Applix (APLX) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-25040

APPLIX, INC.

(Exact name of registrant as specified in its charter)

MASSACHUSETTS	04-2781676
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or15(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. Yesþ Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filerþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yeso Noþ

     As of May 1, 2006, the Registrant had 15,185,409 outstanding shares of common stock.

APPLIX, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2006

Table of Contents

	Page
	No.
Part I — Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005		3
Condensed Consolidated Statements of Income for the three months ended March 31, 2006 and 2005		4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures About Market Risk		18
Item 4. Controls and Procedures		18
Part II — Other Information		20
Item 1A. Risk Factors		20
Item 6. Exhibits		24
Signature		25
EX-10.1 CHANGE-IN-CONTROL AGREEMENT DATED 1/5/2006
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CFO

     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 Part II, Item 1A, “Risk Factors”. These and many other factors could affect Applix’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applix or on its behalf. Applix does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Applix, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and par value amounts)

	March 31,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	25,044		$	20,740
Short-term investments		2,971			4,198
Accounts receivable, less allowance for doubtful accounts of $216 and $231, respectively		5,933			8,066
Other current assets		1,460			1,295
Deferred tax assets		162			164
Total current assets		35,570			34,463
Restricted cash		400			500
Property and equipment, net		979			953
Other assets		610			712
Intangible asset, net of accumulated amortization of $1,250 and $1,188, respectively		250			312
Goodwill		1,158			1,158
TOTAL ASSETS	$	38,967		$	38,098
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,070		$	1,504
Accrued expenses		4,976			5,460
Accrued restructuring expenses, current portion		45			44
Deferred revenues		9,574			9,143
Total current liabilities		15,665			16,151
Accrued restructuring expenses, long term portion		176			186
Other long term liabilities		109			133
Total liabilities		15,950			16,470
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding
Common stock, $.0025 par value; 30,000,000 shares authorized; 15,102,934 and 14,923,894 shares issued and outstanding, respectively		38			37
Additional paid-in capital		58,298			57,178
Accumulated deficit		(33,838	)		(33,935	)
Accumulated other comprehensive loss		(1,481	)		(1,652	)
Total stockholders’ equity		23,017			21,628
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	38,967		$	38,098

See accompanying Notes to Condensed Consolidated Financial Statements.

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Applix, Inc.

Condensed Consolidated Statements of Income
(In thousands, except per share amounts)

	Three Months Ended
	March 31,
	2006			2005
Revenues:
Software license	$	4,427		$	3,447
Professional services and maintenance		4,566			4,201
Total revenues		8,993			7,648
Cost of revenues:
Software license		44			23
Professional services and maintenance		1,016			958
Total cost of revenues		1,060			981
Gross margin		7,933			6,667
Operating expenses:
Sales and marketing		4,573			3,395
Product development		1,568			1,151
General and administrative		1,724			1,361
Amortization of an acquired intangible asset		63			63
Total operating expenses		7,928			5,970
Operating income		5			697
Non-operating income (expense):
Interest and other income (expense), net		126			(20	)
Income before income taxes		131			677
Provision for income taxes		12			46
Income from continuing operations		119			631
Discontinued operations:
Loss from discontinued operations		(22	)		(20	)
Net income	$	97		$	611
Net income (loss) per share, basic and diluted:
Continuing operations, basic	$	0.01		$	0.04
Continuing operations, diluted	$	0.01		$	0.04
Discontinued operations	$	(0.00	)	$	(0.00	)
Net income per share, basic	$	0.01		$	0.04
Net income per share, diluted	$	0.01		$	0.04
Weighted average number of shares outstanding:
Basic		15,024			14,456
Diluted		16,467			16,417

See accompanying Notes to Condensed Consolidated Financial Statements.

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Applix, Inc.

Condensed Consolidated Statements of Cash Flows
(In thousands)

	Three Months Ended
	March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	97		$	611
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		115			68
Amortization		63			63
Stock-based compensation expense		495			15
Changes in operating assets and liabilities:
Decrease in accounts receivable		2,213			1,619
Increase in other assets		(52	)		(31	)
(Decrease) increase in accounts payable		(349	)		117
Decrease in accrued expenses		(478	)		(47	)
Decrease in accrued restructuring expenses		(9	)		(55	)
Decrease in other liabilities		(29	)		(27	)
Increase in deferred revenues		458			547
Cash provided by operating activities		2,524			2,880
Cash flows from investing activities:
Property and equipment expenditures		(226	)		(43	)
Decrease in restricted cash		100			—
Maturities of short-term investments		3,175			—
Purchases of short-term investments		(1,948	)		(2,976	)
Cash provided by (used in) investing activities		1,101			(3,019	)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans		584			825
Proceeds from notes receivable		—			892
Cash provided by financing activities		584			1,717
Effect of exchange rate changes on cash		95			(140	)
Increase in cash and cash equivalents		4,304			1,438
Cash and cash equivalents at beginning of period		20,740			15,924
Cash and cash equivalents at end of period	$	25,044		$	17,362
Supplemental disclosure of cash flow information
Cash paid for income taxes	$	192		$	170

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 Performance Management (“BPM”) and Business Intelligence (“BI”) applications based on Applix’s TM1. TM1 applications enable continuous strategic planning, management and monitoring of performance across the financial and operational functions within the enterprise. The Company’s products represent one principal business segment, which the Company reports as its continuing operations.

2. 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 entries) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. 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, 2005.

Use of Estimates

     The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America 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 property and equipment and intangible assets, domestic and foreign income tax liabilities, valuation of deferred tax assets, stock-based compensation, the allowance for doubtful accounts and accrued liabilities.

3. Stock-based Compensation

     The Company grants stock options to its employees and directors and also provides employees the right to purchase stock pursuant to stockholder approved stock option and employee stock purchase plans. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). Prior to January 1, 2006, the Company followed Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its employee stock-based compensation.

     Under the provisions of SFAS 123R, the Company recognizes the fair value of stock-based compensation on a straight-line basis in net income over the requisite service period of the individual grant, which generally equals the vesting period. All of the Company’s stock-based compensation is accounted for as an equity instrument, as there have been no liability awards granted.

     The Company has elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption, while prior period amounts are not restated. The unrecognized expense of awards not yet vested at the date of adoption shall be

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recognized in net income in the periods after the date of adoption using the same valuation method (i.e.Black-Scholes) and assumptions determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,”(“SFAS 123”) as disclosed in previous filings. Under the provisions of SFAS 123R, the Company recorded $495,000 of stock-based compensation in its condensed consolidated statement of income for the three months ended March 31, 2006, which had the effect of reducing net income by $0.03 per basic and diluted share. The $495,000 of stock-based compensation was included in the following expense categories (in thousands):

	Three Months
	Ended
	March 31,
	2006
Cost of revenues	$	16
Sales and marketing		168
Product development		120
General and administrative		191
Total	$	495

     There was no income tax benefit recognized in the Company’s condensed consolidated statement of income for the three months ended March 31, 2006 for stock-based payments. At March 31, 2006, total unrecognized stock-based compensation expense related to unvested stock options, expected to be recognized over a weighted average period of 1.6 years, amounted to approximately $4,615,000. Total unrecognized stock-based compensation expense will be adjusted for any future changes in estimated forfeitures, if any.

     Prior to the adoption of SFAS 123R, the Company presented all excess tax benefits related to stock-based compensation as cash flows from operating activities in the Company’s statement of cash flows. SFAS 123R requires the cash flows resulting from these tax benefits to be classified as cash flows from financing activities. In the first quarter of 2006, there was no net tax benefit from the exercise of stock options.

     The Company has a number of stock award plans, which provide for the grant or issuance of options, restricted common stock, and unrestricted common stock. These plans are administered by the compensation committee of the Board of Directors, and allow for grants to employees, directors of the Company, and non-employees. Option grants can be in the form of either incentive stock options or non-qualified options. Exercise prices are set on the date of grant and are required to be at fair value, in the case of incentive stock options, or at the discretion of the compensation committee, in the case of non-qualified stock options. Options granted to non-employee directors must have an exercise price equal to the fair value of the common stock on the date of grant.

     Awards to employees require approval by the Board of Directors’ compensation committee. Options generally vest in equal installments over a four year period. There are generally no performance conditions attached to employee awards, other than continued employment by the Company. Options have a contractual life of 7 years.

     On May 27, 2004, the stockholders approved the 2004 Equity Incentive Plan (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 event of stock splits and other similar events) may be issued pursuant to awards granted under the 2004 Plan. On June 9, 2005, the stockholders approved an amendment to the Company’s 2004 Equity Incentive Plan to increase the number of shares of common stock authorized for issuance thereunder from 1,000,000 to 2,000,000 shares of common stock.

     In 2003, the Board of Directors adopted, and the stockholders approved, the 2003 Director Equity Plan (the “2003 Director Plan”). The 2003 Director Plan provides for the grant of non-statutory options not intended to meet the requirements of the Section 422 of the Internal Revenue Code of 1986, as amended. Only directors of the Company who are not full-time employees (“Non-Employee Directors”) of the Company or any subsidiary of the Company are eligible to be granted awards under the Plan. A total of 300,000 shares of the Company’s common stock may be issued under the 2003 Director Plan. Any shares subject to options granted pursuant to the 2003 Director Plan which terminate or expire unexercised will be available for future grants under the 2003 Director Plan. The 2003 Director Plan is administered by the compensation committee of the Board of Directors of the Company.

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The directors are elected by the stockholders of the Company in accordance with the provisions of the Restated Articles of Organization, as amended, and the By-Laws of the Company. Under the 2003 Director Plan, the stock options must be granted with an exercise price of no less than the fair market value of the stock on the date of grant.

     Pursuant to the 2003 Director Plan, each Non-Employee Director receives an automatic grant of common stock and an option for the purchase of common stock on January 1 of each year. Each Non-Employee Director receives an amount of common stock as determined in accordance with the 2003 Director Plan including whether the Director serves on a Board committee. Except for Election Grants (as defined below), both the grant of shares and options are contingent upon attendance by the Non-Employee Director at least 75% of the meetings of the Board of Directors and any committees on which he or she served in the preceding year. Each new Non- Employee Director receives an option to purchase 10,000 shares of common stock upon such director’s initial election to the Board of Directors (an “Election Grant”). Each option will become exercisable (or “vest”), with respect to Election Grants, in two equal annual installments on the first and second anniversary of the date of grant, and with respect to all other options, on the first anniversary of the date of grant, provided in each case that the optionee continues to serve as a director on such date. The Board of Directors may suspend, discontinue or amend the 2003 Director Plan.

     Information with respect to stock option activity under the various stock plans is as shown below:

				Weighted
				Average
	Number			Exercise Price
Options outstanding at January 1, 2006		3,467,812		$	3.46
Options granted		784,000		$	6.39
Options exercised		(130,784	)	$	2.65
Options cancelled		(64,213	)	$	7.95
Options outstanding at March 31, 2006		4,056,815		$	3.98
Options exercisable at March 31, 2006		1,987,795		$	2.89

     The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding at March 31, 2006 were 4.3 years and $15.3 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable at March 31, 2006 were 3.8 years and $9.8 million, respectively. The intrinsic value of options exercised during the three months ended March 31, 2006 was approximately $608,000.

     On February 26, 2001, the Board of Directors adopted, and on May 4, 2001, the stockholders approved the Company’s Employee Stock Purchase Plan (“2001 Plan”), which authorized the issuance of up to 800,000 shares of common stock, allowing eligible employees to purchase common stock, in a series of offerings, through payroll deductions of up to 10% of their total compensation. The purchase price in each offering is 85% of the fair market value of the stock on either (i) the offering commencement date or (ii) the offering termination date (six months after commencement date), whichever is lower. 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.

     The Company utilizes the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123R. The weighted-average fair values of the options granted under the stock option plans and shares subject to purchase under the employee stock purchase plan were $3.46 and $1.81, respectively, for the three months ended March 31, 2006, assuming no dividends and using the following assumptions:

	Stock Option			Purchase
	Plans			Plan
Expected life (years)		4.6			.5
Expected stock price volatility		55.5	%		51.0	%
Risk free interest rate		4.45	%		4.2	%

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     Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury rates on the date of grant for a term equivalent to the expected life of the options. The expected life was calculated using the method outlined in SEC Staff Accounting Bulletin Topic 14.D.2, “Expected Term,” as the Company’s historical experience does not provide a reasonable basis for the expected term of the option.

     Based on the Company’s historical employee turnover and stock option forfeitures rates, an annualized estimated forfeiture rate of 8.5% has been used in calculating the cost for stock options. Under the true-up provisions of SFAS 123R, additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.

     SFAS 123R requires the presentation of pro forma information for the comparative period prior to the adoption as if all of the Company’s stock options had been accounted for under the fair value method of the original SFAS 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year period (in thousands, except per share data).

	Three Months
	Ended
	March 31, 2005
Net income as reported	$	611
Add: Total stock-based employee compensation expense included in reported net income		15
Deduct: Total stock-based employee compensation expense not included in reported net income, determined under fair value based method for all awards		(448	)
Pro forma net income	$	178
Net income per share:
Basic — as reported	$	0.04
Diluted — as reported	$	0.04
Basic — pro forma	$	0.01
Diluted — pro forma	$	0.01
Weighted average number of shares outstanding:
Basic		14,456
Diluted		15,898

     The fair value for stock option awards during the three months ended March 31, 2005 was estimated at the date of the grant, using a Black-Scholes option-pricing model, assuming no dividends and the following assumptions:

	2005
Expected life (years)		4
Expected stock price volatility		94.8	%
Risk free interest rate		3.57	%

4. 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 incremental common shares, determined through the application of the treasury stock method under SFAS No. 128 “Earnings Per Share” to the stock options outstanding during the period.

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	Three Months Ended
	March 31,
	2006			2005
	(In thousands, except
	per share data)
Numerator:
Income from continuing operations	$	119		$	631
Loss from discontinued operations		(22	)		(20	)
Net income	$	97		$	611
Denominator:
Denominator for basic net income per share — Weighted shares outstanding		15,024			14,456
Dilutive effect of assumed exercise of stock options		1,443			1,961
Denominator for diluted net income (loss) per share		16,467			16,417
Basic net income (loss) per share
Continuing operations	$	0.01		$	0.04
Discontinued operations	$	(0.00	)	$	(0.00	)
Total net income per share	$	0.01		$	0.04
Diluted net income (loss) per share
Continuing operations	$	0.01		$	0.04
Discontinued operations	$	(0.00	)	$	(0.00	)
Total net income per share	$	0.01		$	0.04

     Common stock equivalents (stock options) of 272,613 and 90,119 were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2006 and 2005, 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.

5. Comprehensive Income (Loss)

     Components of comprehensive income (loss) include net income and certain transactions that have generally been reported in the consolidated statements of stockholders’ equity. Other comprehensive income (loss) includes gains and losses from foreign currency translation adjustments and unrealized gains and losses on short-term investments.

	Three Months Ended
	March 31,
	(In thousands)
	2006		2005
Net income	$	97	$	611
Foreign currency translation adjustments		171		(63	)
Unrealized loss on short-term investments		—		(1	)
Other comprehensive income (loss)		171		(64	)
Total comprehensive income	$	268	$	547

6. Income Taxes

     The provision for income taxes represents the Company’s federal and state income tax obligations as well as foreign tax provisions. The Company’s provision for income taxes was $12,000 and $46,000 for the three months ended March 31, 2006 and 2005, respectively. The effective tax rates during the three months ended March 31, 2006 and 2005 were significantly less than the U.S. federal statutory rate primarily as a result of the anticipated utilization of domestic net operating loss carryforwards, which will result in the adjustment to the corresponding portion of the previously established valuation allowance. As of March 31, 2006, the domestic deferred tax assets remained fully reserved by the valuation allowance.

7. Commitments and Contingencies

Contingencies

     On January 4, 2006, the Company reached a settlement with the Securities and Exchange Commission concerning the SEC’s investigation, which commenced in 2003, relating to the restatement of the Company’s financial statements for fiscal years 2001 and 2002. The settlement did not require the Company to pay a monetary

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penalty. As part of the settlement, the Company consented to a cease and desist order requiring future compliance with Federal securities laws and regulations, and retained a consultant to assist the Company in reviewing its compliance procedures.

     In connection with this investigation, the Company is subject to indemnification obligations to certain former executives in accordance with the Company’s Restated Articles of Organization. Since the Company is unable to estimate the future indemnification obligations, expenses related to these obligations are recorded as they become known. Under these indemnification agreements, the Company incurred legal expenses of $69,000 and $80,000 during the three months ended March 31, 2006 and 2005, respectively. The Company had obligations of approximately $50,000 and $26,000 recorded in accrued liabilities as of March 31, 2006 and December 31, 2005, respectively. If it is ultimately determined that such executives do not satisfy the criteria for indemnification set forth in the Company’s Restated Articles of Organization, such executives would be obligated to repay the Company any amounts advanced by the Company to cover legal fees or other expenses of defending such investigation.

     From time to time, the Company is subject to routine litigation and proceedings in the ordinary course of business. The Company is not aware of any pending litigation to which the Company is or may become a party, that the Company believes could have a material adverse impact on its consolidated results of operations or financial condition.

8. Restructuring Expenses

     In the second quarter of 2004, the Company adopted a plan of restructuring to reduce operating costs. Under this plan, the Company 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.

     Restructuring charges accrued and unpaid at March 31, 2006, including current and long term portions of $45,000 and $176,000, respectively, were as follows:

	Balance at							Balance at
	December 31,		Restructuring					March 31,
	2005		Expenses		Payments			2006
Facility exit costs	$	230,000		—	$	(9,000	)	$	221,000
Total	$	230,000		—	$	(9,000	)	$	221,000

9. Discontinued Operations

     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 March 31, 2006 and 2005 included costs of $22,000 and $20,000, respectively. These costs primarily relate to legal and accounting costs associated with the dissolution of the VistaSource business in Europe.

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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 Performance Management (“BPM”) and Business Intelligence (“BI”) applications based on Applix’s TM1. TM1 applications enable continuous strategic planning, management and monitoring of performance across the financial and operational functions within the enterprise.

     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.

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.

Stock-based compensation

     Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123(R), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires us to measure the grant date fair value of equity awards given to employees in exchange for services and recognize that cost over the period that such services are performed. Prior to adopting SFAS 123R, we accounted for stock-based compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under APB 25, we generally did not recognize compensation expense in connection with the grant of stock options because all options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant.

     In transitioning from APB 25 to SFAS 123R, we have applied the modified prospective method. Accordingly, periods prior to adoption have not been restated and are not directly comparable to periods after adoption. Under the modified prospective method, compensation cost recognized in periods after adoption includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, less estimated forfeitures, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R, less estimated forfeitures.

     Under SFAS 123R, stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. The Company estimates the fair value of each stock-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates the following assumptions:

• Expected volatility is based on the historical volatility of the Company’s common stock.

• The risk-free interest rate is based on the U.S. Treasury rates on the date of grant for a term equivalent to the expected life of the options.

• The expected life was calculated using the method outlined in SEC Staff Accounting Bulletin Topic 14.D.2, “Expected Term,” which represents the average of the contractual life of the stock option and its graded vesting term, as the Company’s historical experience does not provide a reasonable basis for the expected term of the option.

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• No dividends payments as the Company intends to retain its earnings to finance future growth and therefore does not anticipate paying any cash dividends on its common stock in the foreseeable future.

     Many of these assumptions are highly subjective and require the exercise of management judgment. Management must also apply judgment in developing an estimate of awards that may be forfeited, which is based on the Company’s historical employee turnover and stock option forfeitures rates. If actual results differs significantly from its estimates, management may choose to employ different assumptions in the future, and the stock-based compensation expense recorded in future periods may differ materially from that recorded in the current period.

     For more information about stock-based compensation, including valuation methodology, see Note 3 of Notes to Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q.

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

• Revenue Recognition

• Allowance for Doubtful Accounts

• Goodwill and Other Intangible Assets and Related Impairment

• Restructuring

• Income Taxes

     These policies are unchanged from those used to prepare the 2005 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, 2005, to Note 2 to the consolidated financial statements for the year ended December 31, 2005, contained within the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, and to Note 2 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2006 and 2005

Revenues

	(In thousands, except percentages)
	Three Months Ended March 31,
			Percent					Percent
			of					of
	2006		Revenue			2005		Revenue
Software License Revenues	$	4,427		49	%	$	3,447		45	%
Professional Services Revenues		431		5	%		466		6	%
Maintenance Revenues		4,135		46	%		3,735		49	%
Total Professional Services and Maintenance Revenues		4,566		51	%		4,201		55	%
Total Revenues	$	8,993		100	%	$	7,648		100	%

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     Total revenues for the three months ended March 31, 2006 were $8,993,000, compared to $7,648,000 for the three months ended March 31, 2005. The increase in total revenues from the prior year was comprised of increases of $980,000 in software license revenues and $365,000 in professional services and maintenance revenues.

     Total revenues for three months ended March 31, 2006 increased 18%, which includes impacts of foreign currency exchange rate fluctuations, from the same period in the prior year. When expressed at constant foreign currency exchange rates, total revenues increased 23% for the three months ended March 31, 2006 compared to the same period in the prior year.

Software License Revenues

     Software license revenues increased by $980,000 to $4,427,000, or 49% of total revenues, for the three months ended March 31, 2006, from $3,447,000, or 45% of total revenues, for the three months ended March 31, 2005. Software license revenues for three months ended March 31, 2006 increased 28%, which includes impacts of foreign currency exchange rate fluctuations, from the same period in the prior year. When expressed at constant foreign currency exchange rates, total software license revenues increased 35% for the three months ended March 31, 2006 compared to the same period in the prior year. The increase in software license revenues was largely due to the Company expanding its customer base, domestically and internationally, and successfully competing in broader and higher value deals resulting from the strengthening of our worldwide field operations, resulting primarily from additions to the sales operations, as well as the continued development and enhancements to the Company’s product offerings.

     Domestic license revenues increased by $624,000 to $1,769,000 for the three months ended March 31, 2006 from $1,145,000 for the three months ended March 31, 2005. International license revenues increased by $356,000 to $2,658,000 for the three months ended March 31, 2006 from $2,302,000 for the three months ended March 31, 2005.

     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 value added resellers (“VARs”), independent distributor and sales agents and original equipment manufacturers (“OEMs”).

Professional Services and Maintenance

     Professional services and maintenance revenues increased by 9% to $4,566,000 for the three months ended March 31, 2006 as compared to $4,201,000 for the three months ended March 31, 2005. When expressed at constant foreign currency exchange rates, professional services and maintenance revenues increased 14% for the three months ended March 31, 2006 compared to the same period in the prior year. During the three months ended March 31, 2006, maintenance revenues increased $400,000 to $4,135,000, compared to $3,735,000 for the three months ended March 31, 2005, and professional services revenues decreased to $431,000 for the three months ended March 31, 2006, compared to $466,000 for the three months ended March 31, 2005. The increase in maintenance revenue was primarily attributable to the increase in the customer installed base from 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 Company will continue to rely primarily on its partners to provide consulting services, including BPM/BI product implementations, as the Company focuses on maintenance services, which include telephonic support, unspecified product upgrades, as well as bug fixes and patches. The Company expects maintenance revenues to continue to increase due to strong customer maintenance renewal rates.

Cost of Revenues

	(In thousands, except percentages)
	Three Months Ended March 31,
	2006		2005
Cost of Software License Revenues	$	44	$	23
Cost of Professional Services Revenues and Maintenance Revenues:
Cost of Professional Services Revenues		411		410

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	(In thousands, except percentages)
	Three Months Ended March 31,
	2006				2005
Cost of Maintenance Revenues		605				548
Total		1,016				958
Total Cost of Revenues	$	1,060			$	981
Gross Margin:			(A	)			(A	)
Software License	$	4,383	99	%	$	3,424	99	%
Professional Services and Maintenance:
Professional Services		20	5	%		56	12	%
Maintenance		3,530	85	%		3,187	85	%
Total		3,550	78	%		3,243	77	%
Total Gross Margin	$	7,933	88	%	$	6,667	87	%

(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 and the cost of product packaging and documentation material. Cost of software license revenues as a percentage of software license revenues was less than 1% for the three months ended March 31, 2006 and 2005. The increase in the cost of license revenues was primarily due an increase in third-party royalties associated with the sales of certain products.

Cost of Professional Services and Maintenance Revenues

     The cost of professional services and maintenance revenues consists primarily of personnel salaries and benefits, third-party consultants, facilities and information system costs incurred to provide consulting, training and customer support, and payments to indirect channel partners to provide first level support to end-user customers. 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 increased by $58,000 to $1,016,000 for the three months ended March 31, 2006 from $958,000 for the three months ended March 31, 2005. Gross margin of professional services and maintenance revenues increased to 78% for the three months ended March 31, 2006 as compared to 77% for the three months ended March 31, 2005. The improvement in gross margin was primarily due to lower partner maintenance fees as the Company has reduced the utilization of partners for providing the first level support to end-user customers in maintenance renewals, partially offset by an increase in customer support and professional service employees and approximately $16,000 in stock-based compensation expenses due to the adoption of SFAS 123R on January 1, 2006.

Operating Expenses

	(In thousands, except percentages)
	Three Months Ended March 31,
			Percent of					Percent of
	2006		Revenues			2005		Revenues
Sales and marketing	$	4,573		51	%	$	3,395		44	%
Product development		1,568		17	%		1,151		15	%
General and administrative		1,724		19	%		1,361		18	%
Amortization of acquired intangible asset		63		1	%		63		1	%
Total operating expenses	$	7,928		88	%	$	5,970		78	%

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, as well as the cost of the Company’s international sales operations. Sales and marketing

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expenses increased $1,178,000 to $4,573,000 for the three months ended March 31, 2006 from $3,395,000 for the three months ended March 31, 2005. Sales and marketing expenses as a percentage of total revenues were 51% and 44% for the three months ended March 31, 2006 and 2005, respectively. The increase in sales and marketing expenses was primarily due to an increase in staffing in sales and marketing personnel, including specifically an increase in headcount from 43 at March 31, 2005 to 55 at March 31, 2006 in the Company’s direct sales force and presales technical staff. In addition, the Company increased its investment in marketing programs, advertising and lead generation activities. The increase was also attributable higher sales commission expense based on increased revenues and approximately $168,000 in stock-based compensation expenses due to the adoption of SFAS 123R on January 1, 2006.

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, as well as the cost of software development tools. Product development expenses increased $417,000 to $1,568,000 for the three months ended March 31, 2006 from $1,151,000 for the three months ended March 31, 2005. These expenses represent 17% of total revenues for the three months ended March 31, 2006, as compared to 15% of total revenues for the three months ended March 31, 2005. The increase in product development expenses was primarily due to an increase in staffing as well as approximately $120,000 in stock-based compensation expenses due to the adoption of SFAS 123R on January 1, 2006. 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 those legal costs incurred under indemnification obligations to former executives associated with the investigation by the Securities and Exchange Commission (“SEC”) related to the Company’s financial restatements for the fiscal years 2001 and 2002. General and administrative expenses increased $363,000 to $1,724,000, or 19% of total revenues, for the three months ended March 31, 2006 from $1,361,000, or 18% of total revenues, for the three months ended March 31, 2005. The increase was partially due to higher legal and consulting costs associated with the previously announced SEC investigation that was settled in January 2006. These costs totaled approximately $197,000 for the three months ended March 31, 2006 as compared to approximately $80,000 for the three months ended March 31, 2005. The increase was also attributable in part to approximately $191,000 of stock-based compensation expenses due to the adoption of SFAS 123R on January 1, 2006. The Company will continue to closely monitor general and administrative costs.

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 for the three months ended March 31, 2006 and 2005, respectively. The amortization expense will continue to be ratably amortized through the first quarter of 2007.

Interest and Other Income (Expense), Net

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

     Interest and other income (expense), net increased to income of $126,000 for the three months ended March 31, 2006, as compared to an expense of $20,000 for the three months ended March 31, 2005. The increase was mainly due an increase of approximately $139,000 in interest income for the three months ended March 31, 2006 as compared to the same period in 2005 due to higher interest rates earned on higher average cash and short-term investments balances.

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Provision for Income Taxes

     The provision for income taxes represents the Company’s federal and state income tax obligations as well as foreign tax provisions. The Company’s provision for income taxes was $12,000 and $46,000 for the three months ended March 31, 2006 and 2005, respectively. The effective tax rates of approximately 9% for the three months ended March 31, 2006 and 7% for the three months ended March 31, 2005 were significantly less than the U.S. federal statutory rate primarily as a result of the anticipated utilization of domestic net operating loss carryforwards, which will result in the release of a portion of the previously established valuation allowance.

Discontinued Operations

     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 March 31, 2006 and 2005 included costs of $22,000 and $20,000, respectively. These costs primarily relate to legal and accounting costs associated with the dissolution of the VistaSource business in Europe.

LIQUIDITY AND CAPITAL RESOURCES

     The Company currently derives its liquidity and capital resources primarily from the Company’s cash flow from operations. The Company’s cash and cash equivalents balances were $25,044,000 and $20,740,000 as of March 31, 2006 and December 31, 2005, respectively, which excludes restricted cash of $400,000 and $500,000 as of each respective date. The Company’s days sales outstanding (“DSO”) in accounts receivable was 59 days as of March 31, 2006, compared with 65 days as of December 31, 2005.

     Cash provided by the Company’s operating activities was $2,524,000 for the three months ended March 31, 2006, compared to cash provided by operating activities of $2,880,000 for the three months ended March 31, 2005. Cash provided by operating activities was primarily due strong cash collections on its accounts receivable for the three months ended March 31, 2006.

     Cash provided by investing activities totaled $1,101,000 for the three months ended March 31, 2006 compared to cash used in investing activities of $3,019,000 for the three months ended March 31, 2005. Cash provided by investing activities consisted primarily of maturities, net of purchases, of approximately $1,227,000 of short-term investments during the three months ended March 31, 2006.

     Cash provided by financing activities totaled $584,000 for the three months ended March 31, 2006, which consisted of proceeds received from the issuance of stock under the Company’s stock plans. Cash provided by financing activities totaled $1,717,000 for the three months ended March 31, 2005, which consisted of $825,000 of proceeds received from the issuance of stock under the Company’s stock plans and $892,000 of proceeds from the repayment of notes receivable.

     Cash paid for income taxes by the Company was $192,000 and $170,000 for the three months ended March 31, 2006 and 2005, respectively. The increase was primarily due to an increase in federal income taxes paid.

     In April 2005, the Company renewed its credit facility, which provides for loans and other financial accommodations, with Silicon Valley Bank (“SVB”). The renewed credit facility is a domestic working capital line of credit with an interest rate equal to the prime interest rate and is in the aggregate principal amount of up to the lesser of: (i) $3,000,000; and (ii) an amount based upon a percentage the Company’s qualifying domestic accounts receivable. The facility will expire in March 2007. The availability of borrowings under the Company’s credit facility is subject to the maintenance of certain financial covenants and the borrowing limits described above.

     The Company has contractual obligations for capital leases, operating leases and purchase obligations that were summarized in a table of Contractual Obligations set forth in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. There have been no material changes to the contractual obligations of the Company, outside of the ordinary course of the Company’s business, since December 31, 2005.

     The Company does not have any off-balance sheet financing or unconsolidated special purpose entities.

     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 and short-term investment balances, funds expected to be generated from operations, and funding available under the SVB credit facility. The

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availability of borrowings under the Company’s credit facility 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 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 product development. 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.

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, the Euro and the 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 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 Company’s primary foreign currency exposures relate to its short-term intercompany balances with its foreign subsidiaries, primarily the Australian dollar. The Company’s 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 income. For the three months ended March 31, 2006, the Company reported a net loss on foreign exchange of approximately $81,000 in its Condensed Consolidated Statements of Income, primarily due to unfavorable movements in the Australian dollar exchange rate. Based on foreign currency exposures existing at March 31, 2006, a 10% unfavorable movement in foreign exchange rates related to the British pound, Euro, Australian dollar, and Swiss franc would result in an approximately $925,000 reduction to earnings. The Company has not engaged in activities to hedge these exposures.

     At March 31, 2006, the Company held $25,044,000 in cash and cash equivalents, excluding $400,000 of restricted cash, consisting primarily of money market funds, and $2,971,000 in short-term investments. Cash equivalents are classified as available for sale and carried at fair value, which approximates cost. Short-term investments are classified as available for sale and carried at amortized cost, which approximates their fair value. 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 of March 31, 2006. The term “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”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of March 31, 2006, the Company’s chief executive officer and chief financial officer

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concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

     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 March 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

     Investors should carefully consider the risks described below before making an investment decision with respect to the common stock of the Company.

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;

• 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 the accounting for stock-based compensation; 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 SUSTAIN PROFITABILITY OR BE ABLE TO FULFILL ANY FUTURE CAPITAL NEEDS.

     We could incur operating losses and negative cash flows in the future because of costs and expenses relating to brand development, marketing and other promotional activities, continued development of our information technology infrastructure, expansion of product offerings and development of relationships with other businesses. There can be no assurance that we will continue to achieve a profitable level of operations in the future.

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     We believe, based upon our current business plan, that our current cash, cash equivalents and short-term investments, funds expected to be generated from operations and our available credit line 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 BPM and BI markets, including 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.

WE RELY HEAVILY ON KEY PERSONNEL.

     We rely heavily on key personnel throughout the organization. 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

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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.

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

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     We rely in part on systems integrators to promote, sell and implement our solutions. If we fail to maintain and develop relationships with systems integrators, our operating results will likely suffer. In addition, if we are unable to rely on systems integrators to install and implement our products, we will likely have to provide these services ourselves, resulting in increased costs. As a result, our results of operations 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.

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ITEM 6. EXHIBITS

(a) Exhibits

Exhibit
Number	Description
10.1	Change-in-Control Agreement between the Registrant and Chanchal Samanta, dated January 5, 2006.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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: May 15, 2006	/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

Exhibit
Number	Description
10.1	Change-in-Control Agreement between the Registrant and Chanchal Samanta, dated January 5, 2006.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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