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FORM 10-K

For Annual and Transitional Reports Pursuant to Sections 13 or 15(d)

Commission File No. 0-25040

APPLIX, INC.

Registrant’s telephone number, including area code: (508) 870-0300

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.0025 par value per share

      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 o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes o          No x

      The aggregate market value of Common Stock held by non-affiliates of the registrant was 18,909,527 based on the closing price of the Common Stock on the Nasdaq National Market on June 28, 2002.

      The number of shares of Common Stock outstanding as of March 21, 2003 was 12,516,235.

Documents Incorporated By Reference

Table of Contents

APPLIX, INC.

FORM 10-K

TABLE OF CONTENTS

      Applix TM1, Applix Integra, Applix Interactive Planning, and Applix Service Analytics are trademarks of Applix, Inc. All other trademarks and company names mentioned are the property of their respective owners. All rights reserved.

      Certain information contained in this Annual Report on Form 10-K is forward-looking in nature. All statements included in this Annual Report on Form 10-K or made by management of Applix, Inc. (“Applix” or the “Company”) and its subsidiaries, other than statements of historical facts, are forward-looking statements. Examples of forward-looking statements include statements regarding Applix’s future financial results, operation results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “would”, “expect”, “plan”, “anticipates”, “intend”, “believes”, “estimates”, “predicts”, “potential”, “continue”, or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section below entitled “Risk Factors”. These and many other factors could affect Applix’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applix or on its behalf. Applix does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

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PART I

Item 1.     Business

General

      Applix, Inc. (“Applix” or the “Company”) is a global provider of business intelligence (BI) and business performance management (BPM) solutions, focused on interactive planning, budgeting and analytics. These solutions enable customers to continuously manage and monitor performance across financial, operational, customer and organizational functions within the enterprise. More than 1,600 customers worldwide, including many Fortune 100 companies, use Applix’s adaptable, scalable and real-time solutions to manage their business performance and respond to the marketplace in real time. Incorporated in 1983 and headquartered in Westborough, MA, Applix maintains offices in North America, the U.K., Germany and the Pacific Rim.

      Historically, Applix also provided customer relationship management (CRM) solutions. In January 2003, Applix sold its CRM business to an affiliate of Platinum Equity, LLC in order to focus all of its resources on its core business in the BI and emerging BPM markets.

      In 2002, Applix was honored with several prestigious awards for its leading-edge technologies, including The DM Review 100 Award as a leading provider of business intelligence and analytics applications.

Industry Background

      The harsh economy of recent years has forced companies to adopt rigorous methods for assessing the impact that any future investments would have on their business. With reduced resources, many enterprises are pressed to make difficult decisions as to where to increase and decrease spending in their businesses. Although many companies are focused on incremental investments in IT projects and reductions in plans for cutting-edge technologies and large infrastructure initiatives. However, analysts predict that the BI and BPM markets will be among the few growth markets in 2003.

      The business intelligence market is a large and well-established market focused on leveraging the data collected in operational systems throughout an organization. BI is associated with the data warehousing market and involves the analysis of large amounts of historical data. The historical data is aggregated before it is analyzed and this aggregation process frequently requires several hours or days before any analyses can be performed. Often, the analyses are performed by a few highly trained individuals within an organization.

      The business performance management market is an emerging market that extends the capabilities of business intelligence solutions. BPM solutions tend to focus on proactive, rather than reactive, historical analyses and they rely on recently updated or real-time data feeds. BPM solutions also tend to involve data from across an organization and involve more diverse groups of users than do BI solutions. According to the Gartner Group, as of October 2002, there were no clear leaders in this market segment. Gartner also predicted that two categories of vendors will have the best chance for success in this emerging market: enterprise resource planning (ERP) vendors and BI vendors.

      Factors driving the growth in the need for BI and BPM solutions include increasingly fierce business competition, the need for financial transparency across the enterprise, the rapid explosion of data, and more decentralized decision-making. In November 2002, Gartner Group published results of its survey of corporations relating to the BI market. Over 62% of the respondents expected to increase their BI spending in 2003. While Gartner expected less than 10% of enterprises to have implemented corporate performance management solutions (Gartner’s term for BPM) by the end of 2002, they expect 40% of them to adopt such solutions by 2005. According to a January 2003 report by AMR Research, enterprise performance management (AMR’s term for BPM) spending is expected to be strong, supporting market growth of approximately 23%. By 2006, this market is predicted to grow to $12.2 billion annually, from $5.6 billion estimated in 2001. In a 2002 study of chief financial officers, CFO Research Services, in conjunction with

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      These strong projected growth rates validate Applix’s conviction that in today’s competitive corporate marketplace, companies can no longer succeed by solely automating their day-to-day transactions. Companies must also incorporate analytic processes into their daily operations to monitor and react to key business performance metrics such as customer retention and product profitability.

      Applix TM1 has over 15 years of success in the BI market. Applix is also well positioned to deliver BPM solutions, as evidenced by the growing number of customers who have selected Applix software solutions to maximize business performance. In 2002, more than 200 new customers selected Applix BI and BPM products, and revenues for those products increased by 12% over 2001.

Applix Products

      The Applix product family helps customers automate, analyze and optimize their operational and analytical business processes throughout their extended enterprises. The Applix product family consists of the platforms Applix TM1 and Applix Integra and the applications Applix Interactive Planning and Applix Service Analytics. The Applix family of products enable solutions including:

	•	sales analysis, product profitability, customer profitability and personnel planning applications,
	•	interactive planning, budgeting, and forecasting applications, and
	•	analytics, to manage and analyze all aspects of Service Desk and Help Desk operations.

      In October 2002, Applix introduced Applix Integra, which combined the Company’s application development platform with Applix TM1, to provide enterprise-wide workflow within a web enabled business planning solution. Applix Integra strengthens Applix TM1, enabling analytics solutions for both the back-and front office. Applix Interactive Planning and Applix Service Analytics applications, which are based on the Applix TM1 and Applix Integra platforms, were released in October 2002 and December 2002, respectively.

      The Applix product family represents one principal business segment.

      Applix’s analytics solutions enable companies to turn from reactive to proactive when interacting with their customers and prospects. Applix products enable companies with even the most commoditized products to reduce their customer defection rates, and create greater customer loyalty, all by delivering the high degree of service that more and more customers are beginning to expect.

      Applix and its partners also deliver standardized template solutions, customer-specific applications for planning and customer interaction applications for specific vertical markets. Modifiable template solutions enable customer requirements to be met quickly while retaining the high level of flexibility for which Applix products are renowned.

      Applix’s leading revenue product, Applix TM1, an on-line analytical processing (OLAP) engine, helps improve business performance by enabling effective, real-time decision making at all organization levels. Applix TM1 provides consistent reporting and analysis of data captured from across the extended enterprise.

      Applix TM1’s unique real-time approach to consolidating, viewing and even editing large volumes of multidimensional data is an undisputable differentiator in the OLAP market. With over 40,000 users, including many Fortune 100 companies, Applix TM1 has been one of the leading multi-dimensional databases for highly complex business and financial analytical applications for over fifteen years.

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      Applix TM1 solutions expand the scope of business planning processes to support continuously changing customer demands, operational requirements and evolving application needs in the new economy. It also allows for the quick and effortless integration of information from enterprise resource planning (ERP), financial systems, CRM, human resources, and other “legacy” databases in order to allow a business to run according to its supply of resources and its customer demand.

      Applix TM1 allows business users to access their critical data via Microsoft Excel, a Microsoft Windows client or the world wide web using Applix Integra technology and a browser. With its powerful client-server database engine and an elegant, easy-to-use interface, users are able to spend more time analyzing information and less time maintaining data.

      Applix TM1 provides the following benefits:

	•	Instantaneous response times: Because of Applix TM1’s ability to quickly load vast data sets into memory, it is superior to other products that force the customer to pre-calculate consolidations and derived values before anyone can view the data.
	•	Real-time multi-user read/write and what-if analyses: Because of Applix TM1’s memory-based approach, users can instantly view the results of any updates and what-if analyses they perform.
	•	Scalability: Applix TM1’s 64-bit capability, combined with its ability to support multiple servers, multiple cubes, multi-threaded processing and multi-user data updating, make it a logical choice for large-scale operations.
	•	Efficient use of system resources: Because Applix TM1 never resorts to pre-calculating customers’ data, it requires much less hardware and processing power than other products, which suffer from a common “data explosion” predicament.
	•	Rapid deployment: Applix TM1 typically builds complete applications for customers in a fraction of the time required by competing products.
	•	Familiar spreadsheet interface: Users access Applix TM1 features and capabilities directly from the familiar environment of Microsoft Excel.

      Applix Integra integrates real-time planning, analytics, business workflow, collaboration, exception alerting and forecasting functions. Applix Integra enables businesses to set their key performance indicators, plan and budget, and manage performance with all the planners in the business function. The flexible modeling within Applix TM1, which is incorporated in Applix Integra, also supports organizations’ complex and changing business models, a key demand in today’s mercurial business environment.

      Applix Integra’s benefits include:

	•	Real-time planning and analytics. With these capabilities, businesses can not only view the current situation at an enterprise level, but can perform what-if analyses against the data and receive the answers in real time, without having to wait for lengthy, back-office batch processes to answer hours or even days later.
	•	Dynamic business workflow. This enables a business to map its processes with Applix Integra’s escalation, notification, detection, and workflow capabilities. Easy-to-use “wizards” conform to complex business rules so that users can stay ahead of opportunities and issues.
	•	Complex business modeling. Applix Integra’s unique architecture of multi-cubes, rules, a real-time engine, and workflow allow a business to manage its complex business models.
	•	Actionable alerts. Timely alerts generated from a company’s analyses and business processes enable it to be proactive with respect to its business environment.

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	•	Integrated application and deployment platform. Applix Integra blends the best of the Company’s application development platform and the Applix TM1 platform, which means a business can easily develop and deploy Applix Integra solutions. Using Applix Integra’s XML-compliant development environment, a company can develop complex solutions with simple drag-and-drop objects.

Technology Platforms

      Applix products owe their adaptability to the robust platforms that power them. All of Applix’s software solutions are based on the Applix TM1 and Applix Integra technology platforms.

      The Applix TM1 technology platform provides 64-bit OLAP technology to analyze large and increasing volumes of multi-dimensional data. Applix TM1 includes a multi-tier, highly scalable engine, whose efficient, in-memory methods for building multidimensional cubes and calculating their values are fully leveraged by Applix TM1 software solutions. Its flexible, scalable products — designed to adapt to companies’ unique and competitive business processes — provide analysis, planning, measurement and response to changing customer requirements and business dynamics, all in real time.

      The Applix Integra technology platform provides a multi-tier, highly scalable architecture featuring an XML-compliant development environment named “Developer’s Studio”, a central data schema, a wizard-driven business rule generator, and other tools that drive application development.

      By integrating Applix BPM solutions with Applix Integra’s solid, full-featured technology platform, Applix is able to adapt its software to customers’ needs, rather than forcing customers to compromise their business processes by adapting to the software.

Marketing and Sales

      The Company focuses its marketing efforts on companies committed to improving business analytics at the departmental level and business performance management at the company-wide level. The Company markets its products to the financial services, banking, healthcare, pharmaceuticals, telecommunications, manufacturing, and consumer packaged goods industries. The Company believes that these industry sectors are, and will continue to be, some of the fastest growing sectors for its products. A key part of the Company’s marketing strategy is an emphasis on its high-performance Applix TM1 OLAP engine for financial modeling, real-time calculations, and continuous planning; the rapid deployment of its products; the lower total cost of ownership of its solutions; and the Company’s fully integrated applications.

      Applix’s BPM applications and its platforms are sold through a direct sales force and a network of value added resellers (VARs) and original equipment manufacturers (OEMs). The Company’s sales teams operate out of the Company’s offices in major metropolitan cities in the U.S. as well as its offices in the United Kingdom, Germany, and Australia. These direct selling efforts are supplemented both domestically and abroad with support from strategic marketing partners. While the sales cycle for Applix products varies substantially from customer to customer, it traditionally requires three to six months.

      The Company strongly believes that going forward its hybrid sales and marketing strategy, utilizing a direct sales force working closely with strategic resellers, is an important part of the Company’s future success. The Company also plans on continuing to establish strategic marketing relationships with leading hardware and software vendors and systems integrators within targeted industry sectors. This strategy is expected to support the Company in penetrating both new accounts within its existing markets and also entirely new market segments, while leveraging its sales and marketing investments.

Customer Training, Maintenance Support, and Professional Services

      The Company believes that its superior consulting services and customer support are a critical part of the Company’s sales and marketing efforts. Many of the Company’s customers use the Company’s products to develop and support “mission critical” applications, and the Company therefore recognizes that quality training, support and consulting services are especially important to its customers. In addition to in-

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      The Company’s in-house consultants assist in the sales process by working directly with potential customers, educating them as to the benefits of the Company’s products. In addition, the Company’s consultants work directly with customer personnel in both information technology departments and in the functional areas relevant to the application, to assist them in the planning and deploying of Applix solutions.

      Customers may elect to purchase a maintenance support plan for an annual fee that is generally 18% of the list license fee for covered products. Included in the maintenance support plans are product upgrades and interim fixes to reported problems. Maintenance support plan revenues accounted for approximately 71% of the Company’s professional services and maintenance revenue in 2002 compared to approximately 59% of professional services and maintenance revenue in 2001. In 2002, 86% of Applix customers elected to renew their maintenance agreements.

Product Development

      The Company believes strongly that the path to success is predicated upon constantly being at the forefront of technology and product innovation. With a strong commitment to the future, Applix has continued its long history of investing in product research and development. In 2002, Applix invested approximately $7.3 million, or 20% of total revenues, in product research and development (including capitalized software costs).

Competition

      The Company believes that it competes principally on the basis of product features and functionality (including cross-platform availability, interoperability, integration and extensibility), reliability, ease of use, supportability, and total costs of ownership (initial investment and on-going operating costs of the solution).

      The markets for the Company’s products are highly competitive and subject to rapid change.

      Software vendors are under increasing pressure to provide solutions that are easy to map to customers’ rapidly evolving business models and that integrate with other solutions. Customers have become more methodical in their methods of evaluating vendors’ solutions, and they often require that vendors substantiate their claims with case studies that demonstrate compelling return on investment benefits.

      Many of the Company’s competitors have significantly greater financial, technological, and marketing resources than the Company. No assurance can be given that the Company will be able to compete successfully against current and future competition or that the competitive pressures faced by the Company will not adversely affect its financial performance.

Proprietary Rights

      Applix relies primarily on a combination of copyright law and trade secret law to protect its proprietary technology. The Company has internal policies and systems to ensure limited access to, and the confidential treatment of, its trade secrets. The Company generally distributes its products under “shrink-wrap” software license agreements, which contain various provisions to protect the Company’s ownership and confidentiality of the underlying technology. The Company also requires its employees and other parties with access to confidential information to execute agreements prohibiting the unauthorized use or disclosure of the Company’s technology. Despite these precautions, it may be possible for a third party to misappropriate the Company’s technology or to independently develop similar technology. In addition, effective copyright and trade secret protection may not be available in every foreign country in which the Company’s products are distributed, and “shrink-wrap” licenses, which are not signed by the customer, may be unenforceable in certain jurisdictions.

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      Certain technologies used in or added onto the Company’s products are licensed from third parties. The Company generally pays royalties on such technologies on a percentage of revenue basis (the amount of which is not material to the Company). Applix believes that if the license for any such third-party technology were terminated, it would be able to develop such technology internally or license equivalent technology from another vendor without significant expense. If the Company’s right to distribute such third-party products were terminated, sales of the Company’s products could be adversely affected.

      The Company believes that, due to the rapid pace of technological innovation for software applications, the Company’s ability to establish and maintain a position of technology leadership in the industry is dependent more upon the skills of its development personnel than upon the legal protections afforded its existing technology.

      Applix is not engaged in any material disputes with other parties with respect to the ownership or use of the Company’s proprietary technology. However, there can be no assurance that other parties will not assert technology infringement claims or other claims against the Company in the future. The litigation of such a claim may involve significant expense and management time. In addition, if any such claims were successful, the Company could be required to pay monetary damages and may also be required to either refrain from distributing the infringing product or obtain a license from the party asserting the claim (which license may not be available on commercially reasonable terms).

Employees

      As of March 28, 2003, the Company had 142 total employees. Domestically, the Company had 91 employees, which include 31 employees in product research and development, 27 employees in sales and marketing, 14 employees in professional services, 5 employees in information systems, and 14 employees in finance, operation, administration and facilities. Internationally, the Company had 51 employees, which includes 32 employees in sales and marketing, 17 employees in professional services and 2 in finance. None of the Company’s employees are represented by a labor union, and the Company believes that its employee relations are good.

Item 2.     Properties

      The Company moved into new headquarters (49,920 square feet) in November 2001, located at 289 Turnpike Road in Westborough, Massachusetts. The lease has an original twelve-year term, which will expire in November 2013, with one 5-year option to extend the term. The Company also leases smaller facilities in several metropolitan areas within the United States and the United Kingdom, Germany and Australia. The Company believes that its existing facilities are adequate for its current needs and that suitable additional or substitute space will be available as needed.

Item 3.     Legal Proceedings

      Not applicable.

Item 4.     Submission of Matters to a Vote of Security Holders

      Not applicable.

Executive Officers of the Registrant

      The following table sets forth the names, ages and positions of all executive officers of the Company.

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      Mr. Mahoney was elected interim President and Chief Executive Officer of Applix on February 27, 2003. Mr. Mahoney has also been a director of the Company since October 1992. Mr. Mahoney served as Chief Executive Officer of Verbind, Inc., a provider of real-time behavioral analysis and event triggering technology, from May 2001 until February 2003. Prior to joining Verbind, Mr. Mahoney served as Chairman of the Board of Directors of LeadingSide, Inc. (formerly Dataware Technologies, Incorporated), an e-business solutions provider, from February 2000 to May 2001, and President and Chief Executive Officer of LeadingSide from January 1999 to February 2000. LeadingSide filed for bankruptcy protection in April 2001. Mr. Mahoney served as President and Chief Executive Officer of Sovereign Hill Software, Inc., a collaborative knowledge discovery software provider, from January 1998 to December 1998, when it merged with Dataware Technologies. He served as president of Falcon Group Consulting, a consulting firm, from May 1997 to January 1998. Mr. Mahoney served as Chairman of the Board and Chief Executive Officer of ePresence, Inc. (formerly Banyan Systems, Inc.), a networking software company, from 1983 until May 1997.

      Mr. Hilger was elected as Chief Financial Officer and Treasurer on September 25, 2001. Mr. Hilger joined the Company in November 1999 as the Vice President of Operations and Planning. From 1997 to 1999, Mr. Hilger was Vice President of Corporate Finance for Cahners Business Information, a billion dollar business-to-business web content company. From 1988 to 1997, he worked at Houghton-Mifflin Company, where he served as Corporate Manager of Financial Planning and Analysis and later as Divisional Business Manager.

      Mr. Cervo joined the Company in October 1992 as Vice President, Research & Development and was elected Vice President of Product Development in October of 1994 and Chief Technology Officer in March 2001.

      There are no family relationships among any of the executive officers.

PART II

Item 5.     Market for Registrant’s Common Stock and Related Stockholder Matters

      The Company’s common stock is listed on the Nasdaq National Market (“Nasdaq”) under the symbol “APLX”. The table below reflects the range of high and low sales price per share of common stock, as reported on Nasdaq for the periods indicated.

      The Company has never paid any cash dividends on its common stock. The Company currently intends to retain any earnings for future growth and therefore does not anticipate paying any cash dividends on its common stock in the foreseeable future.

      The approximate number of holders of record of the Company’s common stock on March 18, 2003 was 193. This number does not include shareholders for whom shares are held in a “nominee” or “street” name.

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Item 6.     Selected Financial Data

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW OF THE COMPANY’S OPERATIONS

      The Company is a global provider of business intelligence (BI) and business performance management (BPM) solutions, focused on interactive planning, budgeting and analytics. Historically, the Company also provided customer relationship management (CRM) solutions. The Company sold its CRM business in January 2003. The Company’s operating results reflect the CRM business for all periods presented.

      In December 2000, the Company committed to a plan to dispose of the operations of its VistaSource business. On March 30, 2001, the Company completed the sale of the VistaSource business unit to Real Time International, Inc. (“Real-Time”), a subsidiary of Parallax Capital Partners, LLC, for $1,300,000 and a 19% equity interest in Real-Time. The results of operations including revenue, operating expenses, other income and expense, and income taxes of the VistaSource business unit for 2001 and 2000 were reclassified in the accompanying statements of operations as a discontinued operation. The Company’s balance sheet at December 31, 2002 reflects no remaining liabilities from its discontinued operation and its

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      On March 31, 2001, the Company acquired all of the outstanding capital stock of Dynamic Decisions Pty Limited, its primary Australian reseller, to improve its market presence and increase the Company’s sales in the Pac Rim region, for total cost of approximately $5,867,000 consisting of $5,640,000 in maximum cash consideration to be paid and 100,000 shares of the Company’s common stock which had a fair market value of $227,000. The acquisition was accounted for under the purchase method of accounting, and the purchase price was allocated based on the estimated fair value of the assets acquired and liabilities assumed. An intangible asset, acquired customer relationships of $1,500,000, was recorded based on the fair value of the asset at the time of acquisition and is being amortized on a straight-line basis over its estimated useful life of six years. The excess of the purchase price over the fair value of the net assets acquired of $934,000 was recorded as goodwill. Goodwill is no longer amortized under the provision of SFAS 142.

      Per the terms of the purchase and sale agreement, total maximum cash consideration relating to the purchase of Dynamic Decisions was $5,150,000 payable in installments over a maximum of 30 months beginning on July 1, 2001. During 2001, the Company had paid $1,267,000 of the maximum cash consideration, which was accounted for as purchase price. The purchase price exceeded the fair market value of the net assets purchased due in part to the revenues, profitability and expected future cash flow from the established customer base. In addition, the Company made four additional cash payments in 2002 totaling $2,155,000, which have been accounted for as compensation expense within operating expenses as the payments were contingent upon the continued employment of two key executives of Dynamic Decisions. The remaining cash payments of approximately $2,400,000 will continue to be accounted for as compensation expense within operating expense as they are contingent upon the future employment of the two key executives. The results of operations of Dynamic Decisions are included in the financial statements from the date of acquisition.

      In December 2002, the Company sold the stock of its Dutch subsidiary, a remote sales office, for $362,000 and recorded a net gain of $141,000. The transaction included substantially all of the subsidiary’s assets and liabilities and an amendment to the existing distribution agreement between the Company and the purchaser to provide the purchaser the exclusive rights to resell the Company’s CRM products in the Netherlands.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and assumptions on expected or known trends or events, historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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      Management believes the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of its consolidated financial statements.

     Revenue Recognition

      Revenue from software licensing and service fees is recognized in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, and SOP 98-9 “Software Revenue Recognition with Respect to Certain Transactions”. Substantially all of the Company’s product license revenue is earned from licenses of off-the-shelf software requiring no customization. Accordingly, the Company recognizes revenue from software licensing when all of the following criteria are met: (1) persuasive evidence of an arrangement exists via a signed agreement or purchase order; (2) delivery has occurred including authorization keys; (3) the fee is fixed or determinable representing amounts that are due unconditionally with no future obligations under customary payment terms; and (4) collectibility is probable.

      Revenue from consulting and training is recognized at the time the services are rendered. For contracts with multiple obligations (e.g., deliverable and undeliverable products, support obligations, consulting, and training services), the Company allocates revenue to each element of the contract based on vendor specific objective evidence (VSOE) of the fair value of the elements. The Company has determined fair value based upon prices it charges customers when these elements are sold separately. Maintenance contracts are generally sold with the initial licenses. The related maintenance revenue is deferred based upon VSOE, which is determined by the renewal price of the annual maintenance contract, and is recognized ratably over the maintenance contract period. The Company recognizes consulting and training service revenues, including those sold with license fees, as the services are performed based upon their established VSOE. The Company determines the amount of revenue to allocate to the licenses sold with services or maintenance using the “residual method” of accounting. Under the residual method, the Company allocates the total value of the arrangement first to the undelivered elements based on their VSOE and the remainder to the delivered element, the software license.

      In those instances in which indirect channel partners provides certain support services under the maintenance support contracts to the end-user customer, the Company accounts for amounts received in these arrangements in accordance with Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent.” The Company must make certain judgments in these types of arrangements including whether the Company or the indirect channel partners is in the principal obligor in the arrangement with the end-user customer.

     Accounts Receivable and Bad Debt

      The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company continuously monitors collections and payments from its customers and determines the allowance for doubtful accounts based upon analysis of aged accounts receivable, historical experience and specific customer collection issues. An allowance for doubtful accounts is provided for accounts which management believes may not be collected due to a customer’s financial circumstance (e.g. bankruptcy), and for all accounts which are over 180 days past due, absent evidence which supports their collectibility. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, or the Company’s overdue receivables balance were to increase significantly, additional allowances may be required. The Company generally invoices the customer in the same local currency as to be paid by the customer. The Company does not hedge its foreign customer receivables due to the relatively small exposure from foreign currency rate fluctuations.

     Software Development Costs

      The Company accounts for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Marketed.” SFAS No. 86

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     Accounting For Cost-Based Investments

      In assessing potential impairment for cost-based investments, the Company considers various factors including but not limited to a company’s financial performance, anticipated funding needs, comparable companies’ performance, and volatility inherent in the external market for these investments. If these factors are not supportive of the carrying value of the investment, the Company may record impairment charges not previously recognized to reflect management’s best estimate of recoverability. With the divestment of its VistaSource business unit, the Company retained a cost-based investment in Real-Time International, Inc. that was deemed to have no value at the date of the transaction. The Company also has a cost-based investment in TurboLinux, Inc., which was determined to be impaired, resulting in recognition of a $1,250,000 impairment loss in 2001.

     Goodwill and Other Intangible Assets and Related Impairment

      During 2001, the Company completed its acquisition of Dynamic Decisions and recorded goodwill in the amount of $934,000 associated with the excess purchase price over the fair value of the net assets acquired and identifiable intangible assets of $1,500,000 assigned to identified customer relationships. The amounts assigned to the identifiable assets and liabilities acquired in connection with the acquisition were based on estimated fair values at the date of acquisition. The fair values were determined by the Company’s management, based in part upon information supplied by the management of the acquired business and a valuation prepared by an independent appraiser. The valuation of identified customer relationships has been based primarily upon future cash flow projections discounted to present value using a risk-adjusted discount rate.

      In assessing the recoverability of the Company’s goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors including legal factors, market conditions and operational performance of its acquired businesses to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. If events change and the Company has overestimated the economic life of its intangible asset, the Company will begin to amortize the remaining unamortized carrying value of this asset over the newly estimated life, which may result in additional amortization expense.

     Restructuring

      During 2002 and 2001, the Company recorded charges in connection with its restructuring programs. These charges include estimates pertaining to employee separation costs and the settlements of contractual obligations resulting from the Company’s actions. Although the Company does not anticipate significant changes, the actual costs may differ from these estimates, which would result in adjustments to the original estimates.

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     Deferred Taxes

      The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. At December 31, 2002 and December 31, 2001, the Company’s deferred tax assets were fully reserved. In the event the Company were to determine in the future that it would be able to realize its deferred tax assets in excess of its net-recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

RESULTS OF OPERATIONS

Revenues

      Total revenues for the year ended December 31, 2002 were $36,596,000, a 7% decrease from revenue of $39,405,000 for the year ended December 31, 2001. The overall revenues decrease was primarily due to the decline in the global economy, the continued slowdown in information technology spending and weakness in the CRM market. The weakness in the CRM market was partially offset by the strengthening of the Company’s position in the business analytics market.

     Software Licenses

      The following table sets forth the software license revenues by market:

      Software license revenue in 2002 of $16,050,000 was approximately 13% lower than 2001 software license revenues of $18,406,000. Software license revenues decreased primarily due to the continued weakness in the CRM market. The decline was predominately in Europe. The overall decrease in CRM software license revenues was partially offset by the Company’s strength in BPM and BI revenues, which increased 12% to $11,114,000 in 2002 from $9,928,000 a year earlier. As a result of the success of its BPM

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      The following table sets forth the software license revenues by sales office geography:

      Domestic software license revenue increased 8% to $7,288,000 in 2002 from $6,776,000 in 2001. International software license revenue decreased 25% to $8,762,000 in 2002 from $11,630,000 in 2001. The decrease was primarily due to the decline in the global economy especially in the European market and the continued slowdown in CRM market.

      The Company markets its products through its direct sales force and indirect partners. The Company continues to focus on complementing its direct sales force with indirect channel partners, which consist of original equipment manufacturers (“OEMs”), value added resellers (“VARS”), independent distributors and sales agents.

     Professional Services and Maintenance

      Professional services and maintenance revenues decreased 2% to $20,546,000 in 2002 as compared to $20,999,000 in 2001. Maintenance revenues increased 18% to $14,674,000 in 2002 compared to $12,387,000 in 2001, while consulting and training revenues decreased 32% to $5,872,000 in 2002 compared to $8,612,000 in 2001. Consulting and training revenues declined in 2002 as a result of the Company’s focus on more selective consulting engagements, greater reliance on external authorized Applix partners and the increase in business analytics implementations, which require fewer consulting hours to implement the solutions. The Company’s maintenance revenues have continued to increase both sequentially and on a year-over-year basis, due to an improvement in the customer base satisfaction with the software and support and their election to renew their support agreements. The Company expects the maintenance revenues as a component of total professional service and maintenance revenues to continue to increase due to strong customer renewal rates, the greater use of authorized Applix partners for professional services and the increase in business analytics implementations.

      The following table sets forth the professional services and maintenance revenues generated by domestic and international market:

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Cost of Revenues

(A) Percentage represent:

	(i)	Cost of software license revenues as a percentage of software license revenues;
	(ii)	Cost of professional services revenues as a percentage of professional service revenues;
	(iii)	Cost of maintenance revenues as percentage of maintenance revenues.

     Cost of Software License Revenues

      Cost of software license revenues consist primarily of third-party software royalties, cost of product packaging, documentation materials, order fulfillment employees and amortization of capitalized software costs. The amortization of capitalized software costs begins upon general release of the software to customers. Cost of software license revenues increased 68% to $2,040,000 in 2002, compared to $1,214,000 for 2001. As a percentage of software license revenues, cost of software license revenues increased to 13% for 2002 as compared to 7% in 2001. Cost of software license revenues increased primarily due to an increase in amortization of capitalized software development costs related to the Company’s new product development and third-party royalties. The increase as a percentage of software license revenues was also due to the decline in software license revenues.

     Cost of Professional Services and Maintenance Revenues

      The cost of professional services and maintenance revenues consists primarily of personnel salaries and benefits, facilities and system costs incurred to provide consulting, training and customer support and payments to indirect channel partners to provide first level support to end-user customers, which is generally amortized over the 12-month maintenance support period of the underlying contract with the end-user customer. Cost of professional services and maintenance revenue decreased 27% to $9,989,000 in 2002 from $13,657,000 in 2001. Cost of professional services and maintenance revenue as a percentage of professional services and maintenance revenue was 49% in 2002 as compared to 65% in 2001. The improvement in professional services and maintenance revenue gross margin is due to higher utilization of the Company’s service professionals, and a change in revenue mix from lower margin consulting revenues to higher margin maintenance revenues.

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Operating Expenses

     Sales and Marketing

      Sales and marketing expenses consist primarily of bad debt expense, salaries, commissions and bonuses earned by sales and marketing personnel, field office expenses, travel and entertainment, promotional and advertising expenses and the cost of the Company’s international operations, which are sales operations. Sales and marketing expenses decreased 29% to $15,311,000 in 2002 from $21,671,000 in 2001. Sales and marketing expenses were 42% of total revenues in 2002 compared to 55% in 2001. The decrease, which was partially offset by an increase in bad debt expense, was primarily due to the Company’s cost control initiatives and the decrease in sales commissions that resulted from a decrease in the Company’s software license revenues. In response to the weakening global economy, the Company reduced its expenditures in 2002. The Company’s cost control initiatives included decreased staffing levels and reducing advertising, travel and other discretionary expenditures. The Company expects to continue to closely monitor discretionary expenditures and to continue its cost control initiatives.

     Product Development

      Product development expenses include costs associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries and benefits, consulting costs and the cost of software development tools. The Company capitalizes product development costs during the required capitalization period once the Company has reached technological feasibility through general release of its software products. The Company considers technological feasibility to be achieved when a product design and working model of the software product have been completed and the software product is ready for initial customer testing. Capitalized software development costs are then amortized on a product-by-product basis over the estimated product life of between one to two years and are included in the cost of software license revenue. Product development costs not meeting the requirements for capitalization are expensed as incurred. Applix product development utilizes a total management (TQM) approach to software development and participates in a self-management process measurement using Carnegie Mellon’s Software Engineering Institute’s Capability Maturity Model (self-assessment only).

      Product development decreased 17% to $5,699,000 in 2002 from $6,848,000 in 2001. The decrease is primarily due to an increase of the capitalization of product development costs as a result of the development for the new Applix Integra technology platform and Integra related applications, which was ready for general release in the third quarter of 2002, and capitalization of costs for related applications in the fourth quarter of 2002. The capitalization of product development costs was $1,553,000 in 2002 compared to $844,000 in 2001. The Company anticipates that it will continue to devote substantial

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     General and Administrative

      General and administrative expenses consist primarily of salaries and occupancy costs for administrative, executive and finance, information technology (“IT”) and human resource personnel. General and administrative expenses from continuing operations increased 17% to $5,249,000 in 2002 from $4,484,000 in 2001. The increase was primarily due to increased rent and related costs of the Company’s new corporate headquarters, legal and auditing fees, and corporate insurance premiums. As a percentage of total revenues, general and administrative expenses were 14% in 2002 compared to 11% in 2001. The increase in general and administrative expenses as a percentage of total revenues in 2002 as compared to 2001 was due in part to the decrease in total revenues.

     Compensation Expenses and Amortization of Acquired Intangibles

      Compensation expenses and amortization of acquired intangibles consist primarily of contingent consideration cash payments relating to the Company’s March 2001 acquisition of Dynamic Decisions and the amortization of an identified intangible asset, consisting of customer relationships, associated with the acquisition. Per the terms of the purchase and sale agreement, total maximum cash consideration relating to the purchase of Dynamic Decisions was $5,150,000 payable in installments over a maximum of 30 months beginning on July 1, 2001. During 2001, the Company had paid $1,267,000 of the maximum cash consideration, which was accounted for as purchase price. In 2002, the Company made contingent cash payments of $2,155,000, which have been accounted for as compensation expense as the payments were contingent upon the continued employment of two key executives of Dynamic Decisions. The remaining cash payments of approximately $2,400,000 will continue to be accounted for as compensation expense, as they are contingent upon the future employment of the two key executives. In 2002 and 2001, the amortization expense for customer relationships associated with the Dynamic Decisions acquisition was $252,000 and $186,000, respectively.

     Write down of Notes Receivable

      In September 2000, the Company sold 256,002 shares of common stock to certain company executives. The purchases of such shares were funded by loans from the Company to the executives evidenced by full-recourse promissory notes due and payable on July 31, 2005. Interest on the promissory notes is calculated on the unpaid principal balance at a rate of 6% per year, compounded annually until paid in full. In the event that the executive sells any shares prior to July 31, 2005, the net proceeds from such sale shall become immediately due and payable without notice or demand. In the event the executive leaves the Company, voluntarily or for cause, the loan shall become immediately due and payable. Repayment terms were extended to the original maturity date for several employees who subsequently left the Company. The aggregate principal amount of the notes totaled $1,120,000 at December 31, 2002 and 2001. These loans are secured by the common stock purchased. Certain of these loans are and have been past due for some time, and subsequent to December 31, 2002, in connection with a severance arrangement, the Company forgave one of the loans. As a result of the foregoing, consistent with EITF 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation 44, for accounting purposes only the Company has characterized all of the notes as non-recourse. In this regard, the accounting for these notes has been treated as a repurchase of stock and the issuance of options. As of December 31, 2002, the Company recorded a charge of $964,000 for the difference between the amounts due on the loans, including accrued interest of $128,000, and the fair value of the underlying stock at December 31, 2002. The Company may incur compensation charges if the fair value of the underlying stock appreciates over the original purchase price, plus interest. These loans continue to be full recourse, and the Company intends to enforce collection of those amounts that are outstanding.

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     Restructuring Expense

      In 2001 and 2002, the Company adopted several plans of restructuring aimed at reducing operating costs company-wide, strengthening the Company’s financial position, and reallocating resources to pursue the Company’s future operating strategies.

      In the second quarter of 2001, the Company adopted a plan of restructuring aimed at reducing operating costs company-wide. In connection with this plan, 28 non-management employees, primarily sales, marketing, and administrative personnel, and 2 executive level employees, were terminated. The Company’s restructuring plan also included the closure of the Company’s sales office in France. As a result of the restructuring plan, the Company recorded a restructuring charge of $512,000. The restructuring charge consisted of $449,000 for severance costs and $63,000 for the loss on disposal of the Company’s French subsidiary, which was sold on June 30, 2001. In connection with the sale, the Company paid $100,000 to the purchaser, which is included in the restructuring charge. The restructuring charge was fully paid as of December 31, 2002.

      In the third quarter of 2001, the Company adopted a plan of restructuring to further reduce operating costs company-wide. In connection with this plan, the Company recorded an additional restructuring charge of $438,000 for severance related to the termination of 26 non-management employees, primarily sales, marketing, and administrative personnel. Subsequent to the initial recording of the charge, adjustments totaling $90,000 were recorded, reducing the charge to $348,000. The restructuring charge was fully paid as of December 31, 2002.

      In the fourth quarter of 2001, the Company adopted a plan of restructuring to further reduce operating costs. The plan included the further reduction of headcount of one senior level executive and 16 non-management employees, primarily professional services, sales, and administrative personnel. The plan also included the closure of several domestic offices and the consolidation of space within one European office and the abandonment of leasehold improvements and support assets associated with these locations, which were removed from service shortly after the implementation of the plan. As a result of the restructuring plan, the Company recorded a charge of $840,000, which included $92,000 in non-cash charges relating to impaired assets. In the second quarter of 2002, the Company negotiated an early lease cancellation for a certain office lease for an amount less than the remaining lease obligation, which reduced the charge by $140,000. The restructuring charge was fully paid as of December 31, 2002.

      In the second quarter of 2002, the Company adopted a plan of restructuring to further reduce operating costs. The plan included the further reduction of headcount of five non-management employees, four sales people and one administrative employee. The plan also included the closure of two foreign offices. As a result of the restructuring plan, the Company recorded a charge of $103,000 comprising of $74,000 for workforce reduction and $29,000 for office closures. The restructuring charge was fully paid as of December 31, 2002.

      In the third quarter of 2002, the Company adopted a plan of restructuring to further reduce operating costs. The plan included a reduction of headcount of twenty-one non-management and three management employees, primarily professional services, sales, marketing, and customer support personnel. The plan also included the closure of one foreign office. As a result of the restructuring plan, the Company recorded a charge of $398,000, which is comprised of $372,000 for workforce reduction, $20,000 related termination costs, and $6,000 for office closure. During the fourth quarter of 2002, the Company recorded an adjustment to increase this charge by $20,000. In addition, the Company adjusted the amounts within workforce, office closures and other contractual obligations as changes in estimates but did not change the total amount of the charge except as disclosed. These changes are not significant. The remaining unpaid balance of $71,000 as of December 31, 2002 is expected to be paid in full during the first quarter of 2003.

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      The components of the restructuring cash charges, as well as the Company’s 2002 payments made against accruals are detailed as follows:

Non-Operating Income/Expenses

      Interest and other income (expense), net decreased to an expense of $47,000 in 2002 from other income of $290,000 in 2001. This decrease is primarily attributable to the amortization of deferred financing costs relating to the Company’s credit facilities, a decrease in interest income from a decline in the average cash and cash equivalents balance, a decrease in interest rates, the impact of foreign currency fluctuations, and transaction fees associated with the sale of one of its investments.

      In December 2002, the Company sold the stock of its Dutch subsidiary, a remote sale office, for $362,000 and recorded a net gain of $141,000. The transaction included substantially all of the subsidiary’s assets and liabilities and an amendment to the existing distribution agreement between the company and the purchaser to provide the purchaser the exclusive rights to resell the Company’s CRM products in the Netherlands.

      In December 2001, the Company determined that its cost-based investment in TurboLinux, Inc. of $1,250,000 was impaired. This assessment was based on the Company’s review of operating results for TurboLinux and the Company’s anticipated future cash flows from its investment. Accordingly, the investment was written down to its estimated net realizable value of zero.

      The provision for income taxes represents the Company’s state and foreign income tax obligations and amortization of a deferred tax liability. The Company recorded a provision for income taxes of $222,000 in 2002 as compared to a provision of $558,000 in 2001. This decrease is primarily attributable to lower taxable income in certain foreign jurisdictions and a benefit of $131,000 recorded in 2002 for the amortization of a deferred tax liability relating to the Company’s acquisition of Dynamic Decisions.

     Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

      Total revenue from continuing operations decreased to $39,405,000 in 2001 from $40,239,000 in 2000. Software license revenue in 2001 of $18,406,000 was approximately 22% lower than 2000 at $23,735,000 and represented 47% of revenue from continuing operations for 2001 and 59% of revenue from continuing

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      Professional services and maintenance revenue from continuing operations increased 27% to $20,999,000 in 2001 from $16,504,000 in 2000 and represented 53% and 41% of total revenue from continuing operations for 2001 and 2000, respectively. Domestic professional services and maintenance revenue from continuing operations increased 23% to $7,380,000 in 2001 from $6,002,000 in 2000. International professional services and maintenance revenue increased 30% to $13,619,000 as compared to $10,502,000 in 2000. The increase was primarily due to increased maintenance revenue as a result of the improved renewal rates for maintenance from existing customers. Maintenance revenues increased $4,340,000 to $12,387,000 in 2001 from $8,047,000 in 2000. Maintenance revenue continues to grow as a higher percentage of existing customers are choosing to extend maintenance support contracts.

      Gross margin from continuing operations increased to 62% in 2001 from 61% in 2000. Software license revenue gross margin from continuing operations increased to 93% in 2001 from 92% in 2000. Professional services and maintenance revenue gross margin from continuing operations increased to 35% in 2001 from 17% in 2000, due to a change in revenue mix from lower margin consulting revenues to higher margin maintenance revenues.

      Selling and marketing expenses from continuing operations decreased 15% to $21,671,000 in 2001 from $25,580,000 in 2000. Selling and marketing expenses from continuing operations decreased as a percentage of total revenue to 55% in 2001 from 64% in 2000. Decreases in selling and marketing expenses are related primarily to completion of the corporate rebranding and remarketing effort that was initiated in 2000. The decrease also reflects the declining staffing levels associated with corporate restructuring initiatives including reduction in headcount during 2001.

      Product research and development expenses from continuing operations decreased 9% to $6,848,000 in 2001 from $7,502,000 in 2000. The Company’s investment in product research and development represented 17% and 19% of total revenue from continuing operations for 2001 and 2000, respectively. The Company’s product research and development costs decreased slightly due to productivity gains recognized during 2001. The development costs reflect continued investments in features and functionality for the core Applix TM1 and Applix CRM products and the development of the product platform supporting Applix Integra.

      General and administrative expenses from continuing operations increased 4% to $4,484,000 in 2001 from $4,292,000 in 2000. A decrease in staff costs as a result of restructuring actions was more than offset by an increase in the amortization expense from acquisition activity. General and administrative expenses from continuing operations remained at 11% of revenue in 2001 and 2000.

      The Company initiated three restructuring actions in 2001 involving strategic decisions and continues to re-evaluate the current state of on-going businesses. These restructuring changes are discussed under “Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.”

      Net interest income from continuing operations decreased to $290,000 in 2001 from $1,153,000 in 2000 due to lower interest rates earned on investments and a decrease in the Company’s average cash position.

      As a result of net operating losses incurred in 2001 and 2000 and after evaluating the Company’s anticipated performance over its normal planning horizon, the Company has provided a full valuation allowance for its net operating loss carryforwards and other net deferred tax assets for federal and state tax purposes as of December 31, 2001. The provision in 2000 includes $7,832,000 relating to the establishment of a valuation allowance against the deferred tax asset that was established following the decision to dispose of VistaSource and based on the Company’s historical operating losses from continuing operations.

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      The Company derives its liquidity and capital resources primarily from the Company’s cash flow from operating activities and from its working capital. The Company’s cash and cash equivalent balance was $9,322,000 and $9,278,000 as of December 31, 2002 and 2001, respectively, which included restricted cash of $933,000 and $1,050,000 as of 2002 and 2001, respectively. The Company’s day’s sales outstanding (“DSO”) in accounts receivable was 53 days as of December 31, 2002, which reflected a 6-day decrease in the Company’s DSO from the write-off of certain accounts receivable, and 74 days as of December 31, 2001. The Company has a non-recourse accounts receivable purchase facility. The Company’s non-recourse accounts receivable purchase arrangement allows the Company from time to time to sell qualifying accounts receivable to the bank, in an aggregate amount of up to $2 million outstanding, at a purchase price equal to the balance of the accounts less a discount rate and a fee. On or about December 31, 2002, the Company factored certain accounts receivable to the bank pursuant to the purchase arrangement in the amount of $905,000. The Company sold $729,000 in accounts receivable on or about December 31, 2001. Certain of those accounts receivables sold qualified as a sale and decreased the Company’s DSO by approximately 6 days as of December 31, 2002 and by 3 days as of December 31, 2001. The Company does not have any off-balance-sheet arrangements with unconsolidated entities or related parties, and as such, the Company’s liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities.

      In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, the Company recognized a sale for those accounts receivable balances for which there was no future obligation to the customer, in the amount of $2,323,000 and $361,000 for years ended December 31, 2002 and 2001. The Company has concluded that these accounts have been legally isolated, and accordingly, these amounts have been excluded from the Company’s accounts receivable balance at December 31, 2002 and 2001. The loss from the sale of the financial assets and retained interest for cash collection were not material to the Company’s results of operations or financial position. At December 31, 2002 and 2001, the Company had recorded a net amount of $237,000 and $368,000, respectively, as financing transactions and recognized as a liability because the sale of these receivables do not qualify to be recorded as a sale under SFAS No. 140.

      Cash provided by the Company’s operating activities was $1,658,000 in, 2002 compared to cash used in operating activities of $3,225,000 in 2001. The net loss of $5,774,000 for the year ended December 31, 2002 was partially offset by the increase in operating assets and liabilities of $3,604,000, which was primarily due to an increase in accrued liabilities of $1,303,000 and deferred revenue of $2,247,000 offset by a net decrease in accounts receivables, including the sale of receivables, of $313,000.

      Cash used in investing activities totaled $1,871,000 in 2002 as compared to cash used in investing activities of $2,233,000 in 2001. The increase in cash used in investing activities resulted from the increase in capitalized software costs of $1,553,000 and property and equipment expenditures of $680,000, which were partially offset by the proceeds received from the sale of the Company’s Dutch subsidiary of $362,000.

      Cash provided by financing activities totaled $258,000 in 2002, which consisted of net payments of $131,000, from the accounts receivable factoring arrangement for the amounts owed to the bank at December 31, 2002 which were not accounted for a sale, and proceeds from issuance of stock under stock plans of $389,000. This compares to total cash provided in financing activities of $1,105,000 in 2001.

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      The Company had two revolving credit facilities with a bank, providing for loans and other financial accommodations, totaling approximately $5 million. The facilities expired on December 5, 2002. The Company is evaluating the replacement of these facilities.

      In connection with the Company’s acquisition of Dynamic Decisions, the Company expects to pay out additional contingent cash consideration of $2,400,000 in four quarterly installments between January 1, 2003 and October 1, 2003.

      As of December 31, 2002, the Company had future cash commitments for the cash payments pertaining to its obligation under its non-cancelable leases. The Company’s future minimum operating lease payments for its office facilities and certain equipment are:

      The Company has no commitments or specific plans for any significant capital expenditures in the next 12 months.

      The Company currently expects to attempt to sublease space at its headquarters. In the event that space is sublet and not used by the Company, dependent on market rates at the time, the Company could incur a loss. If all space the Company expects to sublease were vacated and were subleased, the Company could incur a loss of $1,750,000, which is based upon the aggregate difference over the remaining eleven-year term between the Company’s committed lease rate and the estimated market rates at December 31, 2002 of a prospective sublease arrangement.

      On January 21, 2003, the Company completed the sale of certain of its assets relating to its customer relationship management software solutions (the “CRM Business”) to iET Acquisition, LLC (“iET”), a wholly-owned subsidiary of Platinum Equity, LLC, for a purchase price of $5,750,000 in cash (the “Purchase Price”) and the assumption of approximately $3.0 million in net assumed liabilities. Excluded from the sale were approximately $2.8 million in net accounts receivable generated from the sale of CRM products prior to the transaction. iET paid $4,250,000 of the Purchase Price in cash at the initial closing and paid an additional $1,500,000 in cash on March 17, 2003 upon completion of the closing of certain of the assets of the Company’s German subsidiary, Applix GmbH. The purchase price is subject to possible post closing adjustments. The disposition was effected pursuant to an Asset Purchase Agreement, dated as of January 21, 2003 (the “Purchase Agreement”), by and between iET and the Company, on behalf of itself and its subsidiaries.

      As a result of the transactions contemplated by the Purchase Agreement, Applix sold substantially all of the assets used or held for use in connection with the CRM Business and assigned to iET certain specified liabilities relating to the CRM Business. In addition to tangible assets, the Company also sold certain intangible assets, principally the Company’s intellectual property used or held for use exclusively or primarily in the CRM Business.

      The Company has incurred losses from continuing operations for the last several years. As of December 31, 2002, the Company had an accumulated deficit of $43.8 million. Operating losses and negative cash flows may continue because of costs and expenses relating to brand development, marketing and other promotional activities, continued development of the Company’s information technology infrastructure, expansion of product offerings and development of relationships with other businesses. Management’s plans include increasing revenue and generating positive cash flows from operations. The

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     New Accounting Pronouncements

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and nullified Emerging Issues Task Force (“EITF”) Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The adoption of this statement will only have an impact on the accounting for future exit or disposal activities.

      In December 2002, the FASB issued SFAS No. 148 (“SFAS No. 148”), “Accounting for Stock Based Compensation — Transition and Disclosure”. SFAS No. 148 is an amendment of SFAS No. 123 (“SFAS No. 123”), “Accounting for Stock Based Compensation”, to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has accounted for stock-based employee compensation using the intrinsic value method under APB No. 25 and has adopted the amendments to the disclosure provisions of SFAS No. 148.

      In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also requires additional disclosure by a guarantor in its interim and annual financial statements about its obligations under certain guarantees. The initial recognition and measurement provisions of FIN 45 are applicable for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company believes that the adoption of FIN 45 will not have a material impact on its financial position or results of operations.

      In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” which is an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46 addresses consolidation by business enterprises of variable interest entities and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable

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RISK FACTORS

      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;
	•	the timing and magnitude of our capital expenditures, including costs relating to the expansion of our operations;
	•	the acquisition and retention of key partners;
	•	changes in generally accepted accounting policies, especially those related to the recognition of software revenue; and
	•	new government legislation or regulation.

      We typically receive a majority of our orders in the last month of each fiscal quarter because our customers often delay purchases of products until the end of the quarter and our sales organization and our individual sales representatives strive to meet quarterly sales targets. As a result, any delay in anticipated sales is likely to result in the deferral of the associated revenue beyond the end of a particular quarter, which would have a significant effect on our operating results for that quarter. In addition, most of our operating expenses do not vary directly with net sales and are difficult to adjust in the short term. As a result, if net sales for a particular quarter were below expectations, we could not proportionately reduce operating expenses for that quarter, and, therefore, that revenue shortfall would have a disproportionate adverse effect on our operating results for that quarter. If our operating results are below the expectations of public market analysts and investors, the price of our common stock may fall significantly.

      We have devoted a substantial amount of resources to the development and marketing of our new Applix Integra product. We believe that our future financial performance will be dependent in large part on the success of Applix Integra. Because Applix Integra just became available for commercial shipments on October 21, 2002, we cannot yet assess its market acceptance or predict with accuracy the amount of revenue it will generate.

      We have incurred losses from continuing operations for the last several years. Operating losses and negative cash flows may continue because of costs and expenses relating to brand development, marketing

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      We believe, based upon our current business plan, that our current cash and cash equivalents, funds expected to be generated from operations and available credit lines should be sufficient to fund our operations as planned for at least the next twelve months. However, we may need additional funds sooner than anticipated if our performance deviates significantly from our current business plan or if there are significant changes in competitive or other market factors. If we elect to raise additional operating funds, such funds, whether from equity or debt financing or other sources, may not be available, or available on terms acceptable to us.

      The business performance management and business intelligence markets, including in interactive planning, budgeting and analytics are characterized by rapid technological change, frequent new product enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. Our products could be rendered obsolete if products based on new technologies are introduced or new industry standards emerge.

      Enterprise computing environments are inherently complex. As a result, we cannot accurately estimate the life cycles of our products. New products and product enhancements can require long development and testing periods, which requires us to hire and retain technically competent personnel. Significant delays in new product releases or significant problems in installing or implementing new products could seriously damage our business. We have, on occasion, experienced delays in the scheduled introduction of new and enhanced products and may experience similar delays in the future.

      Our future success depends upon our ability to enhance existing products, develop and introduce new products, satisfy customer requirements and achieve market acceptance. We may not successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner.

      We have in the past, and may in the future, buy businesses, products or technologies. In the event of any future purchases, we will face additional financial and operational risks, including:

	•	difficulty in assimilating the operations, technology and personnel of acquired companies;
	•	disruption in our business because of the allocation of resources to consummate these transactions and the diversion of management’s attention from our core business;
	•	difficulty in retaining key technical and managerial personnel from acquired companies;
	•	dilution of our stockholders, if we issue equity to fund these transactions;
	•	assumption of increased expenses and liabilities;
	•	our relationships with existing employees, customers and business partners may be weakened or terminated as a result of these transactions; and
	•	additional ongoing expenses associated with write-downs of goodwill and other purchased intangible assets.

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      We rely heavily on key personnel throughout the organization. We have engaged David Mahoney, one of our directors, to serve as interim President and Chief Executive Officer, and we are currently seeking a permanent President and Chief Executive Officer. The transition of these positions to Mr. Mahoney and any transition to a permanent President and Chief Executive Officer may result in the distraction of management and a delay in our ability to execute our business strategies. The loss of any of our other members of management, or any of our staff of sales and development professionals, could prevent us from successfully executing our business strategies. Any such loss of technical knowledge and industry expertise could negatively impact our success. Moreover, the loss of any critical employees or a group thereof, particularly to a competing organization, could cause us to lose market share, and the Applix brand could be diminished.

      Due to the Company’s significant international operations, we face a number of additional challenges associated with the conduct of business overseas. For example:

	•	we may have difficulty managing and administering a globally-dispersed business;
	•	fluctuations in exchange rates may negatively affect our operating results;
	•	we may not be able to repatriate the earnings of our foreign operations;
	•	we have to comply with a wide variety of foreign laws;
	•	we may not be able to adequately protect our trademarks overseas due to the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property rights;
	•	reductions in business activity during the summer months in Europe and certain other parts of the world could negatively impact the operating results of our foreign operations;
	•	export controls could prevent us from shipping our products into and from some markets;
	•	multiple and possibly overlapping tax structures could significantly reduce the financial performance of our foreign operations;
	•	changes in import/export duties and quotas could affect the competitive pricing of our products and services and reduce our market share in some countries; and
	•	economic or political instability in some international markets could result in the forfeiture of some foreign assets and the loss of sums spent developing and marketing those assets.

      If we fail to compete successfully in the highly competitive and rapidly changing business performance management and business intelligence markets, we may not be able to succeed. We face competition primarily from business intelligence firms. We also face competition from 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 customer analytics and business planning markets by acquiring or forming strategic alliances with our competitors.

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      We rely in part on systems integrators to promote, sell and implement our solutions. If we fail to maintain and develop relationships with systems integrators, our operating results will likely suffer. In addition, if we are unable to rely on systems integrators to install and implement our products, we will likely have to provide these services ourselves, resulting in increased costs. As a result, our results of operation may be harmed. In addition, systems integrators may develop, market or recommend products that compete with our products. Further, if these systems integrators fail to implement our products successfully, our reputation may be harmed.

      The timing of our revenue is difficult to predict in large part due to the length and variability of the sales cycle for our products. Companies often view the purchase of our products as a significant and strategic decision. As a result, companies tend to take significant time and effort evaluating our products. The amount of time and effort depends in part on the size and the complexity of the deployment. This evaluation process frequently results in a lengthy sales cycle, typically ranging from three to six months. During this time we may incur substantial sales and marketing expenses and expend significant management efforts. We do not recoup these investments if the prospective customer does not ultimately license our product.

      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 Applix and our customers, errors may be found in our products after commencement of commercial shipments. If errors are discovered, we may have to make significant expenditures of capital to eliminate them and yet may not be able to successfully correct them in a timely manner or at all. Errors and failures in our products could result in a loss of, or delay in, market acceptance of our products and could damage our reputation and our ability to convince commercial users of the benefits of our products.

      In addition, failures in our products could cause system failures for our customers who may assert warranty and other claims for substantial damages against us. Although our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. Our insurance policies may not adequately limit our exposure to this type of claim. These claims, even if unsuccessful, could be costly and time-consuming to defend.

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      As a multinational corporation, the Company is exposed to market risk, primarily from changes in foreign exchange rates. These exposures may change over time and could have a material adverse impact on the Company’s financial results. Most of the Company’s international sales through its subsidiaries are denominated in foreign currencies. Relative to foreign currency exposures existing at December 31, 2002, a 10% unfavorable movement in foreign exchange rates would not expose the Company to significant losses in earnings or cash flows. To date, foreign currency fluctuations have not had a material effect on the Company’s operating results.

      At December 31, 2002, the Company held $9,322,000 in cash equivalents, including $933,000 of restricted cash, consisting primarily of money market funds. Cash equivalents are classified as available for sale and carried at fair value, which approximates cost. A hypothetical 10% increase in interest rates would not have a material impact on the fair market value of these instruments due to their short maturity and the Company’s intention that all the securities will be sold within one year. There have been no significant changes in cash equivalents since December 31, 2002.

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Item 8.     Financial Statements and Supplementary Data