<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25361
ONYX SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Washington 91-1629814
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
3180-139th Avenue S.E.
Suite 500
Bellevue, Washington 98005
(Address of principal executive offices) (Zip code)
(425) 451-8060
(Registrant's telephone number)
Indicate by check whether the registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of common stock, no par value, outstanding on May 10,
2000 was 36,339,673.
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<PAGE>
ONYX SOFTWARE CORPORATION
CONTENTS
<TABLE>
<C> <S> <C>
PART I--FINANCIAL INFORMATION............................................ 1
Item 1. Consolidated Financial Statements............................ 1
Consolidated Balance Sheets as of December 31, 1999 and March
31, 2000.................................................. 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 2000............................. 2
Consolidated Statement of Shareholders' Equity (Deficit) for
the Three Months Ended March 31, 2000..................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 2000............................. 4
Notes to Consolidated Financial Statements................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 21
PART II--OTHER INFORMATION............................................... 22
Item 2. Changes in Securities and Use of Proceeds.................... 22
Item 6. Exhibits and Reports on Form 8-K............................. 22
SIGNATURES............................................................ 23
</TABLE>
i
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 3,691 $21,121
Securities available-for-sale........................ 19,804 5,502
Accounts receivable, less allowances of $1,154 for
1999 and $1,018 for 2000............................ 22,987 21,183
Prepaid expense and other............................ 2,570 3,720
------- -------
Total current assets............................... 49,052 51,526
Long-term marketable securities...................... 991 --
Property and equipment, net.......................... 8,628 9,852
Purchased technology, net............................ 3,071 3,313
Other intangibles, net............................... 10,683 14,911
Other assets......................................... 755 3,451
------- -------
Total assets....................................... $73,180 $83,053
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable..................................... $ 1,906 $ 2,459
Salary and benefits payable.......................... 2,557 3,666
Accrued liabilities.................................. 2,673 3,642
Income taxes payable................................. 435 630
Current portion of capital lease obligations......... 183 174
Current portion of long-term debt.................... 123 941
Notes payable to shareholders........................ -- 1,131
Deferred revenues.................................... 11,028 13,646
------- -------
Total current liabilities.......................... 18,905 26,289
Capital lease obligations, less current portion....... 70 34
Long-term debt, net of current portion................ 63 63
Deferred tax liability................................ 2,304 2,171
Commitments and Contingencies
Shareholders' equity (deficit):
Preferred stock, $0.01 par value:
Authorized shares--20,000,000 shares;
Designated shares--none............................. -- --
Common stock, $0.01 par value:
Authorized shares--80,000,000 shares;
Issued and outstanding shares--35,329,864 shares at
December 31, 1999 and 36,076,636 at March 31,
2000............................................... 61,166 64,067
Notes receivable from officers for common stock...... (212) (157)
Deferred stock-based compensation.................... (903) (754)
Accumulated deficit.................................. (8,065) (8,552)
Accumulated other comprehensive loss................. (148) (108)
------- -------
Total shareholders' equity......................... 51,838 54,496
------- -------
Total liabilities and shareholders' equity......... $73,180 $83,053
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
1
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1999 2000
------- -------
(Unaudited)
<S> <C> <C>
Revenues:
License.................................................... $ 7,073 $14,341
Support and service........................................ 4,158 8,843
------- -------
11,231 23,184
Cost of revenues:
License.................................................... 464 660
Support and service........................................ 2,095 4,547
------- -------
2,559 5,207
------- -------
Gross margin................................................. 8,672 17,977
Operating expenses:
Sales and marketing........................................ 6,161 11,492
Research and development................................... 2,528 3,777
General and administrative................................. 1,194 2,161
Acquisition-related amortization........................... 109 881
------- -------
Total operating expenses................................. 9,992 18,311
------- -------
Loss from operations......................................... (1,320) (334)
Interest income, net......................................... 114 192
Loss from equity investment.................................. -- (237)
------- -------
Loss before income taxes................................. (1,206) (379)
Income tax provision......................................... 77 108
------- -------
Net loss..................................................... (1,283) (487)
Preferred stock accretion.................................... (1,442) --
------- -------
Loss to common shareholders.................................. $(2,725) $ (487)
======= =======
Loss per share:
Basic and diluted.......................................... $ (0.11) $ (0.01)
Pro forma basic and diluted................................ $ (0.05) NA
Shares used in calculation of loss per share:
Basic and diluted.......................................... 24,868 34,256
Pro forma basic and diluted................................ 28,164 NA
</TABLE>
See accompanying notes to consolidated financial statements.
2
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
for the Three Months Ended March 31, 2000
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Deferred Accumulated
Receivable Stock- Other Total
Common Stock from Based Comprehen- Shareholders'
------------------ Officers for Compensa- Accumulated sive Income Equity
Shares Amount Common Stock tion Deficit (Loss) (Deficit)
---------- ------- ------------ --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
2000................... 35,329,864 $61,166 $(212) $(903) $(8,065) $(148) $51,838
Issuance of common
stock in connection
with acquisition..... 69,398 2,261 -- -- -- -- 2,261
Amortization of
deferred stock
compensation......... -- -- -- 149 -- -- 149
Exercise of stock
options.............. 677,374 583 -- -- -- -- 583
Shareholder loan
repayment............ -- -- 55 -- -- -- 55
Stock-based
compensation......... -- 57 -- -- -- -- 57
Comprehensive income
(loss):
Cumulative translation
gain................. -- -- -- -- -- 33
Unrealized gains on
marketable
securities........... -- -- -- -- -- 7
Net loss.............. -- -- -- -- (487) --
Total comprehensive
loss................. (447)
---------- ------- ----- ----- ------- ----- -------
Balance at March 31,
2000................... 36,076,636 $64,067 $(157) $(754) $(8,552) $(108) $54,496
========== ======= ===== ===== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 2000
-------- -------
(Unaudited)
<S> <C> <C>
Operating activities:
Net loss to common shareholders........................... $ (2,725) $ (487)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Preferred stock accretion............................... 1,442 --
Depreciation and amortization........................... 360 1,611
Accretion of premium on investments..................... -- 23
Deferred income taxes................................... -- (133)
Noncash stock-based compensation expense................ 276 206
Write-down of equity investment......................... -- 237
Changes in operating assets and liabilities:
Accounts receivable................................... 2,068 1,992
Other assets.......................................... 352 (3,989)
Accounts payable and accrued liabilities.............. (40) 1,781
Deferred revenue...................................... 343 2,618
Income taxes.......................................... 41 157
-------- -------
Net cash provided by operating activities........... 2,117 4,016
Investing activities:
Purchases of securities................................... (9,928) --
Proceeds from maturity of securities...................... -- 15,270
Acquisition of CSN, net of cash........................... -- (996)
Purchases of property and equipment....................... (1,344) (1,733)
-------- -------
Net cash provided by (used in) investing
activities......................................... (11,272) 12,541
Financing activities:
Proceeds from exercise of stock options................... 80 583
Payments on capital lease obligations..................... (81) (45)
Payments on long-term debt................................ (4,317) (51)
Proceeds from shareholder notes........................... -- 55
Proceeds from overdraft facility.......................... -- 309
Net proceeds from initial public offering................. 41,873 --
-------- -------
Net cash provided by financing activities........... 37,555 851
Effects of exchange rate changes on cash.................... (11) 22
Net increase in cash and cash equivalents................... 28,389 17,430
Cash and cash equivalents at beginning of period............ 1,853 3,691
-------- -------
Cash and cash equivalents at end of period.................. $ 30,242 $21,121
======== =======
Supplemental cash flow disclosure:
Interest paid............................................. $ 45 $ 57
Income taxes paid, net.................................... 36 84
Issuance of common stock to employees in connection with
fourth quarter 1998 bonus................................ 119 --
Issuance of common stock in connection with acquisition... -- 2,261
Issuance of short-term debt in connection with
acquisition.............................................. -- 1,131
Technology purchased through short-term debt.............. -- 509
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Basis of Presentation
Description of the Company
Onyx Software and subsidiaries (Company) provides enterprise-wide, customer-
centric e-business solutions. Using the Internet in combination with
traditional forms of interaction, including phone, mail, fax and email, the
Company's solution enables enterprises to more effectively acquire, manage and
maintain customer, partner and other relationships. The Company designed its
solution for companies that want to merge new e-business processes with
traditional business processes to enhance their customer-facing operations.
The Company's software applications use a single data model across all
customer interactions, resulting in a single repository for all marketing,
sales and service information. The Company was incorporated in Washington on
February 23, 1994 and maintains its headquarters in Bellevue, Washington.
Interim Financial Information
The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In our opinion, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These financial statements should be
read in conjunction with our audited consolidated financial statements for the
year ended December 31, 1999, included in our Form 10-K filed with the
Securities and Exchange Commission on March 21, 2000. Our results of
operations for any interim period are not necessarily indicative of the
results of operations for any other interim period or for a full fiscal year.
2. Summary of Significant Accounting Policies
Revenue Recognition
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public
Accountants and was amended by Statement of Position 98-4 (SOP 98-4). The
Company adopted SOP 97-2 effective January 1, 1998. The AICPA 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 may
require more revenue to be deferred for certain types of transactions.
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 based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple element arrangements could consist of software
products, upgrades, enhancements, customer support services or consulting
services. If an acceptance
5
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ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. 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.
Research and Development Costs
Research and development costs, which consist primarily of software
development costs, are expensed as incurred. Financial accounting standards
provide for the capitalization of certain software development costs after
technological feasibility of the software is established. Under our current
practice of developing new products and enhancements, the technological
feasibility of the underlying software is not established until substantially
all product development is complete, including the development of a working
model. To date, the period between achieving technological feasibility and the
general availability of such software has been short; therefore, software
development costs qualifying for capitalization have been immaterial.
3. 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 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 to common stock at the time of issuance.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 2000
-------- -------
(in thousands,
except per share
data)
<S> <C> <C>
Net loss (A)............................................ $ (1,283) $ (487)
Preferred stock accretion (1)........................... (1,442) --
-------- -------
Loss to common shareholders (B)......................... (2,725) (487)
======== =======
Weighted average number of common shares (2)............ 24,868 34,256
Effect of dilutive securities......................... * *
Stock options......................................... * *
Redeemable convertible preferred stock................ * *
-------- -------
Adjusted weighted average shares and assumed conversions
(D).................................................... 24,868 34,256
Pro forma adjustment for redeemable convertible
preferred stock........................................ 3,296 --
-------- -------
Pro forma weighted average shares (E)................... 28,164 34,256
======== =======
Loss per share:
Basic and diluted (B)/(D)............................. $ (0.11) $ (0.01)
Pro forma basic and diluted (A)/(E)................... $ (0.05) NA
</TABLE>
6
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ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------
(1) Included within preferred stock accretion in the three months ended March
31, 1999 is a $1.3 million deemed dividend resulting from the 200,000
share increase in the number of shares of common stock issued upon
conversion of the Series B Convertible Preferred Stock.
(2) For purposes of determining the weighted average number of common shares
outstanding, 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. The number of restricted shares during the three months ended March
31, 1999 was 2,600,000 and during the three months ended March 31, 2000
was 1,300,000.
* Excluded from the computation of diluted earnings per share because the
effects are antidilutive. Options to purchase 8,843,102 shares of common
stock with exercise prices of $0.05 to $6.50 per share were outstanding as
of March 31, 1999 and options to purchase 9,484,579 shares of common stock
with exercise prices of $0.05 to $38.09 per share were outstanding as of
March 31, 2000.
4. Comprehensive Income (Loss)
The following table reconciles net loss as reported to comprehensive loss
under the provisions of SFAS 130 for the three months ended March 31, 1999 and
2000:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 2000
-------- -------
(in thousands)
<S> <C> <C>
Net loss.................................................. $ (1,283) $ (487)
Other comprehensive income (loss):
Unrealized currency gain (loss)......................... (44) 33
Unrealized gain (loss) on marketable securities......... -- 7
-------- ------
Total comprehensive loss.............................. $(1,327) $ (447)
======== ======
</TABLE>
5. International Operations
The Company reports operating results based on geographic areas. A summary
of key financial data by segment is as follows (in thousands):
<TABLE>
<CAPTION>
North Rest of
America World Total
------- ------- -------
<S> <C> <C> <C>
Quarter ended March 31, 2000 (unaudited):
Revenues...................................... $17,370 $ 5,814 $23,184
Operating loss (including acquisition-related
amortization)................................ 2,135 (2,469) (334)
Interest income, net.......................... 201 (9) 192
Depreciation and amortization................. 884 727 1,611
Purchases of property and equipment........... 1,655 78 1,733
Long-lived assets............................. 30,650 877 31,527
Total assets.................................. 77,028 6,025 83,053
Quarter ended March 31, 1999 (unaudited):
Revenues...................................... $ 9,340 $ 1,891 $11,231
Operating loss (including acquisition-related
amortization)................................ (368) (952) (1,320)
Interest income, net.......................... 114 -- 114
Depreciation and amortization................. 346 14 360
Purchases of property and equipment........... 1,334 10 1,344
Long-lived assets............................. 10,094 466 10,560
Total assets.................................. 57,768 1,570 59,338
</TABLE>
7
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ONYX SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Acquisition of CSN Computer Consulting
On February 22, 2000, the Company acquired CSN Computer Consulting (CSN), a
privately held e-business consulting, training and technology development
company headquartered in Germany. The purchase price consisted of
approximately $2.3 million in cash and approximately $2.3 million (69,398
shares) of common stock in exchange for all the outstanding capital stock of
CSN. Approximately $1.1 million in cash was paid at closing and $1.1 million
in cash is payable upon evidence of tax obligations owed by the sellers, but
in no event later than January 31, 2001. The transaction was accounted for
using the purchase method of accounting, and, accordingly, the results of
CSN's operations have been included in the Company's consolidated financial
statements from the date of acquisition.
A preliminary summary of the purchase price for the acquisition is as
follows (in thousands):
<TABLE>
<S> <C>
Common stock.......................................................... $2,261
Cash paid to shareholders............................................. 1,131
Notes payable to shareholders......................................... 1,131
Accrued direct acquisition costs...................................... 477
------
$5,000
======
</TABLE>
The purchase price was preliminarily allocated as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired...................................................... $ 506
Liabilities assumed.................................................. (411)
Assembled workforce.................................................. 454
Customer contracts................................................... 658
Goodwill............................................................. 3,793
------
$5,000
======
</TABLE>
7. Stock Split
On January 21, 2000, the Company's Board of Directors approved a two-for-one
stock split (effective in the form of a stock dividend), payable on March 1,
2000. All share and per share amounts in the accompanying consolidated
financial statements have been adjusted to reflect this stock split.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Information
Certain statements in this Form 10-Q contain "forward-looking" information
(as defined in Section 27A of the Securities Act of 1933, as amended) that
involve risks and uncertainties which may cause actual results to differ
materially from those predicted in the forward-looking statements. Forward-
looking statements can be identified by their use of such verbs as "expects,"
"anticipates" and "believes" or similar verbs or conjugations of such verbs.
If any of our assumptions on which the statements are based prove incorrect or
should unanticipated circumstances arise, our actual results could materially
differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors,
including, but not limited to, the "Important Factors That May Affect Our
Business, Our Results of Operations and Our Stock Price" described herein and
in our Securities and Exchange Commission filings from time to time, including
our Form 10-K for the year ended December 31, 1999.
Overview
Onyx is a leading provider of enterprise-wide, customer-centric e-business
solutions. Using the Internet in combination with traditional forms of
interaction, including phone, mail, fax and email, our solution enables
enterprises to more effectively acquire, manage and maintain customer, partner
and other relationships. We designed our solution for companies that want to
merge new e-business processes with traditional business processes to enhance
their customer-facing operations. Our solution uses a single data model across
all customer interactions, resulting in a single repository for all marketing,
sales and service information. We designed our solution from inception to be
fully integrated across all customer-facing departments and interaction media.
Our solution is easy to use, widely accessible, rapidly deployable, scalable,
flexible, customizable and reliable, resulting in a low total cost of
ownership and rapid return on investment.
History of Operations
Onyx was founded in February 1994. We commercially released version 1.0 of
our flagship product, Onyx Customer Center, in December 1994. In our first
three years of operation, we focused primarily on research and development
activities, recruiting personnel, purchasing operating assets, marketing our
products, building a direct sales force and expanding our service business.
Our revenues totaled $2.2 million in 1995 and $9.6 million in 1996. In mid-
1996, we substantially expanded our operations to capitalize on our
opportunity within the rapidly emerging customer relationship management (CRM)
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. We believe these investments have been critical
to our growth. Our revenues grew to $19.4 million in 1997, $35.1 million in
1998 and $60.6 million in 1999. Nevertheless, these investments have also
significantly increased our operating expenses, contributing to the net losses
that we incurred in each fiscal quarter from the first quarter of 1997 through
the second quarter of 1999. After achieving profitability in the third and
fourth quarters of 1999, we decided to again accelerate our investments in
research and development, marketing, domestic and international sales
channels, professional services and our general and administrative
infrastructure to further capitalize on our opportunity within the CRM market.
As a result of these accelerated investments coupled with the impact of
acquisition-related amortization, we incurred a net loss in the first quarter
of 2000 totaling $487,000. 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 and, as a result, we may incur operating losses in future quarters.
9
<PAGE>
Onyx's Results of Operations
The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three months ended March 31,
1999 and 2000 are not necessarily indicative of the results that may be
expected for the full year or any future period.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 2000
------- -------
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
License................................................... 63.0% 61.9%
Service................................................... 37.0 38.1
------- -------
Total revenues.......................................... 100.0 100.0
------- -------
Cost of revenues:
License................................................... 4.1 2.8
Service................................................... 18.7 19.6
------- -------
Total cost of revenues.................................. 22.8 22.4
------- -------
Gross margin................................................ 77.2 77.6
Operating expenses:
Sales and marketing....................................... 54.8 49.6
Research and development.................................. 22.5 16.3
General and administrative................................ 10.6 9.3
Acquisition-related amortization.......................... 1.0 3.8
------- -------
Total operating expenses................................ 88.9 79.0
------- -------
Loss from operations........................................ (11.7) (1.4)
Interest income, net........................................ 1.0 0.8
Equity investment loss...................................... -- (1.0)
------- -------
Loss before income taxes.................................... (10.7) (1.6)
Income tax provision........................................ 0.7 0.5
------- -------
Net loss.................................................... (11.4)% (2.1)%
======= =======
</TABLE>
Revenues
Total revenues, which consist of software license and service revenues,
increased 106%, from $11.2 million in the first quarter of 1999 to $23.2
million in the first quarter of 2000. No single customer accounted for more
than 10% of our revenues in the first quarter of 1999 or 2000.
Our license revenues increased 103%, from $7.1 million in the first quarter
of 1999 to $14.4 million in the first quarter of 2000. Of the increase, $3.8
million was due to increased sales to new customers and $3.5 million was due to
increased follow-on sales to existing customers.
Our service revenues increased 113%, from $4.2 million in the first quarter
of 1999 to $8.8 million in the first quarter of 2000. Of the increase, $2.5
million was due to increases in maintenance and support revenues and $2.1
million was due to increases in consulting and training services. Service
revenues represented 37% of our total revenues in the first quarter of 1999 and
38% in the first quarter of 2000. 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.
10
<PAGE>
Revenues outside of North America increased 208%, from $1.9 million in the
first quarter of 1999 to $5.8 million in the first quarter of 2000. The
increase in international revenues resulted from our investment in direct and
indirect sales channels, primarily in Europe, Australia and Singapore,
including the acquisitions of Market Solutions in the United Kingdom and CSN
Computer Consulting in Germany.
We do not believe that we can sustain our historical percentage growth rates
of license and service revenues as our revenue base increases.
Cost of Revenues
Cost of license revenues
Cost of license revenues consists of license fees for third-party software,
product media, product duplication, manuals, product fulfillment and shipping
costs. Cost of license revenues increased 42%, from $464,000 in the first
quarter of 1999 to $660,000 in the first quarter of 2000. Cost of license
revenues as a percentage of related license revenues was 4% in the first
quarter of 1999 and 3% in the first quarter of 2000. The decrease in cost of
license revenues as a percentage of related license revenues resulted
primarily from a decrease in the relative proportion of products we sold with
third-party technology in the first quarter of 2000 as compared to the first
quarter of 1999, 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 117%, from $2.1 million in the first
quarter of 1999 to $4.5 million in the first quarter of 2000. The increase in
dollar amount resulted primarily from hiring and training consulting, support
and training personnel to support our growing customer base. Our service
employees increased from 63 as of March 31, 1999 to 146 as of March 31, 2000.
Cost of service revenues as a percentage of related service revenues was 50%
in the first quarter of 1999 and 51% in the first quarter of 2000. 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).
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 87%, from $6.2 million in the first quarter
of 1999 to $11.5 million in the first quarter of 2000. The increase in dollar
amount was primarily attributable to the expansion of our worldwide sales and
marketing organization, which included significant increases in personnel-
related costs associated with the employment of additional sales
representatives, sales engineers and marketing professionals. Sales and
marketing employees increased from 129 as of March 31, 1999 to 205 as of March
31, 2000. The increase in dollar amount is also the result of an increase in
sales commissions and bonuses associated with increased revenues and an
increase in marketing activities, including trade shows, cyber seminars and
direct mail campaigns in the first quarter of 2000. Sales and marketing
expenses represented 55% of our total revenues in the first quarter of 1999
and 50% of our total revenues in the first quarter of 2000. The decrease in
sales and marketing expenses as a percentage of total revenues reflects the
more rapid growth in our revenues in this period compared to the growth of
sales and marketing expenses due to maturing direct and indirect sales
channels. 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.
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Research and development
Research and development expenses consist primarily of salaries, benefits
and equipment for software developers, quality assurance personnel, program
managers and technical writers and payments to outside contractors. Research
and development expenses increased 49%, from $2.5 million in the first quarter
of 1999 to $3.8 million in the first quarter of 2000. The increase was
primarily due to an increase in the number of development personnel. Research
and development employees increased from 67 as of March 31, 1999 to 97 as of
March 31, 2000. Research and development costs represented 23% of our total
revenues in the first quarter of 1999 and 16% in the first quarter of 2000.
The decrease in research and development expenses as a percentage of total
revenues primarily reflects the more rapid growth in our revenues in this
period compared to the investment in our research and development activities.
We believe that we need to significantly increase our research and development
investment to expand our market position and continue to expand our product
line. Accordingly, we anticipate that research and development expenses will
increase in future periods.
General and administrative
General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance and administrative personnel and
professional services fees. General and administrative expenses increased 81%,
from $1.2 million in the first quarter of 1999 to $2.2 million in the first
quarter of 2000. The increase was primarily due to the addition of finance,
executive and administrative personnel to support the growth of our business
globally along with an increase in professional fees and investor relations
activities associated with being a public company. General and administrative
employees increased from 32 as of March 31, 1999 to 58 as of March 31, 2000.
General and administrative costs represented 11% of our total revenues in the
first quarter of 1999 and 9% of our total revenues in the first quarter of
2000. The decrease in general and administrative expenses as a percentage of
total revenues primarily reflects the more rapid growth in our revenues in
this period compared to the growth in general and administrative expenses as
we begin to achieve economies of scale in our support infrastructure. We
believe our general and administrative expenses will continue to increase as
we expand our domestic and international administrative staff and incur
significant expenses associated with professional services used to support our
global activities.
Acquisition-related charges and amortization
Acquisition-related amortization consists of intangible amortization
associated with our acquisitions of EnCyc in 1998, Versametrix and Market
Solutions in 1999, and CSN Computer Consulting in 2000. Acquisition-related
amortization totaled $109,000 in the first quarter of 1999 and $881,000 in the
first quarter of 2000. The increase in the first quarter of 2000 resulted
primarily from the acquisitions of Versametrix and Market Solutions in the
second half of 1999 and the acquisition of CSN Computer Consulting in the
first quarter of 2000.
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 $276,000 during the first quarter of 1999 compared to
$149,000 in the first quarter of 2000. Deferred compensation is amortized over
the vesting periods of the options.
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 $114,000 in the first quarter of
1999 compared to $192,000 in the first quarter of 2000. The increase in the
first quarter of 2000 reflects the higher average cash and investment base
during the current period as compared to the first quarter of 1999.
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Income taxes
We recorded an income tax provision of $77,000 in the first quarter of 1999
and $108,000 in the first quarter of 2000 in connection with our foreign
operations. We made no provision or benefit for federal or state income taxes
due to our historical operating losses, resulting in deferred tax assets. We
have recorded a valuation allowance for the entire deferred tax asset as a
result of uncertainties regarding the realization of the asset balance.
Liquidity and Capital Resources
Prior to our initial public offering, we primarily financed our operations
through private placements of our common and preferred stock. To a lesser
extent, we have financed our operations through equipment financing and
traditional financing arrangements. In February 1999, we completed our initial
public offering and issued 7,130,000 shares of common stock at an initial
public offering price of $6.50 per share, as adjusted to reflect the 2-for-1
split of our common stock effected March 1, 2000. We received approximately
$41.9 million in cash proceeds from the offering, net of underwriting
discounts, commissions and other offering costs.
As of March 31, 2000, we had cash and cash equivalents of $21.1 million, an
increase of $17.4 million from cash and cash equivalents held as of December
31, 1999. The increase in cash and cash equivalents from year-end is primarily
the result of short-term marketable securities maturing during the current
quarter, which were subsequently reinvested in securities with an original
maturity date of 90 days or less. We have invested our cash in excess of
current operating requirements in a portfolio of investment-grade securities.
Short-term marketable securities totaled $5.5 million at March 31, 2000. The
investments have variable and fixed interest rates and maturities of less than
one year. In accordance with SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities," such investments are classified as "available for
sale." Our working capital at March 31, 2000 was $25.2 million, compared to
$30.1 million at December 31, 1999.
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 9.0% as of
March 31, 2000. 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 requires us
to maintain specified financial ratios. As of March 31, 2000, we had no
outstanding borrowings under the working capital facility; however, there was
approximately $2.0 million in standby letters of credit outstanding in
connection with facility leases and a guarantee posted in connection with the
acquisition of CSN Computer Consulting. 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 bears interest at a rate equal to the
bank's prime rate plus 0.25%, which equaled 9.25% as of March 31, 2000. The
facility matures September 2002. This facility requires us to maintain
specified financial ratios. As of March 31, 2000, we had borrowed $63,000
under this term loan facility. We were in compliance with all financial
covenants of the credit facility as of March 31, 2000.
Our operating activities resulted in net cash inflows of $2.1 million in the
first quarter of 1999 compared to net cash inflows of $4.0 million in the
first quarter of 2000. The operating cash inflows in the first quarter of 1999
were primarily the result of cash provided by collections on our accounts
receivable and increases in deferred revenues and other current liabilities,
partially offset by cash outflows from our operating loss in the first quarter
of 1999. The operating cash inflows in the first quarter of 2000 were
primarily the result of cash provided by collections on our accounts
receivable and increases in deferred revenues and other current liabilities
coupled with income from our operations adjusted for noncash amortization
charges, offset in part by increases in other assets.
Investing activities used cash of $11.3 million in the first quarter 1999,
primarily for the purchase of short-term and long-term securities following
our initial public offering and the purchase of capital equipment. Investing
activities provided cash of $12.5 million in the first quarter of 2000,
primarily due to proceeds from the maturity of securities offset by cash used
to purchase capital equipment and cash used to acquire CSN Computer
Consulting.
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Financing activities provided cash of $37.6 million in the first quarter of
1999 primarily due to the proceeds from our initial public offering in
February, offset in part by payments on our credit facility and capital lease
obligations. Financing activities provided cash of $851,000 in the first
quarter of 2000 due to proceeds from the exercise of stock options and the
overdraft facility provided to our subsidiary in the United Kingdom, offset in
part by payments on capital lease and other debt 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.
These operating expenses will consume a material amount of our cash resources.
We may also use a portion of our cash resources to acquire complementary
technologies or businesses; however, we currently have no commitments or
agreements and are not involved in any negotiations with respect to any
transactions of this nature. We believe that our existing cash and cash
equivalents, investments and available bank borrowings will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next twelve months. However, we may seek additional funds
before that time through public or private equity financing or from other
sources to fund our operations and pursue our growth strategy. We have no
commitment for additional financings, and we may experience difficulty in
obtaining additional financing on favorable terms, if at all. Any financing we
obtain may dilute your ownership interest in Onyx.
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IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR RESULTS OF OPERATIONS AND
OUR STOCK PRICE
Our operating results fluctuate and could fall below expectations of
securities analysts and investors, resulting in a decline of our stock price.
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. As a result, our operating results for
a particular quarter or year may fall below the expectations of securities
analysts and investors, which could result in a decrease in our stock price.
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 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 may not be a meaningful
basis to predict our future performance. It is particularly difficult to
predict the timing or amount of our license revenues, which comprise the
majority of our total 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 the sales cycle varies
substantially from customer to customer and occasionally sales require
substantially more time;
. 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;
and
. 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.
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 and
could fall below the expectations of securities analysts and investors, which
could result in a decrease in our stock price.
Our operating results may fluctuate seasonally, and these fluctuations may
cause our stock price to decline.
Our stock price may decline due to seasonal fluctuations. 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.
We have a limited operating history and are subject to the risks of new
enterprises.
We commenced operations in February 1994 and commercially released the first
version of our flagship product in December 1994. Accordingly, we have a
limited operating history, and we face all of the risks and uncertainties
encountered by early-stage companies. Our limited operating history makes it
difficult to forecast our future operating results. The new and evolving
nature of the CRM market increases these risks and uncertainties.
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We have incurred losses and may not achieve profitability, which could cause a
decline in our stock price.
If we do not return to profitability in future quarters, our stock price
could decline. We incurred net losses in each quarter from Onyx's inception
through the third quarter of 1994, from the first quarter of 1997 to the
second quarter of 1999, and in the first quarter of 2000. As of March 31,
2000, we had an accumulated deficit of $8.6 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 profitability. Our business strategies may not be successful and we
may not be profitable in any future period as a result. Further, in the near
term, we may elect to accelerate investments in our operations at the
potential expense of profitability to capitalize on our opportunity within the
rapidly emerging CRM and e-business markets.
If we are unable to compete successfully in the highly competitive CRM market,
our business will fail.
The market for CRM software is intensely competitive, fragmented and rapidly
changing. We face competition in the CRM software market primarily from
. front-office software application vendors;
. large enterprise software vendors; and
. our potential customers' information technology departments, which may
seek to develop proprietary CRM systems.
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. An increase in competitive
pressures in our market or our failure to compete effectively may result in
pricing reductions, reduced gross margins and loss of market share. Many of
our competitors have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical,
marketing and other resources than we do. In addition, a number of our
competitors have recently been acquired by other large technology companies,
which further enhance their resources. As a result, they may be able to adapt
more quickly to new technologies and customer needs, devote greater resources
to promoting or selling their products and services, initiate and withstand
substantial price competition, take advantage of acquisition or other
strategic opportunities more readily or develop and expand their product and
service offerings more quickly.
If we are unsuccessful in our attempt to enable our products to operate on
multiple platforms, our revenue growth could be limited.
To date, we have designed our products to operate exclusively on the Windows
NT and Microsoft BackOffice platforms. As a result, we have only marketed our
products to customers which have developed their enterprise computing systems
around these platforms. We recently decided to begin developing a version of
our products that will operate on platforms other than Windows NT and
Microsoft BackOffice. However, these development efforts may be unsuccessful
or involve significantly greater-than-expected costs. If we are unable to
develop product versions for new platforms in a timely and cost-effective
manner, we will be unable to market our products to many customers and our
revenue growth will be limited.
Because many potential customers are unaware of the benefits of CRM solutions,
our products may not achieve market acceptance.
The market for CRM products is still emerging, and continued growth in
demand for and acceptance of CRM products remains uncertain. Even if the
market for CRM 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 CRM solutions and that these solutions
may never achieve market acceptance. We have spent, and will continue to
spend, considerable resources educating potential customers about our products
and CRM
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software solutions in general. However, even with these educational efforts,
market acceptance of our products may not increase. We will not succeed unless
we can educate our market about the benefits of CRM solutions and about our
ability to provide them in a cost-effective and easy-to-use manner.
If potential customers do not accept the Onyx e-Business Engine product
family, our business will fail.
Product license revenues from the Onyx e-Business Engine product family
accounted for approximately 50% of our total revenues, or 79% of total license
revenues, in 1999 and for 54% of our total revenues, or 88% of total license
revenues, in the first quarter of 2000. We expect product license revenues
from the Onyx e-Business Engine 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 e-Business Engine product
family, such as competition or technological change, could dramatically affect
our operating results. If we are unable to successfully deploy current
versions of the Onyx e-Business Engine product family and to develop,
introduce and establish customer acceptance of new and enhanced versions of
the Onyx e-Business Engine product family, our business will fail.
We may be unable to expand our sales and support infrastructure, which could
harm our ability to expand our business.
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,
which could limit our ability to expand our business. We believe that customer
satisfaction is critical to our ability to compete in the CRM market, and we
rely on experienced consulting and customer support staff to support our
customers.
If we do not retain our key employees, our ability to execute our business
strategy will be limited.
Our future performance will also depend largely 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 limit
our ability to execute our business strategy. Our key employees are not
obligated to continue their employment with us and could leave at any time.
Rapid changes in technology could render our products and services obsolete or
unmarketable, and we may be unable to introduce new products and services
timely and successfully.
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 technological 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. If we delay release of our products and product
enhancements, it could harm our reputation and our ability to attract and
retain customers. 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.
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If we do not expand our international operations and successfully overcome the
risks inherent in international business activities, the growth of our
business will be limited.
To be successful, we must continue to 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 e-Business
Engine 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 have not materially affected our operating results in the past. Our
operating results could be materially adversely affected if we enter into
license agreements providing for significant amounts of foreign currencies
with extended payment terms.
If our key partners and systems integrators fail to perform, our ability to
sell our products and services will be limited.
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 ability to sell and
market our products and services will be limited.
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 sales will be limited if:
. we are unable to develop and maintain 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 implement our products; or
. our systems integrators endorse a product or technology other than ours.
Sales delays could cause our operating results to fluctuate, which could cause
a decline in our stock price.
We believe that an enterprise's decision to purchase a CRM solution 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 it
varies substantially from customer to customer and occasionally sales require
substantially more time. Sales delays could cause our operating results to
fall below the expectations of securities analysts or investors, which could
result in a decrease in our stock price.
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Fluctuations in service revenues could decrease our total revenues or decrease
our gross margins, which could cause a decline in our stock price.
Support and service revenues represented 37% of our total revenues in 1999
and 38% of our total revenues in the first quarter of 2000. 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 on our operating
results.
. We subcontract certain consulting, customer support and training
services to third-party service providers. Third-party contract revenues
generally carry lower gross margins than our service business overall;
as a result, our service revenues and related margins may vary from
period to period, depending on the mix of these third-party contract
revenues.
. Service revenues depend in part on ongoing renewals of support contracts
by our customers, some of which may not renew their support contracts.
In addition, consulting revenues as a percentage of total revenues could
decline if customers select third-party service providers to install and
service our products more frequently than they have in the past.
If service revenues are lower than anticipated, our business, financial
condition and operating results could be materially adversely affected. Our
ability to increase service revenues will depend in large part on our ability
to increase the scale of our services organization, including our ability to
successfully recruit and train a sufficient number of qualified services
personnel. We may not be able to do so.
Delivery of our products and services may be delayed if we cannot continue to
license third-party technology that is important to the functionality of our
solution.
We incorporate into our products certain software that is licensed to us by
third-party software developers, currently Sybase, Scribe Software, Greyware
Automation Products, Inso and Trilogy Software. We depend on these third
parties' abilities to deliver and support reliable products, enhance their
current products, develop new products on a timely and cost-effective basis,
and respond to emerging industry standards and other technological changes.
The third-party software currently offered in conjunction with our products
may become obsolete or incompatible with future versions of our products. We
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. However, a significant
interruption in the supply of this technology could delay our development
sales until we can find, license and integrate equivalent technology.
We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively.
Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely primarily on a combination
of copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as
those contained in license agreements with consultants, vendors and customers,
although we have not signed these agreements in every case. Despite our
efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products and obtain and use information that we regard as
proprietary. Other parties may breach confidentiality agreements and other
protective contracts we have entered into, and we may not become aware of, or
have adequate remedies in the event of, such breach.
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Our products may suffer from defects or errors, which could result in loss of
revenues, delayed market acceptance of our products, increased costs and
reputational damage.
Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released. We have
had to delay commercial release of certain versions of our 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.
The integration of Versametrix, Market Solutions, CSN Computer Consulting and
any future acquisitions may be difficult and disruptive.
In August 1999, we acquired Versametrix, a privately held developer of a
comprehensive, browser-based personalization framework and a Web-based
business intelligence solution. In October 1999, we acquired Market Solutions,
a privately held provider of Web-based CRM systems in the United Kingdom. In
February 2000, we acquired CSN Computer Consulting, a privately held e-
business consulting, training and technology development company headquartered
in Germany. We are currently in the process of integrating these companies
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 their sales force, consultants and development staff to adapt
to our product line. 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 have
acquired or that we may acquire in the future.
The concentrated ownership of our common stock could delay or prevent a change
of control, which could reduce the market price of our common stock.
As of March 1, 2000, our officers, directors and affiliated entities
together beneficially owned approximately 42.43% of the outstanding shares of
our common stock. As a result, these shareholders may, as a practical matter,
be able to exert significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions such as acquisitions, and to block unsolicited tender
offers. This concentration of ownership may delay, deter or prevent a third
party from acquiring control over us at a premium over the then-current market
price of our common stock, which could result in a decrease in our stock
price.
Our stock price may be volatile.
Since our initial public offering in February 1999, the price of our common
stock has been volatile. Future announcements concerning us or our
competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by us or our competitors, proprietary rights or other
litigation, changes in earnings estimates or purchase recommendations by
analysts or other factors could cause the market price of our common stock to
fluctuate substantially. In addition, stock prices for many technology
companies fluctuate widely for reasons that may be unrelated to operating
results of these companies. These fluctuations, as well as general economic,
market and political conditions, such as international currency and stock
market volatility, recessions or military conflicts, may materially and
adversely affect the market price of our common stock, regardless of our
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against these companies. Litigation brought against us
could result in substantial costs and a diversion of management's attention
and resources, which could have a material adverse effect on our business,
financial condition and operating results.
20
<PAGE>
Remediation of undiscovered Year 2000-related computer problems could be
costly and time-consuming.
We believe that the current versions of our internally developed software
products, as well as our management and information systems, are Year 2000
compliant. When the century changed, we experienced no disruption of our
business operations and no product failures as a result of Year 2000
compliance issues or otherwise. The costs we incurred in connection with
remediating our systems during 1999 were immaterial. At this time, we are not
aware of any material defects resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties
on which we rely. Nevertheless, some Year 2000 problems may not appear until
several months after January 1, 2000. As a result, we may still face claims
for undiscovered Year 2000 errors in our own products or for Year 2000 issues
arising from third-party products that we integrate into our products or with
which our products and systems exchange data. In addition, if our suppliers or
distributors encounter Year 2000 problems, our ability to deliver our products
and services could be disrupted.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest
rates and foreign currencies.
Interest Rate Risk
We typically do not attempt to reduce or eliminate our market exposures on
our investment securities because the majority of our investments are short
term. We do not have any derivative instruments. The fair value of our
investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to
the short-term nature of the major portion of our investment portfolio. All of
the potential changes noted above are based on sensitivity analysis performed
on our balances as of March 31, 2000.
Foreign Currency Risk
Nearly all of our sales and the majority of our expenses are currently
denominated in U.S. dollars. As a result, we have not experienced significant
foreign exchange gains and losses. While we conducted some transactions in
foreign currencies during the first quarter of 2000 and expect to continue to
do so in the future, foreign exchange gains or losses have not been and are
not expected to be material to Onyx. Although we have not engaged in foreign
currency hedging to date, we may do so in the future.
21
<PAGE>
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities During the Quarter
On February 22, 2000, in connection with the acquisition of CSN Computer
Consulting, we issued 69,398 shares of our common stock. This transaction was
exempt from Securities Act registration under Regulation S promulgated under
the Securities Act on the basis that the transaction was completed outside the
United States.
(d) Use of Proceeds
On February 11, 1999, our registration statement on Form S-1, file no. 333-
68559, became effective. The offering date was February 11, 1999. The offering
has terminated as a result of all of the shares offered being sold. The
managing underwriters were Credit Suisse First Boston Corporation, SG Cowen
Securities Corporation and Piper Jaffray Inc. The offering consisted of
7,130,000 shares of our common stock, including 930,000 shares of common stock
pursuant to the exercise of the underwriters' over-allotment option, as
adjusted to reflect the 2-for-1 split of our common stock effected March 1,
2000. The aggregate price of the shares offered and sold was $46.3 million.
Proceeds to us, after accounting for $3.2 million in underwriting discounts
and commissions and $1.2 million in other expenses, were $41.9 million. We
generated interest income of approximately $1.3 million during the year ended
December 31, 1999 and interest income of $250,000 in the first quarter of
2000.
We are using the net proceeds raised in the initial public offering for
additional working capital, repayment of short-term indebtedness and general
corporate purposes, including increased domestic and international sales and
marketing expenditures, increased research and development expenditures and
capital expenditures made in the ordinary course of business. We have used and
intend to use these proceeds for possible acquisitions of businesses, products
and technologies that are complementary to ours, such as the acquisitions of
Versametrix, Market Solutions and CSN Computer Consulting. Although there are
no current agreements or understandings with respect to any such transactions,
we do from time to time evaluate such opportunities. Pending the uses
described above, the net proceeds are invested in investment-grade, interest-
bearing instruments, the majority of which are short term.
None of the net offering proceeds were paid to, and none of the initial
public offering expenses related to payments, directly or indirectly, to, our
directors, officers or general partners or their associates, persons owning
10% or more of any class of our securities or our affiliates.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation of the registrant (incorporated by
reference to the Quarterly Report on Form 10-Q (No. 0-25361), for the
quarter ended March 31, 1999).
3.2 Amended and Restated Bylaws of the registrant (incorporated by
reference to the registration statement on Form S-1 (No. 333-6889)
filed by registrant on December 8, 1998, as amended).
4.1 Rights Agreement, dated as of October 25, 1999, between the registrant
and Chase Mellon Shareholder Services, LLC (incorporated by reference
to the registration statement on Form 8-A (No. 0-25361), filed on
October 28, 1999).
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
(1) On February 4, 2000, we filed a current report on Form 8-K with respect
to the 2-for-1 split of our common stock effected on March 1, 2000.
(2) On March 9, 2000, we filed a current report on Form 8-K with respect to
the acquisition of CSN Computer Consulting.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ONYX SOFTWARE CORPORATION
(Registrant)
/s/ Brent R. Frei
Date: May 15, 2000 By: _________________________________
Brent R. Frei
President, Chief Executive
Officer and Chairman of the Board
/s/ Amy E. Kelleran
Date: May 15, 2000 By: _________________________________
Amy E. Kelleran
Corporate Controller, Assistant
Secretary
(Principal financial and chief
accounting officer)
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.3 Restated Articles of Incorporation of the registrant (incorporated
by reference to the Quarterly Report on Form 10-Q (No. 0-25361),
for the quarter ended March 31, 1999).
3.4 Amended and Restated Bylaws of the registrant (incorporated by
reference to the registration statement on Form S-1 (No. 333-
6889) filed by registrant on December 8, 1998, as amended).
4.1 Rights Agreement, dated as of October 25, 1999, between the
registrant and Chase Mellon Shareholder Services, LLC
(incorporated by reference to the registration statement on Form
8-A (No. 0-25361), filed on October 28, 1999).
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 21,121
<SECURITIES> 5,502
<RECEIVABLES> 22,201
<ALLOWANCES> (1,018)
<INVENTORY> 0
<CURRENT-ASSETS> 51,526
<PP&E> 12,904
<DEPRECIATION> (3,052)
<TOTAL-ASSETS> 83,053
<CURRENT-LIABILITIES> 26,289
<BONDS> 0
0
0
<COMMON> 64,067
<OTHER-SE> (9,571)
<TOTAL-LIABILITY-AND-EQUITY> 83,053
<SALES> 14,341
<TOTAL-REVENUES> 23,184
<CGS> 5,207
<TOTAL-COSTS> 18,311
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 57
<INCOME-PRETAX> (379)
<INCOME-TAX> 108
<INCOME-CONTINUING> (487)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (487)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
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