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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission File Number 0-25040

APPLIX, INC.

289 Turnpike Road, Westborough, Massachusetts 01581
(Address of principal executive offices)

(508) 870-0300
(Registrant’s telephone number)

Indicate by check 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 by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

     As of November 7, 2003, there were 12,866,557 shares of the Registrant’s common stock, $0.0025 par value, outstanding.

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APPLIX, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2003

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     Applix and TM1 are registered trademarks of Applix, Inc. 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 Quarterly Report on Form 10-Q is forward-looking in nature. All statements included in this Quarterly Report on Form 10-Q 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, operating 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 “Factors that May Affect Future Results”. 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. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Applix, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Applix, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Applix, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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APPLIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

     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, which include Applix TM1 and Applix Integra technology and related applications, such as Applix TM1 Web. The Company’s products represent one principal business segment, which Applix reports as its continuing operations. Historically, the Company also provided customer relationship management (CRM) solutions. The Company sold certain assets relating to its CRM software solutions (the “CRM Business”) in the first quarter of 2003 (See Note 7). The Company’s operating results reflect the CRM Business up through the sale of the business, which occurred on January 21, 2003, followed by a March 17, 2003 closing relating to the German CRM operations.

     On March 30, 2001, the Company sold its VistaSource business unit, previously reported as the Linux Division. This unit has been reported as a discontinued operation for all periods presented (See Note 10).

2. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) including instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K/A, as amended, for the year ended December 31, 2002.

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Revenue Recognition

     The Company generates revenues mainly from licensing the rights to use its software products and providing services. The Company sells products primarily through a direct sales force, indirect channel partners and Original Equipment Manufacturers (“OEMs”). The Company accounts for software revenue transactions in accordance with Statement of Position 97-2 (“SOP 97-2”) “Software Revenue Recognition,” as amended. Revenues from software arrangements are recognized when:

	•		Persuasive evidence of an arrangement exists, which is typically when a non-cancelable software license agreement has been signed, or purchase order has been received;
	•		Delivery has occurred. If the assumption by the customer of the risks and rewards of its licensing rights occurs upon the delivery to the carrier (FOB Shipping Point), then delivery occurs upon shipment (which is typically the case). If assumption of such risks and rewards occurs upon delivery to the customer (FOB Destination), then delivery occurs upon receipt by the customer. In all instances delivery includes electronic delivery of authorization keys to the customer;
	•		The customer’s fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties;

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	•		Collectibility is probable; and
	•		Vendor specific objective evidence of fair value exists for all undelivered elements, typically maintenance and professional services.

     The Company also uses the residual method under SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue, assuming all other conditions for revenue recognition have been satisfied. Substantially all of the Company’s product revenue is recognized in this manner. If the Company cannot determine the fair value of any undelivered element included in an arrangement, the Company will defer revenue until all elements are delivered, until services are performed or until fair value of the undelivered elements can be objectively determined. In circumstances where the Company offers significant and incremental fair value discounts for future purchases of other software products or services to its customers as part of an arrangement, utilizing the residual method, the Company defers the future value of the discount and recognizes such discount to revenue as the related product or service is delivered.

     As part of an arrangement, end-user customers typically purchase maintenance contracts and sometimes professional services from the Company. Maintenance services include telephone and Web based technical support as well as rights to unspecified upgrades and enhancements, when and if the Company makes them generally available. Substantially all of the Company’s software license revenue is earned from perpetual licenses of off-the-shelf software requiring no modification or customization. Therefore, professional services are deemed to be non-essential to the functionality of the software and typically are for implementation planning, loading of software, training, building simple interfaces and running test data.

     In those instances the services are deemed to be essential to the functionality of the software, both license and service revenues are recognized together on a percentage of completion basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.

     Revenues from maintenance services are recognized ratably over the term of the maintenance contract period, which is typically one year, based on vendor specific objective evidence of fair value. Vendor specific objective evidence of fair value is based upon the amount charged when maintenance is purchased separately, which is typically the contract’s renewal rate.

     Revenues from professional services are generally recognized based on vendor specific objective evidence of fair value when: (1) a non-cancelable agreement for the services has been signed or a customer’s purchase order has been received; and (2) the professional services have been delivered. Vendor specific objective evidence of fair value is based upon the price charged when these services are sold separately and is typically an hourly rate for professional services and a per class rate for training. Revenues for consulting services are generally recognized on a time and material basis as services are delivered. Based upon the Company’s experience in completing product implementations, it has determined that these services are typically delivered within 3 months or less subsequent to the contract signing.

     The Company’s license arrangements with its end-user customers and indirect channel partners do not include any rights of return or price protection, nor do arrangements with indirect channel partners include any sell-through contingencies. In those instances where the Company has granted a customer rights to when-and-if available additional products, the Company recognizes the arrangement fee ratably over the term of the agreement.

     Generally, the Company’s arrangements with end-user customers and indirect channel partners do not include any acceptance provisions. In those cases in which significant uncertainties exist with respect to customer acceptance or in which specific customer acceptance criteria are included in the arrangement, the Company defers the entire arrangement fee and recognizes revenue, assuming all other conditions for revenue recognition have been satisfied, when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance by the customer. The Company’s arrangements with indirect channel partners and end-user customers do include a standard warranty provision whereby the Company will use reasonable efforts to cure material nonconformity or defects of the software from the Company’s published specifications. The standard warranty provision does not provide the indirect channel partners or end-user customer with the right of refund. In very limited instances, the Company has granted the right to refund for an extended period if the arrangement is terminated because the product does not meet the Company’s published technical specifications, and the Company is unable to reasonably cure the nonconformity or defect. Generally, the Company determines that this warranty provision is not an acceptance provision and it therefore has been accounted for as a warranty in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5 “Accounting For Contingencies” (“SFAS 5”).

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     At the time the Company enters into an arrangement, the Company assesses the probability of collection of the fee and the payment terms granted to the customer. For end-user customers and indirect channel partners, the Company’s typical payment terms are due within 30 days of invoice date. However, in those cases where payment terms are greater than 30 days, the Company does not recognize revenue from the arrangement fee unless the payment is due within 90 days. If the payment terms for the arrangement are considered extended (greater than 90 days), the Company defers revenue under these arrangements and such revenue is recognized, assuming all other conditions for revenue recognition have been satisfied, when the payment of the arrangement fee becomes due.

     In those instances in which indirect channel partners provide first level maintenance services to the end-user customer and the Company provides second level maintenance support to the indirect channel partner, the Company accounts for amounts received in these arrangements in accordance with Emerging Issues Task Force (“EITF”) 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”). In initial and renewal years for which the Company receives a net fee from the indirect channel partner to provide second level support to the indirect channel partner, such amount is recorded as revenue over the term of the maintenance period at the net amount received since the Company does not collect the fees from the end-user customer, it does not have latitude in establishing the price paid by the end-user customer for maintenance services, and it does not have the latitude to select the supplier providing first level support. However, in those circumstances where the Company renews maintenance contracts directly with the end-user customers, receives payment for the gross amount of the maintenance fee, has the ability to select the supplier for first level support, and the Company believes that it is the primary obligor for first level support to the end customer, the Company records revenue for the gross amounts received. In such circumstances, the Company remits a portion of the payment received to the indirect channel partner to provide first level support to the end-user customer, and such amounts are capitalized and amortized over the maintenance period.

Concentrations of Credit Risk, Accounts Receivable and Allowance for Doubtful Accounts

     The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash, cash equivalents and trade receivables. The Company maintains cash and cash equivalents with high credit quality financial institutions and monitors the amount of credit exposure to any one financial institution.

     The Company extends credit to its customers in the normal course of business, resulting in trade receivables. The Company’s normal credit terms are 30 days.

     The Company performs continuing credit evaluations of its customers’ financial condition and although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances. 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 180 days past due, absent evidence which supports their collectibility.

Intangible Asset

     Amortization expense related to an intangible asset, the customer relationships acquired in the Dynamic Decisions Pty Limited (“Dynamic Decisions”) acquisition (See Note 6), totaled $62,500 and $187,500 for the three and nine months ended September 30, 2003 and 2002, respectively. The estimated future annual amortization expense for this intangible asset remaining as of September 30, 2003 is as follows:

Impairment of Long-Lived Assets

     The Company tests goodwill for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), which requires goodwill to be tested for impairment at the reporting unit level at least annually and more frequently upon occurrence of certain events, as defined by SFAS 142. The Company completed its annual testing for impairment in the third quarter of 2003 and determined that no such impairment exists as of the third quarter of 2003. Goodwill is tested for impairment annually in a two-step process. First, the Company determines if the fair value of its “reporting unit” exceeds the carrying amount of the reporting unit. If the fair value does not exceed the carrying amount, goodwill of the reporting unit is potentially impaired, and the Company

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must then measure the impairment loss by comparing the “implied fair value” of the goodwill, as defined by SFAS 142, to its carrying amount. The fair value of the reporting unit is estimated using the Income Approach, a present value technique.

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company evaluates the recoverability of long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment loss is measured as the difference between the carrying value and the fair value of the impaired asset and charged to expense in the period identified. Fair value is determined by either a quoted market price or a value determined by a discounted cash flow technique, whichever is more appropriate under the circumstances. The rates that would be utilized to discount net cash flows to net present value would take into account the time value of money and investment risk factor. Management believes that no such events have occurred.

Software Development Costs

     In accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” (“SFAS 86”), software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. 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.

     The Company evaluates the net realizable value of capitalized software on an ongoing basis, relying on a number of factors including demand for a product, operating results, business plans and economic projections. In addition, the Company considers non-financial data such as market trends, product development cycles and changes in management’s market emphasis. During the three and nine months ended September 30, 2003, the Company had $387,000 and $682,000, respectively, in revenue for the products to which the capitalized software development costs relate. The Company believes that based on future anticipated sales, the carrying value of the capitalized software of approximately $771,000 does not exceed its net realizable value as of September 30, 2003. The Company will continue to evaluate the net realizable value of the capitalized software based primarily on actual and forecasted sales and record a charge to write-down the carrying value if factors indicate that the carrying value will not be realizable.

     There were no software development costs that qualified for capitalization during the three and nine months ended September 30, 2003. Amortization expense related to software development cost was $230,000 and $275,000, for the three months ended September 30, 2003 and 2002, respectively. Amortization expense related to software development costs was $689,000 and $728,000 for the nine months ended September 30, 2003 and 2002, respectively.

Income Taxes

     Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using enacted income tax rates and laws that will be in effect when the temporary differences are expected to reverse. A valuation allowance is established against net deferred tax assets if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

     For the three and nine months ended September 30, 2003, the Company recorded a provision for income taxes of $0 and $764,000, respectively. The nine months ended September 30, 2003 includes $355,000 for United States (federal and state) and foreign income taxes related to the Company’s sale of its CRM Business.

     Additionally, during 2003, the Company evaluated its ability to utilize its net operating loss carry forwards and the impact of Section 382 of the United States (“U.S.”) Internal Revenue Code of 1986, as amended (“Section 382”) including use of such loss carry forwards to offset its U.S. gain on the sale of the U.S. portion of its CRM Business. Section 382 provides annual limitations to the use of net operating loss carry forwards against future taxable income in the event of a change of ownership. The Company has completed a full analysis of these ownership changes and does not believe that the changes in ownership will increase the Company’s income tax expense as a result of a limitation on its ability to use its net operating loss carry forwards.

     The Company has provided for amounts due in various foreign tax jurisdictions. Judgment is required in determining the Company’s worldwide income tax expense provision based upon the evaluation of the estimated forecasted results for the year as a whole. Uncertainties may arise as a consequence of cost reimbursement arrangements among related entities. Although management

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believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.

Translation of Foreign Currencies

     The Company considers the functional currency of its foreign subsidiaries to be the local currency, and accordingly, the financial statements of the foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of foreign subsidiary financial statements are reported on the balance sheet in accumulated other comprehensive income (loss) within stockholders’ equity (See Note 4). The Company has determined that its intercompany receivables and payables balances with its foreign subsidiaries are short-term in nature and as a result, the Company re-measures these balances at each period end and records any related foreign currency gains and losses in its consolidated statements of operations. The short-term intercompany balances with its foreign subsidiaries are denominated in the Euro, Australian dollar, Swiss franc and British pound. For the three and nine months ended September 30, 2003, foreign exchange gains recorded in the consolidated statements of operations totaled $64,000 and $723,000, respectively, primarily as a result of the strengthening Euro, British pound and Australian dollar against the U.S. dollar. For the three and nine months ended September 30, 2002, foreign exchange gains and losses recorded in the consolidated statements of operations were not material.

     The Company occasionally enters into foreign currency forward contracts that economically hedge gains and losses generated by the re-measurement of certain assets and liabilities denominated in a foreign currency. These foreign exchange contracts are entered into in the ordinary course of business, and accordingly, are not speculative in nature. The Company typically hedges intercompany and receivable balances for periods of 90 days or less. The changes in the fair value of these undesignated hedges are recognized in the statements of operations immediately as an offset to the changes in fair value of the asset or liability being hedged. The Company entered into one hedging contract in 2002 and did not have any open hedging contracts as of September 30, 2003. For the three and nine months ended September 30, 2002, realized and unrealized gains and losses were not material.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions in these financial statements relate to, among other items, the useful lives of fixed assets, capitalized software costs and their realizability, intangible assets, domestic and foreign income tax liabilities, valuation of deferred tax assets, the allowance for doubtful accounts, accrued liabilities, deferred revenue and certain post closing adjustments and transaction costs related to the sale of the Company’s CRM Business.

Stock-Based Compensation

     The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations, and follows the disclosure-only requirements under SFAS 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”). APB No. 25 provides that compensation expense relative to the Company’s employee stock options is measured based on the intrinsic value of the stock options at the measurement date. Accordingly, no stock-based employee compensation cost is reflected in net income (loss), for options granted under the plans with an exercise price equal to the market value of the underlying common stock on the date of grant. If compensation expense had been recorded consistent with SFAS No. 123 based on the fair value of stock awards at the date of grant, the Company’s net income (loss) would have been adjusted to the pro forma amounts presented below (in thousands, except for per share data):

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3. Net Income (Loss) Per Share

     Net income (loss) is computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Dilutive net income (loss) is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect, if any, of potential common shares, which consists of stock options. The following table sets forth the computation of basic and diluted net income (loss) per share.

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     Diluted loss per share is the same as basic loss per share for three and nine months ended September 30, 2002 and for the three months ended September 30, 2003 since the effect of stock options would be anti-dilutive. Anti-dilutive options for the nine months ended September 30, 2003 represent options that have an exercise price greater than the average fair market value of the Company’s common stock for the period.

4. Comprehensive Income (Loss)

     Components of comprehensive income (loss) include net income (loss) and certain transactions that have generally been reported in the consolidated statements of stockholders’ equity. Other comprehensive income (loss) includes foreign currency translation adjustments.

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5. Segments and Geographical Information

     The Company and its subsidiaries are principally engaged in the design, development, marketing and support of the Company’s Business Intelligence and Business Performance Management software products, which it considers to be a single industry segment. Substantially all of the Company’s revenues result from the licensing of its software products and related professional services and maintenance services. Financial information provided to the Company’s key operating decision makers is accompanied by disaggregated information about revenues and expenses by geographic region for purposes of making operating decisions and assessing each geographic region’s financial performance.

6. Acquisition

     On March 31, 2001, the Company acquired all of the outstanding common stock of Dynamic Decisions, its primary Australian reseller, to improve its market presence and increase the Company’s sales in the Pacific Rim region. The total cost of $5,867,000 consists of maximum cash consideration of $5,150,000, transaction costs of $490,000, and 100,000 shares of the Company’s common stock, which had a fair market value of $227,000 at the date of acquisition. 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 $935,000 was recorded as goodwill. Goodwill is no longer amortized under the provision of SFAS 142.

     Per the terms of the share purchase agreement, the total maximum cash consideration relating to the purchase of Dynamic Decisions was $5,150,000 payable in 10 installments over a maximum of 30 months beginning on July 1, 2001. Of the 10 installments, two of the installments totaling $1,267,000 were guaranteed, paid in 2001 and accounted for as purchase price. The remaining eight installments were contingent upon the employment of the two key employees, who were former shareholders of Dynamic Decisions, and therefore were accounted for as compensation expenses within operating expenses. These eight installments were expensed ratably on a straight-line basis over the employees’ contractual employment period, which commenced on April 1, 2001 and ended on March 31, 2003. The amounts that are recognized as expenses and accrued are translated into U.S. dollars from Australian dollars, resulting in foreign currency exchange fluctuations to the Company’s financial statements. Of these contingent payments, the Company made three cash payments totaling $1,855,000 in 2003 and four cash payments totaling $2,153,000 in 2002. As of September 30, 2003, there is one remaining contingent payment totaling $681,000, which has been accrued and will be paid in the fourth quarter of 2003.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition.

7. Gain from Sale of CRM Business

     In the first quarter of 2003, the Company completed the sale of the CRM Business to iET Acquisition, LLC (“iET”), a wholly-owned subsidiary of Platinum Equity Holdings, LLC for $5,750,000 in cash consideration, of which $225,000 was paid back and an additional amount of $262,000 was accrued for as of September 30, 2003 to iET for net working capital adjustments and $3,552,000 in net assumed liabilities. The sale excluded approximately $2,800,000 in net accounts receivable generated from the sale of CRM products and services.

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     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 the completion of the closing of certain assets of the Company’s Germany subsidiary, Applix GmbH. During the period of the initial closing and completion of the Company’s Germany subsidiary closing, Applix GmbH continued to resell the CRM software products sold to iET, and to provide professional services and maintenance support under a reseller’s agreement between the Company and iET.

     The Company’s results for the three-month period ended September 30, 2003 do not include any CRM related license, professional services and maintenance revenues. The Company’s results for the nine months ended September 30, 2003 included CRM license revenues of $253,000 and CRM professional services and maintenance revenues of $999,000.

     The Company has recorded a net gain before tax of $7,910,000, which includes net cash consideration of $5,525,000 and $3,552,000 of net liabilities assumed by iET less transaction costs of $1,167,000. The purchase price is subject to certain post closing adjustments relating to the net working capital as set forth in the Asset Purchase Agreement between the Company and iET, dated January 21, 2003.

8. Commitments and Contingencies

     On February 8, 2002, a customer of the Company’s divested business unit filed a claim in Germany against the Company’s German subsidiary, Veriteam GmbH (which was formerly known as VistaSource). The claim alleges a breach of contract pertaining to software sold and implemented by the divested business unit on behalf of the Company. The customer is seeking repayment for the cost of the software and related services of approximately $800,000. The claim was dismissed by the German court on June 10, 2003 and the decision is final.

     From time to time, the Company is a party to routine litigation and proceedings in the ordinary course of business. The Company is not aware of any current or pending litigation to which the Company is or may be a party that the Company believes could materially adversely affect its consolidated results of operations or financial condition.

     As of September 30, 2003, the Company had future cash commitments for the payments pertaining to its obligation under its non-cancelable leases. The Company’s future minimum lease payments for its operating lease payments for its office facilities and certain equipment are:

     The Company is currently evaluating its space needs on a company-wide basis and 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 was vacated and subleased, the Company could incur a loss of $1,900,000, which is based upon the aggregate difference over the remaining ten and a quarter years term between the Company’s committed lease rate and the estimated market rates at September 30, 2003 of a prospective sublease arrangement, utilizing a discount rate of 8.5% which the Company determined to be its estimated incremental borrowing rate. In the event that market rates change or other events occur relating to the Company’s evaluation of its options regarding its lease arrangement, the loss could be materially different. The Company currently has full access to all its leased facilities and has not recorded any charges related to potential lease abandonment. Such charges will only be recorded if and when the Company commits to actions, which will result in vacating space.

     On June 16, 2003, the Company announced that it is the subject of an SEC investigation. The Company is cooperating fully with the SEC in this matter.

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9. Restructuring Charges

     In 2002, the Company adopted two 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 2002, the Company adopted a plan of restructuring to reduce operating costs. The plan included the 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 was paid in full during the first quarter of 2003.

     The components of the restructuring cash charges, as well as the Company’s 2003 payments made against accruals are detailed as follows:

10. Discontinued Operation

     In December 2000, the Board of Directors 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 was reclassified as a discontinued operation. The Company’s results of operations for the quarters ended September 30, 2003 and 2002 included $106,000 and $43,000, respectively, in expenses primarily relating to certain defense costs incurred from a claim filed against VistaSource (See Note 8) and legal and accounting costs associated with winding down the VistaSource business. For the nine months ended September 30, 2003 and 2002, expenses related to discontinued operations were $162,000 and $128,000, respectively.

11. Non-recourse Sale of Receivables

     The Company has a non-recourse accounts receivable purchase arrangement with a certain bank, which 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. During 2003, the Company did not sell any of its accounts receivables.

     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 resulting in a sale of accounts receivable of $668,000 for the three months ended December 31, 2002. In accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of

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Liabilities” (“SFAS 140”), the Company recognized a sale for those account receivable balances for which there was no future obligation to the customer in the amount of $668,000 for the three months ended December 31, 2002. The Company concluded that these accounts have been legally isolated, and accordingly, these amounts were excluded from the Company’s accounts receivable balance at December 31, 2002. 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, the Company recorded a net amount of $237,000 of the $905,000 as a financing transaction and recognized this amount as a liability because the sale of these receivables did not qualify to be recorded as a sale under SFAS 140.

12. Restricted Cash

     On August 1, 2001, the Company established a $1,050,000 irrevocable standby letter of credit in connection with executing an agreement to lease certain office space, which commenced on November 1, 2001. The irrevocable standby letter of credit is collateralized by a restricted cash deposit of $1,050,000, which is drawn down over the term of the lease, provided the Company has not defaulted on the office lease. The irrevocable standby letter of credit and underlying security deposit (restricted cash) requirement of $1,050,000 was reduced to $933,000 as of November 1, 2002 and will be reduced starting the first day of the second lease year as follows:

     At the end of the sixth year, the Company can reduce the letter of credit to $125,000 or substitute $125,000 in cash in lieu of the letter of credit.

13. Executive Termination Costs

     On February 27, 2003, the Company entered into a Severance Agreement with an executive of the Company. Pursuant to this agreement, the Company has agreed to pay the executive 15 months of salary and provide the executive certain medical benefits during the 15-month period after his termination. In addition, the Company forgave all outstanding principal and interest due under a Secured Promissory Note dated July 30, 2000 in the principal amount of $225,000, executed pursuant to the Company’s Executive Stock Loan Purchase Program. Pursuant to the Severance Agreement, the executive transferred to the Company 51,429 shares of the Company’s common stock, which was held by the Company in treasury as of September 30, 2003, which stock the executive had purchased using the funds loaned to the executive pursuant to such Secured Promissory Note. During the first quarter of 2003, the Company recorded $356,000 in costs related to the termination of employment of the executive. The severance amounts are to be paid in 15 equal installments, and the remaining unpaid balance as of September 30, 2003 was $172,000.

     In the second quarter of 2003, the Company entered into Severance Agreements with two executives. Pursuant to their agreements, the Company has agreed to pay the executives their salary and provide the executives certain benefits including medical during their severance period. During the second quarter of 2003, the Company recorded $206,000 in costs related to the termination of the executives, and $103,000 in stock-based compensation related to one of the executives. The severance amounts are to be paid in equal installments. In the third quarter, the Company recorded an adjustment of $37,000 for severance amounts for one of these executives. The remaining unpaid balance as of September 30, 2003 was $34,500.

14. Indemnifications

     The Company frequently has agreed to indemnification provisions in software license agreements with customers and in its real estate leases in the ordinary course of its business.

     With respect to software license agreements, these indemnifications generally include provisions indemnifying the customer against losses, expenses, and liabilities from damages that may be awarded against the customer in the event the Company’s software is found to infringe upon a patent or copyright of a third party. The software license agreements generally limit the scope of and remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain geography-based scope limitations, the right to replace or modify an infringing product, and the right to terminate the license and refund a portion of the original license fee within a defined period of time from the original licensing date if a remedy is not

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commercially practical. The Company believes its internal development processes and other policies and practices limit its exposure related to the indemnification provisions of the software license agreements. In addition, the Company requires its employees to sign an agreement, which assigns the rights to its employees’ development work to the Company. To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions.

     With respect to real estate lease agreements, these indemnifications typically apply to claims asserted against the landlord relating to personal injury and property damage at the leased premises or to certain breaches of the Company’s contractual obligations. The term of these indemnification provisions generally survive the termination of the agreement, although the provision has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. The Company has purchased insurance that reduces its monetary exposure for landlord indemnifications. The Company has never paid any amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal.

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ITEM 2. 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, which include Applix TM1 and Applix Integra technology and related applications, such as Applix TM1 Web. Historically, the Company also provided customer relationship management (CRM) solutions. In the first quarter of 2003, the Company completed the sale of the CRM Business to iET Acquisition, LLC (“iET”), a wholly-owned subsidiary of Platinum Equity Holdings, LLC, for $5,750,000 in cash consideration, of which $225,000 was paid back and an additional $262,000 will be paid in the fourth quarter of 2003 to iET for net working capital adjustments, and $3,552,000 in net assumed liabilities. The sale excluded approximately $2,800,000 in net accounts receivable generated from the sale of CRM products. The Company has recorded a net gain of $7,910,000 in 2003.

     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 the completion of the closing of the sale of certain of the assets of the Company’s German subsidiary, Applix GmbH. Applix GmbH was allowed to continue to resell the CRM software products sold to iET, and to provide professional services and maintenance support under a reseller’s agreement between the Company and iET, during the period from January 21, 2003 to March 17, 2003.

     Included in the Company’s results for the nine month period ending September 30, 2003 are CRM revenues of $253,000 and $999,000 for license, and professional services and maintenance, respectively.

     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 Company’s results of operations for the three and nine months ended September 30, 2003 included $106,000 and $162,000, respectively, in expenses recorded as discontinued operations primarily relating to certain defense costs incurred from a claim filed against VistaSource and legal and accounting costs associated with winding down the VistaSource business. See Note 8 and Note 10 to the unaudited condensed consolidated financial statements.

     On March 31, 2001, the Company acquired all of the outstanding common stock of Dynamic Decisions, its primary Australian reseller, to improve its market presence and increase the Company’s sales in the Pac Rim region. The total cost of $5,867,000 consists of maximum cash consideration of $5,150,000, transaction costs of $490,000, and 100,000 shares of the Company’s common stock, which had a fair market value of $227,000 at the date of acquisition. 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 $935,000 was recorded as goodwill. Goodwill is no longer amortized under the provision of SFAS 142. 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 established customer base.

     Per the terms of the share purchase agreement, the total maximum cash consideration relating to the purchase of Dynamic Decisions was $5,150,000 payable in 10 installments over a maximum of 30 months beginning on July 1, 2001. Of the 10 installments, two of the installments totaling $1,267,000 were guaranteed, paid in 2001 and accounted for as purchase price. The remaining eight installments were contingent upon the employment of the two key employees, who were former shareholders of Dynamic Decisions, and therefore were accounted for as compensation expenses within operating expenses. These eight installments were expensed ratably on a straight-line basis over the employees’ contractual employment period, which commenced on April 1, 2001 and ended on March 31, 2003. The amounts that are recognized as expense and accrued are translated into U.S. dollars from Australian dollars, resulting in foreign currency exchange fluctuations to the Company’s financial statements. Of these contingent payments, the Company made three cash payments totaling $1,855,000 in 2003 and four cash payments totaling $2,153,000 in 2002. As of September 30, 2003, there is one remaining contingent payment totaling $681,000, which has been accrued and will be paid in the fourth quarter of 2003.

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     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. During the third quarter of 2003, the Company recorded an adjustment to eliminate the gain on the sale of its Dutch subsidiary.

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.

     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 the services are deemed to be essential to the functionality of the software, both license and service revenues are recognized together on a percentage of completion basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.

     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.

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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 generally 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 86”). SFAS 86 specifies that software development costs incurred internally should be expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, all software development costs should be capitalized until the product is available for general release to customers. Judgment is required in determining when the technological feasibility of products is established. 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 amortized as a cost of software license revenue over the estimated product life. Development costs not capitalized under the policy are classified as a development expense in the same period as incurred. If management determines that the recoverability of these unamortized capitalized software costs is not probable based on its cash flow estimates, these costs may require adjustment to their net realizable value, which could affect the results of the reporting period.

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 $935,000 associated with the excess purchase price over the fair value of the net assets acquired and identifiable intangible assets of $937,000, net of accumulated amortization, 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, 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 and impact operations and cash flow other than to the extent already provided in these financial statements.

Income Taxes

     The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS 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 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

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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 September 30, 2003 and December 31, 2002, 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.

     During 2003, the Company evaluated its ability to utilize its net operating loss carryforwards and the impact of Section 382 of the U.S. Internal Revenue Code of 1986, as amended (“Section 382”), including use of such loss carryforwards on its U.S. gain of the U.S. portion of its CRM Business. Under Section 382, annual limitations apply to the use of net operating loss carryforwards against future taxable income in the event of a change of ownership, as defined by Section 382. The Company has completed a full analysis of these ownership changes and does not believe that changes in ownership will impact its ability to use its net operating loss carryforwards.

     The Company has provided for amounts due in various foreign tax jurisdictions. Judgment is required in determining the Company’s worldwide income tax expense provision based upon the evaluation of the estimated forecasted results for the year as a whole. Uncertainties may arise as a consequence of cost reimbursement arrangements among related entities. Although management believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.

Results of Operations

     For the Three and Nine Months Ended September 30, 2003 and 2002:

Revenues