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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 June 30, 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  112th 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
 þ No o Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes þ No o The number of shares of common stock, par value $0.01 per share,
outstanding on August 3, 2004 was 14,553,983.




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ONYX SOFTWARE CORPORATIONCONTENTS PART IFINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004
    
    
    3Condensed
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2003 and 2004
    
    
    4Condensed Consolidated Statement of Shareholders Equity for the Three Months Ended March 31, 2004 and June 30, 2004
    
    
    5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4.
    
    Controls and Procedures
    
    
    34PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    35Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    35Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    35Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    36SIGNATURES
    
    
    
    
    38EXHIBIT 3.2EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EHIBIT 32.2
  2




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##### Table of Contents



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,
    
    June 30,2003
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,127
    
    
    $
    12,292Restricted cash
    
    
    1,723
    
    
    
    Accounts receivable, less allowances of $488 in 2003 and $454 in 2004
    
    
    12,245
    
    
    
    10,952Deferred tax asset
    
    
    362
    
    
    
    333Prepaid expenses and other
    
    
    1,666
    
    
    
    1,576Total current assets
    
    
    26,123
    
    
    
    25,153Property and equipment, net
    
    
    4,277
    
    
    
    4,120Purchased technology, net
    
    
    
    
    
    
    4,085Other intangibles, net
    
    
    675
    
    
    
    229Goodwill, net
    
    
    9,508
    
    
    
    9,685Deferred tax asset
    
    
    
    
    
    
    92Other assets
    
    
    842
    
    
    
    832Total assets
    
    $
    41,425
    
    
    $
    44,196LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    883
    
    
    $
    987Salary and benefits payable
    
    
    946
    
    
    
    1,225Accrued liabilities
    
    
    1,829
    
    
    
    2,031Income taxes payable
    
    
    770
    
    
    
    717Restructuring-related liabilities
    
    
    2,758
    
    
    
    1,268Purchased technology obligation
    
    
    
    
    
    
    943Current portion of term loan
    
    
    
    
    
    
    167Deferred revenue
    
    
    15,053
    
    
    
    14,544Total current liabilities
    
    
    22,239
    
    
    
    21,882Long-term accrued liabilities
    
    
    544
    
    
    
    492Long-term deferred revenue
    
    
    1,025
    
    
    
    2,268Long-term restructuring-related liabilities
    
    
    405
    
    
    
    93Long-term restructuring-related liabilitieswarrants
    
    
    565
    
    
    
    353Long-term purchased technology obligation
    
    
    
    
    
    
    816Term loan
    
    
    
    
    
    
    306Deferred tax liabilities
    
    
    229
    
    
    
    Minority interest in joint venture
    
    
    119
    
    
    
    141Commitments and contingenciesShareholders equity:Common stock, $0.01 par value:Authorized shares  80,000,000; Issued and outstanding shares 
13,969,503 in 2003 and 14,552,505 in 2004
    
    
    142,682
    
    
    
    144,569Accumulated deficit
    
    
    (128,215
    )
    
    
    (128,635
    )Accumulated other comprehensive income
    
    
    1,832
    
    
    
    1,911Total shareholders equity
    
    
    16,299
    
    
    
    17,845Total liabilities and shareholders equity
    
    $
    41,425
    
    
    $
    44,196
 See accompanying notes to condensed consolidated financial statements. 3




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Revenue:License
    
    $
    3,122
    
    
    $
    3,561
    
    
    $
    5,741
    
    
    $
    7,180Support and service
    
    
    12,688
    
    
    
    11,232
    
    
    
    24,276
    
    
    
    21,857Total revenue
    
    
    15,810
    
    
    
    14,793
    
    
    
    30,017
    
    
    
    29,037Cost of revenue:License
    
    
    197
    
    
    
    266
    
    
    
    482
    
    
    
    459Amortization of acquired technology
    
    
    84
    
    
    
    
    
    
    
    168
    
    
    
    Support and service
    
    
    5,443
    
    
    
    4,515
    
    
    
    10,878
    
    
    
    8,971Total cost of revenue
    
    
    5,724
    
    
    
    4,781
    
    
    
    11,528
    
    
    
    9,430Gross margin
    
    
    10,086
    
    
    
    10,012
    
    
    
    18,489
    
    
    
    19,607Operating expenses:Sales and marketing
    
    
    5,082
    
    
    
    4,604
    
    
    
    11,565
    
    
    
    9,381Research and development
    
    
    3,147
    
    
    
    2,704
    
    
    
    6,276
    
    
    
    5,318General and administrative
    
    
    1,842
    
    
    
    2,227
    
    
    
    4,095
    
    
    
    4,151Restructuring and other related charges
    
    
    754
    
    
    
    
    
    
    
    1,094
    
    
    
    484Amortization of acquisition-related intangibles
    
    
    209
    
    
    
    209
    
    
    
    418
    
    
    
    418Amortization of stock-based compensation
    
    
    15
    
    
    
    
    
    
    
    28
    
    
    
    Total operating expenses
    
    
    11,049
    
    
    
    9,744
    
    
    
    23,476
    
    
    
    19,752Income (loss) from operations
    
    
    (963
    )
    
    
    268
    
    
    
    (4,987
    )
    
    
    (145
    )Other income (expense), net
    
    
    111
    
    
    
    (121
    )
    
    
    120
    
    
    
    (314
    )Change in fair value of outstanding warrants
    
    
    15
    
    
    
    90
    
    
    
    257
    
    
    
    212Income (loss) before income taxes
    
    
    (837
    )
    
    
    237
    
    
    
    (4,610
    )
    
    
    (247
    )Income tax provision (benefit)
    
    
    135
    
    
    
    93
    
    
    
    (79
    )
    
    
    149Minority interest in consolidated subsidiary
    
    
    (75
    )
    
    
    (31
    )
    
    
    (232
    )
    
    
    24Net income (loss)
    
    $
    (897
    )
    
    $
    175
    
    
    $
    (4,299
    )
    
    $
    (420
    )Diluted net income (loss) per share
    
    $
    (0.07
    )
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    (0.03
    )Shares used in diluted share computation
    
    
    13,238
    
    
    
    14,615
    
    
    
    12,969
    
    
    
    14,224Basic net income (loss) per share
    
    $
    (0.07
    )
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    (0.03
    )Shares used in basic share computation
    
    
    13,238
    
    
    
    14,465
    
    
    
    12,969
    
    
    
    14,224
 See accompanying notes to condensed consolidated financial statements. 4




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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(In thousands, except share data)
(Unaudited) Common Stock
    
    
    
    
    
    AccumulatedOtherAccumulated
    
    Comprehensive
    
    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
    
    
    $
    16,228Exercise of stock options
    
    
    3,573
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Issuance of common stock under ESPP
    
    
    51,743
    
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    177Common stock issued in connection
with purchased technology
    
    
    504,891
    
    
    
    1,666
    
    
    
    
    
    
    
    
    
    
    
    1,666Comprehensive income (loss):Translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (413
    )Net income
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (238
    )Balance at June 30, 2004
    
    
    14,552,505
    
    
    $
    144,569
    
    
    $
    (128,635
    )
    
    $
    1,911
    
    
    $
    17,845
 See accompanying notes to condensed consolidated financial statements. 5




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Six Months EndedJune 30,2003
    
    2004Operating activities:Net loss
    
    $
    (4,299
    )
    
    $
    (420
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    2,722
    
    
    
    1,424Deferred income taxes
    
    
    (135
    )
    
    
    (292
    )Noncash stock-based compensation expense
    
    
    28
    
    
    
    Change in fair value of outstanding warrants
    
    
    (257
    )
    
    
    (212
    )Minority interest in loss of consolidated subsidiary
    
    
    (232
    )
    
    
    24Changes in operating assets and liabilities:Accounts receivable
    
    
    1,830
    
    
    
    1,350Prepaid and other assets
    
    
    860
    
    
    
    100Accounts payable and accrued liabilities
    
    
    (1,079
    )
    
    
    273Restructuring-related liabilities
    
    
    (5,994
    )
    
    
    (1,802
    )Deferred revenue
    
    
    (1,267
    )
    
    
    734Income taxes
    
    
    264
    
    
    
    (53
    )Net cash provided by (used in) operating activities
    
    
    (7,559
    )
    
    
    1,126Investing activities:Restricted cash
    
    
    (948
    )
    
    
    1,723Acquisition of purchased technology
    
    
    
    
    
    
    (400
    )Purchases of property and equipment
    
    
    (784
    )
    
    
    (849
    )Net cash provided by (used in) investing activities
    
    
    (1,732
    )
    
    
    474Financing activities:Proceeds from exercise of stock options
    
    
    8
    
    
    
    44Proceeds from issuance of shares under employee stock purchase plan
    
    
    201
    
    
    
    177Net proceeds from sale of common stock
    
    
    2,815
    
    
    
    Proceeds from term loan
    
    
    
    
    
    
    500Payments on term loan
    
    
    
    
    
    
    (27
    )Payments on capital lease obligations
    
    
    (257
    )
    
    
    Net cash provided by financing activities
    
    
    2,767
    
    
    
    694Effects of exchange rate changes on cash
    
    
    217
    
    
    
    (129
    )Net increase (decrease) in cash and cash equivalents
    
    
    (6,307
    )
    
    
    2,165Cash and cash equivalents at beginning of period
    
    
    17,041
    
    
    
    10,127Cash and cash equivalents at end of period
    
    $
    10,734
    
    
    $
    12,292Supplemental cash flow disclosure:Interest paid
    
    $
    61
    
    
    $
    72Income taxes paid (refunded), net
    
    
    (208
    )
    
    
    247Supplemental
schedule of acquisition information:Fair value of purchased technology acquired
    
    
    
    
    
    
    4,085Cash paid for the purchased technology
    
    
    
    
    
    
    (400
    )Common stock issued
    
    
    
    
    
    
    (1,666
    )Liabilities
incurred or assumed
    
    
    
    
    
    
    (2,019
    )
 See accompanying notes to condensed consolidated financial statements. 6




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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. 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 estimates in
determining certain provisions, including uncollectible trade accounts
receivable, useful lives for property and equipment, intangible assets, tax
liabilities and restructuring liabilities. 7




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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 June 30, 2004, the Companys cash
equivalents consisted of money market funds. The Company had no restricted cash at June 30, 2004. 8




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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
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004(In thousands, except per share data)Net income (loss):As reported
    
    $
    (897
    )
    
    $
    175
    
    
    $
    (4,299
    )
    
    $
    (420
    )Add: stock-based employee expense
included in reported net loss
    
    
    15
    
    
    
    
    
    
    
    28
    
    
    
    Deduct: stock-based employee
compensation expense determined
under fair-value-based method for all
awards
    
    
    (990
    )
    
    
    (993
    )
    
    
    (3,324
    )
    
    
    (1,672
    )Pro forma
    
    $
    (1,872
    )
    
    $
    (818
    )
    
    $
    (7,595
    )
    
    $
    (2,092
    )Net income (loss) per share:As reported
    
    $
    (0.07
    )
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    (0.03
    )Pro forma
    
    $
    (0.14
    )
    
    $
    (0.06
    )
    
    $
    (0.59
    )
    
    $
    (0.15
    )
 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 June 30, 2003 and 2004 was
$605,000 and $238,000, respectively, which included a translation gain of
$292,000 for the three months ended June 30, 2003 and a translation loss of
$413,000 for the three months ended June 30, 2004. Total comprehensive loss for
the six months ended June 30, 2003 and 2004 was $3.9 million and $341,000,
respectively, which included a translation gain of $421,000 and $79,000,
respectively. 3. Purchased Technology On April 7, 2004, the Company acquired business process management
technology from Visuale, Inc. in an asset acquisition valued at $4.1 million.
Under the terms and conditions of the purchase agreement, the Company purchased
the acquired technology with a purchase price valued at $4.1 million,
including (a) an initial payment of $400,000 in cash, (b) common stock of the
Company valued at $1.7 million in the form of 504,891 shares, and (c) on the
one-year anniversary of closing, a subsequent payment valued at $1.0 million,
to be paid at the Companys option in either cash or stock. In addition, the
Company agreed to make royalty payments for a period of four years to Visuale
on sales of certain Company products incorporating the acquired technology,
with a guaranteed minimum royalty payment in each of the third and fourth years
following closing of $500,000. The Company also assumed employee liabilities
of $115,000 and had incurred professional fees associated with the acquisition of
$145,000 as of June 30, 2004. The above future payments have been recorded on
the balance sheet as purchased technology obligations net of imputed interest
in short-term and long-term liabilities, respectively. The purchased
technology will be amortized over four years starting from the general release
of the product, while the imputed interest will be amortized on a straight-line
basis, which approximates the effective interest method, as interest expense. 9




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4. 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 roll-forward of the related liability for the second quarter of 2004
follow (in thousands): Charge for theBalance at
    
    Three MonthsMarch 31,
    
    Ended
    
    Cash
    
    Fair Value
    
    Balance at2004
    
    June 30, 2004
    
    Payments
    
    Adjustment
    
    June 30, 2004Excess facilities
    
    $
    1,843
    
    
    $
    
    
    
    $
    (627
    )
    
    $
    
    
    
    $
    1,216Excess facilities  warrants
    
    
    443
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    353Employee separation costs
    
    
    255
    
    
    
    
    
    
    
    (110
    )
    
    
    
    
    
    
    145Total
    
    $
    2,541
    
    
    $
    
    
    
    $
    (737
    )
    
    $
    (90
    )
    
    $
    1,714
 The Company issued three five-year warrants to Bellevue Hines Development
LLC (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 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 June 30, 2004, the warrant
value was estimated at $353,000 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, a consequence of which is that 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 for excess
facilities 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 $1.3
million at June 30, 2004, the long-term portion of restructuring-related
liabilities totaled $93,000 at June 30, 2004 and the value of the warrants
issued in connection with the termination of certain facility lease obligations
was $353,000 at June 30, 2004. 10




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5. Net Income (Loss) Per Share Basic net income (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 net income (loss) per share
reflects the potential dilution of securities by including other common stock
equivalents, including stock options using the treasury stock method and
convertible preferred stock using the if-converted method, in the weighted
average number of common shares outstanding for a period, if dilutive. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net income (loss) (A)
    
    $
    (897
    )
    
    $
    175
    
    
    $
    (4,299
    )
    
    $
    (420
    )Weighted average number of common shares (B)
    
    
    13,238
    
    
    
    14,465
    
    
    
    12,969
    
    
    
    14,224Effect of dilutive securities:Stock options
    
    
    *
    
    
    
    149
    
    
    
    *
    
    
    
    *Warrants
    
    
    **
    
    
    
    1
    
    
    
    **
    
    
    
    **Adjusted weighted average shares (C)
    
    
    13,238
    
    
    
    14,615
    
    
    
    12,969
    
    
    
    14,224Income (loss) per share:Basic (A)/(B)
    
    $
    (0.07
    )
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    (0.03
    )Diluted (A)/(C)
    
    $
    (0.07
    )
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    (0.03
    )
  *
    
    The effect of stock options are excluded from the computation of diluted
earnings per share if the effects are antidilutive. Outstanding stock
options of 3,594,162 and 3,020,830 and warrants of 205,000 and
198,750 at June 30, 2003 and 2004, respectively, were excluded
from the computation of diluted earnings per share because the 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 these 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 105,000 shares
and 114,000 shares for the three and six months ended June 30, 2003 and
128,000 shares for the six months ended June 30, 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. In May
2003, the Company issued warrants to purchase 6,250 shares of its common
stock at an exercise price of $3.25 per share in connection with the
private placement of the Companys common stock in May 2003. There were no
warrants outstanding prior to January 2003. 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 Under Loan and Security Agreements with Silicon Valley Bank (SVB), the
Company has a total $10.0 million working capital revolving line of credit and
a $500,000 term loan facility. The $10.0 million working capital revolving line
of credit is split between an $8.0 million domestic facility and a $2.0 million
Export Import Bank of the United States (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 Company was not required to
restrict any cash under the loan agreement as of June 30, 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 4.0% as of June 30, 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 at June 30, 2004. The Company is also
prohibited under the loan and security agreements from paying dividends. The
facilities expire in March 2005. At June 30, 2004, based on $4.8 million
outstanding standby letters of credit relating to long-term lease obligations
and $473,000 outstanding under the term loan facility, $371,000 of additional
amounts were currently available under the revolving credit facilities. 11




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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 June
30, 2003 and 2004 were $7.2 million and $5.6 million, respectively. Total
revenues outside of North America for the six months ended June 30, 2003 and
2004 were $12.4 million and $10.8 million, respectively. The following geographic information is presented for the three and six
months ended June 30, 2003 and 2004 (in thousands): North
    
    United
    
    Rest ofAmerica
    
    Kingdom
    
    World
    
    TotalThree months ended June 30, 2003:Revenue
    
    $
    8,637
    
    
    $
    2,353
    
    
    $
    4,820
    
    
    $
    15,810Three months ended June 30, 2004:Revenue
    
    $
    9,191
    
    
    $
    1,672
    
    
    $
    3,930
    
    
    $
    14,793Six months ended June 30, 2003:Revenue
    
    $
    17,651
    
    
    $
    4,419
    
    
    $
    7,947
    
    
    $
    30,017Six months ended June 30, 2004:Revenue
    
    $
    18,251
    
    
    $
    3,413
    
    
    $
    7,373
    
    
    $
    29,037
 8. Guarantees In the ordinary course of business, the Company is 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 the Companys customer license and service agreements, and give rise
only to the disclosure requirements prescribed by FIN No. 45. Indemnification and warranty provisions contained within the Companys
customer license and service agreements are generally consistent with those
prevalent in its industry. The duration of the Companys product warranties
generally does not exceed 180 days following delivery of its products. The
Company has not incurred significant obligations under customer indemnification
or warranty provisions historically and does not expect to incur significant
obligations in the future. Accordingly, the Company does not maintain accruals
for potential customer indemnification or warranty-related obligations. 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. 12




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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 three
months ended June 30, 2003 and 2004, fees charged under this agreement were
$51,000 and $233,000, respectively. During the six months ended June 30, 2003
and 2004, fees charged under this agreement were $186,000 and $378,000,
respectively. The intercompany fees are eliminated in consolidation; however,
the Company allocates 42% of the fees to the minority shareholders. The minority shareholders capital account balance as of June 30, 2004 was
$141,000. Additional Onyx Japan losses above approximately $335,000 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. 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. The Company was in compliance with the financial
covenants of these facilities as of June 30, 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 second 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. 
 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; 13




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
    
    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. 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 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 and Six Months Ended June 30, 2004 Key financial data points relating to our three and six month performance
include:  
    
    Revenue of $14.8 million, up 4% from the first quarter of 2004 and down 6% from the second quarter of 2003;
    
    License revenue of $3.6 million, down 2% from the first quarter of 2004 and up 14% from the second quarter of 2003;
    
    Service revenue of $11.2 million, up 6% from the first quarter of 2004 and down 11% from the second quarter of 2003;
    
    Service margins of 60%, up from 58% in the first quarter of 2004 and up from 57% in the second quarter of 2003;
    
    Operating expenses, excluding acquisition-related amortization,
stock compensation and restructuring charges, of $9.5 million, up from
$9.3 million in the first quarter of 2004 and down from $10.1 million
in the second quarter of 2003; 14




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
    
    Revenue for the first six months of 2004 of $29.0 million, down 3% from the first six months of 2003;
    
    License revenue for the first six months of 2004 of $7.2 million, up 25% from the first six months of 2003;
    
    Service revenue for the first six months of 2004 of $21.9 million, down 10% from the first six months of 2003;
    
    Service margins for the first six months of 2004 of 59%, up from 55% for the first six months of 2003;
    
    Operating expenses, excluding acquisition-related amortization,
stock compensation and restructuring charges, for the first six months
of 2004 of $18.9 million, down from $21.9 million for the first six
months of 2003;
    
    Cash and restricted cash balances of $12.3 million at June 30,
2004, down from $13.0 million at March 31, 2004 and up from $11.9
million at December 31, 2003; and
    
    Days sales outstanding, based on end of period receivable balances,
down to 68 days compared to 72 days in the first quarter of 2004 and 74
days in the second quarter of 2003. Although 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 challenging 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 these conditions to continue to impact capital-spending
initiatives of our targeted new and existing customer base in the near term. In
addition to the macro-economic factors affecting our industry, we
have also been impacted by transformations in our business during
recent years. Onyx was one of the first companies in the CRM industry
to migrate its product architecture from client-server technology to
a fully Internet-based application. In addition to this major product
re-architecture, Onyx shifted its business strategy to increase its
focus on larger customers. This, in turn, has changed both our
marketing strategies and employee skill requirements. Onyx has
invested a great deal of time and money into these transitions, and
they are not fully complete. We will be focused on the
following objectives in the near term:  
    
    successful rebuilding of our sales force;
    
    increase our pipeline of sales opportunities;
    
    managing our costs toward profitable growth;
    
    focusing our resources and efforts on the market 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; and
    
    maintaining high customer satisfaction levels. We hope that, by focusing our efforts on these key objectives, we will be
able to continue to be profitable in challenging economic times and
successfully grow our business, although we cannot offer any assurance
regarding when, or whether, this will occur. 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 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 15




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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. 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. 16




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##### Table of Contents



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 six months 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. 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 and six months ended
June 30, 2003 and 2004 are not necessarily indicative of the results that may
be expected for the full year or any future period. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Consolidated Statement of Operations Data:Revenue:License
    
    
    19.7
    %
    
    
    24.1
    %
    
    
    19.1
    %
    
    
    24.7
    %Support and service
    
    
    80.3
    
    
    
    75.9
    
    
    
    80.9
    
    
    
    75.3Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:License
    
    
    1.3
    
    
    
    1.8
    
    
    
    1.6
    
    
    
    1.6Amortization of acquired technology
    
    
    0.5
    
    
    
    
    
    
    
    0.6
    
    
    
    Support and service
    
    
    34.4
    
    
    
    30.5
    
    
    
    36.2
    
    
    
    30.9Total cost of revenue
    
    
    36.2
    
    
    
    32.3
    
    
    
    38.4
    
    
    
    32.5Gross margin
    
    
    63.8
    
    
    
    67.7
    
    
    
    61.6
    
    
    
    67.5Operating expenses:Sales and marketing
    
    
    32.1
    
    
    
    31.1
    
    
    
    38.5
    
    
    
    32.3Research and development
    
    
    19.9
    
    
    
    18.3
    
    
    
    20.9
    
    
    
    18.3
 17




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##### Table of Contents



General and administrative
    
    
    11.7
    
    
    
    15.1
    
    
    
    13.6
    
    
    
    14.3Restructuring and other-related charges
    
    
    4.8
    
    
    
    
    
    
    
    3.7
    
    
    
    1.7Amortization of acquisition-related
intangibles
    
    
    1.3
    
    
    
    1.4
    
    
    
    1.4
    
    
    
    1.4Amortization of stock-based compensation
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    Total operating expenses
    
    
    69.9
    
    
    
    65.9
    
    
    
    78.2
    
    
    
    68.0Income (loss) from operations
    
    
    (6.1
    )
    
    
    1.8
    
    
    
    (16.6
    )
    
    
    (0.5
    )Interest and other income (expense), net
    
    
    0.7
    
    
    
    (0.8
    )
    
    
    0.4
    
    
    
    (1.1
    )Change in fair value of outstanding warrants
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.7Income (loss) before income taxes
    
    
    (5.3
    )
    
    
    1.6
    
    
    
    (15.4
    )
    
    
    (0.9
    )Income tax provision (benefit)
    
    
    0.9
    
    
    
    0.6
    
    
    
    (0.3
    )
    
    
    0.5Minority interest in consolidated subsidiary
    
    
    (0.5
    )
    
    
    (0.2
    )
    
    
    (0.8
    )
    
    
    0.0Net income (loss)
    
    
    (5.7
    )%
    
    
    1.2
    %
    
    
    (14.3
    )%
    
    
    (1.4
    )%
 Revenue Total revenue, which consists of software license and support and service
revenue, decreased 6% from $15.8 million in the second quarter of 2003 to $14.8
million in the second quarter of 2004. Total revenue decreased 3% from $30.0
million in the first six months of 2003 to $29.0 million in the first six
months of 2004. For the three and six months ended June 30, 2003 and 2004, no
single customer accounted for more than 10% of total revenue. License revenue increased 14%, from $3.1 million in the second quarter of
2003 to $3.6 million in the second quarter of 2004. License revenue increased
25% from $5.7 million in the first six months of 2003 to $7.2 million in the
first six months of 2004. Although 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 11% from $12.7 million in the
second quarter of 2003 to $11.2 million in the second quarter of 2004. Support
and service revenue represented 80% of our total revenue in the second quarter
of 2003 and 76% in the second quarter of 2004. Our support and service
revenues decreased 10% from $24.3 million in the first six months of 2003 to
$21.9 million in the first six months of 2004. Support and service revenues
represented 81% of our total revenue in the first six months of 2003 and 75% of
our total revenue in the first six months of 2004. We expect the dollar amount
of our service revenue in the third quarter of 2004 to be in the same range
when compared to the second quarter of 2004. We also expect 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 decreased 22% from $7.2 million in the
second quarter of 2003 to $5.6 million in the second quarter of
2004. Revenue
outside of North America decreased 13% from $12.4 million in the first six
months of 2003 to $10.8 million in the first six months of 2004. The decrease
in international revenue was primarily due to the decrease in license revenue
in Europe. 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
increased 35%, from $197,000 in the second quarter of 2003 to $266,000 in the
second quarter of 2004. Cost of license revenue as a percentage of related
license revenue was 6% in the second quarter of 2003 and 7% in the second
quarter of 2004. The increase in the cost of license revenue as a percentage
of related license revenue resulted primarily from an increase in third-party
product royalties during the second quarter of 2004. Cost of license revenue
decreased 5% from $482,000 in the first six months of 2003 to $459,000 in the
first six months of 2004. Cost of license revenue as a percentage of related
license revenue was 8% in the first six months of 2003 and 6% in the first six
months of 2004. The decrease in cost of license revenue as a percentage of
related license revenue resulted primarily from a decrease in third-party
product royalties. 18




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##### Table of Contents



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 second quarter of 2003 and $168,000 in the first six months of 2003.
Amortization of acquired technology was completed in the fourth quarter of 2003
and, accordingly, there was no amortization of acquired technology in either
the first quarter or the first six months of 2004. Purchased technology of
$4.1 million from the Visuale acquisition, will be amortized over four years
starting from the general release of the product, which is expected in early
2005. 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 17%, from $5.4 million
in the second quarter of 2003 to $4.5 million in the second quarter of 2004.
Cost of support and service revenue as a percentage of related support and
service revenue was 43% in the second quarter of 2003 compared to 40% in the
second quarter of 2004. The decrease in cost of support and service revenue as
a dollar amount in the second quarter of 2004 compared to the second quarter of
2003 resulted primarily from a reduction in consulting personnel of
approximately 11% and a decrease in the use of third-party service providers,
of approximately $398,000. Cost of support and service revenue decreased 18%,
from $10.9 million in the first six months of 2003 to $9.0 million in the first
six months of 2004. Cost of support and service revenue as a percentage of
related support and service revenue was 45% in the first six months of 2003
compared to 41% in the first six months of 2004. The decrease in cost of
support and service revenue as a dollar amount in the six months of 2004
compared to the six months of 2003 resulted primarily from an average reduction
in consulting personnel of approximately 13%, and a decrease in the use of
third-party service providers, of approximately $909,000. 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 9%, from $5.1 million in the second quarter of
2003 to $4.6 million in the second quarter of 2004. Sales and marketing
expenses decreased 19%, from $11.6 million in the first six months of 2003 to
$9.4 million in the first six months of 2004. The decrease in dollar amount
from 2003 to 2004 was primarily due to reductions in sales and marketing
headcounts. Sales and marketing employees decreased 19% from June 30, 2003 to
June 30, 2004. Sales and marketing expenses represented 32% of our total
revenue in the second quarter of 2003, compared to 31% in the second quarter of
2004. Sales and marketing expenses represented 39% of our total revenue in the
first six months of 2003, compared to 32% of our total revenue in the first six
months 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 14%, from $3.1 million in the second quarter
of 2003 to $2.7 million in the second quarter of 2004. Research and
development expenses decreased 15%, from $6.3 million in the first six months
of 2003 to $5.3 million in the first six months of 2004. The decrease in
research and development expenses was primarily due to a decrease in the use of
outside contractors and a decrease in the number of development personnel.
Average headcount of research and development employees decreased 10%, in the
first six months of 2004 when compared to the first six months of 2003.
Research and development costs represented 20% of our total revenue in the
second quarter of 2003, compared to 18% in the second quarter of 2004.
Research and development costs represented 21% of our total revenue in the
first six months of 2003, compared to 18% in the first six months of 2004. 19




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We believe that our research and development investments are essential to
our long-term strategy and, to fully realize our long-term sales growth
opportunity, we believe that we may need in future periods to increase our
research and development investment. 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 increased 21%, from $1.8
million in the second quarter of 2003 to $2.2 million in the second quarter of
2004. The increase in dollar amount from the second quarter of 2003 to the
second quarter of 2004 was primarily due to an increase in hired services
related to Sarbanes-Oxley work, recruiting and relocation fees related to the
hiring of our new Chief Executive Officer, and a reduction of our bad debt
reserve in the second quarter of 2003. General and administrative costs
represented 12% of our total revenue in the second quarter of 2003, compared to
15% in the second quarter of 2004. General and administrative expenses
increased 1%, from $4.1 million in the first six months of 2003 to $4.2 million
in the first six months of 2004. General and administrative costs represented
14% of our total revenue in the first six months of 2003, consistent with the
first six months of 2004. We believe that our general and administrative expenses may increase in
future quarters, in particular Q3 2004, as we incur additional professional
services fees related to the satisfaction of new compliance requirements under
the Sarbanes-Oxley Act of 2002. In addition we believe that our general and
administrative expenses may increase with a full quarters compensation cost and
relocation costs associated with the hiring of our 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 and satisfy our new compliance requirements. 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
 The roll-forward of the related liability for the second quarter of 2004
follow (in thousands): Charge for theBalance at
    
    Three MonthsMarch 31,
    
    Ended
    
    Cash
    
    Fair Value
    
    Balance at2004
    
    June 30, 2004
    
    Payments
    
    Adjustment
    
    June 30, 2004Excess facilities
    
    $
    1,843
    
    
    $
    
    
    
    $
    (627
    )
    
    $
    
    
    
    $
    1,216Excess facilities  warrants
    
    
    443
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    353Employee separation costs
    
    
    255
    
    
    
    
    
    
    
    (110
    )
    
    
    
    
    
    
    145Total
    
    $
    2,541
    
    
    $
    
    
    
    $
    (737
    )
    
    $
    (90
    )
    
    $
    1,714
 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 20




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##### Table of Contents



stock at an exercise price of $13.84 per share. If we either undergo 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 June 30, 2004, the warrant value was
estimated at $353,000 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,
a consequence of which is that 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 for excess facilities
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 $1.3
million at June 30, 2004, the long-term portion of restructuring-related
liabilities totaled $93,000 at June 30, 2004 and the value of the warrants
issued in connection with the termination of certain facility lease obligations
was $353,000 at June 30, 2004.We estimate the cash payments for restructuring
and other liabilities will be approximately $463,000 for the third
quarter of 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 second quarter of 2003 and 2004 and $418,000 in the
first six months of 2003 and 2004. Amortization of acquisition-related
intangibles will be completed in the third quarter of 2004. 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 recorded
stock-based compensation expense of $15,000 in the second quarter of 2003 and
$0 in the second quarter of 2004. We recorded stock-based compensation expense
of $28,000 in the first six months of 2003 and $0 in the first six months 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 $111,000 in the second quarter of 2003 compared to
expense of $(121,000) in the second quarter of 2004. Other income (expense),
net was income of $120,000 in the first six months of 2003 compared to expense
of $(314,000) in the first six months of 2004. The decrease in other income
(expense), net was 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 and foreign currency
transaction losses in the first six months 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. 21




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##### Table of Contents



During the second quarter of 2004, we recorded a benefit of $90,000,
representing the change in fair value of the outstanding warrants. The benefit
recorded during the first six months of 2004 totaled $212,000. Income Tax Provision (Benefit) We recorded an income tax provision of $135,000 in the second quarter of
2003 and a provision of $93,000 in the second quarter of 2004. We recorded an
income tax benefit of $(79,000) in the first six months of 2003 and a provision
of $149,000 in the first six months of 2004. Our income tax provision
(benefit) in both 2003 and 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
increased the provision for our UK operation in the second quarter of 2004 and
recorded a long term deferred tax asset of $92,000. We have recorded a
valuation allowance for all but $425,000 of our deferred tax assets as a result
of uncertainties regarding the realization of the asset balance at June 30,
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 second quarter of 2003 and 2004, the minority shareholders interest in
Onyx Japans losses totaled $75,000 and $31,000. In the first six months of
2003, the minority shareholders interest in Onyx Japans losses totaled
$232,000. In the first six months of 2004, the minority shareholders interest
in Onyx Japans income totaled $24,000. At June 30, 2004, the minority
shareholders remaining interest in the joint venture totaled $141,000. As a
result, additional Onyx Japan losses above approximately $335,000 in the
aggregate will be absorbed 100% by Onyx, as compared to 58% in prior periods. Liquidity and Capital Resources At June 30, 2004, we had unrestricted cash and cash equivalents of $12.3
million, an increase of $586,000 from unrestricted cash and cash equivalents
held at December 31, 2003. At June 30, 2004, we did not have any restricted
cash, a decrease of $1.7 million in restricted cash from December 31, 2003. 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 June 30, 2004. At June 30, 2004, our principal obligations consisted of
restructuring-related liabilities totaling $1.4 million, excluding the value
assigned to warrants, of which $1.3 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 $987,000,
salaries and benefits payable of $1.2 million, and acquisition obligations, net
of imputed interest, of $1.8 million, of which $943,000 is expected to be paid
within the next 12 months. The majority of the restructuring-related
liabilities relate to excess facilities in domestic and international markets.
The majority of our accounts payable, salaries and benefits payable and accrued
liabilities at June 30, 2004 will be settled during the next three months and
will result in a corresponding decline in the amount of cash and cash
equivalents, offset by liabilities associated with activity in the third
quarter of 2004. The acquisition obligations relate to our purchase of the
Visuale assets in the second quarter of 2004. We will make a subsequent
payment of $1.0 million in April 2005, with the option of using either cash or
common stock valued at the then-current fair market value. In addition, we
will make royalty payments for a period of four years to Visuale on sales of
our products incorporating the acquired technology, with a guaranteed minimum
royalty payment in each of the third and fourth years following closing of
$500,000. Off-balance sheet obligations as of June 30, 2004 primarily
consisted of operating leases associated with facilities in Bellevue,
Washington and other domestic and international field office facilities. Our
contractual commitments at June 30, 2004 are substantially similar to those at
December 31, 2003 that were disclosed in our annual report on Form 10-K. Under Loan and Security Agreements with SVB, we have a total $10.0 million
working capital revolving line of credit and a $500,000 term loan facility. 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. We were not required to restrict any cash under the loan
agreements of June 30, 2004. 22




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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 at June 30, 2004. We are also prohibited under the loan
and security agreements from paying dividends. The facilities expire in March
2005. At June 30, 2004, based on $4.8 million in outstanding standby letters of
credit relating to long-term lease obligations and $473,000 outstanding under
the term loan facility, $371,000 of additional amounts were currently available
under the revolving credit facilities. Our operating activities resulted in net cash outflows of $7.6 million in
the first six months of 2003 and inflows of $1.1 million in the first six
months of 2004. The operating cash outflow in the first six months of 2003 was
primarily the result of our operating loss for the period adjusted for non-cash
amortization and impairment charges, decreases in accounts payable, 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 and decreases in
prepaid expenses and other assets. The operating cash inflow for the first six
months 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 $7.6 million in the first six months of 2003 includes $7.1 million in cash
paid for restructured items, and the net cash inflow of $1.1 million in the
first six months of 2004 includes $2.2 million in cash paid for restructured items. Investing activities used cash of $1.7 million in
the first six months 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 $474,000 in the first six months of 2004, primarily due to the reduction in
the restriction of cash used to secure outstanding letters of credit, offset by
capital expenditures and the acquisition of the Visuale assets. Financing activities provided cash of $2.8 million in the first six months
of 2003, primarily due to the proceeds from our private offering of common
stock in May 2003, as well as due to proceeds from our employee stock purchase
plan and the exercise of stock options, offset in part by payments on our
long-term obligations. Financing activities provided cash of $694,000 in the
first six months of 2004, primarily due by proceeds from our employee stock
purchase plan, the exercise of stock options and borrowings from our term loan,
offset by principal payments of the term loan. 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 second 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. 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; 23




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
    
    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
    
    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 24




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(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 June 30, 2004, $371,000 of additional amounts were 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 June 30, 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 second quarter of 2004, 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 prior periods, and may not be able to maintain
profitability, which could cause a decrease in our stock price. 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. Although we achieved slight profitability on a quarterly basis in the
second quarter of 2004, we may not be able to achieve or maintain profitability
in future quarters. As of June 30, 2004, we had an accumulated deficit of
$128.6 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 increase in certain areas as we
fund new initiatives. While 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. As a result, we may be unable to maintain profitability in future periods. 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 June 30, 2004 was
$141,000. Additional Onyx Japan losses above approximately $335,000 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. Economic and business 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
six months 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 25




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time. We believe that our customers also face increasing budgetary
pressures due to increased compliance costs in the current regulatory
environment, such as costs associated with establishing and maintaining
satisfactory internal controls under Sarbanes-Oxley Section 404. As a result of the economic slowdown and these increasing budget
pressures, 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 six months of 2004 when compared to the first
six months of 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 six months 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. 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; 26




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
    
    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, SalesLogix (part of Sage, Inc.) 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. 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 June 7, 2004, we announced the appointment of Janice P.
Anderson as our new Chief Executive Officer. To integrate into Onyx, Ms.
Anderson must spend a significant amount of time learning our business model
and establishing a management system, in addition to performing her regular
duties. Accordingly, Ms. Andersons integration could result in some disruption to
our business. 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. 27




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Recently enacted changes in the securities laws and regulations are likely to
increase our costs and we may be unable to obtain the attestation of the
adequacy of our internal control over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 that became law in July 2002 (the Act)
has required changes in some of our corporate governance, securities disclosure
and compliance practices. In response to the requirements of that Act, the SEC
and Nasdaq have promulgated new rules. Compliance with these new rules has
significantly increased our legal, financial and accounting costs, and we
expect these increased costs to continue through at least the end of 2004. As directed by Section 404 of the Act, the SEC adopted rules requiring public
companies to include a report of management on the companys internal control
over financial reporting in their annual reports on Form 10-K that contains an
assessment by management of the effectiveness of the companys internal control
over financial reporting. In addition, the public accounting firm auditing the
companys financial statements must attest to and report on managements
assessment of the effectiveness of the companys internal control over
financial reporting. Although we intend to conduct a rigorous review of our
internal control over financial reporting to help achieve compliance with the
Section 404 requirements, if our independent registered certified public
accounting firm interprets the Section 404 requirements and the related rules
and regulations differently from us or if our independent registered certified
public accounting firm is not satisfied with our internal control over
financial reporting or with the level at which it is documented, operated or
reviewed, they may decline to attest to managements assessment or may issue a
qualified report. This could result in an adverse reaction in the financial
markets due to a loss of confidence in the reliability of our financial
statements, which could cause the market price of our shares to decline. 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. 28




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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. 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. 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. 29




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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. 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 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 has incurred substantial losses in previous
periods. The minority shareholders capital account balance at June 30, 2004
was $141,000. Additional Onyx Japan losses above approximately $335,000 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 30




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
    
    our existing and potential key partners do not have or do not devote the resources necessary to implement our solution. 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. 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 31




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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  
    
    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
    
    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 32




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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. 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. 33




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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 June 30, 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 six months 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 six months of 2004 or in prior fiscal years. At June 30, 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 $475,000 at June 30, 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 June 30, 2004. The cumulative unrealized
gain at June 30, 2004 specifically associated with the goodwill and other
acquisition-related intangibles of Market Solutions amounted to $1.5 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 $1.9 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. 34




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PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings We, several of our officers and directors and Dain Rauscher Wessels were
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 alleged that we violated the
Securities Act of 1933, or Securities Act, and the Securities Exchange Act of
1934, and sought 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 settled 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. In an order dated June 10, 2004, the court approved this settlement. Onyxs directors and some of its officers were named as defendants in a
shareholder derivative lawsuit filed in the Superior Court of Washington in and
for King County. The complaint alleged 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 alleged 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 asserted that these
actions exposed Onyx to harmful and costly securities litigation that could
potentially result in an award of damages against Onyx, and sought to recover
on behalf of Onyx any amounts Onyx would be required to pay in such litigation.
The parties settled 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. In an order dated June 25, 2004 the court
approved this settlement. 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 executed an agreement to settle the matter, along with similar
lawsuits against more than 300 other issuers. The terms of the
settlement requires 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. The settlement is contingent on receipt of final court
approval. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities On April 6, 2004, we issued 504,891 shares of our common stock valued at
$1.7 million to a corporation from which we purchased certain technology. This
transaction was exempt from registration under Section 4(2) of the Securities
Act and Regulation D promulgated under the Securities Act on the basis that the
transaction did not involve a public offering and each purchaser was an
accredited investor. 
 Item 4. Submission of Matters to a Vote of Security Holders Onyx held its 2004 annual meeting of shareholders on June 3, 2004 at
Onyxs corporate headquarters in Bellevue, Washington. A total of 12,929,342
shares of common stock (representing 89.19% of the outstanding shares of common
stock) were present at the meeting, either in person or represented by proxy,
which constituted a quorum for purposes of the meeting, and voted as follows:  (1)
    
    Elect two Class 1 directors to Onyxs board of directors for a three-year term.The incumbent Class 1 directors who stood for reelection were elected with
the following voting results. Nominee
    
    Votes for
    
    Votes WithheldTeresa A. Dial
    
    
    12,747,074
    
    
    
    182,268William B. Elmore
    
    
    12,541,527
    
    
    
    387,815
  (2)
    
    Ratify the appointment of KPMG LLP as independent auditors for the year
ending December 31, 2004 For
    
    
    12,839,960Against
    
    
    79,672Abstain
    
    
    9,710
 35




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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
    
    Third Amendment to Employment Agreement dated January 1, 2004 by and between the registrant and Brian
C. Henry10.2
    
    Employment Agreement dated May 25, 2004 by and between the registrant and Eben Frankenberg10.3
    
    First Amendment to Employment Agreement dated July 27, 2004 by and between the registrant and Brent Frei10.4*
    
    Asset Purchase Agreement dated
April 6, 2004 by and among the registrant, Visuale, Inc.,
Softworks Australia Pty Ltd and certain stockholders of Visuale
(exhibit 10.1)(d)10.5
    
    Registration Rights Agreement dated
April 6, 2004 by and between the registrant and Visuale, Inc.
(exhibit 10.2)(d)10.6
    
    Employment Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.1)(e)10.7
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.2)(e)10.8
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.3)(e)10.9
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.4)(e)10.10
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.5)(e)31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
  
 *
    
    Confidential treatment requested; the omitted material has
been separately filed with the SEC.(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.(d)
    
    Incorporated by reference to the designated exhibit to the registrants
Current Report on Form 8-K (No. 0-25361) filed
April 8, 2004.(e)
    
    Incorporated by reference to the designated exhibit to the registrants
Current Report on Form 8-K (No. 0-25361) filed June 9, 2004. 36




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(b)
    
    Current Reports on Form 8-K(a)
    
    On April 8, 2004, we filed a current report on Form 8-K announcing an
asset acquisition of business management process technology from Visuale,
Inc.(b)
    
    On April 8, 2004, we furnished a current report on Form 8-K announcing
our preliminary financial results for the quarter ended March 31, 2004.(c)
    
    On April 27, 2004, we furnished a current report on Form 8-K announcing
our final financial results for the quarter ended March 31, 2004.(d)
    
    On June 9, 2004, we filed a current report on Form 8-K announcing the
appointment of Janice P. Anderson as Onyxs President and Chief Executive
Officer, and as a director and Chairman of the Board. 37




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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: August 9, 2004
    
    By:
    
    /s/ Janice P. AndersonJanice P. AndersonChief Executive Officer, President andChairman of the Board(Principal Executive Officer)Date: August 9, 2004
    
    By:
    
    /s/ Brian C. HenryBrian C. HenryExecutive Vice President andChief Financial Officer(Principal Financial & Accounting Officer)
 38




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EXHIBIT INDEX 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
    
    Third Amendment to Employment Agreement dated January 1, 2004 by and between the registrant and Brian
C. Henry10.2
    
    Employment Agreement dated May 25, 2004 by and between the registrant and Eben Frankenberg10.3
    
    First Amendment to Employment Agreement dated July 27, 2004 by and between the registrant and Brent Frei10.4*
    
    Asset Purchase Agreement dated
April 6, 2004 by and among the registrant, Visuale, Inc.,
Softworks Australia Pty Ltd and certain stockholders of Visuale
(exhibit 10.1)(d)10.5
    
    Registration Rights Agreement dated
April 6, 2004 by and between the registrant and Visuale, Inc.
(exhibit 10.2)(d)10.6
    
    Employment Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.1)(e)10.7
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.2)(e)10.8
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.3)(e)10.9
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.4)(e)10.10
    
    Stock Option Agreement between the
registrant and Janice P. Anderson, dated June 7, 2004
(exhibit 10.5)(e)31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
  
 *
    
    Confidential treatment requested; the omitted material has
been separately filed with the SEC.(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.(d)
    
    Incorporated by reference to the designated exhibit to the registrants
Current Report on Form 8-K (No. 0-25361) filed
April 8, 2004.(e)
    
    Incorporated by reference to the designated exhibit to the registrants
Current Report on Form 8-K (No. 0-25361) filed June 9, 2004. 39