<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________
Commission File Number 0-25215
ONYX SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1629814
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
310 - 120th Avenue N.E.
Bellevue, Washington 98005
(Address of principal executive offices)
(425) 451-8060
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
------- -------
The number of shares of common stock, no par value, outstanding on May 10,
1999 was 17,218,001.
<PAGE>
ONYX SOFTWARE CORPORATION
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I -- FINANCIAL INFORMATION.................................................................. 1
Item 1. Consolidated Financial Statements................................................... 1
Consolidated Balance Sheets as of December 31, 1998 and March
31, 1999....................................................................... 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1999................................................... 2
Consolidated Statement of Shareholders' Equity (Deficit) for
the Three Months Ended March 31, 1999........................................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1999................................................... 4
Notes to Consolidated Financial Statements........................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 28
PART II -- OTHER INFORMATION..................................................................... 29
Item 1. Legal Proceedings................................................................... 29
Item 2. Changes in Securities and Use of Proceeds........................................... 29
Item 6. Exhibits and Reports on Form 8-K.................................................... 29
SIGNATURES.................................................................................. 30
</TABLE>
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<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, March 31,
1998 1999
----------------- -----------------
Assets........................................................... (unaudited)
Current assets:
Cash and cash equivalents................................... $ 1,853 $ 30,242
Securities available for sale............................... -- 6,275
Accounts receivable, less allowances of $536 for 1998 and $387
for 1999.................................................... 13,149 11,048
Prepaid expense and other................................... 1,327 1,213
----------------- -----------------
Total current assets................................... 16,329 48,778
Long-term investments....................................... -- 3,653
Property and equipment, net................................. 1,664 2,760
Purchased technology........................................ 3,216 3,129
Goodwill.................................................... 642 617
Other assets................................................ 639 401
----------------- -----------------
Total assets........................................... $ 22,490 $ 59,338
================= =================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................................ $ 1,654 $ 1,557
Salary and benefits payable................................. 905 1,221
Accrued liabilities......................................... 1,685 1,308
Income taxes payable........................................ 288 329
Current portion of capital lease obligations................ 216 170
Current portion of long-term debt........................... 975 734
Deferred revenue............................................ 6,745 7,087
----------------- -----------------
Total current liabilities.............................. 12,468 12,406
Capital lease obligations, less current portion............. 191 156
Long-term debt, net of current portion...................... 4,295 219
Redeemable convertible preferred stock, issued and outstanding
shares - 3,433,925 for 1998, none for 1999; Liquidation value
of $11,000.................................................. 13,285 --
Commitments and Contingencies
Shareholder's equity (deficit):
Preferred stock, $0.01 par value.
Authorized shares -- 10,000,000 shares;
Designated shares - none.................................... -- --
Common stock, $0.01 par value:
Authorized shares - 40,000,000 shares
Issued and outstanding shares -9,852,557 shares at
December 31, 1998 and 17,178,821 at March 31, 1999.......... 1,912 57,269
Notes receivable from officers for common stock............. (212) (212)
Deferred stock-based compensation........................... (1,785) (1,509)
Accumulated deficit......................................... (7,621) (8,904)
Accumulated other comprehensive loss........................ (43) (87)
----------------- -----------------
Total shareholders' equity (deficit)................... (7,749) 46,557
----------------- -----------------
Total liabilities and shareholders' equity............. $ 22,490 $ 59,338
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months ended March 31,
------------------------------------------
1998 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
Revenues:
License............................................... $ 4,116 $ 7,073
Support and service................................... 2,839 4,158
----------------- -----------------
6,955 11,231
Cost of revenue:
License............................................... 93 464
Support and service................................... 1,972 2,095
----------------- -----------------
2,065 2,559
----------------- -----------------
Gross margin.............................................. 4,890 8,672
Operating expenses:
Sales and marketing................................... 3,821 6,161
Research and development.............................. 2,070 2,637
General and administrative............................ 781 1,194
----------------- -----------------
Total operating expenses.............................. 6,672 9,992
----------------- -----------------
Loss from operations...................................... (1,782) (1,320)
Interest income........................................... 63 151
Interest expense.......................................... (23) (37)
----------------- -----------------
Loss before income taxes.............................. (1,742) (1,206)
Income tax provision...................................... 62 77
----------------- -----------------
Net loss.................................................. (1,804) (1,283)
Preferred stock accretion................................. (304) (1,442)
----------------- -----------------
Loss to common shareholders............................... $(2,108) $(2,725)
================= =================
Loss per share:
Basic and diluted..................................... $ (0.26) $ (0.22)
Pro forma basic and diluted........................... $ (0.15) $ (0.09)
Shares used in calculation of loss per share:
Basic and diluted.................................... 8,140 12,434
Pro forma basic and diluted........................... 11,673 14,082
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Consolidated Statement of Shareholders' Equity (Deficit)
For the Three Months Ended March 31, 1999
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Receivable Accumulated
from Deferred Retained Other Total
Common Stock Officers for Stock-Based Earnings Comprehen- Shareholders'
----------------------- Common Compensa- (Accumulated sive Income Equity
Shares Amount Stock tion Deficit) (Loss) (Deficit)
------------ --------- -------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998.......... 9,852,557 $ 1,912 $(212) $(1,785) $(7,621) $(43) $(7,749)
Proceeds from initial public
offering, net of offering
costs (Note 3)................... 3,565,000 41,873 - - - - 41,873
Preferred stock accretion......... - (1,442) - - - - (1,442)
Conversion of redeemable
convertible preferred stock
into common stock................. 3,533,925 14,727 - - - - 14,727
Amortization of deferred
stock compensation.............. - - - 276 - - 276
Exercise of stock options......... 213,608 80 - - - - 80
Issuance of common stock to
employees....................... 13,731 119 - - - - 119
Cumulative translation adjustment - - - - - (44)
Net loss.......................... - - - - (1,283) -
Total comprehensive loss.......... (1,327)
------------ --------- -------- --------- ---------- ------- ----------
Balance at March 31, 1999............. 17,178,821 $57,269 $(212) $(1,509) $(8,904) $(87) $46,557
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months ended March 31,
-----------------------------------------------
1998 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss to common shareholders........................... $(2,108) $(2,725)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Preferred stock accretion............................. 304 1,442
Depreciation and amortization......................... 213 360
Accretion of discounts on investments................. (9) --
Noncash stock-based compensation expense.............. 35 276
Changes in operating assets and liabilities:
Accounts receivable................................. 645 2,068
Other assets........................................ (346) 352
Accounts payable and accrued liabilities............ 282 (40)
Deferred revenue.................................... 184 343
Income taxes........................................ 47 41
------------------- -------------------
Net cash provided by (used in)
operating activities.................................. (753) 2,117
Investing activities:
Purchases of securities................................... -- (9,928)
Proceeds from maturity of securities...................... 2,073 --
Purchases of property and equipment....................... (123) (1,344)
------------------- -------------------
Net cash provided by (used in)
investing activities...................................... 1,950 (11,272)
Financing activities:
Proceeds from exercise of stock options................... 1 80
Payments on capital lease obligations..................... (79) (81)
Payments on long-term debt................................ -- (4,317)
Net proceeds initial public offering...................... -- 41,873
------------------- -------------------
Net cash provided by (used in) financing activities... (78) 37,555
Effects of exchange rate changes on cash...................... -- (11)
Net increase in cash and cash equivalents..................... 1,119 28,389
Cash and cash equivalents at beginning of period.............. 3,512 1,853
------------------- -------------------
Cash and cash equivalents at end of period.................... $ 4,631 $30,242
=================== ===================
Supplemental cash flow disclosure:
Interest paid............................................. $ 23 $ 45
Income taxes paid, net.................................... 15 36
Fixed assets financed through capital
lease obligations......................................... 146
Issuance of common stock to employees in connection with
fourth quarter 1998 bonus................................. 119
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Basis of Presentation
-------------------------------------------------
Description of Onyx Software Corporation
Onyx Software Corporation and subsidiaries is a leading provider of
enterprise relationship management software solutions. We derive the majority of
our revenues from the Onyx Front Office product family, which includes Onyx
Customer Center, Onyx Customer Center - Unplugged, Onyx Web Wizards, Onyx
Insight, Onyx Channel Connect, and Onyx EnCyc. We were incorporated in the State
of Washington on February 23, 1994 and maintain our headquarters in Bellevue,
Washington.
Interim Financial Information
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In our
opinion, the statements include all adjustments necessary (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with our audited consolidated financial statements for the year ended December
31, 1998, included in our prospectus, dated February 11, 1999, filed with the
Securities and Exchange Commission in connection with our initial public
offering. Our 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.
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<PAGE>
2. Summary of Significant Accounting Policies
------------------------------------------
Revenue Recognition
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public Accountants
and was amended by Statement of Position 98-4 (SOP 98-4). We adopted SOP 97-2
effective January 1, 1998. Based upon our interpretation of SOP 97-2 and SOP
98-4, we believe our current revenue recognition policies and practices are
materially consistent with SOP 97-2 and SOP 98-4. Additionally, the AICPA
recently issued SOP 98-9, which provides certain amendments to SOP 97-2, which
is effective for transactions entered into beginning January 1, 2000. The
pronouncement is not expected to materially impact our revenue recognition
practices. Further implementation guidelines relating to SOP 97-2 and related
modifications may result in unanticipated changes in our revenue recognition
practices, and such changes could materially adversely affect the timing of our
future revenues and earnings.
We generate revenues through two sources: (i) software license revenues
and (ii) service revenues. Software license revenues are generated from
licensing the rights to use our products directly to end-users and indirectly
through sublicense fees from resellers and, to a lesser extent, through third-
party products we distribute. Service revenues are generated from sales of
post-contract support, consulting and training services performed for customers
that license our products.
Revenues from software license agreements are recognized upon delivery of
software products if
. there is persuasive evidence of an arrangement;
. collection is probable;
. the fee is fixed or determinable; and
. there is sufficient vendor-specific objective evidence to support
allocating the total fee to all elements of multiple-element
arrangements.
Vendor-specific objective evidence is typically 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 before market introduction.
Elements included in multiple element arrangements could consist of software
products, upgrades, enhancements, customer support services, or consulting
services. If an acceptance period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period. We
enter into reseller arrangements that typically provide for sublicense fees
based on a percentage of list price. Sublicense fees are generally recognized
when reported by the reseller upon
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<PAGE>
relicensing of our products to end-users. Our agreements with our customers and
resellers do not contain product return rights.
Revenues from customer support services are recognized ratably over the
term of the contract, typically one year. Consulting revenues are primarily
related to implementation services performed on a time-and-materials basis under
separate service arrangements related to the installation of our software
products. Revenues from consulting and training services are recognized as
services are performed. If a transaction includes both license and service
elements, license fee revenues are recognized upon shipment of the software,
provided services do not include significant customization or modification of
the base product, and the payment terms for licenses are not subject to
acceptance criteria. In cases where license fee payments are contingent upon
the acceptance of services, we defer recognition of revenues from both the
license and the service elements until the acceptance criteria are met.
Research and Development Costs
Research and development costs, which consist primarily of software
development costs, are expensed as incurred. Financial accounting standards
provide for the capitalization of certain software development costs after
technological feasibility of the software is established. Under our current
practice of developing new products and enhancements, the technological
feasibility of the underlying software is not established until substantially
all product development is complete, including the development of a working
model. To date, the period between achieving technological feasibility and the
general availability of such software has been short; therefore, software
development costs qualifying for capitalization have been immaterial.
3. Initial Public Offering
-----------------------
On February 12, 1999, we completed an initial public offering of 3,565,000
shares including 465,000 shares pursuant to the underwriters' exercise of their
overallotment option. The offered shares generated net proceeds to Onyx of
approximately $41.9 million. Concurrent with the offering, all 3,433,925 shares
of our redeemable convertible preferred stock automatically converted into
3,533,925 shares of common stock.
4. Net Loss Per Common Share
-------------------------
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding. Pro forma
net loss per share is computed using the weighted average number of shares used
for basic and diluted per share amounts and the weighted average convertible
redeemable preferred stock outstanding as if such shares were converted to
common stock at the time of issuance.
-7-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
---- ----
(in thousands, except per share data)
<S> <C> <C>
Net loss (A) $(1,804) $(1,283)
Preferred stock accretion (1) (304) (1,442)
-------------------------------------------------
Loss to common shareholders (B) (2,108) (2,725)
-------------------------------------------------
Weighted average number of common shares (2): 8,140 12,434
Effect of dilutive securities * *
Stock options * *
Redeemable convertible preferred stock * *
-------------------------------------------------
Adjusted weighted average shares and assumed conversions (D) 8,140 12,434
Pro forma adjustment for redeemable convertible preferred stock 3,533 1,648
-------------------------------------------------
Pro forma weighted average shares (E) 11,673 14,082
=================================================
Loss per share:
Basic and diluted (B)/(D) $ (0.26) $ (0.22)
Proforma basic and diluted (A)/(E) $ (0.15) $ (0.09)
</TABLE>
(1) Included within preferred stock accretion in the three months ended
March 31, 1999 is a $1.3 million deemed dividend resulting from the 100,000
share increase in the number of shares of common stock issued upon conversion of
the Series B Redeemable Convertible Preferred Stock.
(2) For purposes of determining the weighted average number of common
shares outstanding, 1,300,000 shares of restricted common stock acquired through
the July 1998 exercise of stock options in exchange for promissory notes to Onyx
are only considered in the calculation of diluted earnings per share.
*Excluded from the computation of diluted earnings per share because the
effects are anti-dilutive. Options to purchase 3,697,226 shares of Common Stock
with exercise prices of $0.10 to $1.20 per share were outstanding as of March
31, 1998 and options to purchase
-8-
<PAGE>
4,421,551 shares of Common Stock with exercise prices of $0.10 to $13.00 per
share were outstanding as of March 31, 1999.
5. International Operations
The Company licenses and markets its products through direct and indirect
channels throughout the world. Information regarding revenues in different
geographic regions is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
---- ----
In thousands
<S> <C> <C>
North America $6,331 $ 9,340
Rest of World 624 1,891
------------------------------------------------
Total revenues $6,955 $11,231
================================================
</TABLE>
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<PAGE>
The Company reports operating results based on geographic areas. A summary
of key financial data by segment is as follows:
<TABLE>
<CAPTION>
North Rest of Total
America World
-----------------------------------------------
In thousands
<S> <C> <C> <C>
Quarter ended March 31, 1999 (unaudited):
Revenues $9,340 $1,891 $11,231
Operating loss (368) (952) (1,320)
Interest, net 114 -- 114
Depreciation and amortization 346 14 360
Purchases of property and equipment 1,334 10 1,344
Long-lived assets 10,094 466 10,560
Total assets 57,768 1,570 59,338
Quarter ended March 31, 1998 (unaudited):
Revenues $6,331 $624 $6,955
Operating loss (900) (882) (1,782)
Interest, net 40 -- 40
Depreciation and amortization 203 10 213
Purchases of property and equipment 119 5 124
Long-lived assets 1,311 139 1,450
Total assets 14,347 418 14,765
</TABLE>
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Information
Certain statements in this Form 10-Q contain "forward-looking" information
(as defined in Section 27A of the Securities Act of 1933, as amended) that
involve risks and uncertainties which may cause actual results to differ
materially from those predicted in the forward-looking statements. Forward-
looking statements can be identified by their use of such verbs as "expects,"
"anticipates," and "believes" or similar verbs or conjugations of such verbs. If
any of our assumptions on which the statements are based prove incorrect or
should unanticipated circumstances arise, our actual results could materially
differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors,
including, but not limited to, the "Factors Affecting Operating Results"
described herein and the Risk Factors described in our Securities and Exchange
Commission filings, including our Form S-1 filed February 11, 1999.
Overview of Onyx's Financial Performance
Onyx's History of Operations
Onyx is a leading provider of enterprise relationship management software
solutions. Enterprise relationship management software solutions automate the
key functions that enable enterprises to more effectively acquire, manage and
retain customers, partners and other relationships. The Onyx solution is based
on the Microsoft Windows NT and Microsoft BackOffice platforms. It features a
common data model which creates a single repository of marketing, sales and
service information that is accessible to multiple audiences via the Internet.
We designed our solution from inception to be integrated, easy to use and widely
accessible through a variety of interfaces, including the Internet and corporate
intranets and extranets. The Onyx solution is rapidly deployable, scalable,
flexible and reliable, resulting in a low total cost of ownership and rapid
return on investment.
Onyx was founded in February 1994. We commercially released version 1.0 of
our flagship product, Onyx Customer Center, in December 1994. In our first
three years of operation, we focused primarily on research and development
activities, recruiting personnel, purchasing operating assets, marketing our
products, building a direct sales force and expanding our service business. Our
revenues totaled $2.2 million in 1995 and $9.6 million in 1996.
In mid-1996, we substantially expanded our operations to capitalize on our
opportunity within the rapidly emerging enterprise relationship management
market. We decided, at the potential expense of profitability, to accelerate
our investments in research and
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development, marketing, domestic and international sales channels, professional
services and our general and administrative infrastructure.
We believe these investments have been critical to our growth. Our
revenues grew to $19.4 million in 1997 and to $35.1 million in 1998.
Nevertheless, these investments have also significantly increased our operating
expenses, contributing to the net losses that we incurred in each fiscal quarter
since the first quarter of 1997. As of March 31, 1999, we had an accumulated
deficit of $8.9 million. We anticipate that our operating expenses will
increase substantially in dollar amount for the foreseeable future as we expand
our product development, sales and marketing and professional services staff.
However, due to the significant investments made to date and management's focus
on returning to profitability, we expect the rate at which our expenses grow to
decline relative to our revenue growth.
Onyx's Results of Operations
The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three months ended March 31,
1998 and 1999 are not necessarily indicative of the results that may be expected
for the full year or any future period.
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<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,
---------
1998 1999
---- ----
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
License............................................ 59.2% 63.0%
Service............................................ 40.8 37.0
---- ----
Total revenues.................................. 100.0 100.0
----- -----
Cost of revenues:
License............................................ 1.4 4.1
Service............................................ 28.3 18.7
----- -----
Total cost of revenues.......................... 29.7 22.8
----- -----
Gross margin........................................... 70.3 77.2
Operating expenses:
Sales and marketing................................ 54.9 54.8
Research and development........................... 29.8 23.5
General and administrative......................... 11.2 10.6
----- -----
Total operating expenses........................ 95.9 88.9
----- -----
Loss from operations................................... (25.6) (11.7)
Interest income........................................ 0.9 1.3
Interest expense....................................... (0.3) (0.3)
----- -----
Loss before income taxes............................... (25.0) (10.7)
Income tax provision................................... .9 0.7
----- -----
Net loss............................................... (25.9)% (11.4)%
===== =====
</TABLE>
Revenues
Total revenues, which consist of software license and service revenues,
increased 61%, from $7.0 million in the first quarter of 1998 to $11.2 million
in the first quarter of 1999. No single customer accounted for more than 10% of
our revenues in the first quarter of 1998 or 1999.
Our license revenues increased 72%, from $4.1 million in the first quarter
of 1998 to $7.1 million in the first quarter of 1999. Of the increase, $2.2
million was due to increased follow-on sales to existing customers and $800,000
was due to increased sales to new customers.
Our service revenues increased 46%, from $2.9 million in the first quarter
of 1998 to $4.1 million in the first quarter of 1999. The increase was
primarily due to increases in maintenance and support revenues resulting from an
increase in our software application sales and the overall growth of our
installed base of customers during these periods. Service revenues represented
41% of our total revenues in the first quarter of 1998 and 37% in the first
quarter of 1999. We expect the proportion of service revenues to total revenues
to fluctuate in the future, depending in part on our customers' direct use of
third-party
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<PAGE>
consulting and implementation service providers and the ongoing renewals of
customer support contracts.
Revenues outside of North America increased 203%, from $624,000 in the
first quarter of 1998 to $1.9 million in the first quarter of 1999. The increase
in international revenues resulted from our investment in direct and indirect
sales channels, primarily in Europe, Australia and Singapore.
We do not believe that we can sustain our historical percentage growth
rates of license and service revenues as our revenue base increases.
Cost of Revenues
Cost of license revenues
Cost of license revenues consists of license fees for third-party software,
product media, product duplication and manuals. Cost of license revenues
increased 399%, from $93,000 in the first quarter of 1998 to $464,000 in the
first quarter of 1999. Cost of license revenues as a percentage of related
license revenues was 2% in the first quarter of 1998 and 7% in the first quarter
of 1999. The increase in dollar amount in cost of license revenues resulted
primarily from an increase in third-party technology costs. The increase in
cost of license revenues as a percentage of related license revenues resulted
primarily from the increase in products we sold with third-party technology,
which contribute significantly lower margins.
Cost of service revenues
Cost of service revenues consists of personnel and third-party service
provider costs related to consulting services, customer support and training.
Cost of service revenues increased 6%, from $2.0 million in the first quarter of
1998 to $2.1 million in the first quarter of 1999. The increase in dollar
amount resulted primarily from hiring and training consulting, support and
training personnel to support our growing customer base, offset in part by a
decreased use of third-party service providers. Our service employees increased
from 51 as of March 31, 1998 to 63 as of March 31, 1999. Cost of service
revenues as a percentage of related service revenues was 69% in the first
quarter of 1998 and 50% in the first quarter of 1999. The cost of services as a
percentage of service revenues 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). The decrease in cost of
service revenues as a percentage of related service revenues reflected primarily
a lower percentage use of third-party service providers, which contribute
significantly lower margins than internal resources, and increased customer
support revenues, which contribute higher margins than the other services.
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<PAGE>
Costs and Expenses
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 increased 61%, from $3.8 million in the first quarter of 1998
to $6.2 million in the first quarter of 1999. The increase in dollar amount was
primarily attributable to the expansion of our worldwide sales and marketing
organization, which included significant personnel-related costs to recruit and
hire sales management, sales representatives, sales engineers and marketing
professionals. Sales and marketing employees increased from 97 as of March 31,
1998 to 129 as of March 31, 1999. The increase in dollar amount is also the
result of an increase in sales commissions and bonuses associated with increased
revenues and an increase in marketing activities including trade shows and the
sponsorship of a global customer conference in the first quarter of 1999. Sales
and marketing expenses represented 55% of our total revenues in the first
quarter of 1998 and 1999. We believe that we need to significantly increase our
sales and marketing efforts to expand our market position and further increase
acceptance of our products. Accordingly, we anticipate that sales and marketing
expenses will increase in future periods.
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 increased 27%, from $2.1 million in the first quarter
of 1998 to $2.6 million in the first quarter of 1999. The increase was
primarily due to an increase in the number of development personnel, offset in
part by a decrease in the use of outside contractors. Research and development
employees increased from 49 as of March 31, 1998 to 67 as of March 31, 1999.
Research and development costs represented 30% of our total revenues in the
first quarter of 1998 and 23% in the first quarter of 1999. The decrease in
research and development expenses as a percentage of total revenues primarily
reflects the more rapid growth in our revenues in this period compared to the
investment in our research and development activities. We believe that we need
to significantly increase our research and development investment to expand our
market position and continue to expand our product line. Accordingly, we
anticipate that research and development expenses will increase in future
periods.
General and administrative
General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance, administrative and information
services personnel and professional services fees. General and administrative
expenses increased 53%, from
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$781,000 in the first quarter of 1998 to $1.2 million in the first quarter of
1999. The increase was primarily due to the addition of finance, executive and
administrative personnel to support the growth of our business along with an
increase in professional fees associated with becoming a public company and
expanding internationally. General and administrative employees increased from
26 as of March 31, 1998 to 32 as of March 31, 1999. General and administrative
costs represented 11% of our total revenues in the first quarter of 1998 and
1999. We believe our general and administrative expenses will continue to
increase as we expand our domestic and international administrative staff,
and incur expenses associated with being a public company, including, but not
limited to, annual and other public reporting costs, directors' and officers'
liability insurance, investor relations programs and professional services fees.
Deferred compensation
We amortized deferred compensation expense of $26,000 during the first
quarter of 1998 compared to $276,000 in the first quarter of 1999. Deferred
compensation is amortized over the vesting periods of the options.
Interest income and interest expense
Interest income consists of earnings on our cash and cash equivalent and
investment balances. Interest income was $63,000 in the first quarter of 1998
and $151,000 in the first quarter of 1999. This increase reflects the higher
cash and investment base as a result of proceeds we received in February 1999
from our initial public offering. Interest expense consists of expense
associated with our debt obligations. Interest expense was $23,000 in the first
quarter of 1998 and $37,000 in the first quarter of 1999. This increase was due
to additional bank borrowings during the current period.
Income taxes
We recorded an income tax provision of $62,000 in the first quarter of 1998
and $77,000 in the first quarter of 1999 in connection with our foreign
operations. We made no provision or benefit for federal or state income taxes
in 1998 or 1999 due to the operating losses incurred since the first quarter of
1997 which has resulted in deferred tax assets. We have recorded a valuation
allowance for the entire deferred tax asset as a result of uncertainties
regarding the realization of the asset balance.
Financial Condition
Total assets increased from $22.5 million as of December 31, 1998 to $59.3
million as of March 31, 1999, representing an increase of $36.8 million, or
164%. This increase was primarily due to cash proceeds raised from the sale of
common stock in our recent initial public offering. As of December 31, 1998, we
had cash and cash equivalents of $1.9 million. As of March 31,
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1999, we had cash and cash equivalents of $30.2 million, short-term investments
of $6.3 million and long-term investments of $3.7 million, resulting in total
cash and investments of $40.2 million. This figure represents an increase of
$38.3 million over cash and investment balances at December 31, 1998.
Accounts receivable were $13.1 million as of December 31, 1998 and $11.0
million as of March 31, 1999, representing a decrease of $2.1 million, or 16%.
This decrease was principally a result of significant cash collections during
the three months ended March 31, 1999. Days' sales outstanding in accounts
receivable decreased from 108 days as of December 31, 1998 to 90 days as of
March 31, 1999. We expect that days' sales outstanding will fluctuate
significantly in future quarters. Property and equipment increased due to an
increase in equipment purchased rather than leased through operating leases and
the acquisition of a new trade show booth.
Total liabilities were $30.2 million as of December 31, 1998 and $12.8
million as of March 31, 1999, representing a decrease of $17.4 million, or 58%.
This decrease was principally the result of the conversion of $13.3 million in
redeemable convertible preferred stock to common stock in connection with our
initial public offering and the repayment of borrowings under our working
capital facility.
Liquidity and Capital Resources
Since our inception, we have primarily financed our operations through
private placements of our common and preferred stock. To a lesser extent, we
have financed our operations through equipment financing and traditional
financing arrangements. In February 1999, we completed our initial public
offering and issued 3,565,000 shares of common stock at an initial public
offering price of $13.00 per share. We received approximately $41.9 million in
cash, net of underwriting discounts, commissions and other offering costs.
As of March 31, 1999, we had cash and cash equivalents of $30.2 million,
short-term investments of $6.3 million, and long-term investments of $3.7
million, representing an increase of $38.3 million from cash and investments
held as of December 31, 1998. Our working capital at March 31, 1999 was $36.4
million, compared to $3.9 million at December 31, 1998.
We have an $8.0 million working capital revolving line of credit with
Silicon Valley Bank that is secured by our accounts receivable and bears
interest at the bank's prime rate or LIBOR plus 2.0%, which was 7.75% as of
March 31, 1999. This facility allows us to borrow up to the lesser of 80% of
our eligible accounts receivable or $8.0 million. The facility expires in June
2000. The agreement under which the line of credit was established contains
certain covenants, including a provision requiring us to maintain specified
financial ratios. As of March 31, 1999, we had not borrowed under the working
capital facility; however,
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there was approximately $900,000 in standby letters of credit outstanding. We
also have a $3.0 million term loan facility with Silicon Valley Bank for the
purpose of financing new capital equipment purchases. This facility operates as
a revolver through August 1999, bearing interest at a rate equal to the bank's
prime rate plus 0.25%, which equaled 8.0% as of March 31, 1999, after which time
any balances must be paid over a 36-month term. This facility also requires us
to maintain certain financial covenants, including a requirement that we
maintain certain financial ratios. As of March 31, 1999, we had borrowed $63,000
under this line of credit. As a result of non-cash charges associated with
deferred stock compensation expense and amortization of intangibles associated
with our acquisition of EnCyc in September 1998, our net losses for the first
quarter of 1999 exceeded the applicable limits under this facility. We
subsequently obtained a waiver of this covenant.
Our operating activities resulted in net cash outflows of $753,000 in the
first quarter of 1998 compared to net cash inflows of $2.1 million in the first
quarter of 1999. The operating cash outflows in the first quarter of 1998 were
primarily the result of our operating loss and increases in prepaid expenses and
other current assets, partially offset by decreases in our accounts receivable
and increases in accounts payable, accrued liabilities and deferred revenues.
The operating cash inflows in the first quarter of 1999 were primarily the
result of cash provided by collections on our accounts receivable and increases
in deferred revenues and other assets, partially offset by cash outflows from
our operating loss.
Investing activities provided cash of $1.9 million in the first quarter of
1998, due primarily to proceeds from the maturity of securities offset by cash
used to acquire capital equipment. Investing activities used cash of $11.3
million in the first quarter 1999, primarily for the purchase of short-term and
long-term securities following our initial public offering and the purchase of
capital equipment.
Financing activities used cash of $78,000 in the first quarter of 1998
resulting from payments on capital lease obligations offset in part by proceeds
from the exercise of stock options. Financing activities provided cash of $37.6
million in the first quarter of 1999 primarily due to the proceeds from our
initial public offering in February, offset in part by payments on our credit
facility and capital lease obligations.
We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we
. enter new markets for our products and services;
. increase research and development spending;
. increase sales and marketing activities;
. develop new distribution channels;
. improve our operational and financial systems; and
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. broaden our professional service capabilities.
Such operating expenses will consume a material amount of our cash
resources. We believe that our existing cash and cash equivalents, investments
and available bank borrowings will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next twelve
months. Thereafter, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources. We may
not be able to obtain adequate or favorable financing at that time. Any
financing we obtain may dilute your ownership interest in Onyx.
Year 2000 Compliance
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries (including technology, transportation, utilities,
finance and telecommunications) will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century
change. We recognize the need to ensure our operations will not be adversely
affected by Year 2000 software failures.
We have completed our initial assessment of the potential overall impact of
the impending century change on our business, financial condition and operating
results. Based on our current assessment, we believe the current versions of
our software products are Year 2000 compliant--that is, they are capable of
adequately distinguishing 21st century dates from 20th century dates. However,
our products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products that we cannot adequately
evaluate for Year 2000 compliance. We may face claims based on Year 2000
problems in other companies' products, or issues arising from the integration of
multiple products within an overall system. Although we have not been a party
to any litigation or arbitration proceeding involving our products or services
related to Year 2000 compliance issues, we may in the future be required to
defend our products or services in such proceedings, or to negotiate resolutions
of claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, regardless of the merits of such disputes, and any
liability we have for Year 2000-related damages, including consequential
damages, could materially adversely affect our business, financial condition and
operating results. In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those we offer.
To the extent Year 2000 issues cause a significant delay in, or cancellation of,
decisions to
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purchase our products or services, our business, financial condition and
operating results would be materially adversely affected.
We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems. We also have communicated
with the external vendors that supply us with material software and information
systems and with our significant suppliers to determine their Year 2000
readiness. In the course of these investigations, we have not encountered any
material Year 2000 problems with these third-party products.
We will be relocating our principal offices in July 1999 to a new office
location currently under construction. Before the relocation, we will complete
our evaluation of whether the infrastructure and building systems associated
with our new facility, such as security and sprinkler systems, and all
information technology systems, such as telephony and computer network systems,
are Year 2000 compliant.
To date, we have not incurred any material costs directly associated with
our Year 2000 compliance efforts, except for compensation expense associated
with our salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts. As discussed above, we do not expect the
total cost of Year 2000 problems to be material to our business, financial
condition and operating results. However, during the months prior to the
century change, we will continue to evaluate new versions of our software
products, new software and information systems provided to us by third parties
and any new infrastructure systems that we acquire to determine whether they are
Year 2000 compliant. Despite our current assessment, we may not identify and
correct all significant Year 2000 problems on a timely basis. Year 2000
compliance efforts may involve significant time and expense and unremediated
problems could materially adversely affect our business, financial condition and
operating results. We currently have no contingency plans to address the risks
associated with unremediated Year 2000 problems.
FACTORS AFFECTING OPERATING RESULTS
Our future operating results are uncertain and likely to fluctuate.
Our operating results have varied widely in the past, and we expect that
they will continue to fluctuate in the future. In addition, our operating
results may not follow any past trends. It is particularly difficult to predict
the timing or amount of our license revenues because
. our sales cycles are lengthy and variable, typically ranging between
two to six months from our initial contact with a potential customer
to the signing of a license agreement, although occasionally sales
require substantially more time;
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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
. we recognize a substantial portion of our license revenues in the
last month of a quarter, and often in the last weeks or days of a
quarter.
Nevertheless, we base our decisions regarding our operating expenses on
anticipated revenue trends. Because many of our expenses are relatively fixed,
a delay in recognizing revenue from a limited number of license transactions
could cause our operating results to vary significantly from quarter to quarter
and could result in operating losses. To the extent these expenses are not
followed by increased revenues, our operating results will suffer.
Seasonality affects our revenues.
We continue to experience significant seasonality with respect to software
license revenues. In recent years, we have recognized more license revenues in
our fourth quarter than in each of the first three quarters of a fiscal year and
have experienced lower license revenues in our first quarter than in the
preceding fourth quarter.
Our results fluctuate from quarter to quarter.
In the past, the software industry has experienced significant downturns,
particularly when general economic conditions decline and spending on management
information systems decreases. Our business, financial condition and operating
results may fluctuate substantially from quarter to quarter as a consequence of
general economic conditions in the software industry. In addition, the fiscal
or quarterly budget cycles of our customers can cause our revenues to fluctuate
from quarter to quarter. As a result of all of these factors, we believe that
period-to-period comparisons of our operating results are not meaningful, and
you should not rely on such comparisons to predict our future performance.
Fluctuations in our operating results, particularly compared to the expectations
of market analysts or investors, could cause volatility in the price of our
common stock.
We have a limited operating history.
We commenced operations in February 1994 and commercially released version
1.0 of Onyx Customer Center in December 1994. Accordingly, we have a limited
operating history, and we face all of the risks and uncertainties encountered by
early-stage companies. Our limited operating history makes it difficult to
forecast our future operating results. The new and evolving nature of the
enterprise relationship management market increases these risks and
uncertainties.
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We have incurred losses.
We incurred net losses in each quarter from Onyx's inception through the
third quarter of 1994 and from the first quarter of 1997 to the first quarter of
1999. As of March 31, 1999, we had an accumulated deficit of $8.9 million. We
expect to continue to devote substantial resources to our product development
and sales and customer support. As a result, we will need to generate
significant quarterly revenues to achieve and maintain profitability. Our
business strategies may not be successful, and we may not be profitable in any
future period.
Our market is highly competitive.
The market for enterprise relationship management software is intensely
competitive, fragmented and rapidly changing. We face competition in the
enterprise relationship management software market primarily from
. front-office software applications vendors;
. large enterprise software vendors; and
. our potential customers' internal information technology departments,
which may seek to develop proprietary enterprise relationship
management systems.
In addition, as we develop new products, particularly applications focused
on particular industries, we may begin competing with companies with whom we
have not previously competed. It is also possible that new competitors will
enter the market or that our competitors will form alliances that may enable
them to rapidly increase their market share.
We depend on the performance and continued adoption of the Windows
NT/Microsoft BackOffice platforms.
We have designed our products to operate exclusively on the Windows NT and
Microsoft BackOffice platforms. As a result, we market our products exclusively
to customers who have developed their enterprise computing systems around these
platforms. Our future financial performance will depend on continued growth in
the number of enterprises that successfully adopt the Windows NT and Microsoft
BackOffice computing platforms. The market for enterprise operating systems is
highly competitive. The Windows NT and Microsoft BackOffice computing platforms
face increasing competition, particularly from open source platforms, such as
Unix and Linux. We believe that the Linux platform in particular is currently
growing at a faster annual percentage growth rate than the Windows NT and
Microsoft BackOffice Platforms. Acceptance of the Windows NT and Microsoft
BackOffice platforms may not continue to increase in the future. The adoption
of new operating systems and computing platforms, and the market for software
applications that run on those platforms, has in the past been significantly
affected by the timing of new product
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releases, competitive operating systems and enhancements to computing platforms.
If the Windows NT and Microsoft BackOffice market fails to grow or grows more
slowly than we currently expect, our business, financial condition and operating
results could be materially adversely affected. Recently, Microsoft delayed the
release of Windows 2000 (formerly known as Windows NT 5.0). Although we do not
believe that this delay has materially adversely affected our business,
financial condition or operating results, future delays in the release of new or
enhanced products could have such an effect. Also, the performance of our
products depends, to some extent, on the technical capabilities of the Windows
NT and Microsoft BackOffice platforms. If the Windows NT and Microsoft
BackOffice platforms do not meet the technical demands of our products, the
performance or scalability of the ONYX solution could be limited and, as a
result, our business, financial condition and operating results could be
materially adversely affected.
The market for enterprise relationship management solutions is new and highly
uncertain.
The market for enterprise relationship management products is still
emerging, and continued growth in demand for and acceptance of enterprise
relationship management products remains uncertain. Even if the market for
enterprise relationship management software grows, businesses may purchase our
competitors' products or develop their own. We believe that many of our
potential customers are not fully aware of the benefits of enterprise
relationship management solutions and that these solutions may never achieve
market acceptance. We have spent, and will continue to spend, considerable
resources educating potential customers about our products and enterprise
relationship management software solutions in general. However, even with these
educational efforts, market acceptance of our products may not increase. If the
market for our products does not grow or grows more slowly than we currently
anticipate, our business, financial condition and operating results would be
materially adversely affected.
We rely on sales of only one product family.
Onyx Front Office product license revenues accounted for approximately 55%
of our total revenues, or 84% of total license revenues, during fiscal 1998 and
approximately 61% of our total revenues, or 96% of total license revenues for
the first quarter of 1999. We expect product license revenues from the Onyx
Front Office product family to continue to account for a substantial majority of
our future revenues. As a result, factors adversely affecting the pricing of or
demand for the Onyx Front Office product family, such as competition or
technological change, could materially adversely affect our business, financial
condition and operating results. Our future financial performance will
substantially depend on successfully deploying current versions of the Onyx
Front Office product family and developing, introducing and establishing
customer acceptance of new and enhanced versions of the Onyx Front Office
product family.
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We may be unable to expand our sales and support infrastructure.
To date, we have sold our products primarily through our direct sales force
and have supported our customers with our consulting and customer support staff.
Our future revenue growth will depend in large part on recruiting and training
additional direct sales, consulting and customer support personnel and expanding
our indirect distribution channels. We have experienced and continue to
experience difficulty in recruiting qualified sales and support personnel and in
establishing third-party relationships. We may not be able to successfully
expand our direct sales force or other distribution channels and any such
expansion may not result in increased revenues. If we are unable to hire highly
trained consulting and customer support personnel, we may be unable to meet
customer demands. Our business, financial condition and operating results will
be materially adversely affected if we fail to expand our direct sales force or
other distribution channels or our technical and customer support staff.
We depend on certain key employees.
Our future performance will also largely depend on the efforts and
abilities of our key technical, customer support, sales and managerial personnel
and on our ability to retain them. We have in the past experienced difficulty
in hiring qualified technical, customer support, sales and managerial personnel.
Our success will depend on our ability to attract and retain such personnel in
the future. In addition, the loss of any of our executive officers could
materially adversely affect our business, financial condition and operating
results.
Our market is subject to rapid technological change.
The software market in which we compete is characterized by rapid
technological change. Existing products become obsolete and unmarketable when
products using new technologies are introduced and new industry standards
emerge. For example, we may need to modify our products when third parties
change software that we integrate into our products. As a result, the life
cycles of our products are difficult to estimate. To be successful, we must
continue to enhance our current product line and develop new products that
successfully respond to such developments. We have delayed enhancements or new
product release dates several times in the past and may not be able to introduce
enhancements or new products successfully or in a timely manner in the future.
Our business, financial condition and operating results would be materially
adversely affected if we delay release of our products and product enhancements
or if these products and product enhancements fail to achieve market acceptance
when released. In addition, customers may defer or forego purchases of our
products if we, our competitors or major hardware, systems or software vendors
introduce or announce new products or product enhancements. Such events could
materially adversely affect our business, financial condition and operating
results.
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We face risks from expansion of our international operations.
We intend to substantially expand our international operations and enter
new international markets. This expansion 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. We may not be able to maintain or
increase international market demand for the ONYX Customer Center product
family. We, or our distributors or resellers, may not be able to sustain or
increase international revenues from licenses or from consulting and customer
support. 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. Increases in the
value of the U.S. dollar relative to foreign currencies could materially
adversely affect our operating results.
We rely heavily on key partners and systems integrators.
We rely heavily on our relationships with a number of organizations that
are important to worldwide sales and marketing of our products. If we fail to
maintain our existing relationships, or to establish new relationships, or if
our partners do not perform to our expectations, our business, financial
condition and operating results could be materially adversely affected.
We also rely on a number of systems consulting and integration firms to
implement our software, provide customer support services and endorse our
products during the competitive evaluation stage of the sales cycle. Although
we seek to maintain relationships with these service providers, many of them
have similar, and often more established, relationships with our competitors.
These third parties, many of which have significantly greater resources than we
have, may in the future market software products that compete with ours or
reduce or discontinue their relationships with us or their support of our
products. In addition, our business, financial condition and operating results
could be materially adversely affected if
. we are unable to develop and retain effective, long-term relationships
with our systems integrators;
. we are unable to adequately train a sufficient number of systems
integrators;
. our systems integrators do not have or do not devote the resources
necessary to facilitate implementation of our products; or
. our systems integrators endorse a product or technology other than
ours.
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Our sales cycle is long.
We believe that an enterprise's decision to purchase an enterprise
relationship management system is discretionary, involves a significant
commitment of its resources and is influenced by its budget cycles. To
successfully sell our products, we generally must educate our potential
customers regarding the use and benefit of our products, which can require
significant time and resources. Consequently, the period between initial
contact and the purchase of our products is often long and subject to delays
associated with the lengthy budgeting, approval and competitive evaluation
processes that typically accompany significant capital expenditures. Our sales
cycles are lengthy and variable, typically ranging between two to six months
from our initial contact with a potential customer to the signing of a license
agreement, although occasionally sales require substantially more time. Sales
delays could cause our operating results to vary widely.
We depend on service revenues.
Support and service revenues represented 35% of our total revenues for 1998
and 37% of our total revenues for the first quarter of 1999. We anticipate that
service revenues will continue to represent a significant percentage of total
revenues.
. Because service revenues have lower gross margins than license
revenues, a continued increase in the percentage of total revenues
represented by service revenues or an unexpected decrease in license
revenues could have a detrimental impact on overall gross margins and
our operating results.
. We subcontract certain consulting, customer support and training
services to third-party service providers. Third-party contract
revenues generally carry lower gross margins than our service business
overall; as a result, our service revenues and related margins may
vary from period to period, depending on the mix of these third-party
contract revenues.
. Service revenues depend in part on ongoing renewals of support
contracts by our customers, some of which may not renew their support
contracts.
. In addition, consulting revenues as a percentage of total revenues
could decline if customers select third-party service providers to
install and service our products more frequently than they have in the
past.
If service revenues are lower than anticipated, our business, financial
condition and operating results could be materially adversely affected. Our
ability to increase service revenues will depend in large part on our ability to
increase the scale of our services organization, including our ability to
successfully recruit and train a sufficient number of qualified services
personnel. We may not be able to do so.
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We rely on software licensed to us by third parties.
We incorporate into our products certain software that is licensed to us by
third-party software developers, currently Sybase, Inc., Greyware Automation
Products and Inso Corporation. We believe there are other sources for this
licensed software and that we could replicate the functionality of this licensed
software within a relatively short period of time, approximately four to six
months. Because our products incorporate software developed and maintained by
third parties, however, we depend on such third parties' abilities to deliver
and support reliable products, enhance their current products, develop new
products on a timely and cost-effective basis, and respond to emerging industry
standards and other technological changes. The third-party software currently
offered in conjunction with our products may become obsolete or incompatible
with future versions of our products.
We may be unable to adequately protect our proprietary rights.
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 such 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. We may not become aware of, or have adequate remedies in the
event of, such breach.
We may be unable to adequately protect our trademarks.
We pursue the registration of certain of our trademarks and service marks
in the United States and in certain other countries, but we have not secured
registration of all our marks. A significant portion of our marks include the
word "Onyx." ONYX Computers Incorporated has filed a lawsuit against us
alleging trademark infringement of the mark "ONYX" in Canada. We are
negotiating to settle the litigation. However, our negotiations may not be
successful. A negative outcome could materially adversely affect our financial
condition and operating results. Other companies use "Onyx" in their marks
alone or in combination with other words, and we cannot prevent all third-party
uses of the word "Onyx." We license certain trademark rights to third parties.
Such licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would adversely
affect our trademarks.
Our products may suffer from defects or errors.
Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released. We have had
to delay commercial release of certain versions of our products until software
problems were corrected, and in
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some cases have provided product enhancements to correct errors in released
products. Our new products or releases may not be free from errors after
commercial shipments have begun. Any errors that are discovered after commercial
release could result in loss of revenues or delay in market acceptance,
diversion of development resources, damage to our reputation or increased
service and warranty costs, all of which could materially adversely affect our
business, financial condition and operating results.
The integration of EnCyc and any future acquisitions may be difficult and
disruptive.
In September 1998, we acquired EnCyc, Inc., a privately held marketing
encyclopedia software company. We are currently in the process of integrating
the EnCyc business with our business. This integration is subject to risks
commonly encountered in making acquisitions, including, among others, risk of
loss of key personnel, difficulties associated with assimilating technologies,
products, personnel and operations, potential disruption of our ongoing
business, and the ability of our sales force, consultants and development staff
to adapt to the new product line. We may not successfully overcome these risks
or any other problems encountered in connection with the acquisition of EnCyc.
As part of our business strategy, we expect to consider acquiring other
companies. We may not be able to successfully integrate any technologies,
products, personnel or operations of companies that we may acquire in the
future. If we fail to do so, our business, financial condition and operating
results could be materially adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are short-
term. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. All of the potential changes noted above are based on
sensitivity analysis performed on our balances as of March 31, 1999.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On September 25, 1998, ONYX Computers Incorporated filed a lawsuit against
us in the Federal Court of Canada--Trial Division in Toronto. ONYX Computers
Incorporated alleges trademark infringement of the mark "ONYX" in Canada and
seeks
. a permanent injunction preventing us from using the mark "ONYX," the
trade name "Onyx Software Corporation" or any other similar marks or
trade names in Canada;
. an order requiring us to deliver or destroy all materials in our
possession or under our control bearing the mark "ONYX"; and
. other damages, interest and court costs.
On February 10, 1999, we filed an answer to this claim and a counterclaim
seeking
. an order that ONYX Computers Incorporated's registration of the mark
"ONYX" be canceled;
. an order that ONYX Computers Incorporated pay the costs of the
counterclaim; and
. such further relief as the court may determine.
This claim, even if not meritorious, could require the expenditure of
significant financial and managerial resources. A negative outcome could
materially adversely affect our business, financial condition and operating
results. Other than the trademark infringement matter described above, as of
the date of this prospectus, we are not a party to any litigation that, if
adversely determined, would have a material adverse effect on our business,
financial condition and operating results.
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities During the Quarter
During the quarter ended March 31, 1999, Onyx issued and sold 150,311
unregistered shares of its common stock to employees pursuant to the exercise of
stock options under its 1998 Combined Incentive and Non-Qualified Stock Option
Plan. The options were granted in consideration of these individuals' services
to ONYX, and in issuing these securities Onyx relied on an exemption from
registration pursuant to Rule 701 under Section 3(b) of the Securities Act.
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<PAGE>
(d) Use of Proceeds
On February 11, 1999, Onyx's registration statement on Form S-1, file
number 333-68559, became effective. The offering date was February 12, 1999. The
offering has terminated as a result of all of the shares offered being sold. The
managing underwriters were Credit Suisse First Boston Corporation, SG Cowen
Securities Corporation and Piper Jaffray Inc. The offering consisted of
3,565,000 shares of Onyx common stock, including 465,000 shares of common stock
pursuant to the exercise of the underwriters' over-allotment option. The
aggregate price of the shares offered and sold was approximately $46.3 million.
Proceeds to Onyx, after accounting for $3.2 million in underwriting discounts
and commissions and $1.2 million in other expenses, were $41.9 million. Onyx
generated interest income of approximately $151,000 for the three months ended
March 31, 1999.
We are using the net proceeds raised in the initial public offering for
additional working capital, repayment of short-term indebtedness, and general
corporate purposes, including increased domestic and international sales and
marketing expenditures, increased research and development expenditures and
capital expenditures made in the ordinary course of business. We also intend to
use these proceeds for possible acquisitions of businesses, products and
technologies that are complementary to ours. Although we have not identified
any specific businesses, products or technologies that we may acquire, and there
are no current agreements or understandings with respect to any such
transactions, we do from time to time evaluate such opportunities. Pending such
uses, the net proceeds will be invested in investment-grade, interest-bearing
instruments, the majority of which are short-term.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly, to directors,
officers or general partners of Onyx or their associates, persons owning 10% or
more of any class of our securities, or affiliates of Onyx.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this Form
10-Q.
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<PAGE>
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 14, 1999 By /s/ Sarwat H. Ramadan
-----------------------
Sarwat H. Ramadan
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal financial and chief accounting
officer)
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<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
ONYX SOFTWARE CORPORATION
Pursuant to the provisions of RCW 23B.10.070 of the Washington Business
Corporation Act, ONYX Software Corporation, a Washington corporation, hereby
restates its Articles of Incorporation as heretofore amended:
1. Name
The name of the Company is ONYX Software Corporation (the "Company").
2. Shares
2.1. Authorized Capital
The Company is authorized to issue 50,000,000 shares, consisting of
40,000,000 shares designated as common stock ("Common Stock") and 10,000,000
shares designated as preferred stock ("Preferred Stock"), the par value of each
of which is $0.01. Common Stock is subject to the rights and preferences of
Preferred Stock as hereinafter set forth. Except to the extent such rights are
granted to Preferred Stock or one or more series thereof, holders of shares of
Common Stock shall have unlimited voting rights and are entitled to receive the
net assets of the Company upon dissolution.
2.2. Issuance of Preferred Stock in Series
The Company's Board of Directors (the "Board") may designate one or
more series of Preferred Stock, and the designation and number of shares within
each series, and shall determine the preferences, limitations, and relative
rights of any shares of Preferred Stock, or of any series of Preferred Stock,
before issuance of any shares of that class or series. Preferred Stock, or any
series thereof, may have rights which are identical to those of Common Stock.
Subject to compliance with the provisions of any series of Preferred Stock, the
Board is also authorized to increase or decrease the number of shares of any
series of Preferred Stock prior or subsequent to the issue of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
-1-
<PAGE>
2.3. Dividends
The holders of shares of Preferred Stock shall be entitled to receive
dividends, out of the funds of the Company legally available therefor, at the
rate and at the time or times, whether cumulative or noncumulative, as may be
provided by the Board in designating a particular series of Preferred Stock. If
such dividends on the Preferred Stock shall be cumulative, then if dividends
shall not have been paid, the deficiency shall be fully paid or the dividends
declared and set apart for payment at such rate, but without interest on
cumulative dividends, before any dividends on the Common Stock shall be paid or
declared and set apart for payment. Shares of one class or series may be issued
as a share dividend in respect to shares of another class or series.
2.4. Redemption
Preferred Stock may be redeemable at such price, in such amount, and at
such time or times as may be provided by the Board in designating a particular
series of Preferred Stock. In any event, such Preferred Stock may be repurchased
by the Company to the extent legally permissible.
2.5. Liquidation
In the event of any liquidation, dissolution, or winding up of the
affairs of the Company, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the Common Stock, the holders of
the Preferred Stock at the time outstanding shall be entitled to be paid the
preferential amount or amounts per share as may be provided by the Board in
designating a particular series of Preferred Stock and dividends accrued thereon
to the date of such payment. The holders of the Preferred Stock shall not be
entitled to receive any distributive amounts upon the liquidation, dissolution,
or winding up of the affairs of the Company other than the distributive amounts
referred to in this section, unless otherwise provided by the Board in
designating a particular series of Preferred Stock.
2.6. Conversion
Shares of Preferred Stock may be convertible into Common Stock of the
Company upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board in designating a particular series
of Preferred Stock.
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<PAGE>
2.7. Voting Rights
Holders of Preferred Stock shall have such voting rights as may be
provided by the Board in designating a particular series of Preferred Stock.
3. Preemptive Rights
The shareholders of the Company have no preemptive rights to acquire
additional shares of the capital stock of the Company.
4. Cumulative Voting
The shareholders of the Company shall not be entitled to cumulative voting
at any election of directors.
5. Directors
5.1. Number; Election; Term
The number of Directors of the Company shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein. Prior to the 2000 annual election of
Directors, unless a Director earlier dies, resigns or is removed, his or her
term of office shall expire at the next annual meeting of shareholders. At the
2000 annual election of Directors, the Board shall be divided into three
classes, with said classes to be as equal in number as may be possible, with any
Director or Directors in excess of the number divisible by three being assigned
to Class 3 and Class 2, as the case may be. At the first election of Directors
to such classified Board, each Class 1 Director shall be elected to serve until
the next ensuing annual meeting of shareholders, each Class 2 Director shall be
elected to serve until the second ensuing annual meeting of shareholders and
each Class 3 Director shall be elected to serve until the third ensuing annual
meeting of shareholders. At each annual meeting of shareholders following the
meeting at which the Board is initially classified, the number of Directors
equal to the number of Directors in the class whose term expires at the time of
such meeting shall be elected to serve until the third ensuing annual meeting of
shareholders. Notwithstanding any of the foregoing provisions of this Article,
Directors shall serve until their successors are elected and qualified or until
their earlier death, resignation or removal from office, or until there is a
decrease in the number of Directors.
The Directors of the Company may be removed only for cause; such
removal shall be in the manner provided by the Bylaws.
-3-
<PAGE>
5.2. Limitation of Director Liability
A director of the Company shall not be personally liable to the Company
or its shareholders for monetary damages for conduct as a director, except for
liability of the director (i) for acts or omissions that involve intentional
misconduct by the director or a knowing violation of law by the director, (ii)
for conduct violating RCW 23B.08.310 of the Washington Business Corporation Act,
or (iii) for any transaction from which the director will personally receive a
benefit in money, property or services to which the director is not legally
entitled. If the Washington Business Corporation Act is amended in the future to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Company shall be
eliminated or limited to the full extent permitted by the Washington Business
Corporation Act, as so amended, without any requirement of further action by the
shareholders.
6. Indemnification
The Company shall indemnify any individual made a party to a proceeding
because that individual is or was a director of the Company and shall advance or
reimburse the reasonable expenses incurred by such individual in advance of
final disposition of the proceeding, without regard to the limitations in RCW
23B.08.510 through 23B.08.550 of the Washington Business Corporation Act, or any
other limitation which may hereafter be enacted to the extent such limitation
may be disregarded if authorized by the Articles of Incorporation, to the full
extent and under all circumstances permitted by applicable law.
7. Special Voting Requirements
7.1. Definitions
For the purposes of this Section 7:
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of the Company or any of its Subsidiaries with any other
corporation or entity; (ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition or encumbrance, whether in one transaction or a
series of transactions, by the Company or any of its Subsidiaries of all or a
substantial part of the Company's assets otherwise than in the usual and regular
course of business; or (iii) any agreement, contract or other arrangement
providing for any of the foregoing transactions.
-4-
<PAGE>
(b) "Continuing Director" means any member of the Board who was a
member of the Board on September 30, 1998 or who is elected to the Board after
September 30, 1998 upon the recommendation of a majority of the Continuing
Directors voting separately and as a subclass of Directors on such
recommendation.
(c) "Subsidiary" means a domestic or foreign corporation, a majority
of the outstanding voting shares of which are owned, directly or indirectly, by
the Company.
7.2. Vote Required for Business Combinations
7.2.1. Supermajority Vote
Except as provided in Subsections 7.2.2 and 7.2.3, the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares entitled to vote thereon and, to the extent, if any, provided by
resolution adopted by the Board authorizing the issuance of a class or series of
Common Stock or Preferred Stock, the affirmative vote of the holders of not less
than two-thirds of the outstanding shares of such class or series, voting as a
separate voting group, shall be required for the adoption or authorization of a
Business Combination.
7.2.2. Majority Vote
Notwithstanding Subsection 7.2.1, if a Business Combination shall
have been approved by a majority of the Continuing Directors, voting separately
and as a subclass of Directors, and if such Business Combination is otherwise
required to be approved by the Company's shareholders pursuant to the provisions
of the Washington Business Corporation Act or of these Restated Articles of
Incorporation other than this Section 7, then the affirmative vote of the
holders of not less than a majority of the outstanding shares entitled to vote
thereon and, to the extent, if any, provided by resolution adopted by the Board
authorizing the issuance of a class or series of Common Stock or Preferred
Stock, the affirmative vote of the holders of not less than a majority of the
outstanding shares of such class or series, voting as a separate voting group,
shall be required for the adoption or authorization of such Business
Combination.
7.2.3. No Shareholder Vote
Notwithstanding Subsection 7.2.1 or 7.2.2, if a Business
Combination shall have been approved by a majority of the Continuing Directors,
voting separately and as a subclass of Directors, and if such Business
Combination is not otherwise required to be approved by the Company's
shareholders pursuant to the provisions of
-5-
<PAGE>
the Washington Business Corporation Act or of these Restated Articles of
Incorporation other than this Section 7, then no vote of the shareholders of the
Company shall be required for approval of such Business Combination.
8. Special Meetings of Shareholders
The Chairman of the Board, the President or the Board may call special
meetings of the shareholders for any purpose. Further, a special meeting of the
shareholders shall be held if the holders of not less than twenty-five percent
(25%) of all the votes entitled to be cast on any issue proposed to be
considered at such special meeting have dated, signed and delivered to the
Secretary of the Company no later than 20 days prior to the date of such meeting
one or more written demands for such meeting, describing the purpose or purposes
for which it is to be held.
9. Amendments to Restated Articles of Incorporation
The Company reserves, and the rights of the shareholders of the Company are
granted subject to, the right to amend or repeal any of the provisions contained
in these Restated Articles of Incorporation. The provisions contained in these
Restated Articles shall only be amended as follows:
9.1. Supermajority Voting
Except as provided in Section 9.2 or Section 9.3, the following
Sections and Subsections may be amended or repealed only upon the affirmative
vote of the holders of at least two-thirds of the outstanding shares and, to the
extent, if any, provided by resolution adopted by the Board authorizing the
issuance of a class or series of Common Stock or Preferred Stock, by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of such class or series, voting as a separate voting group:
Section 2.1 ("Shares--Authorized Capital")
Section 2.2 ("Shares--Issuance of Preferred Stock in Series")
Section 3 ("Preemptive Rights")
Section 4 ("Cumulative Voting")
Section 5 ("Directors")
Section 7 ("Special Voting Requirements")
-6-
<PAGE>
Section 8 ("Special Meetings of Shareholders")
Section 9 ("Amendments to Restated Articles of Incorporation").
9.2. Majority Voting
Notwithstanding the provisions of Section 9.1, and except as provided
in Section 9.3, an amendment or repeal of a Section identified in Section 9.1
that is approved by a majority of the Continuing Directors (as defined in
Section 7.1), voting separately and as a subclass of Directors, shall require
the affirmative vote of the holders of at least a majority of the outstanding
shares entitled to vote thereon and, to the extent, if any, provided by
resolution adopted by the Board authorizing the issuance of a class or series of
Common Stock or Preferred Stock, by the affirmative vote of the holders of at
least a majority of the outstanding shares of such class or series, voting as a
separate voting group.
9.3. No Shareholder Vote
Notwithstanding the provisions of Section 9.1 or 9.2 hereof, if the
amendment or repeal of any Section not identified in Section 9.1 shall have been
approved by a majority of the Continuing Directors, voting separately and as a
subclass of Directors, and if such amendment or repeal is not otherwise required
to be approved by the Company's shareholders pursuant to the provisions of the
Washington Business Corporation Act or of these Restated Articles of
Incorporation other than this Section 9, then no vote of the shareholders of the
Company shall be required for approval of such amendment or repeal.
Any repeal or modification of this Article by the shareholders of the
Company shall not adversely affect any right of any individual who is or was a
director of the Company which existed at the time of such repeal or
modification.
-7-
<PAGE>
EXECUTED this 4th day of May, 1999.
ONYX SOFTWARE CORPORATION
By /s/ Sarwat H. Ramadan
----------------------------
Sarwat H. Ramadan
Vice President, Chief Financial
Officer, Secretary and Treasurer
-8-
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