UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from                      to                     

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 o

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

     As of November 9, 2004, the Registrant had 14,281,600 outstanding shares of common stock.

APPLIX, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2004

Table of Contents

     Applix and TM1 are registered trademarks of Applix, Inc. TM1 Integra, Applix Interactive Planning, and TM1 Web 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 par value 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 amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

4

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. (the “Company”) is a global provider of Business Intelligence (“BI”) and Business Performance Management (“BPM”) solutions, focused on interactive planning, budgeting and analytics, as well as financial reporting, which includes Applix TM1 and related modules, such as Applix TM1 Web. The Company’s products represent one principal business segment, which the Company reports as its continuing operations.

     Historically, the Company also provided customer relationship management (“CRM”) software solutions. The Company sold certain assets relating to its CRM software solutions (the “CRM Business”) in the first quarter of 2003 (See Note 5). 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 of certain assets relating to the German CRM operations.

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 of America (“U.S.”) 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 U.S. 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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Reclassifications

     Certain prior year financial statement items have been reclassified to conform to the current year presentation.

Use of Estimates

     The preparation of financial statements and accompanying notes 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. On an ongoing basis, management evaluates its estimates. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates or assumptions.

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 (“SOP”) 97-2, “Software Revenue Recognition,” as amended. Revenues from software arrangements are recognized when:

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	•		Persuasive evidence of an arrangement exists, which is typically when a non-cancelable sales and 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;
	•		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 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. Maintenance services include telephone and Web based 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 instances where 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, these services are typically delivered within three months or less subsequent to the contract signing.

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     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 typically 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 considers that this warranty provision is not an acceptance provision and therefore accounted for as a warranty in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”.

     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 some instances, 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 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”. When the Company receives a net fee from the indirect channel partner to provide second level support to the indirect channel partner, this amount is recorded as revenue over the term of the maintenance period at the net amount received because the Company: (1) does not collect the fees from the end-user customer (2) does not have latitude in establishing the price paid by the end-user customer for maintenance services and (3) does not have the latitude to select the supplier providing first level support. However, in 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. Revenue recorded for amounts collected by the Company and remitted to the indirect channel partners for such renewals aggregated $198,000 and $205,000 for the three months ended September 30, 2004 and 2003, respectively, and $700,000 and $531,000 for the nine months ended September 30, 2004 and 2003, respectively.

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.

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     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.

Stock-Based Compensation

     The Company periodically grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair market value of the shares at the date of the grant. The Company accounts for stock option grants to employees and directors using the intrinsic value method. Under the intrinsic value method, compensation associated with stock awards to employees and directors is determined as the difference, if any, between the current fair value of the underlying common stock on the date compensation is measured and the price the employee or director must pay to exercise the award. The measurement date for employee awards is generally the date of grant.

     If stock-based compensation expense had been recorded 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 amounts):

     The fair value for stock option awards is estimated at the date of the grant using a Black-Scholes option-pricing model, assuming no dividends and the following assumptions:

3. Net Income (Loss) 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. Diluted net income per share 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 (in thousands, except for per share amounts):

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     Common stock equivalents (stock options) of 1,348,622 and 1,655,410 were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2004 and 2003, respectively, and 521,243 and 1,735,352 outstanding stock options were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2004 and 2003, respectively, because these options were anti-dilutive as the stock option exercise price exceeded the average market price for the respective periods. However, these options could be dilutive in the future.

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 (loss) income includes gains and losses from foreign currency translation adjustments.

5. Net Gain from Sale of CRM Business

     In the first quarter of 2003, the Company sold its 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 $487,000 was paid 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. Accordingly, the Company recorded a net gain before tax of $7,910,000, which includes net cash consideration of $5,263,000 and $3,552,000 of net liabilities assumed by iET less transaction costs of $905,000.

     The Company’s results for the three and nine months ended September 30, 2004 and the three months ended September 30, 2003 included no CRM revenues, while the nine months ended September 30, 2003 included CRM license revenues of $253,000 and CRM professional services and maintenance revenues of $999,000.

6. Commitments and Contingencies

Contingencies

     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 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.

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     On June 16, 2003, the Company announced that it was the subject of an investigation by the SEC related to the restatement of the Company’s financial statements for fiscal years 2001 and 2002. The Company is cooperating fully with the SEC in this matter.

     The Company is currently undergoing an unclaimed abandoned property (“UAP”) audit by the Commonwealth of Massachusetts. The UAP audit is currently in a preliminary stage, and based on information to date, no provision has been made in the accompanying financial statements. However, it is possible that provisions may be required in future periods if it becomes probable that amounts could be assessed.

7. Restructuring Expenses

     During 2004 and 2003, the Company initiated restructuring actions in order to consolidate some of its operations, enhance operational efficiency and reduce expenses.

     In the fourth quarter of 2003, the Company adopted a plan of restructuring to reduce operating costs. Under this plan, the Company had ceased to use, and made the determination that it had no future use of or benefit from, certain space pertaining to its Westborough headquarters’ office lease. The Company also commenced negotiations with its landlord to settle amounts related to its lease in general and the abandoned space in particular. These negotiations were completed in January 2004, and as a result, the Company was able to estimate the cost to exit this facility. Additionally, the Company had determined that it would dispose of certain assets, which were removed from service shortly after the implementation of the plan. As a result of this restructuring plan, the Company recorded a restructuring expense for this space of $3,238,000. Restructuring expense included a $3,000,000 fee paid to the landlord for the abandoned space, an adjustment of $162,000 to reduce the Company’s deferred rent expense, adjusted transaction costs of $350,000 for professional service fees (brokerage and legal) and $50,000 in non-cash charges relating to the disposition of certain assets. In the second quarter of 2004, the Company recorded a credit to the restructuring charge of $27,000 as a change in estimate due to lower than anticipated professional service fees. The restructuring charge was fully paid as of September 30, 2004.

     The accrued restructuring expenses, as well as the Company’s 2004 adjustments, payments and write-offs made against accruals are detailed as follows:

     In the second quarter of 2004, the Company adopted a plan of restructuring to reduce operating costs. Under this plan, the Company had ceased to use, and made the determination that it had no future use of or benefit from, certain space pertaining to its UK office lease. In June 2004, the Company entered into a sublease agreement with a subtenant for a portion of the Company’s UK office lease. In July 2004, upon exiting the space, the Company recorded a restructuring charge of approximately $604,000. The restructuring charge was primarily comprised of the difference between the Company’s contractual lease rate for the subleased space and the anticipated sublease rate to be realized over the remaining term of the original lease, discounted by a credit adjusted risk rate of 8%. The restructuring charge also consisted of other related professional services, including legal fees, broker fees and certain build-out costs, incurred in connection with the exiting of the facility.

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     Restructuring charges accrued and unpaid at September 30, 2004 were as follows:

8. Discontinued Operations

     In December 2000, the Board of Directors committed to a plan to dispose of the operations of the Company’s VistaSource business, a discontinued operation. On March 31, 2001, the Company completed the sale of the VistaSource business, including all of its domestic and foreign operations. The Company’s results of operations for the three months ended September 30, 2004 and 2003 included costs of $36,000 and $106,000, respectively, and included costs of $80,000 and $162,000 for the nine months ended September 30, 2004 and 2003, respectively. These costs primarily relate to legal and accounting costs associated with winding down the VistaSource business in Europe.

9. Bank Credit Facilities

     On March 19, 2004, the Company entered into two credit facilities, providing for lines of credit, with Silicon Valley Bank (“SVB”). The first facility, a domestic working capital line of credit, has an interest rate of prime plus 1.00% per annum and provides for borrowings of up to the lesser of (i) $2,000,000 or (ii) an amount based upon a percentage the Company’s qualifying domestic accounts receivable. The second facility, an equipment line of credit, has an interest rate of prime plus 1.50% per annum and provides for borrowings of up to $1,000,000. The obligations of the Company to SVB under the two credit facilities are guaranteed by the Company and certain of its domestic subsidiaries and are secured by substantially all of the assets of the Company and such domestic subsidiaries. The two credit facilities will expire on March 18, 2005. As of September 30, 2004, there were no amounts outstanding under these two credit facilities.

10. Employee Termination Costs

     In the second quarter of 2004, the Company entered into several severance agreements with certain employees. Pursuant to their agreements, the Company has agreed to pay the salary and provide certain benefits including medical, during their severance period. During the second quarter of 2004, the Company recorded $115,000 in costs related to these employee terminations. The severance amounts are to be paid until the end of the severance period which is scheduled to be completed in the fourth quarter of 2004. As of September 30, 2004, there was a remaining unpaid balance of $2,000.

11. Stockholders’ Equity

     Effective July 1, 2004, companies incorporated in Massachusetts became subject to the Massachusetts Business Corporation Act, Chapter 156D. Chapter 156D provides that shares that are reacquired by a company become authorized but unissued shares. As a result, Chapter 156D eliminates the concept of “treasury shares.” Accordingly, at September 30, 2004, the Company has redesignated its existing treasury shares, at an aggregate cost of approximately $1,309,000, as authorized but unissued shares and has allocated this amount to the common stock par value and additional paid-in capital.

     On May 27, 2004, the stockholders approved the 2004 Plan previously adopted by the Board of Directors in the first quarter of 2004. Under the 2004 Plan, up to 1,000,000 shares of common stock (subject to adjustment in the

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event of stock splits and other similar events) may be issued pursuant to awards granted under the 2004 Plan. The 2004 Plan is intended to replace the 1994 Plan, which expired by its terms on April 10, 2004. No additional stock awards were issued under the 1994 Plan after its expiration.

     On May 27, 2004, the stockholders approved an amendment to the 2001 Employee Stock Purchase Plan, previously adopted by the Board of Directors in the first quarter of 2004, increasing the total number of shares reserved for issuance by an additional 500,000 shares of common stock to an aggregate of 1,300,000 shares of common stock.

12. Deferred Gain

     In the second quarter of 2004, the Company recorded a gain in other income of approximately $195,000 relating to the sale of its French subsidiary which occurred in the second quarter of 2001. The Company received $195,000 from the buyer, which was held in escrow pending the outcome of a tax audit.

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, forecasting and analytics as well as financial reporting. These solutions enable customers to continuously manage and monitor performance across financial and operational functions within the enterprise, with the views of past performance, the current state of business, and future opportunities.

     The Company sells its products through both a direct sales force and an expanding network of partners, both domestically and internationally. These partners provide additional implementation resources, domain expertise and complementary applications using the Company’s software products. The Company continues to focus its efforts selling and marketing the licensing and maintenance of its products while increasing the engagement of partners to provide consulting services on the implementation and integration of its product.

     The Company has decided to strategically and tactically focus its efforts, including development, sales and marketing, on its BI and BPM products. In the first quarter of 2003, the Company sold its customer relationship management business (“CRM Business”) (see Note 5 of the Notes to the Condensed Consolidated Financial Statements). The Company’s operating results reflect the operations of the CRM Business up through its sale, which occurred on January 21, 2003, followed by a March 17, 2003 closing relating to the German component of the CRM Business. The Company is currently only selling BPM and BI products and related services. The Company’s 2004 revenues are solely comprised of sales from its BI/BPM products.

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
	•		Accounts Receivable and Bad Debt
	•		Goodwill and Other Intangible Assets and Related Impairment
	•		Restructuring
	•		Deferred Income Taxes

     These policies are unchanged from those used to prepare the 2003 annual consolidated financial statements. For more information regarding the Company’s critical accounting policies, the Company refers the reader to the discussion contained in Item 7 under the heading “Critical Accounting Policies and Estimates” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, to Note 1 to the consolidated financial statements for the year ended December 31, 2003, contained within the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, and to Note 2 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

     Three and Nine Months Ended September 30, 2004 and 2003

Revenues

     Total revenues for the three months ended September 30, 2004 were $6,909,000, compared to $6,423,000 for the three months ended September 30, 2003. Total revenues for the nine months ended September 30, 2004 were

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$21,555,000, compared to $19,198,000 for the nine months ended September 30, 2003. Revenue for the nine months ended September 30, 2003 includes $1,252,000 from the Company’s CRM Business, which was sold during the first quarter of 2003. Revenue from the sale of BI/BPM products increased 20% from $17,946,000 for the nine months ended September 30, 2003 to $21,555,000 for the period ended September 30, 2004. Total revenues for three and nine months ended September 30, 2004 increased 8% and 12%, respectively, which includes the favorable impacts of foreign currency exchange rate fluctuations, from the same periods in the prior year. When expressed at constant foreign currency exchange rates, total revenues remained flat for the three month period and increased 4% for the nine month period ended September 30, 2004 compared to the same periods in the prior year.

Software License Revenues

     Software license revenues increased by $199,000 to $3,307,000, or 48% of total revenues, for the three months ended September 30, 2004, from $3,108,000, or 48% of total revenues, for the three months ended September 30, 2003. Software license revenues for the three months ended September 30, 2004 and September 30, 2003 were solely from BI/BPM products. For the nine months ended September 30, 2004, software license revenues increased by $2,309,000 to $10,766,000, or 50% of total revenues, from $8,457,000, or 44% of total revenues, for the nine months ended September 30, 2003. The increase was partially due to favorable impacts of foreign currency exchange rate fluctuations in the weighted average values of the British pound, Euro and Australian dollar in relation to the U.S. dollar. The net effect of foreign currency exchange rate fluctuations was an increase in software license revenues of approximately $235,000 and $830,000 for the three and nine months ended September 30, 2004, respectively.

     Domestic license revenues decreased by $294,000 to $851,000 for the three months ended September 30, 2004 from $1,145,000 for the three months ended September 30, 2003. International license revenues increased by $493,000 to $2,456,000 for the three months ended September 30, 2004 from $1,963,000 for the three months ended September 30, 2003. Domestic license revenues increased by $684,000 to $3,253,000 for the nine months ended September 30, 2004 from $2,569,000 for the nine months ended September 30, 2003. International license revenues increased by $1,625,000 to $7,513,000 for the nine months ended September 30, 2004 from $5,888,000 for the nine months ended September 30, 2003. The decrease in domestic license revenues for the three months ended September 30, 2004 compared to same period of the prior year was primarily the result of certain organizational changes in the North American field sales organization initiated in the second quarter of 2004. The increase in international license revenues for the three months ended September 30, 2004 compared to the three months ended September 30, 2003 was mainly attributable to the Company’s success in overcoming the traditional seasonality of the third quarter sales in Europe.

     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 (Consulting and Training) and Maintenance Revenues

     Professional services and maintenance revenues for the three months ended September 30, 2004 and 2003 were 52% of total revenues. For the nine months ended September 30, 2004 and 2003, professional services and maintenance revenues were 50% of total revenues and 56% of total revenues, respectively. During the three months ended September 30, 2004, maintenance revenues increased $518,000 to $3,282,000, compared to $2,764,000 for the three months ended September 30, 2003, and professional services decreased $231,000 to $320,000, compared to $551,000 for the three months ended September 30, 2003. For the nine months ended September 30, 2004, maintenance revenues increased $1,343,000 to $9,647,000, compared to $8,304,000 during the nine months ended September 30, 2003, and professional services decreased $1,295,000 to $1,142,000 for the nine months ended September 30, 2004, compared to $2,437,000 during the nine months ended September 30, 2003. The increase in maintenance revenue was primarily attributable to the sale of software licenses to new customers coupled with high rates of renewals of annual maintenance contracts from the sale of licenses in prior periods. The increase in maintenance revenues was also partially due to favorable impacts of foreign currency exchange rate fluctuations in the weighted average values of the British pound, Euro and Australian dollar in relation to the U.S. dollar. The net

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effect of foreign currency exchange rate fluctuations was an increase to professional service and maintenance revenues of approximately $224,000 and $796,000 for the three and nine months ended September 30, 2004, respectively. The Company expects maintenance revenues to continue to increase due to strong customer maintenance renewal rates. The decreases in professional services revenue was primarily due to the Company’s greater reliance on its partners to perform these services. The Company will continue to rely primarily on its partners to provide consulting services, including BI/BPM product implementations, as the Company focuses on maintenance services, which includes telephonic support, unspecified product upgrades and bug fixes and patches.

Cost of Revenues

(A) Gross margins calculated as a percentage of related revenues.

Cost of Software License Revenues

     Cost of software license revenues consists primarily of third-party software royalties, cost of product packaging and documentation materials, and amortization of capitalized software costs. Cost of software license revenues as a percentage of software license revenues was less than 1% for the three months ended September 30, 2004 and 4% for the nine months ended September 30, 2004, compared to 11% and 14% for the three and nine months ended September 30, 2003, respectively. The decrease in the percentages above and corresponding improvement in software license gross margin was primarily due to decreases of $230,000 and $424,000 in the amortization of capitalized software development costs and decreases of $86,000 and $362,000 in third-party software royalties paid by the Company for the three and nine months ended September 30, 2004, respectively, compared to the same periods in the prior year. Capitalized software development costs were fully amortized in the second quarter of 2004.

Cost of Professional Services and Maintenance Revenues

     The cost of professional services and maintenance revenues consists primarily of personnel salaries and benefits, facilities and information system costs incurred to provide consulting, training and customer support and payments

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to indirect channel partners to provide first level support to end-user customers. These payments to indirect channel partners to provide first level support are generally amortized over the 12-month maintenance support period of the underlying contract with the end-user customer. Cost of professional services and maintenance revenues decreased by $308,000 to $856,000 for the three months ended September 30, 2004 from $1,164,000 for the three months ended September 30, 2003. Cost of professional services and maintenance revenues decreased by $1,260,000 to $2,829,000 for the nine months ended September 30, 2004 from $4,089,000 for the nine months ended September 30, 2003. These decreases reflect a reduction in professional service employees in general as the Company focuses on the utilization of partners for consulting services relating to its product. The decrease in the cost of professional services and maintenance revenues for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 was also due to the Company’s decrease in the number of professional service employees as a result of transfers in conjunction with the sale of the CRM Business in the first quarter of 2003. Gross margin of professional services and maintenance revenues increased to 76% for the three months ended September 30, 2004 as compared to 65% for the three months ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, gross margin of professional services and maintenance revenues increased to 74% from 62%, respectively. The improvements in gross margins were due to, in addition to the lower costs described above, a change in revenue mix from lower margin consulting revenues to higher margin maintenance revenues. The Company will continue to focus on the utilization of partners to deliver consulting services for product implementations and customization of its products.

Operating Expenses

Sales and Marketing Expenses

     Sales and marketing expenses consist primarily of salaries and benefits, commissions and bonuses for the Company’s 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 increased $141,000 to $2,473,000 for the three months ended September 30, 2004 from $2,332,000 for the three months ended September 30, 2003. Sales and marketing expenses as a percentage of total revenue remained at 36% for the three months ended September 30, 2004 and 2003. The increase in sales and marketing expenses for the three months ended September 30, 2004 was primarily due to an increase in staffing in sales and marketing, including the Company’s direct sales force and presales technical staff. For the nine months

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ended September 30, 2004 and 2003, sales and marketing expenses decreased $181,000 to $7,631,000, or 35% of total revenue, from $7,812,000, or 41% of total revenue, respectively. The decrease in sales and marketing expenses for the nine months ended September 30, 2004 was primarily due to a decrease in sales and marketing costs related to its CRM product and decreases in sales and marketing employees and their related salaries as a result of transfers conjunction with the sale of the CRM Business in the first quarter of 2003. The Company experienced an unfavorable impact on sales and marketing expenses for the three and nine month periods ended September 30, 2004 as a result of foreign currency exchange rate fluctuations due to the strength of the foreign currencies against the U.S. dollar in the applicable periods in 2004 versus the same periods 2003 and the related effects on the weighted average values of the British pound, Euro and Australian dollar in relation to the U.S. dollar. The net effect of foreign currency exchange rate fluctuations was an increase to sales and marketing expenses of approximately $132,000 and $478,000 for the three and nine months ended September 30, 2004, respectively.

Product Development Expenses

     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 of capitalization are expensed as incurred.

     Product development expenses decreased $284,000 to $1,059,000 for the three months ended September 30, 2004 from $1,343,000 for the three months ended September 30, 2003. These expenses represent 15% of total revenue for the three months ended September 30, 2004, as compared to 21% of total revenues for the three months ended September 30, 2003. For the nine months ended September 30, 2004, product development expenses decreased $619,000 to $3,614,000, or 17% of total revenue, from $4,233,000, or 22% of total revenue for the nine months ended September 30, 2003. The decrease in product development expenses was primarily due to the transfer of product development employees in conjunction with the sale of the CRM Business in the first quarter of 2003. The Company anticipates that it will continue to devote substantial resources to the development of new products, new versions of its existing products, including Applix TM1 and related applications.

General and Administrative Expenses

     General and administrative expenses consist primarily of salaries, benefits and occupancy costs for executive, administrative, finance, information technology, and human resource personnel, as well as accounting and legal costs. General and administrative expenses also include legal costs associated with the investigation by the SEC related to the Company’s financial restatements for the fiscal years 2001 and 2002. General and administrative expenses decreased $216,000, to $1,507,000, or 22% of total revenues, for the three months ended September 30, 2004 from $1,723,000, or 27% of total revenues, for the three months ended September 30, 2003. For the nine months ended September 30, 2004 and 2003, general and administrative expenses decreased $1,400,000 to $4,603,000, or 21% of total revenue, from $6,003,000, or 31% of total revenue, respectively. The decrease was primarily due to lower executive severance costs, stock-based compensation expenses related to certain executive stock options and costs associated with the Company’s two financial restatements and related SEC investigation. The decrease was also attributable to a reduction in rent expense in the three months ended September 30, 2004 of $225,000, or $900,000 on an annualized basis, resulting from the Company’s restructuring of its headquarters’ lease in January 2004. The Company will continue to closely monitor general and administrative costs.

Compensation Expenses Related to Acquisition

     Compensation expenses related to acquisition consists primarily of contingent cash consideration relating to the Company’s March 2001 acquisition of Dynamic Decisions. For the nine months ended September 30, 2003, the

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Company recorded $583,000 for compensation expenses related to the acquisition of Dynamic Decisions, which includes the impact of foreign currency exchange rate fluctuations of translating the Australian dollar to the U.S. dollar. All contingent amounts relating to the Dynamic Decisions acquisition were paid in 2003 and no further amounts are due.

Restructuring Expenses

     During 2004 and 2003, the Company evaluated and initiated restructuring actions in order to consolidate portions of its operations, enhance operational efficiency, and reduce expenses.

     In the fourth quarter of 2003, the Company adopted a plan of restructuring to reduce operating costs. Under this plan, the Company had ceased to use, and made the determination that it had no future use of or benefit from, certain space pertaining to its Westborough headquarters’ office lease. The Company commenced negotiations with its landlord to settle amounts related to its lease in general and the abandoned space in particular. These negotiations were completed in January 2004, and as a result, the Company was able to estimate the cost to exit this facility. Additionally, the Company determined that it would dispose of certain assets, which were removed from service shortly after the implementation of the plan. As a result of this restructuring plan, the Company recorded a restructuring expense for this space of $3,238,000. Restructuring expense included a $3,000,000 fee paid to the landlord for the abandoned space, an adjustment of $162,000 to reduce the Company’s deferred rent expense, adjusted transaction costs of $350,000 for professional service fees (brokerage and legal) and $50,000 in non-cash charges relating to the disposition of certain assets. In the second quarter of 2004, the Company recorded a credit to the restructuring charge of $27,000 as a change in estimate due to lower than anticipated professional service fees. The restructuring charge was fully paid as of September 30, 2004.

     The accrued restructuring expenses, as well as the Company’s 2004 adjustments, payments and write-offs made against accruals are detailed as follows:

     In the second quarter of 2004, the Company adopted a plan of restructuring to reduce operating costs. Under this plan, the Company had ceased to use, and made the determination that it had no future use of or benefit from, certain space pertaining to its UK office lease. In June 2004, the Company entered into a sublease agreement with a subtenant for a portion of the Company’s UK office lease. In July 2004, upon exiting the space, the Company recorded a restructuring charge of approximately $604,000. The restructuring charge was primarily comprised of the difference between the Company’s contractual lease rate for the anticipated subleased space and the sublease rate to be realized over the remaining term of the original lease, discounted by a credit adjusted risk rate of 8%. The restructuring charge also consisted of other related professional services, including legal fees, broker fees and certain build-out costs, incurred in connection with the exiting of the facility.

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     Restructuring charges accrued and unpaid at September 30, 2004 were as follows:

Amortization of Acquired Intangible Asset

     Amortization expense for the acquired intangible asset, customer relationships, associated with the Dynamic Decisions acquisition in March 2001 was $63,000 and $188,000 for each of the three months and nine months ended September 30, 2004 and 2003, respectively. The amortization expense will continue to be ratably amortized through the first quarter of 2007.

Non-Operating Income

Interest and Other Income (Loss), Net

     Interest and other income (loss), net consists primarily of interest income, interest expense and gains and losses on foreign currency exchange fluctuations.

     Interest and other income (loss), net increased to income of $290,000 for the three months ended September 30, 2004, as compared to a loss of $59,000 for the three months ended September 30, 2003. The increase is primarily due to favorable foreign currency exchange rate fluctuations on intercompany balances denominated in the Company’s foreign subsidiaries’ local currencies. In particular, the Company recorded a gain of approximately $218,000 for the three months ended September 30, 2004 due to a favorable foreign currency exchange rate fluctuation of the Australian dollar and its related effect on the Company’s Australian intercompany balances. The increase is also attributable to the effects of having recorded a loss of approximately $144,000 in the third quarter of 2003 relating to the sale of the Company’s Dutch subsidiary.

     Interest and other income (loss), net decreased to income of $256,000 for the nine months ended September 30, 2004, as compared to income of $546,000 for the nine months ended September 30, 2003. The decrease was primarily due to the net effect of the gain on the sale of its French subsidiary offset by a lower gain on foreign currency exchange fluctuations in 2004 compared to 2003. The Company recorded a gain in the second quarter of 2004 of approximately $195,000 relating to the sale of its French subsidiary in second quarter of 2001. The Company received $195,000 from the buyer which had been held in escrow pending the outcome of a tax audit. As noted above, the decrease is also attributable to the effects of having recorded a loss of approximately $144,000 in the third quarter of 2003 relating to the sale of the Company’s Dutch subsidiary.

Net Gain from Sale of CRM Business

     In the first quarter of 2003, the Company sold its 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 $487,000 was paid 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. Accordingly, the Company recorded a net gain before tax of $7,910,000, which includes net cash consideration of $5,263,000 and $3,552,000 of net liabilities assumed by iET less transaction costs of $905,000.

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     The Company’s results for the three and nine months ended September 30, 2004 and the three months ended September 30, 2003 included no CRM revenues, while the nine months ended September 30, 2003 included CRM license revenues of $253,000 and CRM professional services and maintenance revenues of $999,000.

Provision for Income Taxes

     The provision for income taxes represents the Company’s state and foreign income tax obligations and amortization of a deferred tax liability related to the Company’s acquisition of Dynamic Decisions. The Company’s provision for income taxes was $178,000 and $293,000 for the three and nine months ended September 30, 2004, respectively, compared to $0 and $764,000 for the three months and nine months ended September 30, 2003, respectively. The provision for income taxes for the nine months ended September 30, 2003 includes $355,000 in foreign income taxes related to the Company’s sale of its CRM Business. The Company’s effective income tax rate for the nine months ended September 30, 2004 and 2003 decreased to 15% from 21%, respectively, which is primarily due to the additional provision for income taxes recorded as a result of the sale of the CRM Business in 2003 partially offset by an adjustment of approximately $60,000 recorded in the third quarter of 2004 for income taxes relating to prior periods for the Australian subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

     The Company currently derives its liquidity and capital resources primarily from the Company’s cash flow from operations. In addition, the Company sold, at fair market value, $3 million of its common stock in February 2004 to a member of the Company’s Board of Directors, along with another investor who is related to the Board member, and increased its cash balance by $1.7 million from the issuance of the Company’s common stock under its stock plans in the nine months ended September 30, 2004. The Company’s cash and cash equivalents balances were $13,728,000 and $10,058,000 as of September 30, 2004 and December 31, 2003, respectively, which includes restricted cash of $400,000 and $817,000, respectively. The Company’s day’s sales outstanding (“DSO”) in accounts receivable was 55 days as of September 30, 2004, compared with 63 days as of December 31, 2003.

     Cash used in the Company’s operating activities was $979,000 for the nine months ended September 30, 2004, compared to cash used in operating activities of $4,356,000 for the nine months ended September 30, 2003. The decrease in cash used in operating activities is primarily due to an increase in accounts receivable collections as a result of higher revenues, a reduction in expenditures as a result of reduced expenses from the Company’s cost containment efforts and a reduction in expenses due to the sale of the CRM Business, including reduced salaries from transferred employees.

     Cash provided by investing activities totaled $7,000 for the nine months ended September 30, 2004 compared to cash provided by investing activities of $5,377,000 for the nine months ended September 30, 2003. The decrease in cash provided by investing activities is primarily a result of the net cash proceeds of $5,525,000 from the sale of the CRM Business in the first quarter of 2003.

     Cash provided by financing activities totaled $4,971,000 for the nine months ended September 30, 2004, which consisted of proceeds of $3,000,000 from the sale of common stock to two investors described above, $1,739,000 from issuance of stock under the Company’s stock plans and $232,000 from the repayment of notes receivable. This compares to total cash provided in financing activities of $226,000 for the nine months ended September 30, 2003, which consisted of proceeds of $463,000 from the issuance of stock under the Company’s stock plans, offset by net payment of $237,000 owed to a certain bank from an accounts receivable factoring arrangement.

     Cash paid for income taxes by the Company of $518,000 and $509,000 for the nine months ended September 30, 2004 and 2003, respectively. The increase was primarily due an increase in foreign income taxes paid by the Company’s foreign subsidiaries.

     In January 2004, the Company entered into a lease amendment of its original lease with its landlord for its Westborough, MA headquarters. The amendment required the payment of a $3,000,000 restructuring fee to the

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landlord, which was paid on January 22, 2004. Per terms of the amendment, the original lease was amended as follows: 1) a reduction in the amount of space leased from 49,960 square feet to 24,376 square feet, 2) a reduction in annual rental payments from approximately $1,400,000 to $550,000, 3) a reduction in the remaining term of the lease from 9 3/4 years to 7 years, and 4) a reduction in the amount of the required irrevocable standby letter of credit from $817,000 to $400,000. The payment required pursuant to the release of excess space was expensed in 2003 as part of the accrued restructuring expenses.

     On March 19, 2004, the Company entered into two credit facilities, providing for loans, with Silicon Valley Bank (“SVB”). The first facility, a domestic working capital line of credit, has an interest rate of prime plus 1.00% per annum and provides for borrowings of up to the lesser of (i) $2,000,000 or (ii) an amount based upon a percentage of the Company’s qualifying domestic accounts receivable. The second facility, an equipment line of credit, has an interest rate of prime plus 1.50% per annum and provides for borrowings of up to $1,000,000. The obligations of the Company to SVB under the two credit facilities are guaranteed by the Company and certain of its domestic subsidiaries and are secured by substantially all of the assets of the Company and such domestic subsidiaries. The two credit facilities will expire on March 18, 2005. As of September 30, 2004, there were no amounts outstanding under these two credit facilities.

     In June 2004, the Company entered into a sublease agreement with a subtenant for a portion of the Company’s UK office lease. In July 2004, upon exiting the space, the Company recorded a restructuring charge of approximately $604,000. The restructuring charge was primarily comprised of the difference between the Company’s contractual lease rate for the subleased space and the anticipated sublease rate to be realized over the remaining term of the original lease, discounted by a credit adjusted risk rate of 8%. The restructuring charge also consisted of other related professional services, including legal fees, broker fees and certain build-out costs, incurred in connection with the exiting of the facility.

     As of September 30, 2004, the Company had the following future contractual commitments:

     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.

     The Company has plans for approximately $200,000 in capital expenditures for the remainder of 2004, including hardware, software, upgrades and replacements. The Company may finance these purchases through use of third-party financing arrangements including its equipment line of credit.

     For the nine months ended September 30, 2004, the Company achieved operating profitability and generated positive operating cash flow, before the payment of previously accrued restructuring expenses relating to its Westborough headquarters office lease. The Company has, however, historically incurred operating losses and negative cash flows for the last several years. As of September 30, 2004, the Company had an accumulated deficit of $43.8 million. Management’s plans include increasing revenues and generating positive cash flows from operations. The Company currently expects that the principal sources of funding for its operating expenses, capital expenditures and other liquidity needs will be a combination of its available cash balances, funds expected to be generated from operations, and the two SVB credit facilities. The availability of borrowings under the Company’s two credit facilities is subject to the maintenance of certain financial covenants and the borrowing limits described above. The Company believes that the sources of funds currently available will be sufficient to fund its operations for at least the next 12 months. However, there are a number of factors that may negatively impact the Company’s

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available sources of funds. The amount of cash generated from or used by operations will be dependent primarily upon the successful execution of the Company’s business plan, including increasing revenues and reinvesting into its sales and marketing and field operations. If the Company does not meet its plans to generate sufficient revenue or positive cash flows, it may need to raise additional capital or reduce spending.

FACTORS THAT MAY AFFECT FUTURE RESULTS

OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS.

     We may 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, 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 as 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 MAY NOT BE ABLE TO FULFILL ANY FUTURE CAPITAL NEEDS.

     We achieved operating profitability for the three and nine months ended September 30, 2004 and generated positive cash flow for the three and nine months ended September 30, 2004. The Company has, however, historically incurred losses from continuing operations for the last several years. Additionally, we could incur operating losses and negative cash flows in the future because of costs and expenses relating to brand development,

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marketing and other promotional activities, continued development of our information technology infrastructure, expansion of product offerings and development of relationships with other businesses. Although we achieved profitability in the first three quarters of 2004, there can be no assurance that we will achieve a profitable level of operations in the future.

     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.

IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL SUFFER.

     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.

ATTEMPTS TO EXPAND BY MEANS OF BUSINESS COMBINATIONS AND ACQUISITIONS MAY NOT BE SUCCESSFUL AND MAY DISRUPT OUR OPERATIONS OR HARM OUR REVENUES.

     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.

     The loss of any of our 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.

WE MAY NOT BE ABLE TO MEET THE OPERATIONAL AND FINANCIAL CHALLENGES THAT WE ENCOUNTER IN OUR INTERNATIONAL OPERATIONS.

     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.

BECAUSE THE BUSINESS PERFORMANCE MANAGEMENT AND BUSINESS INTELLIGENCE MARKETS ARE HIGHLY COMPETITIVE, WE MAY NOT BE ABLE TO SUCCEED.

     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 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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BECAUSE WE DEPEND IN PART ON THIRD-PARTY SYSTEMS INTEGRATORS TO SELL OUR PRODUCTS, OUR OPERATING RESULTS WILL LIKELY SUFFER IF WE DO NOT DEVELOP AND MAINTAIN THESE RELATIONSHIPS.

     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.

BECAUSE THE SALES CYCLE FOR OUR PRODUCTS CAN BE LENGTHY, IT IS DIFFICULT FOR US TO PREDICT WHEN OR WHETHER A SALE WILL BE MADE.

     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 BUSINESS WILL BE HARMED IF WE ARE UNABLE TO PROTECT OUR TRADEMARKS FROM MISUSE BY THIRD PARTIES.

     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.

OUR PRODUCTS MAY CONTAIN DEFECTS THAT MAY BE COSTLY TO CORRECT, DELAY MARKET ACCEPTANCE OF OUR PRODUCTS AND EXPOSE US TO LITIGATION.

     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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As a multinational corporation, the Company is exposed to market risk, primarily from changes in foreign currency exchange rates, in particular the British pound, Euro and Australian dollar. 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. Although foreign currency

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exchange rates have fluctuated significantly in recent years, the Company’s exposure to changes in net income, due to foreign currency exchange rates fluctuations, in the Company’s foreign subsidiaries is mitigated to some extent by expenses incurred by the foreign subsidiary in the same currency. The exchange rate at September 30, 2004 and September 30, 2003 was 0.55 British pound, 0.80 Euro, 1.37 Australian dollar and 0.60 British pound, 0.86 Euro, 1.47 Australian dollar, respectively. The weighted average exchange rate per $1.00 U.S. dollar for the three months ended September 30, 2004 was 0.55 British pound, 0.82 Euro and 1.41 Australian dollars, as compared to the weighted average dollar for three months ended September 30, 2003 which was 0.62 British pound, 0.89 Euro and 1.52 Australian dollar. The Company’s primary foreign currency exposures relate to its short-term intercompany balances with its foreign subsidiaries, primarily the Australian dollar. Our foreign subsidiaries have functional currencies denominated in the Euro, Australian dollar, British pound and Swiss franc. Intercompany transactions denominated in these currencies are remeasured at each period end with any exchange gains or losses recorded in the Company’s consolidated statements of operations. During the third quarter of 2004, the Company has reported gains of approximately $220,000 in its Consolidated Financial Statements of Operations due to favorable movements in the Australian dollar exchange rate, compared to losses of approximately $300,000 recorded in the second quarter of 2004 resulting from unfavorable movements in the Australian dollar exchange rate. Based on foreign currency exposures existing at September 30, 2004, a 10% unfavorable movement in foreign exchange rates related to the British pound, Euro, Australian dollar, and Swiss franc would result in an approximately $843,000 loss to earnings. The Company has currently not engaged in activities to hedge these exposures.

     At September 30, 2004, the Company held $13,328,000 in cash equivalents, excluding $400,000 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.

ITEM 4. CONTROLS AND PROCEDURES

     The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2004. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

     No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

     PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

(a) Exhibits

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

	APPLIX, INC.
Date: November 15, 2004	/s/ Milton A. Alpern
	Milton A. Alpern
	Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer)

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EXHIBIT INDEX

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