and
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<PAGE> 14
- economic or political instability in some international markets could
result in the forfeiture of some foreign assets and the loss of sums
spent developing and marketing those assets.
Risk Factors Related To The Internet
The success of our internet strategy depends in large part on the
continued development and maintenance of the infrastructure of the internet.
Because global electronic business and commerce and the online exchange of
information is new and evolving, we cannot predict with any certainty that
the internet will be a viable commercial marketplace in the long term. The
internet has experienced, and we expect it to continue to experience,
significant growth in the number of users and amount of traffic. If the
internet continues to experience an increased number of users, frequency of
use or increased bandwidth requirements of users, it may not be able to
support the demands placed upon it by this growth, and its performance and
reliability may suffer. Furthermore, the internet has experienced a variety
of outages and other delays as a result of damage to portions of its
infrastructure, and could face similar outages and delays in the future. Any
outage or delay could affect the level of internet usage, as well as the
volume of traffic on our web site. In addition, the internet could lose its
viability due to increased governmental regulation and delays in the
development or adoption of new standards and protocols to handle increased
levels of activity. If the necessary infrastructure, standards or protocols
or complementary products, services or facilities are not developed, or if
the internet does not become a viable commercial marketplace, our internet
strategy will not succeed.
Substantially all of our communications hardware and other hardware
related to our web site is located at our facilities, although we have
back-up and co-location hardware for our web site located at third-party
facilities. Fire, floods, hurricanes, tornadoes, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems. In addition, although we have implemented network security measures,
our servers are vulnerable to computer viruses, electronic break-ins, human
error and other similar disruptive problems that could adversely affect our
systems and web site. Although we try to prevent unauthorized access to our
systems, we cannot eliminate this risk entirely. We could lose revenue and
suffer damage to our reputation if our systems were affected by any of these
occurrences. Our insurance policies may not adequately compensate us for any
losses that may occur due to failures or interruptions in our systems. We do
not presently have a formal disaster recovery plan.
Risk Factors Related To Our eBusiness
The internet-based customer relationship management (iCRM) market is
new and is likely to change rapidly. The iCRM market encompasses software
solutions that enable companies to automate their employee-facing activities,
such as sales force automation, customer service, consumer business
analytics, and help desk support, as well as customer facing activities such
as email, voicemail, customer self-services, on-line chat, and ecommerce. Our
future success will depend on our ability to effectively and timely
anticipate changing customer requirements and offer products and services
that meet these demands. Potential customers may seek features that our
products do not have. As a result, we may need to develop these features, and
this may result in a longer sales cycle, increased research and development
expenses and reduced profit margins. In addition, the development of new or
enhanced iCRM products is a complex and uncertain process. We may experience
design, development, marketing and other difficulties that could delay or
prevent the introduction of new products and enhancements. For example, our
ability to introduce new products would be impaired if we cannot continue to
attract, hire, train and retain highly skilled personnel.
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<PAGE> 15
If we fail to compete successfully in the highly competitive and
rapidly changing iCRM market, we may not be able to succeed. We face
competition primarily from customer relationship management software firms,
emerging Internet customer interaction software vendors and computer
telephony software companies. We also face competition from traditional call
center technology providers, large enterprise application software vendors,
independent systems integrators, consulting firms and in-house IT
departments. Because barriers to entry into the software market are
relatively low, we expect to face additional competition in the future.
Many of our competitors can devote significantly more resources to the
development, promotion and sale of products than we can, and many of them can
respond to new technologies and changes in customer preferences more quickly
than we can. Further, other companies with resources greater than ours may
attempt to gain market share in the iCRM market by acquiring or forming
strategic alliances with our competitors.
We rely on systems integrators to promote, sell and implement our
solution. If we fail to maintain and develop relationships with systems
integrators, our revenues will likely suffer. We currently rely on systems
integrators such as Consist International, HiServe, Pinck Softech, Readmar,
JBA Software, Dynamic Decision, Revelwood, Armstrong Laing, Breakaway
Solutions, ONE Inc., and Webegg to recommend our products to their customers
and to install our products. If we are unable to rely on systems integrators
to implement our products, we will likely have to provide these services
ourselves, resulting in increased costs. As a result, our results of
operation may be harmed. In addition, systems integrators may develop, market
or recommend products that compete with our products. For this reason, we
must cultivate our relationships with these firms, and our failure to do so
could result in reduced sales revenues. Further, if these systems integrators
fail to implement our products successfully, our reputation may be harmed.
The timing of our revenues is difficult to predict in large part due to
the length and variability of the sales cycle for our products. Companies
often view the purchase of our products as a significant and strategic
decision. As a result, companies tend to take significant time and effort
evaluating our products. The amount of time and effort depends in part on the
size and the complexity of the deployment. This evaluation process frequently
results in a lengthy sales cycle, typically ranging from three to six months.
During this time we may incur substantial sales and marketing expenses and
expend significant management efforts. We do not recoup these investments if
the prospective customer does not ultimately license our product.
Risks Factors Related To The Linux Division
Although the Company has operated its Applixware business since 1989,
the Linux Division was established only recently, and it is difficult to
predict whether the Linux Division will be successful because it has a short
operating and sales history. The introduction of the Linux Division's primary
products and services, Applixware for Linux, Anyware, and CoSource.com began
in 1998. The revenue and income potential of this business and market is
unproven, and the limited operating history makes it difficult to evaluate
the Linux Division and its future prospects. We anticipate that the Linux
Division will make significant investments in its sales and marketing
programs, personnel recruitment, product development and infrastructure.
Therefore, it is likely that the Linux Division will continue to experience
losses on a quarterly and annual basis for the foreseeable future. The Linux
Division's prospects are subject to risks and difficulties encountered by
companies in the early stage of development, particularly companies in new
and rapidly evolving markets. The ability to address these risks depends on a
number of factors, which include the ability to:
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<PAGE> 16
- provide software that is reliable, cost-effective and able to
accommodate significant increases in the number of users and amount of
information;
- market the Applixware, Anyware, and CoSource.com products, as well as
other products and the Linux Division brand name effectively;
- continue to grow its infrastructure to accommodate new developments
in the opensource, ASP and internet software markets and increased
sales;
- hire, retain and motivate qualified personnel; and
- respond to competition.
The Linux Division may not be successful in meeting these challenges
and addressing these risks and uncertainties. If they are unable to do so,
their business will not be successful.
Although the Anyware product line accounted for less than 1% of our
product revenue in 1999, we expect that the Anyware products, and future
upgraded versions of these products, will account for a substantial portion
of the Linux Division's revenue for the foreseeable future. Our future
financial performance will depend on increasing acceptance of our current
Anyware products and on the successful development, introduction and customer
acceptance of new and enhanced versions of these products. Our business could
be harmed if we fail to deliver the enhancements to our products that
customers want.
If other versions of Linux-based office productivity suites are
developed and achieve market acceptance, customers may become less likely to
purchase our products, and our sales would suffer. Further, if free versions
of Linux-based office productivity suites are developed and achieve market
acceptance, our sales would suffer. In addition, we may be required to add
functionality to our Linux-based office productivity suite, which would
increase our operating expense. Competing products are currently available
from Corel, Sun (Star Office), ABISource and Gnomeric.
Many of our competitors can devote significantly more resources to the
development, promotion and sale of products than we can, and many of them can
respond to new technologies and changes in customer preferences more quickly
than we can. Further, other companies with resources greater than ours may
attempt to gain market share in the Linux market by acquiring or forming
strategic alliances with our competitors.
We have not demonstrated the success of our open source business model,
which gives our customers the right freely to copy and distribute our
software. No other company has built a successful open source business. Few
open source software products have gained widespread commercial acceptance
partly due to the lack of viable open source industry participants to offer
adequate service and support on a long-term basis. In addition, open source
vendors are not able to provide industry standard warranties and indemnities
for their products, since these products have been developed largely by
independent parties over whom open source vendors exercise no control or
supervision. If open source software should fail to gain widespread
commercial acceptance, we would not be able to sustain our revenue growth and
our business could fail.
If our plan to sell software services related to Anyware and
CoSource.com over the internet as a substitute for licensing our software
fails, it could have severe implications for our future prospects and
severely harm our business going forward. We plan to price these services on
a per-transaction basis or on a subscription basis to companies seeking to
avoid the up-front cost of licensing software. This business model is
unproven and represents a significant departure from the strategies
traditionally employed by us and other software vendors. Our efforts to
develop this business may require significant management time and attention.
In connection with this new business model, we will contract with third-party
service providers to perform many of the
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<PAGE> 17
necessary services, and we will be responsible for monitoring their
performance. If any service provider delivers inadequate support or service
to our customers, our reputation could be harmed. Even if our strategy of
selling software services over the internet is successful in attracting
customers, some of those internet customers may otherwise have bought our
software and services through our traditional licensing arrangements. Any
shift in potential license revenue to our new business model, which is
unproven and potentially less profitable, could harm our business.
Our failure to manage our growth could adversely affect our business.
The planned expansion of our operations will place a significant strain on
our management, financial controls, operations systems, personnel and other
resources. Our ability to manage our future growth, should it occur, will
depend in large part upon a number of factors including our ability to
rapidly:
- build and train our sales and marketing staff to create an expanding
presence in the evolving enterprise information portal market, and keep
them fully informed over time regarding the technical features, issues
and key selling points of our products;
- develop our customer support capacity as sales of our products grow,
so that we can provide customer support without diverting engineering
resources from product development efforts; and
- expand our internal management and financial controls significantly,
so that we can maintain control over our operations and provide support
to other functional areas within the Linux Division as the size of our
organization increases.
We license various Java-related software from Sun Microsystems, which
is the core technology upon which our Anyware product is based. In the event
that Sun were to discontinue or significantly alter its Java product, it
would impair our ability to provide product upgrades and develop new products
on a timely basis, if at all.
We will need significant additional funds, which we may be unable to
obtain on terms acceptable to us or at all. The expansion and development of
our business will require significant capital to fund our operating losses,
working capital needs and capital expenditures. During the next twelve
months, we expect to meet our cash requirements with existing cash and cash
equivalents. Our failure to raise sufficient funds may require us to delay or
abandon some or all of our development and expansion plans or otherwise
forego market opportunities. Future equity or debt financing may not be
available to us on favorable terms or at all. Our inability to obtain
additional capital on satisfactory terms may delay or prevent the expansion
of our business, which could cause our business and prospects to suffer.
For our business to succeed, we must effectively market our integrated
system and service solution. If our service organization does not meet the
needs or expectations of customers, we face an increased risk that customers
will purchase systems from other integrated solution providers or purchase
systems from one vendor and services from a Linux specialist.
The quality of our products and services is dependent on the efforts
and the expertise of members of the open source community. If we do not
continue to work productively with these members, our ability to provide
product enhancement and quality services will be harmed, which would harm our
revenues and compromise our reputation in the open source community and with
customers.
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<PAGE> 18
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
(B) REPORTS ON FORM 8-K
The Company has not filed any reports on Form 8-K during the quarter ended March
31, 2000.
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<PAGE> 19
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
(principal financial officer)
Date: May 10, 2000
-19-
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