##### Table of Contents



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




---



ONYX SOFTWARE CORPORATION
 CONTENTS
 PART IFINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2004 and June 30, 2005
(Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2004 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statement of Shareholders Equity and Comprehensive Income
(Loss) for the Three Months Ended March 31, 2005 and June 30, 2005 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2004 and 2005 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4.
    
    Controls and Procedures
    
    
    33PART IIOTHER INFORMATION
    
    
    34Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 6.
    
    Exhibits
    
    
    34SIGNATURES
    
    
    36EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements
 
 ONYX SOFTWARE CORPORATION
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 December 31,
    
    June 30,2004
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,393
    
    
    $
    19,676Accounts receivable, less allowances of $475 in 2004 and $358 in 2005
    
    
    10,509
    
    
    
    12,337Current deferred tax asset
    
    
    89
    
    
    
    87Prepaid expenses and other
    
    
    1,968
    
    
    
    2,706Total current assets
    
    
    26,959
    
    
    
    34,806Property and equipment, net
    
    
    3,711
    
    
    
    3,164Purchased technology, net
    
    
    4,095
    
    
    
    3,583Goodwill, net
    
    
    10,306
    
    
    
    9,587Deferred tax asset
    
    
    35
    
    
    
    34Other assets
    
    
    450
    
    
    
    429Total assets
    
    $
    45,556
    
    
    $
    51,603LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,205
    
    
    $
    1,031Salary and benefits payable
    
    
    1,937
    
    
    
    2,115Accrued liabilities
    
    
    2,453
    
    
    
    2,884Income taxes payable
    
    
    217
    
    
    
    15Current portion of restructuring-related liabilities
    
    
    731
    
    
    
    381Term loan
    
    
    167
    
    
    
    167Current portion of deferred revenue
    
    
    17,050
    
    
    
    16,327Total current liabilities
    
    
    23,760
    
    
    
    22,920Long-term accrued liabilities
    
    
    464
    
    
    
    374Long-term deferred revenue, less current portion
    
    
    1,923
    
    
    
    1,761Long-term restructuring-related liabilitieswarrants
    
    
    52
    
    
    
    Long-term purchased technology
    
    
    1,842
    
    
    
    896Term loan  less current portion
    
    
    222
    
    
    
    153Long-term deferred rent
    
    
    450
    
    
    
    325Minority interest in joint venture
    
    
    106
    
    
    
    23Commitments and contingencies
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 17,919,245 in 2005.
    
    
    144,736
    
    
    
    153,889Accumulated deficit
    
    
    (130,969
    )
    
    
    (130,658
    )Accumulated other comprehensive income
    
    
    2,970
    
    
    
    1,920Total shareholders equity
    
    
    16,737
    
    
    
    25,151Total liabilities and shareholders equity
    
    $
    45,556
    
    
    $
    51,603
  3




---



##### Table of Contents



ONYX SOFTWARE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Revenue:License
    
    $
    3,561
    
    
    $
    4,325
    
    
    $
    7,180
    
    
    $
    8,186Support and service
    
    
    11,232
    
    
    
    11,165
    
    
    
    21,857
    
    
    
    21,361Total revenue
    
    
    14,793
    
    
    
    15,490
    
    
    
    29,037
    
    
    
    29,547Cost of revenue:License
    
    
    266
    
    
    
    353
    
    
    
    459
    
    
    
    790Amortization of acquired technology
    
    
    
    
    
    
    256
    
    
    
    
    
    
    
    512Support and service
    
    
    4,515
    
    
    
    4,571
    
    
    
    8,971
    
    
    
    8,778Total cost of revenue
    
    
    4,781
    
    
    
    5,180
    
    
    
    9,430
    
    
    
    10,080Gross margin
    
    
    10,012
    
    
    
    10,310
    
    
    
    19,607
    
    
    
    19,467Operating expenses:Sales and marketing
    
    
    4,604
    
    
    
    4,729
    
    
    
    9,381
    
    
    
    9,145Research and development
    
    
    2,704
    
    
    
    2,476
    
    
    
    5,318
    
    
    
    4,953General and administrative
    
    
    2,227
    
    
    
    2,266
    
    
    
    4,151
    
    
    
    5,043Restructuring and other related charges
    
    
    
    
    
    
    
    
    
    
    484
    
    
    
    Amortization of acquisition-related intangibles
    
    
    209
    
    
    
    
    
    
    
    418
    
    
    
    Total operating expenses
    
    
    9,744
    
    
    
    9,471
    
    
    
    19,752
    
    
    
    19,141Income (loss) from operations
    
    
    268
    
    
    
    839
    
    
    
    (145
    )
    
    
    326Other income (expense), net
    
    
    (121
    )
    
    
    (25
    )
    
    
    (314
    )
    
    
    (227
    )Change in fair value of outstanding warrants
    
    
    90
    
    
    
    
    
    
    
    212
    
    
    
    (2
    )Income (Loss) before income taxes
    
    
    237
    
    
    
    814
    
    
    
    (247
    )
    
    
    97Income tax provision (benefit)
    
    
    93
    
    
    
    (114
    )
    
    
    149
    
    
    
    (133
    )Minority interest in consolidated subsidiary
    
    
    (31
    )
    
    
    (2
    )
    
    
    24
    
    
    
    (81
    )Net Income (loss)
    
    $
    175
    
    
    $
    930
    
    
    $
    (420
    )
    
    $
    311Basic and diluted net income (loss) per share
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.02Shares used in computation of diluted net
income(loss) per share
    
    
    14,615
    
    
    
    16,604
    
    
    
    14,224
    
    
    
    15,655Shares used in computation of basic net
income(loss) per share
    
    
    14,465
    
    
    
    16,488
    
    
    
    14,224
    
    
    
    15,558
  4




---



##### Table of Contents



ONYX SOFTWARE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
(Unaudited)
 AccumulatedOtherCommon Stock
    
    Accumulated
    
    Comprehensive
    

ShareholdersShares
    
    Amount
    
    Deficit
    
    Income
    
    EquityBalance at December 31, 2004
    
    
    14,615,823
    
    
    $
    144,736
    
    
    $
    (130,969
    )
    
    $
    2,970
    
    
    $
    16,737Exercise of stock options
    
    
    2,815
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Restructuring related warrants
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    54Comprehensive income (loss):Translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (360
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (619
    )
    
    
    Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (979
    )Balance at March 31, 2005
    
    
    14,618,638
    
    
    $
    144,794
    
    
    $
    (131,588
    )
    
    $
    2,610
    
    
    $
    15,816Exercise of stock options
    
    
    21,095
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Common stock issued in
connection with purchased
technology obligation
    
    
    367,647
    
    
    
    966
    
    
    
    
    
    
    
    
    
    
    
    966Proceeds from private placement
of common stock
    
    
    2,825,097
    
    
    
    7,853
    
    
    
    
    
    
    
    
    
    
    
    7,853Issuance of common stock under
ESPP
    
    
    86,768
    
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    219Comprehensive income (loss):Translation loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (690
    )Net income
    
    
    
    
    
    
    
    
    
    
    930
    
    
    
    Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240Balance at June 30, 2005
    
    
    17,919,245
    
    
    $
    153,889
    
    
    $
    (130,658
    )
    
    $
    1,920
    
    
    $
    25,151
  5




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2004
    
    2005Operating activities:Net income (loss)
    
    $
    (420
    )
    
    $
    311Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating
activities:Depreciation and amortization
    
    
    1,424
    
    
    
    1,287Loss on disposal of assets
    
    
    
    
    
    
    24Imputed interest expense
    
    
    
    
    
    
    54Deferred income taxes
    
    
    (292
    )
    
    
    3Change in fair value of outstanding warrants
    
    
    (212
    )
    
    
    2Minority interest in income (loss) of consolidated subsidiary
    
    
    24
    
    
    
    (81
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,487
    
    
    
    (1,828
    )Prepaid expenses and other assets
    
    
    100
    
    
    
    (751
    )Accounts payable and accrued liabilities
    
    
    273
    
    
    
    220Restructuring-related liabilities
    
    
    (1,802
    )
    
    
    (350
    )Deferred revenue
    
    
    597
    
    
    
    (885
    )Income taxes
    
    
    (53
    )
    
    
    (202
    )Net cash provided by (used in) operating activities
    
    
    1,126
    
    
    
    (2,196
    )Investing activities:Restricted cash
    
    
    1,723
    
    
    
    Acquisition of purchased technology
    
    
    (400
    )
    
    
    Purchases of property and equipment
    
    
    (849
    )
    
    
    (252
    )Net cash provided by (used in) investing activities
    
    
    474
    
    
    
    (252
    )Financing activities:Proceeds from exercise of stock options
    
    
    44
    
    
    
    61Proceeds from issuance of shares under employee stock purchase plan
    
    
    177
    
    
    
    219Net proceeds from sale of common stock
    
    
    
    
    
    
    7,853Proceeds from term loan
    
    
    500
    
    
    
    Payments on term loan
    
    
    (27
    )
    
    
    (69
    )Net cash provided by financing activities
    
    
    694
    
    
    
    8,064Effects of exchange rate changes on cash
    
    
    (129
    )
    
    
    (333
    )Net increase in cash and cash equivalents
    
    
    2,165
    
    
    
    5,283Cash and cash equivalents at beginning of period
    
    
    10,127
    
    
    
    14,393Cash and cash equivalents at end of period
    
    $
    12,292
    
    
    $
    19,676Supplemental cash flow disclosure:Interest paid
    
    $
    72
    
    
    $
    112Income taxes paid
    
    
    247
    
    
    
    226Purchase technology acquired in exchange for:Common stock issued
    
    
    (1,666
    )
    
    
    (966
    )Liabilities incurred or assumed
    
    
    (2,019
    )
    
    
    
  6




---



##### Table of Contents



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




---



##### Table of Contents



Use of Estimates
  Revenue Recognition
         8




---



##### Table of Contents



Cash and Cash Equivalents
  Stock-Based Compensation
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005(In thousands, except per share data)Net Income (loss):As reported
    
    $
    175
    
    
    $
    930
    
    
    $
    (420
    )
    
    $
    311Add: stock-based employee
expense included in
reported net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: stock-based
employee compensation
expense determined under
fair-value-based method for
all awards
    
    $
    (993
    )
    
    $
    (514
    )
    
    $
    (1,672
    )
    
    $
    (1,173
    )Pro forma
    
    $
    (818
    )
    
    $
    416
    
    
    $
    (2,092
    )
    
    $
    (862
    )Net income (loss) per share:As reported
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.02Pro forma
    
    $
    (0.06
    )
    
    $
    0.03
    
    
    $
    (0.15
    )
    
    $
    (0.06
    )
 Other Comprehensive Income
  9




---



##### Table of Contents



Recently Issued Accounting Pronouncements
  
 3. Purchased Technology
  4. Restructuring and Other Related Charges
   Cash Payments,Balance at December
    
    Fair Value
    
    Write-offs and
    
    Balance at June31, 2004
    
    Adjustment
    
    Reclassifications
    
    30, 2005Excess Facilities
    
    
    731
    
    
    
    
    
    
    
    (350
    )
    
    
    381Excess Facilities  Warrants
    
    
    52
    
    
    
    2
    
    
    
    (54
    )
    
    
    Total:
    
    
    783
    
    
    
    2
    
    
    
    (404
    )
    
    
    381
  10




---



##### Table of Contents



5. Net Income (Loss) Per Share
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005(In thousands, except
    
    (In thousands, exceptper share data)
    
    per share data)Net income (loss) (A)
    
    $
    175
    
    
    $
    930
    
    
    $
    (420
    )
    
    $
    311Weighted average number of common shares (B)
    
    
    14,465
    
    
    
    16,488
    
    
    
    14,224
    
    
    
    15,558Effect of dilutive securities:Stock options
    
    
    149
    
    
    
    116
    
    
    
    
    
    
    
    97Warrants
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Adjusted weighted average shares (C)
    
    
    14,615
    
    
    
    16,604
    
    
    
    14,224
    
    
    
    15,655Gain/(Loss) per share:Basic (A)/(B)
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.02Diluted (A)/(C)
    
    $
    0.01
    
    
    $
    0.06
    
    
    $
    (0.03
    )
    
    $
    0.02
  11
    Table of Contents    Third-Party License Agreements
  7. Line of Credit
  8. Segment and Geographic Information
   12




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005North America
    
    $
    9,191
    
    
    $
    10,173
    
    
    $
    18,251
    
    
    $
    18,784United Kingdom
    
    $
    1,672
    
    
    $
    2,471
    
    
    $
    3,413
    
    
    $
    4,776Rest of World
    
    $
    3,930
    
    
    $
    2,846
    
    
    $
    7,373
    
    
    $
    5,987Total
    
    $
    14,793
    
    
    $
    15,490
    
    
    $
    29,037
    
    
    $
    29,547
 9. Guarantees
  10. Onyx Japan
     13




---



##### Table of Contents



11. Liquidity
    12. Shareholders Equity
   14




---



##### Table of Contents



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




---



##### Table of Contents



Overview of the Results for the Three and Six Months Ended June 30, 2005
  
    
    Total revenue of $15.5 million for the second quarter of 2005, up 10% from the
first quarter of 2005 and up 5% from the second quarter of 2004;
    
    License revenue of $4.3 million for the second quarter of 2005, up 12% from the
first quarter of 2005 and up 21% from the second quarter of 2004;
    
    Service revenue of $11.2 million for the second quarter of 2005, up 9% from the
first quarter of 2005 and down 1% from the second quarter of 2004;
    
    Service margins of 59% for the second quarter of 2005, remaining steady as compared
to 59% in the first quarter of 2005 and down from 60% in the second quarter of 2004;
    
    Total revenue for the first six months of 2005 of $29.5 million, up 2% from the first six months of 2004
    
    License Revenue for the first six months of 2005 of $8.2 million, up 14% from the first six months of 2004.
    
    Operating expenses, of $9.5 million for the second quarter of 2005, down from $9.7
million in the first quarter of 2005 and consistent with $9.5 million in the second
quarter of 2004,(excluding acquisition-related amortization, stock compensation and
restructuring charges)
    
    Cash balances of $19.7 million at June 30, 2005, up from $11.4 million at March 31,
2005; and up from $14.4 million at December 31, 2004.
    
    Days sales outstanding, based on end of period receivable balances, down to 73 days
in the second quarter of 2005 compared to 79 days in the first quarter of 2005 and 68
days in the second quarter of 2004.
    
    
    increase our pipeline of sales opportunities;
    
    integrate new talent into our sales and marketing organization
    
    enhance our market position and awareness;
    
    enhance our solutions portfolio to address more customer needs;
 16




---



##### Table of Contents




    
    focus our resources and efforts on the market opportunities with the highest probability of success;
    
    diversify and expand partnerships with key system integration and technology vendors;
    
    aggressively market our recent major product releases; and
    
    maintain high customer satisfaction levels.
  Critical Accounting Policies and Estimates
   Revenue Recognition
       17




---



##### Table of Contents



Allowance for Doubtful Accounts
  Impairment of Goodwill
  Restructuring
  Recent Accounting Pronouncements
  
 Results of Operations
  18




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Revenue:License
    
    
    24.1
    %
    
    
    27.9
    %
    
    
    24.7
    %
    
    
    27.7
    %Support and service
    
    
    75.9
    
    
    
    72.1
    
    
    
    75.3
    
    
    
    72.3Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue:License
    
    
    1.8
    
    
    
    2.3
    
    
    
    1.6
    
    
    
    2.7Amortization of acquired technology for license
    
    
    
    
    
    
    1.7
    
    
    
    
    
    
    
    1.7Support and service
    
    
    30.5
    
    
    
    29.4
    
    
    
    30.9
    
    
    
    29.7Total cost of revenue
    
    
    32.3
    %
    
    
    33.4
    %
    
    
    32.5
    %
    
    
    34.1
    %Gross margin
    
    
    67.7
    
    
    
    66.6
    
    
    
    67.5
    
    
    
    65.9Operating expenses:Sales and marketing
    
    
    31.1
    
    
    
    30.5
    
    
    
    32.3
    
    
    
    30.9Research and development
    
    
    18.3
    
    
    
    16.0
    
    
    
    18.3
    
    
    
    16.8General and administrative
    
    
    15.1
    
    
    
    14.6
    
    
    
    14.3
    
    
    
    17.1Restructuring and other related charges
    
    
    
    
    
    
    
    
    
    
    1.7
    
    
    
    Amortization of acquisition-related intangibles

    
    
    1.4
    
    
    
    
    
    
    
    1.4
    
    
    
    Total operating expenses
    
    
    65.9
    %
    
    
    61.1
    %
    
    
    68.0
    %
    
    
    64.8
    %Income (loss) from operations
    
    
    1.8
    
    
    
    5.5
    
    
    
    (0.5
    )
    
    
    1.1Other income (expense), net
    
    
    (0.8
    )
    
    
    (0.2
    )
    
    
    (1.1
    )
    
    
    (0.8
    )Change in fair value of outstanding warrants
    
    
    0.6
    
    
    
    0.0
    
    
    
    0.7
    
    
    
    0.0Income (loss) before income taxes
    
    
    1.6
    
    
    
    5.3
    
    
    
    (0.9
    )
    
    
    0.3Income tax provision (benefit)
    
    
    0.6
    
    
    
    (0.7
    )
    
    
    0.5
    
    
    
    (0.5
    )Minority interest in consolidated subsidiary
    
    
    (0.2
    )
    
    
    0.0
    
    
    
    0.0
    
    
    
    (0.3
    )Net income (loss)
    
    
    1.2
    %
    
    
    6.0
    %
    
    
    (1.4
    )%
    
    
    1.1
    %
 Revenue
     Cost of Revenue
 Cost of license revenue
 19




---



##### Table of Contents



Amortization of acquired technology
  Cost of support and service revenue
  Operating Expenses and Other
 Sales and marketing
   Research and development
  20




---



##### Table of Contents



General and administrative
  Restructuring and other related charges
   Cash Payments,Balance at December
    
    Fair Value
    
    Write-offs and
    
    Balance at June31, 2004
    
    Adjustment
    
    Reclassifications
    
    30, 2005Excess Facilities
    
    
    731
    
    
    
    
    
    
    
    (350
    )
    
    
    381Excess Facilities  Warrants
    
    
    52
    
    
    
    2
    
    
    
    (54
    )
    
    
    Total:
    
    
    783
    
    
    
    2
    
    
    
    (404
    )
    
    
    381
      21




---



##### Table of Contents



Other Income (Expense), Net
  Change in Fair Value of Outstanding Warrants
  Income Taxes
  Minority Interest in Consolidated Subsidiary
  Liquidity and Capital Resources
   22




---



##### Table of Contents



23




---



##### Table of Contents



Off-Balance Sheet Arrangements and Contractual Obligations
  Departure of Directors or Principal Officers
  Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price
 Our operating results fluctuate and could fall below expectations of investors, resulting in a
decrease in our stock price.
  
    
    general economic conditions, which may affect our customers capital investment levels in
management information systems and the timing of their purchases;
    
    the loss of any key technical, sales, customer support or management personnel and the timing of any new hires;
    
    budget and spending decisions by our prospective and existing customers;
    
    customers and prospects decisions to defer orders or implementations, particularly
large orders or implementations, from one quarter to the next, or to proceed with
smaller-than-forecasted orders or implementations;
    
    level of purchases by our existing customers, including additional license and maintenance revenues;
    
    our ability to compete in the highly competitive customer management systems market;
    
    our ability to develop, introduce and market new products and product versions on a timely basis;
    
    rate of market acceptance of our software solutions;
    
    variability in the mix of our license versus service revenue, the mix of our direct
versus indirect license revenue and the mix of services that we perform versus those
performed by third-party service providers;
    
    our ability to successfully expand our operations, and the amount and timing of
expenditures related to this expansion;
    
    the costs we incur as a result of our ongoing efforts to comply with the regulations
promulgated under the Sarbanes-Oxley Act of 2002;
    
    the cost and financial accounting effects of any acquisitions of companies or complementary technologies; and
    
    the expense we incur as a result of an impairment in our goodwill.
  
    
    our sales cycles are lengthy and variable, typically ranging between six and twelve
months from our initial contact with a potential new customer to the signing of a license
agreement, although the sales cycle varies substantially from customer to customer, and
occasionally requires substantially more time;
 24




---



##### Table of Contents




    
    a substantial portion of our sales are completed at the end of the quarter and, as a
result, a substantial portion of our license revenue is recognized in the last month of a
quarter, and often in the last weeks or days of a quarter;
    
    the contracting process of our sales cycle may take more time than we have historically
experienced;
    
    the amount of unfulfilled orders for our products at the beginning of a quarter is 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
  We have incurred losses in prior periods, and may not be able to maintain profitability, which
could cause a decrease in our stock price.
    If our new corporate strategy and market positioning is unsuccessful, we may not be able to
generate revenue and achieve profitability.
  If we are unable to compete successfully in the highly competitive customer management systems
market, our business will fail.
  25




---



##### Table of Contents



If we do not retain our key employees and management team our ability to execute our business
strategy will be limited.
  We may be unable to obtain the funding necessary to support the expansion of our business, and any
funding we do obtain could dilute our shareholders ownership interest in Onyx.
   26




---



##### Table of Contents



If we are unable to develop and maintain effective long-term relationships with our key partners,
or if our key partners fail to perform, our ability to sell our solution will be limited.
   
    
    we are unable to develop and maintain effective, long-term relationships with existing and potential key partners;
    
    our existing and potential key partners endorse a product or technology other than our solutions;
    
    we are unable to adequately train a sufficient number of key partners; or
    
    our existing and potential key partners do not have or do not devote resources necessary to implement our solutions.
 Economic and business conditions could adversely affect our revenue growth and ability to forecast
revenue.
    27




---



##### Table of Contents



The internal controls implemented under the Sarbanes-Oxley Act of 2002 may not prevent or detect
all material weaknesses or significant deficiencies.
  We may be unable to establish vendor specific objective evidence in future periods and, if we
cannot, the method by which we recognize revenue could change
  Fluctuations in support and service revenue could decrease our total revenue or decrease our gross
margins, which could cause a decrease in our stock price.
  We have a limited operating history and are subject to the risks of new enterprises.
  
    
    no history of sustained profitability;
    
    uncertain growth in the market for, and uncertain market acceptance of, our solutions;
 28




---



##### Table of Contents




    
    the risk that competition, technological change or evolving customer preferences, such as
preferences for different computing platforms, could harm sales of our solutions;
    
    the need to implement our sales, marketing and after-sales service initiatives, both domestically and internationally;
    
    the need to execute our product development activities;
    
    dependence on a limited number of key technical, customer support, sales and managerial personnel; and
    
    the risk that our management will be unable to effectively manage growth, a downturn or
any acquisition we may undertake.
  Our solutions may not achieve significant market acceptance.
  If potential customers do not accept the Onyx product family, our business will fail.
  We may be unable to efficiently restructure or expand our sales organization, which could harm our
ability to expand our business.
  If our customers cannot successfully implement our products in a timely manner, demand for our
solutions will be limited.
  29




---



##### Table of Contents



Rapid changes in technology could render our products obsolete or unmarketable, and we may be
unable to introduce new products and services successfully and in a timely manner.
   If we do not expand our international operations and successfully overcome the risks inherent in
international business activities, the growth of our business will be limited.
  
    
    costs of customizing products for foreign countries;
    
    export and import restrictions, taxes, tariffs and other trade barriers;
    
    the need to comply with multiple, conflicting and changing laws and regulations;
    
    reduced protection of intellectual property rights and increased liability exposure; and
    
    regional economic, cultural and political conditions, including the direct and indirect
effects of terrorist activity and armed conflict in countries in which we do business.
   We may be unable to adequately protect our proprietary rights, which may limit our ability to
compete effectively.
  30




---



##### Table of Contents



Intellectual property claims and litigation could subject us to significant liability for damages
and result in invalidation of our proprietary rights.
  
    
    stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;
    
    pay damages;
    
    enter into licensing or royalty agreements, which may be unavailable on acceptable terms; or
    
    redesign products or services that incorporate infringing technology, which we might not
be able to do at an acceptable price, in a timely fashion or at all.
 Our products may suffer from defects or errors, which could result in loss of revenue, delayed or
limited market acceptance of our products, increased costs and damage to our reputation.
   You may be unable to resell your shares at or above the price at which you purchased them, and our
stock price may be volatile.
  
    
    significant trading activity by shareholders with large holdings in our common stock;
    
    future announcements concerning us or our competitors;
    
    actual or anticipated quarterly variations in operating results;
    
    changes in analysts earnings projections or recommendations;
    
    announcements of technological innovations;
 31




---



##### Table of Contents




    
    the introduction of new products;
    
    changes in product pricing policies by us or our competitors;
    
    proprietary rights litigation or other litigation; or
    
    changes in accounting standards that adversely affect our revenue and earnings.
   Our articles of incorporation and bylaws and Washington law contain provisions that could
discourage a takeover.
  
    
    stagger the election of our board members so that only one-third of our board is up for
reelection at each annual meeting;
    
    allow our board to issue preferred stock without any vote or further action by the
shareholders;
    
    eliminate the right of shareholders to act by written consent without a meeting, unless
the vote to take the action is unanimous;
    
    eliminate cumulative voting in the election of directors;
    
    specify a minimum threshold for shareholders to call a special meeting;
    
    specify that directors may be removed only with cause; and
    
    specify a supermajority requirement for shareholders to change those portions of our
articles that contain the provisions described above.
    32




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Foreign Currency Risk
    
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
  Changes in internal controls
  33




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 2. Changes in Securities and Use of Proceeds
   
 Item 4. Submission of Matters to a Vote of Security Holders
  (1)
    
    Elect two Class 2 directors to Onyxs board of directors for a three-year term.The Class 2 directors were elected with the following voting results.
 Nominee
    
    Votes for
    Votes WithheldWilliam Porter
    
    
    12,896,302
    
    
    
    30,565Daniel R. Santell
    
    
    12,340,036
    
    
    
    586,831
 (2)
    
    Elect two Class 3 directors to Onyxs board of directors for a three-year term.The Class 3 directors were elected with the following voting results.
 Nominee
    
    Votes for
    Votes WithheldJanice P. Anderson
    
    
    12,683,878
    
    
    
    242,989Robert M. Tarkoff
    
    
    12,595,801
    
    
    
    331,066
 (3)
    
    Ratify the appointment of KPMG LLP as independent auditors for the year ending December 31,
2005
 For
    
    
    12,836,950Against
    
    
    23,964Abstain
    
    
    5,953
 
 Item 6. Exhibits
 (a)
    
    Exhibits
 34




---



##### Table of Contents



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
    
    Common Stock Purchase Agreement dated May 12, 2005 between Onyx
Software Corporation and the purchasers named therein (exhibit
10.1)(e)31.1
    
    Certification of Chief Executive Officer pursuant to Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended31.2
    
    Certification of Chief Financial Officer pursuant to Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 (a)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended September 30, 2003.(b)
    
    Incorporated by reference to the designated exhibit to the registrants registration
statement on Form 8-A (No. 0- 25361) filed October 28, 1999.(c)
    
    Incorporated by reference to the designated exhibit to the registrants Annual Report on Form
10-K (No. 0-25361) for the year ended December 31, 2002.(d)
    
    Incorporated by reference to the designated exhibit to the registrants Quarterly Report on
Form 10-Q (No. 0-25361) for the quarter ended June 30, 2004(e)
    
    Incorporated by reference to the designated exhibit to the registrants Current Report on
Form 8-K (No. 0-25361) filed with the Securities and Exchange Commission on May 13, 2005. 35




---



##### Table of Contents



SIGNATURES
  ONYX SOFTWARE CORPORATION
(Registrant)Date: August 9, 2005
    By:
    /s/ Janice P. AndersonJanice P. AndersonChief Executive Officer and
Chairman of the Board Date: August 9, 2005
    By:
    /s/ Robert J. ChamberlainRobert J. ChamberlainChief Financial Officer
(Principal Financial Officer) 36