##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-25361
 ONYX SOFTWARE CORPORATION
 (Exact name of registrant as specified in its charter)
 Washington
    
    91-1629814(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 1100  112th Avenue NE
Suite 100
Bellevue, Washington 98004
(Address of principal executive offices) (Zip code)
 (425) 451-8060
(Registrants telephone number)
 þ o
 þ o
 o þ




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##### Table of Contents



ONYX SOFTWARE CORPORATION
  
 CONTENTS
 PART IFINANCIAL INFORMATIONItem 1.Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2004 and September 30, 2005
(Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2004 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statement of Shareholders Equity and Comprehensive Income
(Loss) (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2004 and 2005 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.Controls and Procedures
    
    
    33PART IIOTHER INFORMATION
    
    
    34Item 6.Exhibits
    
    
    34SIGNATURES
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 ONYX SOFTWARE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 December 31,
    
    
    September 30,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,393
    
    
    $
    21,368Accounts receivable, less allowances of $475 in 2004 and $402 in 2005
    
    
    10,509
    
    
    
    10,099Current deferred tax asset
    
    
    89
    
    
    
    87Prepaid expenses and other
    
    
    1,968
    
    
    
    2,841Total current assets
    
    
    26,959
    
    
    
    34,395Property and equipment, net
    
    
    3,711
    
    
    
    2,941Purchased technology, net
    
    
    4,095
    
    
    
    3,328Goodwill, net
    
    
    10,306
    
    
    
    9,466Deferred tax asset
    
    
    35
    
    
    
    34Other assets
    
    
    450
    
    
    
    447Total assets
    
    $
    45,556
    
    
    $
    50,611LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,205
    
    
    $
    1,685Salary and benefits payable
    
    
    1,937
    
    
    
    1,932Accrued liabilities
    
    
    2,453
    
    
    
    3,750Income taxes payable
    
    
    217
    
    
    
    28Current portion of restructuring-related liabilities
    
    
    731
    
    
    
    246Term loan
    
    
    167
    
    
    
    167Current portion of deferred revenue
    
    
    17,050
    
    
    
    14,043Total current liabilities
    
    
    23,760
    
    
    
    21,851Long-term deferred revenue, less current portion
    
    
    1,923
    
    
    
    1,208Long-term restructuring-related liabilitieswarrants
    
    
    52
    
    
    
    Long-term purchased technology
    
    
    1,842
    
    
    
    895Term loan  less current portion
    
    
    222
    
    
    
    97Long-term deferred rent
    
    
    914
    
    
    
    695Minority interest in joint venture
    
    
    106
    
    
    
    Commitments and contingenciesShareholders equity:Preferred stock, $0.01 par value:Authorized shares  20,000,000; Issued and outstanding shares  none
    
    
    
    
    
    
    Common stock, $0.01 par value:Authorized shares  80,000,000; Issued and outstanding shares 
14,615,823 in 2004 and 17,964,511 in 2005.
    
    
    144,736
    
    
    
    154,059Accumulated deficit
    
    
    (130,969
    )
    
    
    (129,835
    )Accumulated other comprehensive income
    
    
    2,970
    
    
    
    1,641Total shareholders equity
    
    
    16,737
    
    
    
    25,865Total liabilities and shareholders equity
    
    $
    45,556
    
    
    $
    50,611
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ONYX SOFTWARE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenue:License
    
    $
    2,399
    
    
    $
    4,356
    
    
    $
    9,579
    
    
    $
    12,542Support and service
    
    
    11,274
    
    
    
    11,102
    
    
    
    33,131
    
    
    
    32,463Total revenue
    
    
    13,673
    
    
    
    15,458
    
    
    
    42,710
    
    
    
    45,005Cost of revenue:License
    
    
    154
    
    
    
    372
    
    
    
    613
    
    
    
    1,162Amortization of acquired technology
    
    
    
    
    
    
    256
    
    
    
    
    
    
    
    768Support and service
    
    
    4,674
    
    
    
    4,537
    
    
    
    13,645
    
    
    
    13,316Total cost of revenue
    
    
    4,828
    
    
    
    5,165
    
    
    
    14,258
    
    
    
    15,246Gross margin
    
    
    8,845
    
    
    
    10,293
    
    
    
    28,452
    
    
    
    29,759Operating expenses:Sales and marketing
    
    
    4,956
    
    
    
    5,241
    
    
    
    14,337
    
    
    
    14,386Research and development
    
    
    2,655
    
    
    
    2,454
    
    
    
    7,973
    
    
    
    7,407General and administrative
    
    
    2,210
    
    
    
    2,188
    
    
    
    6,361
    
    
    
    7,231Restructuring and other related charges (benefits)
    
    
    (42
    )
    
    
    
    
    
    
    442
    
    
    
    Amortization of acquisition-related intangibles
    
    
    209
    
    
    
    
    
    
    
    627
    
    
    
    Total operating expenses
    
    
    9,988
    
    
    
    9,883
    
    
    
    29,740
    
    
    
    29,024Income (loss) from operations
    
    
    (1,143
    )
    
    
    410
    
    
    
    (1,288
    )
    
    
    735Other income (expense), net
    
    
    (41
    )
    
    
    257
    
    
    
    (355
    )
    
    
    31Change in fair value of outstanding warrants
    
    
    102
    
    
    
    
    
    
    
    314
    
    
    
    (2
    )Income (loss) before income taxes
    
    
    (1,082
    )
    
    
    667
    
    
    
    (1,329
    )
    
    
    764Income tax provision (benefit)
    
    
    (61
    )
    
    
    (131
    )
    
    
    88
    
    
    
    (264
    )Minority interest in consolidated subsidiary
    
    
    (89
    )
    
    
    (25
    )
    
    
    (65
    )
    
    
    (106
    )Net income (loss)
    
    $
    (932
    )
    
    $
    823
    
    
    $
    (1,352
    )
    
    $
    1,134Basic and diluted net income (loss) per share
    
    $
    (0.06
    )
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.07Shares used in computation of basic net income
(loss) per share
    
    
    14,554
    
    
    
    17,952
    
    
    
    14,317
    
    
    
    16,342Shares used in computation of diluted net income
(loss) per share
    
    
    14,554
    
    
    
    18,203
    
    
    
    14,317
    
    
    
    16,455
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ONYX SOFTWARE CORPORATION
 
 CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE
 INCOME (LOSS)
(In thousands, except share data)
(Unaudited)
 AccumulatedOtherCommon Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Deficit
    
    
    Income
    
    
    EquityBalance at December 31, 2004
    
    
    14,615,823
    
    
    $
    144,736
    
    
    $
    (130,969
    )
    
    $
    2,970
    
    
    $
    16,737Exercise of stock options
    
    
    2,815
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Restructuring- related warrants
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    54Comprehensive income (loss):Translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (360
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (619
    )
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (979
    )Balance at March 31, 2005
    
    
    14,618,638
    
    
    $
    144,794
    
    
    $
    (131,588
    )
    
    $
    2,610
    
    
    $
    15,816Exercise of stock options
    
    
    21,095
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Common stock issued in
connection with purchased
technology obligation
    
    
    367,647
    
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    966Proceeds from private placement
of common stock
    
    
    2,825,097
    
    
    
    7,853
    
    
    
    
    
    
    
    
    
    
    
    7,853Issuance of common stock under
employee stock purchase plan
    
    
    86,768
    
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    219Comprehensive income (loss):Translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (690
    )Net income
    
    
    
    
    
    
    
    
    
    
    930
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240Balance at June 30, 2005
    
    
    17,919,245
    
    
    $
    153,889
    
    
    $
    (130,658
    )
    
    $
    1,920
    
    
    $
    25,151Exercise of stock options
    
    
    45,266
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    170Comprehensive income (loss):Translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (279
    )Net income
    
    
    
    
    
    
    
    
    
    
    823
    
    
    
    Total comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    544Balance at September 30, 2005
    
    
    17,964,511
    
    
    $
    154,059
    
    
    $
    (129,835
    )
    
    $
    1,641
    
    
    $
    25,865
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2004
    
    
    2005Operating activities:Net income (loss)
    
    $
    (1,352
    )
    
    $
    1,134Adjustments to reconcile net income (loss) to net cash used in operating
activities:Depreciation and amortization
    
    
    2,040
    
    
    
    1,917Loss on disposal of assets
    
    
    
    
    
    
    24Imputed interest expense
    
    
    55
    
    
    
    55Deferred income taxes
    
    
    (385
    )
    
    
    3Change in fair value of outstanding warrants
    
    
    (314
    )
    
    
    2Minority interest in loss of consolidated subsidiary
    
    
    (65
    )
    
    
    (106
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,423
    
    
    
    410Prepaid expenses and other assets
    
    
    (305
    )
    
    
    (871
    )Accounts payable and accrued liabilities
    
    
    602
    
    
    
    1,519Restructuring-related liabilities
    
    
    (2,198
    )
    
    
    (485
    )Deferred revenue
    
    
    (250
    )
    
    
    (3,722
    )Income taxes payable
    
    
    (304
    )
    
    
    (189
    )Net cash used in operating activities
    
    
    (1,053
    )
    
    
    (309
    )Investing activities:Restricted cash
    
    
    1,723
    
    
    
    Acquisition of purchased technology
    
    
    (400
    )
    
    
    Purchases of property and equipment
    
    
    (1,057
    )
    
    
    (405
    )Net cash provided by (used in) investing activities
    
    
    266
    
    
    
    (405
    )Financing activities:Proceeds from exercise of stock options
    
    
    45
    
    
    
    231Proceeds from issuance of shares under employee stock purchase plan
    
    
    177
    
    
    
    219Net proceeds from sale of common stock
    
    
    
    
    
    
    7,853Proceeds from term loan
    
    
    500
    
    
    
    Payments on term loan
    
    
    (69
    )
    
    
    (125
    )Net cash provided by financing activities
    
    
    653
    
    
    
    8,178Effects of exchange rate changes on cash
    
    
    (94
    )
    
    
    (489
    )Net increase/ (decrease) in cash and cash equivalents
    
    
    (228
    )
    
    
    6,975Cash and cash equivalents at beginning of period
    
    
    10,127
    
    
    
    14,393Cash and cash equivalents at end of period
    
    $
    9,899
    
    
    $
    21,368Supplemental cash flow disclosure:Interest paid
    
    $
    102
    
    
    $
    111Income taxes paid
    
    
    401
    
    
    
    226Purchase technology acquired in exchange for:Common stock issued
    
    
    (1,666
    )
    
    
    Liabilities incurred or assumed
    
    
    (2,029
    )
    
    
    Settlement of purchase technology liability with common stock
    
    
    
    
    
    
    (966
    )
  6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Description of Business and Basis of Presentation
 Description of the Company
 Overview
  Interim Financial Information
  Reclassifications
  2. Summary of Significant Accounting Policies
 Principles of Consolidation
  7




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Use of Estimates
  Revenue Recognition
         8




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Cash and Cash Equivalents
  Stock-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except per share data)Net Income (loss):As reported
    
    $
    (932
    )
    
    $
    823
    
    
    $
    (1,352
    )
    
    $
    1,134Add: stock-based employee
expense included in reported
net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: stock-based employee
compensation expense
determined under
fair-value-based method for
all awards
    
    $
    (913
    )
    
    $
    (744
    )
    
    $
    (2,585
    )
    
    $
    (1,917
    )Pro forma net income (loss)
    
    $
    (1,845
    )
    
    $
    79
    
    
    $
    (3,937
    )
    
    $
    (783
    )Net income (loss) per share:As reported
    
    $
    (0.06
    )
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.07Pro forma net income (loss)
    
    $
    (0.13
    )
    
    $
    
    
    
    $
    (0.27
    )
    
    $
    (0.05
    )
 Income Taxes
  9




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Other Comprehensive Income
  Recently Issued Accounting Pronouncements
 " "
 3. Purchased Technology
  4. Restructuring and Other Related Charges (Benefits)
   Cash Payments,
    
    
    Balance atBalance at
    
    
    Fair Value
    
    
    Write-offs and
    
    
    September 30,December 31, 2004
    
    
    Adjustment
    
    
    Reclassifications
    
    
    2005Excess Facilities
    
    $
    731
    
    
    
    
    
    
    $
    (485
    )
    
    $
    246Excess Facilities  Warrants
    
    
    52
    
    
    
    2
    
    
    
    (54
    )
    
    
    Total:
    
    $
    783
    
    
    $
    2
    
    
    $
    (539
    )
    
    $
    246
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5. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands, except
    
    
    (In thousands, exceptper share data)
    
    
    per share data)Net income (loss) (A)
    
    $
    (932
    )
    
    $
    823
    
    
    $
    (1,352
    )
    
    $
    1,134Weighted average number of common shares (B)
    
    
    14,554
    
    
    
    17,952
    
    
    
    14,317
    
    
    
    16,342Effect of dilutive securities:Stock options
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    113Warrants
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Adjusted weighted average shares (C)
    
    
    14,554
    
    
    
    18,203
    
    
    
    14,317
    
    
    
    16,455Gain/(Loss) per share:Basic (A)/(B)
    
    $
    (0.06
    )
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.07Diluted (A)/(C)
    
    $
    (0.06
    )
    
    $
    0.05
    
    
    $
    (0.09
    )
    
    $
    0.07
  11




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6. Third-Party License Agreements
  7. Line of Credit
  8. Segment and Geographic Information
  12




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Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Americas
    
    $
    8,904
    
    
    $
    9,576
    
    
    $
    27,156
    
    
    $
    28,360United Kingdom
    
    $
    1,852
    
    
    $
    2,632
    
    
    $
    5,264
    
    
    $
    7,408Rest of World
    
    $
    2,917
    
    
    $
    3,250
    
    
    $
    10,290
    
    
    $
    9,237Total
    
    $
    13,673
    
    
    $
    15,458
    
    
    $
    42,710
    
    
    $
    45,005
 9. Guarantees
  10. Onyx Japan
    13




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11. Liquidity
     12. Shareholders Equity
  14




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13. Contingencies
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Information
  
    
    information concerning possible or assumed future results of operations, trends in
financial results and business plans, including those relating to earnings growth and
revenue growth;
    
    statements about the level of our costs and operating expenses relative to our
revenues, and about the expected composition of our revenues;
    
    statements about our future capital requirements and the sufficiency of our cash,
cash equivalents, investments and available bank borrowings to meet these requirements;
    
    information about the anticipated release dates of new products;
    
    statements about the expected costs and timing of terminating our excess facility commitments;
    
    other statements about our plans, objectives, expectations and intentions; and
    
    other statements that are not historical facts.
   15




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Overview
  Overview of the Results for the Three and Nine Months Ended September 30, 2005
  
    
    Total revenue of $15.5 million for the third quarter of 2005, consistent with the
second quarter of 2005 and up 13% from the third quarter of 2004;
    
    License revenue of $4.4 million for the third quarter of 2005, up 1% from the
second quarter of 2005 and up 82% from the third quarter of 2004;
    
    Support and service revenue of $11.1 million for the third quarter of 2005, down 1%
from the second quarter of 2005 and down 1% from the third quarter of 2004;
    
    Support and service margins of 59% for the third quarter of 2005, remaining steady
as compared to 59% in the second quarter of 2005 and consistent with 59% in the third
quarter of 2004;
    
    Total revenue for the first nine months of 2005 of $45 million, up 5% from the first nine months of 2004;
    
    License revenue for the first nine months of 2005 of $12.5 million, up 31% from the first nine months of 2004;
    
    Operating expenses, of $10.0 million for the third quarter of 2005, up from $9.5
million in the second quarter of 2005 and consistent with $9.9 million in the third
quarter of 2004;
    
    Cash balances of $21.4 million at September 30, 2005, up from $19.7 million at June
30, 2005; and up from $14.4 million at December 31, 2004; and
    
    Days sales outstanding, based on end of period receivable balances, down to 58 days
in the third quarter of 2005 compared to 73 days in the second quarter of 2005 and 78
days in the third quarter of 2004.
    
    
    increase our pipeline of sales opportunities;
    
    integrate new talent into our sales and marketing organization;
    
    enhance our market position and awareness;
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
    
    enhance our solutions portfolio to address more customer needs;
    
    focus our resources and efforts on the market opportunities with the highest probability of success;
    
    diversify and expand partnerships with key system integration and technology vendors;
    
    aggressively market our recent major product releases; and
    
    maintain high customer satisfaction levels.
  Critical Accounting Policies and Estimates
   Revenue Recognition
       17




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Allowance for Doubtful Accounts
  Impairment of Goodwill
  Restructuring
  Incomes Taxes
  Recent Accounting Pronouncements
  18




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Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember
    
    September 30,2004
    
    2005
    
    2004
    
    2005Revenue:License
    
    
    17.5
    %
    
    
    28.2
    %
    
    
    22.4
    %
    
    
    27.9
    %Support and service
    
    
    82.5
    
    
    
    71.8
    
    
    
    77.6
    
    
    
    72.1Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue:License
    
    
    1.1
    
    
    
    2.4
    
    
    
    1.5
    
    
    
    2.6Amortization of acquired technology
for license
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    1.7Support and service
    
    
    34.2
    
    
    
    29.3
    
    
    
    31.9
    
    
    
    29.5Total cost of revenue
    
    
    35.3
    %
    
    
    33.4
    %
    
    
    33.4
    %
    
    
    33.8
    %Gross margin
    
    
    64.7
    
    
    
    66.6
    
    
    
    66.6
    
    
    
    66.2Operating expenses:Sales and marketing
    
    
    36.2
    
    
    
    33.9
    
    
    
    33.6
    
    
    
    32.0Research and development
    
    
    19.4
    
    
    
    15.9
    
    
    
    18.6
    
    
    
    16.5General and administrative
    
    
    16.2
    
    
    
    14.2
    
    
    
    14.9
    
    
    
    16.1Restructuring and other related charges
    
    
    (0.3
    )
    
    
    
    
    
    
    1.0
    
    
    
    Amortization of acquisition-related
intangibles
    
    
    1.5
    
    
    
    
    
    
    
    1.5
    
    
    
    Total operating expenses
    
    
    73.0
    %
    
    
    64.0
    %
    
    
    69.6
    %
    
    
    64.6
    %Income (loss) from operations
    
    
    (8.3
    )
    
    
    2.6
    
    
    
    (3.0
    )
    
    
    1.6Other income (expense), net
    
    
    (0.3
    )
    
    
    1.7
    
    
    
    (0.8
    )
    
    
    0.1Change in fair value of outstanding
warrants
    
    
    0.7
    
    
    
    
    
    
    
    0.7
    
    
    
    Income (loss) before income taxes
    
    
    (7.9
    )
    
    
    4.3
    
    
    
    (3.1
    )
    
    
    1.7Income tax provision (benefit)
    
    
    (0.4
    )
    
    
    (0.8
    )
    
    
    0.3
    
    
    
    (0.6
    )Minority interest in consolidated
subsidiary
    
    
    (0.7
    )
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (0.2
    )Net income (loss)
    
    
    (6.8
    )%
    
    
    5.3
    %
    
    
    (3.2
    )%
    
    
    2.5
    %
 Revenue
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Cost of Revenue
 Cost of license revenue
  Amortization of acquired technology
  Cost of support and service revenue
  Operating Expenses and Other
 Sales and marketing
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Research and development
   General and administrative
  Restructuring and other related charges (benefits)
   Cash Payments,
    
    
    Balance atBalance at
    
    
    Fair Value
    
    
    Write-offs and
    
    
    September 30,December 31, 2004
    
    
    Adjustment
    
    
    Reclassifications
    
    
    2005Excess Facilities
    
    $
    731
    
    
    
    
    
    
    $
    (485
    )
    
    $
    246Excess Facilities  Warrants
    
    $
    52
    
    
    $
    2
    
    
    $
    (54
    )
    
    
    Total:
    
    $
    783
    
    
    $
    2
    
    
    $
    (539
    )
    
    $
    246
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Other Income (Expense), Net
  Change in Fair Value of Outstanding Warrants
  Income Taxes
  Minority Interest in Consolidated Subsidiary
  Liquidity and Capital Resources
  22




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Off-Balance Sheet Arrangements and Contractual Obligations
  Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price
 Our operating results fluctuate and could fall below expectations of investors, resulting in a
decrease in our stock price.
  
    
    general economic conditions, which may affect our customers capital investment levels in
management information systems and the timing of their purchases;
    
    the loss of any key technical, sales, customer support or management personnel and the timing of any new hires;
    
    budget and spending decisions by our prospective and existing customers;
    
    customers and prospects decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next, or to proceed with
smaller-than-forecasted orders or implementations;
    
    level of purchases by our existing customers, including additional license and maintenance revenues;
    
    our ability to compete in the highly competitive customer management systems market;
    
    our ability to develop, introduce and market new products and product versions on a timely basis;
    
    rate of market acceptance of our software solutions;
    
    variability in the mix of our license versus service revenue, the mix of our direct
versus indirect license revenue and the mix of services that we perform versus those
performed by third-party service providers;
    
    our ability to successfully expand our operations, and the amount and timing of
expenditures related to this expansion;
    
    the costs we incur as a result of our ongoing efforts to comply with the regulations
promulgated under the Sarbanes-Oxley Act of 2002;
    
    the cost and financial accounting effects of any acquisitions of companies or complementary technologies; and
    
    the expense we could incur as a result of an impairment in our goodwill.
  
    
    our sales cycles are lengthy and variable, typically ranging between six and twelve
months from our initial contact with a potential new customer to the signing of a license
agreement, although the sales cycle varies substantially from customer to customer, and
occasionally requires substantially more time;
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
    
    a substantial portion of our sales are completed at the end of the quarter and, as a
result, a substantial portion of our license revenue is recognized in the last month of a
quarter, and often in the last weeks or days of a quarter;
    
    the contracting process of our sales cycle may take more time than we have historically
experienced;
    
    the amount of unfulfilled orders for our products at the beginning of a quarter is
typically small because our products are generally shipped shortly after orders are
received; and
    
    the delay of new product releases can result in a customers decision to delay execution
of a contract
  We have incurred losses in prior periods, and may not be able to maintain profitability, which
could cause a decrease in our stock price.
    If our new corporate strategy and market positioning is unsuccessful, we may not be able to
generate revenue and achieve profitability.
  If we are unable to compete successfully in the highly competitive customer management systems
market, our business will fail.
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If we do not retain our key employees and management team our ability to execute our business
strategy will be limited.
  We may be unable to obtain the funding necessary to support the expansion of our business, and any
funding we do obtain could dilute our shareholders ownership interest in Onyx.
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If we are unable to develop and maintain effective long-term relationships with our key partners,
or if our key partners fail to perform, our ability to sell our solution will be limited.
   
    
    we are unable to develop and maintain effective, long-term relationships with existing and potential key partners;
    
    our existing and potential key partners endorse a product or technology other than our solutions;
    
    we are unable to adequately train a sufficient number of key partners; or
    
    our existing and potential key partners do not have or do not devote resources necessary to implement our solutions.
 Economic and business conditions could adversely affect our revenue growth and ability to forecast
revenue.
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The internal controls implemented under the Sarbanes-Oxley Act of 2002 may not prevent or detect
all material weaknesses or significant deficiencies.
  We may be unable to establish vendor specific objective evidence in future periods and, if we
cannot, the method by which we recognize revenue could change
  Fluctuations in support and service revenue could decrease our total revenue or decrease our gross
margins, which could cause a decrease in our stock price.
  We have a limited operating history and are subject to the risks of new enterprises.
  
    
    no history of sustained profitability;
    
    uncertain growth in the market for, and uncertain market acceptance of, our solutions;
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
    
    reliance on one product family;
    
    the risk that competition, technological change or evolving customer preferences, such as
preferences for different computing platforms, could harm sales of our solutions;
    
    the need to implement our sales, marketing and after-sales service initiatives, both domestically and internationally;
    
    the need to execute our product development activities;
    
    dependence on a limited number of key technical, customer support, sales and managerial personnel; and
    
    the risk that our management will be unable to effectively manage growth, a downturn or
any acquisition we may undertake.
  Our solutions may not achieve significant market acceptance.
  If potential customers do not accept the Onyx product family, our business will fail.
  We may be unable to efficiently restructure or expand our sales organization, which could harm our
ability to expand our business.
  If our customers cannot successfully implement our products in a timely manner, demand for our
solutions will be limited.
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Rapid changes in technology could render our products obsolete or unmarketable, and we may be
unable to introduce new products and services successfully and in a timely manner.
   If we do not expand our international operations and successfully overcome the risks inherent in
international business activities, the growth of our business will be limited.
  
    
    costs of customizing products for foreign countries;
    
    export and import restrictions, taxes, tariffs and other trade barriers;
    
    the need to comply with multiple, conflicting and changing laws and regulations;
    
    reduced protection of intellectual property rights and increased liability exposure; and
    
    regional economic, cultural and political conditions, including the direct and indirect
effects of terrorist activity and armed conflict in countries in which we do business.
   We may be unable to adequately protect our proprietary rights, which may limit our ability to
compete effectively.
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Intellectual property claims and litigation could subject us to significant liability for damages
and result in invalidation of our proprietary rights.
  
    
    stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;
    
    pay damages;
    
    enter into licensing or royalty agreements, which may be unavailable on acceptable terms; or
    
    redesign products or services that incorporate infringing technology, which we might not
be able to do at an acceptable price, in a timely fashion or at all.
 Our products may suffer from defects or errors, which could result in loss of revenue, delayed or
limited market acceptance of our products, increased costs and damage to our reputation.
   You may be unable to resell your shares at or above the price at which you purchased them, and our
stock price may be volatile.
  
    
    significant trading activity by shareholders with large holdings in our common stock;
    
    future announcements concerning us or our competitors;
    
    actual or anticipated quarterly variations in operating results;
    
    changes in analysts earnings projections or recommendations;
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
    
    announcements of technological innovations;
    
    the introduction of new products;
    
    changes in product pricing policies by us or our competitors;
    
    proprietary rights litigation or other litigation; or
    
    changes in accounting standards that adversely affect our revenue and earnings.
   Our articles of incorporation and bylaws and Washington law contain provisions that could
discourage a takeover.
  
    
    stagger the election of our board members so that only one-third of our board is up for
reelection at each annual meeting;
    
    allow our board to issue preferred stock without any vote or further action by the
shareholders;
    
    eliminate the right of shareholders to act by written consent without a meeting, unless
the vote to take the action is unanimous;
    
    eliminate cumulative voting in the election of directors;
    
    specify a minimum threshold for shareholders to call a special meeting;
    
    specify that directors may be removed only with cause; and
    
    specify a supermajority requirement for shareholders to change those portions of our
articles that contain the provisions described above.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Foreign Currency Risk
    
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Changes in internal controls
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PART II  OTHER INFORMATION
 
 Item 6. Exhibits
  Number
    
    Description3.1
    
    Restated Articles of Incorporation of the registrant (exhibit 3.1)(a)3.2
    
    Amended and Restated Bylaws of the registrant (exhibit 3.2)(d)4.1
    
    Rights Agreement dated October 25, 1999 between the registrant and
ChaseMellon Shareholder Services LLC (exhibit 2.1)(b)4.2
    
    Amendment No. 1 to Rights Agreement dated March 5, 2003 between the
registrant and Mellon Investor Services LLC (exhibit 4.1)(c)10.1
    
    Second Amendment to Employment
Agreement entered into as of July 11, 2005 between the
registrant and Janice P. Anderson (exhibit 10.1(e)31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended32.1
    
    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 200232.2
    
    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
 
 (a)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended September 30, 2003.(b)
    
    Incorporated by reference to the designated exhibit to the registrants registration
statement on Form 8-A (No. 0- 25361) filed October 28, 1999.(c)
    
    Incorporated by reference to the designated exhibit to the registrants Annual Report on Form
10-K (No. 0-25361) for the year ended December 31, 2002.(d)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended June 30, 2004(e)
    
    Incorporated by reference to the designated exhibit to the registrants Current Report on
Form 8-K (No. 0-25361) filed with the Securities and
Exchange Commission on July 14, 2005. 34




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SIGNATURES
  ONYX SOFTWARE CORPORATION(Registrant)Date: November 9, 2005
    
    By:
    
    /s/ Janice P. AndersonJanice P. AndersonChief Executive Officer andChairman of the BoardDate: November 9, 2005
    
    By:
    
    /s/ Robert J. ChamberlainRobert J. ChamberlainChief Financial Officer(Principal Financial Officer)
 35