##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period fromto
 Commission File Number 0-25361
 ONYX SOFTWARE CORPORATION
 (Exact name of registrant as specified in its charter)
 Washington
(State or other jurisdiction of
incorporation or organization)
    
    91-1629814
(IRS Employer
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)
 þ o
  o þ o
 o þ




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##### 



ONYX SOFTWARE CORPORATION
 CONTENTS
  
 PART IFINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006
(Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31,
2005 and 2006 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2005 and 2006 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART IIOTHER INFORMATION
    
    
    22Item 1A
    
    Risk Factors
    
    
    22Item 6.
    
    Exhibits
    
    
    33SIGNATURES
    
    
    
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART IFINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 ONYX SOFTWARE CORPORATION
 
 CONDENSED CONSOLIDATED
BALANCE SHEETS
(In thousands, except share and per share data)

(Unaudited)
 December 31,
    
    
    March 31,2005
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,574
    
    
    $
    18,812Accounts receivable, less allowances of $397 in 2005 and $465 in 2006
    
    
    11,533
    
    
    
    7,740Prepaid expenses and other
    
    
    2,015
    
    
    
    2,048Total current assets
    
    
    35,122
    
    
    
    28,600Property and equipment, net
    
    
    2,709
    
    
    
    2,442Purchased technology, net
    
    
    3,071
    
    
    
    2,816Goodwill, net
    
    
    9,204
    
    
    
    9,310Other assets
    
    
    556
    
    
    
    561Total assets
    
    $
    50,662
    
    
    
    43,729LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,054
    
    
    $
    1,649Salary and benefits payable
    
    
    1,760
    
    
    
    1,012Accrued liabilities
    
    
    3,118
    
    
    
    2,665Income taxes payable
    
    
    87
    
    
    
    43Current portion restructuring-related liabilities
    
    
    208
    
    
    
    9Current portion of term loan
    
    
    167
    
    
    
    167Current portion of deferred revenue
    
    
    15,211
    
    
    
    11,177Total current liabilities
    
    
    22,605
    
    
    
    16,722Long-term deferred revenue, less current portion
    
    
    1,032
    
    
    
    969Long-term purchased technology
    
    
    908
    
    
    
    921Term loan  less current portion
    
    
    56
    
    
    
    14Long-term deferred rent
    
    
    639
    
    
    
    628Long-term restructuring related liabilities
    
    
    
    
    
    
    170Shareholders equity:Common stock, $0.01 par value:Authorized shares  80,000,000; Issued and outstanding shares 
18,054,821 in 2005 and 18,473,405 in 2006
    
    
    154,277
    
    
    
    155,384Accumulated deficit
    
    
    (129,978
    )
    
    
    (132,152
    )Accumulated other comprehensive income
    
    
    1,123
    
    
    
    1,073Total shareholders equity
    
    
    25,422
    
    
    
    24,305Total liabilities and shareholders equity
    
    $
    50,622
    
    
    
    43,729
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ONYX SOFTWARE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months EndedMarch 31,2005
    
    
    2006Revenue:License
    
    $
    3,861
    
    
    $
    2,014Support and service
    
    
    10,196
    
    
    
    9,996Total revenue
    
    
    14,057
    
    
    
    12,010Cost of revenue:License
    
    
    437
    
    
    
    278Amortization of purchased technology
    
    
    256
    
    
    
    256Support and service
    
    
    4,207
    
    
    
    4,109Total cost of revenue
    
    
    4,900
    
    
    
    4,643Gross margin
    
    
    9,157
    
    
    
    7,367Operating expenses:Sales and marketing
    
    
    4,416
    
    
    
    3,971Research and development
    
    
    2,477
    
    
    
    3,149General and administrative
    
    
    2,777
    
    
    
    2,445Total operating expenses
    
    
    9,670
    
    
    
    9,565Loss from operations
    
    
    (513
    )
    
    
    (2,198
    )Other income (expense), net
    
    
    (203
    )
    
    
    38Loss before income taxes
    
    
    (716
    )
    
    
    (2,160
    )Income tax provision (benefit)
    
    
    (19
    )
    
    
    14Minority interest in consolidated subsidiary
    
    
    (78
    )
    
    
    Net loss
    
    $
    (619
    )
    
    
    (2,174
    )Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.12
    )Shares used in computation of basic and diluted net
loss per share
    
    
    14,618
    
    
    
    18,215
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ONYX SOFTWARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months EndedMarch 312005
    
    
    2006Operating activities:Net loss
    
    $
    (619
    )
    
    $
    (2,174
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    605
    
    
    
    583Imputed interest expense
    
    
    27
    
    
    
    13Change in fair value of outstanding warrants
    
    
    2
    
    
    
    Minority interest in loss of consolidated subsidiary
    
    
    (78
    )
    
    
    Disposal of
property, plant and equipment
    
    
    23
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    494Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (1,039
    )
    
    
    3,793Prepaid expenses and other assets
    
    
    (311
    )
    
    
    (38
    )Accounts payable and accrued liabilities
    
    
    (333
    )
    
    
    (1,617
    )Restructuring-related liabilities
    
    
    (184
    )
    
    
    (29
    )Deferred revenue
    
    
    (742
    )
    
    
    (4,097
    )Income taxes payable
    
    
    (82
    )
    
    
    (44
    )Net cash used in operating activities
    
    
    (2,731
    )
    
    
    (3,116
    )Investing activities:Purchases of property and equipment
    
    
    (88
    )
    
    
    (57
    )Net cash used in investing activities
    
    
    (88
    )
    
    
    (57
    )Financing activities:Proceeds from exercise of stock options
    
    
    4
    
    
    
    613Payments on term loan
    
    
    (41
    )
    
    
    (42
    )Net cash provided by (used in) financing activities
    
    
    (37
    )
    
    
    571Effects of exchange rate changes on cash
    
    
    (102
    )
    
    
    (160
    )Net decrease in cash and cash equivalents
    
    
    (2,958
    )
    
    
    (2,762
    )Cash and cash equivalents at beginning of period
    
    
    14,393
    
    
    
    21,574Cash and cash equivalents at end of period
    
    $
    11,435
    
    
    $
    18,812Supplemental cash flow disclosure:Interest paid
    
    $
    35
    
    
    
    5Income taxes paid
    
    
    76
    
    
    
    57
  5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Description of Business and Basis of Presentation
 Description of the Company
 Overview
    Interim Financial Information
  Reclassifications
  2. Summary of Significant Accounting Policies
 Principles of Consolidation
  6




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Use of Estimates
 Share Based Payments
 Revenue Recognition
 Software Revenue Recognition
      Accounting
for Performance of Construction-Type and Certain Production-Type Contracts
  7




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Cash and Cash Equivalents
  Stock-Based Compensation
  Accounting for Stock Issued to Employees Accounting for Certain
Transactions Involving Stock Compensation
 Accounting for Stock-Based Compensation  Transition and Disclosure Accounting for Stock-Based Compensation
 Three Months EndedMarch 31, 2005Net loss:As reported
    
    $
    (619
    )Add: stock-based employee expense included in reported net loss
    
    
    Deduct:
stock-based employee compensation expense determined under fair-value-based method for all awards
    
    $
    (659
    )Pro forma net loss
    
    $
    (1,278
    )Net loss per share:As reported
    
    $
    (0.04
    )Pro forma net loss
    
    $
    (0.09
    )
 8




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Income Taxes
  Other Comprehensive Income (Loss)
 Reporting Comprehensive Income
 3. Purchased Technology
  4. Restructuring and Other Related Charges
   Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atDecember 31, 2005
    
    
    Reclassifications
    
    
    Cash payments
    
    
    March 31, 2006Excess Facilities  Short-term
    
    $
    208
    
    
    $
    (170
    )
    
    $
    (29
    )
    
    $
    9Excess Facilities  Long-term
    
    $
    
    
    
    $
    170
    
    
    $
    
    
    
    $
    170Total
    
    $
    208
    
    
    $
    
    
    
    $
    (29
    )
    
    $
    179
  9




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##### Table of Contents



5. Stock Based Compensation
   March 31,2006Service Cost of Sales
    
    $
    63Sales and marketing
    
    
    140Research and development
    
    
    82General and administrative
    
    
    209Total
    
    $
    494
  As reported following
    
    If reported followingSFAS 123R
    
    APB 25Condensed Consolidated Statements of Operations:Loss from operations
    
    $
    (2,198
    )
    
    $
    (1,704
    )Loss before income taxes
    
    $
    (2,160
    )
    
    $
    (1,666
    )Net Loss
    
    $
    (2,174
    )
    
    $
    (1,680
    )Basic and diluted net loss per share
    
    $
    (0.12
    )
    
    $
    (0.09
    )Condensed Consolidated Statements of Cash FlowsNet cash used in operating activities
    
    $
    (3,116
    )
    
    $
    (3,116
    )Net cash provided by financing activities
    
    $
    571
    
    
    $
    571
 10




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##### Table of Contents



Options
    
    ESPPMarch 31,
    
    March 31,2005
    
    2006
    
    2005
    
    2006Expected life
    
    5 years
    
    
    
    3.7 years
    
    
    
    1.3 years
    
    
    
    1.3 yearsRisk-free interest rate
    
    
    4.2
    %
    
    
    4.8
    %
    
    
    3.1
    %
    
    
    4.3
    %Volatility
    
    
    53
    %
    
    
    68
    %
    
    
    56
    %
    
    
    49
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average fair value at date of grant
    
    $
    3.07
    
    
    $
    3.56
    
    
    $
    1.30
    
    
    $
    1.63
   WeightedaverageWeighted
    
    remainingaverage
    
    contractual
    
    AggregateShares
    
    exercise price
    
    term
    
    intrinsic valueOutstanding at December 31, 2005
    
    
    4,007,064
    
    
    $
    8.19Grants
    
    
    70,250
    
    
    
    3.85Excercises
    
    
    (165,820
    )
    
    
    3.72Forfeiture or expirations
    
    
    (231,279
    )
    
    
    14.84Outstanding at March 31, 2006
    
    
    3,680,215
    
    
    
    7.90
    
    
    
    7.67
    
    
    $
    3,446,016Exercisable at March 31, 2006
    
    
    1,889,807
    
    
    
    11.55
    
    
    
    6.69
    
    
    
    1,468,734
    11




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Weightedaverage grant-Shares
    
    date fair valueNonvested balance at December 31, 2005
    
    
    
    
    
    
    Granted
    
    
    252,000
    
    
    $
    3.78Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested balance at March 31, 2006
    
    
    252,000
    
    
    $
    3.78
  6. Net Loss Per Share
  Three Months EndedMarch 31,2005
    
    
    2006(In thousands, exceptper share data)Net loss (A)
    
    $
    (619
    )
    
    
    (2,174
    )Weighted average number of common shares (B)
    
    
    14,618
    
    
    
    18,215Effect of dilutive securities:Stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Adjusted weighted average shares (C)
    
    
    14,618
    
    
    
    18,215Loss per share:Basic (A)/(B)
    
    $
    (0.04
    )
    
    
    (0.12
    )Diluted (A)/(C)
    
    $
    (0.04
    )
    
    
    (0.12
    )
   7. Third-Party License Agreements
  12




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8. Segment and Geographic Information
     Three Months EndedMarch 312005
    
    
    2006Americas
    
    $
    8,611
    
    
    $
    7,642United Kingdom
    
    $
    2,305
    
    
    $
    1,624Rest of World
    
    $
    3,141
    
    
    $
    2,744Total
    
    $
    14,057
    
    
    $
    12,010
 9. Guarantees
  10. Onyx Japan
  13




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11. Liquidity
   12. Subsequent Events
   14




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Information
  
    
    information concerning possible or assumed future results of operations, trends in
financial results and business plans, including those relating to earnings growth and
revenue growth;
    
    statements about our engagement of Piper Jaffray to assist our Board of Directors
in evaluating our strategic opportunities;
    
    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.
   Overview
  15




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Overview of the Results for the Three Months Ended March 31, 2006
  
    
    Total revenue of $12.0 million for the first quarter of 2006, down 22% from the
fourth quarter of 2005 and down 15% from the first quarter of 2005;
    
    License revenue of $2.0 million for the first quarter of 2006, down 57% from the
fourth quarter of 2005 and down 48% from the first quarter of 2005;
    
    Support and service revenue of $10.0 million for the first quarter of 2006, down 7%
from the fourth quarter of 2005 and down 2% from the first quarter of 2005;
    
    Support and service margins of 59% for the first quarter of 2006, remaining steady
as compared to 57% in the fourth quarter of 2005 and consistent with 59% in the first
quarter of 2005;
    
    Operating expenses of $9.6 million for the first quarter of 2006, down from $10.0
million in the fourth quarter of 2005 and down from $9.7 million in the first quarter of
2005;
    
    Cash balances of $18.8 million at March 31, 2006, down from $21.6 million at
December 31, 2005; and up from $11.4 million at March 31, 2005; and
    
    Days sales outstanding, based on end of period receivable balances, down to 55 days
in the first quarter of 2006 compared to 67 days in the fourth quarter of 2005 and 79
days in the first quarter of 2005.
    
    
    increase our pipeline of sales opportunities;
    
    integrate new talent into our sales and marketing organization;
    
    enhance our market position and awareness;
    
    enhance our solutions portfolio to address more customer needs;
    
    focus our resources and efforts on the market opportunities with the highest probability of success;
    
    diversify and expand partnerships with key system integration and technology vendors;
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
    
    aggressively market future major product releases; and
    
    maintain customer satisfaction levels.
  Critical Accounting Policies and Estimates
   Revenue Recognition
  Software Revenue Recognition
      17




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Accounting
for Performance of Construction-Type and Certain Production-Type Contracts
   Allowance for Doubtful Accounts
  Impairment of Goodwill
 Goodwill and Other Intangible Assets
 Incomes Taxes
  Stock Based Compensation
 Share Based Payments
 Accounting for
Stock Issued to Employees Accounting for Stock-Based Compensation
 Results of Operations
  18




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Three Months EndedMarch 31,2005
    
    
    2006Revenue:License
    
    
    27.5
    %
    
    
    16.8
    %Support and service
    
    
    72.5
    
    
    
    83.2Total revenue
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue:License
    
    
    3.1
    
    
    
    2.3Amortization of acquired technology for license
    
    
    1.8
    
    
    
    2.1Support and service
    
    
    30.0
    
    
    
    34.2Total cost of revenue
    
    
    34.9
    %
    
    
    38.6
    %Gross margin
    
    
    65.1
    
    
    
    61.4Operating expenses:Sales and marketing
    
    
    31.4
    
    
    
    33.0Research and development
    
    
    17.6
    
    
    
    26.2General and administrative
    
    
    19.8
    
    
    
    20.4Total operating expenses
    
    
    68.8
    %
    
    
    79.6Loss from operations
    
    
    (3.7
    )
    
    
    (18.3
    )Other income (expense), net
    
    
    (1.4
    )
    
    
    0.3
    %Loss before income taxes
    
    
    (5.1
    )
    
    
    (18.0
    )Income tax provision (benefit)
    
    
    (0.1
    )
    
    
    0.1Minority interest in consolidated subsidiary
    
    
    (0.6
    )
    
    
    Net loss
    
    
    (4.4
    )%
    
    
    (18.1
    )%
 Revenue
     Cost of Revenue
 19




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Cost of license revenue
  Amortization of acquired technology
 Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed
 Cost of support and service revenue
  Operating Expenses and Other
 Sales and marketing
   Research and development
   20




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General and administrative
  Other Income (Expense), Net
  Income Taxes
  Minority Interest in Consolidated Subsidiary
   Liquidity and Capital Resources
    21




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Off-Balance Sheet Arrangements and Contractual Obligations
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Foreign Currency Risk
    
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Changes in internal controls
  
  
 Item 1A. Risk Factors
  22




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Our operating results fluctuate and could fall below expectations of investors, resulting in a
decrease in our stock price.
  
    
    general economic conditions, which may affect our customers capital investment levels in
management information systems and the timing of their purchases;
    
    the loss of any key technical, sales, accounting and finance, customer support or
management personnel and the timing of any new hires;
    
    budget and spending decisions by our prospective and existing customers;
    
    customers and prospects decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next, or to proceed with
smaller-than-forecasted orders or implementations;
    
    level of purchases by our existing customers, including additional license and maintenance revenues;
    
    our ability to compete in the highly competitive customer management systems market;
    
    our ability to develop, introduce and market new products and product versions on a timely basis;
    
    rate of market acceptance of our software solutions;
    
    variability in the mix of our license versus service revenue, the mix of our direct
versus indirect license revenue and the mix of services that we perform versus those
performed by third-party service providers;
    
    our ability to successfully expand our operations, particularly our direct and indirect
sales force and professional service organizations, and the amount and timing of
expenditures related to the expansion;
    
    our ability to expand our sales pipeline through our marketing activities and the
expenses associated with such marketing activities;
    
    the success of, the cost associated with and the financial accounting effects of any
acquisitions of companies or complementary technologies that we may complete;
    
    the expense we could incur as a result of an impairment in our goodwill;
    
    the expense we will incur as a result of changes in rules for granting equity compensation; and
    
    changes in generally accepted accounting principles in the United States and the
application of such changes to our financial statements.
  
    
    our sales cycles are lengthy and variable, typically ranging between six and twelve
months from our initial contact with a potential new customer to the signing of a license
agreement, although the sales cycle varies substantially from customer to customer, and
occasionally requires substantially more time;
    
    a substantial portion of our sales are completed at the end of the quarter and, as a
result, a substantial portion of our license revenue is recognized in the last month of a
quarter, and often in the last weeks or days of a quarter;
    
    the contracting process of our sales cycle may take more time than we have historically
experienced;
    
    the amount of unfulfilled orders for our products at the beginning of a quarter is
typically small because our products are generally shipped shortly after orders are
received; and
    
    the delay of new product releases can result in a customers decision to delay execution
of a contract.
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Our review of potential strategic alternatives is uncertain.
  
    
    the review of potential strategies may disrupt the Companys operations and divert
managements attention, which could have a material adverse effect on our business,
financial position or results of operations;
    
    the perceived uncertainties as to the Companys future direction may result in the loss
of, or failure to attract, customers, employees or business partners;
    
    the process of reviewing potential strategies may be more time consuming and expensive
than currently anticipated; and
    
    Onyx may not be able to identify new potential strategies, or variations of existing
strategies, that are worth pursuing, and even if strategies are identified that are believed
to be worth pursuing, the Company may not successfully execute any strategy or strategies
undertaken.
  We have incurred losses in prior periods, and may not be able to return to profitability, which
could cause a decrease in our stock price.
    If our new corporate strategy and market positioning is unsuccessful, we may not be able to
generate revenue and achieve profitability.
  24




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If we are unable to compete successfully in the highly competitive customer management systems
market, our business will fail.
    If we do not retain our key employees and management team our ability to execute our business
strategy will be limited.
  We may be unable to obtain the funding necessary to support the expansion of our business, and any
funding we do obtain could dilute our shareholders ownership interest in Onyx.
  25




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You may be unable to resell your shares at or above the price at which you purchased them, and our
stock price may be volatile.
  
    
    significant trading activity by shareholders with large holdings in our common stock;
    
    announcement of unsolicited acquisition proposals, or the withdrawal of such proposals,
by CDC Corporation or other parties;
    
    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; or
    
    changes in accounting standards that adversely affect our revenue and earnings.
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If we are unable to develop and maintain effective long-term relationships with our key partners,
or if our key partners fail to perform, our ability to sell our solution will be limited.
   
    
    we are unable to develop and maintain effective, long-term relationships with existing and potential key partners;
    
    our existing and potential key partners endorse a product or technology other than our solutions;
    
    we are unable to adequately train a sufficient number of key partners; or
    
    our existing and potential key partners do not have or do not devote resources necessary to implement our solutions.
 Economic and business conditions could adversely affect our revenue growth and ability to forecast
revenue.
    The internal controls implemented under the Sarbanes-Oxley Act of 2002 may not prevent or detect
all material weaknesses or significant deficiencies.
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We may be unable to establish vendor specific objective evidence in future periods and, if we
cannot, the method by which we recognize revenue could change.
  Fluctuations in support and service revenue could decrease our total revenue or decrease our gross
margins, which could cause a decrease in our stock price.
  We have a limited operating history and are subject to the risks of new enterprises.
  
    
    no history of sustained profitability;
    
    uncertain growth in the market for, and uncertain market acceptance of, our solutions;
    
    reliance on one product family;
    
    the risk that competition, technological change or evolving customer preferences, such as
preferences for different computing platforms, could harm sales of our solutions;
    
    the need to implement our sales, marketing and after-sales service initiatives, both domestically and internationally;
    
    the need to execute our product development activities;
    
    dependence on a limited number of key technical, customer support, sales and managerial personnel; and
    
    the risk that our management will be unable to effectively manage growth, a downturn or
any acquisition we may undertake.
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Our solutions may not achieve significant market acceptance.
  If potential customers do not accept the Onyx product family, our business will fail.
  We may be unable to efficiently restructure or expand our sales organization, which could harm our
ability to expand our business.
  If our customers cannot successfully implement our products in a timely manner, demand for our
solutions will be limited.
  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.
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If we do not expand our international operations and successfully overcome the risks inherent in
international business activities, the growth of our business will be limited.
  
    
    costs of customizing products for foreign countries;
    
    export and import restrictions, taxes, tariffs and other trade barriers;
    
    the need to comply with multiple, conflicting and changing laws and regulations;
    
    reduced protection of intellectual property rights and increased liability exposure; and
    
    regional economic, cultural and political conditions, including the direct and indirect
effects of terrorist activity and armed conflict in countries in which we do business.
    We may be unable to adequately protect our proprietary rights, which may limit our ability to
compete effectively.
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Intellectual property claims and litigation could subject us to significant liability for damages
and result in invalidation of our proprietary rights.
  
    
    stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;
    
    pay damages;
    
    enter into licensing or royalty agreements, which may be unavailable on acceptable terms; or
    
    redesign products or services that incorporate infringing technology, which we might not
be able to do at an acceptable price, in a timely fashion or at all.
 Our products may suffer from defects or errors, which could result in loss of revenue, delayed or
limited market acceptance of our products, increased costs and damage to our reputation.
   Our articles of incorporation and bylaws and Washington law contain provisions that could
discourage a takeover.
  
    
    stagger the election of our board members so that only one-third of our board is up for
reelection at each annual meeting;
    
    allow our board to issue preferred stock without any vote or further action by the
shareholders;
    
    eliminate the right of shareholders to act by written consent without a meeting, unless
the vote to take the action is unanimous;
    
    eliminate cumulative voting in the election of directors;
    
    specify a minimum threshold for shareholders to call a special meeting;
    
    specify that directors may be removed only with cause; and
    
    specify a supermajority requirement for shareholders to change those portions of our
articles that contain the provisions described above.
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Item 6. Exhibits
  Number
    
    Description3.1
    
    Restated Articles of Incorporation of the registrant (exhibit 3.1)(a)3.2
    
    Amended and Restated Bylaws of the registrant (exhibit 3.2)(d)4.1
    
    Rights Agreement dated October 25, 1999 between the registrant and ChaseMellon Shareholder
Services LLC (exhibit 2.1)(b)4.2
    
    Amendment No. 1 to Rights Agreement dated March 5, 2003 between the registrant and Mellon
Investor Services LLC (exhibit 4.1)(c)10.1
    
    Form of Stock Award Agreement (exhibit 10.1)(e)10.2
    
    Third Amendment to Employment Agreement, made and entered into as of March 15, 2006, by and
between Onyx and Janice P. Anderson (exhibit 10.2)(f)10.3
    
    Stock Award Agreement, dated March 15, 2006, between Onyx and Janice P. Anderson (exhibit 10.3)(g)10.4
    
    Amendment to Loan Documents between Onyx and Silicon Valley Bank, executed and entered into as of
March 30, 2006 (exhibit 10.1)(h)31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (a)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended September 30, 2003.(b)
    
    Incorporated by reference to the designated exhibit to the registrants registration
statement on Form 8-A (No. 0- 25361) filed October 28, 1999.(c)
    
    Incorporated by reference to the designated exhibit to the registrants Annual Report on Form
10-K (No. 0-25361) for the year ended December 31, 2002.(d)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended June 30, 2004.(e)
    
    Incorporated by reference to the designated exhibit to the registrants Current Report on
Form 8-K (No. 0-25361) filed with the Securities and Exchange Commission on March 17, 2006.(f)
    
    Incorporated by reference to the designated exhibit to the registrants Current Report on
Form 8-K (No. 0-25361) filed with the Securities and Exchange Commission on March 17, 2006.(g)
    
    Incorporated by reference to the designated exhibit to the registrants Current Report on
Form 8-K (No. 0-25361) filed with the Securities and Exchange Commission on March 17, 2006.(h)
    
    Incorporated by reference to the designated exhibit to the registrants Current Report on
Form 8-K (No. 0-25361) filed with the Securities and Exchange Commission on April 4, 2006. 33




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SIGNATURES
  ONYX SOFTWARE CORPORATION
(Registrant)Date: May 10, 2006
    By:
    /s/ Janice P. AndersonJanice P. AndersonChief Executive Officer and
Chairman of the BoardDate: May 10, 2006
    By:
    /s/ Robert J. ChamberlainRobert J. ChamberlainChief Financial Officer
(Principal Financial Officer) 34