e10vq

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 September 30, 2005


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

For the transition period from to

Commission File Number 0-25040

APPLIX, INC.

(Exact name of registrant as specified in its charter)


MASSACHUSETTS		04-2781676

(State or other jurisdiction of		(I.R.S. Employer Identification
incorporation or organization)		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 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 þ No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

As of November 1, 2005, the Registrant had 14,804,134 outstanding shares of common stock.

APPLIX, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2005

Table of Contents


	Page
	No
*Part I — Financial Information*
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004		3
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2005 and 2004		4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004		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		22
Item 4. Controls and Procedures		23
*Part II — Other Information*
Item 6. Exhibits		24
*Signature*		25
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 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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Applix, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and par value amounts)


	September 30,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	18,700		$	15,924
Short-term investments		4,700			—
Accounts receivable, less allowance for doubtful accounts of $343 and $227, respectively		4,199			6,171
Other current assets		1,229			1,207
Deferred tax assets		455			496

Total current assets		29,283			23,798
Restricted cash		500			400
Property and equipment, net		712			580
Other assets		635			687
Intangible asset, net of accumulated amortization of $1,125 and $938, respectively		375			562
Goodwill		1,158			1,158

TOTAL ASSETS	$	32,663		$	27,185

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	915		$	795
Accrued expenses		4,603			5,177
Accrued restructuring expenses, current portion		46			112
Deferred revenues		8,271			8,421

Total current liabilities		13,835			14,505

Accrued restructuring expenses, long term portion		202			261

Other long term liabilities		113			181

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; 14,802,884 and 14,290,584 shares issued and outstanding, respectively		37			36
Additional paid-in capital		56,664			54,348
Accumulated deficit		(36,411	)		(40,673	)
Accumulated other comprehensive loss		(1,777	)		(1,473	)

Total stockholders’ equity		18,513			12,238

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	32,663		$	27,185

See accompanying Notes to Condensed Consolidated Financial Statements.

Applix, Inc.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Revenues:
Software license	$	4,373		$	3,307		$	12,846		$	10,766
Professional services and maintenance		4,441			3,602			13,048			10,789

Total revenues		8,814			6,909			25,894			21,555
Cost of revenues		998			863			3,000			3,220

Gross margin		7,816			6,046			22,894			18,335

Operating expenses:
Sales and marketing		3,695			2,473			11,005			7,631
Product development		1,308			1,059			3,753			3,614
General and administrative (includes $15 of stock-based compensation for the three months ended September 30, 2005 and 2004, respectively, and $45 of stock-based compensation for the nine months ended September 30, 2005 and 2004, respectively)		1,101			1,507			3,868			4,603
Restructuring		—			604			—			577
Amortization of an acquired intangible asset		63			63			188			188

Total operating expenses		6,167			5,706			18,814			16,613

Operating income		1,649			340			4,080			1,722
Non-operating income (expense):
Interest and other income, net		84			290			178			256

Income from continuing operations before income taxes		1,733			630			4,258			1,978
(Benefit) provision for income taxes		(240	)		178			(74	)		293

Income from continuing operations		1,973			452			4,332			1,685
Discontinued operations:
Loss from discontinued operations		(20	)		(36	)		(70	)		(80	)

Net income	$	1,953		$	416		$	4,262		$	1,605

Net income (loss) per share, basic and diluted:
Continuing operations, basic	$	0.13		$	0.03		$	0.30		$	0.12
Continuing operations, diluted	$	0.12		$	0.03		$	0.26		$	0.11
Discontinued operations, basic and diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)
Net income per share, basic	$	0.13		$	0.03		$	0.29		$	0.11
Net income per share, diluted	$	0.12		$	0.03		$	0.26		$	0.10
Weighted average number of shares outstanding:
Basic		14,744			14,243			14,610			13,957
Diluted		16,534			15,539			16,370			15,432

See accompanying Notes to Condensed Consolidated Financial Statements.

Applix, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)


	Nine Months Ended
	September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	4,262		$	1,605
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		228			474
Amortization		188			452
Provision for doubtful accounts		135			(9	)
Deferred gain on sale of subsidiary		—			(195	)
Non-cash stock-based compensation expense		45			45
Non-cash restructuring credit		—			(27	)
Changes in operating assets and liabilities:
Decrease in accounts receivable		1,451			1,458
(Increase) decrease in prepaid and other current assets		(71	)		326
Increase in other assets		(5	)		—
Increase in accounts payable		197			174
Decrease in accrued expenses		(458	)		(1,161	)
Decrease in accrued restructuring expenses		(125	)		(2,969	)
Decrease in other liabilities		(80	)		(86	)
Increase (decrease) in deferred revenues		154			(1,483	)

Cash provided by (used in) operating activities		5,921			(1,396	)
Cash flows from investing activities:
Property and equipment expenditures		(339	)		(188	)
Proceeds from sale of subsidiary		—			195
(Increase) decrease in restricted cash		(100	)		417
Purchases of short-term investments		(8,650	)		—
Sales of short-term investments		3,950			—

Cash (used in) provided by investing activities		(5,139	)		424
Cash flows from financing activities:
Proceeds from issuance of common stock to affiliate		—			3,000
Proceeds from issuance of common stock under stock plans		1,425			1,739
Proceeds from notes receivable		892			232

Cash provided by financing activities		2,317			4,971
Effect of exchange rate changes on cash		(323	)		88

Increase in cash and cash equivalents		2,776			4,087
Cash and cash equivalents at beginning of period		15,924			9,241

Cash and cash equivalents at end of period	$	18,700		$	13,328

Supplemental disclosure of cash flow information
Cash paid for income tax	$	325		$	518

See accompanying Notes to Condensed Consolidated Financial Statements.

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”) solutions, focused on interactive planning, budgeting and analytics, as well as financial reporting, which includes Applix TM1 and related modules. The Company’s products represent one principal business segment, which the Company reports as its continuing 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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004.

Changes in restricted cash balances of $100,000 and $(417,000) have been reported as cash flows from investing activities in the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004, respectively. Cash flows resulting from changes in restricted cash balances had previously been reported as cash flows from operating activities. The presentation of the $417,000 decrease in restricted cash for the nine months ended September 30, 2004 has been restated to conform with this change.

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 fixed assets, intangible assets, domestic and foreign income tax liabilities, valuation of deferred tax assets, the allowance for doubtful accounts and accrued liabilities.

net of tax effects. Realized gains or losses are determined based on the specific identified cost of the securities. Any unrealized losses that are considered to be “other than temporary” are charged immediately to the income statement.

Goodwill

The Company tests its goodwill for impairment annually on September 30^th of each fiscal year or more frequently upon occurrence of certain events or circumstances. Goodwill is tested for impairment annually in a two-step process. First, the Company determines if the fair value of its “reporting unit” exceeds the carrying amount of the reporting unit. If the fair value does not exceed the carrying amount, goodwill of the reporting unit is potentially impaired, and the Company must then measure the impairment loss by comparing the “implied fair value” of the goodwill, as defined by Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, to its carrying amount. The fair value of the reporting unit at September 30, 2005 and 2004 was estimated using the Market Value Approach. In accordance with the Company’s policies, at September 30, 2005 and 2004, the Company evaluated its goodwill and determined that the fair value had not decreased below the carrying value and, accordingly, no impairment adjustments have been recorded to date.

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 would have been adjusted to the pro forma amounts presented below (in thousands, except for per share amounts):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income as reported	$	1,953		$	416		$	4,262		$	1,605
Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects		15			15			45			45
Deduct: Total stock-based employee compensation expense not included in reported net income, determined under fair value based method for all awards, net of related tax effects		(419	)		(324	)		(1,235	)		(1,062	)

Pro forma net income	$	1,549		$	107		$	3,072		$	588

Net income per share:
Basic — as reported	$	0.13		$	0.03		$	0.29		$	0.11

Diluted — as reported	$	0.12		$	0.03		$	0.26		$	0.10

Basic — pro forma	$	0.11		$	0.01		$	0.21		$	0.04

Diluted — pro forma	$	0.10		$	0.01		$	0.19		$	0.04

Pro forma weighted average number of shares outstanding:
Basic		14,744			14,243			14,610			13,957
Diluted		16,044			15,211			15,832			15,093

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 as well as the following assumptions:


	2005			2004
Expected life (years)		4			4
Expected stock price volatility		86.1	%		80.6	%
Risk free interest rate		4.02	%		3.25	%

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R was scheduled to become effective for the first interim or annual reporting period beginning after June 15, 2005.

On April 14, 2005, the Securities and Exchange Commission (“SEC”) announced the adoption of a rule that defers the required effective date of SFAS No. 123R. The SEC rule provides that SFAS No. 123R is now effective for registrants as of the beginning of the first fiscal year beginning after June 15, 2005, instead of at the beginning of the first quarter after June 15, 2005, delaying the required change until January 1, 2006. The Company is currently assessing the impact of SFAS No. 123R and considering the valuation models available; however, we anticipate that the adoption will significantly increase recorded compensation expense.

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. 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.


	Three Months Ended						Nine Months Ended
	September30,						September 30,
	2005			2004			2005			2004
	(In thousands, except per share data)
Numerator:
Income from continuing operations	$	1,973		$	452		$	4,332		$	1,685
Loss from discontinued operations		(20	)		(36	)		(70	)		(80	)

Net income	$	1,953		$	416		$	4,262		$	1,605

Denominator:
Denominator for basic net income per share:
Weighted average shares outstanding		14,744			14,243			14,610			13,957
Dilutive effect of assumed exercise of stock options		1,790			1,296			1,760			1,475

Denominator for diluted net income (loss) per share		16,534			15,539			16,370			15,432

Basic net income (loss) per share
Continuing operations	$	0.13		$	0.03		$	0.30		$	0.12
Discontinued operations	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)
Net income per share	$	0.13		$	0.03		$	0.29		$	0.11
Diluted net income (loss) per share
Continuing operations	$	0.12		$	0.03		$	0.26		$	0.11
Discontinued operations	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)
Net income per share	$	0.12		$	0.03		$	0.26		$	0.10

Common stock equivalents (stock options) of 115,825 and 1,348,622 were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2005 and 2004, respectively, and 161,325 and 521,243 were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2005 and 2004, 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. Short-Term Investments

The Company’s short-term investments were as follows:


			September 30, 2005
			(In thousands)
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Fair Value
Debt securities	$	4,701	$	—	$	(1	)	$	4,700

Total	$	4,701	$	—	$	(1	)	$	4,700

As of September 30, 2005, all short-term investments mature in less than one year.

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


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	(In thousands)						(In thousands)
	2005			2004			2005			2004
Net income	$	1,953		$	416		$	4,262		$	1,605
Other comprehensive (loss) income:
Foreign currency translation adjustments		(52	)		(197	)		(303	)		185
Unrealized gain on investments		1			—			(1	)		—

Other comprehensive (loss) income		(51	)		(197	)		(304	)		185

Total comprehensive income	$	1,902		$	219		$	3,958		$	1,790

6. Income Taxes

The Company has provided for potential amounts due in various foreign tax jurisdictions. Judgment is required in determining the Company’s worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although management believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.

During the quarter ended September 30, 2005, the Company benefited from the favorable resolution of a matter with tax authorities in the United Kingdom relating to transfer pricing effected in prior years. The reversal of the related tax contingency reserve resulted in a tax benefit of approximately $379,000.

The provision for income taxes represents the Company’s federal and state income tax obligations as well as foreign tax provisions. The Company’s (benefit) provision for income taxes were ($240,000) and ($74,000) for the three and nine months ended September 30, 2005, respectively, and $178,000 and $293,000 for the three and nine months ended September 30, 2004, respectively. The effective tax rates during 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 have resulted in the adjustment to the corresponding portion of the previously established valuation allowance. As of September 30, 2005, the domestic deferred tax assets remained fully reserved by the valuation allowance.

7. Commitments and Contingencies

Contingencies

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 be a party, that the Company believes could have a material adverse effect on its consolidated results of operations or financial condition.

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. In connection with this investigation, the Company is subject to indemnification obligations to certain former executives in accordance with the Company’s Articles of Organization. Since the Company is unable to estimate the future indemnification obligations, these obligations are recorded as they become known. Under these indemnification agreements, the Company incurred legal expenses of $14,000 during the nine months ended September 30, 2005 and $386,000 during the fiscal year ended December 31, 2004. The Company had no recorded obligations as of September 30, 2005 and approximately $10,000 recorded in accrued liabilities as of December 31, 2004. If it is ultimately determined that such executive does not satisfy the criteria for indemnification set forth in the Company’s Articles of Organization, such executive would be obligated to repay the Company any amounts advanced by the Company to cover legal fees or other expenses of defending such investigation.

The Company is currently undergoing an unclaimed abandoned property (“UAP”) audit by the Commonwealth of Massachusetts. During the fourth quarter of 2004, the Company recorded a provision of approximately $300,000 based on its estimated exposure relating to the UAP audit. However, it is possible that additional provisions may be required in future periods if it becomes probable that the actual results from the ultimate disposition of the UAP audit differ from this estimate.

8. Restructuring 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 for and 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 vacated 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. In connection with the restructuring plan, the Company recorded a restructuring expense for this space of $3,238,000. The restructuring expense included a $3,000,000 fee paid to the landlord for the vacated 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 June 30, 2004.

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 for 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. The Company expects to make payments relating to this restructuring until the lease expires in March 2010.

Restructuring charges accrued and unpaid at September 30, 2005, including current and long term portions of $46,000 and $202,000, respectively, were as follows:


	Balance at							Balance at
	December 31,		Restructuring					September 30,
	2004		Expenses		Payments			2005
Facility exit costs	$	373,000		—	$	(125,000	)	$	248,000

Total	$	373,000		—	$	(125,000	)	$	248,000

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 September 30, 2005 and 2004 included costs of $20,000 and $36,000, respectively, and $70,000 and $80,000 for the nine months ended September 30, 2005 and 2004, respectively. These costs primarily relate to legal and accounting costs associated with the dissolution of the VistaSource business in Europe.

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 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.

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 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 2004 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, 2004, to Note 2 to the consolidated financial statements for the year ended December 31, 2004 contained within the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, 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, 2005 and 2004

Revenues


								(In thousands, except percentages)
	Three Months Ended September 30,										Nine Months Ended September 30,
			Percent					Percent					Percent					Percent
			of					of					of					of
	2005		Revenues			2004		Revenues			2005		Revenues			2004		Revenues
Software License Revenues	$	4,373		50	%	$	3,307		48	%	$	12,846		50	%	$	10,766		50	%

Professional Services Revenues		513		6	%		320		4	%		1,523		6	%		1,142		5	%
Maintenance Revenues		3,928		44	%		3,282		48	%		11,525		44	%		9,647		45	%

Total Professional Services and Maintenance Revenues		4,441		50	%		3,602		52	%		13,048		50	%		10,789		50	%

Total Revenues	$	8,814		100	%	$	6,909		100	%	$	25,894		100	%	$	21,555		100	%

Total revenues for the three months ended September 30, 2005 were $8,814,000, compared to $6,909,000 for the three months ended September 30, 2004. The increase in total revenues was due to an increase of $1,066,000 in software license revenues, coupled with an increase of $839,000 in professional services and maintenance revenues. Total revenues for the nine months ended September 30, 2005 were $25,894,000 as compared to $21,555,000 for the nine months ended September 30, 2004. Total revenues for three and nine months ended September 30, 2005 increased 28% and 20%, respectively, from the same periods in prior year, which includes the favorable impacts of foreign currency exchange rate fluctuations.

Software License Revenues

Software license revenues increased by $1,066,000 to $4,373,000, representing 50% of total revenues, for the three months ended September 30, 2005, from $3,307,000, representing 48% of total revenues, for the three months ended September 30, 2004. For the nine months ended September 30, 2005, software license revenues increased by $2,080,000 to $12,846,000, or 50% of total revenues, from $10,766,000, or 50% of total revenues, for the same period of 2004. The increase in software license revenues was primarily attributable to the organizational changes in the North American sales operations made in the second half of 2004 which resulted in the strengthening our worldwide field operations and securing new customers, domestically and internationally. The increase 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 effect of foreign currency exchange rate fluctuations was an increase in software license revenues of approximately $42,000 and $270,000 for the three and nine months ended September 30, 2005, respectively.

Domestic license revenues increased by $965,000 to $1,816,000 for the three months ended September 30, 2005 from $851,000 for the same period of 2004. International license revenues increased by $101,000 to $2,557,000 for the three months ended September 30, 2005 from $2,456,000 for the three months ended September 30, 2004. For the nine months ended September 30, 2005, domestic license revenues increased by $1,567,000 to $4,820,000 from $3,253,000 for the same period of 2004. International license revenues increased by $513,000 to $8,026,000 for the nine months ended September 30, 2005 from $7,513,000 for the nine months ended September 30, 2004.

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

Professional Services and Maintenance

Professional services and maintenance revenues increased by 23% to $4,441,000 for the three months ended September 30, 2005 as compared to $3,602,000 for the three months ended September 30, 2004. During the three months ended September 30, 2005, maintenance revenues increased $646,000 to $3,928,000 from $3,282,000 for the three months ended September 30, 2004. Professional services revenues were $513,000 for the three months ended September 30, 2005 compared to $320,000 for the three months ended September 30, 2004. For the nine months ended September 30, 2005, professional services and maintenance revenues increased by 21% to $13,048,000 compared to $10,789,000 for the nine months ended September 30, 2004. During the nine months ended September 30, 2005, maintenance revenues increased $1,878,000 to $11,525,000 from $9,647,000 for the nine months ended September 30, 2004, and professional services revenues increased $381,000 to $1,523,000, compared to $1,142,000 for the nine months ended September 30, 2004. 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 increase in professional services and 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 effect of foreign currency exchange rate fluctuations was an increase to professional service and maintenance revenues of approximately $32,000 and $277,000 for the three and nine months ended September 30, 2005, respectively. 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 September 30,								Nine Months Ended September 30,
	2005				2004				2005				2004
Cost of Software License Revenues	$	5			$	7			$	61			$	391
Cost of Professional Services Revenues and Maintenance Revenues:
Cost of Professional Services Revenues		424				260				1,213				841
Cost of Maintenance Revenues		569				596				1,726				1,988

Total		993				856				2,939				2,829

Total Cost of Revenues	$	998			$	863			$	3,000			$	3,220

Gross Margin:			(A	)			(A	)			(A	)			(A	)

Software License	$	4,368	100	%	$	3,300	100	%	$	12,785	100	%	$	10,375	96	%
Professional Services and Maintenance:
Professional Services		89	17	%		60	19	%		310	20	%		301	26	%
Maintenance		3,359	86	%		2,686	82	%		9,799	85	%		7,659	79	%

Total		3,448	78	%		2,746	76	%		10,109	77	%		7,960	74	%

Total Gross Margin	$	7,816	89	%	$	6,046	88	%	$	22,894	88	%	$	18,335	85	%


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

Cost of Software License Revenues

Cost of software license revenues consist 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, 2005 and 2004, respectively, and less than 1% and 4% for the nine months ended September 30, 2005 and 2004, respectively. The decrease and corresponding improvement in software license gross margin for the nine months ended September 30, 2005 as compared to the same period in the prior year was primarily due to a decrease of $265,000 in the amortization of capitalized software development costs. 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, 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 $137,000 to $993,000 for the three months ended September 30, 2005 from $856,000 for the three months ended September 30, 2004. Gross margin of professional services and maintenance revenues increased to 78% for the three months ended September 30, 2005 as compared to 76% for the three months ended September 30, 2004. For the nine months ended September 30, 2005, the cost of professional services and maintenance revenues increased to $2,939,000 from $2,829,000 for the same period of 2004. Gross margin of professional services and maintenance revenues increased to 77% for the nine months ended September 30, 2005 as compared to 74% for the nine months ended September 30, 2004. The improvements in gross margins were 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 of third party consulting fees resulting from increased consulting revenues.

Operating Expenses


	(In thousands, except percentages)
	Three Months Ended September 30,										Nine Months Ended September 30,
			Percent of					Percent of					Percent of					Percent of
	2005		Revenues			2004		Revenues			2005		Revenues			2004		Revenues
Sales and marketing	$	3,695		42	%	$	2,473		36	%	$	11,005		43	%	$	7,631		35	%
Product development		1,308		15	%		1,059		15	%		3,753		14	%		3,614		17	%
General and administrative		1,101		12	%		1,507		22	%		3,868		15	%		4,603		21	%
Restructuring		—		—	%		604		9	%		—		—	%		577		3	%
Amortization of acquired intangible asset		63		1	%		63		1	%		188		1	%		188		1	%

Total operating expenses	$	6,167		70	%	$	5,706		83	%	$	18,814		73	%	$	16,613		77	%

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 $1,222,000 to $3,695,000 for the three months ended September 30, 2005 from $2,473,000 for the three months ended September 30, 2004. Sales and marketing expenses as a percentage of total revenues were 42% and 36% for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005, sales and marketing expenses increased $3,374,000 to $11,005,000, or 43% of total revenue, from $7,631,000, or 35% of total revenue for the same period of 2004. The increase in sales and marketing expenses for the three and nine months ended September 30, 2005 was primarily due to an increase in staffing in sales and marketing, including the Company’s direct sales force and presales technical staff, as well as an increased investment in marketing programs, advertising and lead generation activities.

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. There were no software development costs that qualified for capitalization during the three and nine months ended September 30, 2005 or 2004. Product development costs not meeting the requirements of capitalization are expensed as incurred.

Product development expenses increased $249,000 to $1,308,000 for the three months ended September 30, 2005 from $1,059,000 for the three months ended September 30, 2004. These expenses represent 15% of total revenues for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005, product development expenses increased $139,000 to $3,753,000, or 14% of total revenue, from $3,614,000, or 17% of total revenue, for the nine months ended September 30, 2004. The increase in product development expenses was primarily due to a slight increase in staffing. 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 (including costs under indemnification obligations to former executives) 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 $406,000 to $1,101,000, or 12% of total revenues, for the three months ended September 30, 2005 from $1,507,000, or 22% of total revenues, for the three months ended September 30, 2004. For the nine months ended September 30, 2005, general and administrative expenses decreased $735,000 to $3,868,000, or 15% of total revenue, compared to $4,603,000, or 21% of total revenue, for the same period of 2004. The decrease was primarily due to lower legal costs associated with the SEC investigation for the three and nine months ended September 30, 2005. The decrease for the nine months ended September 30, 2005 compared to the same period of 2004 was also due to a reduction in allocated rent expense resulting from the Company’s restructuring of its UK office lease in 2004. The Company will continue to closely monitor general and administrative costs.

Restructuring

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 the three and nine months September 30, 2005 and 2004, respectively. The intangible asset 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 and gains and losses on foreign currency exchange fluctuations.

Interest and other income (expense), net decreased $206,000 to income of $84,000 for the three months ended September 30, 2005, as compared to income of $290,000 for the three months ended September 30, 2004. For the nine months ended September 30, 2005, interest and other income (expense), net decreased $78,000 to income of $178,000, as compared to income of $256,000 for the nine months ended September 30, 2004. The decreases were mainly due to foreign currency exchange rate fluctuations, primarily the Euro, the British Pound, and the Australian dollar, on intercompany balances denominated in the Company’s foreign subsidiaries’ local currencies. In particular, the Company recorded losses of approximately $34,000 and $93,000 for the three and nine months ended September 30, 2005, respectively, compared to gains of $252,000 and $20,000 for the three and nine months ended September 30, 2004, respectively. The decrease in interest and other income (expense), net was partially offset by an increase of approximately $111,000 and $282,000 in interest income for the three and nine months ended September 30, 2005, respectively, as compared to the same periods in 2004 due to higher interest rates earned on higher average cash and short-term investments balances. In addition, the decrease in interest and other income (expense), net for the nine month period was due to a gain of $195,000 recorded in the second quarter of 2004 relating to the sale of its French subsidiary in the second quarter of 2001. The Company received $195,000 from the buyer which was released from escrow upon completion of a tax audit.

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 (benefit) provision for income taxes were ($240,000) and ($74,000) for the three and nine months ended September 30, 2005, respectively, and $178,000 and $293,000 for the three and nine months ended September 30, 2004, respectively. The effective tax rates 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 have resulted in the release of a portion of the previously established valuation allowance. In addition, the decrease in income tax provision for the three and nine months ended September 30, 2005 compared to the same periods of 2004 was due to the favorable resolution of a matter with tax authorities in the United Kingdom relating to transfer pricing effected in prior years. The reversal of the related tax contingency reserve resulted in a tax benefit of approximately $379,000 in the quarter ended September 30, 2005.

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 $19,200,000 and $16,324,000 as of September 30, 2005 and December 31, 2004, respectively, which includes restricted cash of $500,000 and $400,000 as of each respective balance sheet date. The Company’s days sales outstanding (“DSO”) in accounts receivable was 43 days as of September 30, 2005, compared to 59 days as of December 31, 2004.

Cash provided by the Company’s operating activities was $5,921,000 for the nine months ended September 30, 2005, compared to cash used in operating activities of $1,396,000 for the nine months ended September 30, 2004. Cash provided by operating activities was primarily due to net income of $4,262,000, coupled with strong cash collections on its accounts receivable for the nine months ended September 30, 2005.

Cash used in investing activities totaled $5,139,000 for the nine months ended September 30, 2005 compared to cash provided by investing activities of $424,000 for the nine months ended September 30, 2004. Cash used in investing activities consisted primarily of the Company’s net purchase of approximately $4,700,000 of short-term investments during the nine months ended September 30, 2005.

Cash provided by financing activities totaled $2,317,000 for the nine months ended September 30, 2005, which consisted of $1,425,000 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. This compares to total cash provided by financing activities of $4,971,000 for the nine months ended September 30, 2004, which consisted of proceeds of $3,000,000 from the Company’s sale of its common stock, at fair market value, to a member of the Company’s Board of Directors, along with another investor who is related to the Board member, $1,739,000 from the issuance of stock under the Company’s stock plans and $232,000 from the repayment of notes.

Cash paid for income taxes by the Company was $325,000 and $518,000 for the nine months ended September 30, 2005 and 2004, respectively. The decrease was primarily due to a decrease in foreign 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 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, 2004. 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, 2004.

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

For the nine months ended September 30, 2005 and the year ended December 31, 2004, the Company achieved operating profitability and generated positive operating cash flow. The Company, however, incurred operating losses and negative cash flows for the last several years prior to 2004. As of September 30, 2005, the Company had an accumulated deficit of $36.4 million. Management’s plans include increasing revenues and continuing to generate 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 SVB credit facility. 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 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 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.

Although we were profitable in the three and nine months ended September 30, 2005 and 2004, we incurred losses from continuing operations for the last several years prior to 2004. 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.

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 the 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 business performance management and business intelligence 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.

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, sale and support 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 be more attractive to customers because of their greater financial stability and 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.

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, 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 operations. For the three and nine months ended September 30, 2005, the Company recorded net losses of $34,000 and $93,000, respectively, on foreign exchange in its Condensed Consolidated Statements of Income, primarily due to movements in the Australian dollar, the British pound and the Euro exchange rates. Based on foreign currency exposures existing at September 30, 2005, a 10% unfavorable movement in foreign exchange rates related to the British pound, Euro, Australian dollar, and Swiss franc would result in an

approximately $753,000 loss to earnings. The Company has currently not engaged in activities to hedge these exposures.

At September 30, 2005, the Company held $18,700,000 in cash and cash equivalents, excluding $500,000 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 of September 30, 2005. 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 deigned 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 September 30, 2005, the Company’s chief executive officer and chief financial officer 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 September 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


Exhibit
Number		Description
10.1*		Letter Agreement between Applix, Inc. and Craig Cervo, dated October 26, 2005.

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 Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended.


		APPLIX, INC.

Date: November 14, 2005		/s/ Milton A. Alpern Milton A. Alpern
		Chief Financial Officer and Treasurer (Duly
		Authorized Officer and Principal Financial and Accounting Officer)


Exhibit
Number		Description
10.1*		Letter Agreement between Applix, Inc. and Craig Cervo, dated October 26, 2005.

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 Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended.

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		[Not applicable.]

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


*		Incorporated by reference from the Registrant’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 31, 2005.

	1.		I have reviewed this Quarterly Report on Form 10-Q of Applix, Inc.;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


Date: November 14, 2005		/s/ David C. Mahoney David C. Mahoney
		President and Chief Executive Officer


Date: November 14, 2005		/s/ Milton A. Alpern Milton A. Alpern
		Chief Financial Officer and Treasurer