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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004
 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  112
th Avenue NE
Suite 100
Bellevue, Washington 98004
(Address of principal executive offices) (Zip code) (425) 451-8060
(Registrants telephone number) Indicate by check whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes  x  No  o Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  x  No  o The number of shares of common stock, par value $0.01 per share,
outstanding on April 28, 2004 was 14,497,189.




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ONYX SOFTWARE CORPORATION CONTENTS PART IFINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2003 and March 31, 2004Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2004Condensed Consolidated Statement of Shareholders Equity for the Three Months Ended March 31, 2004Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2004Notes to Condensed Consolidated Financial StatementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART IIOTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT 3.2EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART IFINANCIAL INFORMATION 
 Item 1. Condensed Consolidated Financial Statements 
 CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
 (Unaudited)
 December 31,
    
    March 31,2003
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,127
    
    
    $
    11,706Restricted cash
    
    
    1,723
    
    
    
    1,303Accounts receivable, less allowances of $691 in 2003 and $476
in 2004
    
    
    12,245
    
    
    
    11,178Current deferred tax asset
    
    
    362
    
    
    
    367Prepaid expenses and other
    
    
    1,666
    
    
    
    1,496Total current assets
    
    
    26,123
    
    
    
    26,050Property and equipment, net
    
    
    4,277
    
    
    
    3,955Other intangibles, net
    
    
    675
    
    
    
    464Goodwill, net
    
    
    9,508
    
    
    
    9,804Other assets
    
    
    842
    
    
    
    846Total assets
    
    $
    41,425
    
    
    $
    41,119LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    883
    
    
    $
    777Salary and benefits payable
    
    
    946
    
    
    
    1,230Accrued liabilities
    
    
    1,829
    
    
    
    2,004Income taxes payable
    
    
    770
    
    
    
    649Current portion of restructuring-related liabilities
    
    
    2,758
    
    
    
    1,807Current portion of deferred revenue
    
    
    15,053
    
    
    
    14,496Total current liabilities
    
    
    22,239
    
    
    
    20,963Long-term accrued liabilities
    
    
    544
    
    
    
    528Long-term deferred revenue, less current portion
    
    
    1,025
    
    
    
    2,328Long-term restructuring-related liabilities, less current portion
    
    
    405
    
    
    
    291Long-term restructuring-related liabilitieswarrants
    
    
    565
    
    
    
    443Deferred tax liabilities
    
    
    229
    
    
    
    158Minority interest in joint venture
    
    
    119
    
    
    
    180Commitments 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 
13,969,503 in 2003 and 13,992,298 in 2004
    
    
    142,682
    
    
    
    142,714Accumulated deficit
    
    
    (128,215
    )
    
    
    (128,810
    )Accumulated other comprehensive income
    
    
    1,832
    
    
    
    2,324Total shareholders equity
    
    
    16,299
    
    
    
    16,228Total liabilities and shareholders equity
    
    $
    41,425
    
    
    $
    41,119
 See accompanying notes to condensed consolidated financial statements.




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
 (Unaudited)
 Three Months EndedMarch 31,2003
    
    2004Revenue:License
    
    $
    2,619
    
    
    $
    3,619Support and service
    
    
    11,588
    
    
    
    10,625Total revenue
    
    
    14,207
    
    
    
    14,244Cost of revenue:License
    
    
    285
    
    
    
    193Amortization of acquired technology
    
    
    84
    
    
    
    Support and service
    
    
    5,435
    
    
    
    4,456Total cost of revenue
    
    
    5,804
    
    
    
    4,649Gross margin
    
    
    8,403
    
    
    
    9,595Operating expenses:Sales and marketing
    
    
    6,483
    
    
    
    4,777Research and development
    
    
    3,129
    
    
    
    2,614General and administrative
    
    
    2,253
    
    
    
    1,924Restructuring and other related charges
    
    
    340
    
    
    
    484Amortization of acquisition-related intangibles
    
    
    209
    
    
    
    209Amortization of stock-based compensation
    
    
    13
    
    
    
    Total operating expenses
    
    
    12,427
    
    
    
    10,008Loss from operations
    
    
    (4,024
    )
    
    
    (413
    )Other income (expense), net
    
    
    9
    
    
    
    (193
    )Change in fair value of outstanding warrants
    
    
    242
    
    
    
    122Loss before income taxes
    
    
    (3,773
    )
    
    
    (484
    )Income tax provision (benefit)
    
    
    (214
    )
    
    
    56Minority interest in consolidated subsidiary
    
    
    (157
    )
    
    
    55Net loss
    
    $
    (3,402
    )
    
    $
    (595
    )Net loss per share:Basic and diluted
    
    $
    (0.27
    )
    
    $
    (0.04
    )Shares used in calculation of net loss per share:Basic and diluted
    
    
    12,698
    
    
    
    13,982
 See accompanying notes to condensed consolidated financial statements.




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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (In thousands, except share data)
 (Unaudited)
 Common Stock
    
    Accumulated
    
    AccumulatedOtherComprehensive
    
    ShareholdersShares
    
    Amount
    
    Deficit
    
    Income
    
    EquityBalance at December 31, 2003
    
    
    13,969,503
    
    
    $
    142,682
    
    
    $
    (128,215
    )
    
    $
    1,832
    
    
    $
    16,299Exercise of stock options
    
    
    22,795
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32Comprehensive income (loss):Translation gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    492Net loss
    
    
    
    
    
    
    
    
    
    
    (595
    )
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103
    )Balance at March 31, 2004
    
    
    13,992,298
    
    
    $
    142,714
    
    
    $
    (128,810
    )
    
    $
    2,324
    
    
    $
    16,228
 See accompanying notes to condensed consolidated financial statements.




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2003
    
    2004Operating activities:Net loss to common shareholders
    
    $
    (3,402
    )
    
    $
    (595
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    1,579
    
    
    
    680Deferred income taxes
    
    
    (38
    )
    
    
    (76
    )Noncash stock-based compensation expense
    
    
    13
    
    
    
    Change in fair value of outstanding warrants
    
    
    (242
    )
    
    
    (122
    )Minority interest in loss of consolidated subsidiary
    
    
    (157
    )
    
    
    55Changes in operating assets and liabilities:Accounts receivable
    
    
    3,124
    
    
    
    1,239Other assets
    
    
    246
    
    
    
    166Accounts payable and accrued liabilities
    
    
    (674
    )
    
    
    337Restructuring-related liabilities
    
    
    (3,325
    )
    
    
    (1,065
    )Deferred revenue
    
    
    (792
    )
    
    
    746Income taxes
    
    
    52
    
    
    
    (121
    )Net cash provided by (used in) operating activities
    
    
    (3,616
    )
    
    
    1,244Investing activities:Restricted cash
    
    
    (1,533
    )
    
    
    420Purchases of property and equipment
    
    
    (687
    )
    
    
    (149
    )Net cash provided by (used in) investing activities
    
    
    (2,220
    )
    
    
    271Financing activities:Proceeds from exercise of stock options
    
    
    5
    
    
    
    32Payments on capital lease obligations
    
    
    (29
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (24
    )
    
    
    32Effects of exchange rate changes on cash
    
    
    (2
    )
    
    
    32Net increase (decrease) in cash and cash equivalents
    
    
    (5,862
    )
    
    
    1,579Cash and cash equivalents at beginning of period
    
    
    17,041
    
    
    
    10,127Cash and cash equivalents at end of period
    
    $
    11,179
    
    
    $
    11,706Supplemental cash flow disclosure:Interest paid
    
    $
    29
    
    
    $
    45Income taxes refunded, net
    
    
    (228
    )
    
    
    (45
    )
 See accompanying notes to condensed consolidated financial statements.




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ONYX SOFTWARE CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. Description of Business and Basis of Presentation Description of the Company Onyx Software Corporation and subsidiaries (Company) is a leading provider
of enterprise-wide customer relationship management (CRM) solutions designed to
promote strategic business improvement and revenue growth by enhancing the way
businesses market, sell and service their products. Using the Internet in
combination with traditional forms of interaction, including phone, mail, fax
and e-mail, the Companys solution helps enterprises to more effectively
acquire, manage and maintain customer, partner and other relationships. The
Company markets its solution to companies that want to merge new, online
business processes with traditional business processes to enhance their
customer-facing operations, such as marketing, sales, customer service and
technical support. The Companys solution uses a single data model across all
customer interactions, resulting in a single repository for all marketing,
sales and service information. It is fully integrated across all
customer-facing departments and interaction media. The Companys solution is
designed to be easy to use, widely accessible, rapidly deployable, scalable,
flexible, customizable and reliable, which can result in a comparatively low
total cost of ownership and rapid return on investment. The Company was
incorporated in the state of Washington on February 23, 1994 and maintains its
headquarters in Bellevue, Washington. Interim Financial Information The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed, or omitted, pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). In
the Companys opinion, the statements include all adjustments necessary (which
are of a normal and recurring nature) for a fair presentation of the results
for the interim periods presented. These financial statements should be read in
conjunction with the Companys audited consolidated financial statements for
the year ended December 31, 2003, included in its Form 10-K filed with the SEC
on March 15, 2004. The Companys results of operations for any interim period
are not necessarily indicative of the results of operations for any other
interim period or for a full fiscal year. Reverse Stock Split On July 23, 2003, the Companys shareholders approved a one-for-four
reverse stock split. All share and per share amounts in the accompanying
condensed consolidated financial statements have been adjusted to reflect this
reverse stock split. Reclassifications The Company reclassified prior quarter amounts for long-term accrued
liabilities and long-term deferred revenue to conform with the current quarter
presentation. Long-term accrued liabilities are liabilities that will not be
settled within one year and long-term deferred revenue are revenues that will
not be recognized within one year. Such reclassifications had no impact on the
results of operations or shareholders equity for any quarter presented. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company
and its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect amounts reported in
the financial statements. Changes in these estimates and assumptions may have a
material impact on the financial statements. The Company has used




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estimates in determining certain provisions, including uncollectible trade
accounts receivable, useful lives for property and equipment, intangible
assets, tax liabilities and restructuring liabilities. Revenue Recognition The Company recognizes revenue in accordance with accounting standards for
software companies, including Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended by SOP 98-9, and related interpretations,
including Technical Practice Aids. The Company generates revenue through two sources: (a) software license
revenue and (b) support and service revenue. Software license revenue is
generated from licensing the rights to use the Companys products directly to
end-users and vertical service providers (VSPs) and indirectly through
value-added resellers (VARs) and, to a lesser extent, through third-party
products the Company distributes. Support and service revenue is generated from
sales of customer support services, consulting services and training services
performed for customers that license the Companys products. License revenue is recognized when a noncancellable license agreement
becomes effective as evidenced by a signed contract, the product has been
shipped, the license fee is fixed or determinable, and collectibility is
probable. In software arrangements that include rights to multiple software products
and/or services, the Company allocates the total arrangement fee among each of
the deliverables using the residual method, under which revenue is allocated to
undelivered elements based on vendor-specific objective evidence of fair value
of such undelivered elements and the residual amounts of revenue are allocated
to delivered elements. Elements included in multiple-element arrangements could
consist of software products, maintenance (which includes customer support
services and unspecified upgrades), or consulting services. Vendor-specific
objective evidence is based on the price charged when an element is sold
separately or, in the case of an element not yet sold separately, the price
established by authorized management, if it is probable that the price, once
established, will not change once the element is sold separately. Standard terms for license agreements call for payment within 90 days.
Probability of collection is based on the assessment of the customers
financial condition through the review of its current financial statements or
credit reports. For follow-on sales to existing customers, prior payment
history is also used to evaluate probability of collection. Revenue from
distribution agreements with VARs is typically recognized on the earlier of
receipt of cash from the VAR or identification of an end-user. In the latter
case, probability of collection is evaluated based on the creditworthiness of
the VAR. The Companys agreements with its customers, VSPs and VARs do not
contain product return rights. Revenue from maintenance arrangements is recognized ratably over the term
of the contract, typically one year. Consulting revenue is primarily related to
implementation services performed on a time-and-materials basis or, in certain
situations, on a fixed-fee basis, under separate service arrangements. Revenue
from consulting and training services is recognized as services are performed.
Standard terms for renewal of maintenance arrangements, consulting services and
training services call for payment within 30 days. Fees from licenses sold together with consulting services are generally
recognized upon shipment of the software, provided that the above criteria are
met, payment of the license fees do not depend on the performance of the
services, and the consulting services are not essential to the functionality of
the licensed software. If the services are essential to the functionality of
the software, or payment of the license fees depends on the performance of the
services, both the software license and consulting fees are recognized under
the percentage of completion method of contract accounting. If the fee is not fixed or determinable, revenue is recognized as payments
become due from the customer. If a nonstandard acceptance period is provided,
revenue is recognized upon the earlier of customer acceptance and the
expiration of the acceptance period. Cash Equivalents and Restricted Cash The Company considers all highly liquid investments with a remaining
maturity of three months or less at the date of purchase to be cash
equivalents. At December 31, 2003 and March 31, 2004, the Companys cash
equivalents consisted of money market funds. Separately, the Company had $1.3 million in restricted cash at March 31,
2004, which was security for its credit line with Silicon Valley Bank that
supports its outstanding letters of credit.




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Stock-Based Compensation The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, including Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25, issued in March 2000, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. Under APB Opinion No. 25, because the exercise price of the
Companys employee stock options generally equals the fair value of the
underlying stock on the date of grant, no compensation expense is generally
recognized. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, (SFAS 123) established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting described
above, and has adopted only the disclosure requirements of SFAS 123. The
following table illustrates the effect on net loss had the fair-value-based
method been applied to all outstanding and unvested awards in each period. Three Months Ended March 31,2003
    
    2004(In thousands, except per share data)Net loss:As reported
    
    $
    (3,402
    )
    
    $
    (595
    )Add: stock-based employee expense included in reported net loss
    
    
    13
    
    
    
    Deduct: stock-based employee compensation expense determined
under fair-value-based method for all awards
    
    
    (2,334
    )
    
    
    (679
    )Pro forma
    
    $
    (5,723
    )
    
    $
    (1,274
    )Net loss per share:As reported
    
    $
    (0.27
    )
    
    $
    (0.04
    )Pro forma
    
    $
    (0.45
    )
    
    $
    (0.09
    )
 Other Comprehensive Income SFAS No. 130, Reporting Comprehensive Income, establishes standards for
the reporting and display of comprehensive income and its components in the
financial statements. The only items of other comprehensive income that the
Company currently reports are foreign currency translation
adjustments. Total comprehensive loss for the three months ended
March 31, 2003 and 2004 was $3.3 million and $103,000,
respectively, which included a translation gain of approximately
$129,000 and $492,000, respectively. 3. Restructuring and Other Related Charges Restructuring and other related charges represent the Companys efforts to
reduce its overall cost structure. In April and again in September 2001, the
Company approved a restructuring plan to reduce headcount, reduce
infrastructure and eliminate excess and duplicate facilities. In April 2003,
the Company approved a restructuring plan to reduce additional headcount.
During 2001, 2002, and 2003, the Company recorded approximately $51.8 million,
$8.5 million and $1.4 million, respectively, in restructuring and other related
charges. During the first quarter of 2004, the Company recorded approximately
$484,000 in restructuring and other related charges. The components of the first quarter 2004 charges and a roll-forward of the
related liability follow (in thousands): Charge for the
    
    CashBalance at
    
    Three Months
    
    PaymentsDecember 31,
    
    Ended
    
    and Write-
    
    Fair Value
    
    Balance at2003
    
    March 31, 2004
    
    offs
    
    Adjustment
    
    March 31, 2004Excess facilities
    
    $
    3,092
    
    
    $
    155
    
    
    $
    (1,404
    )
    
    $
    
    
    
    $
    1,843Excess
facilities - warrants
    
    
    565
    
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    443Employee separation costs
    
    
    71
    
    
    
    329
    
    
    
    (145
    )
    
    
    
    
    
    
    255Total
    
    $
    3,728
    
    
    $
    484
    
    
    $
    (1,549
    )
    
    $
    (122
    )
    
    $
    2,541
 The Company issued three five-year warrants to Hines in January 2003 for
the purchase of up to an aggregate of 198,750 shares of the Companys common
stock, including a warrant to purchase 66,250 shares of common stock at an
exercise price of $10.38 per share, a warrant to purchase 66,250 shares of
common stock at an exercise price of $12.11 per share and a warrant to purchase
66,250 shares of common stock at an exercise price of $13.84 per share. If the
Company either undergoes a change




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of control or issues securities with rights
and preferences superior to the Companys common stock before January 2005,
Hines will have the option of canceling any unexercised warrants and receiving
a cash cancellation payment of $18.40 per share in the case of the $10.38
warrants, $16.00 per share in the case of the $12.11 warrants and $13.92 per
share in the case of the $13.84 warrants. These contingent cash payments
aggregate $3.2 million. The Company also entered into a registration rights
agreement with Hines, pursuant to which the Company filed a registration
statement on February 14, 2003 covering the resale of the shares of the
Companys common stock subject to purchase by Hines under the warrants. The
warrant value as of December 31, 2002 was estimated at $920,000 based on (a)
the estimated value of the warrants using the Black-Scholes model with an
expected dividend yield of 0.0%, a risk-free interest rate of 5.0%, volatility
of 85% and an expected life of five years and (b) the estimated value of the
cash cancellation payments in the event of a change in control. The warrants
are subject to variable accounting and the Company is required to mark the
warrants to market at each reporting period. At March 31, 2004, the warrant
value was estimated at $443,000 using similar assumptions to those used at
December 31, 2002, and is included in long-term liabilities. The accounting for excess facilities is complex and requires judgment, as
a consequence of which adjustments may be required to the Companys current
restructuring charge. In particular, based on the terms of the warrants issued
in connection with the partial lease termination of excess facilities in
Bellevue, Washington, the warrants are subject to variable accounting and will
be marked to market at each reporting period. Future cash outlays are
anticipated through July 2006 unless estimates and assumptions change or the
Company is able to negotiate to exit certain leases at an earlier date. The current portion of restructuring-related liabilities totaled $1.8
million at March 31, 2004, the long-term portion of restructuring-related
liabilities totaled $291,000 at March 31, 2004 and the value of the warrants
issued in connection with the termination of certain facility lease obligations
was $443,000 at March 31, 2004. 4. Litigation and Contingencies The Company, several of its officers and directors and Dain Rauscher
Wessels have been named as defendants in a series of related lawsuits filed in
the United States District Court for the Western District of Washington on
behalf of purchasers of publicly traded Onyx common stock during various time
periods. The consolidated amended complaint in these lawsuits alleges that the
Company violated the Securities Act of 1933, as amended ( Securities Act), and
the Securities Exchange Act of 1934, as amended (Exchange Act) and seeks
certification of a class action for purchasers of the Companys common stock in
February 12, 2001 public offering and on the open market during the period
January 23, 2001 through July 24, 2001. The parties have executed an agreement
to settle the matter on terms that will not require a payment by any of the
defendants, inasmuch as the settlement consideration will be paid entirely by
insurance proceeds. The court has preliminarily approved the settlement and
has set a final approval hearing for June 10, 2004. None of the complaints or
claims specifies the amount of damages to be claimed. The Companys directors and some of its officers have been named as
defendants in a shareholder derivative lawsuit filed in the Superior Court of
Washington in and for King County. The complaint alleges that the individual
defendants breached their fiduciary duty and their duty of care to the Company
by allegedly failing to supervise the Companys public statements and public
filings with the SEC. The complaint alleges that, as a result of these
breaches, misinformation about the Companys financial condition was
disseminated into the marketplace and filed with the SEC. The complaint asserts
that these actions have exposed the Company to harmful and costly securities
litigation that could potentially result in an award of damages against the
Company, and seeks to recover on behalf of the Company any amounts the Company
is required to pay in that litigation. The parties have executed an agreement
to settle the matter on terms that will not require a payment by any of the
defendants, inasmuch as the settlement consideration will be paid entirely by
insurance proceeds. The settlement agreement will be presented to the court
for approval. The settlements of both the derivative action and the putative
class action described above are contingent on both settlements receiving final
court approval. The Company, one of its officers and one of its former officers have also
been named as defendants in a lawsuit filed in the United States District Court
for the Southern District of New York on behalf of purchasers through December
6, 2000 of the Companys common stock sold under the February 12, 1999
registration statement and prospectus for the Companys initial public
offering. The complaint alleges that the Company and the individual defendants
violated the Securities Act by failing to disclose excessive commissions
allegedly obtained by the Companys underwriters pursuant to a secret
arrangement whereby the underwriters allocated initial public offering shares
to certain investors in exchange for the excessive commissions. The complaint
also asserts claims against the underwriters under the Securities Act and the
Exchange Act in
connection with the allegedly undisclosed commissions. The parties have
agreed in principle to settle the matter, along with similar lawsuits against
more than 300 other issuers. The terms of the settlement, which are in the
process of being definitively documented, would require the Company and the
other issuers to contribute to the settlement, which is being funded by a




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consortium of insurance carriers for the various issuers, only in the event
that their carriers become insolvent or their insurance coverage is exhausted.
The Company believes it is unlikely that any such contribution by the Company
will be required. In the event any of the above settlements do not receive final court
approval, the Company intends to vigorously defend itself and, where
applicable, its officers and directors against these lawsuits and claims, and
believes it has several meritorious defenses and, in certain instances,
counterclaims. If the Company is not successful in its defense of these claims,
however, the Company could be forced to make significant payments to the
plaintiffs and their lawyers and such payments, if not covered by the Companys
insurance carriers, could harm its financial condition, operating results and
cash flows. Even if these claims are not successful, the litigation could
result in substantial costs to the Company and could divert managements time
and attention away from business operations. The uncertainty associated with
this unresolved litigation may also impair the Companys relationships with
existing customers and the Companys ability to obtain new customers. 5. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share reflects
the potential dilution of securities by including other common stock
equivalents, including stock options and convertible preferred stock, in the
weighted average number of common shares outstanding for a period, if dilutive. Three Months EndedMarch 31,2003
    
    2004(In thousands, exceptper share data)Net loss (A)
    
    $
    (3,402
    )
    
    $
    (595
    )Weighted average number of common shares (B)
    
    
    12,698
    
    
    
    13,982Effect of dilutive securities:Stock options
    
    
    *
    
    
    
    *Warrants
    
    
    **
    
    
    
    **Adjusted weighted average shares (C)
    
    
    12,698
    
    
    
    13,982Loss per share:Basic (A)/(B)
    
    $
    (0.27
    )
    
    $
    (0.04
    )Diluted (A)/(C)
    
    $
    (0.27
    )
    
    $
    (0.04
    )
   *
    
    The effect of stock options are excluded from the computation of diluted earnings per share because the effects are
antidilutive. Outstanding stock options of 3,083,686 and 3,074,610 at March 31, 2003 and 2004, respectively, were excluded
from the computation of diluted earnings per share because their effect was antidilutive. Outstanding options will be
included in the computation of diluted earnings per share in future periods to the extent their effects are dilutive. If
the Company had been profitable during any of the periods reported, based on the average price of the Companys common stock
during each period using the treasury stock method, the approximate number of dilutive options included in the computation
of diluted earnings per share would have been 121,000 shares for the three months ended March 31, 2003 and 94,000 shares for
the three months ended March 31, 2004.**
    
    In January 2003, the Company issued warrants to purchase 198,750 shares of its common stock at exercise prices ranging from
$10.38 to $13.84 per share in connection with the termination of excess facilities. There were no warrants outstanding
prior to January 2003. Outstanding warrants were excluded from the computation of diluted earnings per share for the three
months ended March 31, 2003 and 2004 because their effect was antidilutive. Outstanding warrants will be included in the
computation of diluted earnings per share in future periods to the extent their effects are dilutive. 6. Line of Credit In documents dated March 28, 2003 and May 5, 2003, the Company amended its
Loan and Security Agreement with Silicon Valley Bank (SVB), which was
originally entered into in February 2002, and entered into a second Loan and
Security Agreement with SVB that is intended to take advantage of a loan
guarantee by the Export Import Bank of the United States (Exim Bank). The loan
documents were further amended on January 12, 2004 to revise the tangible net
worth covenant and
the accounts receivable advance rates beginning with the month ended
December 31, 2003. Effective March 31, 2004, the Company amended its Loan and
Security Agreement and its Loan and Security Agreement (Exim Program) with SVB.
Under the terms of these agreements, the Company has a total $10.0 million
working capital revolving line of credit and a $500,000 term loan facility with
SVB. The $10.0 million working capital revolving line of credit is split
between an $8.0 million




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domestic facility and a $2.0 million Exim Bank
facility. All of the facilities are secured by accounts receivable, property
and equipment and intellectual property. The domestic facility allows the
Company to borrow up to the lesser of (a) 70% of eligible domestic and
individually approved foreign accounts receivable and (b) $8.0 million. The
Exim Bank facility allows the Company to borrow up to the lesser of (a) 75% of
eligible foreign accounts receivable and (b) $2.0 million. The amount
available to borrow under the working capital revolving line of credit is
reduced by reserves for outstanding standby letters of credit issued by SVB on
the Companys behalf and 50% of any borrowings under the term loan facility.
If the calculated borrowing base falls below the reserves, SVB may require the
Company to cash secure the amount by which the reserves exceed the borrowing
base. The amount required to be restricted under the loan agreement was $1.3
million, measured as of March 31, 2004. Due to the variability in the Companys
borrowing base, the Company may be subject to restrictions on its cash at
various times throughout the year. Any borrowings will bear interest at SVBs
prime rate, which was 4.00% as of March 31, 2004, plus 1.5% (plus 2% for the
term loan facility), subject to a minimum rate of 6.0%. The loan agreements
require that the Company maintain certain financial covenants based on its
adjusted quick ratio and tangible net worth. The Company was in compliance with
these covenants, as amended, at March 31, 2004. The Company is also prohibited
under the loan and security agreements from paying dividends. The facilities
expire in March 2005. Based on the outstanding standby letters of credit
relating to long-term lease obligations totaling $6.5 million at March 31,
2004, no additional amounts are currently available under the revolving credit
facilities. At March 31, 2004, no amount was borrowed under the term loan
facility. 7. Segment and Geographic Information The Company and its subsidiaries are principally engaged in the design,
development, marketing and support of enterprise-wide CRM solutions designed to
promote strategic business improvement and revenue growth by enhancing the way
businesses market, sell and service their products. Substantially all revenue
results from licensing the Companys software products and related consulting
and customer support (maintenance) services. The Companys Chief Executive
Officer and Chief Financial Officer, who are the Companys chief operating
decision makers, review financial information presented on a consolidated
basis, accompanied by disaggregated information about revenue by geographic
region for purposes of making operating decisions and assessing financial
performance. Accordingly, the Company considers itself to be in a single
industry segment, specifically the license, implementation and support of its
software applications, and to have only one operating segment. The Company does
not prepare reports for, or measure the performance of, its individual software
applications and, accordingly, the Company has not presented revenue or any
other related financial information by individual software product. The Company evaluates the performance of its geographic regions primarily
based on revenues. In addition, the Companys assets are primarily located in
its corporate office in the United States and not allocated to any specific
region. The Company does not produce reports for, or measure the performance
of, its geographic regions on any asset-based metrics. Therefore, geographic
information is presented only for revenues. Total revenues outside of North America for the three months ended March
31, 2003 and 2004 were $5.2 million and $5.2 million, respectively. The following geographic information is presented for the three months
ended March 31, 2003 and 2004 (in thousands): North
    
    United
    
    Rest ofAmerica
    
    Kingdom
    
    World
    
    TotalThree months ended March 31, 2003:Revenue
    
    $
    9,014
    
    
    $
    2,066
    
    
    $
    3,127
    
    
    $
    14,207Three months ended March 31, 2004:Revenue
    
    $
    9,044
    
    
    $
    1,741
    
    
    $
    3,459
    
    
    $
    14,244
 8. Guarantees In the ordinary course of business, we are not subject to potential
obligations under guarantees that fall within the scope of FASB Interpretation
No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, except for standard
indemnification and warranty provisions that are contained within many of our
customer license and service agreements, and give rise only to the disclosure
requirements prescribed by FIN No. 45. Indemnification and warranty provisions contained within our customer
license and service agreements are generally consistent with those prevalent in
our industry. The duration of our product warranties generally does not exceed
180 days following delivery of our products. We have not incurred significant
obligations under customer indemnification or warranty provisions historically
and do not expect to incur significant obligations in the future. Accordingly,
we do not maintain accruals for potential customer indemnification or
warranty-related obligations.




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9. Onyx Japan In September 2000, the Company entered into a joint venture with Softbank
Investment Corporation and Prime Systems Corporation to create Onyx Software
Co., Ltd. (Onyx Japan), a Japanese corporation, for the purpose of distributing
the Companys technology and product offerings in Japan. In October 2000, the
Company made an initial contribution of $4.3 million in exchange for 58% of the
outstanding common stock of Onyx Japan. The Companys joint venture partners
invested an additional $3.1 million for the remaining 42% of the common stock
of Onyx Japan. Because the Company has a controlling interest, Onyx Japan has
been included in its consolidated financial statements. The minority
shareholders interest in Onyx Japans earnings or losses is separately
reflected in the statement of operations. Under the terms of the joint venture agreement, Prime Systems may, at any
time, sell its shares of Onyx Japan stock to a third party, provided that it
notifies the Company 90 days prior to doing so. The Company has a right of
first refusal to purchase any of Prime Systems shares that are offered for
resale at the same price for which those shares are being offered to a third
party. Further, either the Company or Prime Systems may terminate the joint
venture agreement at its discretion . If Prime Systems exercises its right of
termination, the Company has the right, at its election, to either (a) buy
Prime Systems shares at the current fair market value as determined by an
appraiser or (b) force a liquidation of Onyx Japan. The Company has entered into a distribution agreement with Onyx Japan,
which was approved by the minority shareholders, that provides the Company with
a fee based on license and maintenance revenues in Japan. During the first
quarter of 2003 and 2004, fees charged under this agreement were $135,000 and
$145,000, respectively. The intercompany fees are eliminated in consolidation;
however, the Company allocates 42% of the fees to the minority shareholders. Although profitable in each of the last three quarters ended March 31,
2004, Onyx Japan incurred substantial losses in previous quarters. The minority
shareholders capital account balance as of March 31, 2004 was $180,000.
Additional Onyx Japan losses above approximately $429,000 in the aggregate will
be absorbed 100% by the Company, as compared to 58% in prior periods. Restructuring efforts carried out in the second half of 2002 significantly
reduced the operating expenses of Onyx Japan and increased the probability that
Onyx Japan can be cash flow positive, as evidenced by the recent profits
generated by Onyx Japan. Nevertheless, additional funding may be required to
continue the operation of the joint venture. If Onyx Japan incurs losses in
future periods and no additional capital is invested, the Company may have to
further restructure Onyx Japans operations. 10. Liquidity The Company has a total $10.0 million working capital revolving line of
credit and a $500,000 term loan facility with SVB. The $10.0 million working
capital revolving line of credit is split between an $8.0 million domestic
facility and a $2.0 million Exim Bank facility. All of the facilities are
secured by accounts receivable, property and equipment and intellectual
property. The domestic facility allows the Company to borrow up to the lesser
of (a) 70% of eligible domestic and individually approved foreign accounts
receivable and (b) $8.0 million. The Exim Bank facility allows the Company to
borrow up to the lesser of (a) 75% of eligible foreign accounts receivable and
(b) $2.0 million. The amount available to borrow under the working capital
revolving line of credit is reduced by reserves for outstanding standby letters
of credit issued by SVB on the Companys behalf and 50% of any borrowings under
the term loan facility. At the time of this filing, however, no additional
amounts are available under the lines of credit based on the level of the
Companys borrowing base and its outstanding letters of credit. The Company was
in compliance with the financial covenants of these facilities as of March 31,
2004. If the Company is unable to maintain compliance with its covenants in the
future or if SVB decides to restrict its cash deposits, the Companys liquidity
would be further limited and its business, financial condition and operating
results could be materially harmed. The Company believes its revenue performance will be comparable to the
most recent quarterly periods reported and that the Companys existing cash and
cash equivalents will be sufficient to meet its capital requirements for at
least the next 12 months. Should the Companys results for subsequent
quarters fall significantly below the results the Company achieved in the first
quarter of 2004, the Company would likely take action to restructure its
operations to preserve its cash. Such actions would primarily consist of
reductions in headcount. Due to the fact that lower cash balances could
negatively impact the
Companys sales efforts, the Company may seek additional funds in the
future through public or private equity financing or from other sources to fund
its operations and pursue the Companys growth strategy. The Company may
experience difficulty in obtaining funding on favorable terms, if at all. Any
financing the Company might obtain may contain covenants that restrict the
Companys freedom to operate its business or may require the Company to issue
securities that have rights, preferences or privileges senior to its common
stock and may dilute current shareholders ownership interest in the Company.




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11. Subsequent Events On April 7, 2004, the Company announced that it has acquired business
process management technology from Visuale, Inc. of Los Gatos, California in an
asset acquisition with a guaranteed purchase price of $4.0 million.
Consideration includes an initial payment of $400,000 in cash and 504,891
shares of the Companys common stock, which shares were valued at the time of
the acquisition at $1.6 million. Upon the one-year anniversary of closing, the
Company will make a subsequent payment valued at $1.0 million, with the option
of using either cash or common stock valued at the then-current fair market
value. In each of years three and four following closing, the Company will
make minimum royalty payments of $500,000 in cash based on sales of the
Companys products incorporating the acquired technology. Separately, the
Company has entered into employment agreements with key developers of the
acquired technology. On April 15, 2004, the Company borrowed $500,000 under the term loan
facility for the purchase of network and telephone equipment under an expiring
operating lease, which lowered the Companys standby letters of credit by $1.0
million. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Information Our disclosure and analysis in this report contain forward-looking
statements, which provide our current expectations or forecasts of future
events. Forward-looking statements in this report include, without limitation:  
    
    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. Words such as believes, anticipates and intends may identify
forward-looking statements, but the absence of these words does not necessarily
mean that a statement is not forward-looking. Forward-looking statements are
subject to known and unknown risks and uncertainties and are based on
potentially inaccurate assumptions that could cause actual results to differ
materially from those expected or implied by the forward-looking statements.
Our actual results could differ materially from those anticipated in the
forward-looking statements for many reasons, including the factors described in
the section entitled Important Factors That May Affect Our Business, Our
Results of Operations and Our Stock Price in this report. Other factors
besides those described in this report could also affect actual results. You
should carefully consider the factors described in the section entitled
Important Factors That May Affect Our Business, Our Results of Operations and
Our Stock Price in evaluating our forward-looking statements. You should not unduly rely on these forward-looking statements, which
speak only as of the date of this report. We undertake no obligation to
publicly revise any forward-looking statement to reflect circumstances or
events after the date of this report, or to reflect the occurrence of
unanticipated events. Overview Onyx Software Corporation is a leading provider of enterprise-wide
customer relationship management, or CRM, solutions designed to promote
strategic business improvement and revenue growth by enhancing the way
businesses market, sell and service their products. We focus on our customers
success as the prime criterion for how we judge our own success. Using the
Internet in combination with traditional forms of interaction, including phone,
mail, fax and e-mail, our solution helps enterprises to more effectively
acquire, manage and maintain customer, partner and other relationships. We
market our




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solution to companies that want to merge new, online business
processes with traditional business processes to enhance their customer-facing
operations, such as marketing, sales, customer service and technical support.
Our solution is Internet-based, which means companies can take advantage of
lower costs and faster deployment associated with accessing CRM software with a
simple browser. Our solution uses a single data model across all customer
interactions, resulting in a single repository for all marketing, sales and
service information. It is fully integrated across all customer-facing
departments and interaction media. Our solution is designed to be easy to use,
widely accessible, rapidly deployable, scalable, flexible, customizable and
reliable, which can result in a comparatively low total cost of ownership and
rapid return on investment. Overview of the Results for the Three Months Ended March 31, 2004 Key financial data points relating to our first quarter 2004 performance
include:  
    
    Revenue of $14.2 million, up 10% from the fourth quarter of 2003 and consistent with the first quarter of 2003;
    
    License revenue of $3.6 million, up 31% from the fourth quarter of 2003 and up 38% from the first quarter of
2003;
    
    Service revenue of $10.6 million, up 4% from the fourth quarter of 2003 and down 8% from the first quarter of
2003;
    
    Service margins of 58%, up from 55% in the fourth quarter of 2003 and up from 53% in the first quarter of 2003;
    
    Operating expenses, excluding acquisition-related amortization, stock compensation and restructuring charges,
of $9.3 million, consistent with the fourth quarter of 2003 and down from $11.9 million in the first quarter
of 2003;
    
    Cash and restricted cash balances of $13.0 million at March 31, 2004, up from $11.9 million at December 31,
2003; and
    
    Days sales outstanding, based on end of period receivable balances, down to 72 days compared to 86 days in the
fourth quarter of 2003 and 73 days in the first quarter of 2003. Although our license revenue in the first quarter of 2004 showed
incremental improvement and recent published reports are signaling modest
improvement in the global economy, we are cautious as to the speed at which
macroeconomic conditions will improve, particularly as it relates to the
information technology and communications industries, and believe our ability
to generate new license sales will continue to be challenged in the near term.
The majority of our revenue has been generated from customers in the
high-technology, financial services, government and healthcare industries.
Accordingly, our business is affected by the economic and business conditions
of these industries and the demand for information technology within these
industries. Macroeconomic conditions were extremely challenging during 2001,
2002 and 2003, and we expect them to continue to impact capital-spending
initiatives of our targeted new and existing customer base in the near term. As a result of current economic uncertainties, we will be focused on the
following objectives in the near term:  
    
    successful rebuilding of our direct sales force;
    
    managing our costs to allow our return to profitability and allow us to preserve our cash;
    
    focusing our resources and efforts on the sales opportunities with the highest probability of success;
    
    maximizing the value of our partnerships with key system
integration and technology vendors, particularly as it relates to our
Embedded CRM initiative and our key vertical industries;
    
    aggressive marketing of our recent major product releases on the
Windows NT/Microsoft BackOffice and Oracle/Unix platforms; and
    
    maintaining high customer satisfaction levels. We hope that, by focusing our efforts on these key objectives, we will be
able to return to profitability in challenging economic times and successfully
grow our business, although we cannot offer any assurance regarding when, or
whether, this will occur. We continue to align costs and expenses to our
expected revenues. We may, however, continue to experience losses and negative
cash flows in the near term, unless sales of our products and services grow. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported




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amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
critical accounting policies and estimates, including those related to revenue
recognition, bad debts, intangible assets, restructuring, and contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that we believe 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. We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. Revenue Recognition Revenue recognition rules for software companies are very complex and
often subject to interpretation. We follow very specific and detailed
guidelines in measuring revenue; however, certain judgments affect the
application of our revenue policy. Revenue results are difficult to predict,
and any shortfall in revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter and could
result in future operating losses. We recognize revenue in accordance with accounting standards for software
companies, including Statement of Position, or SOP, 97-2, Software Revenue
Recognition, as amended by SOP 98-9 and related interpretations, including
Technical Practice Aids. We generate revenue through two sources: (a) software license revenue and
(b) support and service revenue. Software license revenue is generated from
licensing the rights to use our products directly to end-users and vertical
service providers, or VSPs, and indirectly through value-added resellers, or
VARs, and, to a lesser extent, through third-party products we distribute.
Support and service revenue is generated from sales of customer support
services (maintenance contracts), consulting services and training services
performed for customers that license our products. License revenue is recognized when a noncancelable license agreement
becomes effective as evidenced by a signed contract, the product has been
shipped, the license fee is fixed or determinable, and collection is probable. In software arrangements that include rights to multiple software products
and/or services, we allocate the total arrangement fee among each of the
deliverables using the residual method, under which revenue is allocated to
undelivered elements based on vendor-specific objective evidence of fair value
of such undelivered elements and the residual amounts of revenue are allocated
to delivered elements. Elements included in multiple-element arrangements could
consist of software products, maintenance (which includes customer support
services and unspecified upgrades), or consulting services. Vendor-specific
objective evidence is based on the price charged when an element is sold
separately or, in the case of an element not yet sold separately, the price
established by authorized management, if it is probable that the price, once
established, will not change once the element is sold separately. Standard terms for license agreements call for payment within 90 days.
Probability of collection is based on the assessment of the customers
financial condition through the review of its current financial statements or
credit reports. For follow-on sales to existing customers, prior payment
history is also used to evaluate probability of collection. Revenue from
distribution agreements with VARs is typically recognized upon the earlier of
receipt of cash from the VAR or identification of an end-user. In the latter
case, probability of collection is evaluated based on the creditworthiness of
the VAR. Our agreements with customers, VSPs and VARs do not contain product
return rights. Revenue from maintenance arrangements is recognized ratably over the term
of the contract, typically one year. Consulting revenue is primarily related to
implementation services performed on a time-and-materials basis or, in certain
situations, on a fixed-fee basis, under separate service arrangements.
Implementation services are periodically performed under fixed-fee arrangements
and, in such cases, consulting revenue is recognized on a
percentage-of-completion basis. Revenue from consulting and training services
is recognized as services are performed. Standard terms for renewal of
maintenance arrangements, consulting services and training services call for
payment within 30 days. Revenue consisting of fees from licenses sold together with consulting
services is generally recognized upon shipment of the software, provided that
the above criteria are met, payment of the license fees do not depend on the
performance of the services, and the consulting services are not essential to
the functionality of the licensed software. If the services are essential
to the functionality of the software, or payment of the license fees
depends on the performance of the services, both the software license and
consulting fees are recognized under the percentage of completion method of
contract accounting.




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If the fee is not fixed or determinable, revenue is recognized as payments
become due from the customer. If a nonstandard acceptance period is provided,
revenue is recognized upon the earlier of customer acceptance and the
expiration of the acceptance period. Allowance for Doubtful Accounts A considerable amount of judgment is required when we assess the ultimate
realization of receivables, including assessing the probability of collection
and the current creditworthiness of each customer. Although we recorded a net
benefit in 2003 and recorded no expenses for the first quarter of 2004,
significant expenses were recorded to increase our allowance for doubtful
accounts in prior years due to the rapid downturn in the economy, and in the
technology sector in particular.We may record additional expenses in the
future. Impairment of Intangible Assets We periodically evaluate intangible asset valuations of businesses we
acquired as impairment indicators arise. Our judgments regarding the existence
of impairment indicators are based on legal factors, market conditions and
operational performance of our acquired businesses. Future events could cause
us to conclude that impairment indicators exist and that goodwill and other
intangible assets associated with our acquired businesses are impaired. Restructuring During 2001 and 2002, we recorded significant write-offs and accruals in
connection with our restructuring program under Emerging Issues Task Force, or
EITF, Issue No. 94-3. These write-offs and accruals include estimates
pertaining to employee separation costs and the settlements of contractual
obligations related to excess leased facilities and other contracts. Although
we believe that we have made reasonable estimates of our restructuring costs in
calculating these write-offs and accruals, the actual costs could differ from
these estimates. With the contractual settlement of the majority of our excess
facilities, the range of outcomes that must be estimated has narrowed
significantly, except for the value assigned to the warrants issued in
connection with the settlement, which will fluctuate in the future based on our
stock price. In June 2002, the Financial Accounting Standards Board , or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred. The provisions of this
statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS No. 146 has not had a material
effect on our consolidated financial statements. Contingencies and Litigation We are subject to proceedings, lawsuits and other claims related to class
action lawsuits and other matters. We are required to assess the likelihood of
any adverse judgments or outcomes to these matters, as well as potential ranges
of probable losses. A determination of the amount of loss accrual required, if
any, for these contingencies are made after careful analysis of each individual
issue. The required accruals may change in the future due to new developments
in each matter. Results of Operations The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenue for the
periods indicated. The operating results for the three months ended March 31,
2003 and 2004 are not necessarily indicative of the results that may be
expected for the full year or any future period. Three Months EndedMarch 31,2003
    
    2004Revenue:License
    
    
    18.4
    %
    
    
    25.4
    %Support and service
    
    
    81.6
    
    
    
    74.6Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue:License
    
    
    2.0
    
    
    
    1.3




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Three Months EndedMarch 31,2003
    
    2004Amortization of acquired technology
    
    
    0.6
    
    
    
    0.0Support and service
    
    
    38.3
    
    
    
    31.3Total cost of revenue
    
    
    40.9
    
    
    
    32.6Gross margin
    
    
    59.1
    
    
    
    67.4Operating expenses:Sales and marketing
    
    
    45.6
    
    
    
    33.5Research and development
    
    
    22.0
    
    
    
    18.4General and administrative
    
    
    15.9
    
    
    
    13.5Restructuring and other-related charges
    
    
    2.4
    
    
    
    3.4Amortization of acquisition-related charges
    
    
    1.5
    
    
    
    1.5Amortization of stock-based compensation
    
    
    0.1
    
    
    
    0.0Total operating expenses
    
    
    87.5
    
    
    
    70.3Loss from operations
    
    
    (28.4
    )
    
    
    (2.9
    )Other income (expense), net
    
    
    0.1
    
    
    
    (1.4
    )Change in fair value of outstanding warrants
    
    
    1.7
    
    
    
    0.9Loss before income taxes
    
    
    (26.6
    )
    
    
    (3.4
    )Income tax provision (benefit)
    
    
    (1.5
    )
    
    
    0.4Minority interest in consolidated subsidiary
    
    
    (1.1
    )
    
    
    0.4Net loss
    
    
    (24.0
    )%
    
    
    (4.2
    )%
 Revenue Total revenue, which consists of software license and support and service
revenue, was $14.2 million in the first quarter of 2004, which was consistent
with the first quarter of 2003. While no single customer accounted for more
than 10% of our total revenue in the first quarter of 2003, Metavante accounted
for 12% of our total revenue in the first quarter of 2004. Our license revenue increased 38%, from $2.6 million in the first quarter
of 2003 to $3.6 million in the first quarter of 2004. Although our license
revenue in the first quarter of 2004 showed incremental improvement and recent
published reports are signaling modest improvement in the global economy, we
are cautious as to the speed at which macroeconomic conditions will improve,
and believe our ability to generate new license sales will continue to be
challenged in the near term. Our support and service revenue decreased 8% from $11.6 million in the
first quarter of 2003 to $10.6 million in the first quarter of 2004. The
decrease was primarily due to a decrease in consulting revenue. Support and
service revenue represented 82% of our total revenue in the first quarter of
2003 and 75% in the first quarter of 2004. We expect a sequential increase in
our service revenue in the second quarter of 2004 when compared to the first
quarter of 2004. We also expect that the proportion of support and service
revenue to total revenue to fluctuate in the future, depending in part on our
customers direct use of third-party consulting and implementation service
providers, the degree to which we provide opportunities for our partners to
engage with our customers and the ongoing renewals of customer support
contracts, as well as our overall sales of software licenses to new and
existing customers. Revenue outside of North America was $5.2 million in the first quarter of
2004, which was consistent with the first quarter of 2003. Cost of Revenue Cost of license revenue Cost of license revenue consists of license fees for third-party software,
product media, product duplication and manuals. Cost of license revenue
decreased 32%, from $285,000 in the first quarter of 2003 to $193,000 in the
first quarter of 2004. Cost of license revenue as a percentage of related
license revenue was 11% in the first quarter of 2003 and 5% in the first
quarter of 2004. The decrease in cost of license revenue in dollar amount and
as a percentage of related license revenue resulted primarily from a decrease
in the fixed amount of our third-party product royalties.




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Amortization of acquired technology Amortization of acquired technology represents the amortization of
capitalized technology associated with our acquisitions of EnCyc in 1998 and
Market Solutions in 1999. Amortization of acquired technology was $84,000 in
the first quarter of 2003 and $0 in the first quarter of 2004. Amortization of
acquired technology was completed in the fourth quarter of 2003. Cost of support and service revenue Cost of support and service revenue consists of personnel and third-party
service provider costs related to consulting services, customer support and
training. Cost of support and service revenue decreased 18%, from $5.4 million
in the first quarter of 2003 to $4.5 million in the first quarter of 2004. Cost
of support and service revenue as a percentage of related support and service
revenue was 47% in the first quarter of 2003 compared to 42% in the first
quarter of 2004. The decrease in cost of support and service revenue as a
dollar amount and as a percentage of related support and service revenue in the
first quarter of 2004 compared to the first quarter of 2003 resulted primarily
from a reduction in consulting personnel of approximately 15%, and a decrease
in the use of third-party service providers, of approximately $512,000. The
cost of support and services as a percentage of support and service revenue may
vary between periods primarily for two reasons: (1) the mix of services we
provide (consulting, customer support, training), which have different cost
structures, and (2) the resources we use to deliver these services (internal
versus third parties). Operating Expenses and Other Sales and marketing Sales and marketing expenses consist primarily of salaries, commissions
and bonuses earned by sales and marketing personnel, travel and promotional
expenses and facility and communication costs for direct sales offices. Sales
and marketing expenses decreased 26%, from $6.5 million in the first quarter of
2003 to $4.8 million in the first quarter of 2004. The decrease in sales and
marketing expenses from the first quarter of 2003 to the first quarter of 2004
was primarily due to the reduction in sales and marketing headcount. Sales and
marketing full-time employees decreased 29% from March 31, 2003 to March 31,
2004. Sales and marketing expenses represented 46% of our total revenue in the
first quarter of 2003, compared to 34% in the first quarter of 2004. To fully realize our long-term sales growth opportunity, we believe that
we may need to increase our sales and marketing efforts, particularly in
support of our vertical and embedded CRM strategies, to expand our market
position and further increase acceptance of our products. Research and development Research and development expenses consist primarily of salaries, benefits
and equipment for software developers, quality assurance personnel, program
managers and technical writers, and payments to outside contractors. Research
and development expenses decreased 16%, from $3.1 million in the first quarter
of 2003 to $2.6 million in the first quarter of 2004. Research and development
full-time employees decreased 17% from March 31, 2003 to March 31, 2004. The
decrease in research and development expenses from the first quarter of 2003 to
the first quarter of 2004 was primarily due to a decrease in the number of
development personnel. Research and development costs represented 22% of our
total revenue in the first quarter of 2003, compared to 18% in the first
quarter of 2004. Although research and development expenses were affected by our April 2003
restructuring efforts, those development projects that we believe to be most
essential to our long-term growth were least affected. We believe that our
research and development investments are essential to our long-term strategy.
To fully realize our long-term sales growth opportunity, we believe that we may
need to increase our research and development investment in the future. General and administrative General and administrative expenses consist primarily of salaries,
benefits and related costs for our executive, finance, human resource and
administrative personnel, professional services fees and allowances for
doubtful accounts. General and administrative expenses decreased 15%, from $2.3
million in the first quarter of 2003 to $1.9 million in the first quarter of
2004. General and administrative full-time employees decreased 28% from March
31, 2003 to March 31, 2004. The decrease in dollar amount from the first
quarter of 2003 to the first quarter of 2004 was primarily due to the decrease
in personnel and a reduction in our insurance expense, specifically director
and officer liability insurance. General and administrative costs represented
16% of our total revenue in the first quarter of 2003, compared to 14% in the
first quarter of 2004. Although general and administrative expenses have been reduced through our
restructuring efforts in recent periods, our general and administrative
expenses may increase in future quarters as we incur additional professional
services fees related to




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the satisfaction of new compliance requirements under
the Sarbanes-Oxley Act of 2002 and incur costs associated with the recruitment
and hiring of a new Chief Executive Officer. We also believe that we may need
to expand our administrative staff, domestically and internationally, in the
future to pursue our long-term sales growth opportunities. Restructuring and other related charges Restructuring and other related charges represent our efforts to reduce
our overall cost structure. In April and again in September 2001, we approved
a restructuring plan to reduce headcount, reduce infrastructure and eliminate
excess and duplicate facilities. In April 2003, we approved a restructuring
plan to reduce additional headcount. During 2001, 2002, and 2003, we recorded
approximately $51.8 million, $8.5 million and $1.4 million, respectively, in
restructuring and other related charges. During the first quarter of 2004, we
recorded approximately $484,000 in restructuring and other related charges. The components of the first quarter 2004 charges and a roll-forward of the
related liability follow (in thousands): Charge for the
    
    CashBalance at
    
    Three Months
    
    PaymentsDecember 31,
    
    Ended
    
    and Write-
    
    Fair Value
    
    Balance at2003
    
    March 31, 2004
    
    offs
    
    Adjustment
    
    March 31, 2004Excess facilities
    
    $
    3,092
    
    
    $
    155
    
    
    $
    (1,404
    )
    
    $
    
    
    
    $
    1,843Excess
facilities - warrants
    
    
    565
    
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    443Employee separation costs
    
    
    71
    
    
    
    329
    
    
    
    (145
    )
    
    
    
    
    
    
    255Total
    
    $
    3,728
    
    
    $
    484
    
    
    $
    (1,549
    )
    
    $
    (122
    )
    
    $
    2,541
 We issued three five-year warrants to Hines in January 2003 for the
purchase of up to an aggregate of 198,750 shares of our common stock, including
a warrant to purchase 66,250 shares of common stock at an exercise price of
$10.38 per share, a warrant to purchase 66,250 shares of common stock at an
exercise price of $12.11 per share and a warrant to purchase 66,250 shares of
common stock at an exercise price of $13.84 per share. If we either undergoes a
change of control or issue securities with rights and preferences superior to
our common stock before January 2005, Hines will have the option of canceling
any unexercised warrants and receiving a cash cancellation payment of $18.40
per share in the case of the $10.38 warrants, $16.00 per share in the case of
the $12.11 warrants and $13.92 per share in the case of the $13.84 warrants.
These contingent cash payments aggregate $3.2 million. We also entered into a
registration rights agreement with Hines, pursuant to which we filed a
registration statement on February 14, 2003 covering the resale of the shares
of our common stock subject to purchase by Hines under the warrants. The
warrant value as of December 31, 2002 was estimated at $920,000 based on (a)
the estimated value of the warrants using the Black-Scholes model with an
expected dividend yield of 0.0%, a risk-free interest rate of 5.0%, volatility
of 85% and an expected life of five years and (b) the estimated value of the
cash cancellation payments in the event of a change in control. The warrants
are subject to variable accounting and we are required to mark the warrants to
market at each reporting period. At March 31, 2004, the warrant value was
estimated at $443,000 using similar assumptions to those used at December 31,
2002, and is included in long-term liabilities. The accounting for excess facilities is complex and requires judgment, as
a consequence of which adjustments may be required to our current restructuring
charge. In particular, based on the terms of the warrants issued in connection
with the partial lease termination of excess facilities in Bellevue,
Washington, the warrants are subject to variable accounting and will be marked
to market at each reporting period. Future cash outlays are anticipated through
July 2006 unless estimates and assumptions change or we are able to negotiate
to exit certain leases at an earlier date. The current portion of restructuring-related liabilities totaled $1.8
million at March 31, 2004, the long-term portion of restructuring-related
liabilities totaled $291,000 at March 31, 2004 and the value of the warrants
issued in connection with the termination of certain facility lease obligations
was $443,000 at March 31, 2004. Amortization of acquisition-related intangibles Amortization of acquisition-related intangibles consists of intangible
amortization associated with our acquisitions of EnCyc in 1998 and Market
Solutions in 1999. Amortization of other acquisition-related intangibles
totaled $209,000 in the first quarter of 2003 and the first quarter of 2004.
Amortization of acquisition-related intangibles will be completed in the third
quarter of 2004.




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Amortization of stock-based compensation We recorded deferred stock-based compensation of $2.2 million in 1998,
representing the difference between the exercise prices of options granted to
acquire shares of common stock during 1997 and 1998, prior to our initial
public offering, and the deemed fair value for financial reporting purposes of
our common stock on the grant dates. We recorded an additional $1.8 million in
deferred compensation in connection with the options granted to new employees
in conjunction with the acquisition of RevenueLab in January 2001. Deferred
compensation is amortized over the vesting periods of the options. We amortized
stock-based compensation expense of $13,000 in the first quarter of 2003 and $0
in the first quarter of 2004. Option-related deferred compensation recorded at
our initial public offering and the deferred stock-based compensation in
connection with the acquisition of RevenueLab have both been fully amortized. Other Income (Expense), Net Other income (expense), net consists of earnings on our cash and cash
equivalent and short-term investment balances and foreign currency transaction
gains, offset by interest expense, bank fees associated with debt obligations
and credit facilities and foreign currency transaction losses. Other income
(expense), net was income of $9,000 in the first quarter of 2003 compared to
expense of $193,000 in the first quarter of 2004. The decrease in other income
(expense), net from the first quarter of 2003 to the first quarter of 2004
primarily related to the realized foreign currency loss related to the closure
of our French subsidiary and the settlement of the intercompany accounts in the
first quarter of 2004. Change in Fair Value of Outstanding Warrants Based on the terms of the warrants issued in connection with the partial
lease termination of excess facilities in Bellevue, Washington, we are subject
to variable accounting and will be required to mark the warrants to market at
each reporting period. During the first quarter of 2004, we recorded a benefit
of $122,000, representing the change in fair value of the outstanding warrants. Income Taxes We recorded an income tax benefit of $214,000 in the first quarter of 2003
and a provision of $56,000 in the first quarter of 2004. Our income tax
provision (benefit) in both the first quarter of 2003 and the first quarter of
2004 is the net result of income taxes in connection with our foreign
operations, offset by the deferred tax benefit recorded as we amortize the
intangibles associated with our international acquisitions. We made only
insignificant provisions and recorded no benefit for federal or state income
taxes in the first quarter of 2003 or the first quarter of 2004 due to our
historical operating losses. We have recorded a valuation allowance for all but
$367,000 of our deferred tax assets as a result of uncertainties regarding the
realization of the asset balance at March 31, 2004. Minority Interest in Consolidated Subsidiary Softbank Investments Corporation and Prime Systems Corporation together
own 42% of Onyx Japan, our Japanese joint venture. We have a controlling
interest and, therefore, Onyx Japan has been included in our consolidated
financial statements. The minority shareholders interest in Onyx Japans
earnings or losses is accounted for in the statement of operations each period.
In the first quarter of 2003, the minority shareholders interest in Onyx
Japans losses totaled $157,000. In the first quarter of 2004, the minority
shareholders interest in Onyx Japans income totaled $55,000. At March 31,
2004, the minority shareholders remaining interest in the joint venture
totaled $180,000. As a result, additional Onyx Japan losses above approximately
$429,000 in the aggregate will be absorbed 100% by Onyx, as compared to 58% in
prior periods. Liquidity and Capital Resources At March 31, 2004, we had unrestricted cash and cash equivalents of $11.7
million, an increase of $1.6 million from unrestricted cash and cash
equivalents held at December 31, 2003. At March 31, 2004, we also had
restricted cash balances totaling $1.3 million. We invest our cash in excess of
current operating requirements in a portfolio of investment-grade securities.
We did not hold any short-term marketable securities at December 31, 2003 or at
March 31, 2004. At March 31, 2004, our principal obligations consisted of
restructuring-related liabilities totaling $2.1 million, excluding the value
assigned to warrants, of which $1.8 million is expected to be paid within the
next 12 months, accrued liabilities of $2.5 million, of which $2.0 million is
expected to be paid within the next 12 months, trade payables of $777,000 and
salaries and benefits payable of $1.2 million. The majority of the
restructuring-related liabilities relate to excess facilities in domestic and
international markets, the most significant portion of which relates to the
termination agreement signed in December 2002 in connection with excess
facilities in Bellevue, Washington. The majority of our accounts payable,
salaries and benefits payable and accrued liabilities at March 31, 2004 will be
settled during the next three months and will result in a corresponding




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decline in the amount of cash and cash equivalents, offset by liabilities associated
with activity in the second quarter of 2004. Off-balance sheet obligations as
of March 31, 2004 primarily consisted of operating leases associated with
facilities in Bellevue, Washington and other domestic and international field
office facilities. Our contractual commitments at March 31, 2004 are
substantially similar to those at December 31, 2003 that were disclosed in our
annual report on Form 10-K. In documents dated March 28, 2003 and May 5, 2003, we amended our Loan and
Security Agreement with Silicon Valley Bank, or , which was originally entered
into in February 2002, and entered into a second Loan and Security Agreement
with SVB that is intended to take advantage of a loan guarantee by the Export
Import Bank of the United States, or the loan documents were further amended on
January 12, 2004 to revise the tangible net worth covenant and the accounts
receivable advance rates beginning with the month ended December 31, 2003.
Effective March 31, 2004, we amended our Loan and Security Agreement and our
Loan and Security Agreement (Exim Program) with SVB. Under the terms of these
agreements, we have a total $10.0 million working capital revolving line of
credit and a $500,000 term loan facility with SVB. The $10.0 million working
capital revolving line of credit is split between an $8.0 million domestic
facility and a $2.0 million Exim Bank facility. All of the facilities are
secured by accounts receivable, property and equipment and intellectual
property. The domestic facility allows us to borrow up to the lesser of (a) 70%
of eligible domestic and individually approved foreign accounts receivable and
(b) $8.0 million. The Exim Bank facility allows us to borrow up to the lesser
of (a) 75% of eligible foreign accounts receivable and (b) $2.0 million. The
amount available to borrow under the working capital revolving line of credit
is reduced by reserves for outstanding standby letters of credit issued by SVB
on our behalf and 50% of any borrowings under the term loan facility. If the
calculated borrowing base falls below the reserves, SVB may require us to cash
secure the amount by which the reserves exceed the borrowing base. The amount
required to be restricted under the loan agreement was $1.3 million, measured
as of March 31, 2004. Due to the variability in our borrowing base, we may be
subject to restrictions on our cash at various times throughout the year. Any
borrowings will bear interest at SVBs prime rate, which was 4.00% as of March
31, 2004, plus 1.5% (plus 2% for the term loan facility), subject to a minimum
rate of 6.0%. The loan agreements require that we maintain certain financial
covenants based on our adjusted quick ratio and tangible net worth. We were in
compliance with these covenants, as amended, at March 31, 2004. We are also
prohibited under the loan and security agreements from paying dividends. The
facilities expire in March 2005. Based on the outstanding standby letters of
credit relating to long-term lease obligations totaling $6.5 million at March
31, 2004, no additional amounts are currently available under the revolving
credit facilities. At March 31, 2004, no amount was borrowed under the term
loan facility. Our operating activities resulted in net cash outflows of $3.6 million in
the first quarter of 2003 and inflows of $1.2 million in the first quarter of
2004. The operating cash outflow in the first quarter of 2003 was primarily
the result of our operating loss for the period adjusted for non-cash
amortization and impairment charges, decreases in salaries and benefits payable
and accrued liabilities, decreases in restructuring-related liabilities,
decreases in deferred revenues, offset in part by cash provided by collections
on accounts receivable, increases in prepaid expenses and other assets. The
operating cash inflow in the first quarter of 2004 was primarily the result of
cash provided by collections on accounts receivable, increases in deferred
revenue, adjustment for non-cash depreciation and amortization charges, offset
by our operating loss for the period and decreases in restructuring-related
liabilities. The net cash outflow of $3.6 million in the first quarter of 2003
includes $3.6 million in cash paid for restructured items, and the net cash
inflow of $1.2 million in the first quarter of 2004 includes $1.5 million in
cash paid for restructured items. Investing activities used cash of $2.2 million in the first quarter of
2003, primarily due to the restriction of cash used to secure outstanding
letters of credit and capital expenditures associated with the relocation of
our corporate headquarters in January 2003. Investing activities provided cash
of $271,000 in the first quarter of 2004, primarily due to the reduction in the
restriction of cash used to secure outstanding letters of credit, offset by
capital expenditures. Financing activities used cash of $24,000 in the first quarter of 2003,
primarily due to the payments on our capital lease obligations, offset in part
by proceeds from the exercise of stock options. Financing activities provided
cash of $32,000 in the first quarter of 2004, primarily due by proceeds from
the exercise of stock options. We believe our revenue performance will be comparable to the most recent
quarterly periods reported and that our existing cash and cash equivalents will
be sufficient to meet our capital requirements for at least the next 12 months.
Should our results for subsequent quarters fall significantly below the
results we achieved in the first quarter of 2004, we would likely take action
to restructure our operations to preserve our cash. Such actions would
primarily consist of reductions in headcount. Due to the fact that lower cash
balances could negatively impact our sales efforts, we may seek additional
funds in the future through public or private equity financing or from other
sources to fund our operations and pursue our growth strategy. We may
experience difficulty in obtaining funding on favorable terms, if at all. Any
financing we might obtain may contain covenants that restrict our freedom to
operate our business or may require us to issue securities that have rights,
preferences or privileges senior to our common stock and may dilute current
shareholders ownership interest in us.




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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. Our operating results have varied widely in the past, and we expect that
they will continue to fluctuate in the future. If our operating results fall
below the expectations of investors, it could result in a decrease in our stock
price. Some of the factors that could affect the amount and timing of our
revenue and related expenses and cause our operating results to fluctuate
include:  
    
    general economic conditions, which may affect our customers
capital investment levels in management information systems and the
timing of their purchases;
    
    rate of market acceptance of our CRM solution;
    
    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 enable our products to operate on multiple platforms;
    
    our ability to compete in the highly competitive CRM market;
    
    the loss of any key technical, sales, customer support or
management personnel and the timing of any new hires;
    
    our ability to develop, introduce and market new products and
product versions on a timely basis;
    
    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; and
    
    the cost and financial accounting effects of any acquisitions
of companies or complementary technologies that we may complete. As a result of all of these factors, we cannot predict our revenue with
any significant degree of certainty, and future product revenue may differ from
historical patterns. It is particularly difficult to predict the timing or
amount of our license revenue because:  
    
    our sales cycles are lengthy and variable, typically ranging
between six and eighteen months from our initial contact with a
potential customer to the signing of a license agreement, although
the sales cycle varies substantially from customer to customer, and
occasionally sales require substantially more time;
    
    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;
    
    in recent quarters, the contracting process of our sales cycle
has taken more time than we have historically experienced;
    
    the amount of unfulfilled orders for our products at the
beginning of a quarter is small because our products are typically
shipped shortly after orders are received; and




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
    
    delay of new product releases can result in a customers
decision to delay execution of a contract or, for contracts that
include the new release as an element of the contract, will result in
deferral of revenue recognition until such release. Even though our revenue is difficult to predict, we base our decisions
regarding our operating expenses on anticipated revenue trends. Many of our
expenses are relatively fixed, and we cannot quickly reduce spending if our
revenue is lower than expected. As a result, revenue shortfalls could result in
significantly lower income or greater loss than anticipated for any given
period, which could result in a decrease in our stock price. 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. Our future revenue may be insufficient to support the expenses of our
operations, capital needs of Onyx Japan, and the expansion of our business. We
may therefore need additional equity or debt capital to finance our operations.
If we are unable to generate sufficient cash flow from operations or to obtain
funds through additional financing, we may have to reduce our development and
sales and marketing efforts and limit the expansion of our business. We currently have a total $10.0 million working capital revolving line of
credit and a $500,000 term loan facility with SVB. The $10.0 million working
capital revolving line of credit is split between an $8.0 million domestic
facility and a $2.0 million Exim Bank facility. All of the facilities are
secured by accounts receivable, property and equipment and intellectual
property. The domestic facility allows us to borrow up to the lesser of (a) 70%
of eligible domestic and individually approved foreign accounts receivable and
(b) $8.0 million. The Exim Bank facility allows us to borrow up to the lesser
of (a) 75% of eligible foreign accounts receivable and (b) $2.0 million. The
amount available to borrow under the working capital revolving line of credit
is reduced by reserves for outstanding standby letters of credit issued by SVB
on the Companys behalf and 50% of any borrowings under the term loan facility.
At the time of this filing, however, no additional amounts are available
under the lines of credit based on the level of our borrowing base and our
outstanding letters of credit. We were in compliance with the financial
covenants of these facilities as of March 31, 2004. If we are unable to
maintain compliance with our covenants in the future or if SVB decides to
restrict our cash deposits, our liquidity would be further limited and our
business, financial condition and operating results could be materially harmed. Assuming our future revenue performance is comparable to the most recent
quarterly periods reported, we believe that our existing cash and cash
equivalents will be sufficient to meet our capital requirements for at least
the next 12 months. Should our revenue results for subsequent quarters fall
significantly below the results we achieved in the fourth quarter of 2003, we
would likely take action to restructure our operations to preserve our cash.
Due to the fact that lower cash balances could negatively impact our sales
efforts, we may seek additional funds in the future through public or private
equity financing or from other sources to fund our operations and pursue our
growth strategy. We may experience difficulty in obtaining funding on favorable
terms, if at all. Any financing we might obtain may contain covenants that
restrict our freedom to operate our business or may require us to issue
securities that have rights, preferences or privileges senior to our common
stock and may dilute current shareholders ownership interest in Onyx. We have incurred losses in recent periods, and may not again achieve
profitability, which could cause a decrease in our stock price. If we do not return to profitability in future quarters, our stock price
could decrease. We incurred net losses in each quarter from Onyxs inception
through the third quarter of 1994, from the first quarter of 1997 through the
second quarter of 1999, and from the first quarter of 2000 through the first
quarter of 2004. As of March 31, 2004, we had an accumulated deficit of $128.8
million. Our accumulated deficit and financial condition have caused some of
our potential customers to question our viability, which we believe has in turn
hampered our ability to sell some of our products. In the near-term, we believe our costs and operating expenses, excluding
restructuring-related charges, may decrease in certain areas as we continue
to maintain strict cost controls. We expect our costs and operating expenses
in the near-term to be at a level that is in line with our expected revenue.
We may not be able to increase our revenue sufficiently to keep pace with any
growth in expenditures, if at all, and, as a result, may be unable to achieve
or maintain profitability in the future. Although profitable in the third and fourth quarters of 2003 and the first
quarter of 2004, Onyx Japan incurred substantial losses in previous periods.
The minority shareholders capital account balance as of March 31, 2004 was
$180,000. Additional Onyx Japan losses above approximately $429,000 in the
aggregate will be absorbed 100% by Onyx, as compared to 58% in prior periods,
which could impact our ability to achieve profitability in future periods.




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Economic conditions could adversely affect our revenue growth and ability to forecast revenue. Our revenue growth and potential for profitability depend on the overall
demand for CRM software and services. Because our sales are primarily to
corporate customers, we are also impacted by general economic and business
conditions. A softening of demand for computer software caused by the weakened
economy, both domestic and international, has affected our sales and may
continue to result in decreased revenue and growth rates. When economic
conditions weaken, sales cycles for software products tend to lengthen, and, as
a result, we experienced longer sales cycle in 2001, 2002, 2003, and the first
quarter of 2004. We expect to continue to experience longer sales cycles than
usual in the foreseeable future. As a result of the economic downturn, we have
also experienced and may continue to experience difficulties in collecting
outstanding receivables from our customers. Our management team uses our software to identify, track and forecast
future revenue, backlog and trends in our business. Our sales force monitors
the status of all proposals, such as the date when they estimate that a
transaction will close and the potential dollar amount of such sale. We
aggregate these estimates regularly in order to generate a sales pipeline and
then evaluate the pipeline at various times to look for trends in our business.
While this pipeline analysis provides us with visibility about our potential
customers and the associated revenue for budgeting and planning purposes, these
pipeline estimates may not consistently correlate to revenue in a particular
quarter or over a longer period of time. The slowdown in the domestic and
international economies, as well as the effects of terrorist activity and
actual and threatened armed conflict, may continue to cause customer purchasing
decisions to be delayed, reduced in amount or cancelled, which could reduce the
rate of conversion of the pipeline into contracts during a particular period of
time. In particular, as a result of the economic slowdown, we believe that a
number of our potential customers may delay or cancel their purchase of our
software, consulting services or customer support services or may elect to
develop their own CRM solution or solutions. A variation in the pipeline or in
the conversion of the pipeline into contracts could adversely affect our
business and operating results. In addition, because a substantial portion of
our sales are completed at the end of the quarter, and often in the last weeks
or days of a quarter, we may be unable to adjust our cost structure in response
to a variation in the conversion of the pipeline into contracts in a timely
manner, which could adversely affect our business and operating results. We
have also recently experienced a trend of smaller initial orders by new
purchasers of our software. Some customers are reluctant to make large
purchases before they have had the opportunity to observe how our software
performs in their organization, and have opted instead to make their planned
purchase in stages. Additional purchases, if any, may follow only if the
software performs as expected. We believe that this trend is a symptom of poor
economic conditions, lack of successful deployments by competitors and
increasing averseness to risk among our customers and potential customers. To
the extent that this trend continues, it will adversely affect our revenues. 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. Although our support and service revenue represented a lower percentage of
our total revenue in the first quarter of 2004 when compared to 2003, during
2001, 2002 and 2003, our support and service revenue represented a higher
percentage of our total revenue than in past periods, which negatively impacted
our gross margins. To the extent that this trend continues, our gross margins
will continue to suffer. Due largely to the decrease in license revenue in
2001, 2002 and 2003, support and service revenue represented 62% of our total
revenue in 2001, 67% of our total revenue in 2002 and 79% of our total revenue
in 2003. In the first quarter of 2004, support and service revenue represented
75% of our total revenue. We anticipate that support and service revenue will
continue to represent a significant percentage of total revenue. Because
support and service revenue has lower gross margins than license revenue, a
continued increase in the percentage of total revenue represented by support
and service revenue or a further decrease in license revenue, as we experienced
in 2001, 2002 and 2003, could have a detrimental effect on our overall gross
margins and thus on our operating results. Our support and service revenue is
subject to a number of risks. First, we subcontract some of our consulting,
customer support and training services to third-party service providers.
Third-party contract revenue generally carries even lower gross margins than
our service business overall. As a result, our support and service revenue and
related margins may vary from period to period, depending on the mix of
third-party contract revenues. Second, support and service revenue depends in
part on ongoing renewals of support contracts by our customers, some of which
may not renew their support contracts. Finally, support and service revenue
could decline further if customers select third-party service providers to
install and service our products more frequently than they have in the past. If
support and service revenue is lower than anticipated, our operating results
could fall below the expectations of investors, which could result in a
decrease in our stock price.




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We have a limited operating history and are subject to the risks of new enterprises. We commenced operations in February 1994 and commercially released the
first version of our flagship product in December 1994. Accordingly, we have a
limited operating history, and we face all of the risks and uncertainties
encountered by early-stage companies. These risks and uncertainties include:  
    
    no history of sustained profitability;
    
    uncertain growth in the market for, and uncertain market acceptance of, our solution;
    
    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 solution;
    
    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. The evolving nature of the CRM market increases these risks and
uncertainties. Our limited operating history makes it difficult to predict how
our business will develop. If we are unable to compete successfully in the highly competitive CRM market, our business will fail. Our solution targets the CRM market. This market is intensely competitive,
fragmented, rapidly changing and significantly affected by new product
introductions. We face competition in the CRM market primarily from
front-office software application vendors, large enterprise software vendors
and our potential customers information technology departments, which may seek
to develop proprietary CRM systems. The dominant competitor in our industry is
Siebel Systems, Inc., which holds a significantly greater percentage of the CRM
market than we do. Other companies with which we compete include, but are not
limited to, Amdocs Limited, E.piphany, Inc., Kana Communications, Inc.,
Microsoft Corporation, Oracle Corporation, PeopleSoft, Inc., Pivotal
Corporation (recently acquired by CDC Software), RightNow Technologies,
Salesforce.com, and SAP AG. In addition, as we develop new products, including new product versions
operating on new platforms, we may begin competing with companies with whom we
have not previously competed. It is also possible that new competitors will
enter the market. In 2002, we experienced an increase in competitive pressures
in our market, which has resulted in enhanced pricing competition among our
competitors. A continued increase in competitive pressures in our market or our
failure to compete effectively may result in pricing reductions, reduced gross
margins and loss of market share. Many of our competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical, marketing and other resources than we do.
Furthermore, we believe that there may be ongoing consolidation among our
competitors. As a result of consolidation among our competitors, our
competitors may be able to adapt more quickly to new technologies and customer
needs, devote greater resources to promoting or selling their products and
services, initiate and withstand substantial price competition, take advantage
of acquisition or other strategic opportunities more readily or develop and
expand their product and service offerings more quickly than we can. In
addition, our competitors may form strategic relationships with each other and
with other companies in attempts to compete more successfully against us. These
relationships may take the form of strategic investments, joint marketing
agreements, licenses or other contractual arrangements, any of which may
increase our competitors ability, relative to ours, to address customer needs
with their software and service offerings and that may enable them to rapidly
increase their market share.




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If we do not retain our key employees and management team, and integrate our
new senior management personnel, our ability to execute our business strategy
will be limited. Our future performance will depend largely on the efforts and abilities of
our key technical, sales, customer support and managerial personnel and on our
ability to attract and retain them. In addition, our ability to execute our
business strategy will depend on our ability to recruit additional experienced
management personnel and to retain our existing executive officers. The
competition for qualified personnel in the computer software and technology
markets is particularly intense. We have in the past experienced difficulty in
hiring qualified technical, sales, customer support and managerial personnel,
and we may be unable to attract and retain such personnel in the future. In
addition, due to the intense competition for qualified employees, we may be
required to increase the level of compensation paid to existing and new
employees, which could materially increase our operating expenses. Our key
employees are not obligated to continue their employment with us and could
leave at any time. On January 12, 2004, we announced that Onyxs co-founder
and Chief Executive Officer, Brent Frei, would be transitioning out of his role
and that we would be initiating a search for a new Chief Executive Officer. It
is uncertain what individual, if any, we may be able to attract for this
position, what the financial cost of his or her compensation package will be,
and what effect, if any, a new Chief Executive Officer may have on our business
prospects. The market price of our common stock has fluctuated substantially since
our initial public offering in February 1999. Consequently, potential employees
may perceive our equity incentives such as stock options as less attractive,
and current employees whose options are no longer priced below market value may
choose not to remain employed by us. In that case, our ability to attract or
retain employees will be adversely affected. We have been named as a defendant in securities class actions and other
litigation that could result in substantial costs and divert managements
attention and resources if pending settlements do not receive final court
approval. We, several of our officers and directors and Dain Rauscher Wessels have
been named as defendants in a series of related lawsuits filed in the United
States District Court for the Western District of Washington on behalf of
purchasers of publicly traded Onyx common stock during various time periods.
The consolidated amended complaint in these lawsuits alleges that we violated
the Securities Act of 1933, or Securities Act, and the Securities Exchange Act
of 1934, or Exchange Act, and seeks certification of a class action for
purchasers of Onyx common stock in Onyxs February 12, 2001 public offering and
on the open market during the period January 23, 2001 through July 24, 2001.
The parties have executed an agreement to settle the matter on terms that will
not require a payment by any of the defendants, inasmuch as the settlement
consideration will be paid entirely by insurance proceeds. The court has
preliminarily approved the settlement and has set a final approval hearing for
June 10, 2004. None of the complaints or claims specifies the amount of
damages to be claimed. Onyxs directors and some of its officers have been named as defendants in
a shareholder derivative lawsuit filed in the Superior Court of Washington in
and for King County. The complaint alleges that the individual defendants
breached their fiduciary duty and their duty of care to Onyx by allegedly
failing to supervise Onyxs public statements and public filings with the
Securities and Exchange Commission, or SEC. The complaint alleges that, as a
result of these breaches, misinformation about Onyxs financial condition was
disseminated into the marketplace and filed with the SEC. The complaint asserts
that these actions have exposed Onyx to harmful and costly securities
litigation that could potentially result in an award of damages against Onyx,
and seeks to recover on behalf of Onyx any amounts Onyx is required to pay in
that litigation. The parties have executed an agreement to settle the matter
on terms that will not require a payment by any of the defendants, inasmuch as
the settlement consideration will be paid entirely by insurance proceeds. The
settlement agreement will be presented to the court for approval. The
settlements of both the derivative action and the putative class action
described above are contingent on both settlements receiving final court
approval. Onyx, one of its officers and one of its former officers have also been
named as defendants in a lawsuit filed in the United States District Court for
the Southern District of New York on behalf of purchasers through December 6,
2000 of Onyx common stock sold under the February 12, 1999 registration
statement and prospectus for our initial public offering. The complaint alleges
that Onyx and the individual defendants violated the Securities Act by failing
to disclose excessive commissions allegedly obtained by our underwriters
pursuant to a secret arrangement whereby the underwriters allocated initial
public offering shares to certain investors in exchange for the excessive
commissions. The complaint also asserts claims against the underwriters under
the Securities Act and the Exchange Act in connection with the allegedly
undisclosed commissions. The parties have agreed in principle to settle the
matter, along with similar lawsuits against more than 300 other issuers. The
terms of the settlement, which are in the process of being definitively
documented, would require Onyx and the other issuers to contribute to the
settlement, which is being funded by a consortium of insurance carriers for the
various issuers, only in the event that their carriers become insolvent or
their insurance coverage is exhausted. We believe it is unlikely that any such
contribution by Onyx will be required.




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In the event any of the above settlements do not receive final court
approval, Onyx intends to vigorously defend itself and, where applicable, its
officers and directors against these lawsuits and claims, and believes it has
several meritorious defenses and, in certain instances, counterclaims. If we
are not successful in our defense of these claims, however, we could be forced
to make significant payments to the plaintiffs and their lawyers and such
payments, if not covered by our insurance carriers, could harm our financial
condition, operating results and cash flows. Even if these claims are not
successful, the litigation could result in substantial costs to Onyx and could
divert managements time and attention away from business operations. The
uncertainty associated with this unresolved litigation may also impair our
relationships with existing customers and our ability to obtain new customers. Our solution may not achieve significant market acceptance. Continued growth in demand for and acceptance of CRM systems remains
uncertain. Even if the market for CRM systems grows, businesses may purchase
our competitors solutions or develop their own. We believe that many of our
potential customers are not fully aware of the benefits of CRM systems and
that, as a result, CRM systems have not achieved, and may not achieve, market
acceptance. We also believe that many of our potential customers perceive the
implementation of a CRM system to require a great deal of time, expense and
complexity. This perception has been exacerbated by well-publicized failures of
certain CRM projects of some of our competitors. This, in turn, has caused some
potential customers to approach purchases of CRM systems with caution or to
postpone their orders or decline to make a purchase altogether. We have spent,
and will continue to spend, considerable resources educating potential
customers not only about our solution but also about CRM systems in general.
Even with these educational efforts, however, continued market acceptance of
our solution may not increase. We will not succeed unless we can educate our
target market about the benefits of CRM systems and the cost effectiveness,
ease of use and other benefits of our solution. If potential customers do not accept the Onyx product family, our business will fail. We rely on one product family for the success of our business. License
revenue from the Onyx product family has historically accounted for nearly all
of our license revenue. We expect product license revenue from the Onyx product
family to continue to account for a substantial majority of our future revenue.
As a result, factors adversely affecting the pricing of or demand for the Onyx
product family, such as competition or technological change, could dramatically
affect our operating results. If we are unable to successfully deploy current
versions of the Onyx product family and to develop, introduce and establish
customer acceptance of new and enhanced versions of the Onyx product family,
our business will fail. If we are unsuccessful in our attempt to enable our products to operate on
multiple platforms, our revenue growth could be limited. We originally designed our products to operate exclusively on the Windows
NT and Microsoft BackOffice platforms. As a result, our primary market has
historically been to customers that have developed or are willing to develop
their enterprise computing systems around these platforms, which limits our
potential sales. We announced the general availability of an Oracle version of
Onyx Employee Portal, or OEP, designed to operate on the Unix platform in June
2002. Later in 2002, we also introduced an Oracle version of OEP designed to
run on IBM AIX. Subsequent product versions have been released on these
platforms. If these product versions or new product versions do not achieve
general market acceptance, our revenue growth will be limited. We believe that
our ability to effectively expand our business into large enterprises depends
in part on the successful release and market acceptance of our new platform
versions. If we are unable to expand into large enterprises, the growth of our
business and our revenue will be limited. Moreover, enabling our products to
run on multiple platforms could lengthen the development cycle, thus delaying
the release date of future product versions or new products, which could
further restrict our revenue growth. Privacy and security concerns, particularly related to the use of our software
on the Internet, may limit the effectiveness of and reduce the demand for our
solution. The effectiveness of our solution relies on the storage and use of
customer data collected from various sources, including information derived
from customer registrations, billings, purchase transactions and surveys. The
collection and use of such data by our customers for customer profiling may
raise privacy and security concerns. Our customers generally have implemented
security measures to protect customer data from disclosure or interception by
third parties. These security measures may not, however, be effective against
all potential security threats. If a well-publicized breach of customer data
security were to occur, our solution may be perceived as less desirable, which
could limit our revenue growth.




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In addition, due to privacy concerns, some Internet commentators, consumer
advocates and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of
customer profiling data. If major countries or regions adopt legislation or
other restrictions on the use of customer profiling data, our solution would be
less useful to customers, and our sales could decrease. We may be unable to efficiently restructure or expand our sales organization,
which could harm our ability to expand our business. To date, we have sold our solution primarily through our direct sales
force. As a result, our future revenue growth will depend in large part on
recruiting, training and retaining direct sales personnel and expanding our
indirect distribution channels. These indirect channels include VARs, VSPs,
original equipment manufacturer, or OEM, partners, system integrators and
consulting firms. We have experienced and may continue to experience difficulty
in recruiting qualified direct sales personnel and in establishing third-party
relationships with VARs, VSPs, OEM partners, systems integrators and consulting
firms. In April 2003, we eliminated two significant sales positions: Senior Vice
President of the Americas and one of our regional sales management positions in
North America. We do not plan to hire individuals in either of these positions
in the near term. Our sales organization for the Americas has been realigned
and is now headed by an executive who has been with Onyx since 1995. This
executive has past experience managing Onyxs global sales organization. If our customers cannot successfully implement our products in a timely manner,
demand for our solution will be limited. The implementation of our products involves a significant commitment of
resources by prospective customers. Our customers frequently deploy our
products to large numbers of sales, marketing and customer service personnel,
who may not accept our products. Our products are also used with a number of
third-party software applications and programming tools. This use may present
significant technical challenges, particularly as large numbers of personnel
attempt to use our software concurrently. If an implementation is not
successful, we may be required to deliver additional consulting services free
of charge in order to remedy the problem. If our customers have difficulty
deploying our software or for any other reason are not satisfied with our
software, our operating results and financial condition may be harmed. 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. The CRM market is characterized by rapid change due to changing customer
needs, rapid technological developments and advances introduced by competitors.
Existing products can become obsolete and unmarketable when products using new
technologies are introduced and new industry standards emerge. New technologies
could change the way CRM systems are sold or delivered. We may also need to
modify our products when third parties change software that we integrate into
our products. As a result, the life cycles of our products are difficult to
estimate. To be successful, we must continue to enhance our current product line and
develop new products that successfully respond to changing customer needs,
technological developments and competitive product offerings. We may not be
able to successfully develop or license the applications necessary to respond
to these changes, or to integrate new applications with our existing products.
We have delayed enhancements or new product release dates several times in the
past, and may be unable to introduce enhancements or new products successfully
or in a timely manner in the future. If we delay release of our products and
product enhancements, or if they fail to achieve market acceptance when
released, it could harm our reputation and our ability to attract and retain
customers, and our revenue may decline. In addition, customers may defer or
forego purchases of our products if we, our competitors or major technology
vendors introduce or announce new products or product enhancements. 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. To be successful in the long term, we will need to expand our
international operations. This expansion may be delayed as a result of our
recent operating expense reduction measures and general economic conditions. If
we do expand internationally, it will require significant management attention
and financial resources to successfully translate and localize our software
products to various languages and to develop direct and indirect international
sales and support channels. Even if we




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successfully translate our software and develop new channels, we may not
be able to maintain or increase international market demand for our solution.
We, or our VARs or VSPs, may be unable to sustain or increase international
revenues from licenses or from consulting and customer support. In addition,
our international sales are subject to the risks inherent in international
business activities, including  
    
    costs of customizing products for foreign countries;
    
    export and import restrictions, 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. As noted above, Onyx Japan was profitable in each of the last three
quarters ended March 31, 2004; however, Onyx Japan incurred substantial losses
in previous periods. The minority shareholders capital account balance at
March 31, 2004 was $180,000. Additional Onyx Japan losses above approximately
$429,000 in the aggregate will be absorbed 100% by Onyx, as compared to 58% in
prior periods. Additional funding may be required to continue the operation of
the joint venture. Our joint venture partners are not obligated to participate
in any capital call and have indicated that they do not currently intend to
invest additional sums in Onyx Japan. We are, however, discussing other ways
our partners can assist Onyx Japan. If Onyx Japan incurs losses in future
periods and no additional capital is invested, we may have to further
restructure Onyx Japans operations. Our foreign subsidiaries operate primarily in local currencies, and their
results are translated into U.S. dollars. We do not currently engage in
currency hedging activities, but we may do so in the future. Changes in the
value of the U.S. dollar relative to foreign currencies have not materially
affected our operating results in the past. Our operating results could,
however, be materially harmed if we enter into license or other contractual
agreements involving significant amounts of foreign currencies with extended
payment terms if the values of those currencies fall in relation to the U.S.
dollar over the payment period. 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 rely on our existing relationships with a number of key partners,
including consulting firms, system integrators, VARs, VSPs and third-party
technology vendors, that are important to worldwide sales and marketing of our
solution. We expect an increasing percentage of our revenue to be derived from
sales that arise out of our relationships with these key partners. Key partners
often provide consulting, implementation and customer support services, and
endorse our solution during the competitive evaluation stage of the sales
cycle. Although we seek to maintain relationships with our key partners, and to
develop relationships with new partners, many of these existing and potential
key partners have similar, and often more established, relationships with our
competitors. These existing and potential partners, many of which have
significantly greater resources than we have, may in the future market software
products that compete with our solution or reduce or discontinue their
relationships with us or their support of our solution. In addition, our sales
will be limited if  
    
    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 solution;
    
    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 the resources necessary to implement our solution.




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We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively. Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely primarily on a combination
of copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as
those contained in license agreements with consultants, vendors and customers,
although we have not signed these agreements in every case. Despite our efforts
to protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. Other
parties may breach confidentiality agreements and other protective contracts we
have entered into, and we may not become aware of, or have adequate remedies in
the event of, a breach. We face additional risk when conducting business in
countries that have poorly developed or inadequately enforced intellectual
property laws. While we are unable to determine the extent to which piracy of
our software products exists, we expect piracy to be a continuing concern,
particularly in international markets and as a result of the growing use of the
Internet. In any event, competitors may independently develop similar or
superior technologies or duplicate the technologies we have developed, which
could substantially limit the value of our intellectual property. Intellectual property claims and litigation could subject us to significant
liability for damages and result in invalidation of our proprietary rights. In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant
time and attention of our key management and technical personnel. Although we
have not been sued for intellectual property infringement, we may face
infringement claims from third parties in the future. The software industry has
seen frequent litigation over intellectual property rights, and we expect that
participants in the industry will be increasingly subject to infringement
claims as the number of products, services and competitors grows and the
functionality of products and services overlaps. Infringement litigation could
also force us to  
    
    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
revenues, delayed or limited market acceptance of our products, increased costs
and reputational damage. Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released. Our
customers are particularly sensitive to such defects and errors because of the
importance of our solution to the day-to-day operation of their businesses. We
have had to delay commercial release of past versions of our products until
software problems were corrected, and in some cases have provided product
updates to correct errors in released products. Our new products or releases
may not be free from errors after commercial shipments have begun. Any errors
that are discovered after commercial release could result in loss of revenues
or delay in market acceptance, diversion of development resources, damage to
our reputation, increased service and warranty costs or claims against us. In addition, the operation of our products could be compromised as a
result of errors in the third-party software we incorporate into our software.
It may be difficult for us to correct errors in third-party software because
that software is not in our control. 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. Since our initial public offering in February 1999, the price of our
common stock has been volatile, particularly in the last year. Our common
stock, on a split-adjusted basis, reached a high of $176.00 per share on March
6, 2000 and traded as low as $2.24 per share on April 30, 2003. As a result of
fluctuations in the price of our common stock, you may be unable to sell your
shares at or above the price at which you purchased them. The trading price of
our common stock could be subject to fluctuations for a number of reasons,
including




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
    
    future announcements concerning us or our competitors;
    
    actual or anticipated quarterly variations in operating results;
    
    changes in analysts earnings projections or recommendations;
    
    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;
    
    changes in accounting standards that adversely affect our revenues and earnings; or
    
    significant trading activity by shareholders with large holdings in our common stock. In addition, future sales of substantial numbers of shares of our common
stock in the public market, or the perception that these sales could occur,
could adversely affect the market price of our common stock. Stock prices for many technology companies fluctuate widely for reasons
that may be unrelated to operating results of these companies. These
fluctuations, as well as general economic, market and political conditions,
such as national or international currency and stock market volatility,
recessions or military conflicts, may materially and adversely affect the
market price of our common stock, regardless of our operating performance and
may expose us to class action securities litigation which, even if
unsuccessful, would be costly to defend and distracting to management. Our articles of incorporation and bylaws and Washington law contain provisions
that could discourage a takeover. Certain provisions of our restated articles of incorporation and bylaws,
our shareholder rights plan and Washington law would make it more difficult for
a third party to acquire us, even if doing so would be beneficial for our
shareholders. This could limit the price that certain investors might be
willing to pay in the future for shares of our common stock. For example,
certain provisions of our articles of incorporation or bylaws  
    
    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. In October 1999, we adopted a shareholder rights plan, which is triggered
upon commencement or announcement of a hostile tender offer or when any one
person or group acquires 15% or more of our common stock. Once triggered, the
rights plan would result in the issuance of preferred stock to the holders of
our common stock other than the acquirer. The holders of this preferred stock
would be entitled to ten votes per share on corporate matters. In addition,
these shareholders receive rights under the rights plan to purchase our common
stock, and the stock of the entity acquiring us, at reduced prices.




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We are also subject to certain provisions of Washington law that could
delay or make more difficult a merger, tender offer or proxy contest involving
us. In particular, Chapter 23B.19 of the Washington Business Corporation Act
prohibits corporations based in Washington from engaging in certain business
combinations with any interested shareholder for a period of five years unless
specific conditions are met. These provisions of our articles of incorporation, bylaws and rights plan
and Washington law could have the effect of delaying, deferring or preventing a
change in control of Onyx, including, without limitation, discouraging a proxy
contest or making more difficult the acquisition of a substantial block of our
common stock. The provisions could also limit the price that investors might be
willing to pay in the future for shares of our common stock.




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Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to financial market risks, including changes in interest
rates and foreign currencies. Interest Rate Risk We typically do not attempt to reduce or eliminate our market exposures on
our investment securities because all of our investments are short-term in
nature and are classified as cash equivalents as of March 31, 2004. Due to the
short-term nature of these investments, their fair value would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates. We do not use any hedging transactions or any financial
instruments for trading purposes and we are not a party to any leveraged
derivatives. Foreign Currency Risk In 2003, international revenue accounted for 39% of our consolidated
revenue and in the first quarter of 2004, international revenue accounted for
37% of our consolidated revenue. International revenue, as well as most of the
related expenses incurred, is denominated in the functional currencies of the
corresponding country. Results of operations from our foreign subsidiaries are
exposed to foreign currency exchange rate fluctuations as the financial results
of these subsidiaries are translated into U.S. dollars upon consolidation. As
exchange rates vary, revenues and other operating results, when translated, may
differ materially from expectations. The effect of foreign exchange transaction
gains and losses were not material to Onyx during the first quarter of 2004 or
in prior fiscal years. At March 31, 2004, we were also exposed to foreign currency risk related
to the current assets and current liabilities of our foreign subsidiaries, in
particular our consolidated joint venture, which is denominated in Japanese
Yen, and our United Kingdom operation, which is denominated in British pounds.
Cumulative unrealized translation losses related to the consolidation of Onyx
Japan amounted to $464,000 at March 31, 2004. Cumulative unrealized
translation gains related to the consolidation of Onyx Software UK Limited,
including the goodwill and other intangible assets resulting from the
acquisition of Market Solutions, amounted to $2.2 million at March 31, 2004.
The cumulative unrealized gain at March 31, 2004 specifically associated with
the goodwill and other acquisition-related intangibles of Market Solutions
amounted to $1.7 million. These unrealized translation gains and losses,
combined with the cumulative unrealized translation gains related to the
consolidation of our other foreign subsidiaries, resulted in net consolidated
cumulative unrealized translation gains of $2.3 million. Although we have not engaged in foreign currency hedging to date, we may
do so in the future. 
 Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end
of the period covered by this quarterly report, have concluded that as of that
date, our disclosure controls and procedures were effective in ensuring that
information required to be disclosed by us in this quarterly report is
accumulated and communicated by our management, to allow timely decisions
regarding required disclosure. Changes in internal controls There have been no changes in our internal control over financial
reporting that occurred during the period covered by this quarterly report that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.




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PART II  OTHER INFORMATION 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits Number
    
    Description3.1
    
    Restated Articles of Incorporation of the registrant (exhibit 3.1)(a)3.2
    
    Amended and Restated Bylaws of the registrant4.1
    
    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
    
    Amendment to Loan Documents dated March 31, 2004 by and between the registrant and Silicon Valley Bank10.2
    
    Amendment to Loan Documents (Exim Program) dated March 31, 2004 by and between the registrant and
Silicon Valley Bank31.1
    
    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,
2001.(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.  (b)
    
    Current Reports on Form 8-K(a)
    
    On January 12, 2004, we filed a current report on Form 8-K announcing the
decision of Brent R. Frei to transition from his role as Chief Executive
Officer.(b)
    
    On January 12, 2004, we furnished a current report on Form 8-K announcing
our preliminary financial results for the quarter and year ended December
31, 2003.(c)
    
    On February 4, 2004, we furnished a current report on Form 8-K announcing
our final financial results for the quarter and year ended December 31,
2003.




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ONYX SOFTWARE CORPORATION
(Registrant)Date: May 7, 2004
    By:
    /s/ Brent R. FreiBrent R. FreiChief Executive Officer and
Chairman of the Board
(Principal Executive Officer) Date: May 7, 2004
    By:
    /s/ Brian C. HenryBrian C. HenryExecutive Vice President and
Chief Financial Officer
(Principal Financial Officer)