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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_]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
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ONYX SOFTWARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1629814
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3180 - 139th Avenue S.E., Suite 500, Bellevue, Washington 98005-4091
(Address of Principal Executive Offices)
(425) 451-8060
(Registrant's Telephone Number, Including Area Code)
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Securities Registered Pursuant to Section 12(b) of the Act:
None.
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Per Share
Preferred Stock Purchase Rights, $.01 Par Value Per Share
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Indicate by check mark whether the registrant: (1) has 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting and nonvoting stock held by
nonaffiliates of the registrant at February 12, 2001 was approximately
$431,006,161.
The number of shares of the registrant's common stock outstanding at
February 12, 2001 was 40,601,234.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set
forth herein, is incorporated herein by reference from the Registrant's
definitive proxy statement relating to the annual meeting of shareholders to
be held in 2001, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this report relates.
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ONYX SOFTWARE CORPORATION
FORM 10-K
For the Year Ended December 31, 2000
INDEX
Page
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PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 24
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters.......................................... 25
Item 6. Selected Consolidated Financial Data.......................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 38
Item 8. Consolidated Financial Statements and Supplementary Data...... 39
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 62
PART III
Item 10. Directors and Executive Officers of the Registrant............ 63
Item 11. Executive Compensation........................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 63
Item 13. Certain Relationships and Related Transactions................ 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 64
Signatures.............................................................. 67
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PART I
Our disclosure and analysis in this report contain forward-looking
statements, which provide our current expectations or forecasts of future
events. Forward-looking statements include statements about our plans,
objectives, expectations and intentions and other statements that are not
historical facts. When used in this discussion, the words "believes,"
"anticipates" and "intends" and similar expressions are intended to identify
forward-looking statements, but the absence of these words does not necessarily
mean that a statement is not forward-looking. Forward-looking statements are
subject to known and unknown risks and uncertainties and are based on
potentially inaccurate assumptions that could cause actual results to differ
materially from those expected or implied by the forward-looking statements.
Our actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the factors described
under "Important Factors That May Affect Our Business, Our Results of
Operations and Our Stock Price."
Readers should not unduly rely on the forward-looking statements, which
speak only as of the date of this report. We undertake no obligation to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events. Readers should, however, review the factors and risks we
describe in reports we file from time to time with the Securities and Exchange
Commission after the date of this report.
ITEM 1. BUSINESS
Overview
Onyx Software Corporation is a leading provider of enterprise-wide,
customer-centric e-business solutions designed to promote strategic business
improvement and revenue growth by enhancing the way businesses market, sell and
service their products. Using the Internet in combination with traditional
forms of interaction, including phone, mail, fax and email, our solution helps
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, such as marketing, sales, customer service
and technical support. 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 designed to be 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.
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 traditional value-added resellers, or
VARs, and application service providers, or ASPs. Our solution can be easily
implemented and flexibly configured to address an enterprise's specific
business needs. We believe our solution provides broad functionality that
enables our customers to compete more effectively in today's intensely
competitive and dynamic business environment.
Our principal executive offices are located at 3180 139th Avenue S.E., Suite
500, Bellevue, Washington 98005-4081. We were incorporated in Washington in
1994.
Industry Background
In recent years, an increasing number of enterprises have sought to use
technology to improve their interactions with their customers. Many of these
enterprises have implemented customer relationship
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management, or CRM, software systems to automate their customer-facing
departments. The market for CRM systems, however, has changed substantially in
the last five years. In the early 1990s, software vendors addressed the CRM
market by delivering systems designed specifically for individual departments.
For example, some vendors delivered systems for customer service or support,
some for help desk, some for sales force automation, and some for marketing
intelligence. These systems effectively automated the single department at
which they were targeted, but the companies that used them often were left with
the difficult task of integrating disparate customer information spread across
these separate systems to get a complete view of their relationship with each
customer.
When we delivered our first products in 1994, we were one of the few vendors
to offer a single system for all customer-facing departments. Since 1995, there
has been significant consolidation within the market, with most of the single
departmental vendors being acquired or acquiring complementary vendors so that
in combination they could offer a more complete CRM solution. 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. As a result, most of these vendors are still largely single-
department software vendors. In addition to consolidation among the CRM
vendors, enterprise resource planning vendors have also entered the CRM market
with their own technology, as well as by acquiring CRM companies.
We believe that, with the wide proliferation of the Internet over the last
several years, an increasing number of customers, partners, distributors and
suppliers want to employ e-business solutions in their operations; that is,
they want to use the Internet as a means of conducting business. Traditional
businesses are beginning to respond to this desire by deploying Internet- and
email-based interaction systems for their customer-facing departments. To
address these new demands, an increasing number of vendors are entering the CRM
market with e-business systems designed to automate Internet- and email-based
customer interactions. Like the CRM vendors of the early 1990s, these new
vendors typically offer solutions that automate only one department. In
addition, these new solutions typically have been designed to handle only
Internet- or email-based communication, rather than more traditional forms of
communication, such as phone, mail, fax or personal interaction. We believe
that companies adopting these new e-business applications will face a
significant integration challenge to get a comprehensive view of their business
relationships. They will be required to integrate data from multiple
departmental applications, and to integrate data collected from the Internet or
email with separate data collected by phone, mail, fax or personal interaction.
The appropriate deployment of CRM technologies to manage multiple revenue
streams will also be a challenge.
With this convergence of traditional businesses interacting online and e-
businesses interacting by traditional means, we believe there is a strong
opportunity for an enterprise-wide, customer-centric e-business solution that
automates and integrates Internet, email and traditional interactions across
all customer-facing departments. Such a solution would enable both traditional
and e-business enterprises to more effectively acquire, manage and maintain
customer, partner and other relationships. This solution would provide a high
return on investment by improving the effectiveness of sales, marketing and
support activities across all communication channels, while maintaining a low
total cost of ownership.
Our solution is designed specifically for companies that are combining e-
business communications with traditional business, regardless of whether they
started as an e-business or a traditional business. Our technology spans two
growth markets: e-commerce and CRM. According to AMR Research, through 2003,
the e-commerce market is expected to grow at an annual rate of 78% and the CRM
market is expected to grow at an annual rate of 49%. Our ability to align and
integrate strategy with enabling CRM technologies will provide an enhanced
solution for clients looking to acquire a competitive advantage in their
marketplace.
Advantages of the Onyx Solution
The Onyx solution is designed to promote strategic business improvement and
revenue growth for our customers by enhancing the way they market, sell, and
service their products, both directly and through partners. The Onyx solution
combines sales strategy with strong business processes and leading-edge
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technology to deliver a comprehensive CRM operating environment tailored to the
specific business needs of each customer. We believe our solutions enable our
customers to compete more effectively in today's intensely competitive and
dynamic business environment, which may result in increased revenue, higher
customer loyalty, stronger partnerships and superior financial performance for
our customers.
Our solution provides the following key advantages:
Strategic Business Our solution is designed to increase both the
Improvement effectiveness and the efficiency of how our
customers market and sell their products, and
service their customers and partners. Each of
our customers has a specific business objective
for their CRM operating environment, such as
increased revenues, increased customer loyalty
or increased margins. We tailor every
implementation and create appropriate operating
metrics to help our customers achieve the
specific business improvement that they desire.
Business Alignment Our solution aligns all customer-facing
departments around a common sales and marketing
strategy and around holistic customer
relationships. Onyx's integrated solution gives
organizations the ability to manage the entire
customer lifecycle from end to end, rather than
simply automating departmental functions. We
use integrated workflow and an integrated data
model that, unlike traditional customer
interaction software, such as sales force
automation software or other point solutions,
provides a single repository of marketing,
service and sales information throughout the
organization.
e-Business Integration Our solution enables companies to integrate
their e-business initiatives with traditional
forms of relationship management, so they can
utilize the Internet in the way that they
believe is most effective for their business.
This flexibility makes our solution attractive
to customers that vary widely in their approach
to combining traditional and electronic
interactions with their customers and partners.
Rapid Deployment From strategy development to technology
implementation, our solution is designed to be
rapidly deployable throughout the enterprise so
companies can quickly adapt to rapid changes in
the business environment. On average, our
customers complete initial deployments of their
Onyx solution in eight to ten weeks.
Ease of Use Our solution facilitates consistent
communication and collaboration across the
organization through clearly defined and
customized operating procedures and a suite of
easy-to-use interfaces. Interfaces and
processes can be tailored by audience, device,
and skill level. We have won user's choice
awards for leading ease of use.
Return on Investment Our solutions are designed to provide rapid and
significant results at a reasonable expense. As
a result, we believe our product offers higher
overall return on investment and faster payback
than other CRM products.
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Scalability and Flexibility We designed our solution so that it can scale
up and down to serve the needs of both very
large and small business operations. Studies
sponsored by us and run in scalability labs
showed our solution's ability to scale to
32,000 simultaneous users in a real-world
testing environment. However, in large
companies, solutions need to be able to scale
down as well so they can handle the needs of
smaller divisions or other smaller groups
within the larger enterprise. Our solution is
flexible, scalable, and widely deployable
across a wide spectrum of business sizes.
Internet Architecture We have developed our application using a
robust Internet architecture that provides
users with a comprehensive Internet interface
for managing customer and partner
relationships. The Internet interface gives our
customers and partners more flexibility for
integrating additional applications and for
deploying the system across a larger and more
distributed workforce than is capable with
traditional client-server architectures.
Strategy
Our objective is to be the leading provider of enterprise-wide, customer-
centric e-business solutions. Our strategy to achieve this goal includes the
following key elements:
Exploit Demand for We offer companies a single platform for
Integrated e-Business and automating both e-business and traditional
CRM Applications types of customer interactions. Integration
between these channels of interaction is
imperative as traditional businesses go online
and e-businesses add traditional infrastructure
to support growing customer bases.
Provide Rapidly Deployable We designed our solution to be quickly and
Solutions efficiently adopted, installed and deployed in
mid- to large-sized organizations. We believe
the length of time it takes to deploy
traditional CRM products and the high cost of
deployment are unacceptable to growing numbers
of organizations. Competitive pressures
encourage organizations of all sizes to adopt
information technology solutions that are
quickly deployed, meet business-critical needs
and provide interfaces that minimize user
training and facilitate incremental upgrades,
extensions and scalability. We plan to continue
to design our products to maintain low total
cost of ownership.
Pursue ASP Delivery Model We have a strong presence in the emerging ASP
market. ASPs typically host our software for
customers over the Internet with guaranteed
service level agreements. This model is well
suited for companies with limited information
technology resources, capital resources or time
necessary for implementing the Onyx solution
internally. We believe our solution is well
designed for this type of delivery because it
is rapidly deployable, customizable, scalable,
and reliable. We anticipate that many of our
ASPs will develop specialized versions of our
products and offer them to specific market
segments.
Expand Internationally Our products are currently installed and
operational in 25 countries. We plan to expand
our global operations by investing in our sales
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channels in major international markets. We may
also acquire service providers or establish
strategic relationships with distribution and
technology partners in new international
markets.
Maintain Industry-Leading We plan to maintain industry-leading customer
Customer Satisfaction satisfaction through high-quality products,
superior implementation, and responsive
customer service and support. In 1999, we won a
best practices award from Arthur Andersen for
exceeding customer expectations. We plan to
continue to develop and implement best
practices in CRM within our own company, as
well as for our customers.
Expand Strategic Partnerships We are actively adding both distribution and
technology partners. We believe that expanding
the number of our partnerships will provide us
with increased access to various geographic
markets and potential customers.
Increase Vertical Market We plan to design and deliver industry-specific
Penetration versions of our software to better meet the
requirements of specific vertical markets. We
believe industry-specific versions will give us
an advantage over competitors who sell more
generic applications.
Offer Go-to-Market Strategy We provide sales and marketing strategy
Consulting Services consulting to complement our e-business
solution. We believe our customers must clearly
understand their customer management strategies
to effectively implement a CRM solution. As a
result, we believe our ability to provide sales
and marketing strategy consulting gives us an
advantage over competitors who do not offer
these services.
Products and Services
Our customer-centric e-business solution enables companies to manage their
customer relationships through one integrated, enterprise-wide technology
platform. Users of our 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
We offer a comprehensive, customer-centric e-business solution consisting of
our core e-Business Engine and three audience specific portals: the Onyx
Employee Portal, the Onyx Partner Portal and the Onyx Customer Portal. This
technology platform enables our customers to manage all aspects of their
customer management through our products' core capabilities, as well as through
links into peripheral enterprise-based and Internet-based applications.
The Onyx e-Business Engine is the backbone of our solution that enables
companies to manage customer relationships across departments. Our e-Business
Engine can be divided into four key elements: the Universal Interface
Framework, the e-Business Process Technology, the e-Business Data Center, and
the e-Business Integration Framework. These four elements in combination enable
customers to deploy enterprise-class CRM systems in a scalable and extensible
fashion:
. The Universal Interface Framework enables companies to deliver customer
data to multiple user communities through a variety of offline and
online interfaces, including Windows-based clients, Internet-based
clients, Outlook-based clients and handheld devices.
. The e-Business Process Technology manages the flow of information and
process through all customer-facing departments, including marketing,
sales and service organizations. The e-Business Process Technology is
responsible for CRM activity, including list management, marketing
campaign
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execution, email marketing, marketing collateral distribution, lead
management, sales process management, forecasting, quote generation,
reporting, service automation, knowledge management, incident escalation
and routing, workflow management, Internet-based qualification, email
support, Internet-based lead capture, Internet-based support, Internet-
based commerce, partner management and other Internet-based and non-
Internet-based customer management processes.
. The e-Business Data Center is an enterprise-wide customer-centric
solution for managing all customer-related information. The e-Business
Data Center consists of multiple data storage structures, including a
transactional data structure, a reporting/analytics data structure and a
content distribution data structure.
. The e-Business Integration Framework consists of multiple integration
technologies that enable companies to link our e-Business Engine with
other systems, including Internet-based content, Internet-based
applications, legacy ERP and accounting applications, computer telephony
solutions, reporting applications, commerce solutions and desktop
productivity applications.
Onyx Employee Portal is a personalizable Internet-based interface designed
for use by our customers' internal employees. The Onyx Employee Portal can be
configured for multiple internal teams, such as marketing, sales, service and
management, to provide the applications and content they require. In addition
to providing access to the Onyx solution, end users can access third-party
content and applications from within the Onyx Employee Portal. Onyx has
established multiple partnerships with leading third-party vendors who provide
applications and content that is relevant to the overall CRM process.
Onyx Partner Portal is a personalizable Internet-based interface designed
for use by partners of our customers. The Onyx Partner Portal includes a broad
set of capabilities that enable companies and their partners to share
information regarding prospects, customers, marketing, sales and service to
better serve customers.
Onyx Customer Portal is a personalizable Internet-based interface designed
for use by customers of our customers. The Onyx Customer Portal includes a
broad set of capabilities that enable companies to interact with their
customers online, including areas such as literature fulfillment, on-line
profiling, lead capture, on-line commerce, customer self help, incident
management and profile management. The Onyx Customer Portal is integrated with
Microsoft Index Server, Commerce Edition for its on-line commerce capabilities.
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 52% of our total revenues, or 83% of total license
revenues in 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.
We typically price our core applications on a per-user basis combined with a
database server fee that varies depending on the number of users licensed to
use the database server. We price several add-on applications on a per-server
basis.
We currently incorporate third-party software from Cognos, Greyware
Automation Products, Inso, Scribe Software, Sybase and Trilogy Software into
some of our products. This software is licensed to us pursuant to original
equipment manufacturer agreements that require us to pay a fee for each copy of
software we sublicense.
Professional Services
In addition to the products described above, we also provide consulting,
customer support and training services as follows:
Consulting We offer our customers high-quality consulting
services, including business process
reengineering, change management, systems
integration, configuration, installation and
project management. We work closely with our
customers to identify their individual
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business needs and 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 who use our
products and to identify, analyze and solve any
problems that may result from that use. The
support program includes email support, on-line
support via the Internet and telephone support
from our four 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
regarding the implementation and administration
of our solution, including end-user training
and in-depth technical training.
Go-to-Market Strategy Through our Revenue Lab division, we provide
Consulting sales and marketing strategy services in
advance of a software implementation. This
division can also provide training, coaching,
skills assessment and compensation strategy
services.
We typically price our consulting services based on the time spent and
resources used. We price our support programs as a percentage of the software
license fee plus additional amounts for premium support services. We price
training services on a per-class basis. We price RevenueLab services either on
a project basis or a time spent and resources used basis, depending on the type
of engagement.
We have established a number of relationships with systems integrators for
implementing our software. We have conducted joint implementations projects
with Accenture, Arthur Andersen, Breakaway Solutions, Crowe-Chizek, Deloitte &
Touche, ePartners, equarius, Interliant, KPMG, marchFIRST,
PriceWaterhouseCoopers, Solutions Consulting, Star IT, WaveBend Solutions, and
Yaletown Technologies. We frequently participate in joint sales and marketing
efforts with our systems integrators.
Onyx Technology
Internet-based Architecture
The Onyx Internet Architecture is built exclusively with Internet
technologies to deliver the superior accessibility and manageability required
for large-scale CRM deployments. This multi-tier architectural approach has
enabled us to deliver thin-client, portal-based offerings that target internal
front office employees (Onyx Employee Portal), as well as external customers
and partners (Onyx Customer Portal and Onyx Partner Portal). With the Onyx
Employee Portal, front office employees can access customer information anytime
and anywhere they have a secure Internet connection via their Web browser.
Relevant functionality and information is consolidated in a single interface
for sales, marketing, service and support users. In addition, Onyx's Internet
architecture reduces the costs associated with deploying and maintaining the
solution, since no software has to be installed or upgraded on client machines.
XML Integration Framework
The Onyx e-Business Engine delivers enterprise class integration through a
data-driven, component-based architecture that manages data natively as XML,
and leverages XML for customization and integration. This XML integration
approach allows our software to integrate directly with other enterprise-class
systems and leading middleware products through XML, COM, or CORBA. Such
flexibility enables the Onyx portal suite to act as the foundation and single
interface for managing mission-critical customer and partner relationships.
Simultaneously, this approach reduces the complexity and cost of integration
processes associated with non-XML-based, closed integration architectures.
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Enterprise Class Platform
Our CRM platform provides the extensibility, scalability, and flexibility
required by large, enterprise-class organizations and high-end systems
integrators seeking to create value-added, vertically focused solutions for
their customers. The Onyx platform is an interface-independent platform that
provides enterprise-wide front-office capabilities to the Onyx portal suite and
to audience- and industry- specific interfaces. Through highly extensible,
data-driven business services, the Onyx platform lets customers and partners
align and adapt their CRM solution to meet their unique business objectives.
Partners and customers can adapt existing functionality and create new
functionality by leveraging the object-level infrastructure delivered within
the platform. Through platform optimization, stateless operation, and caching
services, the Onyx e-Business Engine is also designed to scale to meet the
needs of even the largest and most demanding organizations. Onyx has scaled its
application suite to over 32,000 concurrent users in multiple operating
environments. Finally, the customization and integration framework in the Onyx
e-Business Engine provides flexibility for building business rules, workflow,
and integration components, which gives organizations the ability to customize
our products to meet complex business requirements.
Our products are based on Windows Distributed interNet Application, or DNA,
architecture and use industry-standard, low-cost modular components. We believe
this combination of technology and flexible design enables us to offer an
attractive combination of reliability, performance, scalability, integration
and low total cost of ownership. Key aspects of our technology that enable us
to provide a robust CRM solution are as follows:
Support for Multiple Platforms. Our software is currently optimized for the
Windows NT and Microsoft BackOffice platforms. We have announced plans to
expand beyond the Microsoft platform, which will give customers a broader
selection of platforms to choose from in intranet, extranet and Internet
environments over local and wide area network environments. We released the
developer's version of the first additional platform in December 2000, which is
designed to operate on the Sun Solaris operating system and the Oracle
platform. We do not code to the lowest common denominator in support of
multiple platforms. Rather, we maximize code reuse while leveraging vendor-
specific language extensions to optimize for operating systems and relational
database engines.
n-tiered Architecture. Our software consists of a relationship-centric,
integrated data model surrounded by a set of configurable business logic and
presentation objects. This architecture uses multiple tiers to deliver a
balance between configurability, performance and administration. The logical
tiers are user interface services, or presentation layer, business logic
services, or business rules, and data services, or data access and data
storage. All tiers can be customized, and customizations can be preserved
during system upgrades.
Configuration. To adapt to rapidly changing business needs, our software
solution architecture offers broad customization at all tiers:
. User Interface Services Tier. Our Internet-based portal interface can be
customized by leveraging our graphical administration tools and the
inherent openness, extensibility and customizability of Internet forms
architecture.
. Business Logic Services Tier. Our application's business logic can be
customized via a suite of graphical administration tools coupled with an
open programmatic customization framework. The graphical administration
tools allow customers to easily model business terminology, processes,
workflow and security. For more complex customizations, customers are
not limited by graphical user interface administration tools. Our
customization framework provides an industry-standard development
environment in which complex processes and rules can be modeled.
Business terminology, rules, workflows and security models are inherited
by alternative client interfaces.
. Data Services Tier. Our software application includes a generic data
access integration framework that can be used to manage data residing
outside the standard Onyx e-Business data center. By using this service
and the forms customization framework, the Onyx e-Business Engine can
manage information that extends beyond core CRM.
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Integration With Other Enterprise Applications. Through our e-Business
Integration Framework, Onyx supports integration at all tiers of the n-tier
architecture-user interface services, business logic services and data
services. This enables our software and other third-party applications to
integrate at the optimal interface point. The Onyx e-Business Integration
Framework enables integration with third-party or legacy systems via batch,
real-time, peer-to-peer or enterprise application integration. Data from third-
party or legacy systems can be managed through the Onyx e-Business Engine,
which offers employees a real-time view of enterprise information without
requiring redundant storage of information in multiple databases. These
interfaces are object-based and allow bi-directional integration between our
products and other business applications.
Real-Time Synchronization Architecture. Real-time synchronization
architecture creates a mobile user's data snapshot as a replica of the
enterprise database upon completion of synchronization between the mobile
client and enterprise database. In addition, our architecture provides error
detection and recovery by automatically restarting the data synchronization
process at the point of failure should a connectivity link fail. Our
synchronization system also provides configurable data conflict resolution
algorithms and enables synchronization to be performed without user
intervention or attention.
Integrated Data Model. Our 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 can have 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 Universal Interface
Framework supports multiple interfaces, including Windows desktop applications,
Web applications and personal digital assistants.
Standards-Based Tools and Components. Our application's integration
interfaces and administration tools are built on open, published, industry-
standard tools and technologies.
Cross-Platform Interoperability. Although the Onyx e-Business Engine is
built on the Microsoft PC-based COM/DCOM standard, it can integrate with
applications running on disparate platforms such as a CORBA-based backbone.
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Customers and Markets
We target mid- to large-sized businesses and divisions of Fortune 500
companies in a wide variety of industries. We believe that these enterprises
have a strong need to move quickly and deliver increasing levels of customer
service through both e-business and traditional channels and that they are
deploying new technologies as a competitive advantage. We have licensed our
products to 745 customers through December 31, 2000. The following is a
representative list of our current customers who purchased more than $300,000
in software licenses from January 1, 1999 to December 31, 2000.
Telecommunications,
Technology Financial Services Internet & Application
Service Providers
Agile Software Brinson Partners
ANSYS Chairities Aid Broadwing Communications
AvantGo Foundation Cavillon Systems
Avid Technology Credit Suisse Cervalis
Bindview Development DBS Bank Ericsson Australia
BuildNet Equity Office Properties Eschelon Telecom
Cadence Design Systems Fisher Investments Evoke Communications
Commerce One Friends Ivory & Sime Futurelink
Crowe Chizek Trust Link GN Nettest
eShare Lease Plan Australia Interliant
eSoft NYCE marchFIRST
I-many Phillips Hager & North NTL Group
InfoSpace.com State Street Global Promon IP
Ingenix Advisors Q-Strategies
Interactive Intelligence Strong Capital Singapore Cable Vision
Interwoven Management Singapore Technologies
Mercator Telemedia
Mobius Management Health Care & Insurance The Sutherland Group
Systems Telstra
Netegrity Health Alliance Medical Verado Holdings
NeuVis Plans
Ontrack Data LIMRA International Other
International The Regence Group
OTG Software Swiss Life Adexa
Portal Software UPMC Health Plan Australian Business
Primus Limited
Rainbow Technologies Manufacturing Bedford, Freeman & Worth
Renaissance Learning Canter Group
Resonate AVT Factiva
Sagebrush Diagnostic Ultrasound Greenfield Online
SeeBeyond Fluke Networks Hostmark
Selkirk Financial IGo Intelligroup
Technologies Matsushita Avionics Jones Knowledge
StorageNetworks Zilog Lab Safety Supply
W-Technologies Merial Australia
Utilities Multiple Zones
New South Wales
ENMAX Department of Public
Mirant Works and Services
Wisconsin Public Service rivals.com
Singapore Press Holdings
Softek
techies.com
TietoEnator
Top Producer Systems
10
Sales and Marketing
We market and sell our software and services through a direct sales force,
as well as through our VARs. We have direct sales offices in the United States,
Australia, Canada, France, Germany, Hong Kong, Japan, Malaysia, New Zealand,
Singapore and the United Kingdom, and VARs in North America, Asia, Australia,
Europe, and Latin America. As of December 31, 2000, we employed 326 people in
sales and marketing. We support our field sales force with telemarketing
representatives and sales engineers.
VARs complement our direct sales effort in many of our markets. Our VARs
typically sell our software in conjunction with their implementation services.
Some also provide the first line of technical support for the customer.
We also distribute software through a network of ASPs, which host our
software to customers over the Internet, typically on a subscription basis.
This model is well suited for companies with limited information technology
resources, capital resources, or time necessary for implementing our system
internally. ASPs offer varying levels of managed services from simple system
administration operations to complete business consulting services.
Our marketing programs are focused on lead generation and brand awareness.
Direct marketing 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 direct and indirect sales channels, we have sponsored a
series of joint seminars, including Internet-based seminars, with key customers
and partners, such as Microsoft, and premier systems integration partners. Our
marketing personnel engage in a variety of marketing activities, including
managing and maintaining the Onyx Web site, conducting targeted direct-mail
campaigns, placing advertisements, conducting public relations programs and
establishing and maintaining relationships with recognized industry analysts.
Our sales process consists of several phases: lead generation, initial
contact, lead qualification, needs assessment, enterprise overview, product
demonstration, proposal generation and contract negotiation. Our initial sales
cycle typically ranges from two to six months, although it varies substantially
from customer to customer, and, in the past, some sales cycles have lasted
substantially longer.
We have a network of VARs who market, sell and install our systems in their
respective markets. We collaborate with our VARs in a variety of areas,
including seminars, trade shows and conferences. In some markets, our VARs also
create market-specific collateral and product demonstrations and assist in the
localization of our products and related documentation.
We typically enter into buy-sell contracts with VARs pursuant to which they
purchase our products with a right to re-license them to end users, provided
the licensing terms are materially consistent with those used by Onyx. The VARs
have no right to return the product, regardless of their ability to re-license
the product to an end user. In addition, our revenues from the sale of our
products to VARs are independent of the VAR's ability to collect payment from
an end user. We typically do not grant exclusive sales territories to our VARs,
but may do so if a proposed distribution transaction merits such an
arrangement.
We typically license our products to ASPs pursuant to contracts under which
they may include our products as part of their subscription-based services
offered over the Internet.
Research and Development
As of December 31, 2000, we employed 119 people in research and development.
This team is responsible for designing, developing and releasing our 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 that
11
work closely with sales, marketing, and professional services members, and with
customers and prospects to better understand market needs and requirements.
When required, we also use 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 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 of functions, components, systems, integration, performance, stress
and internationalization;
. 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 of English and localized products.
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 an international market, which enables 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 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, any breach.
"Onyx," "Onyx Web Wizards," "Customer Center," "Customer Center-Unplugged"
and "Total Customer Management" are our registered trademarks in the United
States. "Onyx" is also our registered trademark in a number of international
jurisdictions. All other trademarks or service marks appearing in this report
are trademarks or service marks of the respective companies that use them.
We pursue the registration of some trademarks and service marks in the
United States and in 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." 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 trademark rights to third parties. The licensees may
not abide by compliance and quality control guidelines with respect to the
licensed trademark rights and may take actions that would materially adversely
affect our business, financial condition and operating results.
12
Competition
Our solution targets the e-business systems market. This market is intensely
competitive, fragmented, rapidly changing and significantly affected by new
product introductions. We believe that we compete effectively as a result of
our integrated, relationship-centric, rapidly deployable, Internet-enabled
systems and 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 e-business systems market primarily from
. front-office software application vendors, such as Nortel Networks,
Pivotal, and Siebel Systems,
. large enterprise software vendors, such as Oracle and PeopleSoft, and
. our potential customers' information technology departments, which may
seek to develop proprietary systems.
In addition, because we offer extensive e-business capabilities, we also
face competition from e-business software application vendors such as Kana,
E.piphany and Broadvision.
Employees
As of December 31, 2000, we had 745 employees, excluding independent
contractors and other temporary employees, including 119 people in research and
development, 326 people in sales and marketing, 205 people in consulting,
customer support and training and 95 people in general and administrative
services. Our future performance will depend largely on the efforts of our key
technical, sales, customer support and managerial personnel and on our ability
to attract and retain them. The competition for qualified personnel in the
computer software and technology markets is intense. We have in the past
experienced difficulty in hiring qualified technical, sales, customer support
and managerial personnel, and we may be unable to attract and retain such
personnel in the future. None of our employees is represented by a labor union,
and we consider our employee relations to be good.
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 decrease in our stock price.
Our operating results have varied widely in the past, and we expect that
they will continue to fluctuate in the future. 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. Some of the factors that could affect the amount and timing of our
software license revenues and related expenses and cause our operating results
to fluctuate include:
. market acceptance of our solution;
. our ability to compete in the highly competitive e-business systems
market;
. continued purchases by our existing customers, including additional
license and maintenance revenues;
. our ability to expand our sales and support infrastructure;
. our ability to successfully expand our international operations;
. our ability to develop, introduce and market new products on a timely
basis;
. our ability to enable our products to operate on multiple platforms;
. variability in the mix of our license versus service revenues, the mix
of our direct versus indirect license revenues and the mix of services
that we perform versus those performed by third-party service providers;
13
. the cost and financial accounting effects of any acquisitions of
companies or complementary technologies that we may complete;
. the loss of any key technical, sales, customer support or management
personnel and the timing of any new hires;
. the timing of customer orders, which can be affected by customer
ordering and budgeting cycles or by customer order deferrals in
anticipation of new products or product enhancements introduced by us or
our competitors; and
. general economic conditions, which may affect our customers' capital
investment levels in management information systems.
As a result of all of these factors, we cannot predict our revenues with any
significant degree of certainty, and future product revenues may differ from
historical patterns. 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
and 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;
. a substantial portion of our sales are completed at the end of the
quarter and, as a result, a substantial portion of our license revenues
are recognized 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.
Even though our revenues are difficult to predict, we base our decisions
regarding our operating expenses on anticipated revenue trends. Many of our
expenses are relatively fixed, and we cannot quickly reduce spending if our
revenues are lower than expected. As a result, revenue shortfalls could result
in significantly lower income or greater loss than anticipated for any given
period, which could result in a decrease in our stock price.
Our operating results may fluctuate seasonally, and these fluctuations may
cause our stock price to decrease.
Our stock price may decrease due to seasonal fluctuations in 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. We believe that these fluctuations are caused in part
by customer buying patterns and the efforts of our direct sales force to meet
or exceed fiscal year-end quotas. We expect that these seasonal trends are
likely to continue in the future.
We have a limited operating history and are subject to the risks of new
enterprises.
We commenced operations in February 1994 and commercially released the first
version of our flagship product in December 1994. Accordingly, we have a
limited operating history, and we face all of the risks and uncertainties
encountered by early-stage companies. These risks and uncertainties include:
. no history of sustained profitability;
. uncertain growth in the market for, and uncertain market acceptance of,
our solution;
. reliance on one product family;
. the risk that competition, technological change or evolving customer
preferences, such as preferences for different computing platforms,
could adversely affect sales of our solution;
. the need to expand our sales and support infrastructure;
. the need to expand our international operations;
14
. dependence on a limited number of key technical, customer support, sales
and managerial personnel; and
. the risk that our management will not be able to effectively manage
growth or any acquisition we may undertake.
The new and evolving nature of the e-business systems market increases these
risks and uncertainties. Our limited operating history makes it difficult to
predict how our business will develop.
We have incurred losses in recent periods, and may not again achieve
profitability, which could cause a decrease in our stock price.
If we do not return to profitability in future quarters, our stock price
could decrease. 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 all four quarters of 2000. As of December 31, 2000, we
had an accumulated deficit of $10.6 million. We expect to continue to devote
substantial resources to our product development and sales and customer
support. In addition, we currently anticipate that we will continue to
experience significant growth in our operating expenses for the foreseeable
future as we
. increase sales and marketing activities;
. enter new markets for our solution;
. increase research and development spending;
. develop new distribution channels;
. expand our headquarters and field office facilities and infrastructure;
. expand our senior management team;
. improve our operational and financial systems; and
. broaden our professional service capabilities.
As a result, we will need to generate significant quarterly revenues to achieve
profitability. We cannot assure you that we will be able to do so. Our business
strategies may not be successful and, as a result, we may not be profitable in
any future period. 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 e-business systems
market.
If we are unable to compete successfully in the highly competitive e-business
systems market, our business will fail.
Our solution targets the e-business systems market. This market is intensely
competitive, fragmented, rapidly changing and significantly affected by new
product introductions. We face competition in the e-business systems 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 e-business systems. The
dominant competitor in our industry is Siebel Systems, Inc. Other companies
with which we compete include, but are not limited to, BroadVision, Inc.,
E.piphany, Inc., Kana Communications, Inc., Nortel Networks, Oracle
Corporation, PeopleSoft, Inc. and Pivotal Corporation.
In addition, as we develop new products, including new product versions
operating on new platforms, 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
15
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 enhances 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.
We originally designed our products to operate exclusively on the Windows NT
and Microsoft BackOffice platforms. As a result, we historically have only been
able to market our solution to customers which have developed their enterprise
computing systems around these platforms, which limits our potential sales. In
December 2000, we announced the release of a new product version designed to
operate on the Oracle platform. Because the Oracle version of our product is
relatively new, we cannot predict the degree to which it will achieve market
acceptance. If our new product version does not achieve market acceptance, our
revenue growth will be limited.
Because many potential customers are unaware of the benefits of e-business
systems, our products may not achieve market acceptance.
The market for e-business systems is still emerging, and continued growth in
demand for and acceptance of e-business systems remains uncertain. Even if the
market for e-business systems 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 e-business systems and that they may
never achieve market acceptance. We have spent, and will continue to spend,
considerable resources educating potential customers not only about our
solution but also about e-business systems in general. However, even with these
educational efforts, market acceptance of our solution may not increase. We
will not succeed unless we can educate our target market about the benefits of
e-business systems 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 52% of our total revenues, or 83% of total license
revenues, in 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.
If we are unable to continue to develop products that are compatible with the
Internet and if use of the Internet does not continue to expand, demand for our
products may be limited.
Our products communicate through public and private networks over the
Internet. The success of our products may depend, in part, on our ability to
continue developing products that are compatible with the Internet. We are
uncertain how businesses will use the Internet as a means of communication and
commerce and whether a significant market will develop for Internet-based e-
business systems. The use of the Internet is evolving rapidly, and many
companies are developing products and services that use the Internet. The
increased commercial use of the Internet could require substantial modification
of our products and the introduction of new products. We do not know what forms
of products and services may emerge as alternatives to our existing products or
to any future Internet-based or electronic commerce features and services we
may introduce.
16
In addition, critical issues concerning the commercial use of the Internet,
including security, demand, reliability, cost, ease of use, accessibility,
quality of service and potential tax or other government regulation, remain
unresolved and may affect the use of the Internet as a medium to support the
functionality of our products and distribution of our software. If these
critical issues are not favorably resolved, our Internet-related products may
not achieve market acceptance.
We may be unable to expand our sales infrastructure, which could harm our
ability to expand our business.
To date, we have sold our solution primarily through our direct sales force.
As a result, our future revenue growth will depend in large part on recruiting
and training additional direct sales personnel and expanding our indirect
distribution channels, such as VARs, ASPs, original equipment manufacturer, or
OEM, partners and system integrators and consultants. We have experienced and
continue to experience difficulty in recruiting qualified direct sales
personnel and in establishing third-party relationships with VARs, ASPs, OEM
partners and systems integrators and consultants. 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. Even if we successfully
expand our direct sales force and other distribution channels, the expansion
may not result in expected revenue growth.
If we do not retain our key employees and expand our management team, our
ability to execute our business strategy will be limited.
Our future performance will depend largely on the efforts and abilities of
our key technical, sales, customer support and managerial personnel and on our
ability to attract and retain them. In addition, our ability to execute our
business strategy will depend on our ability to recruit additional experienced
management personnel, including a chief financial officer, and to retain our
existing executive officers. The competition for qualified personnel in the
computer software and technology markets is particularly intense. We have in
the past experienced difficulty in hiring qualified technical, sales, customer
support and managerial personnel, and we may be unable to attract and retain
such personnel in the future. In addition, due to the intense competition for
qualified employees, we may be required to increase the level of compensation
paid to existing and new employees, which could materially increase our
operating expenses. 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 e-business systems market in which we compete is characterized by rapid
change due to changing customer needs, rapid technological developments and
advances introduced by competitors. Existing products can become obsolete and
unmarketable when products using new technologies are introduced and new
industry standards emerge. New technologies, including the rapid growth of the
Internet, could change the way e-business systems are sold or delivered. We may
also 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 changing customer needs,
technological developments and competitive product offerings. We may not be
able to successfully develop or license the applications necessary to respond
to these changes, or to integrate new applications with our existing products.
We have 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, or if they fail to achieve market acceptance when
released, it could harm our reputation and our ability to attract and retain
customers, and our revenues may decline. 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.
17
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. Even if we successfully
translate our software and develop new channels, we may not be able to maintain
or increase international market demand for the Onyx e-Business Engine product
family. We, or our VARs or ASPs, may not be able to sustain or increase
international revenues from licenses or from consulting and customer support.
In addition, our international sales are subject to the risks inherent in
international business activities, including
. costs of customizing products for foreign countries;
. export and import restrictions, tariffs and other trade barriers;
. the need to comply with multiple, conflicting and changing laws and
regulations;
. reduced protection of intellectual property rights and increased
liability exposure; and
. regional economic, cultural and political conditions.
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. However, 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 the values of those currencies fall in relation to the U.S. dollar
over the payment period.
If we are unable to develop and maintain effective long-term relationships with
our key partners, or if our key partners fail to perform, our ability to sell
our solution will be limited.
We rely on our relationships with a number of key partners, including
management consulting firms, system integrators, VARs, ASPs and third-party
technology vendors, that are important to worldwide sales and marketing of our
solution. These key partners often provide consulting, implementation and
customer support services, and endorse our solution during the competitive
evaluation stage of the sales cycle. Although we seek to maintain relationships
with our key partners, many of them have similar, and often more established,
relationships with our competitors. These key partners, many of which have
significantly greater resources than we have, may in the future market software
products that compete with our solution or reduce or discontinue their
relationships with us or their support of our solution. In addition, our sales
will be limited if
. we are unable to develop and maintain effective, long-term relationships
with our key partners;
. we are unable to adequately train a sufficient number of key partners;
. our key partners do not have or do not devote the resources necessary to
implement our solution; or
. our key partners endorse a product or technology other than our
solution.
If our relationships with application service providers are unsuccessful, our
ability to market and sell our solution will be limited.
We expect a significant percentage of our revenues to be derived from our
relationships with domestic and international ASPs that market and sell our e-
business systems, such as Interliant, Inc., Singapore Telecommunications
Telemedia and Telstra, Ltd. If these ASPs do not successfully market our
solution, our operating results will be materially harmed. Because our
relationships with ASPs are relatively new, we cannot predict the degree to
which the ASPs will succeed in marketing and selling our solution. In addition,
because
18
the ASP model for selling software is relatively new and unproven, we cannot
predict the degree to which our potential customers will accept this delivery
model. If the ASPs fail to provide adequate implementation and support for our
products and services, end-users could decide not to subscribe, or cease
subscribing, for our products and services. The ASPs typically offer our
products and services in combination with other products and services, some of
which may compete with our products and services.
Our sales cycle is long, and sales delays could cause our operating results to
fluctuate, which could cause a decline in our stock price.
An enterprise's decision to purchase an e-business system is discretionary,
involves a significant commitment of its resources and is influenced by its
budget cycles. To successfully sell our solution, we generally must educate our
potential customers regarding the use and benefit of our solution, which can
require significant time and resources. Consequently, the period between
initial contact and the purchase of our solution 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 and
six months from our initial contact with a potential customer to the signing of
a license agreement, although the amount of time 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.
Fluctuations in service revenues could decrease our total revenues or decrease
our gross margins, which could cause a decrease in our stock price.
Support and service revenues represented 37% of our total revenues in 1999
and 38% of our total revenues in 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
our overall gross margins and thus on our operating results. We subcontract
some of our consulting, customer support and training services to third-party
service providers. Third-party contract revenues generally carry even 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, service 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 operating results could
fall below the expectations of securities analysts or investors, which could
result in a decrease in our stock price.
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
solutions.
We incorporate into our products software that is licensed to us by third-
party software developers, currently Cognos, Greyware Automation Products,
Inso, Scribe Software, Sybase 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 the functionality we derive from this
licensed software and that we could identify and incorporate alternative
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 sales until we can find, license and integrate equivalent
technology.
19
We may have to reduce or cease operations if we are unable to obtain the
funding necessary to meet our working capital requirements.
Our future revenues may be insufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable to generate
sufficient cash flow from operations or to obtain funds through additional
financing, we may have to reduce some or all of our development and sales and
marketing efforts or cease operations. We have an equity financing arrangement
with Ramius Securities, LLC, or Ramius Securities, and Ramius Capital Group,
LLC, or Ramius Capital, under which we may from time to time in the next two
years elect to have Ramius Securities sell a limited number of shares of our
common stock (up to $30 million) on a best-efforts basis or to have Ramius
Capital purchase those shares if the selling efforts are unsuccessful. The
obligations of Ramius Securities and Ramius Capital under this arrangement are
subject to a number of conditions and limitations, and the amount of common
stock that we may sell depends on the daily trading volumes of our common stock
on the Nasdaq National Market. As a result, we may be unable to sell our common
stock under this facility in the amounts and at the times that we want. In
addition, the terms of the equity financing arrangement have not been reviewed
or approved by the National Association of Securities Dealers, or NASD. NASD
review is pending and no securities will be offered under the arrangement
unless and until NASD approval is obtained.
We completed a public offering of our common stock on February 12, 2001,
which resulted in net proceeds to us of approximately $31.3 million. We believe
that the net proceeds from this offering, together with our existing cash and
cash equivalents balances, our arrangement with Ramius Securities and Ramius
Capital and our existing lines of credit will be sufficient to meet our capital
requirements 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.
Except for the arrangement with Ramius Securities and Ramius Capital, we have
no commitment for additional financing, and we may experience difficulty in
obtaining funding on favorable terms, if at all. Any financing we obtain may
contain covenants that restrict our freedom to operate our business or may have
rights, preferences or privileges senior to our common stock and may dilute our
current shareholders' ownership interest in Onyx. Any common stock that we
issue under the arrangement with Ramius Securities and Ramius Capital, or
otherwise, will dilute our current shareholders' ownership interest in Onyx.
Failure to address strain on our resources caused by our rapid growth will
result in our inability to effectively manage our business.
Our current systems, management and resources will be inadequate if we
continue to grow. Our business has grown rapidly in size and complexity. This
rapid expansion has placed significant strain on our administrative,
operational and financial resources and has resulted in increasing
responsibilities for each of our management personnel. We will be unable to
effectively manage our business if we are unable to timely and successfully
alleviate the strain on our resources caused by our rapid growth.
We may be unable to adequately protect our proprietary rights, which may limit
our ability to compete effectively.
Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely primarily on a combination
of copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as
those contained in license agreements with consultants, vendors and customers,
although we have not signed these agreements in every case. Despite our efforts
to protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary. Other
parties may breach confidentiality agreements and other protective contracts we
have entered into, and we may not become aware of, or have adequate remedies in
the event of, a breach. We face additional risk when conducting business in
countries that have poorly developed or inadequately enforced intellectual
property laws. While we are unable to determine the extent to which piracy of
our software products exists, we expect piracy to be a continuing concern,
particularly in international markets and as a result of the growing use of the
Internet. In any event, competitors
20
may independently develop similar or superior technologies or duplicate the
technologies we have developed, which could substantially limit the value of
our intellectual property.
Intellectual property claims and litigation could subject us to significant
liability for damages and result in invalidation of our proprietary rights.
In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant
time and attention of our key management and technical personnel. Although we
have not been sued for intellectual property infringement, we may face
infringement claims from third parties in the future. The software industry has
seen frequent litigation over intellectual property rights, and we expect that
participants in the industry will be increasingly subject to infringement
claims as the number of products, services and competitors grows and the
functionality of products and services overlaps. Infringement litigation could
also force us to
. stop or delay selling, incorporating or using products that incorporate
the challenged intellectual property;
. pay damages;
. enter into licensing or royalty agreements, which may be unavailable on
acceptable terms; or
. redesign products or services that incorporate infringing technology,
which we might not be able to do at an acceptable price, in a timely
fashion or at all.
Our products may suffer from defects or errors, which could result in loss of
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 past versions of our products until software
problems were corrected, and in some cases have provided product updates to
correct errors in released products. Our new products or releases, including
our new Oracle version of our product, 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,
increased service and warranty costs or claims against us.
In addition, the operation of our products could be compromised as a result
of errors in the third-party software we incorporate into our software. It may
be difficult for us to correct errors in third-party software because that
software is not in our control.
The integration of Market Solutions, CSN Computer Consulting, RevenueLab and
any future acquisitions may be difficult and disruptive.
In October 1999, we acquired Market Solutions, a privately held provider of
Internet-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. In January 2001, we
acquired RevenueLab, a provider of proprietary go-to-market strategy and
revenue acceleration programs. We are currently in the process of integrating
these companies into our business. This integration is subject to risks
commonly encountered in making acquisitions, including
. loss of key personnel;
. difficulties associated with assimilating technologies, products,
personnel and operations;
. potential disruption of our ongoing business; and
. the inability of our sales force, consultants and development staff to
adapt to the new product line in a timely manner.
21
We may not successfully overcome these or any other problems encountered in
connection with integrating Market Solutions, CSN and RevenueLab. 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 February 12, 2001, our officers, directors and affiliated entities
together beneficially owned approximately 19.7% 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, particularly in the last year. As a result of
fluctuations in the price of our common stock, you may be unable to sell your
shares at or above the price at which you purchased them. The trading price of
our common stock could be subject to fluctuations for a number of reasons,
including
. future announcements concerning us or our competitors;
. actual or anticipated quarterly variations in operating results;
. changes in analysts' earnings projections or recommendations;
. announcements of technological innovations;
. the introduction of new products;
. changes in product pricing policies by us or our competitors;
. proprietary rights litigation or other litigation; or
. changes in accounting standards that adversely affect our revenues and
earnings.
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 national or international currency and stock market volatility,
recessions or military conflicts, may materially and adversely affect the
market price of our common stock, regardless of our operating performance. 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.
Changes in accounting standards and in the way we charge for licenses could
affect our future operating results.
In October 1997, the American Institute of Certified Public Accountants
issued its Statement of Position 97-2, Software Revenue Recognition, and later
amended its position by its Statement of Position 98-4 and Statement of
Position 98-9. Based on our interpretation of the AICPA's position, we believe
our current revenue recognition policies and practices are consistent with
Statement of Position 97-2, Statement of Position 98-4 and Statement of
Position 98-9. However, Technical Practice Aids for these standards continue to
be issued by the accounting standard setters. Any such Technical Practice Aids
could lead to unanticipated
22
changes in our current revenue accounting practices, which could materially
adversely affect our business, financial condition and operating results.
Accounting standard setters, including the SEC and the Financial Accounting
Standards Board, are also currently reviewing the accounting standards related
to business combinations and other areas. Any changes to these accounting
standards or the way these standards are interpreted or applied could require
us to change the way we account for any acquisitions we may pursue, or other
aspects of our business, in a manner that could adversely affect our reported
financial results.
Future sales and issuances of our common stock may depress our stock price.
Sales by our shareholders of substantial numbers of shares of our common
stock in the public market, or the perception that these sales could occur,
could adversely affect the market price of our common stock. As of February 12,
2001, 40,601,234 shares of our common stock were outstanding. Of these shares,
11,500,851 are restricted as a result of securities laws or lock-up agreements
signed by the holders in connection with our public offering in February 2001.
We have agreed to register, on or before March 6, 2001, the public resale of
337,925 shares of our common stock. The shares of common stock that are
currently restricted will be available for sale in the public market as
follows:
Number of
Date of Availability for Sale Shares
----------------------------- ----------
On the date of this report...................................... 100,723
After March 6, 2001, upon effectiveness of the registration
statement described above...................................... 337,925
On May 8, 2001, upon the expiration of lock-up agreements signed
for our recent public offering................................. 10,708,854
At various times thereafter on the expiration of one-year
holding periods................................................ 353,349
----------
11,500,851
==========
Dain Rauscher Wessels, the underwriter of our recent public offering, may,
in its sole discretion and at any time without prior notice, release all or any
portion of the common stock subject to lock-up agreements.
In addition, we may choose to issue and sell additional shares of our common
stock in the public market from time to time through our arrangement with
Ramius Securities and Ramius Capital. However, we have agreed with Dain
Rauscher Wessels not to sell any shares of common stock under the Ramius
arrangement or otherwise, subject to certain exceptions, until May 8, 2001.
Our articles of incorporation and bylaws and Washington law contain provisions
that could discourage a takeover.
Certain provisions of our articles of incorporation and bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders. These provisions
could discourage companies from presenting acquisition proposals to us and
could delay, deter or prevent a change of control of us, which could reduce the
market price of our common stock.
23
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, support and research and
development facilities are located in approximately 100,000 square feet of
space in Bellevue, Washington. This facility is leased to us through July 2006.
In May 2001, we plan to relocate our administrative, sales, marketing and
support personnel to a new location in Bellevue, Washington with approximately
178,000 square feet, pursuant to a lease that expires in 2011. Our research and
development personnel will continue to occupy our current facility in Bellevue,
Washington. We have leased an additional 84,000 square feet in Bellevue,
Washington pursuant to a lease that expires in 2013 that will serve as
expansion space in our new facilities. We currently lease other domestic sales
and support offices in California, Colorado, Georgia, Illinois, Indiana,
Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania and Texas.
We maintain international offices in Australia, Canada, France, Germany, Hong
Kong, Japan, Malaysia, New Zealand, Singapore and the United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this report, we are not a party to any litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2000.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market Information
Our common stock began trading under the symbol ONXS on the Nasdaq National
Market on February 12, 1999 at an initial public offering price of $6.50 per
share. The table below lists the high and low closing prices per share of our
common stock for each quarterly period during the past two years as reported on
the Nasdaq National Market, as adjusted to reflect the 2-for-1 split of our
common stock effected on March 1, 2000.
Price Range
of Common
Stock
-------------
High Low
------ ------
Year Ended December 31, 1999
First Quarter (beginning February 12, 1999)................. $22.32 $ 8.63
Second Quarter.............................................. 17.25 8.38
Third Quarter............................................... 11.13 6.63
Fourth Quarter.............................................. 20.00 7.82
Year Ended December 31, 2000
First Quarter............................................... $42.63 $15.94
Second Quarter.............................................. 31.00 17.00
Third Quarter............................................... 28.13 16.50
Fourth Quarter.............................................. 22.19 9.00
Holders
As of February 12, 2001, there were approximately 456 holders of record of
our common stock. This does not include the number of persons whose stock is in
nominee or "street name" accounts through brokers.
Dividends
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 and therefore do not anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of our credit facility prohibit us
from paying any cash dividends.
Recent Sales of Unregistered Securities
On October 1, 2000, in connection with the acquisition of Market Solutions,
we issued 162,712 shares of our common stock. This transaction was exempt from
the registration requirements of the Securities Act of 1933, as amended, or
Securities Act, under Regulation S promulgated under the Securities Act on the
basis that the transaction was completed outside the United States.
On November 17, 2000, we issued 343,100 shares of our common stock for an
aggregate purchase purchase price of $5.0 million to William B. Elmore, a
member of our Board of Directors. This transaction was exempt from the
registration requirements of the Securities Act under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder on the basis that Mr.
Elmore is an accredited investor and that the transaction did not involve a
public offering.
25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes
included in this report, as well as the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Historical results are not necessarily indicative of future
results.
Year Ended December 31,
------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- ------- --------
(In thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
License.......................... $6,797 $13,191 $22,811 $38,122 $ 75,910
Support and service.............. 2,848 6,246 12,299 22,452 45,613
------ ------- ------- ------- --------
Total revenues................. 9,645 19,437 35,110 60,574 121,523
Cost of revenues:
License.......................... 52 250 1,127 2,243 3,520
Acquisition-related
amortization--technology........ -- -- 83 500 820
Support and service.............. 2,062 5,022 7,927 11,466 23,662
------ ------- ------- ------- --------
Total cost of revenues......... 2,114 5,272 9,137 14,209 28,002
------ ------- ------- ------- --------
Gross margin....................... 7,531 14,165 25,973 46,365 93,521
Operating expenses:
Sales and marketing.............. 3,187 11,026 19,656 29,941 59,421
Research and development......... 1,170 4,729 8,855 10,545 21,109
General and administrative....... 1,109 2,156 4,136 5,966 11,256
Acquisition-related charges and
amortization--other
intangibles..................... -- -- 26 1,064 4,332
------ ------- ------- ------- --------
Total operating expenses....... 5,466 17,911 32,673 47,516 96,118
------ ------- ------- ------- --------
Income (loss) from operations...... 2,065 (3,746) (6,700) (1,151) (2,597)
Interest income, net............... 118 314 61 1,224 788
Equity investment loss............. -- -- -- -- (500)
------ ------- ------- ------- --------
Income (loss) before income taxes.. 2,183 (3,432) (6,639) 73 (2,309)
Income tax provision (benefit)..... 789 (888) 340 517 404
Minority interest in loss of
consolidated subsidiary........... -- -- -- -- (216)
------ ------- ------- ------- --------
Net income (loss).................. $1,394 $(2,544) $(6,979) $ (444) $ (2,497)
====== ======= ======= ======= ========
Basic and diluted net loss per
share(1).......................... $ (0.30) $ (0.01) $ (0.07)
Shares used in computation of basic
and diluted
net loss per share(1)............. 23,642 31,216 34,922
December 31,
------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- ------- --------
(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $1,356 $ 3,512 $ 1,853 $ 3,691 $ 11,492
Working capital.................... 4,288 9,307 3,861 30,147 27,466
Total assets....................... 8,004 15,952 22,490 73,180 111,534
Long-term obligations, net of
current portion................... 356 155 4,486 133 428
Redeemable convertible preferred
stock............................. 3,202 12,070 13,285 -- --
Shareholders' equity (deficit)..... 1,878 (1,552) (7,749) 51,838 68,300
- --------
(1) See Notes 1 and 10 of Notes to Consolidated Financial Statements for an
explanation of the method used to calculate basic and diluted net loss per
share. The 1998 and 1999 amounts are calculated on a pro forma basis.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Onyx is a leading provider of enterprise-wide, customer-centric e-business
solutions designed to promote strategic business improvement and revenue growth
by enhancing the way businesses market, sell and service their products. Using
the Internet in combination with traditional forms of interaction, including
phone, mail, fax and email, our solution helps 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
such as marketing, sales, customer service and technical support. 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 designed to be 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 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. Our revenues grew to $121.5 million in 2000. Excluding
acquisition-related amortization and equity investment losses, after tax net
income in 2000 totaled $2.5 million. Including these charges, we incurred a net
loss in 2000 totaling $2.5 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 and, as a result, we may incur operating losses in future quarters.
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 ASPs and indirectly through VARs. 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 VARs.
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 the undelivered 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
27
arrangements could consist of software products, maintenance (which includes
customer support services and upgrades), or consulting services. If a
nonstandard acceptance period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period. Our
agreements with our customers and VARs do not contain product return rights.
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 impacted by the services. 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.
Acquisitions of Versametrix, Market Solutions, CSN Computer Consulting and
RevenueLab
In August 1999, we acquired Versametrix, a privately held developer of a
comprehensive, browser-based personalization framework and an Internet-based
business intelligence solution. In exchange for all the outstanding shares of
Versametrix, we issued $1.6 million (192,386 shares) of common stock and
assumed $62,000 of Versametrix's debt, which was immediately liquidated. As a
result of the acquisition, we capitalized $100,000 of recent royalty advances
to Versametrix and accounted for them as part of the purchase price. Including
direct costs of the acquisition, the total purchase price was $1.8 million. We
accounted for the transaction using the purchase method, and, accordingly, the
results of Versametrix's operations have been included in our consolidated
financial statements from the date of acquisition. We recorded a charge to
income of $390,000, pursuant to an allocation of the purchase price by an
independent appraiser, as a write-off of acquired research and development. We
recorded capitalized technology and other intangible assets of $1.5 million,
which will be amortized on a straight-line basis over a three- to five-year
period following the acquisition. This represents the expected life of the
intangible assets that we acquired.
In October 1999, we acquired Market Solutions, a corporation formed under
the laws of England. Market Solutions, a privately held company established in
1989, was a provider of Internet-based CRM systems in the United Kingdom. We
paid $5.0 million in cash and issued $1.0 million (132,048 shares) of common
stock at closing in exchange for all the outstanding capital stock of Market
Solutions. We also issued an additional $3.6 million (162,712 shares) of common
stock on October 1, 2000 and are obligated to issue an additional $4.32 million
of common stock on October 1, 2001. These shares of Onyx common stock will be
valued based on the trading prices of Onyx common stock on the Nasdaq National
Market on the three trading days immediately prior to issuance. The issuance of
these shares will dilute our current shareholders' ownership interest in Onyx.
The total purchase price, including direct costs associated with the
acquisition, was $15.3 milli