<PAGE>
As filed with the Securities and Exchange Commission on February 8, 1999
Registration 333-68559
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ONYX SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
Washington 7372 91-1629814
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Identification Number)
incorporation or Number)
organization)
310 - 120th Avenue N.E.
Bellevue, Washington 98005
(425) 451-8060
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Brent R. Frei
President, Chief Executive Officer and Chairman of the Board
ONYX Software Corporation
310 - 120th Avenue N.E.
Bellevue, Washington 98005
(425) 451-8060
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Gregory Gorder Mark A. Bertelsen
Alan C. Smith Jose F. Macias
Geoffrey R. Entress S. Dawn Smith
Perkins Coie LLP Wilson Sonsini Goodrich & Rosati
1201 Third Avenue, 40th Floor Professional Corporation
Seattle, Washington 98101-3099 650 Page Mill Road
(206) 583-8888 Palo Alto, California 94304-1050
(650) 493-9300
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We +
+cannot sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 8, 1999
3,100,000 Shares
[LOGO OF ONYX SOFTWARE]
Common Stock
--------
Prior to this offering, there has been no public market for the common stock.
The initial public offering price is expected to be between $9.00 and $11.00
per share. The common stock has been approved for listing on the Nasdaq
National Market under the symbol "ONXS," subject to official notice of
issuance.
We have granted the underwriters a 30-day option to purchase a maximum of
465,000 additional shares to cover over-allotments of shares.
Investing in the common stock involves certain risks. See "Risk Factors"
starting on page 5.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds
Public Commissions to ONYX
-------- ------------- --------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total........................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 1999,
against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
SG Cowen
Piper Jaffray Inc.
Prospectus dated , 1999
<PAGE>
[ARTWORK APPEARS HERE]
[THE COMPANY'S LOGO AND A GRAPHIC REPRESENTING THE ONYX ENTERPRISE
RELATIONSHIP MANAGEMENT SOLUTION ACCOMPANIED BY THE FOLLOWING TEXT:
"ONYX Software builds enterprise relationship management solutions for
organizations competing in today's business environment. Specifically the ONYX
solution:
. Integrates functional departments of an enterprise around common
relationships
. Deploys rapidly throughout the entire enterprise
. Yields lower total cost of ownership
. Employs latest generation technologies including the Windows NT and
Microsoft BackOffice platforms and Internet Technologies."]
[PICTURES OF A SCREEN FROM ONYX CUSTOMER CENTER ACCOMPANIED BY THE FOLLOWING
TEXT:
"Solutions for Progressive Organizations."
"ONYX enables communication and collaboration across the organization through
a consistent, easy-to-use interface that is accessible through the Internet,
corporate intranets and extranets."]
[GRAPHIC REPRESENTING THE IMPORTANCE OF BUSINESS INFORMATION ACCOMPANIED BY
THE FOLLOWING TEXT:
"GAIN PERSPECTIVE--AND UNDERSTANDING Having a single repository of marketing,
sales and service information allows the ONYX solution to provide a real-time
view of an organization's performance."]
[GRAPHICS DEPICTING THE CUSTOMIZABILITY OF SOFTWARE VERSUS SPEED OF
IMPLEMENTATION ACCOMPANIED BY THE FOLLOWING TEXT:
"THE RIGHT TECHNOLOGY MIX Enterprise relationship management technologies can
vary significantly. The ONYX enterprise relationship management solution
provides out-of-the-box functionality that lowers acquisition, implementation,
consulting and education costs, while allowing customers to tailor the
application to their business methodologies using pre-configured templates."
"WORKING SMARTER--FASTER We have designed the ONYX enterprise relationship
management solution to be rapidly deployable throughout the enterprise, thereby
helping to provide a higher return on investment. On average, customers have
completed initial deployments of ONYX applications in eight to ten weeks."]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................ 3
Risk Factors...................................................... 5
Use of Proceeds................................................... 13
Dividend Policy................................................... 13
Capitalization.................................................... 14
Dilution.......................................................... 15
Selected Consolidated Financial Data.............................. 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 17
Business.......................................................... 29
Management........................................................ 43
Certain Transactions.............................................. 51
Principal Shareholders............................................ 53
Description of Capital Stock...................................... 56
Shares Eligible for Future Sale................................... 59
Underwriting...................................................... 61
Notice to Canadian Residents...................................... 62
Legal Matters..................................................... 63
Experts........................................................... 63
Additional Information............................................ 64
Index to Consolidated Financial Statements........................ F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Until , 1999 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we present more fully in the rest of
this prospectus. The summary is not complete and does not contain all the
information you should consider before buying shares in this offering. You
should read the entire prospectus carefully. Except where we state otherwise,
we present information in this prospectus assuming (1) the conversion of all
outstanding shares of redeemable convertible preferred stock into an aggregate
of 3,533,925 shares of common stock upon the closing of this offering and (2)
no exercise of the underwriters' over-allotment option.
ONYX Software Corporation
ONYX is a leading provider of enterprise relationship management software
solutions. Enterprise relationship management software automates 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.
We believe that in today's challenging and rapidly developing business
environment there is a market opportunity for an enterprise relationship
management system that employs recent technology developments, including
Internet capabilities, to enable enterprises to more effectively acquire,
manage and retain customers, partners and other relationships. This solution
would provide a high return on investment by improving the effectiveness of
sales, marketing and support activities while maintaining a low total cost of
ownership.
Our integrated product family allows enterprises to automate the customer
lifecycle across the entire enterprise, instead of automating only individual
departments. We target mid- to large-sized organizations and divisions of
Fortune 500 companies, marketing and selling our software and services through
a direct sales force, as well as through distributors. We have direct sales
offices in the United States, the United Kingdom, Singapore and Australia and
distributors in Latin America, Asia and Europe. We have licensed our products
to over 350 customers in a variety of industries, including financial services,
high technology, health care, manufacturing and telecommunications. Our
customers include American Express Financial Advisors, Brooklyn Union Gas
Company, Cincinnati Bell Telephone, Datastream Systems Inc., GIGA Information
Group, NTL Internet and Sierra Health Services, Inc.
Our principal executive offices are located at 310 - 120th Avenue N.E.,
Bellevue, Washington 98005 and our telephone number is (425) 451-8060. We were
incorporated in Washington in 1994.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered................ 3,100,000 shares
Common stock to be outstanding after
this offering...................... 16,486,482 shares
Use of proceeds..................... For repayment of short-term indebtedness,
capital equipment purchases, working
capital and other general corporate
purposes
Proposed Nasdaq National Market
symbol............................. ONXS
</TABLE>
Common stock to be outstanding after this offering is based on shares
outstanding on December 31, 1998. It excludes
. 3,218,330 shares of common stock issuable upon exercise of options
outstanding, of which 511,283 shares are exercisable, under our Amended
and Restated 1994 Combined Incentive and Nonqualified Stock Option Plan
at a weighted average exercise price of $1.68 per share,
. 16,200 shares of common stock issuable upon exercise of options
outstanding, of which none are exercisable, under our 1998 Stock
Incentive Compensation Plan at an exercise price of $9.00 per share,
. 1,646,246 shares available for issuance under our 1998 option plan, and
. 500,000 shares available for issuance under our 1998 Employee Stock
Purchase Plan.
Summary Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period From Year Ended
February 23, 1994 December 31,
(Inception) to ------------------------------
December 31, 1994 1995 1996 1997 1998
----------------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues............. $166 $2,198 $9,645 $19,437 $35,110
Income (loss) from
operations................ (35) 801 2,065 (3,746) (6,700)
Net income (loss).......... (15) 523 1,394 (2,544) (6,979)
Pro forma basic and diluted
net loss per share........ $ (0.59)
Shares used in computation
of pro forma basic and
diluted net loss per
share..................... 11,821
</TABLE>
The following table summarizes
. actual consolidated balance sheet data,
. pro forma consolidated balance sheet data, giving effect to conversion
of all 3,433,925 outstanding shares of redeemable convertible preferred
stock into 3,533,925 shares of common stock, and
. pro forma consolidated balance sheet data as adjusted to give effect to
the sale by ONYX of 3,100,000 shares of common stock offered through
this prospectus at an assumed initial public offering price of $10.00
per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
December 31, 1998
------------------------------
Pro Forma
Actual Pro Forma as Adjusted
------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents..................... $ 1,853 $ 1,853 $ 29,933
Working capital............................... 3,861 3,861 31,941
Total assets.................................. 22,490 22,490 50,570
Long-term obligations,
net of current portion....................... 4,486 4,486 4,486
Redeemable convertible preferred stock........ 13,285 -- --
Shareholders' equity (deficit)................ (7,749) 5,536 33,616
</TABLE>
4
<PAGE>
RISK FACTORS
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;
. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results."
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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 fourth quarter
of 1998. As of December 31, 1998, we had an accumulated deficit of $7.6
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
5
<PAGE>
maintain profitability. Our business strategies may not be successful, and we
may not be profitable in any future period. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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. See "Business--Competition."
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 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. See
"Business--Industry Background" and "--Products and Services."
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
6
<PAGE>
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. See
"Business--Sales and Marketing."
We rely on sales of only one product family.
ONYX Customer Center product license revenues accounted for approximately 55%
of our total revenues, or 84% of total license revenues, during fiscal 1998. We
expect product license revenues from the ONYX Customer Center 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
Customer Center 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 Customer Center product
family and developing, introducing and establishing customer acceptance of new
and enhanced versions of the ONYX Customer Center product family. See
"Business--Products and Services."
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. See "Business--Sales and Marketing."
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. See "Management."
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. See "Business--Products and Services."
7
<PAGE>
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. See "Business--Sales and Marketing."
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.
See "Business--Products and Services."
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We depend on service revenues.
Support and service revenues represented 30% of our total revenues for 1996,
32% for 1997 and 35% for 1998. 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.
8
<PAGE>
. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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. and Greyware Automation
Products. 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. See "Business--Products and Services."
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. See "Business-- Legal Proceedings."
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
9
<PAGE>
products until software problems were corrected, and in 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Certain existing shareholders own a large percentage of our voting stock.
Following the closing of this offering, our officers, directors and
affiliated entities together will beneficially own approximately 62% of the
outstanding shares of our common stock (61% if the underwriters' over-allotment
option is exercised in full). As a result, these shareholders will be able to
control all matters requiring shareholder approval and, thereby, our management
and affairs. Matters that typically require shareholder approval include:
. election of directors;
. merger or consolidation; and
. sale of all or substantially all our assets.
This concentration of ownership may delay, deter or prevent acts that would
result in a change of control, which in turn could reduce the market price of
our common stock. See "Principal Shareholders."
Our articles of incorporation and bylaws and Washington law contain provisions
that could discourage a takeover.
Certain provisions of our articles of incorporation and our bylaws and
Washington law could make it more difficult for a third party to obtain control
of ONYX. See "Description of Capital Stock."
Future sales of our common stock may depress our stock price.
After this offering, we will have outstanding 16,486,482 shares of common
stock. Sales of a substantial number of shares of common stock in the public
market following this offering could materially adversely affect the market
price of our common stock. All the shares sold in this offering will be freely
tradable. The remaining shares of common stock outstanding after this offering
will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number
Date of Availability for Sale of Shares
----------------------------- ---------
<S> <C>
, 1999 (90 days after the date of this prospectus) 49,940
, 1999 (180 days after the date of this prospectus) 13,094,314
At various times thereafter upon the expiration of one-year
holding periods 242,228
----------
13,386,482
==========
</TABLE>
See "Shares Eligible for Future Sale" and "Underwriting."
10
<PAGE>
Year 2000 remediation may involve significant time and expense and may reduce
our future sales.
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. Year 2000 compliance efforts may involve significant time and
expense, and uncorrected problems could materially adversely affect our
business, financial condition and operating results. Although we believe the
current versions of our software products are Year 2000 compliant, we may face
claims based on Year 2000 issues arising from the integration of multiple
products within an overall system. We may also experience reduced sales of our
products as potential customers reduce their budgets for enterprise
relationship management software due to increased expenditures on their own
Year 2000 compliance efforts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance."
Remediation of problems related to the European monetary conversion may involve
significant time and expense and may reduce our future sales.
We are aware of the issues associated with the forthcoming changes in Europe
aimed at forming a European economic and monetary union. One of the changes
resulting from this union required member countries to irrevocably fix their
respective currencies to a new currency, the Euro, on January 1, 1999, at which
date the Euro became a functional legal currency of these countries. During the
next three years, business in member countries will be conducted in both the
existing national currency, such as the French Franc or the Deutsche Mark, and
the Euro. As a result, companies operating in or conducting business in member
countries will need to ensure that their financial and other software systems
are capable of processing transactions and properly handling these currencies,
including the Euro.
We are still assessing the impact the conversion to the Euro will have on
both our internal systems and the products we sell. We will take appropriate
corrective actions based on the results of such assessment. We have not yet
determined the cost related to addressing this issue. This issue and its
related costs could materially adversely affect our business, financial
condition and operating results.
Changes in accounting standards could affect the calculation of our future
operating results.
We recognize revenues from software license agreements upon delivery of our
software products if
. persuasive evidence of an arrangement exists;
. collection is probable;
. the fee is fixed or determinable; and
. vendor-specific objective evidence exists to allocate the total fee to
all elements of the arrangement.
We recognize customer support (maintenance) revenues ratably over the
contract term--typically one year--and recognize revenues for consulting and
training services as such services are performed.
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. Based on our interpretation of Statement of Position
97-2 and Statement of Position 98-4, we believe our current revenue recognition
policies and practices are consistent with Statement of Position 97-2 and
Statement of Position 98-4. The American Institute of Certified Public
Accountants has also issued Statement of Position 98-9 which is effective for
us for transactions entered into beginning January 1, 2000. However, full
implementation guidelines for this standard have not yet been issued. Once
available, such implementation guidelines could lead to unanticipated changes
in our current revenue accounting practices, which changes could materially
adversely affect our business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
11
<PAGE>
Additionally, the accounting standard setters, including the Securities and
Exchange Commission and the Financial Accounting Standards Board are reviewing
the accounting standards related to business combinations and stock-based
compensation. Any changes to either of these standards or any other accounting
standards could materially adversely affect our business, financial condition
and operating results.
You should not unduly rely on forward-looking statements.
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate," "believes," "expects,"
"future" and "intends," and similar expressions, to identify forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks described above and elsewhere
in this prospectus.
12
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $28.1 million in net proceeds from the
sale of the 3,100,000 shares of common stock in this offering, assuming an
initial public offering price of $10.00 per share (approximately $32.4 million
if the underwriters' over-allotment option is exercised in full).
We intend to use the net proceeds of this offering primarily for additional
working capital, repayment of short-term indebtedness, capital equipment
purchases and other 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 our business. Specifically, we plan to use a portion of the net proceeds to
repay the outstanding balance on our working capital revolving line of credit
with Silicon Valley Bank. As of December 31, 1998, we had borrowed $3.9 million
under this facility. The working capital revolving line of credit bears
interest at Silicon Valley Bank's prime rate, which was 7.75% as of
December 31, 1998. In addition, we plan to use approximately $2.3 million of
the net proceeds for capital equipment purchases associated with our planned
relocation of our principal administrative, sales, marketing, support and
research and development facilities in July 1999. We plan to use the remainder
of the net proceeds for working capital and general corporate purposes. We may
also use a portion of the net proceeds to acquire additional businesses,
products and technologies or to establish joint ventures that we believe will
complement our current or future business. However, we have no specific oral or
written plans, agreements or commitments to do so, and are not currently
negotiating any such acquisition or joint venture. The amounts that we actually
expend for working capital purposes will vary significantly depending on a
number of factors, including future revenue growth, if any, the amount of cash
we generate from operations and the progress of our product development
efforts. As a result, we will retain broad discretion in allocating the net
proceeds of this offering. Pending the uses described above, we will invest the
net proceeds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend to
retain any future earnings to fund the development and growth of our business.
Therefore, we do not currently anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of our current credit facility
prohibit us from paying dividends without our lender's consent.
13
<PAGE>
CAPITALIZATION
The following table sets forth (1) our actual capitalization as of December
31, 1998, (2) pro forma capitalization after giving effect to the conversion of
all 3,433,925 outstanding shares of redeemable convertible preferred stock into
3,533,925 shares of common stock, and (3) the pro forma capitalization as
adjusted to give effect to the sale of 3,100,000 shares of common stock at an
assumed initial public offering price of $10.00 per share (less estimated
underwriting discounts and commissions and estimated expenses we expect to pay
in connection with this offering). You should read this table in conjunction
with our Consolidated Financial Statements and the Notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------
Pro Forma
Actual Pro Forma as Adjusted
--------------- ---------------- ------------------
(In thousands, except share and per share data)
<S> <C> <C> <C>
Long-term obligations,
net of current
portion................ $ 4,486 $ 4,486 $ 4,486
Redeemable convertible
preferred stock, $0.01
par value per share;
10,000,000 shares
authorized: 3,433,925
shares issued and
outstanding, actual; no
shares issued and
outstanding, pro forma
and pro forma as
adjusted............... 13,285 -- --
Shareholders' equity
(deficit):
Preferred stock, $0.01
par value per share;
10,000,000 shares
authorized; none pro
forma or pro forma as
adjusted............. -- -- --
Common stock, $0.01
par value per share;
40,000,000 shares
authorized; 9,852,557
shares issued and
outstanding, actual;
13,386,482 shares
issued and
outstanding, pro
forma; 16,486,482
shares issued and
outstanding, pro
forma as
adjusted(1).......... 1,912 15,197 43,277
Notes receivable from
officers for common
stock................ (212) (212) (212)
Deferred stock-based
compensation......... (1,785) (1,785) (1,785)
Accumulated deficit... (7,621) (7,621) (7,621)
Accumulated other
comprehensive loss... (43) (43) (43)
--------------- --------------- ---------------
Total shareholders'
equity (deficit)... (7,749) 5,536 33,616
--------------- --------------- ---------------
Total
capitalization..... $ 10,022 $ 10,022 $ 38,102
=============== =============== ===============
</TABLE>
- --------
(1) Excludes (1) 3,218,330 shares of common stock issuable upon exercise of
options outstanding under our 1994 option plan, of which 511,283 shares
are exercisable, at a weighted average exercise price of $1.68 per share,
and 16,200 shares of common stock issuable upon exercise of options
outstanding under our 1998 option plan, of which none are exercisable, at
an exercise price of $9.00 per share, (2) 1,646,246 shares available for
future issuance under our 1998 option plan, and (3) 500,000 shares
available for issuance under our employee stock purchase plan.
14
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less intangible
assets and total liabilities) by the number of outstanding shares of common
stock.
The pro forma net tangible book value of ONYX at December 31, 1998, after
giving effect to the automatic conversion of all outstanding shares of
redeemable convertible preferred stock into 3,533,925 shares of common stock
upon the closing of this offering was $1,678,000, or $0.12 per share of common
stock. After giving effect to the sale of the 3,100,000 shares of common stock
at an assumed initial public offering price of $10.00 per share (less estimated
underwriting discounts and commissions and estimated expenses we expect to pay
in connection with this offering), the pro forma as adjusted net tangible book
value of ONYX at December 31, 1998 would be $29,758,000, or $1.80 per share.
This represents an immediate increase in the as adjusted pro forma net tangible
book value of $1.68 per share to existing shareholders and an immediate
dilution of $8.20 per share to new investors, or approximately 82.0% of the
assumed offering price of $10.00 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $10.00
Pro forma net tangible book value per share at December 31,
1998......................................................... $0.12
Increase per share attributable to new investors.............. 1.68
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................ 1.80
------
Dilution per share to new investors........................... $ 8.20
======
</TABLE>
The following table shows on a pro forma as adjusted basis at December 31,
1998, after giving effect to the automatic conversion of all outstanding shares
of preferred stock into an aggregate of 3,533,925 shares of common stock upon
the closing of this offering, the number of shares of common stock purchased
from us, the total consideration paid to us and the average price paid per
share by existing shareholders and by new investors purchasing common stock in
this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 13,386,482 81.2% $12,672,000 29.0% $ 0.95
New investors............... 3,100,000 18.8 31,000,000 71.0 10.00
---------- ----- ----------- -----
Total..................... 16,486,482 100.0% $43,672,000 100.0%
========== ===== =========== =====
</TABLE>
At December 31, 1998, we had outstanding options to purchase shares of common
stock as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
--------- --------
<S> <C> <C>
1994 option plan...................................... 3,218,330 $1.68
1998 option plan...................................... 16,200 $9.00
---------
Total................................................. 3,234,530 $1.72
=========
</TABLE>
Additionally, there were 1,646,246 options available for future grant under our
1998 option plan and 500,000 shares available for issuance under our 1998
Employee Stock Purchase Plan. To the extent the option holders exercise these
outstanding options, or any options we grant in the future, there will be
further dilution to new investors.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data and other operating
information are derived from our consolidated financial statements, which have
been audited by Ernst & Young LLP, independent auditors. When you read this
selected consolidated financial data, it is important that you also read the
historical consolidated financial statements and related notes included in this
prospectus, as well as the section of this prospectus related to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
Period From Year Ended
February 23,1994 December 31,
(Inception) to ------------------------------
December 31,1994 1995 1996 1997 1998
---------------- ------ ------ ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License.................. $ 115 $1,665 $6,797 $13,191 $22,811
Service.................. 51 533 2,848 6,246 12,299
----- ------ ------ ------- -------
Total revenues.......... 166 2,198 9,645 19,437 35,110
Cost of revenues:
License.................. 2 10 52 250 1,127
Service.................. 52 300 2,062 5,022 7,927
----- ------ ------ ------- -------
Total cost of revenues.. 54 310 2,114 5,272 9,054
----- ------ ------ ------- -------
Gross margin............. 112 1,888 7,531 14,165 26,056
Operating expenses:
Sales and marketing...... 35 583 3,187 11,026 19,656
Research and
development............. 86 255 1,170 4,729 8,964
General and
administrative.......... 26 249 1,109 2,156 4,136
----- ------ ------ ------- -------
Total operating
expenses............... 147 1,087 5,466 17,911 32,756
----- ------ ------ ------- -------
Income (loss) from
operations.............. (35) 801 2,065 (3,746) (6,700)
Interest income, net..... 2 10 118 314 61
----- ------ ------ ------- -------
Income (loss) before
income taxes............ (33) 811 2,183 (3,432) (6,639)
Income tax provision
(benefit)............... (18) 288 789 (888) 340
----- ------ ------ ------- -------
Net income (loss)........ $ (15) $ 523 $1,394 $(2,544) $(6,979)
===== ====== ====== ======= =======
Pro forma basic and
diluted net loss per
share(1)................ $ (0.59)
Shares used in
computation of pro forma
basic and diluted net
loss per share(1)....... 11,821
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, 1998
-------------------------- ---------------------
1994 1995 1996 1997 Actual Pro Forma(2)
---- ------ ------ ------- ------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents........... $ 90 $ 377 $1,356 $ 3,512 $ 1,853 $ 1,853
Working capital........ 136 391 4,288 9,307 3,861 3,861
Total assets........... 221 1,200 8,004 15,952 22,490 22,490
Long-term obligations,
net of current
portion............... -- -- 356 155 4,486 4,486
Redeemable convertible
preferred stock....... -- -- 3,202 12,070 13,285 --
Shareholders' equity
(deficit)............. 185 708 1,878 (1,552) (7,749) 5,536
</TABLE>
- --------
(1) See Notes 1 and 8 of Notes to Consolidated Financial Statements for an
explanation of the method used to calculate pro forma basic and diluted
income (loss) per share.
(2) Adjusted to reflect the conversion of 3,433,925 outstanding shares of
redeemable convertible preferred stock into 3,533,925 shares of common
stock.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of this prospectus includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipate," "believes,"
"expects," "future" and "intends," and similar expressions, to identify
forward-looking statements. You should not unduly rely on these forward-looking
statements, which apply only as of the date of this prospectus. These forward-
looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical results or our
predictions. For a description of these risks, see "Risk Factors."
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. 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 year of operation, we
focused primarily on research and development activities. From early 1995
through mid-1996, we began to recruit personnel, purchase operating assets,
market our products, build a direct sales force and expand our service
business. Our revenues totaled $2.2 million in 1995 and $9.6 million in 1996.
Of these total revenues, ONYX Customer Center product license revenues
represented 76% in 1995 and 65% in 1996. We generated net income of $523,000 in
1995 and $1.4 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 development, marketing, domestic and
international sales channels, professional services and our general and
administrative infrastructure. Since June 30, 1996, we have
. added more than 200 employees;
. opened 13 domestic field sales offices;
. entered the European and Pacific markets by opening direct sales offices
in the United Kingdom, Australia and Singapore;
. released localized versions of ONYX Customer Center in German and
Spanish;
. established distributor relationships with 11 international resellers;
. released three major upgrades to our flagship product;
. released four Internet-based products; and
. acquired a leading marketing encyclopedia software developer, EnCyc, Inc.
We believe these investments have been critical to our growth. Our revenues
were $19.4 million in 1997, representing an increase of 102% from 1996. ONYX
Customer Center product license revenues accounted for approximately 61% of our
total revenues in 1997. During 1998, our revenues were $35.1 million,
representing an increase of 81% from 1997. ONYX Customer Center product license
revenues represented 55% of our total revenues 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 December 31, 1998, we had an accumulated
deficit of $7.6 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. As a result, we expect to be operating
cash flow positive within the next two years.
17
<PAGE>
ONYX's Source of Revenues and Revenue Recognition Policy
We generate revenues from sales of software licenses and services. We receive
software license revenues from licensing our products directly to end-users and
indirectly through resellers. To a lesser extent, we receive software license
revenues from third-party products that we distribute. We receive service
revenues from sales of post-contract support, consulting and training services
that we perform for customers that license our products either directly from us
or indirectly through resellers.
We recognize revenues from software license agreements upon delivery of our
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.
Multiple-element arrangements could consist of software products, upgrades,
enhancements, customer support services or consulting services. If an
acceptance period is required, we recognize revenues upon the earlier of
customer acceptance or the expiration of the acceptance period. We enter into
reseller arrangements that typically provide for sublicense fees payable to us
based on a percentage of our list price. We recognize sublicense fees as they
are reported by the reseller when it relicenses our products to end-users.
We recognize revenues from customer support services ratably over the term of
the contract, typically one year. We derive consulting revenues primarily from
implementation services performed on a time-and-materials basis under separate
service arrangements related to the installation of our software products. We
recognize revenues from consulting and training services as these services are
performed. If a transaction includes both license and service elements, we
recognize license fee revenue on 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 on the acceptance of services, we
defer recognition of revenues from both the license and the service elements
until the acceptance criteria are met.
We believe that our current revenue recognition policies and practices are
materially consistent with the revenue recognition rules released by the
American Institute of Certified Public Accountants in October 1997 and in early
1998. However, full implementation guidelines for these rules have not yet been
issued.
ONYX's Recent Acquisition of EnCyc
In September 1998, we acquired EnCyc, a marketing encyclopedia software
developer founded in August 1995. In exchange for all of EnCyc's outstanding
shares, we issued 233,333 shares of our common stock, paid $500,000 to EnCyc
shareholders and liquidated $250,000 of EnCyc's existing long-term debt. In
addition, we issued options to EnCyc employees to purchase up to 75,000 shares
of our common stock at an exercise price of $5.00 per share. For accounting
purposes, these options have been treated as part of the purchase price,
resulting in a total purchase price of $2.4 million, including direct costs of
the acquisition. In determining the purchase price, we estimated the fair value
of our common stock and stock options issued in the transaction. We accounted
for the acquisition under the purchase method of accounting. We have included
EnCyc's results of operations and the fair value of the assets acquired and
liabilities assumed in our Consolidated Financial Statements beginning on the
acquisition date. We recorded capitalized technology and other intangible
assets of $2.3 million, which will be amortized on a straight-line basis over
the five-year period following the acquisition. This period represents the
expected life of the intangible assets that we acquired. Other net assets
acquired aggregated $103,000 and consisted primarily of accounts receivable.
ONYX's Results of Operations
We believe that period-to-period comparisons of our operating results are not
meaningful. You should not rely on them to predict our future performance. You
should consider our prospects in light of the risks, expenses and difficulties
frequently encountered by early stage companies, particularly companies in new
and
18
<PAGE>
rapidly evolving markets. However, we may not be able to successfully address
such risks and difficulties. In addition, although we have experienced
significant revenue growth recently, such revenue growth may not continue, and
we may not achieve or maintain profitability in the future. Our future
operating results will depend on many factors, including
. demand for our products and services;
. product and price competition;
. variability in the mix of our license and service revenues;
. variability in the mix of our direct versus indirect license revenues;
. variability in the mix of services that we perform versus those
performed by third-party service providers;
. success in expanding our direct sales force, indirect distribution
channels and consulting organization;
. our ability to develop and market new and enhanced products on a timely
basis;
. timing of our new product introductions and product enhancements or
those of our competitors;
. continued purchases by our existing customers, including additional
license and maintenance revenues;
. international sales and strategic acquisitions; and
. the loss of any key employees and timing of our new hires.
The following table presents certain financial data as a percentage of total
revenues:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
License................................................ 70.5% 67.9 % 65.0 %
Service................................................ 29.5 32.1 35.0
----- ----- -----
Total revenues........................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
License................................................ 0.5 1.3 3.2
Service................................................ 21.4 25.8 22.6
----- ----- -----
Total cost of revenues................................ 21.9 27.1 25.8
----- ----- -----
Gross margin............................................ 78.1 72.9 74.2
Operating expenses:
Sales and marketing.................................... 33.0 56.7 56.0
Research and development............................... 12.1 24.3 25.5
General and administrative............................. 11.5 11.2 11.8
----- ----- -----
Total operating expenses.............................. 56.6 92.2 93.3
----- ----- -----
Income (loss) from operations........................... 21.5 (19.3) (19.1)
Interest income, net.................................... 1.2 1.6 0.2
----- ----- -----
Income (loss) before income taxes....................... 22.7 (17.7) (18.9)
Income tax provision (benefit).......................... 8.2 (4.6) 1.0
----- ----- -----
Net income (loss)....................................... 14.5% (13.1)% (19.9)%
===== ===== =====
</TABLE>
19
<PAGE>
Years Ended December 31, 1997 and 1998
Revenues
Total revenues, which consist of software license and service revenues,
increased 81%, from $19.4 million in 1997 to $35.1 million in 1998. No single
customer accounted for more than 10% of our revenues in 1997 or 1998.
Our license revenues increased 73%, from $13.2 million in 1997 to $22.8
million in 1998. Of the increase, $5.6 million was due to increased sales to
new customers and $4.0 million was due to increased follow-on sales to existing
customers.
Our service revenues increased 97%, from $6.2 million in 1997 to $12.3
million in 1998. Of the increase, $3.4 million was due to increases in
maintenance and support revenues and $2.7 million was due to increases in
consulting and training services. The increase in service revenues reflects an
increase in our software application sales and the overall growth of our
installed base of customers during these periods. Service revenues represented
32% of our total revenues in 1997 and 35% in 1998. 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 consulting and implementation
service providers and the ongoing renewals of customer support contracts.
Revenues outside of North America totaled $1.2 million in 1997 and $5.2
million in 1998. The increase in international revenues resulted from our
investment in direct and indirect sales channels, primarily in Europe,
Australia and Singapore, over the period. Revenues from indirect sales channels
totaled $103,000 in 1997 and $1.3 million in 1998. The increase in our indirect
revenues resulted primarily from the increased volume of business generated by
our international resellers, the majority of which were added in mid-1997.
We do not believe that we can sustain the 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 351%, from $250,000 in 1997 to $1.1 million in 1998. Cost of license
revenues as a percentage of related license revenues was 2% in 1997 and 5% in
1998. 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 58%, from $5.0 million in 1997 to $7.9
million in 1998. The increase in dollar amount resulted primarily from hiring
and training consulting, support and training personnel to support our growing
customer base. Included in cost of service revenues in 1998 is $118,000 in
amortization of deferred stock compensation. Cost of service revenues as a
percentage of related service revenues was 80% in 1997 and 64% in 1998. 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.
20
<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 78%, from $11.0 million in 1997 to $19.7
million in 1998. The increase in dollar amount was attributable to the
expansion of our worldwide sales and marketing organization, including $4.0
million in increased salaries and benefits for the addition of field sales and
marketing personnel and salary increases for existing personnel, $1.4 million
for higher sales commissions and bonuses associated with increased revenues,
$1.2 million in increased marketing and promotional activities, $900,000 in
increased travel activities, and $800,000 in additional facility and
communication costs associated with opening and expanding field sales offices
domestically and internationally. The remaining $400,000 increase is the result
of increased lead referral fees and other selling expenses. Included in sales
and marketing expenses in 1998 is $238,000 in amortization of deferred stock
compensation. Sales and marketing expenses represented 57% of our total
revenues in 1997 and 56% in 1998. The decrease in sales and marketing expenses
as a percentage of total revenues reflects primarily the more rapid growth in
our revenues compared to the growth of sales and marketing expenses due to
maturing direct and indirect sales channels, as well as increased service
revenues as a percentage of total revenues. 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 90%, from $4.7 million in 1997 to $9.0
million in 1998. Of the increase, $2.9 million was due to an increase in the
number of development personnel and salary increases for existing personnel and
$1.4 million was due to an increase in the use of outside contractors to
support our product development and testing activities. Included in research
and development expenses in 1998 is $73,000 in amortization of deferred stock
compensation. Research and development costs represented 24% of our total
revenues in 1997 and 26% in 1998. The increase in research and development
expenses as a percentage of total revenues reflects primarily the more rapid
investment in our research and development activities compared to the growth of
our revenues in this period. 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 92%, from $2.2 million in 1997 to $4.1 million in 1998. Of
the increase, $900,000 was due to the addition of finance, executive and
administrative personnel to support the growth of our business and salary
increases for existing personnel and $300,000 was due to an increase in our
allowance for doubtful accounts associated with the growth in our revenues. The
remaining $700,000 increase is the result of an increase in professional
services fees and other administrative expenses. Included in general and
administrative expenses in 1998 is $154,000 in amortization of deferred stock
compensation. General and administrative costs represented 11% of our total
revenues in 1997 and 12% in 1998. We believe our general and administrative
expenses will continue to increase as we expand our administrative staff,
domestically and internationally, and incur expenses associated with becoming 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.
21
<PAGE>
Deferred compensation
We recorded deferred compensation of $2.2 million in 1998, representing the
difference between the exercise prices of options granted to acquire shares of
common stock during 1998 and the deemed fair value for financial reporting
purposes of our common stock on the grant dates. We amortized deferred
compensation expense of $583,000 during 1998. Deferred compensation is
amortized over the vesting periods of the options. Amortization of the deferred
stock-based compensation balance of $1.8 million at December 31, 1998 will
approximate $882,000, $489,000, $270,000 and $144,000 for the fiscal years
ending December 31, 1999, 2000, 2001 and 2002, respectively.
Interest income, net
Interest income, net consists of earnings on our cash and cash equivalent and
short-term investment balances offset by interest expense associated with debt
obligations. Interest income, net was $314,000 in 1997 and $61,000 in 1998. The
decrease resulted primarily from a reduction in interest income resulting from
lower average cash and cash equivalent and short-term investment balances over
the period.
Income taxes
As a result of our net operating loss in 1997 and prior years' profitability,
we realized a tax benefit of $888,000 in 1997. We recorded an income tax
provision of $340,000 in 1998 in connection with our foreign operations. We
made no provision or benefit for federal or state income taxes in 1998 due to
the operating losses incurred in the period. As of December 31, 1998, we had
net operating loss carryforwards for tax reporting purposes of approximately
$7.0 million, which begin to expire in 2017. In addition, as of December 31,
1998, we had tax credit carryforwards of approximately $520,000, which begin to
expire in 2017. The Internal Revenue Code limits the use in any future period
of net operating loss and credit carryforwards upon the occurrence of certain
events, including a significant change in ownership interests. We had net
deferred tax assets, including net operating loss carryforwards and tax
credits, totaling approximately $2.5 million as of December 31, 1998. We have
recorded a valuation allowance for the entire deferred tax asset as a result of
uncertainties regarding the realization of the asset balance. See Note 9 of
Notes to Consolidated Financial Statements.
Years Ended December 31, 1996 and 1997
Revenues
Total revenues increased 102%, from $9.6 million in 1996 to $19.4 million in
1997. No single customer accounted for more than 10% of our revenues in 1996 or
1997.
Our license revenues increased 94%, from $6.8 million in 1996 to $13.2
million in 1997. Of the increase, $4.3 million was due to increased sales to
new customers and $2.1 million was due to increased follow-on sales to existing
customers. The increase in sales to new and existing customers during this
period was attributable in part to the introduction of products complementary
to our core product, including the initial release of ONYX Customer Center-
Unplugged at the end of the third quarter of 1996.
Our service revenues increased 119%, from $2.8 million in 1996 to $6.2
million in 1997. Of the increase, $1.9 million was due to increases in
consulting and training services and $1.5 million was due to increases in
maintenance and support revenues. The increase in service revenues reflects an
increase in our software application sales and the overall growth of our
installed base of customers during these periods. Service revenues represented
30% of our total revenues in 1996 and 32% in 1997.
Revenues outside of North America totaled $348,000 in 1996 and $1.2 million
in 1997. The increase in international revenues resulted from our investment in
direct and indirect sales channels, primarily in Europe, Australia and
Singapore, over the period. During these periods, revenues from indirect sales
channels were insignificant.
22
<PAGE>
Cost of Revenues
Cost of license revenues
Cost of license revenues increased 381%, from $52,000 in 1996 to $250,000 in
1997. Cost of license revenues as a percentage of related license revenues was
1% in 1996 and 2% in 1997. The increase in dollar amount of cost of license
revenues resulted primarily from an increase in the volume of shipments of our
Web Wizards and ONYX Customer Center-Unplugged products, which include third-
party technology. The increase in cost of license revenues as a percentage of
related license revenues resulted primarily from an increase in products we
sold with third-party technology, which contribute significantly lower margins.
Cost of service revenues
Cost of service revenues increased 144%, from $2.1 million in 1996 to $5.0
million in 1997. The increase in dollar amount was the result of $2.1 million
of additional costs associated with hiring and training consulting, support and
training personnel to support our growing customer base and salary increases
for existing personnel and an additional $800,000 of costs associated with
increased use of third-party service providers. Cost of service revenues as a
percentage of related service revenues was 72% in 1996 and 80% in 1997. The
increase in cost of service revenues as a percentage of related service
revenues reflected primarily a higher percentage use of third-party service
providers, which contribute significantly lower margins than internal
resources.
Costs and Expenses
Sales and marketing
Sales and marketing expenses increased 246%, from $3.2 million in 1996 to
$11.0 million in 1997. The increase in dollar amount was attributable to the
expansion of our worldwide sales and marketing organization, including $3.3
million in increased salaries and benefits for the addition of field sales and
marketing personnel and salary increases for existing personnel, $1.1 million
for higher sales commissions and bonuses associated with increased revenues,
$1.1 million in additional facility and communication costs associated with
opening and expanding field sales offices domestically and internationally, and
$800,000 in increased marketing and promotional activities. The remaining $1.5
million increase is the result of increased travel, recruiting fees, and other
selling expenses. Sales and marketing expenses represented 33% of our total
revenues in 1996 and 57% in 1997. The increase in sales and marketing expenses
as a percentage of total revenues reflects primarily the more rapid investment
in our sales and marketing infrastructure compared to the growth of our
revenues.
Research and development
Research and development expenses increased 304%, from $1.2 million in 1996
to $4.7 million in 1997. Of the increase, $1.8 million was due to an increase
in the use of outside contractors to support our product development and
testing activities and $1.7 million was due to an increase in the number of
development personnel and salary increases for existing personnel. Research and
development costs represented 12% of our total revenues in 1996 and 24% in
1997. The increase in research and development expenses as a percentage of
total revenues reflects primarily the more rapid investment in our research and
development activities compared to the growth of our revenues in this period.
General and administrative
General and administrative expenses increased 94%, from $1.1 million in 1996
to $2.2 million in 1997. The increases from 1996 to 1997 resulted primarily
from the addition of finance, executive and administrative personnel to support
the growth of our business during these periods. General and administrative
costs represented 11% of our total revenues in 1996 and 1997.
23
<PAGE>
Deferred compensation
We recorded deferred compensation of approximately $215,000 in 1997,
representing the difference between the exercise prices of options granted to
acquire shares of common stock during 1997 and the deemed fair value for
financial reporting purposes of our common stock on the grant dates. Deferred
compensation is amortized over the vesting periods of the options.
Interest income, net
Interest income, net was $118,000 in 1996 and $314,000 in 1997. The increase
resulted primarily from an increase in interest income resulting from higher
average cash and cash equivalent and short-term investment balances over the
period.
Income taxes
Our provision for federal, state and foreign income taxes was $789,000 for
1996, yielding an effective rate of 36% in 1996. As a result of our net
operating loss in 1997 and prior years' profitability, we realized a tax
benefit of $888,000 in 1997. See Note 9 of Notes to Consolidated Financial
Statements.
Quarterly Results of Operations
The following table presents our unaudited quarterly results of operations
for 1997 and 1998. You should read the following table in conjunction with our
Consolidated Financial Statements and related Notes thereto included elsewhere
in this prospectus. We have prepared this unaudited information on the same
basis as the audited Consolidated Financial Statements. This table includes all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for the quarters presented. You should not draw any conclusions about
our future results from the results of operations for any quarter.
24
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License................ $2,160 $3,096 $ 3,152 $ 4,783 $ 4,116 $ 5,076 $ 5,961 $ 7,658
Service................ 1,029 1,173 1,667 2,377 2,839 2,929 3,083 3,448
------ ------ ------- ------- ------- ------- ------- -------
Total revenues........ 3,189 4,269 4,819 7,160 6,955 8,005 9,044 11,106
------ ------ ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 24 24 42 160 93 240 274 520
Service................ 700 1,049 1,311 1,962 1,972 1,918 2,035 2,002
------ ------ ------- ------- ------- ------- ------- -------
Total cost of
revenues............. 724 1,073 1,353 2,122 2,065 2,158 2,309 2,522
------ ------ ------- ------- ------- ------- ------- -------
Gross margin........... 2,465 3,196 3,466 5,038 4,890 5,847 6,735 8,584
Operating expenses:
Sales and marketing.... 1,614 2,573 3,091 3,748 3,821 4,381 5,491 5,963
Research and
development........... 659 790 1,482 1,798 2,070 2,387 2,274 2,233
General and
administrative........ 381 515 593 667 781 869 1,013 1,473
------ ------ ------- ------- ------- ------- ------- -------
Total operating
expenses............. 2,654 3,878 5,166 6,213 6,672 7,637 8,778 9,669
------ ------ ------- ------- ------- ------- ------- -------
Loss from operations... (189) (682) (1,700) (1,175) (1,782) (1,790) (2,043) (1,085)
Interest income
(expense), net........ 33 103 94 84 40 22 33 (34)
------ ------ ------- ------- ------- ------- ------- -------
Loss before income
taxes................. (156) (579) (1,606) (1,091) (1,742) (1,768) (2,010) (1,119)
Income tax provision
(benefit)............. (40) (150) (416) (282) 62 62 69 147
------ ------ ------- ------- ------- ------- ------- -------
Net loss............... $ (116) $ (429) $(1,190) $ (809) $(1,804) $(1,830) $(2,079) $(1,266)
====== ====== ======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth unaudited quarterly results of operations as a
percentage of revenues for 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
License................ 67.7 % 72.5 % 65.4 % 66.8 % 59.2 % 63.4 % 65.9 % 69.0 %
Service................ 32.3 27.5 34.6 33.2 40.8 36.6 34.1 31.0
----- ----- ----- ----- ----- ----- ----- -----
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License................ 0.8 0.6 0.9 2.2 1.4 3.0 3.0 4.7
Service................ 22.0 24.6 27.2 27.4 28.3 24.0 22.5 18.0
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues............. 22.8 25.2 28.1 29.6 29.7 27.0 25.5 22.7
----- ----- ----- ----- ----- ----- ----- -----
Gross margin........... 77.2 74.8 71.9 70.4 70.3 73.0 74.5 77.3
Operating expenses:
Sales and marketing.... 50.6 60.3 64.1 52.4 54.9 54.7 60.7 53.7
Research and
development........... 20.6 18.5 30.8 25.1 29.8 29.8 25.2 20.1
General and
administrative........ 11.9 12.0 12.3 9.3 11.2 10.9 11.2 13.3
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 83.1 90.8 107.2 86.8 95.9 95.4 97.1 87.1
----- ----- ----- ----- ----- ----- ----- -----
Loss from operations... (5.9) (16.0) (35.3) (16.4) (25.6) (22.4) (22.6) (9.8)
Interest income
(expense), net........ 1.0 2.4 2.0 1.2 0.6 0.3 0.4 (0.3)
----- ----- ----- ----- ----- ----- ----- -----
Loss before income
taxes................. (4.9) (13.6) (33.3) (15.2) (25.0) (22.1) (22.2) (10.1)
Income tax provision
(benefit)............. (1.3) (3.6) (8.6) (3.9) 0.9 0.8 0.8 1.3
----- ----- ----- ----- ----- ----- ----- -----
Net loss............... (3.6)% (10.0)% (24.7)% (11.3)% (25.9)% (22.9)% (23.0)% (11.4)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The trends discussed in the annual comparisons of operating results from 1996
to 1997 and from 1997 to 1998 generally apply to the comparison of results of
operations for the eight quarters in the period ended
25
<PAGE>
December 31, 1998, adjusted for the seasonality we have experienced as referred
to below. Cost of service revenues remained relatively flat in dollar amount
during the four quarters of 1998 due to the declining use of third-party
service providers offset by the hiring of our own service personnel. Research
and development expenses declined in the second half of 1998 due to reduced use
of independent contractors and other outside services used to develop our
products. The significant increase in sales and marketing expenses during the
three months ended September 30, 1998 resulted primarily from increased lead
referral fees made under our agreement with certain international partners. The
increase in general and administrative expenses in the three months ended
December 31, 1998 resulted primarily from an increase in our allowance for
doubtful accounts associated with the growth in our revenues. Our results of
operations include approximately $26,000 in amortization of deferred stock
compensation expense in the first quarter of 1998, $44,000 in the second
quarter of 1998, $225,000 in the third quarter of 1998, and $288,000 in the
fourth quarter of 1998. Our quarterly operating results have varied widely in
the past, and we expect that they will continue to fluctuate in the future as a
result of a number of factors, many of which are outside our control.
ONYX has experienced, and expects to continue to experience, significant
seasonality with respect to software license revenues. In recent years, there
has been a greater demand for our products in our fourth quarter than in each
of the first three quarters of our fiscal year. For example, in 1998, 32% of
total revenues were recognized in the fourth quarter, including 34% of license
revenues and 28% of service revenues. We also have experienced lower revenues
in our first quarter than in the preceding fourth quarter. For example, license
revenues in the first quarter of 1998 decreased 14% from the fourth quarter of
1997. We believe that these fluctuations are caused by customer buying patterns
(often influenced by year-end budgetary pressures) and the efforts of our
direct sales force to meet or exceed year-end sales quotas. We expect that
seasonal trends will continue for the foreseeable future.
Liquidity and Capital Resources
Since our inception, we have primarily financed our operations through
private placements of our common and preferred stock. Through December 31,
1998, gross proceeds from private placements of common and preferred stock
totaled $11.3 million. To a lesser extent, we have financed our operations
through equipment financing and traditional financing arrangements.
As of December 31, 1998, we had cash and cash equivalents of $1.9 million, a
decrease of $1.7 million from cash and cash equivalents held as of December 31,
1997. Our working capital at December 31, 1998 was $3.9 million, compared to
$9.3 million at December 31, 1997.
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 December 31,
1998. 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 December 31, 1998, we had borrowed $3.9 million under the working
capital facility. 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% as of December 31,
1998, 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 December 31, 1998,
we had borrowed $63,000 under this line of credit. We were in compliance with
all financial covenants of the credit facility at December 31, 1998.
Our operating activities resulted in net cash inflows of $323,000 in 1996,
and net cash outflows of $5.0 million in 1997 and $5.1 million in 1998. The
sources of cash in 1996 were primarily income from operations, increases in
accounts payable and accrued liabilities and increases in deferred revenues,
partially offset by increases in accounts receivable, and other current assets.
The operating cash outflows in 1997 and 1998 resulted from significant
investments in sales, marketing and product development, which led to operating
losses. The cash outflows from operating losses, increases in accounts
receivable, prepaid expenses and other current assets were partially offset by
increases in accounts payable and accrued liabilities and deferred revenues. As
a percentage of total current assets,
26
<PAGE>
accounts receivable has increased from 52% in 1997 to 81% as of December 31,
1998. This trend is the result of increasing accounts receivable driven by
significant growth in both recognized and deferred revenues, coupled with a
decrease in cash and other current assets. Cash decreased due to operating
losses, which used the majority of the cash generated by our operations in
earlier periods, as well as the cash infusion provided in two preferred equity
financing transactions. We do not believe this trend will continue in the long
term as we strive to return to profitability and become operating cash flow
positive. Further, we are working to improve our receivable turnover rates. In
the near term, however, we do not believe this trend will have a negative
impact on our operations.
Investing activities used cash of $2.2 million in 1996 and $354,000 in 1997,
primarily for the purchase of capital equipment and short-term securities.
Investing activities provided cash of $264,000 in 1998, due primarily to
proceeds from the maturity of securities offset by cash used to acquire EnCyc
and the purchase of capital equipment.
Financing activities provided cash of $2.8 million in 1996 and $7.5 million
in 1997, primarily through the issuance of preferred stock and proceeds from
the exercise of stock options, partially offset by payments on capital
equipment lease obligations. Financing activities provided cash of $3.2 million
in 1998, due to borrowings under our credit facilities partially offset by
payments on long-term 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
. broaden our professional service capabilities.
Such operating expenses will consume a material amount of our cash resources,
including a portion of the net proceeds of this offering. We believe that the
net proceeds of this offering, together with our existing cash and cash
equivalents, tax refund 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
27
<PAGE>
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 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.
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BUSINESS
ONYX Software Corporation
ONYX is a leading provider of enterprise relationship management software
solutions. Enterprise relationship management software automates 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 that 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,
scaleable, flexible and reliable, resulting in a low total cost of ownership
and rapid return on investment.
Our integrated product family allows enterprises to automate the customer
lifecycle across the entire enterprise, instead of automating only individual
departments. We target mid- to large-sized organizations and divisions of
Fortune 500 companies, marketing and selling our software and services through
a direct sales force, as well as through distributors. The ONYX solution can be
easily implemented and flexibly configured to address an enterprise's specific
business needs. We believe that our solution provides broad functionality that
enables our customers to compete more effectively in today's intensely
competitive and dynamic business environment.
Industry Background
In recent years, many enterprises have sought to use technology to improve
interactions with their customers. Many of these enterprises have implemented
customer interaction software systems to automate separate departments, such as
sales, marketing and customer service and support. For example, sales force
automation software, a class of customer interaction software, automates an
enterprise's sales process. Sales force automation software has improved the
way sales departments manage customer contacts and sales opportunities.
International Data Corporation estimates that the aggregate customer
relationship management market was $955 million in 1997 and will grow to $6.7
billion by 2002.
As the competitive and operational pressures in today's business environment
have increased, many enterprises have adopted customer interaction software
applications to help address these challenges. Traditionally, organizations
utilizing UNIX- and mainframe-based customer interaction software applications
to manage enterprise relationships have been hindered by long development
cycles and significant costs of ownership. Recently, improvements in the
affordability and flexibility of client-server technologies have enabled
enterprises of all sizes to adopt advanced technologies that were previously
available only to large enterprises with significant information technology
resources. These technology developments include:
. improvements in the scalability and performance of powerful, low-cost
"Wintel" servers and PCs, which are replacing traditional UNIX client-
server systems;
. adoption of the Internet and corporate intranets and extranets as
channels of internal and external corporate interaction; and
. use of object-oriented programming languages, which have significantly
improved the functionality and accessibility of enterprise software
applications.
These technology developments have also significantly contributed to the
rapid penetration of the Windows NT and Microsoft BackOffice platforms within
corporate enterprises. International Data Corporation projects that the
installed base of Windows NT-based servers will increase from 1.6 million in
1997 to 5.9 million in 2002.
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<PAGE>
[GRAPH REPRESENTING PROJECTED WORLDWIDE MICROSOFT
WINDOWS NT INSTALLED BASE, 1997-2002
SOURCE: INTERNATIONAL DATA CORP. APPEARS HERE]
As these technology developments have made advanced software applications
more widely available, organizations have begun to adopt a new approach to
managing their enterprise relationships, called enterprise relationship
management. This relationship-centric approach automates the customer lifecycle
by creating a single repository of marketing, sales and service information
that is accessible to multiple audiences via the Internet. In an attempt to
provide a comparable solution, traditional customer interaction software
application vendors have bundled departmental applications into product suites
to provide more comprehensive relationship management capabilities. These
solutions, however, remain limited in their ability to distribute and share
information. In addition, many of these applications require significant
customization and ongoing support.
We believe that in today's challenging and dynamic business environment there
is a market opportunity for an enterprise relationship management system that
employs recent technological developments, including Internet capabilities, to
enable enterprises to more effectively acquire, manage and retain customers,
partners and other relationships. This solution would provide a high return on
investment by improving the effectiveness of sales, marketing and support
activities while maintaining a low total cost of ownership.
Advantages of the ONYX Solution
We provide an integrated enterprise relationship management solution for the
Windows NT and Microsoft BackOffice platforms that is easy to use and widely
accessible through a variety of interfaces, including the Internet. We designed
the ONYX solution specifically to be rapidly deployable, scaleable, flexible
and reliable, resulting in a low total cost of ownership and rapid return on
investment. Our integrated product family allows enterprises to automate the
customer lifecycle across the entire enterprise, instead of automating only
individual departments, by creating a single repository of marketing, sales and
service information. We target mid- to large-sized organizations and divisions
of Fortune 500 companies. The ONYX solution can be easily implemented and
flexibly configured to address an enterprise's specific business needs. We
believe that our solution provides broad functionality that enables our
customers to compete more effectively in today's intensely competitive and
dynamic business environment.
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<PAGE>
Our solution provides the following key advantages:
Offers an Integrated The ONYX solution integrates functional departments of
Approach to an enterprise around common relationships. This
Enterprise integrated solution provides an enterprise with a
Relationship relationship-centric approach to automating all its
Management business-critical relationships, instead of automating
individual functional departments. We use a
distributed, common data model which, unlike
traditional customer interaction software such as sales
force automation software or other point solutions,
creates a single repository of marketing, service and
sales information that is accessible throughout the
enterprise. Each employee can access a unified view of
an enterprise's interactions with a customer, thereby
improving the enterprise's ability to satisfy the
customer's needs.
Facilitates Extended Our solution has been designed to extend front-office
Interaction Via the information across the enterprise and to those
Internet individuals who have relationships with the enterprise,
including customers, vendors and partners, through the
use of the Internet, as well as corporate intranets and
extranets.
Enables Rapid We have designed the ONYX solution to be rapidly
Deployment deployable throughout the enterprise, thereby enabling
customers to generate a higher return on investment. On
average, customers have completed initial deployments
of ONYX applications in eight to ten weeks.
Easy to Use The ONYX solution enables communication and
collaboration across the organization through a
consistent, easy-to-use "dashboard" interface. This
common interface enables access to relationship
information from both client-server and Web-based
applications.
Yields Lower Total We have specifically designed our solution to be a
Cost of Ownership flexible application that is well suited for rapidly
growing enterprises demanding highly functional
solutions without the high cost of ownership associated
with traditional client/server implementations. The
ONYX solution provides out-of-the-box functionality
that lowers acquisition, implementation, consulting and
education costs, while allowing customers to tailor the
application to their business methodologies using
preconfigured templates.
Provides Scalability We designed the ONYX solution to support the growth of
our customers as they add new users and process an
increased volume of transactions. Studies sponsored by
ONYX and run on our product in Microsoft scalability
labs showed our product's ability to scale to 5,000
concurrent users in a simulated production environment.
However, because it is difficult to simulate the actual
processing load that is placed on a system in a real-
world implementation, we currently recommend 3,000
concurrent users to our customers.
Designed for the We designed our products to operate exclusively on the
Windows NT and Windows NT and Microsoft BackOffice platforms. We
Microsoft BackOffice believe that we are the market leader in providing
Platforms enterprise relationship management systems for these
platforms.
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<PAGE>
Strategy
Our strategy for establishing a market leadership position in the enterprise
relationship management market includes the following key elements:
Exploit Growing We designed the ONYX solution to be quickly and
Demand for Rapidly efficiently adopted, installed and deployed in mid- to
Deployable, Low- large-sized enterprises, including divisions of Fortune
Cost Solutions 500 companies. The length and high cost of deployment
of traditional high-end customized enterprise
relationship management products are unacceptable to
growing numbers of enterprises. Competitive pressures
encourage enterprises of all sizes to adopt information
technology solutions that can be deployed quickly,
offer extensive capabilities that meet business-
critical needs and provide interfaces that minimize
user training and facilitate incremental upgrade,
extension and scalability paths. We plan to continue to
design our products to maintain low total cost of
ownership.
Use Internet We are developing new products and enhancing our
Technology current products to provide greater Internet
connectivity and deploy Web-based technologies. The
Internet enables enterprise relationship management
information to be available to sales and service
professionals, prospects, partners and customers.
Build on Market For the foreseeable future, we plan to focus
Leadership Position exclusively on the Windows NT platform and build on our
in Windows NT market leadership position in Windows NT-based
enterprise relationship management solutions. The
Windows NT platform is rapidly gaining share in the
enterprise computing market. A recent International
Data Corporation study stated that Windows NT-based
solutions are the most popular corporate choice for new
customer relationship management solutions. We believe
our products have a competitive advantage in leveraging
the Windows NT platform, because they were conceived,
designed and implemented to optimize Microsoft
technology.
Expand We plan to expand our global operations by investing in
Internationally our sales channels in major international markets and
building new localized products. Our products are
currently available in Spanish and German and are
installed and operational in 22 countries worldwide.
Maintain Industry- We plan to maintain industry-leading customer
Leading Customer satisfaction through high-quality products, superior
Satisfaction implementation and responsive customer service and
support. A recent study by CustomerSat.com, sponsored
by us and some of our competitors, concluded that we
exceeded the average customer satisfaction index
achieved by our competition on all analyzed customer
satisfaction attributes. We strive to maintain this
position because we believe it is a critical
differentiator and gives us a significant competitive
advantage.
Expand Strategic We are actively adding both channel and technology
Partnerships partners. We believe that expanding our channel
partnerships will provide us with increasing access to
various geographic markets and potential customers. In
addition, we are forming strategic relationships that
enhance the integration with our partners' technology
to expand our product functionality.
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Products and Services
The ONYX solution enables an enterprise to manage its relationships,
primarily its customers, partners and employees. Users of the ONYX solution,
including employees in sales, marketing, service and support, as well as
customers and partners, can access the system through a variety of software
interfaces and hardware devices.
Products
ONYX's products provide four primary types of functionality, which automate
the key processes involved in managing enterprise relationships, including
sales, marketing and customer service and support.
Opportunity and Process Management is the foundation of our product line.
This functionality enables users to automate their relationship management
processes across the entire enterprise. These processes include prospect
management, forecasting, task management, campaign management, campaign
tracking, lead assignment and management, work notes, key word search, customer
and prospect segmentation tools, literature fulfillment, bug tracking, product
and pricing configuration, reporting, administrative controls, contact
management, surveys, calendar functions and activity tracking. Our products
also provide connectivity to email, fax and telephony software applications.
Vertical Solutions offer industry-specific methodologies and functionality
tailored to the business processes of enterprises in particular industries.
ONYX offers preconfigured templates tailored for the financial services,
health-care and high-technology industries.
Distributed Interface Technologies enable ONYX Customer Center users,
including customers, partners, members, vendors and employees, to communicate
with the ONYX Customer Center application through a variety of distributed
interfaces, including the Internet and corporate intranets and extranets. ONYX
offers several forms of interface functionality that facilitate the interaction
between the user and the application for sales, service and distribution
relationships.
Knowledge Management functionality enables users to easily search for and
share customer, market, competitive, technology, product and other information
located on corporate networks to improve the efficiency and effectiveness of
sales, marketing and support activities. This functionality also enables
enterprises to exchange information among customers, partners and remote
employees via the Web.
Integration functionality facilitates the linkage of the ONYX solution to
other business information and legacy systems, such as accounting and
telephony. ONYX also provides software development kits that enable the
development of integration interfaces between ONYX products and other business
applications.
[GRAPH REPRESENTING ONYX ENTERPRISE RELATIONSHIP
MANAGEMENT SOLUTION APPEARS HERE]
33
<PAGE>
The ONYX enterprise relationship management solution includes the following
products:
<TABLE>
<S> <C> <C>
Product Description Benefit
------------------------ ------------------------------- -------------------------------
Opportunity and Process Management Products
ONYX Customer Center . Provides an integrated and . Improves productivity,
comprehensive system for increases collaboration and
managing sales, marketing and facilitates development of
customer service and support strong relationships with key
relationships external people
. Enables employees to interact . Improves management
with each other, customers visibility of the dynamic
and partners changes in the business
. Automates the processes of
sales, marketing, service and
support
ONYX Customer Center- . Provides the core . Improves productivity of
Unplugged functionality of ONYX field users by providing
Customer Center for remote or access to current
mobile users relationship information
. Provides synchronization
capabilities for remote or
mobile users to update
customer data
Trilogy SC Config . Enables users to dynamically . Improves product
(resold product) configure and manage the configuration and pricing
pricing of their product or accuracy in the sales cycle
system
Vertical Solutions
Products
ONYX Industry Solutions . Provides preconfigured ONYX . Brings industry-specific
Customer Center templates methodologies to an
tailored for a particular implementation, allowing
industry customers to deploy the
solution effectively and
efficiently
--ONYX Asset Management
--ONYX Managed Care
--ONYX High Tech
Distributed Interface Products
ONYX Web Wizards for . Captures, qualifies and . Prepopulates the database
Sales distributes prospect automatically and distributes
information via the Web sales leads to the
appropriate users according
to enterprise-required
business rules
. Qualifies customers in the
sales cycle
ONYX Web Wizards for . Enables support professionals . Improves and simplifies
Service to answer support questions interactions with customers
and interact with customers to increase customer
via the Web satisfaction
ONYX Channel Connect . Distributes sales leads to . Extends the capabilities of
channel and distribution sales organizations by
partners via the Web enhancing communication with
partners while capturing
valuable customer information
from partners
Knowledge Management Products
ONYX Insight . Allows employees, partners . Empowers employees to find
and customers to search and reuse information faster
secure portions of an and more efficiently
enterprise's intranet from
their browser via the Web
. Facilitates convenient access
to information for customers
and partners without
intervention from the
enterprise
ONYX EnCyc Marketing . Provides users with access to . Builds presentations, quotes
Encyclopedia a repository of critical and proposals easily and
sales and marketing automatically
information
. Sends information to . Customizes information
prospects, customers and directly to a client's or
other users prospect's needs
Integration Functionality Products
ONYX RapidLink for Great . Integrates the Sales Order . Enables ONYX Customer Center
Plains Processing module of Great users to more efficiently
Plains Dynamics C/S+ version link to accounting and
4.0 with ONYX Customer Center financial information
ONYX Computer Telephony . Provides customers and . Enables users to access
Integration Software independent software vendors computer telephony
Development Kit with the ability to create functionality through ONYX
bi-directional integration Customer Center
between telephony
applications and ONYX
Customer Center
. Enables ONYX Customer Center
to be interfaced with a
variety of telephony
applications
</TABLE>
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<PAGE>
We price our core application, ONYX Customer Center, as well as ONYX Customer
Center-Unplugged and ONYX Channel Connect, on a per user basis plus an
additional database server fee that varies depending on the number of users
licensed to use the database server. We sell ONYX EnCyc both as part of the
ONYX Customer Center product family and as a stand-alone product at a base
price plus an additional fee based on the number of users. We resell Trilogy SC
Config on a per user basis. All the other products in the ONYX Customer Center
product family provide functionality that enhances and extends the capabilities
of ONYX Customer Center. We sell these products as add-ons to ONYX Customer
Center, based on a per server price.
We currently incorporate third-party software from Sybase Incorporated and
Greyware Automation Products into our ONYX Customer Center-Unplugged and ONYX
Web Wizards products. This software is licensed to us pursuant to original
equipment manufacturer agreements that provide for payment of a fee for each
copy of software we sublicense. Our agreement with Sybase has an automatically
renewable one-year term. Under this agreement, we prepaid $148,000 to Sybase,
which allows us to relicense 4,000 copies of its software. Our agreement with
Greyware has an indefinite term. Under this agreement, we pay a per copy
royalty, which ranges from $95-$150 depending on the cumulative number of
software copies we relicense. We also recently entered into an agreement with
Trilogy Software that gives us the right to incorporate Trilogy software into
our core product, ONYX Customer Center. We currently intend to incorporate
Trilogy software into a future version of our product, but we have not yet
determined a schedule for this incorporation. Under the Trilogy agreement, we
will pay Trilogy $1.25 million in eight quarterly installments of $156,000.
These payments end in April 2000. In addition to the installment payments, if
we incorporate Trilogy software into our product, we will pay Trilogy per user
royalty payments, the amount of which varies depending on the particular
Trilogy product we incorporate into ONYX Customer Center.
Professional Services
In addition to the products described above, ONYX also provides consulting,
support and training services as follows:
Consulting We offer our customers high-quality consulting,
including business process reengineering, change
management, systems integration, configuration,
installation and project management. We work closely
with our customers to identify their unique business
needs and we tailor our solution to these needs in an
efficient, cost-effective manner. We provide ongoing
business consulting to help our customers optimize the
use of our system over time.
Customer Support We have implemented a comprehensive customer support
program to assist customers to use our products and to
identify, analyze and solve any problems that may
result from such use. The support program includes
email support, on-line support via the Web and
telephone support from our three worldwide support
centers. In addition, we offer a premium support
program that allows our customers to contact our
support centers around the world seven days a week, 24
hours a day.
Training We offer a number of educational classes in conjunction
with our products, including end-user training and in-
depth technical training regarding the implementation
and administration of our solution.
We price our consulting and training services based on the time spent and
resources used. We price our basic support program based on a percentage of the
software license fee plus additional amounts for premium support services. We
price training services on a per-class basis.
We have established a number of strong relationships for both the
implementation of our solution and the training of our customer base. For
example, we have relationships internationally with KPMG Peat Marwick
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<PAGE>
LLP in Singapore and Arthur Andersen LLP in Australia. Domestically, we have
relationships with regional and local systems integrators such as Norstan
Consulting, TechnologyWorks, Inc., Breakaway Solutions Inc., Eggrock Partners,
LLC and Aquarius Technology Corporation. We frequently participate in joint
sales and marketing efforts with our systems integrators.
We use an industry-leading third-party training organization, Tech Resource
Group, Inc., to broaden our customer training offerings. Tech Resource Group
offers a wide range of training courses in the configuration, administration
and use of our products. Such training is available either at the customer's
place of business or at the facilities maintained by Tech Resource Group.
ONYX Technology
ONYX's products are based on a 32-bit client/server architecture and use
industry-standard, low cost modular components. This combination of robust
technology and flexible design enables us to offer an attractive combination of
reliability, performance, scalability, integration and low total cost of
ownership. Following are the key technologies that enable ONYX to provide a
robust enterprise relationship management solution:
Optimized for Windows NT and SQL Server. ONYX software is optimized for
Windows NT and SQL Server in both local area network and wide area network
environments in the following ways:
. uses precompiled stored procedures;
. uses Microsoft vendor-specific extensions to the ANSI 92 SQL standard;
. uses Microsoft vendor-specific object interface (COM); and
. optimizes data model architecture for the SQL Server query engine and
data storage engine.
n-tiered Architecture. ONYX software consists of a relationship-centric,
integrated data model surrounded by a set of configurable business objects.
This architecture utilizes multiple tiers to deliver a balance between
configurability, performance and administration. The logical tiers are: user
services (presentation layer), business services (business rules) and data
services (data access and data store). All tiers can be customized, and
customizations can be preserved during system upgrades.
Configuration. To adapt to rapidly changing business needs, the ONYX solution
provides the following technologies:
. Enterprise Configurable Procedures. The ONYX architecture allows
customization of standard business rules and procedures through
accessible and configurable software programming code. These enterprise
configurable procedures are implemented as SQL-stored procedures and are
written in Transact-SQL, a vendor-specific implementation of ANSI 92
SQL. This enables more robust customization than traditional
configuration methods that are based on a graphical user interface and
enables these customized business rules to be preserved during system
upgrades. Using Transact-SQL as the scripting language also enables the
same business rules to be used online and offline.
. External Data Connectivity. External data connectivity enables
integration with other business applications and legacy systems, as well
as customization of the core product. Standard external data
connectivity is a data-driven architecture coupled with a graphical
administration tool that allows administrators to integrate data
residing outside the ONYX Customer Center solution with the ONYX
enterprise client. Standard external data connectivity is particularly
focused on integration with Windows NT/Microsoft BackOffice-based
solutions. Common object model external data connectivity utilizes
industry-standard interfaces to enable broader integration, specifically
with any ODBC-compliant database and custom forms.
. Software Development Kits. To increase the breadth and depth of
solutions available for the ONYX enterprise relationship management
solution, we have developed products that include integration platforms
consisting of common object model presentation objects and business
objects allowing bi-directional integration between ONYX products and
other business applications.
Real-time synchronization architecture. Real-time synchronization
architecture ensures that, upon completion of synchronization between the
mobile client and enterprise database, the mobile user's data snapshot is a
replica of the enterprise database. In addition, our architecture provides
robust error detection and
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<PAGE>
recovery by automatically restarting the data synchronization process at the
point of failure should a connectivity link fail. Our synchronization system
also provides robust, configurable data conflict resolution algorithms and
enables synchronization to be performed without user intervention or attention.
Integrated data model. The ONYX solution includes a relationship-centric,
integrated data model--every task, form, campaign, opportunity management form,
forecasting tool and any other feature can be interrelated at any time within
the application. This fundamental part of the architecture allows any
relationship information to be shared with any other part of the organization
and ensures that every user within an organization has access to the same data.
This data model also provides flexibility to make additions and changes to the
application as the needs of the enterprise change over time.
Multiple interface support. Due to the architectural design enabling
integration in front of the business rules, the ONYX software platform supports
multiple interfaces, including Windows desktop applications, Web applications
and personal digital assistants.
Standards-based tools and components. Our products employ an n-tiered
client/server architecture built on the Windows NT, Microsoft BackOffice,
Microsoft Office and Microsoft Windows 95 and Windows 98 operating systems.
ONYX utilizes advanced object-oriented development tools and technologies in
the development of its products, including Microsoft Visual C++, Microsoft
Visual Basic, Microsoft OLE2/COM/ActiveX, Sybase SQL Anywhere, PLATINUM ERwin
relational database modeling tool, Rational Rose object modeling tool and
Rational SQA Manager test automation tool.
Customers and Markets
We target mid- to large-sized businesses and divisions of Fortune 500
companies. We believe that these enterprises have a strong need to move quickly
and develop collaborative teams, and that they are deploying new technologies
as a competitive advantage. For this reason, we target these enterprises as
prospective customers. We have licensed our products to over 350 such customers
through December 31, 1998. The following is a representative list of our
current customers who have purchased more than $200,000 in software licenses
from January 1, 1997 to December 31, 1998.
<TABLE>
<S> <C>
High Technology Health Care
Active Voice Corporation AEA International Pte Ltd.
Advent Software, Inc. Momentum Employee Benefits
BindView Development Penn State Geisinger Health Plan
Clarus Corporation Sierra Health Services, Inc.
Data Dimensions Inc. Neighborhood Health Plan
Datastream Systems Inc.
Hummingbird Communications Ltd. Manufacturing
JetForm Corporation Data Broadcasting Corporation
Lam Research Corp. Direct Focus, Inc.
Orcom Solutions, Inc. MicroTouch Systems, Inc.
PC DOCS/Fulcrum Optiva Corporation
Restrac, Inc.
Telecommunications
Financial Services Cincinnati Bell Telephone
Aames Funding Corporation e.spire Communications, Inc.
American Express Financial Advisors NTL Group Ltd. (Business Telecoms and Internet divisions)
American Express Retirement Services
ASB Bank Ltd. Other
Dreyfus Service Corporation AMR Research
Evergreen Investment Services, Inc. Brooklyn Union Gas Company
First American Trust Company Coastal Video Communications Corporation
Piper Jaffray Inc. GIGA Information Group
Reed Exhibition Companies
Trail Blazers, Inc.
Weider Publications, Inc.
</TABLE>
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<PAGE>
Selected Customer Applications
<TABLE>
<CAPTION>
Customer Application
<C> <S>
American Express American Express Financial Advisors is one of the leading
Financial Advisors financial services companies in the United States and has
approximately $188.8 billion under management. Three
divisions of American Express Financial Advisors use the
ONYX solution. One division, Retirement Services, uses the
ONYX solution in Sales, Marketing, and Client Services,
which has allowed them to be more customer focused and has
improved their ability to manage client information from
the initial point of contact. It also allows for improved
visibility into the other business relationships that other
Amex divisions have with their clients, including card,
travel and other services.
NTL Internet NTL Internet, a U.K.-based Internet service provider,
purchased ONYX Customer Center to manage its inbound sales
and support queries. The system was installed and
operational in four weeks, including integration with
existing billing systems and customization to address NTL
Internet's particular requirements, together with complete
end-user training. NTL Internet's call center handles up to
6,000 calls per day, seven days per week, from customers
regarding new sales inquiries, connection requests and
operational queries. In 1998, NTL Internet was awarded the
UK Call Centre of the Year award by UK Computing Magazine.
In addition to supporting large and varied call volumes,
ONYX Customer Center is also directly integrated with NTL
Internet's sales and marketing Web site, where NTL Internet
receives over 500 sales leads daily. NTL Internet utilizes
ONYX Web Wizards for Sales to automatically populate its
customer database with this lead information and uses ONYX
Web Wizards for Sales to then distribute this lead
information to the appropriate follow-up personnel. Using
the ONYX enterprise relationship management solution, NTL
Internet has converted a significant number of these Web-
based leads into sales.
Sierra Health Sierra Health Services, Inc., a diversified health care
Services, Inc. services company, selected ONYX as its enterprise
relationship management solution provider for managing
marketing, sales and service activities for direct
relationships with individual Medicare customers,
commercial accounts and brokers. In the Medicare segment,
Sierra utilizes the ONYX solution to manage its direct
marketing, sales and service activities. The ONYX solution
enables Sierra to generate lists of Medicare prospects
based on a variety of segmentation criteria, which can then
be used to automatically send direct marketing materials to
Medicare prospects. Telesales representatives use the ONYX
solution to schedule prospect appointments. This integrated
process enables Sierra to carefully track rates of
conversion from competitive plans and measure the
effectiveness of each marketing campaign. Sierra also
utilizes the ONYX solution to manage its commercial account
relationships. A majority of Sierra's commercial accounts
are acquired from brokers who sell its plans directly to
employer groups. Sales opportunity tracking, forecasting
and quote/contract generation is managed with the ONYX
solution, enabling Sierra to better forecast revenues and
identify top producing brokers with which to align itself.
With the ONYX solution, Sierra is able to quickly provide
its brokers and prospective group members with updated
benefit/plan information, thereby allowing Sierra to
improve quote generation times, reduce the contracting
cycle and improve overall customer response and
satisfaction.
</TABLE>
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<PAGE>
Sales and Marketing
We market and sell our software and services through a direct sales force, as
well as through distributors. We have direct sales offices in the United
States, the United Kingdom, Singapore and Australia and distributors in Latin
America, Asia and Europe. As of December 31, 1998, we employed 114 people in
sales and marketing. We support our field sales force with telemarketing
representatives and sales engineers. The direct sales effort is complemented by
indirect channel partners in many of our international markets.
Our marketing programs are focused on creating awareness, preference and lead
generation for the ONYX enterprise relationship management solution. These
programs are targeted at key executives such as chief executive officers and
chief information officers, as well as vice presidents of sales, service and
marketing.
To support our international direct and indirect sales channels, we have
sponsored a series of joint seminars with key customers and partners, such as
Microsoft. Our marketing personnel engage in a variety of marketing activities,
including managing and maintaining the ONYX Web site, making direct mailings,
placing advertisements, conducting public relations programs and establishing
and maintaining relationships with recognized industry analysts.
We also have initiated a branding and marketing communications strategy to
solidify our position as a leading provider of enterprise relationship
management software. This effort includes new messaging, target positioning, a
new "look and feel" and an increased effort to broaden market awareness of
ONYX. We have also initiated marketing strategies targeted at industry-specific
vertical markets, including high technology, financial services, health care,
telecommunications and manufacturing.
Our sales process consists of several phases: lead generation, initial
contact, lead qualification, needs assessment, enterprise overview, product
demonstration, proposal generation and contract negotiation. In a number of
instances, we believe that our relationships with strategic partners, including
systems integrators, has substantially shortened our sales cycle. Partners have
generated and qualified sales leads, made initial customer contacts and
assessed needs prior to our introduction. Additionally, systems integration
partners have assisted us in the creation of customized presentations and
demonstrations, which we believe enhance our competitive position. While the
sales cycle varies substantially from customer to customer, the initial sales
cycle typically ranges from two to six months, although in the past certain
sales cycles have lasted substantially longer.
We have distribution partners located in Europe, Asia, Latin America and the
South Pacific who market, promote and sell our software products. Our
distributors also typically provide both the implementation and customer
support services to our end-users, drawing on our expertise as necessary to
assist them in these efforts. We collaborate with our distributors in a variety
of areas, including seminars, trade shows and conferences. Our distributors
also create market- and language-specific collateral and product demonstrations
and assist in the localization of our products and related documentation.
We typically enter into buy-sell contracts with our distribution partners,
pursuant to which they purchase our products with a right to relicense them to
end-users, provided the relicense terms are materially consistent with those
used by ONYX. The distribution partners typically have no right to return the
product, regardless of their ability to relicense the product to an end-user.
In addition, our revenue from the sale of our product to a distribution partner
is independent of the distribution partner's ability to collect payment from an
end-user. We typically do not grant exclusive sales territories to our
distribution partners, but may do so in the future if a proposed distribution
transaction merits such an arrangement.
Research and Development
As of December 31, 1998, we employed 65 people in our research and
development organization. This team is responsible for the design, development
and release of ONYX products. The group is organized into four disciplines:
development, quality assurance, documentation and program management. Members
from each of these disciplines, along with a product manager from our marketing
department, form separate product teams
39
<PAGE>
that work closely with sales, marketing, professional services, customers and
prospects to better understand market needs and requirements. When required, we
also utilize third-party development firms to expand the capacity and technical
expertise of our internal research and development team. Additionally, we
sometimes license third-party technology that is incorporated into our
products. We believe this approach significantly shortens our time to market
without compromising our competitive position or product quality. Therefore, we
expect to continue to draw on third-party resources in the foreseeable future.
We have a well-defined software development methodology that we believe
allows us to deliver products that satisfy real business needs for the global
market and meet commercial quality expectations. This methodology is based on
the following key components:
. specification and review of business requirements, functional
requirements, prototypes, technical designs, test plans and
documentation plans;
. iterative, scheduled quality assurance of code and documentation;
. frequent stabilization of product;
. test automation definition, instrumentation and execution;
. test functions, components, systems, integration, performance, stress
and international and Year 2000 compliance;
. full product regression testing before beta or general availability
releases;
. trial deployments in an internal production environment prior to
release;
. external beta releases; and
. general availability release.
We emphasize quality assurance throughout the software development life
cycle. We believe that strong emphasis placed on analysis and design early in
the project life cycle reduces the number and costs of defects that may be
found in later stages. Our development methodology focuses on delivery of
product to a global market, enabling localization into multiple languages from
a single code base.
Intellectual Property and Other 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, and we may not become aware of, or have adequate remedies in
the event of, such breach.
"ONYX," "ONYX Web Wizards" and "Total Customer Management" are registered
trademarks of ONYX Software Corporation. We have applied for federal
registration of the marks "Customer Center," "Customer Center-Unplugged,"
"RapidLink" and "ChannelConnect." All other trademarks or service marks
appearing in this prospectus are trademarks or service marks of the respective
companies that use them.
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. In addition, the laws of some foreign countries
do not protect our proprietary rights to the same extent as do the laws of the
United States, and effective copyright, trademark and trade secret protection
may not be available in other jurisdictions. 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. 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
companies use
40
<PAGE>
"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 materially adversely affect our business, financial condition and
operating results.
Competition
The market for enterprise relationship management software is intensely
competitive, fragmented and rapidly changing. To our knowledge, we are the only
provider of enterprise relationship management software solutions that focuses
exclusively on the Windows NT platform. We believe that we compete effectively
as a result of our integrated, relationship-centric, rapidly deployable,
Internet-enabled solution that is optimized for the Windows NT platform,
coupled with our commitment to providing high-quality solutions that yield a
rapid return on investment and a low total cost of ownership.
We face competition in the enterprise relationship management software market
primarily from
. customer interaction software applications vendors, such as Clarify,
Inc., Pivotal Corp., SalesLogix Corporation, Siebel Systems, Inc., and
The Vantive Corporation,
. large enterprise software vendors, such as Baan Company N.V., J. D.
Edwards & Co., Oracle Corporation, PeopleSoft Corporation and SAP AG,
and
. our potential customers' information technology departments, which may
seek to develop proprietary enterprise relationship management systems.
Many of our competitors have already established supplier relationships with
divisions of our current or potential customers. These competitors may be able
to leverage their existing relationships to discourage these customers from
purchasing additional ONYX products or persuade them to replace our products
with their products. Many of our competitors have longer operating histories,
significantly greater resources and name recognition and a larger installed
base of customers than we have. As a result, these competitors may have greater
credibility with our existing and potential customers. They also may be able to
devote greater resources to the development, promotion and sale of their
products than we can to ours, which would allow them to respond more quickly
than we can to new or emerging technologies and changes in customer
requirements.
We expect that competition will increase as other established and emerging
companies enter the enterprise relationship management market, as new products
and technologies are introduced and as new competitors enter the market.
Increased competition may result in price reductions, lower gross margins and
loss of our market share, any of which could materially adversely affect our
business, financial condition and operating results.
Employees
As of December 31, 1998, we had a total of 271 employees, excluding
independent contractors and other temporary employees, including 65 people in
research and development, 114 people in sales and marketing, 61 people in
consulting, customer support and training and 31 people in general and
administrative services. Our future performance depends in significant part on
the continued service of our key technical, sales and senior management
personnel. The loss of the services of one or more of our key employees could
have a material adverse effect on our business, financial condition and
operating results. Our future success also depends on our continuing ability to
attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense. We cannot provide any
assurance that we can retain our key technical, sales and managerial personnel
in the future. None of our employees is represented by a labor union, and we
consider our employee relations to be good.
Facilities
Our principal administrative, sales, marketing, support and research and
development facilities are located in approximately 38,500 square feet of space
in Bellevue, Washington. Our principal lease, covering 33,000
41
<PAGE>
square feet of this office space, expires on June 30, 1999. The remaining
leases expire between June 1999 and January 2002. In July 1999, we plan to
relocate our principal administrative, sales, marketing, support and research
and development facilities to a new location in Bellevue, Washington with
approximately 90,000 square feet, pursuant to a lease that expires in 2006. We
currently lease other domestic sales and support offices in California,
Colorado, Georgia, Illinois, Maryland, Massachusetts, Minnesota, New Jersey,
Oregon and Texas. We maintain international offices in Australia, Singapore and
the United Kingdom.
Legal Proceedings
In the computer software market there is frequent and substantial
intellectual property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of outcome. We
have been subject to claims and expect to be subject to legal proceedings and
claims from time to time in the ordinary course of our business, including
claims of alleged infringement of trademarks and other intellectual property
rights of third parties. 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.
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.
42
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of ONYX as of January 15, 1999 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- ----------------------------------------------------------------
<S> <C> <C>
Brent R. Frei........... 32 President, Chief Executive Officer and Chairman of the Board
Sarwat H. Ramadan....... 55 Vice President, Chief Financial Officer, Secretary and Treasurer
Keith D. Brown.......... 40 Vice President of Marketing
Eben W. Frankenberg..... 32 Vice President of Sales
Howard K. Hawk.......... 35 Vice President of International Operations
Michael D. Racine....... 41 Vice President of Professional Services
Mary A. Reeder.......... 40 Vice President of Product Development
H. Raymond Bingham...... 53 Director
William B. Elmore(1).... 45 Director
Jay C. Hoag(2).......... 40 Director
Paul G. Koontz(1)(2).... 38 Director
Daniel R. Santell....... 40 Director
Todd A. Stevenson....... 30 Director
</TABLE>
- --------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Brent R. Frei, a cofounder of ONYX, has been a director of ONYX since its
inception in 1994, served as Secretary and Treasurer from September 1995 to
October 1998, and has served as President since September 1995 and Chief
Executive Officer and Chairman of the Board since October 1998. From 1991 to
February 1994, Mr. Frei was a Programmer Analyst with Microsoft's Information
Technology Group, in which position he was involved with creating international
customer information systems. From 1989 to 1990, he was a mechanical engineer
with Motorola Corporation. Mr. Frei received his B.S. in engineering from the
Thayer School of Engineering at Dartmouth College.
Sarwat H. Ramadan has been Chief Financial Officer of ONYX since June 1998
and Vice President, Secretary and Treasurer since October 1998. From 1993 to
June 1998, Mr. Ramadan was the Chief Financial Officer, Secretary and Treasurer
of Integrated Measurement Systems, Inc., an engineering test stations and
software company. From 1987 to 1993, Mr. Ramadan was Chief Accounting Officer
and Finance Director of Mentor Graphics Corporation, an electronic design
automation software company. Mr. Ramadan held various executive positions from
1985 to 1987 with CAD/CAM Resources, Inc. and from 1979 to 1985 with
Computervision Corporation. Mr. Ramadan received his B.S. from Ain Shams
University, his M.B.A. from the University of New Haven and his C.S.S. from
Harvard University.
Keith D. Brown has been Vice President of Marketing of ONYX since October
1997. From 1987 to October 1997, Mr. Brown held several positions, including
Strategic Alliances Manager, Product Marketing Manager and Worldwide Marketing
Manager, in Hewlett-Packard Corporation's LaserJet Printer Solutions Group. Mr.
Brown received his B.S. in electrical engineering from the DeVry Institute of
Technology and his M.B.A. from the University of Montana.
Eben W. Frankenberg joined ONYX in January 1995 and has been Vice President
of Sales since August 1995. From 1990 to December 1994, Mr. Frankenberg was a
petroleum geophysicist for Amoco Production Company, a developer of crude oil
and natural gas, and Amoco Netherlands Petroleum Co., a producer of petroleum.
Mr. Frankenberg received his B.A. from Dartmouth College and his M.S. from
Stanford University.
Howard K. Hawk has been Vice President of International Operations of ONYX
since August 1996. From 1989 to August 1996, Mr. Hawk was Director of
International Information Technology of Microsoft. From
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<PAGE>
1985 to 1987, he was a Senior Consultant with Andersen Consulting LLP. Mr. Hawk
received his B.S. in business administration with a concentration in
information systems from the University of Washington.
Michael D. Racine has been Vice President of Professional Services of ONYX
since July 1994. From 1991 to July 1994, Mr. Racine held various positions with
Microsoft's Information Technology Group, including Project Manager in the
development and deployment of a revenue consolidation and reporting system.
From 1987 to 1991, he was a Senior Consultant with Andersen Consulting LLP. Mr.
Racine received his B.A. from Utah State University and his M.B.A. from the
University of Oregon.
Mary A. Reeder has been Vice President of Product Development of ONYX since
June 1996. From 1989 to May 1996, Ms. Reeder worked for Microsoft, where she
was involved in product development, process management and emerging
technology. From 1987 to 1989, she was an independent consultant, developing
custom software. From 1985 to 1987, she was a Senior Programmer Analyst of Data
I/O Corporation, a manufacturer of engineering programming systems. Ms. Reeder
received her B.S. in computer science and her B.F.A. in graphic design from the
University of Washington.
H. Raymond Bingham became a director of ONYX in January 1999. Since 1993, Mr.
Bingham has been Chief Financial Officer and Executive Vice President of
Cadence Design Systems, Inc. From 1988 to 1993, Mr. Bingham was Executive Vice
President and Chief Financial Officer of Red Lion Hotels and Inns. From 1984 to
1988, he was Managing Director of Agrico Overseas Investment Company, a
subsidiary of The Williams Companies, Inc. Mr. Bingham serves on the boards of
directors of Integrated Measurement Systems, Inc., Legato Systems, Inc. and
Sunstone Hotel Investors, Inc. Mr. Bingham received his B.S. in economics from
Weber State College and his M.B.A. from the Harvard Business School.
William B. Elmore has been a director of ONYX since March 1996. Since 1995,
Mr. Elmore has been a member of Foundation Capital Management, L.L.C., the
general partner of Foundation Capital, L.P., a venture capital firm focused on
early-stage information technology companies. From 1987 to 1995, he was a
general partner of Inman & Bowman, a venture capital firm. Mr. Elmore serves on
the boards of directors of Wind River Systems, Inc. and Pilot Network Services,
Inc., as well as several privately held companies. Mr. Elmore received his B.S.
and M.S. in electrical engineering from Purdue University and his M.B.A. from
Stanford University.
Jay C. Hoag has been a director of ONYX since October 1998. Since June 1995,
Mr. Hoag has been a managing member of Technology Crossover Management II,
L.L.C. From 1982 to 1994, he was with Chancellor Capital Management, Inc. Mr.
Hoag serves on the boards of directors of several privately held companies. Mr.
Hoag received his B.A. in economics and political science from Northwestern
University and his M.B.A. from the University of Michigan.
Paul G. Koontz has been a director of ONYX since April 1997. Since 1996, Mr.
Koontz has been a member of Foundation Capital Management, L.L.C., the general
partner of Foundation Capital, L.P. From 1995 to 1996, he was with Sutter Hill
Ventures and, in 1994, he was the initial Vice President of Marketing of
Netscape Communications Corporation. From 1987 to 1994, Mr. Koontz was with
Silicon Graphics, Inc., where he held a number of positions, including Director
of Marketing. From 1983 to 1987, he held various marketing and management
positions with Hewlett-Packard Corporation in the United States and Europe.
Mr. Koontz serves on the boards of directors of several privately held
companies. Mr. Koontz received his B.S. in mechanical engineering from
Princeton University and his Masters in engineering management from Stanford
University.
Daniel R. Santell has been a director of ONYX since November 1994. Since
1996, Mr. Santell has been the Vice President of Worldwide Services for
InterWorld Corporation. From 1995 to 1996, he was Director of the North
American Client Services Division for SSA Corporation, from 1992 to 1996, he
was Vice President of Product Development at Platinum Software and from 1983 to
1992, he was a Manager at Andersen Consulting LLP. Mr. Santell received his
B.S.E. from Purdue University and his M.B.A. from the University of Washington.
44
<PAGE>
Todd A. Stevenson, a cofounder of ONYX, has been a director of ONYX since its
inception in 1994 and served as Chairman of the Board until October 1998. Mr.
Stevenson has been a manager of the Developer Support Service Group since July
1998. He previously served as Chief Technology Officer from June 1996 to July
1998 and Vice President of Development from ONYX's inception to June 1996. From
1993 to 1994, Mr. Stevenson was a programmer involved in creating international
customer information systems at Microsoft and from 1991 to 1993, he was a
support analyst for Microsoft Pty (Australia) developer products. Mr. Stevenson
received his B.S. in computer science from Oregon State University.
Committees of the Board of Directors
The compensation committee of our board of directors currently consists of
Messrs. Elmore and Koontz. The compensation committee
. reviews and approves the compensation and benefits for our executive
officers and grants stock options under our stock option plans; and
. makes recommendations to the board of directors regarding such matters.
The audit committee consists of Messrs. Hoag and Koontz. The audit committee
. makes recommendations to the board of directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided
by our independent auditors; and
. reviews and evaluates our audit and control functions.
Director Compensation
All nonemployee directors of the Company will be paid
. $1,000 for each board of directors meeting attended in person,
. $500 for each board meeting attended telephonically,
. $500 for each committee meeting attended in person, and
. $250 for each committee meeting attended telephonically.
We also reimburse them for reasonable expenses they incur in attending meetings
of the board of directors and its committees. In November 1994, we granted Mr.
Santell, an ONYX director, a nonqualified stock option to purchase 50,000
shares of common stock at an exercise price of $0.12 per share. In January
1999, we granted Mr. Bingham, an ONYX director, a nonqualified stock option to
purchase 50,000 shares of common stock at an exercise price of $9.00 per share,
plus an annual grant over the next five years, commencing in 2000, of an
additional 5,000 shares at an exercise price equal to the fair market value on
the date of grant. We currently intend to make comparable option grants to
future nonemployee directors. Directors of ONYX are eligible to participate in
our 1998 option plan.
Director and Officer Indemnification and Liability
Our articles of incorporation limit the liability of directors to the fullest
extent permitted by the Washington Business Corporation Act as it currently
exists or as it may be amended in the future. Consequently, subject to the
Washington Business Corporation Act, no director shall be personally liable to
ONYX or its shareholders for monetary damages resulting from his or her conduct
as a director of ONYX, except liability for
. acts or omissions involving intentional misconduct or knowing violations
of law,
. unlawful distributions, or
. transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our articles of incorporation also provide that we shall indemnify any
individual made a party to a proceeding because that individual is or was a
director of ONYX and shall advance or reimburse reasonable
45
<PAGE>
expenses incurred by such individual in advance of the final disposition of the
proceeding to the full extent permitted by applicable law. Any repeal of or
modification to our articles of incorporation may not adversely affect any
right of a director of ONYX who is or was a director at the time of such repeal
or modification. To the extent the provisions of our articles of incorporation
provide for indemnification of directors for liabilities arising under the
Securities Act of 1933, those provisions are, in the opinion of the Securities
and Exchange Commission, against public policy as expressed in the Securities
Act and they are therefore unenforceable.
Our bylaws provide that we shall indemnify our directors and officers and may
indemnify our employees and agents to the full extent permitted by law. In
addition, we have entered into separate indemnification agreements with our
directors and executive officers that could require us, among other things, to
indemnify them against certain liabilities that arise because of their status
or service as directors or executive officers and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified. Finally, we intend to purchase and maintain a liability insurance
policy, pursuant to which our directors and officers may be indemnified against
liability they may incur for serving in their capacities as directors and
officers of ONYX.
We believe that the limitation of liability provision in our articles of
incorporation, the indemnification provisions in our bylaws, the
indemnification agreements and the liability insurance policy will facilitate
our ability to continue to attract and retain qualified individuals to serve as
directors and officers of ONYX.
Compensation Committee Interlocks and Insider Participation
Our board of director's compensation committee currently consists of Messrs.
Elmore and Koontz. No member of our board of directors or of its compensation
committee serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as
members of our board of directors or its compensation committee.
Messrs. Elmore and Koontz are Members of Foundation Capital Management,
L.L.C., which is the General Partner of Foundation Capital, L.P. and a Member
of Foundation Capital Entrepreneurs Fund, L.L.C. In addition, Foundation
Capital Management, L.L.C. holds a 7.86% interest in TCV II Strategic Partners,
L.P., another holder of ONYX Series B Preferred Stock.
The entities affiliated with Foundation Capital Management, L.L.C. are
parties to an Amended and Restated Investors' Rights Agreement dated as of
March 31, 1997. Pursuant to the terms of the Investors' Rights Agreement, the
holders of the Series B Preferred Stock have a right of first offer to purchase
in the initial public offering their pro rata share of an aggregate number of
shares equal to the greater of (1) the number of shares having an aggregate
offering price of $3,000,000 and (2) 10% of the shares offered in the initial
public offering; provided, however, that the purchase amount shall not exceed
the number of shares having an aggregate offering price of $4,000,000. Each
holder of Series B Preferred Stock is also entitled to purchase its pro rata
share of any shares not purchased by the other holders of Series B Preferred
Stock. The Investors' Rights Agreement also grants certain registration rights
that obligate ONYX, under certain circumstances, to effect a registration under
the Securities Act of shares of common stock. See "Description of Capital
Stock--Registration Rights."
The entities affiliated with Foundation Capital Management, L.L.C. have
expressed a current intent to exercise their right to purchase shares in this
offering, including any shares subject to the right of first offer but not
purchased by the other holders of the Series B Preferred Stock. Despite their
expressions of intent, the entities affiliated with Foundation Capital
Management, L.L.C. are under no obligation to purchase any shares in this
offering until the earlier to occur of
. delivery to them of the prospectus filed with the Securities and
Exchange Commission with respect to this offering and
. two hours after the later to occur of (1) effectiveness of the
Registration Statement of which this prospectus forms a part and (2)
determination of the initial public offering price.
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<PAGE>
Prior to that time, the entities affiliated with Foundation Capital
Management, L.L.C. can elect not to purchase shares in this offering for any
reason, including as a result of access to information about ONYX or this
offering not known to ONYX or other potential investors. Accordingly, ONYX can
make no assurance that the entities affiliated with Foundation Capital
Management, L.L.C. will purchase shares in this offering and, if any of them do
not purchase such shares, the pricing or consummation of this offering could be
adversely affected.
In April 1998, entities affiliated with Foundation Capital Management, L.L.C.
entered into a transaction with Leon and Barbara Stevenson, the parents of Todd
Stevenson, who is a cofounder and director of ONYX, pursuant to which Mr. and
Mrs. Stevenson
. executed promissory notes to borrow $425,000 from such entities,
. pledged 283,331 shares of common stock to secure such indebtedness, and
. granted to the entities affiliated with Foundation Capital Management,
L.L.C. call options to purchase 100,000 shares of common stock of ONYX
at a per share purchase price of $4.25.
The promissory notes are interest free and no payments are due until April
30, 2003. In connection with these transactions, we agreed to hold in escrow
the shares of ONYX common stock subject to the Stevensons' call options and
pledges. The call options have been exercised, subject to the closing of this
offering. The exercise price for the call options will be paid by cancellation
of the promissory notes.
In connection with this offering, our board of directors and shareholders
approved amendments to our articles of incorporation that, among other things,
increase by an aggregate of 25,000 the number of shares of common stock
issuable on conversion of the Series B Preferred Stock held by the entities
affiliated with Foundation Capital Management, L.L.C. and eliminate the minimum
per share price threshold for automatic conversion of our preferred stock upon
completion of this offering.
We have entered into separate indemnification agreements with each of Messrs.
Elmore and Koontz.
Executive Compensation
The following table sets forth information concerning the compensation
received for services rendered to ONYX in all capacities during the year ended
December 31, 1998 by ONYX's Chief Executive Officer and the other executive
officer of ONYX who earned compensation in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-----------------------
Other Annual All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Compensation($)
- -------------------------------------- ---- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Brent R. Frei, Chief Executive Officer
and President........................ 1998 $ 85,000 $ 1,500 $ -0- $ -0-
1997 75,334 1,500 -0- -0-
Keith D. Brown, Vice President of
Marketing(1)......................... 1998 114,083 1,250 -0- -0-
</TABLE>
- --------
(1) Mr. Brown joined ONYX in October 1997. The compensation he earned in
fiscal 1997 did not exceed $100,000.
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<PAGE>
Option Grants in Last Fiscal Year
We did not grant Mr. Frei any stock options during fiscal 1998. The following
table sets forth certain information regarding stock options we granted Mr.
Brown during fiscal 1998.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Number of Percent of Price
Securities Total Options Appreciation for
Underlying Granted to Option Term(2)
Options Employees in Exercise Expiration -----------------
Name Granted(#) Fiscal Year(1) Price($/Sh) Date 5%($) 10%($)
---- ---------- -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Keith D. Brown.......... 40,000(3) 2.7% $2.50 6/1/08 $551,558 $937,497
</TABLE>
- --------
(1) Based on a total of 1,456,660 option shares granted to employees during
fiscal 1998.
(2) The assumed rates of appreciation are prescribed by the Securities and
Exchange Commission for illustrative purposes only and are not intended to
forecast or predict future stock prices.
(3) One-fourth of Mr. Brown's options vest and become exercisable 18 months
after the date of grant and an additional one-eighth of his options vest
and become exercisable at the end of each six-month period thereafter.
Fiscal 1998 Year-End Option Values
Mr. Brown did not exercise any options during fiscal 1998. The following
table sets forth certain information regarding unexercised stock options held
by Mr. Brown as of December 31, 1998. Mr. Frei does not currently hold options
to purchase capital stock of ONYX.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Fiscal Year-End(#) Fiscal Year-End ($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Keith D. Brown.............. -- 120,000 $ 0 $1,044,000
</TABLE>
- --------
(1) Calculated on the basis of an assumed initial public offering price of
$10.00 per share.
Employment Agreement With Mr. Brown
Pursuant to an employment agreement, dated September 14, 1997, we agreed to
provide Mr. Brown with an annual salary of $110,000; participation in ONYX's
bonus program, insurance and other employee benefits; options to purchase
80,000 shares of common stock, which vest over a period of four and one-half
years; and a relocation allowance to cover relocation expenses to the Seattle
area.
In addition, if ONYX is purchased within 18 months of Mr. Brown's hire date,
resulting in the elimination of his role as Vice President of Marketing through
no fault of Mr. Brown, and another comparable position is not offered, Mr.
Brown is entitled to receive a payment equal to six months' base salary. In
this event, we would also accelerate the vesting of 25% of his initial 80,000
share option grant.
Employee Benefit Plans
1998 Stock Incentive Compensation Plan
Our board of directors and shareholders have adopted our 1998 option plan.
The purpose of our 1998 option plan is to enhance long-term shareholder value
by offering opportunities to employees, directors, officers, consultants,
agents, advisors and independent contractors of ONYX and its subsidiaries to
participate in ONYX's growth and success, and to encourage them to remain in
the service of ONYX and its subsidiaries and to own ONYX stock. Our 1998 option
plan provides for awards of stock options and restricted stock. Our board has
reserved a total of 1,500,000 shares of common stock, plus
. any shares reserved but not granted under our 1994 option plan or
returned to the 1994 option plan upon termination of options or
repurchase of shares by ONYX and
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<PAGE>
. an automatic annual increase, to be added on the first day of our fiscal
year beginning in 2000, equal to the lesser of (1) 1,675,763 shares and
(2) 5% of the average common shares outstanding as used to calculate
fully diluted earnings per share as reported in ONYX's Annual Report for
the preceding year.
As of December 31, 1998, options to purchase 16,200 shares of common stock were
outstanding under our 1998 option plan with exercise prices of $9.00 per share,
options to purchase 1,646,246 shares were available for future grant and no
options had been exercised.
Stock Option Grants. The compensation committee of our board of directors
serves as the plan administrator of our 1998 option plan. The plan
administrator has the authority to select individuals to receive options under
our 1998 option plan and to specify the terms and conditions of each option
granted (incentive or nonqualified), the exercise price (which, for incentive
stock options, must be at least equal to the fair market value of the common
stock on the date of grant), the vesting provisions and the option term. For
purposes of our 1998 option plan, fair market value means the average of the
high and low per share sales price as reported on the Nasdaq National Market on
the date of grant. Unless otherwise provided by the plan administrator, and to
the extent required for incentive stock options by the Internal Revenue Code,
an option granted under our 1998 option plan will expire ten years from the
date of grant or, if earlier, three months after the optionee's termination of
service (other than termination for cause) or one year after the optionee's
death or disability.
Stock Awards. The plan administrator is authorized under our 1998 option plan
to issue shares of common stock to eligible participants with terms, conditions
and restrictions established by the plan administrator in its sole discretion.
Restrictions may be based on continuous service with ONYX or its subsidiaries
or the achievement of performance goals. Holders of restricted stock are
shareholders of ONYX and have, subject to certain restrictions, all the rights
of shareholders with respect to such shares.
Adjustments. The plan administrator will make proportional adjustments to the
aggregate number of shares issuable under our 1998 option plan and to
outstanding awards in the event of stock splits or other capital adjustments.
Corporate Transactions. In the event of certain corporate transactions, such
as a merger or sale of ONYX, each outstanding option and restricted stock award
will automatically accelerate and become 100% vested immediately before the
corporate transaction, unless the option or restricted stock award is, in
connection with the corporate transaction, assumed by ONYX's successor
corporation or parent thereof. Any option or restricted stock award granted to
an "executive officer," as defined for purposes of Section 16 of the Securities
Exchange Act of 1934, as amended, that is assumed or replaced in the corporate
transaction will automatically accelerate in the event the executive officer
terminates his or her employment for certain specified good reasons, or the
successor corporation terminates the executive officer's employment or services
without cause within two years following the corporate transaction.
1998 Employee Stock Purchase Plan
Our board of directors and shareholders have adopted our employee stock
purchase plan. We will implement the stock purchase plan upon the effectiveness
of this offering. We intend for this plan to qualify under Section 423 of the
Internal Revenue Code. This plan permits eligible employees of ONYX and its
subsidiaries to purchase common stock through payroll deductions of up to 10%
of their compensation. Under this plan, no employee may purchase common stock
worth more than $25,000 in any calendar year, valued as of the first day of
each offering period. In addition, owners of 5% or more of ONYX's or a
subsidiary's common stock may not participate in this plan. We authorized the
issuance under this plan of a total of 500,000 shares of common stock, plus an
automatic annual increase, to be added on the first day of our fiscal year
beginning in 2000, equal to the lesser of (1) 200,000 shares and (2) 1.2% of
the average common shares outstanding as used to calculate fully diluted
earnings per share as reported in ONYX's Annual Report for the preceding year,
or a lesser amount determined by our board of directors. Any shares from
increases in previous years that are not actually issued shall be added to the
aggregate number of shares available for issuance under this plan.
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<PAGE>
We will implement the stock purchase plan with six-month offering periods.
The first offering period will commence on the effectiveness of this offering.
Subsequent offering periods will begin on each January 1 and July 1. The price
of the common stock purchased under this plan will be the lesser of 85% of the
fair market value on the first day of an offering period and 85% of the fair
market value on the last day of an offering period, except that the purchase
price for the first offering period will be equal to the lesser of 100% of the
initial public offering price of the common stock and 85% of the fair market
value on June 30, 1999. This plan terminates ten years after the date of
adoption by our board of directors, but the board may terminate it at any
earlier time. We have not yet issued any shares of common stock under this
plan.
In the event of a merger, consolidation or acquisition by another corporation
of all or substantially all of our assets, each outstanding option to purchase
shares under the stock purchase plan shall be assumed or an equivalent option
substituted by the successor corporation. If the successor corporation refuses
to assume or substitute for the option, the offering period during which a
participant may purchase stock will be shortened to a specified date before the
proposed merger or sale. Similarly, in the event of a proposed liquidation or
dissolution of ONYX, the offering period during which a participant may
purchase stock will be shortened to a specified date before the date of the
proposed liquidation or dissolution.
1994 Combined Incentive and Nonqualified Stock Option Plan
In April 1994, our board of directors and shareholders adopted our 1994
option plan and reserved an aggregate of 5,000,000 shares of common stock for
grants of stock options under the plan. Our 1994 option plan provides for the
grant of options for common stock to employees, directors, consultants or
independent contractors of ONYX or its subsidiaries. As of December 31, 1998,
options to purchase 3,218,330 shares of common stock were outstanding under our
1994 option plan with exercise prices ranging from $0.10 to $9.00 per share and
options for 1,619,224 shares had been exercised. Simultaneous with the adoption
of the 1998 option plan, our board of directors suspended our 1994 option plan
and determined that no further grants shall be made pursuant to it. Any future
cancellations of options from our 1994 option plan will become available for
future grant under our 1998 option plan.
Our 1994 option plan is administered by our board of directors. Options
granted under our 1994 option plan must be exercised within three months of the
optionee's termination of service (as defined in our 1994 option plan) to or
employment by ONYX, or within one year after the optionee's termination by
death or disability, but in no event later than the expiration of the option
term. Options granted under our 1994 option plan are not transferable by the
optionee, except by will or the laws of descent and distribution, and generally
are exercisable during the optionee's lifetime only by the optionee.
In the event of a merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation of ONYX, as a result of which the
shareholders receive cash, stock or other property in exchange for their shares
of common stock, the board of directors will determine whether provision will
be made in connection with any such transaction for assumption of the options
under our 1994 option plan or substitution of appropriate new options covering
the stock of the successor corporation or an affiliate of the successor
corporation. If the board of directors determines that no such assumption or
substitution will be made, each outstanding option under our 1994 option plan
will automatically accelerate and become 100% vested and exercisable
immediately before the transaction. Acceleration will not occur, however, if,
in the opinion of our accountants, it would render unavailable "pooling of
interest" accounting for the transaction.
401(k) Plan
We maintain a 401(k) plan that covers all our employees who satisfy certain
eligibility requirements relating to minimum age, length of service and hours
worked. We may make an annual contribution for the benefit of eligible
employees in an amount determined by our board of directors. We have not made
any such contribution to date and have no current plans to do so. Eligible
employees may make pretax elective contributions of up to 15% of their
compensation, subject to maximum limits on contributions prescribed by law.
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<PAGE>
CERTAIN TRANSACTIONS
Since our inception in February 1994, we have issued shares of preferred
stock in private placement transactions as summarized in the following table:
<TABLE>
<CAPTION>
Shares of Preferred Stock
----------------------------------------------------------
Entities affiliated
Entities with Technology
affiliated with Crossover
Class of Issuance Price Per Foundation Capital Management II, Hillman/Dover
Preferred Stock Date Share Management, L.L.C. L.L.C. Limited Partnership
- --------------- ---------- --------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Series A March 1996 $1.38 2,174,082 -- --
Series B March 1997 $6.35 314,961 629,922 314,960
</TABLE>
William B. Elmore and Paul G. Koontz, directors of ONYX, are members of
Foundation Capital Management, L.L.C., which is the general partner of
Foundation Capital, L.P. and a member of Foundation Capital Entrepreneurs Fund,
L.L.C. Jay C. Hoag, a director of ONYX, is a managing member of Technology
Crossover Management II, L.L.C., the general partner of Technology Crossover
Ventures II, L.P., TCV II (Q), L.P., Technology Crossover Ventures II, C.V.,
TCV II Strategic Partners, L.P. and TCV II V.O.F. In addition, Foundation
Capital Management, L.L.C. holds a 7.86% interest in TCV II Strategic Partners,
L.P. All outstanding shares of preferred stock will convert into an aggregate
of 3,533,925 shares of common stock upon the closing of this offering.
In connection with the issuances of preferred stock described above, we
entered into the Investors' Rights Agreement with the holders of our preferred
stock and certain principal shareholders of our common stock, including:
. Brent R. Frei, President, Chief Executive Officer and Chairman of the
Board of ONYX, his parents, Ronald and Glenda Frei, his sister, Colleen
Chmelik, and his brother-in-law, James Chmelik;
. Brian J. Janssen, a former director and a principal shareholder of ONYX;
. Todd A. Stevenson, a director of ONYX, and his parents, Leon and Barbara
Stevenson; and
. Michael and Mary Racine, principal shareholders of ONYX.
Pursuant to the terms of this Investors' Rights Agreement, the holders of the
Series B Preferred Stock are entitled to purchase shares in the initial public
offering. The Investors' Rights Agreement also grants certain registration
rights that obligate ONYX, under certain circumstances, to effect a
registration under the Securities Act of shares of common stock. See
"Description of Capital Stock--Registration Rights."
The entities affiliated with Foundation Capital Management, L.L.C. and
Technology Crossover Management II, L.L.C. have expressed a current intent to
exercise their right to purchase shares in this offering, while Hillman/Dover
Limited Partnership has elected to waive its right. The entities affiliated
with Foundation Capital Management, L.L.C. and Technology Crossover Management
II, L.L.C. also have expressed a current intent to purchase in this offering
the shares that Hillman/Dover Limited Partnership has elected not to purchase.
Despite their expressions of intent, the entities affiliated with Foundation
Capital Management, L.L.C. and Technology Crossover Management II, L.L.C. are
under no obligation to purchase any shares in this offering until the earlier
to occur of
. delivery to them of the prospectus filed with the Securities and
Exchange Commission with respect to this offering and
. two hours after the later to occur of (1) effectiveness of the
Registration Statement, of which this prospectus is a part, and (2)
determination of the initial public offering price.
Prior to that time, the entities affiliated with Foundation Capital
Management, L.L.C. and Technology Crossover Management II, L.L.C. can elect not
to purchase shares in this offering for any reason, including as a result of
access to information about ONYX or this offering not known to ONYX or other
potential investors.
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<PAGE>
Accordingly, ONYX can make no assurance that the entities affiliated with
Foundation Capital Management, L.L.C. and Technology Crossover Management II,
L.L.C. will purchase shares in this offering, and, if any of them do not
purchase shares, the pricing or consummation of this offering could be
adversely affected.
In May 1998, the entities affiliated with Technology Crossover Management II,
L.L.C. entered into a transaction with Ronald and Glenda Frei, the parents of
Brent Frei, who is our chief executive officer, pursuant to which Mr. and Mrs.
Frei
. executed promissory notes to borrow $85,000 from entities affiliated
with Technology Crossover Management II, L.L.C.;
. pledged to the entities affiliated with Technology Crossover Management
II, L.L.C. 56,666 shares of common stock of ONYX to secure such
indebtedness; and
. granted to the entities affiliated with Technology Crossover Management
II, L.L.C. call options to purchase 20,000 shares of common stock at a
per share price of $4.25.
The promissory notes are interest free and no payments are due until May 1,
2003. In connection with this transaction, we agreed to hold in escrow the
shares of ONYX common stock subject to the Freis' call options and pledges. The
call options have been exercised, subject to the closing of this offering. The
exercise price for the call options will be paid by cancellation of the
promissory notes.
In July 1998, Eben W. Frankenberg, an ONYX officer, exercised an option to
purchase 800,000 shares of common stock and paid the exercise price by issuing
a full recourse promissory note to us in the amount of $160,000. The note is
secured by 750,000 shares of the common stock issued upon exercise. The note
accrues interest at the rate of 5.39% per annum and is due in July 2001. To
date, no payments have been made on the note.
In connection with this offering, our board of directors and shareholders
approved amendments to our articles of incorporation that, among other things,
increase by an aggregate of 100,000 the number of shares of common stock
issuable on conversion of our Series B Preferred Stock and eliminate the
minimum per share price threshold for automatic conversion of our preferred
stock upon completion of this offering.
We have entered into separate indemnification agreements with each of our
directors and executive officers.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table summarizes certain information regarding the beneficial
ownership of our outstanding common stock as of December 31, 1998 for
. each person or group that we know owns more than 5% of the common stock,
. each of our directors,
. our chief executive officer,
. the officer whose compensation exceeded $100,000 in 1998, and
. all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the Securities
and Exchange Commission and includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of common stock subject
to options currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding the
options but are not deemed outstanding for computing the percentage ownership
of any other person. Except as otherwise indicated, we believe the beneficial
owners of the common stock listed below, based on information furnished by
them, have sole voting and investment power with respect to the number of
shares listed opposite their names. Unless otherwise indicated, the following
officers, directors and shareholders can be reached at the principal offices of
ONYX.
<TABLE>
<CAPTION>
Percentage of Shares
Outstanding
------------------------
Number of Shares Before After
Name and Address Beneficially Owned Offering Offering
---------------- ------------------ ---------- ----------
<S> <C> <C> <C>
Entities Affiliated with
Foundation Capital
Management, L.L.C.(1).......... 2,679,281 19.86% 16.15%
75 Willow Road
Menlo Park, CA 94025
Brian J. Janssen(2)............. 2,308,895 17.25 14.00
Todd A. Stevenson(3)............ 2,500,000 18.68 15.16
Brent R. Frei(4)................ 2,500,000 18.68 15.16
Michael D. Racine(5)............ 991,105 7.40 6.01
Eben W. Frankenberg(6).......... 800,000 5.98 4.85
Glenda and Ronald Frei(7)....... 708,000 5.29 4.29
Entities Affiliated with
Technology Crossover
Management II, L.L.C.(8)....... 906,589 6.67 5.43
56 Main Street, Suite 210
Millburn, NJ 07041
Ray Bingham..................... -- -- --
William B. Elmore(9)............ 2,679,281 19.86 16.15
Jay C. Hoag(10)................. 906,589 6.67 5.43
Paul G. Koontz(11).............. 2,679,281 19.86 16.15
Daniel R. Santell(12)........... 40,000 * *
Keith D. Brown.................. -- -- --
All directors and executive
officers as a group (13
persons)(13)................... 10,567,550 76.14 62.24
</TABLE>
- --------
* Less than 1%.
53
<PAGE>
(1) Includes 2,514,043 shares issuable upon conversion of the preferred stock
held by entities affiliated with Foundation Capital Management, L.L.C.
Also includes 61,905 shares over which entities affiliated with
Foundation Capital Management, L.L.C. hold call options, which options
have been exercised effective immediately prior to the closing of this
offering. Also includes up to 103,333 shares issuable on exercise of
certain contractual rights of first offer pursuant to the Investors'
Rights Agreement, which rights the entities affiliated with Foundation
Capital Management, L.L.C. have expressed a current interest to exercise.
Foundation Capital Management, L.L.C. is the general partner of
Foundation Capital, L.P. and the manager of Foundation Capital
Entrepreneurs Fund, L.L.C., and thus is deemed to beneficially own such
shares. Messrs. Elmore and Koontz, directors of ONYX, Kathryn Gould,
James Andersen and Michael Schuh are members of Foundation Capital
Management, L.L.C.
(2) Includes 300,000 shares for which Mr. Janssen has sole voting power
pursuant to irrevocable proxies granted to him by various persons and
entities to whom he previously transferred shares of ONYX common stock,
which proxies will terminate upon the closing of this offering. Mr.
Janssen disclaims beneficial ownership of such shares upon termination of
such proxies. Mr. Janssen is a former director of ONYX.
(3) Includes 578,750 shares for which Mr. Stevenson has sole voting power
pursuant to irrevocable proxies granted to him by various persons to whom
he previously transferred shares of ONYX common stock, which proxies will
terminate upon the closing of this offering. Mr. Stevenson disclaims
beneficial ownership of such shares upon termination of such proxies.
(4) Includes 904,900 shares for which Mr. Frei has sole voting power pursuant
to irrevocable proxies granted to him by various persons to whom he
previously transferred shares of ONYX common stock, which proxies will
terminate upon the closing of this offering. Mr. Frei disclaims
beneficial ownership of such shares upon termination of such proxies.
(5) Includes 350,505 shares held jointly with Mr. Racine's spouse. Also
includes 70,300 shares held by the Michael Racine Generation-Skipping
Trust of 1998 and 70,300 shares held by the Mary Racine Generation-
Skipping Trust of 1998, trusts for the benefit of Mr. Racine's children,
for which Mr. Racine has sole voting power pursuant to irrevocable
proxies granted to him, which proxies will terminate upon the closing of
this offering. Mr. Racine disclaims beneficial ownership of the shares
held by such trusts upon termination of such proxies.
(6) Includes 25,000 shares held by the Eben Whitfied Frankenberg Generation-
Skipping Trust of 1998 and 25,000 shares held by the Sarah Shaw
Frankenberg Generation-Skipping Trust of 1998, trusts for the benefit of
Mr. Frankenberg's children, for which Mr. Frankenberg has sole voting
power pursuant to irrevocable proxies granted to him, which proxies will
terminate upon the closing of this offering. Mr. Frankenberg disclaims
beneficial ownership of such shares upon termination of such proxies.
(7) Represents 657,500 shares held by Glenda and Ronald Frei, including
20,000 shares subject to call options held by entities affiliated with
Technology Crossover Management II, L.L.C., which options have been
exercised effective immediately prior to the closing of this offering,
36,500 shares held by their daughter, Kim Frei, a minor, and 14,000
shares held by their son, Mark Frei, a minor. Brent R. Frei currently
exercises sole voting power with respect to these shares pursuant to
irrevocable proxies that will expire upon the closing of this offering.
Glenda and Ronald Frei disclaim beneficial ownership of the shares held
by their minor children.
(8) Includes 679,922 shares issuable upon conversion of the preferred stock
held by entities affiliated with Technology Crossover Management II,
L.L.C. Also includes 20,000 shares over which entities affiliated with
Technology Crossover Management II, L.L.C. hold call options, which
options have been exercised effective immediately prior to the closing of
this offering. Also includes up to 206,667 shares issuable on exercise of
certain contractual rights of first offer pursuant to the Investors'
Rights Agreement, which rights the entities affiliated with Technology
Crossover Management II, L.L.C. have expressed a current intent to
exercise. Technology Crossover Management II, L.L.C. is the general
partner of each of the entities affiliated with Technology Crossover
Management II, L.L.C. and thus is deemed to beneficially own such shares.
Mr. Hoag, a director of ONYX, and Richard H. Kimball are the only
managing members of Technology Crossover Management II, L.L.C.
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<PAGE>
(9) Includes 2,514,043 shares issuable upon conversion of the preferred stock
held by entities affiliated with Foundation Capital Management, L.L.C.
Also includes 61,905 shares over which entities affiliated with
Foundation Capital Management, L.L.C. hold call options, which options
have been exercised effective immediately prior to the closing of this
offering. Also includes up to 103,333 shares issuable on exercise of
certain contractual rights of first offer pursuant to the Investors'
Rights Agreement, which rights the entities affiliated with Foundation
Capital Management, L.L.C. have expressed a current intent to exercise.
Mr. Elmore is a member of Foundation Capital Management, L.L.C., the
general partner and a manager of the entities affiliated with Foundation
Capital Management, L.L.C. Mr. Elmore disclaims beneficial ownership of
the shares held by the entities affiliated with Foundation Capital
Management, L.L.C., except to the extent of his pecuniary interest
arising from his interest in Foundation Capital Management II, L.L.C.
(10) Includes 679,922 shares issuable upon conversion of the preferred stock
held by entities affiliated with Technology Crossover Management II,
L.L.C. Also includes 20,000 shares over which entities affiliated with
Technology Crossover Management II, L.L.C. hold call options, which
options have been exercised effective immediately prior to the closing of
this offering. Also includes up to 206,667 shares issuable on exercise of
certain contractual rights of first offer pursuant to the Investors'
Rights Agreement, which rights the entities affiliated with Technology
Crossover Management II, L.L.C. have expressed a current intent to
exercise. Mr. Hoag is a managing member of Technology Crossover
Management II, L.L.C., the general partner of each of the entities
affiliated with Technology Crossover Management II, L.L.C. Mr. Hoag
disclaims beneficial ownership of the shares held by entities affiliated
with Technology Crossover Management II, L.L.C., except to the extent of
his pecuniary interest therein arising from his interest in Technology
Crossover Management II, L.L.C.
(11) Includes 2,514,043 shares issuable upon conversion of the preferred stock
held by entities affiliated with Foundation Capital Management, L.L.C.
Also includes 61,905 shares over which entities affiliated with
Foundation Capital Management, L.L.C. hold call options, which options
have been exercised effective immediately prior to the closing of this
offering. Also includes up to 103,333 shares issuable on exercise of
certain contractual rights of first offer pursuant to the Investors'
Rights Agreement, which rights the entities affiliated with Foundation
Capital Management, L.L.C. have expressed a current intent to exercise.
Mr. Koontz is a member of Foundation Capital Management, L.L.C., the
general partner and a manager of the entities affiliated with Foundation
Capital Management, L.L.C. Mr. Koontz disclaims beneficial ownership of
the shares held by the entities affiliated with Foundation Capital
Management, L.L.C., except to the extent of his pecuniary interest
arising from his interest in Foundation Capital Management II, L.L.C.
(12) Represents shares subject to an option exercisable within 60 days of
December 31, 1998.
(13) Includes 181,875 shares subject to options exercisable within 60 days of
December 31, 1998. Also includes 81,905 shares over which entities
affiliated with Foundation Capital Management, L.L.C. and entities
affiliated with Technology Crossover Management II, L.L.C. hold call
options, which options have been exercised immediately prior to the
closing of this offering. Also includes up to 310,000 shares issuable on
exercise of certain contractual rights of first offer pursuant to the
Investors' Rights Agreement, which rights the entities affiliated with
Foundation Capital Management, L.L.C. and the entities affiliated with
Technology Crossover Management II, L.L.C. have expressed a current
intent to exercise.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 40,000,000 shares of common stock, $0.01 par
value per share, and 10,000,000 shares of preferred stock, $0.01 par value per
share. The following summary of certain provisions of the common stock and
preferred stock is not complete and may not contain all the information you
should consider before investing in the common stock. You should read carefully
our articles of incorporation, which are included as an exhibit to the
Registration Statement, of which this prospectus is a part.
Common Stock
As of December 31, 1998, assuming conversion of all outstanding shares of
preferred stock, there were 13,386,482 shares of common stock outstanding held
of record by 81 shareholders. Following this offering, there will be 16,486,482
shares of common stock outstanding (assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options). The holders of
common stock are entitled to one vote per share on all matters to be voted on
by the shareholders. Subject to preferences of any outstanding shares of
preferred stock, the holders of common stock are entitled to receive ratably
any dividends the board of directors declares out of funds legally available
for the payment of dividends. If ONYX is liquidated, dissolved or wound up, the
holders of common stock are entitled to share pro rata all assets remaining
after payment of liabilities and liquidation preferences of any outstanding
shares of preferred stock. Holders of common stock have no preemptive rights or
rights to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued following this offering will be fully paid
and nonassessable.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted into 3,533,925 shares of common stock. Thereafter, pursuant
to our articles of incorporation, the board of directors will have the
authority, without further action by the shareholders, to issue up to
10,000,000 shares of preferred stock in one or more series. The board also has
the authority to fix the designations, powers, preferences, privileges and
relative, participating, optional or special rights and the qualifications,
limitations or restrictions of any preferred stock issues, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock. The board of directors, without shareholder approval, can issue
preferred stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms that could delay or
prevent a change in control of ONYX or make removal of management more
difficult. Additionally, the issuance of preferred stock may decrease the
market price of the common stock and may adversely affect the voting and other
rights of the holders of common stock. We have no plans to issue any preferred
stock.
Registration Rights
After this offering, the holders of 11,453,358 shares of common stock will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act, pursuant to the Investors' Right Agreement. Under the
terms of the Investors' Rights Agreement, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of the registration and to include shares of common
stock in the registration at our expense. Additionally, such holders are
entitled to certain demand registration rights pursuant to which they may
require us to file a registration statement under the Securities Act at our
expense with respect to their shares of common stock. Further, such holders may
require us to file additional registration statements on Form S-3 at our
expense. All of these registration rights are subject to certain conditions and
56
<PAGE>
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and our right to decline to
effect such a registration before the earlier of March 31, 2000 and six months
after the closing of the initial public offering.
Antitakeover Effects of Certain Provisions of Articles of Incorporation, Bylaws
and Washington Law
As noted above, our board of directors, without shareholder approval, has the
authority under our articles of incorporation to issue preferred stock with
rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change in control of ONYX or make removal of management more
difficult.
Election and Removal of Directors. Effective with the first annual meeting of
shareholders following this offering, our articles of incorporation provide for
the division of our board of directors into three classes, as nearly as equal
in number as possible, with the directors in each class serving for a three-
year term, and one class being elected each year by our shareholders. Directors
may be removed only for cause. Because this system of electing and removing
directors generally makes it more difficult for shareholders to replace a
majority of the board of directors, it may tend to discourage a third party
from making a tender offer or otherwise attempting to gain control of ONYX and
may maintain the incumbency of the board of directors.
Approval for Certain Business Combinations. Our articles of incorporation
require that certain business combinations (including a merger, share exchange
and the sale, lease, exchange, mortgage, pledge, transfer or other disposition
or encumbrance of a substantial part of our assets other than in the usual and
regular course of business) be approved by the holders of not less than two-
thirds of the outstanding shares, unless such business combination has been
approved by a majority of the board of directors, in which case the affirmative
vote required shall be a majority of the outstanding shares.
Shareholder Meetings. Under our articles of incorporation and bylaws, our
shareholders may call a special meeting only upon the request of holders of at
least 25% of the outstanding shares. Additionally, the board of directors, the
chairman of the board and the president may call special meetings of
shareholders.
Requirements for Advance Notification of Shareholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
shareholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.
Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with
certain exceptions, from engaging in certain significant business transactions
with an "acquiring person," which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of the target
corporation, for a period of five years after such acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members
of the target corporation's board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things,
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive any disproportionate benefit as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of ONYX.
57
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C., Ridgefield Park, New Jersey.
Nasdaq National Market Listing
The common stock has been approved for listing on the Nasdaq National Market
under the symbol "ONXS," subject to official notice of issuance.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the common stock.
We cannot provide any assurance that a significant public market for the common
stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock in the public market, or the possibility of
such sales occurring, could adversely affect prevailing market prices for the
common stock or our future ability to raise capital through an offering of
equity securities.
After this offering, we will have outstanding 16,486,482 shares of common
stock (16,951,482 shares if the underwriters' over-allotment option is
exercised in full). Of these shares, the 3,100,000 shares that we expect to
sell in this offering (3,565,000 shares if the underwriters' over-allotment
option is exercised in full) will be freely tradable in the public market
without restriction under the Securities Act, unless such shares are held by
"affiliates" of ONYX, as that term is defined in Rule 144 under the Securities
Act.
The remaining 13,386,482 shares of common stock that will be outstanding
after this offering will be restricted shares. We issued and sold the
restricted shares in private transactions in reliance on exemptions from
registration under the Securities Act. Restricted shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rule 144 or Rule 701 under the Securities Act, as
summarized below.
Pursuant to certain "lock-up" agreements, all the executive officers,
directors and certain shareholders of ONYX, who collectively hold an aggregate
of 13,336,542 restricted shares, have agreed not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any such shares for
a period of 180 days from the date of this prospectus. We also have entered
into an agreement with the underwriters that we will not offer, sell or
otherwise dispose of common stock for a period of 180 days from the date of
this prospectus.
Ninety days after the date of this prospectus, 49,940 shares that are not
subject to lock-up agreements will be eligible for sale in the public market in
accordance with Rules 144 and 701. On the date of the expiration of the lock-up
agreements, an additional 13,094,314 restricted shares will be eligible for
immediate sale (of which 8,387,170 shares will be subject to certain volume,
manner of sale and other limitations under Rule 144). The remaining 242,228
restricted shares will be eligible for sale pursuant to Rule 144 on the
expiration of various one-year holding periods over the six months following
the expiration of the lock-up period.
Following the expiration of such lock-up periods, certain shares issued upon
exercise of options we granted prior to the date of this prospectus will also
be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of such shares in reliance upon Rule
144 under the Securities Act but without compliance with certain restrictions,
including the holding-period requirement, imposed under Rule 144. Under Rule
144, beginning 90 days after the date of this prospectus, a person who has
beneficially owned restricted shares for at least one year would be entitled to
sell in any three-month period up to the greater of
. 1% of the then-outstanding shares of common stock (approximately 164,865
shares immediately after this offering) and
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about ONYX.
Under Rule 144(k), a person who has not been an affiliate of ONYX during the
preceding 90 days and who has beneficially owned the restricted shares for at
least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
59
<PAGE>
We intend to file, after the effective date of this offering, a Registration
Statement on Form S-8 to register up to approximately 9,132,302 shares of
common stock reserved for issuance under our 1994 option plan, our 1998 option
plan and our employee stock purchase plan. The Registration Statement will
become effective automatically upon filing. Shares issued under the foregoing
plans, after the filing of a Registration Statement on Form S-8, may be sold in
the open market, subject, in the case of certain holders, to the Rule 144
limitations applicable to affiliates, the above-referenced lock-up agreements
and vesting restrictions imposed by us.
In addition, following this offering, the holders of 11,453,358 shares of
outstanding common stock will, under certain circumstances, have rights to
require us to register their shares for future sale.
60
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom Credit
Suisse First Boston Corporation, SG Cowen Securities Corporation and Piper
Jaffray Inc. are acting as representatives, have severally but not jointly
agreed to purchase from ONYX the following respective numbers of shares of
common stock:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Credit Suisse First Boston Corporation......................
SG Cowen Securities Corporation.............................
Piper Jaffray Inc...........................................
---------
Total..................................................... 3,100,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will be
obligated to purchase all the shares of common stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased. The underwriting agreement provides that, in the event of a default
by an underwriter, in certain circumstances the purchase commitments of
nondefaulting underwriters may be increased or the underwriting agreement may
be terminated.
ONYX has granted to the underwriters a 30-day option to purchase up to
465,000 additional shares at the initial public offering price less the
underwriting discounts and commissions. Such option may be exercised only to
cover over-allotments in the sale of shares of common stock.
ONYX has been advised by the underwriters that they propose to offer the
shares to the public initially at the public offering price set forth on the
cover page of this prospectus and to certain dealers at such price less a
concession of $ per share. The underwriters and such dealers may allow a
discount of $ per share on sales to certain other dealers. After the initial
public offering, the public offering price and concession and discount to
dealers may be changed by the representatives.
The following table summarizes the compensation to be paid to the
underwriters by ONYX, and the expenses payable by ONYX.
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by ONYX............................. $ $ $
Expenses payable by ONYX.................. $ $ $
</TABLE>
The underwriters have informed ONYX that they do not expect discretionary
sales by the underwriters to exceed 5% of the shares being offered hereby.
ONYX, its officers and directors and certain other shareholders have agreed
that they will not offer, sell, contract to sell, announce their intention to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Securities and Exchange Commission a registration statement under the
Securities Act relating to, any additional shares of common stock or securities
convertible into or exchangeable or exercisable for any shares of ONYX without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days
61
<PAGE>
after the date of this prospectus, except in the case of ONYX issuances
pursuant to the exercise of employee stock options outstanding on the date
hereof.
Of the 3,100,000 shares of common stock to be sold in this offering, the
underwriters have reserved for sale, at the price to public set forth on the
cover page of this prospectus, up to 573,500 shares as follows: (1) at the
Company's request, up to 263,500 shares for the Company's directors, officers,
employees and business associates and (2) up to an additional 310,000 shares
for the holders of our preferred stock in connection with a preexisting
contractual right between the Company and those holders. As a result, the
number of shares of common stock available for sale to the general public will
be reduced to the extent such persons purchase the reserved shares. The
underwriters will offer to the general public (on the same basis as the other
shares to be sold in this offering) any reserved shares that are not so
purchased.
ONYX has agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments which the underwriters may be required to make in respect thereof.
The common stock has been approved for listing on the Nasdaq National Market,
subject to official notice of issuance.
Prior to this offering, there has been no public market for the common stock.
The initial public offering price will be determined by negotiation between
ONYX and the representatives of the underwriters. The principal factors to be
considered in determining the public offering price include: the information
set forth in this prospectus and otherwise available to the representatives;
the history and the prospects for the industry in which ONYX will compete; the
ability of ONYX's management; the prospects for future earnings of ONYX; the
present state of ONYX's development and its current financial condition; the
general condition of the securities markets at the time of this offering; and
the recent market prices of, and the demand for, publicly traded common stock
of generally comparable companies.
The representatives, on behalf of the underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives of the underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that ONYX prepare and file
a prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
62
<PAGE>
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to ONYX and the dealer from whom such purchase
confirmation is received that (1) such purchaser is entitled under applicable
provincial securities laws to purchase such common stock without the benefit of
a prospectus qualified under such securities laws, (2) where required by law,
such purchaser is purchasing as principal and not as agent, and (3) such
purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers, as well as the experts named
herein, may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from ONYX. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
Certain legal matters will be passed on for ONYX by Perkins Coie llp,
Seattle, Washington. Certain legal matters will be passed on for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in this prospectus and Registration
Statement for the years ended December 31, 1996, 1997 and 1998, as set forth in
their reports, which are included in this prospectus and Registration
Statement. Our consolidated financial statements are included herein in
reliance on their reports, given on their authority as experts in accounting
and auditing.
63
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in
this prospectus to any contract or other document of ONYX, such references are
not necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement, including exhibits and schedule
filed therewith, at the Securities and Exchange Commission's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Securities and Exchange
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of such materials from the Public
Reference Section of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, such as ONYX, that file
electronically with the Securities and Exchange Commission.
64
<PAGE>
ONYX SOFTWARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Shareholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
ONYX Software Corporation
We have audited the accompanying consolidated balance sheets of ONYX Software
Corporation as of December 31, 1997 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ONYX Software
Corporation at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
February 4, 1999
F-2
<PAGE>
ONYX SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
Shareholders'
December 31, Equity at
---------------- December 31,
1997 1998 1998
------- ------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 3,512 $ 1,853
Securities available-for-sale.................. 2,064 --
Accounts receivable, less allowances of $536
($553 in 1997) ............................... 7,650 13,149
Income tax receivable.......................... 963 --
Prepaid expense and other...................... 397 1,327
------- -------
Total current assets............................ 14,586 16,329
Property and equipment, net..................... 1,264 1,664
Purchased technology............................ -- 3,216
Goodwill........................................ -- 642
Other assets.................................... 102 639
------- -------
Total assets.................................... $15,952 $22,490
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 574 $ 1,654
Salary and benefits payable.................... 476 905
Accrued liabilities............................ 902 1,685
Income taxes payable........................... 65 288
Current portion of capital lease obligations... 475 216
Current portion of long-term debt.............. -- 975
Deferred revenue............................... 2,787 6,745
------- -------
Total current liabilities....................... 5,279 12,468
Capital lease obligations, less current
portion........................................ 155 191
Long-term debt, net of current portion.......... -- 4,295
Redeemable convertible preferred stock, issued
and outstanding shares -- 3,433,925
Liquidation value of $11,000 (Note 6).......... 12,070 13,285
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $0.01 par value:
Authorized shares -- 10,000,000
Designated shares -- 3,433,925 (none pro
forma)...................................... -- -- $ --
Common stock, $0.01 par value:
Authorized shares -- 40,000,000
Issued and outstanding shares -- 8,137,876,
and 9,852,557 in 1997 and 1998, respectively
(13,386,482 pro forma)...................... (694) 1,912 15,197
Notes receivable from officers for common
stock......................................... -- (212) (212)
Deferred stock-based compensation.............. (215) (1,785) (1,785)
Accumulated deficit............................ (642) (7,621) (7,621)
Accumulated other comprehensive loss........... (1) (43) (43)
------- ------- -------
Total shareholders' equity (deficit)............ (1,552) (7,749) $ 5,536
------- ------- =======
Total liabilities and shareholders' equity...... $15,952 $22,490
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
ONYX SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues:
License........................................ $ 6,797 $ 13,191 $ 22,811
Support and service............................ 2,848 6,246 12,299
------- -------- --------
9,645 19,437 35,110
Cost of revenues:
License........................................ 52 250 1,127
Support and service............................ 2,062 5,022 7,927
------- -------- --------
2,114 5,272 9,054
------- -------- --------
Gross margin..................................... 7,531 14,165 26,056
Operating expenses:
Sales and marketing............................ 3,187 11,026 19,656
Research and development....................... 1,170 4,729 8,964
General and administrative..................... 1,109 2,156 4,136
------- -------- --------
Total operating expenses......................... 5,466 17,911 32,756
------- -------- --------
Income (loss) from operations.................... 2,065 (3,746) (6,700)
Interest income.................................. 136 370 147
Interest expense................................. (18) (56) (86)
------- -------- --------
118 314 61
------- -------- --------
Income (loss) before income taxes................ 2,183 (3,432) (6,639)
Income tax provision (benefit)................... 789 (888) 340
------- -------- --------
Net income (loss)................................ 1,394 (2,544) (6,979)
Preferred stock accretion........................ (225) (923) (1,215)
------- -------- --------
Income (loss) available to common shareholders... $ 1,169 $ (3,467) $ (8,194)
======= ======== ========
Earnings (loss) per share:
Basic.......................................... $ 0.15 $ (0.43) $ (0.99)
Diluted........................................ $ 0.14 $ (0.43) $ (0.99)
Pro forma basic and diluted.................... $ (0.59)
Shares used in calculation of earnings (loss) per
share:
Basic.......................................... 8,008 8,068 8,287
Diluted........................................ 8,390 8,068 8,287
Pro forma basic and diluted.................... 11,821
</TABLE>
See accompanying notes.
F-4
<PAGE>
ONYX SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Notes
Receivable
from Retained Accumulated Total
Common Stock Officers for Deferred Earnings Other Shareholders'
---------------- Common Stock-Based (Accumulated Comprehensive Equity
Shares Amount Stock Compensation Deficit) Loss (Deficit)
--------- ------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 8,000,000 $ 200 $ -- $ -- $ 508 $-- $ 708
Exercise of stock
options............... 10,000 1 -- -- -- -- 1
Preferred stock
accretion............. -- (225) -- -- -- -- (225)
Net income............. -- -- -- -- 1,394 -- 1,394
--------- ------ ----- ------- ------- ---- -------
Balance at December 31,
1996................... 8,010,000 (24) -- -- 1,902 -- 1,878
Exercise of stock
options............... 127,876 24 -- -- -- -- 24
Stock options exchanged
for services.......... -- 14 -- -- -- -- 14
Deferred stock
compensation.......... -- 215 -- (215) -- -- --
Preferred stock
accretion............. -- (923) -- -- -- -- (923)
Comprehensive loss:
Cumulative translation
loss.................. -- -- -- -- -- (1)
Net loss............... -- -- -- -- (2,544) --
Total comprehensive
loss................... (2,545)
--------- ------ ----- ------- ------- ---- -------
Balance at December 31,
1997................... 8,137,876 (694) -- (215) (642) (1) (1,552)
Exercise of stock
options, net of
shareholder loans..... 1,481,348 248 (212) -- -- -- 36
Stock options exchanged
for services.......... -- 9 -- -- -- -- 9
Deferred stock
compensation.......... -- 2,153 -- (2,153) -- -- --
Amortization of
deferred stock
compensation.......... -- -- -- 583 -- -- 583
Issuance of common
stock and options in
connection with
acquisition (Note 2).. 233,333 1,411 -- -- -- -- 1,411
Preferred stock
accretion............. -- (1,215) -- -- -- -- (1,215)
Comprehensive loss:
Cumulative translation
loss.................. -- -- -- -- -- (42)
Net loss............... -- -- -- -- (6,979) --
Total comprehensive
loss................... (7,021)
--------- ------ ----- ------- ------- ---- -------
Balance at December 31,
1998................... 9,852,557 $1,912 $(212) $(1,785) $(7,621) $(43) $(7,749)
========= ====== ===== ======= ======= ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ONYX SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Operating activities
Net income (loss) available to common
shareholders...................................... $ 1,169 $(3,467) $(8,194)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Preferred stock accretion........................ 225 923 1,215
Depreciation and amortization.................... 213 689 1,042
Accretion of discounts on investments............ (28) (95) (9)
Deferred income taxes............................ (54) 54 --
Noncash stock-based compensation expense......... -- 14 592
Changes in operating assets and liabilities:
Accounts receivable............................ (2,728) (4,443) (5,350)
Other assets................................... (229) (188) (1,473)
Accounts payable and accrued liabilities....... 526 1,255 1,987
Deferred revenue............................... 813 1,773 3,861
Income taxes................................... 416 (1,487) 1,185
------- ------- -------
Net cash provided by (used in) operating
activities........................................ 323 (4,972) (5,144)
Investing activities
Purchases of securities............................ (1,996) (4,989) --
Proceeds from maturity of securities............... -- 5,045 2,073
Acquisition of EnCyc............................... -- -- (750)
Purchase of technology............................. -- -- (85)
Purchases of property and equipment................ (196) (410) (974)
------- ------- -------
Net cash provided by (used in) investing
activities........................................ (2,192) (354) 264
Financing activities
Proceeds from exercise of stock options............ 1 24 36
Proceeds from line of credit ...................... -- -- 3,963
Payments on capital lease obligations.............. (130) (486) (540)
Payments on long-term debt......................... -- -- (237)
Net proceeds from issuance of Series A preferred
stock............................................. 2,977 -- --
Net proceeds from issuance of Series B preferred
stock............................................. -- 7,945 --
------- ------- -------
Net cash provided by financing activities.......... 2,848 7,483 3,222
Effect of exchange rate changes on cash............ -- (1) (1)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 979 2,156 (1,659)
Cash and cash equivalents at beginning of year..... 377 1,356 3,512
------- ------- -------
Cash and cash equivalents at end of year........... $ 1,356 $ 3,512 $ 1,853
======= ======= =======
Supplemental cash flow disclosure
Interest paid...................................... $ 18 $ 62 $ 77
Income taxes paid (refunded), net.................. 426 565 (846)
Fixed assets financed through capital lease
obligations....................................... 808 439 317
Technology purchased through long-term debt........ -- -- 1,544
Issuance of common stock and stock options in
connection with acquisition of EnCyc.............. -- -- 1,411
</TABLE>
See accompanying notes.
F-6
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
ONYX Software Corporation and subsidiaries (Company) is a leading provider of
enterprise relationship management solutions. The ONYX enterprise relationship
management solution automates the key functions that enable enterprises to more
effectively acquire, manage and retain customers, partners and other
relationships. The majority of the Company's revenues are from the ONYX
Customer Center product family. The Company was incorporated in the State of
Washington on February 13, 1994 and maintains its headquarters in Bellevue,
Washington.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its foreign subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the financial statements. Changes in these
estimates and assumptions may have a material impact on the financial
statements. The Company has used estimates in determining certain provisions,
including uncollectible trade accounts receivable, useful lives for fixed
assets and intangibles, and tax liabilities.
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). The
Company adopted SOP 97-2 effective January 1, 1998. Based upon their
interpretation of SOP 97-2 and SOP 98-4, the Company believes its current
revenue recognition policies and practices are consistent with SOP 97-2 and SOP
98-4. However, full implementation guidelines for this standard have not yet
been issued. Once available, such implementation guidance could lead to
unanticipated changes in current revenue accounting practices, and such changes
could materially adversely affect the timing of the Company's future revenues
and earnings. 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. This pronouncement is not expected to
materially impact the Company's revenue recognition practices.
The Company generates revenues through two sources: (1) software license
revenues and (2) service revenues. Software license revenues are generated from
licensing the rights to use the Company's products directly to end-users and
indirectly through sublicense fees from resellers and, to a lesser extent,
through third-party products the Company distributes. Service revenues are
generated from sales of customer support services, consulting and training
services performed for customers that license the Company's products.
Revenues from software license agreements are recognized upon delivery of
software if persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
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
F-7
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Company enters 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 relicensing of the Company's products to end-users. The Company's
agreements with its 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 the Company's
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 on 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 on the acceptance of services, the Company defers recognition of
revenues from both the license and the service elements until the acceptance
criteria are met.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. The Company's
cash equivalents consist of banker's acceptances with a maturity of three
months or less and money market funds.
Fair Values of Financial Instruments
At December 31, 1998, the Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
liabilities, capital lease obligations and long-term debt. The carrying value
of cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximates their fair value based on the liquidity of these
financial instruments or based on their short-term nature. The carrying value
of capital lease obligations and long-term debt approximates fair value based
on the market interest rates available to the Company for debt of similar risk
and maturities.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the related assets (or over the lease term if it
is shorter for leasehold improvements), which range from two to seven years.
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life.
Purchased Technology and Goodwill
Purchased technology represents software source code and software licenses
acquired from third parties. Amortization of purchased technology is provided
on a product-by-product basis over the estimated economic life of the software,
generally three to five years, using the straight-line method. Unamortized
capitalized costs determined to be in excess of the net realizable value of a
product are expensed at the date of such determination.
Goodwill represents the excess of the purchase price over the fair value of
identifiable tangible and intangible assets acquired and is amortized using the
straight-line method over its estimated life of five years. The carrying value
of goodwill is reviewed periodically. In the event that the sum of expected
undiscounted future cash flows is less than the recorded book value, the
carrying value will be reduced to its fair value.
F-8
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development
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 the Company's
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. No such costs have been capitalized because the impact of capitalizing
such costs would not be material.
Concentration of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to a concentration
of credit risk consist principally of accounts receivable. The Company's
customer base is dispersed across many different geographic areas throughout
North America, Europe, Asia Pacific and Latin America and consists of companies
in a variety of industries. During 1996, 1997 and 1998, no single customer
accounted for 10% or more of total revenues. The Company does not require
collateral or other security to support credit sales, but provides an allowance
for bad debts based on historical experience and specifically identified risks.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the exchange rate in effect on the balance sheet date. Revenues and expenses
are translated at the average rates of exchange prevailing during the year. The
translation adjustment resulting from this process is shown within accumulated
other comprehensive income (loss) as a component of shareholders' equity. Gains
and losses on foreign currency transactions are included in the consolidated
statement of operations as incurred. To date, gains and losses on foreign
currency transactions have not been significant.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). APB
No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123 (refer to Note 7).
F-9
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising
Advertising costs are expensed as the related promotional materials are
released. Advertising expense was $704,000, $1.6 million and $2.1 million
during the years ended December 31, 1996, 1997 and 1998, respectively.
Earnings Per Share and Pro Forma Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities by including other common stock equivalents, including
stock options and redeemable convertible preferred stock, in the weighted
average number of common shares outstanding for a period, if dilutive.
Pro forma earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding and the weighted average
redeemable convertible preferred stock outstanding as if such shares were
converted into common stock at the time of issuance.
Other Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. The only item of other
comprehensive income (loss) which the Company currently reports is foreign
currency translation adjustments.
Business Segments
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Information related to segment
disclosures is contained in Note 11.
Derivatives
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Because the Company has never used nor currently intends to use
derivatives, management does not anticipate that the adoption of this new
standard will have a significant effect on earnings or the financial position
of the Company.
F-10
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. ACQUISITION
In September 1998, the Company acquired EnCyc, Inc. (EnCyc), a privately-held
marketing encyclopedia software developer. In exchange for all the outstanding
shares of EnCyc, the Company issued 233,333 shares of its common stock, paid
$500,000 to EnCyc shareholders, and liquidated $250,000 of EnCyc's existing
long-term debt. In addition, in connection with the acquisition, the Company
issued options to EnCyc employees to purchase up to 75,000 shares of common
stock at an exercise price of $5.00 per share. These options have been treated
as part of the purchase price, resulting in a total purchase price of $2.4
million, including direct costs of the acquisition. The acquisition was
accounted for using the purchase method of accounting, and, accordingly, the
results of EnCyc's operations are included in the Company's consolidated
financial statements from the date of acquisition.
A summary of the purchase price for the acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Common stock and stock options....................................... $1,411
Cash paid to shareholders............................................ 500
Cash paid to liquidate notes payable................................. 250
Accrued direct acquisition costs..................................... 280
------
$2,441
======
</TABLE>
The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired...................................................... $ 248
Liabilities assumed.................................................. (145)
Purchased technology................................................. 1,670
Goodwill............................................................. 668
------
$2,441
======
</TABLE>
To determine the value of the developed technology, the expected future cash
flows of the existing technology products were discounted, taking into account
risks related to the characteristics and applications of each product, existing
and future markets, and assessments of the life cycle stage of each product.
Based on this analysis, the existing technology that had reached technological
feasibility was capitalized. Amounts attributable to purchased technology and
goodwill will be amortized over their estimated useful life of five years on a
straight-line basis.
The unaudited pro forma combined historical results of operations, as if
EnCyc had been acquired on January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1998
-------------------- --------------------
Actual Pro Forma Actual Pro Forma
------- ----------- ------- -----------
(Unaudited) (Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues......................... $19,437 $19,776 $35,110 $35,487
Net loss available to common
shareholders.................... (3,467) (3,946) (8,194) (8,579)
Net loss per share (basic and
diluted)........................ $ (0.43) $ (0.48) $ (0.99) $ (1.02)
</TABLE>
The pro forma information does not purport to be indicative of the results
that would have been attained had these events occurred at the beginning of the
period presented and is not necessarily indicative of future results.
F-11
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
(In thousands)
<S> <C> <C>
Computer and office equipment............................... $1,755 $ 2,605
Purchased software.......................................... 170 468
Furniture and fixtures...................................... 129 255
Leasehold improvements...................................... 163 221
------ -------
2,217 3,549
Less accumulated depreciation and amortization.............. (953) (1,885)
------ -------
$1,264 $ 1,664
====== =======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $1.2 million and $1.5
million as of December 31, 1997 and 1998, respectively. Accumulated
amortization on the leased assets was approximately $635,000 and $1.2 million
as of December 31, 1997 and 1998, respectively.
4. LINE OF CREDIT
Accounts Receivable Line of Credit
In August 1998, the Company entered into a revolving credit agreement with
Silicon Valley Bank. The agreement allows the Company to borrow up to $8.0
million, with maximum borrowings not to exceed 80% of eligible receivables as
defined by the agreement. Interest on borrowings is, at the Company's
discretion, at the lender's prime rate or LIBOR plus 2.0% (7.75% at December
31, 1998). Among other provisions, the Company is required to maintain certain
financial covenants, and the agreement restricts the payment of dividends. The
line of credit agreement expires in June 2000. At December 31, 1998, the
Company had borrowed $3.9 million in cash under this credit facility. In
addition, Silicon Valley Bank had issued approximately $280,000 in letters of
credit on behalf of the Company in connection with two lease commitments, which
reduces the amount available under this credit facility.
Equipment Term Loan Facility
In August 1998, the Company entered into an agreement with Silicon Valley
Bank providing a $3.0 million term loan facility, with maximum borrowings not
to exceed invoice amounts for equipment purchased after June 1, 1998, for the
purpose of financing new capital equipment purchases. Interest on borrowings is
at the lender's prime rate plus 0.25% (8.00% at December 31, 1998). The
facility provides for a twelve-month advance period with monthly payments of
interest only, followed by 36 monthly payments of principal plus interest.
Among other provisions, the Company is required to maintain certain financial
covenants, and the agreement restricts the payment of dividends. The equipment
term loan facility expires in August 2002. At December 31, 1998, the Company
had borrowed $63,000 under this credit facility.
Both credit facilities are cross-collateralized by liens against accounts
receivable and specific assets financed by the lender, with a negative pledge
on other assets. The Company was in compliance with all financial covenants of
the credit facilities at December 31, 1998.
F-12
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under noncancelable operating lease
agreements that expire on various dates through June 2006. The Company leases
certain equipment under noncancelable capital and operating leases that expire
on various dates through July 2001.
Minimum future lease payments under noncancelable capital and operating
leases for the periods ended December 31 pursuant to leases outstanding as of
December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(In thousands)
<S> <C> <C>
Year ending December 31:
1999..................................................... $ 234 $ 2,999
2000..................................................... 156 2,746
2001..................................................... 61 2,353
2002..................................................... -- 2,109
2003..................................................... -- 2,095
Thereafter............................................... -- 4,921
----- -------
451 $17,223
=======
Less amount representing interest.......................... (44)
-----
Present value of minimum capital lease obligations......... 407
Less current portion....................................... (216)
-----
Capital lease obligations, less current portion............ $ 191
=====
</TABLE>
Rental expense was approximately $232,000, $1.1 million and $2.3 million in
1996, 1997, and 1998, respectively.
In June 1998, the Company signed a seven-year lease for a new corporate
headquarters in Bellevue, Washington, which is expected to commence July 1999.
The minimum lease payments associated with this lease are included in the
commitments above. The Company has the option to extend the lease for two
additional three-year terms. The Company must provide a $750,000 letter of
credit as security for the lease. If certain working capital requirements are
not met on the commencement date, the Company will be required to provide an
additional $250,000 letter of credit. The letter of credit may be reduced
annually by specified amounts in the lease agreement upon the Company's
achieving certain economic goals. At December 31, 1998, a $250,000 letter of
credit (initial portion of the $750,000 letter of credit referred to above) was
provided by the Company as security for the lease.
Purchased Technology Obligations
In June 1998, the Company entered into a noncancelable agreement with a
third-party software developer to license certain technology which will be
embedded in a future release of the Company's core product. The agreement calls
for eight quarterly payments of $156,000 totaling $1.25 million through April
2000. The initial cost of this technology of $1.25 million has been recorded as
purchased technology with remaining amounts outstanding at December 31, 1998 of
$1,093,000 ($781,000 as a current liability) in the accompanying consolidated
balance sheet. In addition to the installment payments, the agreement calls for
per user royalty payments. There are no minimum per user royalty commitments in
connection with this agreement.
F-13
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Upon release of the product with the embedded third-party technology, the
intangible will be expensed on the higher of a per user basis over the
projected product life or straight-line amortization of two years from date of
release.
During 1998, the Company also acquired other technology for which amounts
owing at December 31, 1998 amounted to $214,000.
Other Third-Party License Agreements
The Company has entered into various agreements that allow the Company to
incorporate licensed technology into its products or that allow the Company the
right to sell separately the licensed technology. The Company incurs royalty
fees under these agreements that are based on a predetermined fee per license
sold. Royalty costs incurred under these agreements are recognized as products
are licensed and are included in cost of license revenues. These amounts
totaled $5,000, $156,000 and $900,000 in 1996, 1997 and 1998. As of December
31, 1998, future commitments under these arrangements were not significant.
Contingencies
The Company is subject to legal proceedings and claims in the ordinary course
of business. ONYX Computers, Inc. has filed a lawsuit against the Company
alleging trademark infringement in Canada. The Company is attempting to
negotiate a settlement, but any amount of loss is not estimable and no accrual
has been recorded in the financial statements. An adverse outcome could have a
material adverse effect on the Company's financial position, liquidity, and
results of operations.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The redeemable convertible preferred stock outstanding at December 31, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
(In thousands)
<S> <C> <C>
Series A, par value $0.01 per share, issued and outstanding
2,174,082 shares; net of $23,000 in offering costs, plus
accretion to redemption value............................. $ 3,525 $ 3,880
Series B, par value $0.01 per share, issued and outstanding
1,259,843 shares; net of $55,000 in offering costs, plus
accretion to redemption value............................. 8,545 9,405
------- -------
$12,070 $13,285
======= =======
</TABLE>
Series A Redeemable Convertible Preferred Stock
In March 1996, the Company completed a $3.0 million private placement of
2,174,082 shares of Series A Convertible and Redeemable Preferred Stock (Series
A) at $1.38 per share. Net proceeds from the financing amounted to $2,977,000.
Each share of Series A is convertible into common stock at any time at the
option of the holder using the formula provided in the Articles of
Incorporation (currently at a ratio of one-to-one) or automatically upon the
closing of an initial public offering of the Company's common stock from which
the aggregate proceeds are not less than $20 million and at a price not less
than $4.14 per share.
Holders of Series A have preferential rights over common shareholders to
dividends of $0.138 (10%) per share per annum, when and if declared, and are
entitled to the number of votes equal to the number of shares of common stock
into which their stock could be converted. The Company is not allowed to carry
out certain events, as specified in the Articles of Incorporation, without the
advance consent of the majority of the
F-14
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preferred shareholders, as specified in the Articles of Incorporation. In the
event of liquidation, the holders of Series A have preferential rights over
common shareholders to liquidation payments at the original purchase price,
plus declared but unpaid dividends. The Company has not declared any Series A
dividends to date. Holders of Series A have redemption rights on or after
February 1, 2000 that may require the Company to redeem their stock at the
original purchase price, plus declared but unpaid dividends, plus simple
interest at 10% per annum from the date of original issuance of such shares.
Series B Redeemable Convertible Preferred Stock
In March 1997, the Company completed an $8.0 million private placement of
1,259,843 shares of Series B Convertible and Redeemable Preferred Stock (Series
B) at $6.35 per share. Net proceeds from the financing amounted to $7,945,000.
In conjunction with the sales of Series B, the Company entered into amended
Investors' Rights, Voting, and Co-Sale, and Right of First Offer Agreements.
Each share of Series B is convertible into common stock at any time at the
option of the holder, using the formula provided in the Articles of
Incorporation, or automatically upon the closing of an initial public offering.
In December 1998, the Board of Directors authorized a 100,000 increase in the
number of shares of common stock issuable upon conversion of the Series B
Redeemable Convertible Preferred Stock effectively increasing the conversion
ratio from one-to-one to 1.079 to one. The fair value of the 100,000 increase
in the number of shares of common stock issuable upon a conversion of the
Series B Redeemable Convertible Preferred Stock will be accounted for as a
deemed dividend based on the price of stock issued in the initial public
offering, and will be reflected within preferred stock accretion in the
statement of operations.
Under the terms of the agreement, Series B shareholders have rights in
preference to, but otherwise similar to those of, Series A shareholders,
including dividends of $0.635 (10%) per share per annum, when and if declared.
Series B shareholders also have redemption rights on or after February 1, 2000
that may require the Company to redeem their stock at the original purchase
price, plus declared but unpaid dividends, plus simple interest at 10% per
annum from the date of original issuance of such shares. The Company has not
declared any Series B dividends to date.
F-15
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. SHAREHOLDERS' EQUITY
Initial Public Offering
In December 1998, the Board of Directors authorized management to file a
registration statement with the Securities and Exchange Commission to permit
the Company to offer its common stock to the public. In December 1998, the
Company's shareholders also approved the amendment of the Company's Articles
and Bylaws, which included, among other things, an increase in the
capitalization of the Company to 40,000,000 shares of common stock and
10,000,000 shares of preferred stock, each with a par value of $0.01 per share,
and a 100,000 increase in the number of shares of common stock issuable upon
conversion of the Series B Redeemable Convertible Preferred Stock. If the
offering is consummated under terms presently anticipated, all outstanding
shares of redeemable convertible preferred stock will convert into 3,533,925
shares of common stock. Unaudited pro forma shareholders' equity reflects the
assumed conversion of the redeemable convertible preferred stock outstanding at
December 31, 1998 into common stock.
Notes Receivable from Officers
In July 1998, certain officers exercised options to purchase 1,300,000 shares
of common stock and paid the exercise price by issuing promissory notes to the
Company totaling $210,000. These notes, which have been offset against common
stock for financial statement presentation, are due in July 2001 and bear
interest at 5.39%, payable annually. These notes and the interest thereon are
full recourse.
1994 Combined Incentive and Nonqualified Stock Option Plan
Under the terms of the 1994 Combined Incentive and Nonqualified Stock Option
Plan (the 1994 option plan), the Board of Directors may grant incentive and
nonqualified stock options to employees, officers, directors, agents,
consultants, and independent contractors of the Company. There were 5,000,000
shares of common stock reserved under the 1994 option plan. Generally, the
Company grants stock options with exercise prices equal to the fair market
value of the common stock on the date of grant, as determined by the Company's
Board of Directors. Options generally vest over a four and one-half year
period; 25% are exercisable after 18 months, with 12.5% exercisable every six
months thereafter. In December 1997, the Board of Directors made a special
grant of 141,600 options to certain key employees that vest 1.67% after 18
months, and an additional 1.67% at the end of each month thereafter, with the
result that 100% of the options are vested six and one-half years from the date
of grant. Options generally expire ten years from the date of grant. In October
1998, the Board of Directors suspended the 1994 option plan and determined that
no further grants shall be made pursuant to the 1994 option plan (see 1998
Stock Incentive Compensation Plan).
1998 Stock Incentive Compensation Plan
In October 1998, the Board of Directors adopted the 1998 Stock Incentive
Compensation Plan (the 1998 option plan), which was approved by the Company's
shareholders in November 1998. The 1998 option plan provides for both stock
options and restricted stock awards to employees, officers, directors, agents,
advisors, consultants and independent contractors of the Company. There were
1,500,000 shares of common stock reserved under the 1998 option plan and the
plan provides that any options cancelled and returned to the 1994 option plan
shall become available for future grant under the 1998 option plan. The 1998
option plan provides for an annual increase to be added on the first day of
each fiscal year beginning in 2000 equal to the lesser of (a) 1,675,763 shares,
or (b) 5% of the average common shares outstanding used to calculate fully
diluted earnings per share, as reported for the preceding year. Options granted
under the 1998 option plan generally vest and become exercisable 25% 18 months
after the date of grant, and additional 12.5% shall vest at the end of each
six-month period thereafter, with the result that 100% of the options are
vested four and one-half years from the initiation date.
F-16
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Activity
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------
Shares Weighted
Available Number Average
for of Exercise
Grant Shares Prices
---------- ---------- --------
<S> <C> <C> <C>
Balance at January 1, 1996 (exercisable--
165,000)................................. 3,537,000 1,463,000 $0.14
Options granted......................... (1,730,800) 1,730,800 $0.20
Options canceled........................ 75,000 (75,000) $0.16
Options exercised....................... -- (10,000) $0.12
---------- ----------
Balance at December 31, 1996
(exercisable--656,267)................... 1,881,200 3,108,800 $0.18
Options granted......................... (1,091,400) 1,091,400 $0.65
Options canceled........................ 241,248 (241,248) $0.26
Options exercised....................... -- (127,876) $0.19
---------- ----------
Balance at December 31, 1997
(exercisable--1,163,672)................. 1,031,048 3,831,076 $0.31
1998 option plan introduction........... 1,500,000 -- --
Options granted......................... (1,456,660) 1,456,660 $3.53
Options canceled........................ 571,858 (571,858) $0.88
Options exercised....................... -- (1,481,348) $0.17
---------- ----------
Outstanding at December 31, 1998
(exercisable--511,283)................... 1,646,246 3,234,530 $1.72
========== ==========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------- ------------------
Weighted
Average Weighted
Range of Remaining Average
Exercise Number of Contractual Number of Exercise
Prices Options Life (Years) Options Price
-------- --------- ------------ --------- --------
<S> <C> <C> <C> <C>
$0.10--$0.12 188,500 5.58 46,000 $0.12
$0.20--$0.40 1,013,246 7.53 327,456 0.21
$0.70 696,224 8.12 95,327 0.70
$1.20--$1.50 152,100 9.20 -- --
$2.50--$3.50 644,560 9.44 -- --
$5.00 457,000 9.73 42,500 5.00
$9.00 82,900 9.81 -- --
--------- -------
$0.10--$9.00 3,234,530 8.37 511,283 $0.69
========= =======
</TABLE>
F-17
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Disclosure Under SFAS No. 123
Under APB No. 25, because the exercise price of the Company's employee stock
options generally equals the fair value of the underlying stock on the date of
grant, no compensation expense is recognized. Deferred compensation expense of
$215,000 and $2,153,000 was recorded during 1997 and 1998, respectively, for
those situations where the exercise price of an option was lower than the
deemed fair value for financial reporting purposes of the underlying common
stock. The deferred compensation is being amortized over the vesting period of
the underlying options. Amortization of the deferred stock-based compensation
balance of $1.8 million at December 31, 1998 will approximate $882,000,
$489,000, $270,000 and $144,000 the fiscal years ending December 31, 1999,
2000, 2001 and 2002, respectively.
Had the stock compensation expense for the Company's stock option plan been
determined based on the minimum value model using the multiple-option approach,
the Company's net income (loss) would have been adjusted to these pro forma
amounts:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1997 1998
-------------------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net income (loss) available to
common shareholders:
As reported.................... $1,169 $ (3,467) $ (8,194)
SFAS No. 123 pro forma......... $1,136 $ (3,526) $ (8,626)
Diluted earnings (loss) per
share:
As reported--diluted........... $ 0.14 $ (0.43) $ (0.99)
SFAS No. 123 pro forma......... $ 0.14 $ (0.44) $ (1.04)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield........................... 0.0% 0.0% 0.0%
Risk-free interest rate........................... 6.5% 5.3% 5.0%
Expected life..................................... 7 years 5 years 5 years
</TABLE>
For purposes of the pro forma disclosures, the estimated weighted average
fair value of the options granted, estimated to be $0.05, $0.15 and $1.15 at
December 31, 1996, 1997 and 1998, respectively, is amortized to expense over
the options' vesting period. Compensation expense recognized in providing
pro forma disclosures may not be representative of the effects on pro forma
earnings for future years because SFAS No. 123 does not apply to stock option
grants made prior to 1995.
F-18
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 Employee Stock Purchase Plan
In December 1998, the Board of Directors and shareholders approved the 1998
Employee Stock Purchase Plan (the ESPP). The Company will implement it upon the
effectiveness of the initial public offering. The ESPP permits eligible
employees of the Company and its subsidiaries to purchase common stock through
payroll deductions of up to 10% of their compensation. Under the ESPP, no
employee may purchase common stock worth more than $25,000 in any calendar
year, valued as of the first day of each offering period. In addition, owners
of 5% or more of the Company's or a subsidiary's common stock may not
participate in the ESPP. The Company authorized the issuance under the ESPP of
a total of 500,000 shares of common stock, plus an automatic annual increase,
to be added on the first day of the fiscal year beginning in 2000, equal to the
lesser of (a) 200,000 shares, (b) 1.2% of the average common shares outstanding
as used to calculate fully diluted earnings per share as reported in the Annual
Report for the preceding year, or (c) a lesser amount determined by the Board
of Directors. Any shares from increases in previous years that are not actually
issued shall be added to the aggregate number of shares available for issuance
under the ESPP.
The Company will implement the ESPP with six-month offering periods. The
first offering period will commence on the effectiveness of the initial public
offering. Subsequent offering periods will begin on each January 1 and July 1.
The price of the common stock purchased under the ESPP will be the lesser of
85% of the fair market value on the first day of an offering period and 85% of
the fair market value on the last day of an offering period, except that the
purchase price for the first offering period will be equal to the lesser of
100% of the initial public offering price of the common stock and 85% of the
fair market value on June 30, 1999. The ESPP does not have a fixed expiration
date, but the Company's Board of Directors may terminate it at any time. The
Company has not yet issued any shares of common stock under the ESPP.
Common Shares Reserved for Future Issuance
The Company has reserved shares of common stock as of December 31, 1998 as
follows:
<TABLE>
<S> <C>
Stock options...................................................... 4,880,776
Employee Stock Purchase Plan....................................... 500,000
Conversion of redeemable convertible preferred stock:
Series A......................................................... 2,174,082
Series B......................................................... 1,359,843
---------
8,914,701
=========
</TABLE>
F-19
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. EARNINGS PER SHARE
The following represents the calculations for earnings per share:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) (A)............................... $ 1,394 $ (2,544) $ (6,979)
Preferred stock accretion........................... (225) (923) (1,215)
----------- ------------ ------------
Income (loss) available to common shareholders (B).. $ 1,169 $ (3,467) $ (8,194)
=========== ============ ============
Weighted average number of common shares (1)(C)..... 8,008 8,068 8,287
Effect of dilutive securities:
Stock options...................................... 382 ** **
Redeemable convertible preferred stock............. ** ** **
----------- ------------ ------------
Adjusted weighted average shares and assumed
conversions (D).................................... 8,390 8,068 8,287
=========== ============
Pro forma adjustment for redeemable convertible
preferred stock.................................... 3,534
------------
Pro forma weighted average shares (E)............... 11,821
============
Earnings (loss) per share:
Basic (B)/(C)...................................... $ 0.15 $ (0.43) $ (0.99)
Diluted (B)/(D).................................... $ 0.14 $ (0.43) $ (0.99)
Pro forma basic and diluted (A)/(E)................ $ (0.59)
</TABLE>
- --------
(1) 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 the Company are only considered in the calculation of diluted earnings
per share.
** Excluded from the computation of diluted earnings per share given the
effects are antidilutive. Outstanding stock options to purchase 799,764,
3,831,076, and 4,534,530 shares of common stock at December 31, 1996,
1997, and 1998 respectively, were excluded from the computation of diluted
earnings per share because their effect was antidilutive (see Note 7 for
additional stock option information).
F-20
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES
Income (loss) before taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current:
U.S. ....................................... $ 2,159 $ (3,601) $ (7,495)
Foreign..................................... 24 169 856
------- -------- --------
$ 2,183 $ (3,432) $ (6,639)
======= ======== ========
The provision (benefit) for income taxes consists of the following:
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal..................................... $ 800 $ (1,007) $ --
State and local............................. 37 5 --
Foreign..................................... 6 60 340
------- -------- --------
Total current income taxes.................... 843 (942) 340
Deferred--federal............................. (54) 54 --
------- -------- --------
Income tax provision (benefit)................ $ 789 $ (888) $ 340
======= ======== ========
The effective rate differs from the U.S. federal statutory rate as follows:
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate
of 34%....................................... $ 742 $ (1,167) $ (2,257)
State taxes, net of federal benefit........... 24 3 --
Losses producing no current tax benefit....... -- 276 2,597
Research and development tax credit........... (22) -- --
Other items, net.............................. 45 -- --
------- -------- --------
Income tax provision (benefit)................ $ 789 $ (888) $ 340
======= ======== ========
</TABLE>
At December 31, 1998, the Company had a domestic net operating loss and
research and development carryforwards of $7.0 million and $520,000,
respectively, which begin to expire in 2017. Utilization of these carryforwards
depends on the recognition of future taxable income. The Company's ability to
utilize net operating loss carryforwards may be limited in the event that a
change in ownership, as defined in the Internal Revenue Code, occurs in the
future. To the extent that any single-year loss is not utilized to the full
amount of the limitation, such unused loss is carried forward to subsequent
years until the earlier of its utilization or the expiration of the relevant
carryforward period.
F-21
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Book reserves in excess of tax........................... $ 246 $ 285
Research and development credit carryforward............. 100 520
Net operating loss carryforward.......................... 170 2,395
------ --------
Total gross deferred tax assets............................ 516 3,200
Less valuation allowance................................... (315) (2,516)
------ --------
201 684
Deferred tax liabilities:
Deductible basis in fixed assets......................... (201) (145)
Purchased technology..................................... -- (539)
------ --------
(201) (684)
------ --------
Net deferred tax assets.................................... $ -- $ --
====== ========
</TABLE>
Since the Company's utilization of these deferred tax assets is dependent on
future profits, which are not assured, a valuation allowance equal to the net
deferred tax assets has been provided. The valuation allowance for deferred tax
assets increased $315,000 and $2.2 million during the years ended December 31,
1997 and 1998, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a profit-sharing retirement plan for eligible employees
under the provisions of Internal Revenue Code Section 401(k). Participants may
defer up to 15% of their annual compensation on a pretax basis, subject to
maximum limits on contributions prescribed by law. Contributions by the Company
are at the discretion of the Board of Directors. No discretionary contributions
have been made by the Company to date.
F-22
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. 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>
Year Ended December 31,
-------------------------
1996 1997 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
North America...................................... $ 9,297 $ 18,272 $ 29,918
Rest of World...................................... 348 1,165 5,192
------- -------- --------
Total Revenues..................................... $ 9,645 $ 19,437 $ 35,110
======= ======== ========
</TABLE>
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
America World Total
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Year ended December 31, 1998:
Revenues........................................ $29,918 $ 5,192 $35,110
Operating loss.................................. (4,044) (2,656) (6,700)
Interest, net................................... 61 -- 61
Depreciation and amortization................... 998 44 1,042
Purchases of property and equipment............. 816 158 974
Long-lived assets............................... 5,685 476 6,161
Total assets.................................... 21,254 1,236 22,490
Year ended December 31, 1997:
Revenues........................................ $18,272 $ 1,165 $19,437
Operating loss.................................. (2,060) (1,686) (3,746)
Interest, net................................... 314 -- 314
Depreciation and amortization................... 675 14 689
Purchases of property and equipment............. 293 117 410
Long-lived assets............................... 1,232 134 1,366
Total assets.................................... 15,485 467 15,952
</TABLE>
F-23
<PAGE>
[INSIDE BACK COVER]
[ARTWORK APPEARS HERE]
[GRAPHIC DEPICTING THE CUSTOMER LIFECYCLE ACROSS BUSINESS DEPARTMENTS
ACCOMPANIED BY THE FOLLOWING TEXT:
"ONYX Enterprise Relationship Management Today's business increasingly face
competitive and operational challenges such as:
. Intense competition
. Constantly changing technologies
. Rapid growth
. High costs of customer acquisition and retention
ONYX enterprise relationship management solutions enable businesses to
address these issues by:
. Improving the effectiveness of marketing, sales and support efforts
. Organizing data around relationships--not functional departments
. Enabling customer interaction through the Internet
. Front-Office solutions for the real world"]
<PAGE>
[COMPANY LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown
are estimates, except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 10,902
NASD filing fee.................................................. 4,065
Nasdaq National Market listing fee............................... 95,000
Blue Sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 200,000
Accounting fees and expenses..................................... 175,000
Transfer Agent and Registrar fees................................ 10,000
Miscellaneous expenses........................................... 95,033
--------
Total.......................................................... $750,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation
Act (the "WBCA") authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Amended and Restated Bylaws
(Exhibit 3.2 hereto) provides for indemnification of the registrant's
directors, officers, employees and agents to the maximum extent permitted by
Washington law. The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a director's
liability to the corporation or its shareholders for monetary damages for acts
or omissions as a director, except in certain circumstances involving
intentional misconduct, knowing violations of law or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Section 5.2 of the registrant's Third Amended and Restated Articles
of Incorporation, as amended by Articles of Amendment (Exhibit 3.1 hereto),
contains provisions implementing, to the fullest extent permitted by Washington
law, such limitations on a director's liability to the registrant and its
shareholders.
The registrant has entered into certain indemnification agreements with its
officers and directors, the form of which is attached as Exhibit 10.12 to this
Registration Statement and incorporated herein by reference. The
indemnification agreements provide the registrant's officers and directors with
indemnification to the maximum extent permitted by the WBCA.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the registrant and its executive officers and directors,
and by the registrant of the Underwriters, for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the Underwriters for inclusion in this
Registration Statement.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
Since its inception in February 1994, the registrant has issued and sold
unregistered securities as follows:
1. In March 1996, the registrant issued 2,174,082 shares of Series A
Preferred Stock, which are convertible into 2,174,082 shares of common
stock, to two investors, Foundation Capital, L.P. and Foundation Capital
Entrepreneurs Fund, L.L.C., for a consideration of $1.38 per share of
Series A Preferred Stock, or an aggregate of $3,000,000. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof on the basis that the transactions did not
involve a public offering.
2. In March 1997, the registrant issued 1,259,843 shares of Series B
Preferred Stock, which are convertible into 1,359,843 shares of common
stock, to eight investors, Foundation Capital, L.P., Foundation Capital
Entrepreneurs Fund, L.L.C., TCV II, V.O.F., Technology Crossover Ventures
II, L.P., TCV II (Q), L.P., TCV II Strategic Partners, L.P., Technology
Crossover Ventures II, C.V. and Hillman/Dover Limited Partnership, for a
consideration of $6.35 per share of Series B Preferred Stock, or an
aggregate of $8,000,000. The foregoing purchases and sales were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof on
the basis that the transactions did not involve a public offering.
3. From December 31, 1995 through December 31, 1998, the registrant
granted stock options to purchase 4,278,860 shares of common stock, with
exercise prices ranging from $.20 to $9.00 per share, to employees,
consultants and directors pursuant to its Amended and Restated 1994
Combined Incentive and Nonqualified Stock Option Plan and 1998 Stock
Incentive Compensation Plan. Of these options, options for 888,106 shares
have been canceled without being exercised, options for 1,619,224 shares
have been exercised and options for 3,234,530 shares remain outstanding and
1,646,246 were available for future grant.
4. In September 1998, pursuant to an Agreement and Plan of Merger by and
among the registrant, EnCyc Acquisition, Inc., EnCyc, Inc. and the
shareholders of EnCyc, the registrant issued 233,333 shares of common stock
in connection with the registrant's acquisition of all the issued and
outstanding shares of EnCyc. The recipients of the common stock were the
former shareholders of EnCyc. The issuance of these securities was exempt
from registration under the Securities Act pursuant to Section 4(2) thereof
on the basis that the transaction did not involve a public offering.
The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to Rule 701 promulgated thereunder on the
basis that these options were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to written contracts relating to
consideration, as provided by Rule 701.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Third Amended and Restated Articles of Incorporation of the
registrant, as further amended by Articles of Amendment.
3.2+ Amended and Restated Bylaws of the registrant.
5.1 Opinion of Perkins Coie LLP as to the legality of the shares.
10.1+ Amended and Restated Investors' Rights Agreement, dated as of
December 14, 1998, by and among the registrant, Foundation Capital,
L.P., Foundation Capital Entrepreneurs Fund, L.L.C., TCV II,
V.O.F., Technology Crossover Ventures II, L.P., TCV II (Q), L.P.,
TCV II Strategic Partners, L.P., Technology Crossover Ventures II,
C.V., Hillman/Dover Limited Partnership, Brent Frei, Brian Janssen,
Todd Stevenson, Mary Forler, Ronald Frei, Glenda Frei, Barbara
Stevenson, Leon Stevenson, Michael Racine, Mary Winifred Racine,
Bettie Ruzicka, Larry L. Ruzicka, Colleen Chmelik, James Chmelik,
J. Michael Ellis and Barbara S. Ellis.
10.2+ Lease Agreement, dated as of June 26, 1998, by and between WRC
Sunset North LLC and the registrant.
10.3+ Sublease Agreement, as amended, dated as of March 6, 1996, by and
between WWC Holding Co., Inc. and the registrant.
10.4+ Lease, as amended, dated as of February 4, 1997, by and between WRC
Properties, Inc. and the registrant.
10.5+ Lease, dated as of February 19, 1998, by and between Teachers
Insurance & Annuity Association of America, Inc. and the
registrant.
10.6+ Loan and Security Agreement, dated as of September 3, 1998, between
Silicon Valley Bank and the registrant.
10.7+ Amended and Restated 1994 Combined Incentive and Nonqualified Stock
Option Plan.
10.8+ 1998 Stock Incentive Compensation Plan.
10.9 1998 Employee Stock Purchase Plan.
10.10 [Reserved]
10.11+ Offer of Employment, dated as of September 14, 1997, from the
registrant to Keith Brown.
10.12+ Form of Indemnification Agreement between the registrant and each
of Ray Bingham, Keith Brown, William Elmore, Eben Frankenberg,
Brent Frei, Howard Hawk, Jay Hoag, Paul Koontz, Sarwat Ramadan,
Michael Racine, Mary Reeder, Daniel Santell and Todd Stevenson.
21.1+ Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Perkins Coie LLP (contained in the opinion filed as
Exhibit 5.1 hereto).
24.1+ Power of Attorney.
24.2+ Power of Attorney of Ray Bingham.
27.1 Financial Data Schedule.
99.1 Report of Ernst & Young LLP, Independent Auditors, on Financial
Statement Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules
The following financial statement schedule is filed herewith:
Section II--Valuation and Qualifying Accounts
II-3
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Bellevue, State of Washington, on the 5th day of February, 1999.
ONYX SOFTWARE CORPORATION
/s/ Brent R. Frei
By: _________________________________
Brent R. Frei,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 5th day of February, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Brent R. Frei President, Chief Executive Officer and
______________________________________ Chairman of the Board (Principal Executive
Brent R. Frei Officer)
/s/ Sarwat H. Ramadan Vice President, Chief Financial Officer,
______________________________________ Secretary and Treasurer (Principal
Sarwat H. Ramadan Financial and Accounting Officer)
* Todd A. Stevenson Director
______________________________________
Todd A. Stevenson
* Ray Bingham Director
______________________________________
Ray Bingham
* William B. Elmore Director
______________________________________
William B. Elmore
* Jay C. Hoag Director
______________________________________
Jay C. Hoag
* Paul G. Koontz Director
______________________________________
Paul G. Koontz
* Daniel R. Santell Director
______________________________________
Daniel R. Santell
</TABLE>
<TABLE>
<C> <C> <S>
*By: /s/ Sarwat H. Ramadan
__________________________________
Sarwat H. Ramadan
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ONYX SOFTWARE CORPORATION
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
----------------------
Charged to
Balance of Charged to Other
Beginning Costs and Accounts -- Deduction -- Balance at
Description of Period Expenses Describe Describe(1) End of Period
----------- ---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 30 $314 $ -- $ (27) $317
Year ended December 31,
1997
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 317 525 -- (289) 553
Year ended December 31,
1998
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 553 854 -- (871) 536
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibits
------- --------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Third Amended and Restated Articles of Incorporation of the
registrant, as further amended by Articles of Amendment.
3.2+ Amended and Restated Bylaws of the registrant.
5.1 Opinion of Perkins Coie LLP as to the legality of the shares.
10.1+ Amended and Restated Investors' Rights Agreement, dated as of December
14, 1998, by and among the registrant, Foundation Capital, L.P.,
Foundation Capital Entrepreneurs Fund, L.L.C., TCV II, V.O.F.,
Technology Crossover Ventures II, L.P., TCV II (Q), L.P., TCV II
Strategic Partners, L.P., Technology Crossover Ventures II, C.V.,
Hillman/Dover Limited Partnership, Brent Frei, Brian Janssen, Todd
Stevenson, Mary Forler, Ronald Frei, Glenda Frei, Barbara Stevenson,
Leon Stevenson, Michael Racine, Mary Winifred Racine, Bettie Ruzicka,
Larry L. Ruzicka, Colleen Chmelik, James Chmelik, J. Michael Ellis and
Barbara S. Ellis.
10.2+ Lease Agreement, dated as of June 26, 1998, by and between WRC Sunset
North LLC and the registrant.
10.3+ Sublease Agreement, as amended, dated as of March 6, 1996, by and
between WWC Holding Co., Inc. and the registrant.
10.4+ Lease, as amended, dated as of February 4, 1997, by and between WRC
Properties, Inc. and the registrant.
10.5+ Lease, dated as of February 19, 1998, by and between Teachers
Insurance & Annuity Association of America, Inc. and the registrant.
10.6+ Loan and Security Agreement, dated as of September 3, 1998, between
Silicon Valley Bank and the registrant.
10.7+ Amended and Restated 1994 Combined Incentive and Nonqualified Stock
Option Plan.
10.8+ 1998 Stock Incentive Compensation Plan.
10.9 1998 Employee Stock Purchase Plan.
10.10 [Reserved]
10.11+ Offer of Employment, dated as of September 14, 1997, from the
registrant to Keith Brown.
10.12+ Form of Indemnification Agreement between the registrant and each of
Ray Bingham, Keith Brown, William Elmore, Eben Frankenberg, Brent
Frei, Howard Hawk, Jay Hoag, Paul Koontz, Sarwat Ramadan, Michael
Racine, Mary Reeder, Daniel Santell and Todd Stevenson.
21.1+ Subsidiaries of the registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1 hereto).
24.1+ Power of Attorney (contained on signature page).
24.2+ Power of Attorney of Ray Bingham.
27.1 Financial Data Schedule.
99.1 Report of Ernst & Young LLP, Independent Auditors, on Financial
Statement Schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 1.1
_____________ Shares
ONYX SOFTWARE CORPORATION
Common Stock, par value $0.01 per share
UNDERWRITING AGREEMENT
February __, 1999
Credit Suisse First Boston Corporation
SG Cowen Securities Corporation
Piper Jaffray Inc.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. ONYX Software Corporation, a Washington corporation
("Company"), proposes to issue and sell ___________ shares ("Firm Securities")
of its Common Stock, par value $0.01 per share ("Securities"), and also proposes
to issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than __________ additional shares ("Optional Securities")
of its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities." The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("Underwriters") as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-68559) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (i) has been
declared effective under the Securities Act of 1933 ("Act") and is not
proposed to be amended or (ii) is proposed to be amended by amendment or
post-effective amendment. If such registration statement ("initial
registration statement") has been declared effective, either (i) an
additional registration statement ("additional registration statement")
relating to the Offered Securities may have been filed with the Commission
pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has
become effective upon filing pursuant to such Rule, and the Offered
Securities all have been duly registered under the Act pursuant to the
initial registration statement and, if applicable, the additional
registration statement or (ii) such an additional registration statement is
proposed to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such filing the
Offered Securities will all have been duly registered under the Act
pursuant to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act
or, in the case of the additional registration statement, Rule 462(b). For
purposes of this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery of
this Agreement, the additional registration
<PAGE>
statement means (i) if the Company has advised the Representatives that it
does not propose to amend such registration statement, the date and time as
of which such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery of
this Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company has
advised the Representatives that it proposes to file an amendment or post-
effective amendment to such registration statement, the date and time as of
which such registration statement, as amended by such amendment or post-
effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed
prior to the execution and delivery of this Agreement but the Company has
advised the Representatives that it proposes to file one, "Effective Time"
with respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes effective
pursuant to Rule 462(b). "Effective Date" with respect to the initial
registration statement or the additional registration statement (if any)
means the date of the Effective Time thereof. The initial registration
statement, as amended at its Effective Time, including all information
contained in the additional registration statement (if any) and deemed to
be a part of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General Instructions
of the Form on which it is filed and including all information (if any)
deemed to be a part of the initial registration statement as of its
Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is
hereinafter referred to as the "Initial Registration Statement." The
additional registration statement, as amended at its Effective Time,
including the contents of the initial registration statement incorporated
by reference therein and including all information (if any) deemed to be a
part of the additional registration statement as of its Effective Time
pursuant to Rule 430A(b), is hereinafter referred to as the "Additional
Registration Statement." The Initial Registration Statement and the
Additional Registration Statement are herein referred to collectively as
the "Registration Statements" and individually as a "Registration
Statement." The form of prospectus relating to the Offered Securities, as
first filed with the Commission pursuant to and in accordance with Rule
424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as
included in a Registration Statement, is hereinafter referred to as the
"Prospectus." No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement conformed in all material respects to the requirements of the Act
and the rules and regulations of the Commission ("Rules and Regulations")
and did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all material respects to the requirements of
the Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or will
not omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) on the
date of this Agreement, the Initial Registration Statement and, if the
Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration
Statement each conforms, and at the time of filing of the Prospectus
pursuant to Rule 424(b) or (if no such filing is required) at the Effective
Date of the Additional Registration Statement in which the Prospectus is
included, each Registration Statement and the Prospectus will conform, in
all material respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will include, any
untrue statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement: on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement and the Prospectus will conform in all
material respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement of
a material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed. The
two preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only
such information is that described as such in Section 7(b) hereof.
-2-
<PAGE>
(c) The Company has been duly incorporated and is a validly existing
corporation under the laws of the State of Washington, with power and
authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct of
its business requires such qualification (except where the failure to be so
qualified would not have a material adverse effect on the condition
(financial or other), business, properties, or results of operations of the
Company and its subsidiaries taken as a whole ("Material Adverse Effect").
The Company has filed all excise tax returns and paid all taxes required by
the State of Washington Department of Revenue.
(d) The Company has no significant subsidiaries as defined in
paragraph (w) of Rule 1.02 of Regulation S-X promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(e) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Prospectus; and
each subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in which
its ownership or lease of property or the conduct of its business requires
such qualification, except where the failure to be so qualified would not
have a Material Adverse Effect; all of the issued and outstanding capital
stock of each subsidiary of the Company has been duly authorized and
validly issued and is fully paid and nonassessable; and the capital stock
of each subsidiary owned by the Company, directly or through subsidiaries,
is owned free from liens, encumbrances and defects.
(f) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered Securities
will have been, validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus; and, except
as disclosed in the Prospectus, the stockholders of the Company have no
preemptive rights with respect to the Securities.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would
give rise to a valid claim against the Company or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection with
this offering.
(h) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to a Registration
Statement or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act which have not
been fully satisfied or waived.
(i) The Offered Securities have been approved for listing on The
Nasdaq Stock Market's Nasdaq National Market subject to notice of issuance.
(j) No consent, approval, authorization, or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in
connection with the issuance and sale of the Offered Securities by the
Company, except such as have been obtained and made under the Act and the
Exchange Act and such as may be required under state securities laws.
(k) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities will not result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having jurisdiction over
the Company or any subsidiary of the Company or any of their properties, or
any agreement or
-3-
<PAGE>
instrument to which the Company or any such subsidiary is a party or by
which the Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, or the charter
or by-laws of the Company or any such subsidiary, and the Company has full
power and authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement.
(l) This Agreement has been duly authorized, executed and delivered
by the Company.
(m) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and
except as disclosed in the Prospectus, the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the use made
or to be made thereof by them.
(n) The Company and its subsidiaries possess valid certificates,
authorities or permits issued by appropriate governmental agencies or
bodies necessary to conduct the business now operated by them, except for
such certificates, authorities or permits the failure of which to obtain
would not have a Material Adverse Effect and have not received any notice
of proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a Material Adverse Effect.
(o) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a Material Adverse Effect.
(p) Except as disclosed in the Prospectus, the Company and its
subsidiaries own, possess or can acquire on reasonable terms, adequate
trademarks, trade names and other rights to inventions, know-how, patents,
copyrights, confidential information and other intellectual property,
including applications licensed directly from third parties (collectively,
"intellectual property rights"), necessary to conduct the business now
operated by them, or presently employed by them, and, except as disclosed
in the Prospectus, have not received any notice of infringement of or
conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect. The discoveries, inventions, products or processes of the
Company referred to in the Prospectus do not, to the Company's knowledge,
infringe or conflict with any intellectual property right of any third
party, where such infringement or conflict could have a Material Adverse
Effect.
(q) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or restoration
of the environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), owns or operates any real property
contaminated with any substance that is subject to any environmental laws,
is liable for any off-site disposal or contamination pursuant to any
environmental laws, or is subject to any claim relating to any
environmental laws, which violation, contamination, liability or claim
would individually or in the aggregate have a Material Adverse Effect; and
the Company is not aware of any pending investigation which might lead to
such a claim.
(r) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, or any of
its subsidiaries or any of their respective properties that, if determined
adversely to the Company or any of its subsidiaries, would individually or
in the aggregate have a Material Adverse Effect, or would materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement, or which are otherwise material in the context of the
sale of the Offered Securities; and no such actions, suits or proceedings
are threatened or, to the Company's knowledge, contemplated.
-4-
<PAGE>
(s) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the Company and
its consolidated subsidiaries as of the dates shown and their results of
operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis;
and the schedules included in each Registration Statement present fairly
the information required to be stated therein.
(t) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus, there has
been no Material Adverse Change, nor any development or event involving a
prospective Material Adverse Change, and, except as disclosed in or
contemplated by the Prospectus, there has been no dividend or distribution
of any kind declared, paid or made by the Company on any class of its
capital stock.
(u) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940.
(v) Other than beneficial holders who have registration rights
pursuant to the Amended and Restated Investor Rights Agreement dated
December 14, 1998 (the "Rights Agreement"), there are no other beneficial
holders of the Company's securities that have registration rights.
(w) Except for securities beneficially owned by the individuals named
in Schedule B hereto, all outstanding Securities, and all securities
convertible into or exercisable or exchangeable for Securities, are subject
to valid and binding agreements (collectively, "Lock-up Agreements") that
restrict the holders thereof from selling, making any short sale of,
granting any option for the purchase of, or otherwise transferring or
disposing of, any of such Securities, or any such securities convertible
into or exercisable or exchangeable for Securities, for a period of 180
days after the date of the Prospectus without the prior written consent of
Credit Suisse First Boston Corporation ("CSFBC"); and the Company has
imposed a stop-transfer instruction with the Company's transfer agent in
order to enforce the foregoing Lock-Up Agreements.
(x) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes and the Company
agrees to comply with such Section if prior to the completion of the
distribution of the Offered Securities it commences doing such business.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of $______ per share, the respective
numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for the
accounts of the Underwriters, at the office of CSFBC, Eleven Madison Avenue, New
York, New York, against payment of the purchase price in Federal (same day)
funds by official bank check or checks or wire transfer to an account at a bank
acceptable to CSFBC drawn to the order of the Company at the office of Perkins
Coie LLP, 1201 Third Avenue, 40th Floor, Seattle, Washington, at 10:00 A.M., New
York time, on _______________, 1999 or at such other time not later than seven
full business days thereafter as CSFBC and the Company determine, such time
being herein referred to as the "First Closing Date." For purposes of Rule 15c6-
1 under the Securities Exchange Act of 1934, the First Closing Date (if later
than the otherwise applicable settlement date) shall be the settlement date for
payment of funds and delivery of securities for all the Offered Securities sold
pursuant to the offering. The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the above office of CSFBC in New York at least 24 hours prior to
the First Closing Date.
-5-
<PAGE>
In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date," which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, at the above
office of CSFBC in New York, against payment of the purchase price therefor in
Federal (same day) funds by official bank check or checks or wire transfer to an
account at a bank acceptable to CSFBC drawn to the order of the Company at the
above office of Perkins Coie LLP in Seattle, Washington. The certificates for
the Optional Securities being purchased on each Optional Closing Date will be in
definitive form, in such denominations and registered in such names as CSFBC
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the above office of CSFBC in New
York at a reasonable time in advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as
of such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective amendment
thereto with the Commission pursuant to and in accordance with Rule 462(b)
on or prior to 10:00 P.M., New York time, on the date of this Agreement or,
if earlier, on or prior to the time the Prospectus is printed and
distributed to any Underwriter, or will make such filing at such later date
as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial or any additional registration statement as filed or
the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent, which
consent shall not be unreasonably withheld; and the Company will also
advise CSFBC promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and
-6-
<PAGE>
delivery of this Agreement) and of any amendment or supplementation of a
Registration Statement or the Prospectus and of the institution by the
Commission of any stop order proceedings in respect of a Registration
Statement and will use its best efforts to prevent the issuance of any such
stop order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "Availability Date" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"Availability Date" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (four of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC reasonably requests. The Prospectus shall
be so furnished on or prior to 3:00 P.M., New York time, on the business
day following the later of the execution and delivery of this Agreement or
the Effective Time of the Initial Registration Statement. All other
documents shall be so furnished as soon as available. The Company will pay
the expenses of printing and distributing to the Underwriters all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such U.S. jurisdictions as CSFBC
designates and such foreign jurisdictions as the Company and CSFBC shall
agree in advance, will continue such qualifications in effect so long as
required for the distribution; provided, however, that the Company shall
not be obligated to file any general consent to service of process or to
qualify as a foreign corporation or as a securities dealer in any
jurisdiction or to subject itself to taxation in respect of doing business
in any jurisdiction in which it is not otherwise so subject.
(g) During the period of five (5) years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Securities Exchange Act of 1934 or mailed to
stockholders, and (ii) from time to time, such other publicly available
information concerning the Company as CSFBC may reasonably request.
(h) The Company will pay all expenses incident to the performance of
its obligations under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) incurred in
connection with qualification of the Offered Securities for sale under the
laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto, for the filing fee incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. of the Offered Securities, for any travel expenses of the
Company's officers and employees and any other expenses of the
-7-
<PAGE>
Company in connection with attending or hosting meetings with prospective
purchasers of the Offered Securities and for expenses incurred in
distributing preliminary prospectuses and the Prospectus (including any
amendments and supplements thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Commission a registration statement under the Act relating
to, any additional shares of its Securities or securities convertible into
or exchangeable or exercisable for any shares of its Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of CSFBC, except
(1) issuances of Securities pursuant to the conversion of convertible
securities and the exercise of options, in each case, outstanding on the
date hereof, (2) grants of employee stock options pursuant to the terms of
a plan in effect on the date hereof and issuances of Securities pursuant to
the exercise of such options, (3) issuances of Securities pursuant to the
terms of the Company's 1998 Employee Stock Purchase Plan ("ESPP") in effect
on the date hereof, or (4) if CSFBC is provided with at least three (3)
days prior written notice, issuance of Securities in connection with
strategic acquisitions or alliances or other business relationships
approved by the Company's Board of Directors.
(j) The Company agrees to use its best efforts to cause all
directors, officers, and shareholders to agree that, without the prior
written consent of CSFBC on behalf of the Underwriters, such person or
entity will not, for a period of 180 days following the commencement of the
public offering of the Offered Securities by the Underwriters, directly or
indirectly, sale, make any short sale of, grant any option for the purchase
of, or otherwise transfer or dispose of, any of such Securities, or any
such securities convertible into or exercisable or exchangeable for
Securities.
(k) The Company agrees to use its best efforts to cause each person
who acquires Securities of the Company pursuant to the exercise of any
option granted under the Company's Amended and Restated 1994 Combined
Incentive and Nonqualified Stock Plan, the 1998 Stock Incentive
Compensation Plan or the ESPP to sign an agreement that restricts such
person from selling, making any short sale of, granting any option for the
purchase of, or otherwise transferring or disposing of, any of such
Securities, or any such securities convertible into or exercisable or
exchangeable for Securities, for a period of 180 days after the date of the
Prospectus without the prior written consent of CSFBC; and the Company will
issue and impose a stop-transfer instruction with the Company's transfer
agent in order to enforce the foregoing lock-up agreements.
(l) The Company will (i) enforce the terms of each Lock-up Agreement,
and (ii) issue stop-transfer instructions to the transfer agent for the
Securities with respect to any transaction or contemplated transaction that
would constitute a breach of or default under the applicable Lock-up
Agreement. In addition, except with the prior written consent of CSFBC,
the Company agrees (i) not to amend or terminate, or waive any right under,
any Lock-up Agreement, or take any other action that would directly or
indirectly have the same effect as an amendment or termination, or waiver
of any right under any Lock-up Agreement, that would permit any holder of
Securities, or any securities convertible into, or exercisable or
exchangeable for, Securities, to make any short sale of, grant any option
for the purchase of, or otherwise transfer or dispose of, any such
Securities or other securities, prior to the expiration of the 180 days
after the date of the Prospectus and (ii) not to consent to any sale, short
sale, grant of an option for the purchase of, or other disposition or
transfer of shares of Securities, or securities convertible into or
exercisable or exchangeable for Securities, subject to a Lock-up Agreement.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be
-8-
<PAGE>
on or prior to the date of this Agreement (but in no event earlier than the
Effective Time) or, if the Effective Time of the Initial Registration
Statement is subsequent to the execution and delivery of this Agreement,
shall be prior to the filing of the amendment or post-effective amendment
to the registration statement to be filed shortly prior to such Effective
Time), of Ernst & Young LLP confirming that they are independent public
accountants within the meaning of the Act and the related Rules and
Regulations adopted thereunder by the Commission and stating to the effect
that:
(i) in their opinion the financial statements and financial
statement schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related Rules
and Regulations adopted thereunder by the Commission;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement of Auditing
Standards No. 71, Interim Financial Information, on the unaudited
financial statements included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial statements
of the Company, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other
specified procedures, nothing came to their attention that caused them
to believe that:
(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act
and the related adopted Rules and Regulations or any material
modifications should be made to such unaudited financial
statements for them to be in conformity with generally accepted
accounting principles;
(B) the unaudited total revenues, loss from operations, net
loss, pro forma basic and diluted net loss per share amounts for
the three (3) month periods ended December 31, 1998 included in
the Prospectus do not agree with the amounts set forth in the
unaudited consolidated financial statements for those same
periods or were not determined on a basis substantially
consistent with that of the corresponding amounts in the audited
statement of operations;
(C) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business days prior to the date of this Agreement,
there was any change in the capital stock (except pursuant to
option exercises or other issues described in the Prospectus) or
any increase in short-term indebtedness or long-term obligations
of the Company and its consolidated subsidiaries or, at the date
of the latest available balance sheet read by such accountants,
there was any decrease in consolidated total current assets or
total assets, or any increase in shareholders' deficit as
compared with amounts shown on the latest balance sheet included
in the Prospectus; or
(D) for the period from the closing date of the latest
statement of operations included in the Prospectus to the closing
date of the latest available statement of operations read by such
accountants there were any decreases, as compared with the
corresponding period of the previous year and with the period of
corresponding length ended the date of the latest statement of
operations included in the Prospectus, in revenues, income from
operations or increase in net loss or per share amounts of net
loss.
except in all cases set forth in clauses (C) and (D) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
-9-
<PAGE>
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial and
statistical information are derived from the general accounting
records of the Company and its subsidiaries subject to the internal
controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting records
and other procedures specified in such letter and have found such
dollar amounts, percentages and other financial and statistical
information to be in agreement with such results, except as otherwise
specified in such letter.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration is subsequent to
such execution and delivery, "Registration Statements" shall mean the
Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the
post-effective amendment to be filed shortly prior to its Effective
Time, and (iii) "Prospectus" shall mean the prospectus included in the
Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
in writing by CSFBC. If the Effective Time of the Additional Registration
Statement (if any) is not prior to the execution and delivery of this
Agreement, such Effective Time shall have occurred not later than 10:00
P.M., New York time, on the date of this Agreement or, if earlier, the time
the Prospectus is printed and distributed to any Underwriter, or shall have
occurred at such later date as shall have been consented to by CSFBC. If
the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, the Prospectus shall have been
filed with the Commission in accordance with the Rules and Regulations and
Section 5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or,
to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, properties or results of operations of the Company or its
subsidiaries which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and
makes it impractical or inadvisable to proceed with completion of the
public offering or the sale of and payment for the Offered Securities; (ii)
any downgrading in the rating of any debt securities of the Company by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Act), or any public announcement that any
such organization has under surveillance or review its rating of any debt
securities of the Company (other than an announcement with positive
implications of a possible upgrading, and no implication of a possible
downgrading, of such rating); (iii) any suspension or limitation of trading
in securities generally on the New York Stock Exchange, or any setting of
minimum prices for trading on such exchange, or any suspension of trading
of any securities of the Company on any exchange or in the over-the-counter
market; (iv) any banking moratorium declared by U.S. Federal or New York
authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or
any other substantial national or international calamity or emergency if,
in the judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities.
-10-
<PAGE>
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Perkins Coie LLP, counsel for the Company, in the form
attached hereto as Appendix A.
(e) The Representatives shall have received from Wilson Sonsini
Goodrich & Rosati, counsel for the Underwriters, such opinion or opinions,
dated such Closing Date, with respect to the incorporation of the Company,
the validity of the Offered Securities delivered on such Closing Date, the
Registration Statements, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to
pass upon such matters. In rendering such opinion, Wilson Sonsini Goodrich
& Rosati may rely as to the incorporation of the Company and all other
matters governed by Washington law upon the opinion of Perkins Coie LLP
referred to in subsection (d) above.
(f) The Representatives shall have received a certificate, dated such
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that: the representations and warranties of the Company in this Agreement
are true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated by
the Commission; the Additional Registration Statement (if any) satisfying
the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed
pursuant to Rule 462(b), including payment of the applicable filing fee in
accordance with Rule 111(a) or (b) under the Act, prior to the time the
Prospectus was printed and distributed to any Underwriter; and, subsequent
to the date of the most recent financial statements in the Prospectus,
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated such
Closing Date, of Ernst & Young LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to
in such subsection will be a date not more than three days prior to such
Closing Date for the purposes of this subsection.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter,
its partners, directors and officers and each person, if any, who controls
such Underwriter within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, the
Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as such
in subsection (b) below.
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<PAGE>
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the Act,
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement
or omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred, it being understood and
agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: (i) the concession and reallowance figures appearing in the
fourth paragraph under the caption "Underwriting" and (ii) the information
contained in the sixth and twelfth paragraphs under the caption
"Underwriting."
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under subsection (a) or (b) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than under subsection (a) or (b) above. In case any such
action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to
the indemnifying party), and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party under
this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement
of any pending or threatened action in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a) or (b)
above (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on
the other from the offering of the Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result
of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection
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<PAGE>
with investigating or defending any action or claim which is the subject of
this subsection (d). Notwithstanding the provisions of this subsection (d),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this subsection (d) to contribute are several
in proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section shall be in addition to any
liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each director of the
Company, to each officer of the Company who has signed a Registration
Statement and to each person, if any, who controls the Company within the
meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated
pursuant to Section 8 or if for any reason the purchase of the Offered
Securities by the Underwriters is not consummated, the Company shall remain
responsible for the expenses to be paid or reimbursed by it pursuant to Section
5 and the respective obligations of the Company and the Underwriters pursuant to
Section 7 shall remain in effect, and if any Offered Securities have been
purchased hereunder the representations and warranties in Section 2 and all
obligations under Section 5 shall also remain in effect. If the purchase of the
Offered Securities by the Underwriters is not consummated for any reason other
than solely because of the termination of this Agreement pursuant to Section 8
or the occurrence of any event specified in clause (iii), (iv) or (v) of Section
6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses
(including fees and disbursements of counsel) reasonably incurred by them in
connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 310 120th Avenue N.E.,
Bellevue, Washington,
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<PAGE>
98005, Attention: Chief Financial Officer; provided, however, that any notice to
an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed
and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any suit
or proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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<PAGE>
If the foregoing is in accordance with the Representatives' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
ONYX SOFTWARE CORPORATION
a Washington corporation
By
----------------------------------
Brent R. Frei
Chairman of the Board, President and
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
SG COWEN SECURITIES CORPORATION
PIPER JAFFRAY INC.
Acting on behalf of themselves and as the Representatives of the several
Underwriters
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By
----------------------------
Title
-------------------------
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION> NUMBER OF
Underwriter Firm Securities
<S> <C>
Credit Suisse First Boston Corporation......................................................
SG Cowen Securities Corporation.............................................................
Piper Jaffray Inc...........................................................................
___________________.........................................................................
___________________......................................................................... -------------------
Total...................................................................
===================
</TABLE>
<PAGE>
SCHEDULE B
NAME
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<PAGE>
EXHIBIT 5.1
February 8, 1999
ONYX Software Corporation
310 - 120th Avenue N.E.
Bellevue, WA 98005
Ladies and Gentlemen:
We have acted as counsel to you in connection with the proceedings for the
authorization and issuance by ONYX Software Corporation (the "Company") of up to
3,100,000 shares (the "Firm Shares") of the Company's common stock, $.01 par
value per share (the "Common Stock"), together with an additional 465,000 shares
of Common Stock if and to the extent the underwriters exercise an over-allotment
option granted by the Company (the "Over-Allotment Shares"), and the preparation
and filing of a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
which you are filing with the Securities and Exchange Commission with respect to
the Firm Shares and the Over-Allotment Shares (collectively, the "Shares").
We have examined the Registration Statement and such documents and records
of the Company and other documents as we have deemed necessary for the purpose
of this opinion. Based upon the foregoing, we are of the opinion that upon the
happening of the following events:
(a) the filing and effectiveness of the Registration Statement and any
amendments thereto,
(b) due execution by the Company and registration by its registrar of the
Shares,
(c) the offering and sale of the Shares as contemplated by the
Registration Statement, and
(d) receipt by the Company of the consideration required for the Firm
Shares and the Overallotment Shares to be sold by the Company as
contemplated by the Registration Statement,
the Shares will be duly authorized, validly issued, fully paid and
nonassessable.
<PAGE>
ONYX Software Corporation
February 8, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto, including any and all post-
effective amendments and any registration statement relating to the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to the reference to our firm in the Prospectus of the
Registration Statement under the heading "Legal Matters". In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
PERKINS COIE LLP
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EXHIBIT 10.9
ONYX SOFTWARE CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE
The purposes of the ONYX Software Corporation 1998 Employee Stock Purchase
Plan (the "Plan") are (a) to assist employees of ONYX Software Corporation, a
Washington corporation (the "Company"), and its designated subsidiaries in
acquiring a stock ownership interest in the Company pursuant to a plan that is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code of 1986, as amended, and (b) to encourage employees to
remain in the employ of the Company and its subsidiaries.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
"BOARD" means the Board of Directors of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Company's Compensation Committee.
"COMPANY" means ONYX Software Corporation, a Washington corporation.
"CORPORATE TRANSACTION" means either of the following events:
(a) Consummation of any merger or consolidation of the Company with or
into another corporation; or
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or substantially all of
the Company's assets other than a transfer of the Company's assets to a
Subsidiary Corporation.
"DESIGNATED SUBSIDIARY" has the meaning set forth under the definition of
"Eligible Employee" in this Section 2.
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"ELIGIBLE COMPENSATION" means all regular cash compensation including
overtime, cash bonuses and commissions. Regular cash compensation does not
include severance pay, hiring and relocation bonuses, pay in lieu of vacations,
sick leave or any other special payments.
"ELIGIBLE EMPLOYEE" means any employee of the Company or any domestic
Subsidiary Corporation or any other Subsidiary Corporation designated by the
Board or the Committee (each a "Designated Subsidiary"), who is in the employ of
the Company (or any Designated Subsidiary) on one or more Offering Dates and who
meets the following criteria:
(a) the employee does not, immediately after the option is granted,
own stock (as defined by the Code) possessing 5% or more of the
total combined voting power or value of all classes of stock of
the Company or of a Parent Corporation or a Subsidiary
Corporation of the Company;
(b) the employee's customary employment is for more than 20 hours per
week; provided, however, that the Plan Administrator may decrease
this minimum requirement for future Offering Periods; and
(c) the employee has been employed for at least three months as of
the Offering Date.
If the Company permits any employee of a Designated Subsidiary to participate in
the Plan, then all employees of that Designated Subsidiary who meet the
requirements of this paragraph shall also be considered Eligible Employees.
"ENROLLMENT PERIOD" has the meaning set forth in Section 7.1.
"ESPP BROKER" has the meaning set forth in Section 10.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"NEW PURCHASE DATE" has the meaning set forth in Sections 21.2 and 21.3.
"OFFERING" has the meaning set forth in Section 5.1.
"OFFERING DATE" means the first day of an Offering.
"OFFERING PERIOD" has the meaning set forth in Section 5.1.
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"OPTION" means an option granted under the Plan to an Eligible Employee to
purchase shares of Stock.
"PARENT CORPORATION" means any corporation, other than the Company, in an
unbroken chain of corporations ending with the Company, if, at the time of the
granting of the Option, each of the corporations, other than the Company, owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
"PARTICIPANT" means any Eligible Employee who has elected to participate in
an Offering in accordance with the procedures set forth in Section 7.1 and who
has not withdrawn from the Plan or whose participation in the Plan is not
terminated.
"PLAN" means the ONYX Software Corporation 1998 Employee Stock Purchase
Plan.
"PURCHASE DATE" means the last day of each Purchase Period.
"PURCHASE PERIOD" has the meaning set forth in Section 5.2.
"PURCHASE PRICE" has the meaning set forth in Section 6.
"STOCK" means the common stock of the Company.
"SUBSCRIPTION" has the meaning set forth in Section 7.1.
"SUBSIDIARY CORPORATION" means any corporation, other than the Company, in
an unbroken chain of corporations beginning with the Company, if, at the time of
the granting of the Option, each of the corporations, other than the last
corporation in the unbroken chain, owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or the Committee or, if and to
the extent the Board or the Committee designates an executive officer of the
Company to administer the Plan, by such executive officer (each, the "Plan
Administrator"). Any decisions made by the Plan Administrator shall be
applicable equally to all Eligible Employees.
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3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Subject to the provisions of the Plan, the Plan Administrator shall have
the authority, in its sole discretion, to determine all matters relating to
Options granted under the Plan, including all terms, conditions, restrictions
and limitations of Options; provided, however, that all Participants granted
Options pursuant to the Plan shall have the same rights and privileges within
the meaning of Code Section 423. The Plan Administrator shall also have
exclusive authority to interpret the Plan and may from time to time adopt, and
change, rules and regulations of general application for the Plan's
administration. The Plan Administrator's interpretation of the Plan and its
rules and regulations, and all actions taken and determinations made by the Plan
Administrator pursuant to the Plan, unless revised by the Board or the
Committee, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's other officers or employees as the Plan Administrator so determines.
SECTION 4. STOCK SUBJECT TO PLAN
Subject to adjustment from time to time as provided in Section 21, the
maximum number of shares of the Company's Stock which shall be available for
issuance under the Plan shall be 500,000 shares, plus an annual increase to be
added on the first day of the Company's fiscal year beginning in 2000 equal to
the lesser of (a) 200,000 shares of Stock and (b) 1.2% of the adjusted average
common shares outstanding of the Company used to calculate fully diluted
earnings per share as reported in the Annual Report to shareholders for the
preceding year, or (c) a lesser amount determined by the Board; provided,
however, that any shares from any increases in previous years that are not
actually issued shall be added to the aggregate number of shares available for
issuance under the Plan. Shares issued under the Plan shall be drawn from
authorized and unissued shares or shares now held or subsequently acquired by
the Company.
SECTION 5. OFFERING DATES
5.1 OFFERING PERIODS
(a) Except as otherwise set forth below, the Plan shall be implemented by
a series of Offerings (each, an "Offering"). Offerings shall commence on January
1 and July 1 of each year and end on the next June 30 and December 31,
respectively, occurring thereafter (each, an "Offering Period"); provided,
however, that the first Offering Period shall begin on the day (the "IPO Date")
on which shares of the Company's Stock are first offered to the public in an
underwritten initial public offering of such Stock pursuant to a registration
statement filed with and declared
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effective by the Securities and Exchange Commission (such day being the first
trading day for the Stock on the Nasdaq National Market, the New York Stock
Exchange or other applicable trading market), and shall end on June 30, 1999.
(b) Notwithstanding the foregoing, the Board may establish (i) a different
term for one or more Offerings and (ii) different commencing and ending dates
for such Offerings; provided, however, that an Offering Period may not exceed
five years; and provided, further, that if the Purchase Price may be less than
85% of the fair market value of the Stock on the Purchase Date, the Offering
Period may not exceed 27 months.
(c) In the event the first or the last day of an Offering Period is not a
regular business day, then the first day of the Offering Period shall be deemed
to be the next regular business day and the last day of the Offering Period
shall be deemed to be the last preceding regular business day. An employee who
becomes eligible to participate in the Plan after an Offering Period has
commenced shall not be eligible to participate in such Offering but may
participate in any subsequent Offering, provided that such employee is still an
Eligible Employee as of the commencement of any such subsequent Offering.
Eligible Employees may not participate in more than one Offering at a time.
5.2 PURCHASE PERIODS
Each Offering Period shall consist of one or more consecutive purchase
periods (each, a "Purchase Period"). The last day of each Purchase Period shall
be the Purchase Date for such Purchase Period. Except as otherwise set forth
below, each Purchase Period shall commence on January 1 and July 1 of each year
and end on the next June 30 and December 31, respectively, occurring thereafter;
provided, however, that the Purchase Period for the first Offering shall
commence on the IPO Date and end on June 30, 1999. Notwithstanding the
foregoing, the Board may establish (a) a different term for one or more Purchase
Periods and (b) different commencing and ending dates for any such Purchase
Period. In the event the first or last day of a Purchase Period is not a regular
business day, then the first day of the Purchase Period shall be deemed to be
the next regular business day and the last day of the Purchase Period shall be
deemed to be the last preceding regular business day.
5.3 GOVERNMENTAL APPROVAL; SHAREHOLDER APPROVAL
Notwithstanding any other provision of the Plan to the contrary, an Option
granted pursuant to the Plan shall be subject to (a) obtaining all necessary
governmental approvals and qualifications of the Plan and the issuance of
Options and sale of Stock pursuant to the Plan and (b) obtaining shareholder
approval of the Plan.
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SECTION 6. PURCHASE PRICE
The purchase price (the "Purchase Price") at which Stock may be acquired in
an Offering pursuant to the exercise of all or any portion of an Option granted
under the Plan (the "Offering Exercise Price") shall be 85% of the lesser of (a)
the fair market value of the Stock on the Offering Date of such Offering and (b)
the fair market value of the Stock on the Purchase Date; provided, however, that
the Purchase Price for the first Offering Period that begins on the IPO Date
shall be the lesser of (a) 100% of the initial public offering price per share
of Stock, before underwriters' discounts or concessions, set forth in that
certain Underwriting Agreement between the Company and the representatives of
the underwriters when executed in connection with the Company's initial public
offering of the Stock and (b) 85% of the fair market value of the Stock on the
Purchase Date. The fair market value of the Stock on the Offering Date or on the
Purchase Date shall be the closing price for the Stock as reported for such day
by the Nasdaq National Market, the New York Stock Exchange or other trading
market on which the Company's Stock may then be traded (the "Exchange"). If no
sales of the Stock were made on the Exchange on such day, fair market value
shall mean the closing price for the Stock as reported for the next preceding
day on which sales of the Stock were made on the Exchange. If the Stock is not
listed on an Exchange, the Board shall designate an alternative method of
determining the fair market value of the Stock.
SECTION 7. PARTICIPATION IN THE PLAN
7.1 INITIAL PARTICIPATION
An Eligible Employee shall become a Participant on the first Offering Date
after satisfying the eligibility requirements and delivering to the Plan
Administrator during the enrollment period established by the Plan Administrator
(the "Enrollment Period") a subscription (the "Subscription"):
(a) indicating the Eligible Employee's election to participate in the
Plan;
(b) authorizing payroll deductions and stating the amount to be deducted
regularly from the Participant's pay; and
(c) authorizing the purchase of Stock for the Participant in each Purchase
Period.
An Eligible Employee who does not deliver a Subscription as provided above
during the Enrollment Period shall not participate in the Plan for that Offering
Period or for any subsequent Offering Period unless such Eligible Employee
subsequently
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enrolls in the Plan by filing a Subscription with the Company during the
Enrollment Period for such subsequent Offering Period. The Company may, from
time to time, change the Enrollment Period for any future Offering as deemed
advisable by the Plan Administrator, in its sole discretion, for the proper
administration of the Plan.
7.2 CONTINUED PARTICIPATION
A Participant shall automatically participate in the next Offering Period
until such time as such Participant withdraws from the Plan pursuant to Section
11.2 or 11.3 or terminates employment as provided in Section 13.
SECTION 8. LIMITATIONS ON RIGHT TO PURCHASE SHARES
8.1 NUMBER OF SHARES PURCHASED
The maximum number of shares of Stock that may be offered to a Participant
on any Offering Date shall be equal to $25,000 divided by the fair market value
of one share of Stock on the applicable Offering Date. Further, no Participant
shall be entitled to purchase Stock under the Plan (or any other employee stock
purchase plan that is intended to meet the requirements of Code Section 423
sponsored by the Company, a Parent Corporation or a Subsidiary Corporation) with
a fair market value exceeding $25,000, determined as of the Offering Date for
each Offering Period (or such other limit as may be imposed by the Code), in any
calendar year in which a Participant participates in the Plan (or other employee
stock purchase plan described in this Section 8.1).
8.2 PRO RATA ALLOCATION
In the event the number of shares of Stock that might be purchased by all
Participants in the Plan exceeds the number of shares of Stock available in the
Plan, the Plan Administrator shall make a pro rata allocation of the remaining
shares of Stock in as uniform a manner as shall be practicable and as the Plan
Administrator shall determine to be equitable. Fractional shares may not be
issued under the Plan unless the Plan Administrator determines otherwise for
future Offering Periods.
SECTION 9. PAYMENT OF PURCHASE PRICE
9.1 GENERAL RULES
Subject to Section 9.11, Stock that is acquired pursuant to the exercise of
all or any portion of an Option may be paid for only by means of payroll
deductions from the Participant's Eligible Compensation. Except as set forth in
this Section 9, the
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amount of compensation to be withheld from a Participant's Eligible Compensation
during each pay period shall be determined by the Participant's Subscription.
9.2 PERCENT WITHHELD
The amount of payroll withholding for each Participant for purchases
pursuant to the Plan during any pay period shall be at least 1% but shall not
exceed 10% of the Participant's Eligible Compensation for such pay period.
Amounts shall be withheld in whole percentages only.
9.3 PAYROLL DEDUCTIONS
Payroll deductions shall commence on the first payday following the
Offering Date and shall continue through the last payday of the Offering Period
unless sooner altered or terminated as provided in the Plan.
9.4 MEMORANDUM ACCOUNTS
Individual accounts shall be maintained for each Participant for memorandum
purposes only. All payroll deductions from a Participant's Eligible
Compensation shall be credited to such account but shall be deposited with the
general funds of the Company. All payroll deductions received or held by the
Company may be used by the Company for any corporate purpose.
9.5 NO INTEREST
No interest shall be paid on payroll deductions received or held by the
Company.
9.6 ACQUISITION OF STOCK
On each Purchase Date of an Offering Period, each Participant shall
automatically acquire, pursuant to the exercise of the Participant's Option, the
number of shares of Stock arrived at by dividing the total amount of the
Participant's accumulated payroll deductions for the Purchase Period by the
Purchase Price; provided, however, that the number of shares of Stock purchased
by the Participant shall not exceed the number of whole shares of Stock so
determined, unless the Plan Administrator has determined for any future Offering
that fractional shares may be issued under the Plan; and provided, further, that
the number of shares of Stock purchased by the Participant shall not exceed the
number of shares for which Options have been granted to the Participant pursuant
to Section 8.1.
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9.7 REFUND OF EXCESS AMOUNTS
Any cash balance remaining in the Participant's account at the termination
of each Purchase Period shall be refunded to the Participant as soon as
practical after the Purchase Date without the payment of any interest; provided,
however, that if the Participant participates in the next Purchase Period, any
cash balance remaining in the Participant's account shall be applied to the
purchase of Stock in the new Purchase Period, provided such purchase complies
with Section 8.1.
9.8 WITHHOLDING OBLIGATIONS
At the time the Option is exercised, in whole or in part, or at the time
some or all of the Stock is disposed of, the Participant shall make adequate
provision for federal and state withholding obligations of the Company, if any,
that arise upon exercise of the Option or upon disposition of the Stock. The
Company may withhold from the Participant's compensation the amount necessary to
meet such withholding obligations.
9.9 TERMINATION OF PARTICIPATION
No Stock shall be purchased on behalf of a Participant on a Purchase Date
if his or her participation in the Offering or the Plan has terminated on or
before such Purchase Date.
9.10 PROCEDURAL MATTERS
The Company may, from time to time, establish (a) limitations on the
frequency and/or the number of any permitted changes in the amount withheld
during an Offering, as set forth in Section 11.1, (b) an exchange ratio
applicable to amounts withheld in a currency other than U.S. dollars, (c)
payroll withholding in excess of the amount designated by a Participant in order
to adjust for delays or mistakes in the Company's processing of properly
completed withholding elections and (d) such other limitations or procedures as
deemed advisable by the Company in its sole discretion that are consistent with
the Plan and in accordance with the requirements of Code Section 423.
9.11 LEAVES OF ABSENCE
During leaves of absence approved by the Company and meeting the
requirements of the applicable Treasury Regulations promulgated under the Code,
a Participant may elect to continue participation in the Plan by delivering cash
payments to the Plan Administrator on the Participant's normal paydays equal to
the amount of his or her payroll deduction under the Plan had the Participant
not taken a leave of
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absence. Currently, the Treasury Regulations provide that a Participant may
continue participation in the Plan only during the first 90 days of a leave of
absence unless the Participant's reemployment rights are guaranteed by statute
or contract.
SECTION 10. STOCK PURCHASED UNDER THE PLAN
10.1 ESPP BROKER
If the Plan Administrator designates or approves a stock brokerage or other
financial services firm (the "ESPP Broker") to hold shares purchased under the
Plan for the accounts of Participants, the following procedures shall apply.
Promptly following each Purchase Date, the number of shares of Stock purchased
by each Participant shall be deposited into an account established in the
Participant's name with the ESPP Broker. A Participant shall be free to
undertake a disposition of the shares of Stock in his or her account at any time
but, in the absence of such a disposition, the shares of Stock must remain in
the Participant's account at the ESPP Broker until the holding period set forth
in Code Section 423 has been satisfied. With respect to shares of Stock for
which the holding periods set forth above have been satisfied, the Participant
may move those shares of Stock to another brokerage account of the Participant's
choosing or request that a stock certificate be issued and delivered to him or
her. Any dividends paid in the form of shares of Stock with respect to Stock in
a Participant's account shall be credited to such account. A Participant who is
not subject to payment of U.S. income taxes may move his or her shares of Stock
to another brokerage account of his or her choosing or request that a stock
certificate be delivered to him or her at any time, without regard to the Code
Section 423 holding period.
10.2 NOTICE OF DISPOSITION
By entering the Plan, each Participant agrees to promptly give the Company
notice of any Stock disposed of within the later of one year from the Purchase
Date and two years from the Offering Date for such Stock, showing the number of
such shares disposed of and the Purchase Date and Offering Date for such Stock.
This notice shall not be required if and so long as the Company has a designated
ESPP Broker.
SECTION 11. WITHHOLDING CHANGES AND VOLUNTARY WITHDRAWAL
11.1 CHANGES IN WITHHOLDING NOTICES
(a) Unless otherwise determined by the Plan Administrator for a future
Offering, a Participant may not change his or her rate of payroll withholding
during an
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Offering Period, except that a Participant may cease contributions during an
Offering Period and have all payroll deductions accrued as of the date of such
notice to the Plan Administrator applied toward the purchase of Stock on the
Purchase Date. Notice of any such election must be delivered to the Plan
Administrator in such form and in accordance with such terms as the Plan
Administrator may establish for an Offering. Unless otherwise indicated,
discontinuance of payroll contributions during an Offering shall not result in
withdrawal from the Plan or any succeeding Offering therein.
(b) A Participant may elect to increase or decrease the amount to be withheld
from his or her Eligible Compensation for future Offerings; provided, however,
that notice of such election must be delivered to the Plan Administrator in such
form and in accordance with such terms as the Plan Administrator may establish
for an Offering.
11.2 WITHDRAWAL FROM AN OFFERING
A Participant may withdraw from an Offering by signing and delivering to
the Company's Plan Administrator a written notice of withdrawal on a form
provided by the Company for such purpose. Such withdrawal must be elected at
least ten days prior to the end of the Purchase Period for which such withdrawal
is to be effective or by any other date specified by the Plan Administrator for
any future Offering. If a Participant withdraws after the Purchase Date for a
Purchase Period of an Offering, the withdrawal shall not affect Stock acquired
by the Participant in any earlier Purchase Periods. Unless otherwise indicated,
withdrawal from an Offering shall not result in a withdrawal from the Plan or
any succeeding Offering therein. A Participant is prohibited from again
participating in the same Offering at any time upon withdrawal from such
Offering. The Company may, from time to time, impose a requirement that the
notice of withdrawal be on file with the Plan Administrator for a reasonable
period prior to the effectiveness of the Participant's withdrawal.
11.3 WITHDRAWAL FROM THE PLAN
A Participant may withdraw from the Plan by signing a written notice of
withdrawal on a form provided by the Company for such purpose and delivering
such notice to the Plan Administrator. Such notice must be delivered at least
ten days prior to the end of the Purchase Period for which such withdrawal is to
be effective or by any other date specified by the Plan Administrator for any
future Offering. In the event a Participant voluntarily elects to withdraw from
the Plan, the Participant may not resume participation in the Plan during the
same Offering Period, but may participate in any subsequent Offering under the
Plan by again satisfying the definition of Eligible Employee. The Company may
impose, from time to time, a
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requirement that the notice of withdrawal be on file with the Plan Administrator
for a reasonable period prior to the effectiveness of the Participant's
withdrawal.
11.4 RETURN OF PAYROLL DEDUCTIONS
Upon withdrawal from an Offering pursuant to Section 11.2 or from the Plan
pursuant to Section 11.3, the withdrawing Participant's accumulated payroll
deductions that have not been applied to the purchase of Stock shall be returned
as soon as practical after the withdrawal, without the payment of any interest,
to the Participant and the Participant's interest in the Offering shall
terminate. Such accumulated payroll deductions may not be applied to any other
Offering under the Plan.
SECTION 12. MARKET STANDOFF
In connection with the underwritten initial public offering by the Company
of its Common Stock, neither a Participant nor any beneficiary designated
pursuant to Section 14.2 shall sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose of or
transfer for value or otherwise agree to engage in any of the foregoing
transactions with respect to any Common Stock issued under the Plan for a period
of 180 days after the IPO Date, except that the foregoing provision shall not
apply in the event of the Participant's death or "disability" as that term is
defined in Section 22(e)(3) of the Code.
In the event of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
Company's Common Stock effected as a class without the Company's receipt of
consideration, any new, substituted or additional securities distributed with
respect to the purchased Common Stock shall be immediately subject to the
provisions of this Section 12.
In order to enforce the limitations of this Section 12, the Company may
issue stop-transfer instructions to the ESPP Broker and/or the Company's
transfer agent until the end of the period ending 180 days after the IPO Date.
SECTION 13. TERMINATION OF EMPLOYMENT
Termination of a Participant's employment with the Company for any reason,
including retirement, death or the failure of a Participant to remain an
Eligible Employee, shall immediately terminate the Participant's participation
in the Plan. The payroll deductions credited to the Participant's account since
the last Purchase Date shall, as soon as practical, be returned to the
Participant or, in the case of a Participant's death, to the Participant's legal
representative or designated beneficiary as provided in Section 14.2, and all of
the Participant's rights under the Plan shall
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terminate. Interest shall not be paid on sums returned to a Participant pursuant
to this Section 13.
SECTION 14. RESTRICTIONS ON ASSIGNMENT
14.1 TRANSFERABILITY
An Option granted under the Plan shall not be transferable and such Option
shall be exercisable during the Participant's lifetime only by the Participant.
The Company will not recognize, and shall be under no duty to recognize, any
assignment or purported assignment by a Participant of the Participant's
interest in the Plan, of his or her Option or of any rights under his or her
Option.
14.2 BENEFICIARY DESIGNATION
The Plan Administrator may permit a Participant to designate a beneficiary
who is to receive any shares and cash, if any, from the Participant's account
under the Plan in the event the Participant dies after the Purchase Date for an
Offering but prior to delivery to such Participant of such shares and cash. In
addition, the Plan Administrator may permit a Participant to designate a
beneficiary who is to receive any cash from the Participant's account under the
Plan in the event that the Participant dies before the Purchase Date for an
Offering. Such designation may be changed by the Participant at any time by
written notice to the Plan Administrator.
SECTION 15. NO RIGHTS AS SHAREHOLDER UNTIL SHARES ISSUED
With respect to shares of Stock subject to an Option, a Participant shall
not be deemed to be a shareholder of the Company, and he or she shall not have
any rights or privileges of a shareholder. A Participant shall have the rights
and privileges of a shareholder of the Company when, but not until, a
certificate or its equivalent has been issued to the Participant for the shares
of Stock following exercise of the Participant's Option.
SECTION 16. LIMITATIONS ON SALE OF STOCK PURCHASED UNDER THE PLAN
The Plan is intended to provide Stock for investment and not for resale.
The Company does not, however, intend to restrict or influence any Participant
in the conduct of his or her own affairs. A Participant, therefore, may sell
Stock purchased under the Plan at any time he or she chooses, subject to
compliance with any applicable federal and state securities laws. A Participant
assumes the risk of any market fluctuations in the price of the Stock.
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SECTION 17. AMENDMENT OF THE PLAN
The Board may amend the Plan in such respects as it shall deem advisable;
provided, however, that, to the extent required for compliance with Code Section
423 or any applicable law or regulation, shareholder approval will be required
for any amendment that will (a) increase the total number of shares as to which
Options may be granted under the Plan, (b) modify the class of employees
eligible to receive Options, or (c) otherwise require shareholder approval under
any applicable law or regulation.
SECTION 18. TERMINATION OF THE PLAN
The Plan shall continue in effect for ten years after the date of its
adoption by the Board. Notwithstanding the foregoing, the Board may suspend or
terminate the Plan at any time. During any period of suspension or upon
termination of the Plan, no Options shall be granted; provided, however, that
suspension or termination of the Plan shall have no effect on Options granted
prior thereto.
SECTION 19. NO RIGHTS AS AN EMPLOYEE
Nothing in the Plan shall be construed to give any person (including any
Eligible Employee or Participant) the right to remain in the employ of the
Company or a Parent or Subsidiary Corporation or to affect the right of the
Company or a Parent or Subsidiary Corporation to terminate the employment of any
person (including any Eligible Employee or Participant) at any time with or
without cause.
SECTION 20. EFFECT UPON OTHER PLANS
The adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company or any Parent or Subsidiary
Corporation. Nothing in the Plan shall be construed to limit the right of the
Company, any Parent Corporation or Subsidiary Corporation to (a) establish any
other forms of incentives or compensation for employees of the Company, a Parent
Corporation or Subsidiary Corporation or (b) grant or assume options otherwise
than under the Plan in connection with any proper corporate purpose, including,
but not by way of limitation, the grant or assumption of options in connection
with the acquisition, by purchase, lease, merger, consolidation or otherwise, of
the business, stock or assets of any corporation, firm or association.
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SECTION 21. ADJUSTMENTS
21.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or kind of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Stock, then (subject to any required action by the
Company's shareholders), the Board or the Committee, in its sole discretion,
shall make such equitable adjustments as it shall deem appropriate in the
circumstances in (i) the maximum number and kind of shares of Stock subject to
the Plan as set forth in Section 4 and (ii) the number and kind of securities
that are subject to any outstanding Option and the per share price of such
securities. The determination by the Board or the Committee as to the terms of
any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, a dissolution or liquidation of the Company or a
Corporate Transaction shall not be governed by this Section 21.1 but shall be
governed by Sections 21.2 and 21.3, respectively.
21.2 DISSOLUTION OR LIQUIDATION OF THE COMPANY
In the event of the proposed dissolution or liquidation of the Company, the
Offering Period then in progress shall be shortened by setting a new Purchase
Date (the "New Purchase Date"), and shall terminate immediately prior to the
consummation of such proposed dissolution or liquidation, unless provided
otherwise by the Board. The New Purchase Date shall be a specified date before
the date of the Company's proposed dissolution or liquidation. The Board shall
notify each Participant in writing, at least ten business days prior to the New
Purchase Date, that the Purchase Date for the Participant's Option has been
changed to the New Purchase Date and that the Participant's Option shall be
exercised automatically on the New Purchase Date, unless prior to such date the
Participant has withdrawn from the Offering Period or the Plan as provided in
Section 11 hereof.
21.3 CORPORATE TRANSACTIONS
In the event of a Corporate Transaction, each outstanding Option shall be
assumed or an equivalent option substituted by the successor corporation or a
parent or subsidiary corporation of the successor corporation. In the event
that the successor
-15-
<PAGE>
corporation refuses to assume or substitute for the Option, the Offering Period
then in progress shall be shortened by setting a new Purchase Date (the "New
Purchase Date"). The New Purchase Date shall be a specified date before the date
of the Corporate Transaction. The Board shall notify each Participant in
writing, at least ten business days prior to the New Purchase Date, that the
Purchase Date for the Participant's Option has been changed to the New Purchase
Date and that the Participant's Option shall be exercised automatically on the
New Purchase Date, unless prior to such date the Participant has withdrawn from
the Offering Period or the Plan as provided in Section 11 hereof.
21.4 LIMITATIONS
The grant of Options shall in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 22. REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Participant to register for
offering or resale under the Securities Act of 1933, as amended, or register or
qualify under state securities laws, any shares of Stock. The Company may issue
certificates for shares with such legends and subject to such restrictions on
transfer and stop-transfer instructions as counsel for the Company deems
necessary or desirable for compliance by the Company with federal and state
securities laws.
SECTION 23. EFFECTIVE DATE
The Plan's effective date is the date on which it is approved by the
Company's shareholders.
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<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our reports dated
February 4, 1999 in Amendment No. 3 to the Registration Statement (Form S-1 No.
333-68559) and the related Prospectus of ONYX Software Corporation for the
registration of 3,565,000 shares of its common stock, to be filed with the
Securities and Exchange Commission on or about February 8, 1999.
ERNST & YOUNG LLP
Seattle, Washington
February 6, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements of ONYX Software Corporation as of December 31, 1998.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 3,512,000 1,853,000
<SECURITIES> 2,064,000 0
<RECEIVABLES> 8,203,000 13,685,000
<ALLOWANCES> (553,000) (536,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,586,000 16,329,000
<PP&E> 2,217,000 3,549,000
<DEPRECIATION> (953,000) (1,885,000)
<TOTAL-ASSETS> 15,952,000 22,490,000
<CURRENT-LIABILITIES> 5,279,000 12,468,000
<BONDS> 0 0
0 0
12,070,000 13,285,000
<COMMON> (694,000) 1,912,000
<OTHER-SE> (858,000) (9,661,000)
<TOTAL-LIABILITY-AND-EQUITY> 15,952,000 22,490,000
<SALES> 13,191,000 22,811,000
<TOTAL-REVENUES> 19,437,000 35,110,000
<CGS> 5,272,000 9,054,000
<TOTAL-COSTS> 17,911,000 32,756,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (314,000) (61,000)
<INCOME-PRETAX> (3,432,000) (6,639,000)
<INCOME-TAX> (888,000) 340,000
<INCOME-CONTINUING> (2,544,000) (6,979,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,544,000) (6,979,000)
<EPS-PRIMARY> (0.43) (0.99)
<EPS-DILUTED> (0.43) (0.99)
</TABLE>
<PAGE>
Exhibit 99.1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS,
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated balance sheets of ONYX Software Corporation
as of December 31, 1997 and 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
February 4, 1999 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington
February 4, 1999
