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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 1934For the quarterly period ended March 31, 2005o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from___________________to ___________________
 Commission File Number 0-25361 ONYX SOFTWARE CORPORATION (Exact name of registrant as specified in its charter)
 Washington
(State or other jurisdiction of
incorporation or organization)
    
    91-1629814
(IRS Employer
Identification No.)
 1100 
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 mark 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 April 29,
2005 was 14,986,285




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ONYX SOFTWARE CORPORATION CONTENTS PART IFINANCIAL INFORMATIONItem 1.Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2004 and March 31, 2005
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2005
    
    
    4Condensed Consolidated Statement of Shareholders Equity for the Three Months Ended March 31, 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2005
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.Controls and Procedures
    
    
    32PART IIOTHER INFORMATION
    
    
    33Item 6.Exhibits
    
    
    33SIGNATURES
    
    
    34EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART IFINANCIAL INFORMATION 
 Item 1. Condensed Consolidated Financial Statements 
 CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
 (Unaudited)
 December 31,
    
    
    March 31,2004
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,393
    
    
    $
    11,435Accounts receivable, less allowances of $494 in 2004 and $407 in 2005
    
    
    11,220
    
    
    
    12,228Current deferred tax asset
    
    
    89
    
    
    
    89Prepaid expenses and other
    
    
    1,968
    
    
    
    2,286Total current assets
    
    
    27,670
    
    
    
    26,038Property and equipment, net
    
    
    3,711
    
    
    
    3,453Purchased technology, net
    
    
    4,095
    
    
    
    3,839Goodwill, net
    
    
    10,306
    
    
    
    10,050Deferred tax asset
    
    
    35
    
    
    
    35Other assets
    
    
    450
    
    
    
    443Total assets
    
    $
    46,627
    
    
    $
    43,858LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,205
    
    
    $
    1,071Salary and benefits payable
    
    
    1,937
    
    
    
    1,438Accrued liabilities
    
    
    2,453
    
    
    
    2,925Income taxes payable
    
    
    217
    
    
    
    135Current portion of restructuring-related liabilities
    
    
    731
    
    
    
    547Term loan
    
    
    167
    
    
    
    167Current portion of deferred revenue
    
    
    17,761
    
    
    
    17,362Total current liabilities
    
    
    24,471
    
    
    
    23,645Long-term accrued liabilities
    
    
    464
    
    
    
    422Long-term deferred revenue, less current portion
    
    
    1,923
    
    
    
    1,580Long-term restructuring-related liabilitieswarrants
    
    
    52
    
    
    
    Long-term purchased technology
    
    
    1,842
    
    
    
    1,869Term loan  less current portion
    
    
    222
    
    
    
    181Long-term deferred rent
    
    
    450
    
    
    
    320Minority interest in joint venture
    
    
    106
    
    
    
    25Commitments and contingencies
Shareholders equity:Shareholders equity:Preferred stock, $0.01 par value:Authorized shares  20,000,000; Issued and outstanding shares  none
    
    
    
    
    
    
    Common stock, $0.01 par value:Authorized shares  80,000,000; Issued and outstanding shares 
14,615,823 in 2004 and 14,618,638 in 2005.
    
    
    144,736
    
    
    
    144,794Accumulated deficit
    
    
    (130,969
    )
    
    
    (131,588
    )Accumulated other comprehensive income
    
    
    2,970
    
    
    
    2,610Total shareholders equity
    
    
    16,737
    
    
    
    15,816Total liabilities and shareholders equity
    
    $
    46,267
    
    
    $
    43,858
 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 EndedMarch 31,2004
    
    
    2005Revenue:License
    
    $
    3,619
    
    
    $
    3,861Support and service
    
    
    10,625
    
    
    
    10,196Total revenue
    
    
    14,244
    
    
    
    14,057Cost of revenue:License
    
    
    193
    
    
    
    437Amortization of purchased technology for license
    
    
    
    
    
    
    256Support and service
    
    
    4,456
    
    
    
    4,207Total cost of revenue
    
    
    4,649
    
    
    
    4,900Gross margin
    
    
    9,595
    
    
    
    9,157Operating expenses:Sales and marketing
    
    
    4,777
    
    
    
    4,416Research and development
    
    
    2,614
    
    
    
    2,477General and administrative
    
    
    1,924
    
    
    
    2,777Restructuring and other related charges
    
    
    484
    
    
    
    Amortization of acquisition-related intangibles
    
    
    209
    
    
    
    Total operating expenses
    
    
    10,008
    
    
    
    9,670Loss from operations
    
    
    (413
    )
    
    
    (513
    )Other income (expense), net
    
    
    (193
    )
    
    
    (201
    )Change in fair value of outstanding warrants
    
    
    122
    
    
    
    (2
    )Loss before income taxes
    
    
    (484
    )
    
    
    (716
    )Income tax provision (benefit)
    
    
    56
    
    
    
    (19
    )Minority interest in consolidated subsidiary
    
    
    55
    
    
    
    (78
    )Net loss
    
    $
    (595
    )
    
    $
    (619
    )Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.04
    )Shares used in calculation of basic and diluted net loss per share
    
    
    13,982
    
    
    
    14,618
 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)
 AccumulatedOtherCommon Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Deficit
    
    
    Income
    
    
    EquityBalance at December 31, 2004
    
    
    14,615,823
    
    
    $
    144,736
    
    
    $
    (130,969
    )
    
    $
    2,970
    
    
    $
    16,737Exercise of stock options
    
    
    2,815
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Restructuring related warrants
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    54Comprehensive income (loss):Translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (360
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (619
    )
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (979
    )Balance at March 31, 2005
    
    
    14,618,638
    
    
    $
    144,794
    
    
    $
    (131,588
    )
    
    $
    2,610
    
    
    $
    15,816
 See accompanying notes to condensed consolidated financial statements. 5




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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2004
    
    
    2005Operating activities:Net loss to common shareholders
    
    $
    (595
    )
    
    $
    (619
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    680
    
    
    
    605Imputed interest expense
    
    
    
    
    
    
    27Deferred income taxes
    
    
    (76
    )
    
    
    Change in fair value of outstanding warrants
    
    
    (122
    )
    
    
    2Loss on disposal of property, plant and equipment
    
    
    
    
    
    
    23Minority interest in income (loss) of consolidated subsidiary
    
    
    55
    
    
    
    (78
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,239
    
    
    
    (1,039
    )Other assets
    
    
    166
    
    
    
    (311
    )Accounts payable and accrued liabilities
    
    
    337
    
    
    
    (333
    )Restructuring-related liabilities
    
    
    (1,065
    )
    
    
    (184
    )Deferred revenue
    
    
    746
    
    
    
    (742
    )Income taxes payable
    
    
    (121
    )
    
    
    (82
    )Net cash provided by (used in) operating activities
    
    
    1,244
    
    
    
    (2,731
    )Investing activities:Restricted cash
    
    
    420
    
    
    
    Purchases of property and equipment
    
    
    (149
    )
    
    
    (88
    )Net cash provided by (used in) investing activities
    
    
    271
    
    
    
    (88
    )Financing activities:Proceeds from exercise of stock options
    
    
    32
    
    
    
    4Repayment of term loan
    
    
    
    

    
    
    (41
    )Net cash provided by (used in) financing activities
    
    
    32
    
    
    
    (37
    )Effects of exchange rate changes on cash
    
    
    32
    
    
    
    (102
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,579
    
    
    
    (2,958
    )Cash and cash equivalents at beginning of period
    
    
    10,127
    
    
    
    14,393Cash and cash equivalents at end of period
    
    $
    11,706
    
    
    $
    11,435Supplemental cash flow disclosure:Interest paid
    
    $
    45
    
    
    $
    35Income taxes paid (refunded), net
    
    
    (45
    )
    
    
    76
 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 Overview Onyx Software Corporation and subsidiaries is a leading provider of enterprise solutions that
combine customer management, process management and performance management technologies to help
organizations more effectively acquire, service, manage and maintain customer and partner
relationships. We market our solutions to enterprises that want to integrate their business
processes and functions with the help of software in order to increase their market share, enhance
customer service and improve profitability. We consider our solutions to be leading edge in terms
of software design and architecture. As a result, enterprises using our solutions can take
advantage of lower costs, a high degree of adaptability and flexibility, and a faster deployment
than what we believe is available from other suppliers in the industry. Our solutions are
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. Our integrated product family allows enterprises to automate the customer lifecycle,
along with the associated business processes, across the entire enterprise. We offer specialized
solutions directly to the market and with partners for industries such as financial services,
insurance and government. Our Internet-based solutions can be easily implemented and flexibly
configured to address an enterprises specific business needs and unique processes. We were
incorporated in Washington on February 23, 1994 and maintain our 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, 2004,
included in its Form 10-K filed with the SEC on March 24, 2005. 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. Reclassifications Certain prior period amounts have been reclassified to conform to the current period
presentation, with no effect on the Companys financial position, cash flows or net loss. 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. 7




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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, usefulness for intangibles, tax liabilities, deferred tax valuation allowances and
restructuring liabilities. The Company has also used estimates in assessing impairment of goodwill
and equity investments. 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 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 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 as services are performed. 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 for certain long-term contracts is recognized in accordance with SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts and is recognized on
the percentage-of-completion method. Revenue consisting of 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. 8




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If the fee is not fixed or determinable, revenue is recognized as payments become due from the
customer. If a nonstandard acceptance period is provided, revenue is deferred and recognized upon
the earlier of customer acceptance and the expiration of the acceptance period. Cash and Cash Equivalents 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, 2004 and March 31, 2005,
the Companys cash equivalents consisted of money market funds. The company had no restricted cash
at December 31, 2004 or at March 31, 2005. 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. In December 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure. This statement amends SFAS
No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transistion
for a voluntary change to a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS 148, 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 148. The following table illustrates the effect on net loss had the
fair-value-based method been applied to all outstanding and unvested awards in each period. Three Months Ended March 31,2004
    
    
    2005(In thousands, except per share data)Net loss:As reported
    
    $
    (595
    )
    
    $
    (619
    )Add: stock-based employee expense included in reported net loss
    
    
    
    
    
    
    Deduct: stock-based employee compensation expense determined
under fair-value-based method for all awards
    
    
    (679
    )
    
    
    (659
    )Pro forma
    
    $
    (1,274
    )
    
    $
    (1,278
    )Net loss per share:As reported
    
    $
    (0.04
    )
    
    $
    (0.04
    )Pro forma
    
    $
    (0.09
    )
    
    $
    (0.09
    )
 Other Comprehensive Income SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and
display of comprehensive income and its components in the financial statements. The only items of
other comprehensive income (loss) that the Company currently reports are foreign currency
translation adjustments. Total comprehensive loss for the three months ended March 31, 2004 and
2005 was $103,000 and $979,000, respectively, which included a translation gain (loss) of
approximately $492,000 and ($360,000), respectively. Recently Issued Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R will require that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based
compensation arrangements, including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS 123R replaces SFAS 123,
Accounting for Stock Based Compensation. In March 2005, the SEC issued Staff Accounting Bulletin
No. 107 Share Based Payment, which provides 9




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additional guidance for adoption of SFAS No 123R. SFAS 123R will be effective for the Company
in the first quarter ending March 31, 2006. The Company is in the process of evaluating the impact
of adopting SFAS 123R. 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) 504,891 shares of common
stock valued at $1.7 million, 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 April of
2005, the Company issued 367,647 shares of common stock to Visuale, Inc. in fulfillment of the
one-year anniversary payment obligation. The number of shares was calculated based on the average
closing price of the Companys stock on the 15 trading days prior to issuance. 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 incurred professional fees associated with the acquisition of
$155,000. The above future payments have been recorded on the balance sheet as purchased
technology obligations net of imputed interest in long-term liabilities. The purchased technology
is being amortized over four years starting from the general release of the product, while the
imputed interest is being amortized on a straight-line basis, which approximates the effective
interest method, as interest expense. The Company amortized $256,000 of the purchased technology to
cost of licenses during the first quarter of 2005. 4. Restructuring and Other Related Charges Restructuring and other related charges represent the Companys efforts to reduce its overall
cost structure. During 2004, the Company recorded approximately $442,000 in restructuring and
other related charges. No restructuring charges were recorded during the first quarter of 2005. The components of the first quarter 2005 roll-forward of the related liability are as follows
(in thousands): CashPayments,Write -Balance at
    
    
    
    
    
    
    offsDecember 31,
    
    
    Fair Value
    
    
    and
    
    
    Balance at2004
    
    
    Adjustment
    
    
    Reclassifications
    
    
    March 31, 2005Excess facilities
    
    $
    731
    
    
    $
    
    
    
    $
    (184
    )
    
    $
    547Excess facilities  warrants
    
    
    52
    
    
    
    2
    
    
    $
    (54
    )
    
    
    0Total
    
    $
    783
    
    
    $
    2
    
    
    $
    (238
    )
    
    $
    547
 As part of the restructuring in 2002 the Company issued three five-year warrants in January
2003 for the purchase of up to an aggregate of 198,750 shares of the Companys common stock at
prices ranging from $10.38 to $13.84 per share. If the Company had either a change of control or
issued securities with rights and preferences superior to the Companys common stock before January
2005, the warrant holder would have had the option of canceling any unexercised warrants and
receiving a cash cancellation payment aggregating $3.2 million. In January 2005, the contingent
cash payment options expired as the company had neither undergone a change in control nor issued
securities with rights and preferences superior to the Companys common stock. 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. Prior to the
expiration of the contingent cash payment, the warrants were subject to variable accounting and the
Company was required to mark the warrants to market at each reporting period. The Company estimated the fair value of the warrants on the date of expiration of the
contingent cash payment to be $54,000 based on the Black-Scholes model with an expected dividend
yield of 0.0%, a risk-free interest rate of 3.3%, volatility of 56% and an expected life of three
years. During the first quarter of 2005, the Company reclassified the warrant value into 10




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equity as the contingent cash payment options had expired as the company had neither undergone
a change in control nor issued securities with rights and preferences superior to the Companys
common stock. The Company also entered into a registration rights agreement with the warrant holder,
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 under the warrants. The accounting for excess facilities is complex and requires judgment and as a consequence
adjustments may be required to the Companys restructuring-related liabilities.
Restructuring-related liabilities totaled $547,000 at March 31, 2005 and future cash outlays are
anticipated through March 2006 unless estimates and assumptions change. 5. Loss Per Share Basic loss per share is computed by dividing net loss available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted loss per share
reflects the potential dilution of securities by including other common stock equivalents,
including stock options and convertible preferred stock, in the weighted average number of common
shares outstanding for a period, if dilutive. Three Months EndedMarch 31,2004
    
    
    2005(In thousands, exceptper share data)Net loss (A)
    
    $
    (595
    )
    
    $
    (619
    )Weighted average number of common shares (B)
    
    
    13,982
    
    
    
    14,618Effect of dilutive securities:Stock options
    
    
    *
    
    
    
    *Warrants
    
    
    **
    
    
    
    **Adjusted weighted average shares (C)
    
    
    13,982
    
    
    
    14,618Loss per share:Basic (A)/(B)
    
    $
    (0.04
    )
    
    $
    (0.04
    )Diluted (A)/(C)
    
    $
    (0.04
    )
    
    $
    (0.04
    )
   *
    
    The effect of stock options are excluded from the computation of diluted earnings per share
because the effects are antidilutive. Outstanding stock options of 3,074,610 and 4,344,542 at
March 31, 2004 and 2005, respectively, were excluded from the computation of diluted earnings
per share because their effect was antidilutive. Outstanding options will be included in the
computation of diluted earnings per share in future periods to the extent their effects are
dilutive. If the Company had been profitable during any of the periods reported, based on the
average price of the Companys common stock during each period using the treasury stock
method, the approximate number of dilutive options included in the computation of diluted
earnings per share would have been 94,000 shares for the three months ended March 31, 2004 and
78,000 shares for the three months ended March 31, 2005.**
    
    In January 2003, the Company issued warrants to purchase 198,750 shares of its common stock
at exercise prices ranging from $10.38 to $13.84 per share in connection with the termination
of excess facilities. There were no warrants outstanding prior to January 2003. Outstanding
warrants were excluded from the computation of diluted earnings per share for the three months
ended March 31, 2004 and 2005 because their effect was antidilutive. Outstanding warrants will
be included in the computation of diluted earnings per share in future periods to the extent
their effects are dilutive. 6. Line of Credit Under the loan and security agreements with Silicon Valley Bank, or SVB, the Company has an
$8.0 million working capital revolving line of credit and a $500,000 term loan facility. The $8.0
million working capital revolving line of credit is split between a $6.0 million domestic facility
and a $2.0 million Export Import Bank of the United States, or 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 11




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accounts receivable and (b) $6.0 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. Based on this calculation, no restriction on cash was required under the loan agreement as of
March 31, 2005. 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 5.75% as of March 31, 2005, 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 March 31, 2005. The Company is also prohibited under the
loan and security agreements from paying dividends. The facilities expire in March 2006. At March
31, 2005, the Company had $4.9 million outstanding standby letters of credit relating to long-term
lease obligations and $347,000 outstanding under the term loan facility. 7. Segment and Geographic Information The Company is principally engaged in the design, development, marketing and support of
enterprise solutions that combine customer management, process management and performance
management technologies to help organizations more effectively acquire, service, manage and
maintain customer and partner relationships. 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 revenue of the North America segment, primarily
relates to revenue within the United States. Total revenue outside of North America for the three months ended March 31, 2004 and 2005 was
$5.2 million and $5.4 million, respectively. The following geographic information is presented for the three months ended March 31, 2004
and 2005 (in thousands): North
    
    
    United
    
    
    Rest ofAmerica
    
    
    Kingdom
    
    
    World
    
    
    TotalThree months ended March 31, 2004:Revenue
    
    $
    9,044
    
    
    $
    1,741
    
    
    $
    3,459
    
    
    $
    14,244Three months ended March 31, 2005:Revenue
    
    $
    8,611
    
    
    $
    2,305
    
    
    $
    3,141
    
    
    $
    14,057
 8. Guarantees Indemnification and warranty provisions contained within our customer license and service
agreements are generally consistent with those prevalent in our industry. The duration of our
product warranties generally does not exceed 90 days following delivery of our products. We have
not incurred significant obligations under customer indemnification or warranty provisions
historically and do not expect to incur significant obligations in the future. Accordingly, we do
not maintain accruals for potential customer indemnification or warranty-related obligations. 12




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9. Onyx Japan In September 2000, the Company entered into a joint venture with Softbank Investment
Corporation(SoftBank), and Prime Systems Corporation to create Onyx Software Co., Ltd. (Onyx
Japan), a Japanese corporation, for the purpose of distributing the Companys technology and
product offerings in Japan. In October 2000, the Company made an initial contribution of $4.3
million in exchange for 58% of the outstanding common stock of Onyx Japan. The Companys joint
venture partners invested an additional $3.1 million for the remaining 42% of the common stock of
Onyx Japan. Because the Company has a controlling interest, Onyx Japan has been included in its
consolidated financial statements. The minority shareholders interest in Onyx Japans earnings or
losses is separately reflected in the statement of operations. Under the terms of the joint venture agreement, Prime Systems may, at any time, sell its shares of
Onyx Japan stock to a third party, provided that it notifies the Company 90 days prior to doing so.
The Company has a right of first refusal to purchase any of Prime Systems shares that are offered
for resale at the same price for which those shares are being offered to a third party. Under the
terms of an investment agreement with Softbank, Softbank also has the right to sell its shares of
Onyx Japan, subject to the approval of the Board of Directors of Onyx Japan and certain conditions
of the Japanese Commercial Code. 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 March 31 of 2004 and 2005, fees charged under this
agreement were $145,000 and $225,000, respectively. The intercompany fees are eliminated in
consolidation; however, the Company allocates 42% of the fees to the minority shareholders. The minority shareholders interest in Onyx Japans earnings or losses is accounted for in the
statement of operations for each period. During the three months ended March 31, 2004 and 2005,
the minority shareholders interest in Onyx Japans losses totaled $55,000 and $78,000,
respectively. At March 31, 2005, the minority shareholders remaining interest in Onyx Japan
totaled $25,000. Any future losses of Onyx Japan will be shared by the minority shareholders to
the extent of its interest in the joint venture. As a result, additional Onyx Japan losses above
approximately $60,000 in the aggregate will be absorbed 100% by the Company, as compared to 58% in
all other periods since inception of the joint venture. 10. Liquidity Under the loan and security agreements with Silicon Valley Bank, or SVB, the Company has an
$8.0 million working capital revolving line of credit and a $500,000 term loan facility. The $8.0
million working capital revolving line of credit is split between a $6.0 million domestic facility
and a $2.0 million Export Import Bank of the United States, or 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) $6.0 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. Based on this calculation, no restriction on cash was
required under the loan agreement as of March 31, 2005. 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 5.75% as of March 31,
2005, 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 March 31,
2005. The Company is also prohibited under the loan and security agreements from paying dividends.
The facilities expire in March 2006. At March 31, 2005, the Company had $4.9 million outstanding
standby letters of credit relating to long-term lease obligations and $347,000 outstanding under
the term loan facility. The Company believes that its existing cash and cash equivalents will be sufficient to meet
its capital requirements for at least the next 12 months. Due to the fact that lower cash balances
could negatively impact the Companys sales efforts, the Company may seek additional funds through
public or private equity financing or from other sources to fund its operations and 13




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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. At March 31, 2005, the Company had received cash of $936,000 as part of a fourth quarter 2004
transaction with the Queensland Government. The transaction is contingent on the achievement of
two milestones: (i) an election by the Queensland Government to move forward with the project and
(ii) achievement of the criteria required for acceptance of the system. In the event either of
these milestones are not met, the Company is obligated to refund $936,000. No revenue has been
recognized on this transaction as of March 31, 2005 11. Subsequent Events In April 2005 the company issued 367,467 shares of common stock to Visuale, Inc. in
fulfillment of the one-year anniversary payment obligation. The number of shares was calculated
based on the average closing price of the Companys stock on the 15 trading days prior to issuance. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Information Our disclosure and analysis in this report contain forward-looking statements, which provide
our current expectations or forecasts of future events. Forward-looking statements in this report
include, without limitation:  
    information concerning possible or assumed future results of operations, trends in
financial results and business plans, including those relating to earnings growth and
revenue growth;
    statements about the level of our costs and operating expenses relative to our
revenues, and about the expected composition of our revenues;
    statements about our future capital requirements and the sufficiency of our cash,
cash equivalents, investments and available bank borrowings to meet these requirements;
    information about the anticipated release dates of new products;
    statements about the expected costs and timing of terminating our excess facility commitments;
    other statements about our plans, objectives, expectations and intentions; and
    other statements that are not historical facts. Words such as believes, anticipates and intends may identify forward-looking statements,
but the absence of these words does not necessarily mean that a statement is not forward-looking.
Forward-looking statements are subject to known and unknown risks and uncertainties and are based
on potentially inaccurate assumptions that could cause actual results to differ materially from
those expected or implied by the forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements for many reasons, including the
factors described in the section entitled Important Factors That May Affect Our Business, Our
Results of Operations and Our Stock Price in this report. Other factors besides those described in
this report could also affect actual results. You should carefully consider the factors described
in the section entitled Important Factors That May Affect Our Business, Our Results of Operations
and Our Stock Price in evaluating our forward-looking statements. You should not unduly rely on these forward-looking statements, which speak only as of the
date of this report. We undertake no obligation to publicly revise any forward-looking statement to
reflect circumstances or events after the date of this report, or to reflect the occurrence of
unanticipated events. 14




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##### Table of Contents



Overview Onyx Software Corporation and its subsidiaries (Company) is a leading provider of enterprise
solutions that combine customer management, process management and performance management
technologies to help organizations more effectively acquire, service, manage and maintain customer
and partner relationships. We market our solutions to enterprises that want to integrate their
business processes and functions with the help of software in order to increase their market share,
enhance customer service and improve profitability. We consider our solutions to be leading edge
in terms of software design and architecture. As a result, enterprises using our solutions can
take advantage of lower costs, a high degree of adaptability and flexibility, and a faster
deployment than what we believe is available from other suppliers in the industry. Our solutions
are 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. Our integrated product family allows enterprises to automate the
customer lifecycle, along with the associated business processes, across the entire enterprise. We
offer specialized solutions directly to the market and with partners for industries such as
financial services, insurance and government. Our Internet-based solutions can be easily
implemented and flexibly configured to address an enterprises specific business needs and unique
processes. Overview of the Results for the Three Months Ended March 31, 2005 Key financial data points relating to our first quarter 2005 performance include:  
    Revenue of $14.1 million, down 6% from the fourth quarter of 2004 and down 1% from
the first quarter of 2004;
    License revenue of $3.9 million, down 6% from the fourth quarter of 2004 and up 7%
from the first quarter of 2004;
    Service revenue of $10.2 million, down 6% from the fourth quarter of 2004 and down
4% from the first quarter of 2004;
    Service margins of 56%, up from 54% in the fourth quarter of 2004 and down from 58%
in the first quarter of 2004;
    Operating expenses, excluding acquisition-related amortization, stock compensation
and restructuring charges, of $9.7 million, down from $9.8 million in the fourth quarter
2004 and up from $9.3 million in the first quarter of 2004;
    Cash and restricted cash balances of $11.4 million at March 31, 2005, down from
$14.4 million at December 31, 2004; and down from $13 million at March 31, 2004.
    Days sales outstanding, based on end of period receivable balances, up to 79 days
in the first quarter of 2005 compared to 69 days in the fourth quarter of 2004 and 72
days in the first quarter of 2004. In recent years the global economy has remained quite challenging. However, based on our
observations, we believe that the macroeconomic environment is now slowly improving. We remain
somewhat cautious, however, as to the speed at which these macroeconomic conditions will improve,
particularly as it relates to the information technology and communications industries. The
majority of our revenue has been generated from customers in the high-technology, financial
services, government, business services and healthcare industries. Accordingly, our business is
affected by the economic and business conditions of these industries and the business service
demand for information technology within these industries. We are constantly reevaluating our business operations and strategy to determine what changes
are likely to give us the greatest opportunity to successfully grow. As this process continues, we
will likely refine our focus on selected market segments and adjust our market positioning
accordingly. We will be focused on the following objectives in the near term:  
    successfully integrate new talent in our sales and marketing organizations;
    increase our pipeline of sales opportunities;
    enhance our market position and awareness;
    manage our costs to allow our return to profitability;
    focus our resources and efforts on the market opportunities with the highest probability of success; 15




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##### Table of Contents




    diversify and expand partnerships with key system integration and technology vendors;
    aggressively market our recent major product releases;
    enhance our solutions portfolio to address more customer needs;
    continue our focus on compliance with the Sarbanes-Oxley Act of 2002; and
    maintain high customer satisfaction levels. We hope that, by focusing our efforts on these key objectives, we will be able to return to
profitability 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 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 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 non-cancelable 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- 16




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user. In the latter case, probability of collection is evaluated based on the
creditworthiness of the VAR. Our agreements with customers 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 as services are performed.
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 for certain long-term contracts is recognized in accordance with SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts and is recognized on
the percentage-of-completion method. 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 or the expiration of the acceptance period. Allowance for Doubtful Accounts A considerable amount of judgment is required when we assess the ultimate realization of
receivables, including assessing the probability of collection and the current creditworthiness of
each customer. Although we recorded a net benefit in 2003 and a small amount of expenses were
recorded to increase our allowance for doubtful accounts in 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, and we may record additional expenses
in the future. Impairment of Goodwill We periodically evaluate goodwill 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. In addition to testing
goodwill for impairment when impairment indicators arise, we perform an annual impairment test of
goodwill per the guidance outlined in Statement of Financial Accounting Standards, or SFAS, No.
142, Goodwill and Other Intangible Assets. Our chosen annual impairment testing date is November
30, 2004. 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. In June 2002, the Financial Accounting Standards Board issued 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, with early application encouraged. The
adoption of SFAS No. 146 has not had a material effect on our consolidated financial statements. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R will require that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based
compensation arrangements, including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. SFAS 123R replaces SFAS 123,
Accounting for Stock Based 17




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Compensation. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 Share Based
Payment, which provides additional guidance for adoption of SFAS No 123R. SFAS 123R will be
effective for the Company in the first quarter ending March 31, 2006. The Company is in the
process of evaluating the impact of adopting SFAS 123R. Results of Operations The following table presents certain financial data, derived from our unaudited statements of
operations, as a percentage of total revenue for the periods indicated. The operating results for
the three months ended March 31, 2004 and 2005 are not necessarily indicative of the results that
may be expected for the full year or any future period. Three Months EndedMarch 31,2004
    
    
    2005Revenue:License
    
    
    25.4
    %
    
    
    27.5
    %Support and service
    
    
    74.6
    
    
    
    72.5Total revenue
    
    
    100.0
    
    
    
    100.0Cost of revenue:License
    
    
    1.3
    
    
    
    3.1Amortization of acquired technology for license
    
    
    0.0
    
    
    
    1.8Support and service
    
    
    31.3
    
    
    
    29.9Total cost of revenue
    
    
    32.6
    
    
    
    34.9Gross margin
    
    
    67.4
    
    
    
    65.1Operating expenses:Sales and marketing
    
    
    33.5
    
    
    
    31.4Research and development
    
    
    18.4
    
    
    
    17.6General and administrative
    
    
    13.5
    
    
    
    19.8Restructuring and other related charges
    
    
    3.4
    
    
    
    Amortization of acquisition-related charges
    
    
    1.5
    
    
    
    Total operating expenses
    
    
    70.3
    
    
    
    68.8Loss from operations
    
    
    (2.9
    )
    
    
    (3.7
    )Other income (expense), net
    
    
    (1.4
    )
    
    
    (1.4
    )Change in fair value of outstanding warrants
    
    
    0.9
    
    
    
    Loss before income taxes
    
    
    (3.4
    )
    
    
    (5.1
    )Income tax provision (benefit)
    
    
    0.4
    
    
    
    (0.1
    )Minority interest in consolidated subsidiary
    
    
    0.4
    
    
    
    (0.6
    )Net loss
    
    
    (4.2
    )%
    
    
    (4.4
    )%
 Revenue Total revenue, which consists of software license and support and service revenue, was $14.1
million in the first quarter of 2005, which decreased from $14.2 million in the first quarter of
2004. No single customer accounted for more than 10% of our total revenue in the first quarter of
2005. Our license revenue increased 7%, from $3.6 million in the first quarter of 2004 to $3.9
million in the first quarter of 2005. Although our license revenue in the first quarter of 2005
showed incremental improvement and we believe there has been a modest improvement in the global
economy, we remain cautious as to the speed at which macroeconomic conditions will improve. Our support and service revenue decreased 4% from $10.6 million in the first quarter of 2004
to $10.2 million in the first quarter of 2005. The decrease was primarily due to a decrease in
consulting revenue, resulting from delays in the commencement of new consulting engagements.
Support and service revenue represented 75% of our total revenue in the first quarter of 2004 and
73% in the first quarter of 2005. We expect that the proportion of support and service revenue to
total revenue to fluctuate in the future, depending in part on our customers direct use of
third-party consulting and implementation service providers, the degree to which we provide
opportunities for our partners to engage with our customers and the ongoing renewals of customer
support contracts, as well as our overall sales of software licenses to new and existing customers. Revenue outside of North America was $5.4 million in the first quarter of 2005, an increase
from the first quarter of 2004 when revenue outside of North America was $5.2 million. 18




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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 127%, from $193,000 in the first
quarter of 2004 to $437,000 in the first quarter of 2005. Cost of license revenue as a percentage
of related license revenue was 5% in the first quarter of 2004 and 11% in the first quarter of
2005. The increase was due to the additional third party products sold during the first quarter of
2005. Amortization of acquired 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) 504,891 shares of common
stock valued at $1.7 million, 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 April of
2005, the company issued 367,647 shares of common stock to Visuale, Inc. in fulfillment of the one
year anniversary payment obligation. The number of shares calculated was based on the average
closing price of the companys common stock 15 trading days prior to issuance. 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 incurred professional fees associated with the acquisition of
$155,000. The above future payments have been recorded on the balance sheet as purchased
technology obligations net of imputed interest in long-term liabilities. The purchased technology
is being 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. The Company amortized $256,000 of the purchased technology to
cost of licenses during the first quarter of 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 6%, from $4.5 million in the first quarter of 2004 to $4.2 million in the first
quarter of 2005. Cost of support and service revenue as a percentage of related support and service
revenue remained relatively steady at 42% in the first quarter of 2004 and 41% in the first
quarter of 2005. The slight decrease in cost of support and service revenue as a dollar amount of
related support and service revenue in the first quarter of 2005 compared to the first quarter of
2004 was primarily due to a reduction in consulting personnel of approximately 10%. The cost of
support and services as a percentage of support and services 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 8%, from $4.8 million in the first
quarter of 2004 to $4.4 million in the first quarter of 2005. The decrease in sales and marketing
expenses from the first quarter of 2004 to the first quarter of 2005 was primarily due to the
reduction in sales and marketing headcount. Sales and marketing full-time employees decreased 24%
from March 31, 2004 to March 31, 2005. Sales and marketing expenses represented 34% of our total
revenue in the first quarter of 2004, compared to 31% in the first quarter of 2005. To fully realize our long-term sales growth opportunity, we believe that we will need to
increase our sales and marketing efforts to expand our market position and further increase
acceptance of our products. 19




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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 5%, from $2.6 million
in the first quarter of 2004 to $2.5 million in the first quarter of 2005. Research and development
full-time employees decreased 8% from March 31, 2004 to March 31, 2005. The decrease in research
and development expenses from the first quarter of 2004 to the first quarter of 2005 was primarily
due to a decrease in the number of development personnel. Research and development costs
represented 18% of our total revenue in the first quarter of 2004, remaining steady at 18% in the
first quarter of 2005. We believe that our research and development investments are essential to our long-term
strategy. To fully realize our long-term sales growth opportunity, we will need to increase our
research and development investment in the future. General and administrative General and administrative expenses consist primarily of salaries, benefits and related costs

for our executive, finance, human resource and administrative personnel, professional services fees
and allowances for doubtful accounts. General and administrative expenses increased 44%, from $1.9
million in the first quarter of 2004 to $2.8 million in the first quarter of 2005. General and
administrative cost represent 14% of our total revenue in the first quarter of 2004 and 20% of our
total revenue in the first quarter of 2005. The increase in dollar amount from the first quarter of
2004 to the first quarter of 2005 was primarily due to an increase in professional services fees
related to the compliance requirements under the Sarbanes-Oxley Act of 2002. Restructuring and other related charges Restructuring and other related charges represent our efforts to reduce our overall cost
structure. In April 2003, we approved a restructuring plan to reduce headcount. During 2004 we
recorded approximately $442,000 in restructuring and other related charges. During the first
quarter of 2005, we did not record any restructuring charges. The components of the first quarter 2005 roll-forward of the related liability are as follows
(in thousands): CashPaymentsWrite -Balance at
    
    
    
    
    
    
    offsDecember 31,
    
    
    Fair Value
    
    
    and
    
    
    Balance at2004
    
    
    Adjustment
    
    
    Reclassifications
    
    
    March 31, 2005Excess facilities
    
    $
    731
    
    
    $
    
    
    
    $
    (184
    )
    
    $
    547Excess facilities  warrants
    
    
    52
    
    
    
    2
    
    
    $
    (54
    )
    
    
    Total
    
    $
    783
    
    
    $
    2
    
    
    $
    (238
    )
    
    $
    547
 As part of the restructuring in 2002 the Company issued three five-year warrants in January
2003 for the purchase of up to an aggregate of 198,750 shares of the Companys common stock at
prices ranging from $10.38 to $13.84 per share. If the Company had either a change of control or
issued securities with rights and preferences superior to the Companys common stock before January
2005, the warrant holder would have had the option of canceling any unexercised warrants and
receiving a cash cancellation payment aggregating $3.2 million. In January 2005, the contingent
cash payment options expired as the company had neither undergone a change in control nor issued
securities with rights and preferences superior to the Companys common stock. 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. The Company estimated the fair value of the warrants on the date of expiration of the
contingent cash payment to be $54,000 based on the Black-Scholes model with an expected dividend
yield of 0.0%, a risk-free interest rate of 3.3%, volatility 20




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of 56% and an expected life of three years. During the first quarter of 2005, the Company
reclassified the warrant value into equity. The Company also entered into a registration rights agreement with the warrant holder,
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 under the warrants. The accounting for excess facilities is complex and requires judgment and as a consequence
adjustments may be required to the Companys current restructuring-related liabilities.
Restructuring-related liabilities totaled $547,000 at March 31, 2005 and future cash outlays are
anticipated through March 2006 unless estimates and assumptions change. Other Income (Expense), Net Other income (expense), net consists of earnings on our cash and cash equivalents 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) was a net expense of $193,000 and $201,000 for the quarters ended
March 31, 2004 and 2005, respectively. Change in Fair Value of Outstanding Warrants The warrants issued in connection with the partial lease termination of excess facilities in
Bellevue, Washington, were subject to variable accounting and we were required to mark the warrants
to market at each reporting period. In January 2005, the contingent cash payment options expired as
the company had neither undergone a change in control nor issued securities with rights and
preferences superior to the Companys common stock. The Company estimated the fair value of the
warrants on the date of expiration of the contingent cash payment to be $54,000 and recorded an
expense of $2,000, representing the change in fair value of the outstanding warrants. During
January of 2005, the Company reclassified the warrant value into equity as the contingent cash
payment options had expired as the company had neither undergone a change in control nor issued
securities with rights and preferences superior to the Companys common stock. Income Taxes We recorded an income tax provision of $56,000 in the first quarter of 2004 and a benefit of
$19,000 in the first quarter of 2005. Our income tax provision (benefit) in both the first quarter
of 2004 and the first quarter of 2005 is the net result of income taxes in connection with our
foreign operations, offset by the deferred tax benefit recorded as we amortize the intangibles
associated with our international acquisitions. We made only insignificant provisions and recorded
no benefit for federal or state income taxes in either the first quarter of 2004 or the first
quarter of 2005 due to our historical operating losses. We have recorded a valuation allowance for
all but $124,000 of our deferred tax assets as a result of uncertainties regarding the realization
of the asset balance at March 31, 2005. 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 for each period. In the
first quarter of 2004, the minority shareholders interest in Onyx Japans losses totaled $55,000.
In the first quarter of 2005, the minority shareholders interest in Onyx Japans loss totaled
$78,000. At March 31, 2005, the minority shareholders remaining interest in the joint venture
totaled $25,000. As a result, additional Onyx Japan losses above approximately $60,000 in the
aggregate will be absorbed 100% by us, as compared to 58% in all prior periods since inception of
the joint venture. Liquidity and Capital Resources At March 31, 2005, we had unrestricted cash and cash equivalents of $11.4 million, a decrease
of $3 million from unrestricted cash and cash equivalents held at December 31, 2004. 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, 2004 or at March 31, 2005. At
March 31, 2005, we had no restricted cash balance. 21




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At March 31, 2005, our principal obligations consisted of restructuring-related liabilities
totaling $547,000, accrued liabilities of $3.3 million, of which $2.9 million is expected to be
paid within the next 12 months, trade payables of $1.1 million and salaries and benefits payable of
$1.4 million. The majority of the restructuring-related liabilities relate to excess facilities in
domestic and international markets, the most significant portion of which relates to the
termination agreement signed in December 2002 in connection with excess facilities in Bellevue,
Washington. We expect that the majority of our accounts payable, salaries and benefits payable and
accrued liabilities at March 31, 2005 will be settled during the second quarter of 2005 and will
result in a corresponding decline in the amount of cash and cash equivalents, offset by liabilities
associated with activity in the second quarter of 2005. Our purchased technology obligations
relate to our asset acquisition of business process management technology from Visuale, Inc. Off-balance sheet obligations at March 31, 2005 primarily consisted of operating leases
associated with facilities in Bellevue, Washington and other domestic and international field
office facilities. Our contractual commitments at March 31, 2005 are substantially similar to those
at December 31, 2004 that were disclosed in our annual report on Form 10-K. Under the Loan and Security Agreements with Silicon Valley Bank, or SVB, we have an $8 million
working capital revolving line of credit and a $500,000 term loan facility. The $8 million working
capital revolving line of credit is split between a $6.0 million domestic facility and a $2.0
million Export Import Bank of the United States, or 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) $6.0 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. Based
on this calculation, no restriction on cash was required under the loan agreement as of March 31,
2005. 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 5.75% as of March 31, 2005, 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 March 31, 2005. We are also prohibited under the loan and security agreements from
paying dividends. The facilities expire in March 2006. At March 31, 2005, we had $4.9 million
outstanding standby letters of credit relating to long-term lease obligations and $347,000
outstanding under the term loan facility. Our operating activities resulted in net cash inflows of $1.2 million in the first quarter of
2004 and net outflows of $2.7 million in the first quarter of 2005. The operating cash inflow in
the first quarter of 2004 was primarily the result of cash provided by collections on accounts
receivable, increases in deferred revenue and 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 $2.7 million in the first quarter of 2005 was primarily the
result of our operating loss for the period adjusted for non cash amortization and depreciation,
decreases in salaries and benefits payable, decreases in deferred revenues and increases in
accounts receivable, offset in part by increases in other accrued liabilities. Investing activities provided cash of $271,000 in the first quarter of 2004, primarily due to
the reduction in the restriction of cash used to secure outstanding letters of credit, offset by
capital expenditures. Investing activities used cash of $88,000 in the first quarter of 2005 due
to capital expenditures. Financing activities provided cash of $32,000 in the first quarter of 2004, due to proceeds
from the exercise of stock options. Financing activities used cash of $37,000 in the first quarter
of 2005, primarily due to the repayment of the term loan. The Company believes that its existing cash and cash equivalents will be sufficient to meet
its capital requirements for at least the next 12 months. Due to the fact that lower cash balances
could negatively impact the Companys sales efforts, the Company may seek additional funds 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. 22




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At March 31, 2005, we had received cash of $936,000 as part of a fourth quarter transaction
with the Queensland Government. The transaction is contingent on the achievement of two
milestones: (i) an election by the Queensland Government to move forward with the project and
(ii) achievement of the criteria required for acceptance of the system. In the event either of
these milestones are not met, we are obligated to refund $936,000. No revenue has been recognized
on this transaction as of March 31, 2005. 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. We anticipate this may be particularly evident in 2005 as we focus our
efforts on the sale of our products and services to a greater number of larger enterprises and
governmental entities. We believe that selling to these target markets typically results in a
higher degree of unpredictability in the sales cycle. 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;
    the loss of any key technical, sales, customer support or management personnel and the timing of any new hires;
    budget and spending decisions by our prospective and existing customers;
    customers and prospects decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next, or to proceed with
smaller-than-forecasted orders or implementations;
    level of purchases by our existing customers, including additional license and maintenance revenues;
    our ability to compete in the highly competitive customer management systems market;
    our ability to develop, introduce and market new products and product versions on a timely basis;
    rate of market acceptance of our software solutions;
    variability in the mix of our license versus service revenue, the mix of our direct
versus indirect license revenue and the mix of services that we perform versus those
performed by third-party service providers;
    our ability to successfully expand our operations, and the amount and timing of
expenditures related to this expansion;
    the costs we incur as a result of our ongoing efforts to comply with the regulations
promulgated under the Sarbanes-Oxley Act of 2002;
    the cost and financial accounting effects of any acquisitions of companies or
complementary technologies that we may complete; and
    the expense we incur as a result of an impairment in our goodwill. As a result of all of these factors, we cannot predict our revenue or expenses with any
significant degree of certainty, and future 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 twelve
months from our initial contact with a potential new customer to the signing of a license
agreement, although the sales cycle varies substantially from customer to customer, and
occasionally requires substantially more time;
    a substantial portion of our sales are completed at the end of the quarter and, as a
result, a substantial portion of our license revenue is recognized in the last month of a
quarter, and often in the last weeks or days of a quarter;
    the contracting process of our sales cycle may take more time than we have historically
experienced; 23




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
    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 have incurred losses in prior periods, and may not be able to return to 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, from the first quarter of
2000 through the first quarter of 2004 and from the third quarter of 2004 through the first quarter
of 2005. We may not be able to achieve profitability in future quarters. As of March 31, 2005, we
had an accumulated deficit of $131.6 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 may increase in certain areas as
we fund certain new initiatives   including those relating to the marketing efforts surrounding
our new corporate strategy. We anticipate these expenses will be offset to some extent by smaller
cost associated with compliance with the Sarbanes-Oxley Act of 2002, relative to those expenses
incurred to date. While we will strive to keep 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 return to profitability in future periods. Although profitable in the third and fourth quarters of 2003 and the first and fourth quarters
of 2004, Onyx Japan Software Co. Ltd., our Japanese joint venture, or Onyx Japan, incurred
substantial losses in previous periods as well as the first quarter of 2005. The minority
shareholders capital account balance as of March 31, 2005 was $25,000. Additional Onyx Japan
losses above approximately $60,000 in the aggregate will be absorbed 100% by us, as compared to 58%
in all prior periods since inception of the joint venture, which could affect our ability to
achieve profitability in future periods. If our new corporate strategy and market positioning is unsuccessful, we may not be able to
generate revenue and achieve profitability. Historically we have been known as a leading provider of customer relationship management, or
CRM, solutions. Over time, however, we have learned that automating relationships with customers
is but one business problem that our customers and prospects are trying to solve. As such, we
recently announced a new corporate strategy which focuses not only on traditional CRM, but also on
process management and performance management. While we have developed products which we believe
can help businesses automate, manage and report on their operations,
we are uncertain of the market
acceptance of our solution. In the event our new marketing strategy fails to generate the level
of sales we anticipate, our business will be materially adversely impacted. If we are unable to compete successfully in the highly competitive customer management systems
market, our business will fail. Our solutions target what is typically referred to as the customer management systems market.
This market is intensely competitive, fragmented, rapidly changing and significantly affected by
new product introductions. We face competition primarily from front-office software application
vendors, providers of hosted solutions, large enterprise software vendors and our potential
customers information technology departments, which may seek to develop proprietary systems. The
dominant competitor in our industry is Siebel Systems, Inc., which holds a significantly greater
percentage of the market than we do. Other companies with which we compete include, but are not
limited to, Amdocs Limited, E.piphany, Inc., Oracle Corporation, PeopleSoft, Inc. (recently
acquired by Oracle Corporation), Pivotal Corporation (a wholly owned subsidiary of CDC Software),
RightNow Technologies, Salesforce.com, SalesLogix (part of Sage, Inc.) and SAP AG. 24




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In addition, as we develop new products 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
recent years we have experienced an increase in competitive pressures in our market, which has led
to enhanced price competition. We expect this trend to continue. 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, there has been increasing consolidation among our competitors and we believe
this consolidation will continue. 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 our ability to execute our business
strategy will be limited. Our future performance will depend largely on the efforts and abilities of our key executive,
technical, sales, customer support and managerial personnel and on our ability to attract and
retain them. In March 2005, Brian C. Henry, our Chief Financial Officer, and Benjamin E. Kiker,
our Chief Marketing Officer, announced their resignations. We subsequently announced the hiring of
Robert J. Chamberlain as our new Chief Financial Officer. Additional changes to our senior
management team, if they were to occur, and the integration of new senior executives, including Mr.
Chamberlain, could result in some disruption to our business while these new executives become
familiar with our business model and establish new management systems. If our new management
team, including any additional senior executives who join us in the future, is unable to work
together effectively to implement our strategies and manage our operations and accomplish our
business objectives, our ability to grow our business and successfully meet operational challenges
could be severely impaired. In addition, our ability to execute our business strategy will
depend on our ability to recruit and retain key personnel. Our key employees are not obligated to
continue their employment with us and could leave at any time. 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. As part of our
strategy to attract and retain personnel, we offer stock option grants to certain employees.
However, given the fluctuations of the market price of our common stock, potential employees may
not perceive our equity incentives such as stock options as attractive, and current employees whose
options are no longer priced below market value may choose not to remain employed by us. 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. 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. Under Loan and Security Agreements with Silicon Valley Bank (SVB), the Company has an $8.0 million
working capital revolving line of credit and a $500,000 term loan facility. The $8.0 million
working capital revolving line of credit is split between a $6.0 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) $6.0 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. Based on this calculation, no restriction on cash was
required under the loan agreement as of March 31, 2005. 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 5.75% as of March 31,
2005, 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 25




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adjusted quick ratio and tangible net worth. The Company was in compliance with these covenants at
March 31, 2005. The Company is also prohibited under the loan and security agreements from paying
dividends. The facilities expire in March 2006. At March 31, 2005, the Company had $4.9 million
outstanding standby letters of credit relating to long-term lease obligations and $347,000
outstanding under the term loan facility. The Company believes that its existing cash and cash equivalents will be sufficient to meet
the Companys capital requirements for at least the next 12 months. Due to the fact that lower
cash balances could negatively impact the Companys sales efforts, the Company may seek additional
funds 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 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. 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 and third-party technology vendors, that are important to worldwide
sales and marketing of our solutions. Key partners often provide consulting, implementation and
customer support services, and endorse our solutions during the competitive evaluation stage of the
sales cycle. We expect an increasing percentage of our revenue to be derived from sales that arise
out of our relationships with these key partners. 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 solutions or reduce or discontinue their relationships with us or their
support of our solutions. 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 solutions;
    we are unable to adequately train a sufficient number of key partners; or
    our existing and potential key partners do not have or do not devote resources necessary to implement our solutions. Economic and business conditions could adversely affect our revenue growth and ability to forecast
revenue. Our revenue growth and potential for profitability depend on the overall demand for customer
management systems software and services. Because our sales are primarily to corporate customers,
we are greatly affected by general economic and business conditions. A softening of demand for
computer software caused by an uncertain 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
prolonged sales cycle in 2002, 2003 and 2004. We expect this trend to continue through at least
2005. 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 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 uncertainty in the domestic and
international economies may continue to cause customer purchasing decisions to be delayed, reduced
in amount or cancelled, which could reduce the rate of conversion of the pipeline into contracts
during a particular period of time. 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 Section 404 of
the Sarbanes-Oxley Act of 2002. As a result of the uncertain economy 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 solution. 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 26




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in the conversion of the pipeline into contracts in a timely manner, which could adversely
affect our business and operating results. 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 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
revenue. The internal controls implemented under the Sarbanes-Oxley Act of 2002 may not prevent or detect
all material weaknesses or significant deficiencies. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to
furnish an internal controls report of managements assessment of the design and effectiveness of
our internal controls as part of our Annual Report on Form 10-K beginning with the fiscal year
ending December 31, 2004. Our independent registered accounting firm is then required to attest
to, and report on, managements assessment. Although our internal testing, as well as our
independent registered accounting firms report, identified no material weaknesses in our internal
controls, certain weaknesses may be subsequently discovered that will require remediation. This
remediation may require implementing additional controls, the costs of which could have a material
adverse effect on our operating results. Moreover, if we are not able to annually comply with the
requirements of Section 404, our reputation might be harmed and we might be subject to sanctions or
investigation by regulatory authorities, such as the SEC, or de-listing by the Nasdaq Stock Market.
Any such action could adversely affect our financial results and the market price of our common
stock. 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 2004 and in the first quarter of 2005 as compared to 2003, during 2002 and 2003, our support and
service revenue represented a higher percentage of our total revenue than in past periods, which
negatively affected 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 2002 and 2003, support
and service revenue represented 67% of our total revenue in 2002 and 79% of our total revenue in
2003. In 2004, support and service revenue represented 76% of our total revenue and 73% in the
first quarter of 2005. We anticipate that support and service revenue will continue to represent a
significant percentage of our 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 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 revenue. 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 solutions;
    reliance on one product family;
    the risk that competition, technological change or evolving customer preferences, such as
preferences for different computing platforms, could harm sales of our solutions;
    the need to implement our sales, marketing and after-sales service initiatives, both domestically and internationally; 27




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
    the need to execute our product development activities;
    dependence on a limited number of key technical, customer support, sales and managerial personnel; and
    the risk that our management will be unable to effectively manage growth, a downturn or
any acquisition we may undertake. The evolving nature of the customer management systems market increases these risks and
uncertainties. Our limited operating history makes it difficult to predict how our business will
develop. Our solutions may not achieve significant market acceptance. Continued growth in demand for customer management systems and our new products remains
uncertain. Even if the market 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
customer management systems and that, as a result, these systems have not achieved, and may not
achieve, market acceptance. We also believe that many of our potential customers perceive the
implementation of such a system to require a great deal of time, expense and complexity. This
perception has been exacerbated by well-publicized failures of certain projects of some of our
competitors. This, in turn, has caused some potential customers to approach purchases of customer
management 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 solutions but also about customer management systems in general. Even
with these educational efforts, however, continued market acceptance of our solutions may not
increase. We will not succeed unless we can educate our target market about the benefits of
customer management systems and the cost effectiveness, ease of use and other benefits of our
solutions. 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. 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 solutions primarily through our direct sales force, with this trend
especially pronounced in the North American market. 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, OEM partners, systems 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, OEM
partners, systems integrators and consulting firms. If our customers cannot successfully implement our products in a timely manner, demand for our
solutions 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, which can increase the complexity of the implementation.
Further, our products are also used in combination with, or integrated to, a number of third-party
software applications and programming tools, which may also increase the complexity of the
implementation. 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 products or for any other reason are not satisfied with our products, 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 market for customer management systems 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 customer management
systems are sold or delivered. We may also need to modify our products when 28




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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 recently introduced new products to the market. While we anticipate
that these products will be licensed and successfully deployed by our customers, the products may
not receive the market acceptance we expect. We have delayed enhancements or new product release
dates several times in the past, and may be unable to introduce enhancements or new products
successfully or in a timely manner in the future. If we delay release of our products and product
enhancements, or if they fail to achieve market acceptance when released, it could harm our
reputation and our ability to attract and retain customers, and our revenue may decline. In
addition, customers may defer or forego purchases of our products if we, our competitors or major
technology vendors introduce or announce new products or product enhancements. If we do not expand our international operations and successfully overcome the risks inherent in
international business activities, the growth of our business will be limited. To be successful in the long term, we will likely need to expand our international operations,
particularly in Europe. This expansion may be delayed as a result of our desire to minimize
expenses. 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 solutions. We, or our VARs, 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, taxes, tariffs and other trade barriers;
    the need to comply with multiple, conflicting and changing laws and regulations;
    reduced protection of intellectual property rights and increased liability exposure; and
    regional economic, cultural and political conditions, including the direct and indirect
effects of terrorist activity and armed conflict in countries in which we do business. As noted above, Onyx Japan has incurred substantial losses in previous periods. The minority
shareholders capital account balance at March 31, 2005 was $25,000. Additional Onyx Japan losses
above approximately $60,000 in the aggregate will be absorbed 100% by us, as compared to 58% in all
prior periods since inception of the joint venture. 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. 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. 29




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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 revenue, delayed or
limited market acceptance of our products, increased costs and damage to our reputation. 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 solutions 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 revenue 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 products. 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 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:  
    significant trading activity by shareholders with large holdings in our common stock;
    future announcements concerning us or our competitors;
    actual or anticipated quarterly variations in operating results;
    changes in analysts earnings projections or recommendations;
    announcements of technological innovations;
    the introduction of new products;
    changes in product pricing policies by us or our competitors;
    proprietary rights litigation or other litigation; or
    changes in accounting standards that adversely affect our revenue and earnings. 30




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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 effect the market price of
our common stock. Stock prices for many technology companies fluctuate widely for reasons that may be unrelated
to operating results of these companies. These fluctuations, as well as general economic, market
and political conditions, such as national or international currency and stock market volatility,
recessions or military conflicts, may materially and adversely affect the market price of our
common stock, regardless of our operating performance and may expose us to class action securities
litigation which, even if unsuccessful, would be costly to defend and distracting to management. Our articles of incorporation and bylaws and Washington law contain provisions that could
discourage a takeover. Certain provisions of our restated articles of incorporation and bylaws, our shareholder
rights plan and Washington law would make it more difficult for a third party to acquire us, even
if doing so would be beneficial for our shareholders. This could limit the price that certain
investors might be willing to pay in the future for shares of our common stock. For example,
certain provisions of our articles of incorporation or bylaws:  
    stagger the election of our board members so that only one-third of our board is up for
reelection at each annual meeting;
    allow our board to issue preferred stock without any vote or further action by the
shareholders;
    eliminate the right of shareholders to act by written consent without a meeting, unless
the vote to take the action is unanimous;
    eliminate cumulative voting in the election of directors;
    specify a minimum threshold for shareholders to call a special meeting;
    specify that directors may be removed only with cause; and
    specify a supermajority requirement for shareholders to change those portions of our
articles that contain the provisions described above. In October 1999, we adopted a shareholder rights plan, which is triggered upon commencement or
announcement of a hostile tender offer or when any one person or group acquires 15% or more of our
common stock. Once triggered, the rights plan would result in the issuance of preferred stock to
the holders of our common stock other than the acquirer. The holders of this preferred stock would
be entitled to ten votes per share on corporate matters. In addition, these shareholders receive
rights under the rights plan to purchase our common stock, and the stock of the entity acquiring
us, at reduced prices. 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. 31




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Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to financial market risks, including changes in interest rates and foreign
currencies. Interest Rate Risk We typically do not attempt to reduce or eliminate our market exposures on our investment
securities because all of our investments are short-term in nature and are classified as cash
equivalents as of March 31, 2005. 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 the first quarter of 2004, international revenue accounted for 37% of our consolidated
revenue remaining relatively consistent at 39% in the first quarter of 2005. International
revenue, as well as most of the related expenses incurred, is denominated in the functional
currencies of the corresponding country. Operating results 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 us during the first quarter
of 2005 or in the prior two fiscal years. At March 31, 2005, we were also exposed to foreign currency risk related to the assets and
liabilities of our foreign subsidiaries, in particular our United Kingdom operation denominated in
British pounds. Cumulative unrealized translation gains related to the consolidation of Onyx UK,
including the goodwill and other intangible assets resulting from the acquisition of Market
Solutions Limited in 1999, amounted to $2.5 million at March 31, 2005. The unrealized gain at
March 31, 2005 specifically associated with the goodwill and other acquisition-related intangibles
of Market Solutions amounted to $1.9 million. This unrealized translation gain combined with the
cumulative unrealized translation gains and losses related to the consolidation of our other
foreign subsidiaries, resulted in net consolidated cumulative unrealized translation gains of $2.6
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. 32




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PART II  OTHER INFORMATION 
 Item 6. Exhibits (a) Exhibits Number
    
    Description3.1
    
    Restated Articles of Incorporation of the registrant (exhibit 3.1)(a)3.2
    
    Amended and Restated Bylaws of the registrant (exhibit 3.2)(d)4.1
    
    Rights Agreement dated October 25, 1999 between the registrant and ChaseMellon Shareholder Services LLC
(exhibit 2.1)(b)4.2
    
    Amendment No. 1 to Rights Agreement dated March 5, 2003 between the registrant and Mellon Investor
Services LLC (exhibit 4.1)(c)10.1
    
    Amendment to Loan Documents dated March 30, 2005 by and between the registrant and Silicon Valley Bank10.2
    
    Amendment to Loan Documents (Exim Program) dated March 30, 2005 by and between the registrant and
Silicon Valley Bank10.3
    
    Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement dated
March 30, 2005 by and between the registrant and Silicon Valley Bank10.4
    
    Streamline Facility Agreement dated March 30, 2005 by and between the registrant and Silicon Valley Bank10.5
    
    First Amendment to Employment
Agreement by and between Onyx Software Corporation and Janice P.
Anderson, dated as of January 20, 2005 (exhibit 10.1)(e)10.6
    
    Stock Option Agreement by and
between Onyx Software Corporation and Janice P. Anderson, dated
as of January 20, 2005 (exhibit 10.2)(e)10.7
    
    Employment Agreement between Onyx
Software Corporation and Robert J. Chamberlain dated
March 16, 2005 (exhibit 10.1)(f)31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   (a)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended September 30, 2003.(b)
    
    Incorporated by reference to the designated exhibit to the registrants registration
statement on Form 8-A (No. 0- 25361) filed October 28, 1999.(c)
    
    Incorporated by reference to the designated exhibit to the registrants Annual Report on Form
10-K (No. 0-25361) for the year ended December 31, 2002.(d)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended June 30, 2004(e)
    
    Incorporated by reference to the designated
exhibit to the registrants Current Report on Form 8-K
(No. 0-25361) filed January 26, 2005(f)
    
    Incorporated by reference to the designated
exhibit to the registrants Current Report on Form 8-K
(No. 0-25361) filed March 18, 2005 33




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ONYX SOFTWARE CORPORATION
(Registrant)Date: May 10, 2005
    By:
    /s/ Janice P. AndersonJanice P. AndersonChief Executive Officer and
Chairman of the Board Date: May 10, 2005
    By:
    /s/ Robert J. ChamberlainRobert J. ChamberlainChief Financial Officer
(Principal Financial Officer) 34