| ONYX SOFTWARE CORP/WA ITEM 1A RISK FACTORS Our operating results fluctuate and could fall below expectations of 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 |
| We anticipate this will continue to be evident in 2006 as we maintain our focus on the sale of our products and services to a greater number of larger enterprises and governmental entities |
| We believe that selling to these target markets typically results in a higher degree of unpredictability in the sales cycle |
| If our operating results fall below the expectations of investors, it could result in a decrease in our stock price |
| Some of the factors that could affect the amount and timing of our revenue and related expenses and cause our operating results to fluctuate include: • general economic conditions, which may affect our customers’ capital investment levels in management information systems and the timing of their purchases; • the loss of any key technical, sales, accounting and finance, customer support or management personnel and the timing of any new hires; • budget and spending decisions by our prospective and existing customers; • customers’ and prospects’ decisions to defer orders or implementations, particularly large orders or implementations, from one quarter to the next, or to proceed with smaller-than-forecasted orders or implementations; • level of purchases by our existing customers, including additional license and maintenance revenues; • our ability to compete in the highly competitive customer management systems market; • our ability to develop, introduce and market new products and product versions on a timely basis; • rate of market acceptance of our software solutions; • variability in the mix of our license versus service revenue, the mix of our direct versus indirect license revenue and the mix of services that we perform versus those performed by third-party service providers; • our ability to successfully expand our operations, particularly our direct and indirect sales force and professional services organizations, and the amount and timing of expenditures related to this expansion; • our ability to expand our sales pipeline through our marketing activities and the expenses associated with these marketing activities; • the success of, the costs associated with, and the financial accounting effects of any acquisitions of companies or complementary technologies; • the expense we could incur as a result of an impairment in our goodwill; • the expense we will incur as a result of changes in rules for granting equity-based compensation; and • changes in generally accepted accounting principles in the United States and the application of any such changes to the presentation of financial results |
| As a result of all of these factors, we cannot predict our revenue or expenses with any significant degree of certainty, and future revenue may differ from historical patterns |
| It is particularly difficult to predict the timing or amount of our license revenue because: • our sales cycles are lengthy and variable, typically ranging between six and twelve months from our initial contact with a potential new customer to the signing of a license agreement, although the sales cycle varies substantially from customer to customer, and occasionally requires substantially more time; • a substantial portion of our sales are completed at the end of the quarter and, as a result, a substantial portion of our license revenue is recognized in the last month of a quarter, and often in the last weeks or days of a quarter; 16 _________________________________________________________________ [65]Table of Contents • the contracting process of our sales cycle may take more time than we have historically experienced; • the amount of unfulfilled orders for our products at the beginning of a quarter is typically small because our products are generally shipped shortly after orders are received; and • the delay of new product releases can result in a customer’s decision to delay execution of a contract |
| Even though our revenue is 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 revenue is 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 |
| We have incurred losses in prior periods, and may not be able to maintain profitability, which could cause a decrease in our stock price |
| We have periodically incurred net losses since our inception in 1994 and may not be able to achieve or maintain profitability in future quarters |
| As of December 31, 2005, we had an accumulated deficit of dlra130 million |
| Our accumulated deficit and financial condition have caused some of our potential customers to question our viability, which we believe has in turn hampered our ability to sell some of our products |
| During at least the first half of 2006, we believe our costs and operating expenses will increase in certain areas as we fund certain new initiatives, including those relating to heightened efforts in research and development, the expansion of our partner program and our marketing efforts surrounding our corporate strategy and associated awareness campaigns |
| Moreover, we may not be able to increase our revenue sufficiently to keep pace with any growth in expenditures and, as a result, we may be unable to achieve or maintain profitability in future periods |
| In addition, because we have not historically used the accounting methodology of SFAS 123R, but will be required to do so after January 1, 2006, our operating results will reflect a higher level of compensation expense than they have historically |
| Because we have been unable to sustain a high level of profitability, this increased expense could result in an operating loss instead of operating profits, and have a material adverse affect on our operating results |
| Although profitable for periods of 2003 and 2004, Onyx Japan Software Co |
| Ltd, our Japanese joint venture, or Onyx Japan, has incurred substantial losses overall |
| The minority shareholders’ capital account balance as of December 31, 2005 had been reduced to zero |
| As a result, additional Onyx Japan losses will be absorbed 100prca by us, as compared to 58prca in all prior periods since inception of the joint venture, which could affect our ability to achieve profitability in future periods |
| If our corporate strategy and market positioning is unsuccessful, we may not be able to generate revenue and achieve profitability |
| Historically we have been known as a leading provider of CRM, solutions |
| Over time, however, we have learned that automating interactions with customers is but one business problem that our customers and prospects are trying to solve |
| As such, in 2005 we announced a new corporate strategy that focuses not only on traditional CRM, but also on process management and performance management solutions |
| While we have developed products that we believe can help businesses automate, manage and report on their operations, we are uncertain of the market acceptance of our solutions |
| Moreover, we have made a concerted effort to market our products and services to larger potential customers than we have historically served |
| We believe that selling to these larger enterprises presents a greater market opportunity for us |
| However, sales to larger enterprises typically requirs a longer sales cycle than our prior business model which may affect the timing of license revenues |
| If this marketing strategy fails to generate the level of sales we anticipate, our business and our operating results may be adversely affected |
| If we are unable to compete successfully in the highly competitive customer management systems market, our business will fail |
| Our solutions target what is typically referred to as the customer management systems market |
| This market is intensely competitive, rapidly changing and significantly affected by new product introductions |
| We face 17 _________________________________________________________________ [66]Table of Contents competition primarily from front-office software application vendors, providers of hosted solutions, large enterprise software vendors and our potential customers’ internal information technology departments, which may seek to develop proprietary systems |
| Our primary competitor is Siebel Systems, Inc |
| (part of Oracle Corporation) |
| Other companies with which we compete include, but are not limited to, Amdocs Limited, Chordiant Software, Inc, Microsoft Corporation, Oracle Corporation, PeopleSoft, Inc |
| (part of Oracle Corporation), Pivotal Corporation (part of CDC Software), RightNow Technologies, Salesforce |
| com, SalesLogix (part of Sage, Inc |
| ) and SAP AG In addition, as we develop new products we may begin competing with companies with whom we have not previously competed |
| It is also possible that new competitors will enter the market |
| In recent years we have experienced an increase in competitive pressures in our market, which has led to enhanced price competition |
| Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, marketing and other resources than we do |
| Furthermore, there has been increasing consolidation among our competitors |
| In particular, Oracle Corporation has acquired People Soft and Siebel Systems |
| We believe that the consolidation among our competitors will continue |
| As a result of consolidation among our competitors, our competitors 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 than we can |
| In addition, our competitors may form strategic relationships with each other and with other companies in attempts to compete more successfully against us |
| These relationships may take the form of strategic investments, joint marketing agreements, licenses or other contractual arrangements, any of which may increase our competitors’ ability, relative to ours, to address customer needs with their software and service offerings and that may enable them to rapidly increase their market share |
| The business applications software market sector is consolidating, which may lead to stronger competitors or create questions in the marketplace regarding our status as an independent software vendor |
| The business applications software market has experienced a number of mergers and acquisitions during the last few years |
| We expect this trend towards consolidation to continue in 2006, as companies attempt to expand their competitive position and increase their customer and revenue base |
| This increased consolidation may create larger, stronger competitors which reduce our ability to successfully compete in the marketplace |
| Moreover, on December 6, 2005, CDC Software (“CDC”) announced its desire to acquire us |
| Although we rejected their unsolicited offer on January 5, 2006 and they subsequently withdrew their proposal, CDC or another software vendor, may attempt to acquire us in the future |
| Other unsolicited acquisition offers may materially and negatively affect our near-term revenue opportunities as prospective and current customers may be concerned about uncertainty and may question our long-term status as an independent company |
| If we do not retain our key employees and 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 executive, technical, sales, finance and accounting, customer support and managerial personnel and on our ability to attract and retain them |
| The loss of one or more of our senior management personnel may adversely effect our business, financial condition or operating results |
| In recent years we have lost members of the senior management team, and other key employees |
| When this occurs, new employees must spend a significant amount of time learning our business model in addition to performing their regular duties and integration of these individuals often results in some disruption to our business |
| In addition, our ability to execute our business strategy will depend on our ability to recruit and retain key personnel |
| Our key employees are not obligated to continue their employment with us and could leave at any time |
| 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 |
| As part of our 18 _________________________________________________________________ [67]Table of Contents strategy to attract and retain personnel, we offer stock option grants to certain employees |
| However, given the fluctuations of the market price of our common stock, potential employees may not perceive our equity incentives such as stock options as attractive, and current employees whose options are no longer priced below market value may choose not to remain employed by us |
| 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 |
| Changes in applicable rules regarding equity compensation could require modifications to our equity compensation strategy that may negatively affect our ability to attract and retain employees and adversely affect our operating results |
| On December 15, 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Accounting Standards, or SFAS, Nodtta 123R (revised 2004) “Share Based Payment” or SFAS 123R SFAS 123R will require us to expense stock options in our statement of operations on an ongoing basis |
| SFAS 123R applies to all outstanding stock options that are not vested as of January 1, 2006 and to grants of new stock options made subsequent to that date |
| We have historically used stock options as a key component of our employee compensation program |
| SFAS 123R, and any subsequent regulations relating to stock options, may make it less attractive and expensive for us to grant stock options to employees in the future |
| In light of these changes we have evaluated different strategies for providing our employees with equity compensation |
| If employees believe that new compensation strategies result in less desirable compensation packages, we may be unable to attract and retain the best employees |
| In addition, because we have not historically used the accounting methodology of SFAS 123R, but will be required to do so after January 1, 2006, our operating results will reflect a higher level of compensation expense than they have historically |
| Because we have been unable to sustain a high level of profitability, this increased expense could result in an operating loss instead of operating profits and have a material adverse affect on our operating results |
| We may be unable to obtain the funding necessary to support the expansion of our business, and any funding we do obtain could dilute our shareholders’ ownership interest in us |
| Our future revenue may be insufficient to support the expenses of our operations, capital needs of Onyx Japan, 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 our development and sales and marketing efforts and limit the expansion of our business |
| Under the loan and security agreements with Silicon Valley Bank, or SVB, we have an dlra8dtta0 million working capital revolving line of credit and a dlra500cmam000 term loan facility |
| The dlra8dtta0 million working capital revolving line of credit is split between a dlra6dtta0 million domestic facility and a dlra2dtta0 million Export Import Bank of the United States, or Exim Bank, facility |
| All of the facilities are secured by accounts receivable, property and equipment and intellectual property |
| The domestic facility allows us to borrow up to the lesser of (a) 70prca of eligible domestic and individually approved foreign accounts receivable and (b) dlra6dtta0 million |
| The Exim Bank facility allows us to borrow up to the lesser of (a) 75prca of eligible foreign accounts receivable and (b) dlra2dtta0 million |
| The amount available to borrow under the working capital revolving line of credit is reduced by reserves for outstanding standby letters of credit issued by SVB on our behalf |
| If the calculated borrowing base falls below the reserves, SVB may require us to cash secure the amount by which the reserves exceed the borrowing base |
| Based on this calculation, no restriction on cash was required under the loan agreement as of December 31, 2005 |
| Due to the variability in our borrowing base, we may be subject to restrictions on our cash at various times throughout the year |
| Any borrowings will bear interest at SVB’s prime rate, which was 7dtta25prca as of December 31, 2005, plus 1dtta5prca (plus 2prca for the term loan facility), subject to a minimum rate of 6dtta0prca |
| The loan agreements require that we maintain certain financial covenants based on our adjusted quick ratio and tangible net worth |
| We believe we were in compliance with these covenants at December 31, 2005 |
| We are prohibited under the loan and security agreements from paying dividends |
| The facilities expire in March 2006 |
| At December 31, 2005, we had dlra4dtta7 million outstanding standby letters of credit relating to long-term lease obligations and dlra223cmam000 outstanding under the term loan facility |
| 19 _________________________________________________________________ [68]Table of Contents We believe that our existing cash and cash equivalents will be sufficient to meet our capital requirements for at least the next 12 months |
| We may seek additional funds through public or private equity financing or from other sources to fund our operations and pursue our growth strategy |
| We may experience difficulty in obtaining funding on favorable terms, if at all |
| Any financing we might obtain may contain covenants that restrict our freedom to operate our business or require us to issue securities that have rights, preferences or privileges senior to its common stock and may dilute the ownership interest of our current shareholders |
| 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 existing relationships with a number of key partners, including consulting firms, system integrators, VARs and third-party technology vendors, that are important to worldwide sales and marketing of our solutions |
| Key partners often provide consulting, implementation and customer support services, and endorse our solutions during the competitive evaluation stage of the sales cycle |
| In 2005, we announced a new partner program and intend to increase our focus and commitment on our partner activities worldwide |
| We expect an increasing percentage of our revenue to be derived from sales that arise out of our relationships with these key partners |
| Although we seek to maintain relationships with our key partners, and to develop relationships with new partners, many of these existing and potential key partners have similar, and often more established, relationships with our competitors |
| These existing and potential partners, many of which have significantly greater resources than we have, may in the future market software products that compete with our solutions or reduce or discontinue their relationships with us or their support of our solutions |
| In addition, our sales will be limited if: • we are unable to develop and maintain effective, long-term relationships with existing and potential key partners; • our existing and potential key partners endorse a product or technology other than our solutions; • we are unable to adequately train a sufficient number of key partners; or • our existing and potential key partners do not have or do not devote resources necessary to implement our solutions |
| Economic and business conditions could adversely affect our revenue growth and ability to forecast revenue |
| Our revenue growth and potential for profitability depend on the overall demand for customer management software and services |
| Because our sales are primarily to corporate customers, we are greatly affected by general economic and business conditions |
| If these conditions weaken, sales cycles for software products tend to lengthen, and, as a result, we have seen our sales cycle lengthen in recent years |
| Our management team uses our software to identify, track and forecast future revenue, backlog and trends in our business |
| Our sales force monitors the status of proposals, such as the date when they estimate that a transaction will close and the potential dollar amount of such sale |
| We aggregate these estimates regularly in order to generate a sales pipeline and then evaluate the pipeline at various times to look for trends in our business |
| While this pipeline analysis provides us with visibility about our potential customers and the associated revenue for budgeting and planning purposes, these pipeline estimates may not consistently correlate to revenue in a particular quarter or over a longer period of time |
| If we experience a downturn in business conditions, it may cause customer purchasing decisions to be delayed, reduced in amount or cancelled |
| This could, in turn, reduce the rate of conversion of the pipeline into contracts during a particular period of time |
| We also believe that our customers face increasing budgetary pressures due to increased compliance costs in the current regulatory environment, such as costs associated with establishing and maintaining satisfactory internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 |
| A variation in the pipeline or in the conversion of the pipeline into contracts could adversely affect our business and operating results |
| In addition, 20 _________________________________________________________________ [69]Table of Contents because a substantial portion of our sales are completed at the end of the quarter, and often in the last weeks or days of a quarter, we may be unable to adjust our cost structure in response to a variation in the conversion of the pipeline into contracts in a timely manner, which could adversely affect our business and operating results |
| Some customers are reluctant to make large purchases before they have had the opportunity to observe how our software performs in their organization, and have opted instead to make their planned purchase in stages |
| Additional purchases, if any, may follow only if the software performs as expected |
| We believe that this trend is a symptom of lack of successful deployments by competitors and increasing averseness to risk among our customers and potential customers |
| Our business is subject to regulations promulgated under the Sarbanes-Oxley Act of 2002 that have resulted in increased operating costs and diversion of management attention |
| Our work to comply with new regulations promulgated by the SEC, the Nasdaq Stock Market and the Public Company Accounting Oversight Board, particularly with respect to the Sarbanes-Oxley Act of 2002, has resulted in, and is likely to continue to result in, increased general and administrative expenses, which we expect to increase even further in future periods |
| Moreover, compliance with these regulations has diverted a substantial amount of management time and attention away from revenue-generating activities to compliance activities, which could affect our ability to increase our sales and grow our business |
| Because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available |
| This may result in ongoing uncertainty regarding compliance matters and on-going revisions to our public disclosure and corporate governance practices to ensure continued compliance |
| The internal controls implemented under the Sarbanes-Oxley Act of 2002 may not prevent or detect all material weaknesses or significant deficiencies |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish an internal controls report of management’s assessment of the design and effectiveness of our internal controls as part of our Annual Report on Form 10-K beginning with the fiscal year ending December 31, 2004 |
| Our independent registered accounting firm is then required to attest to, and report on, management’s assessment and the effectiveness of internal controls |
| Although our internal testing, as well as our independent registered accounting firm’s report, identified no material weaknesses in our internal controls, certain weaknesses may be subsequently discovered that will require remediation |
| This remediation may require implementing additional controls, the costs of which could have a material adverse effect on our operating results |
| Moreover, if we are not able to annually comply with the requirements of Section 404, our reputation might be harmed and we might be subject to sanctions or investigation by regulatory authorities, such as the SEC, or de-listing by the Nasdaq Stock Market |
| Any such action could adversely affect our financial results and the market price of our common stock |
| We may be unable to establish vendor-specific objective evidence of fair value or undelivered transaction elements, which could delay our ability to recognize software license revenue to later periods and thereby adversely affecting our operating results |
| If we are unable to establish vendor-specific objective evidence of fair value or undeliverable elements of our software contract, we will be required to delay revenue recognition for payments received under these contracts, which could adversely affect our operating results |
| We recognize revenue under the residual method, where revenue is allocated to undelivered elements in a transaction — typically software maintenance and product support — based on vendor-specific objective evidence of its fair value |
| The remaining revenue from the specific transaction — typically license revenue — is then determined |
| 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 once the element is sold separately |
| If we cannot continue to demonstrate vendor specific objective evidence for items such as maintenance and professional services, it would likely prohibit us from recognizing revenue upon contract execution, and instead require us to recognize software license revenue over the initial period of the maintenance and product support, 21 _________________________________________________________________ [70]Table of Contents which is typically one year |
| This would have a significant effect on the timing of the license revenue that we recognize, delaying revenue recognition to future periods and thereby adversely affecting our operating results |
| An unfavorable review of our domestic and international tax returns could adversely affect our operating results |
| Our operations are subject to income, payroll and other taxes in the United States and other foreign jurisdictions where we do business |
| We exercise judgment and use estimates in determining provisions for these taxes and there may be certain transactions where the ultimate tax determination is uncertain at the time such determination is made |
| While we believe we have made adequate provisions related to these tax returns, the final determination of our obligations may exceed the amounts we have included in our consolidated financial statements |
| If additional taxes and/or penalties are assessed as a result of ongoing or future audits, there could be a material effect on our income tax provision, operating expenses and net income in the period or periods for which that determination is made |
| Unauthorized or improper actions of our personnel could adversely impact our operating results and financial statements |
| Our consolidated financial statements could be adversely affected by our employees’ errant or improper actions |
| For example, proper revenue recognition depends on, among other criteria, full knowledge of the terms negotiated in our contracts with customers |
| It is possible that our personnel may act outside of their authority and negotiate additional terms without our knowledge |
| We have implemented policies and procedures to prevent and detect such conduct, but we cannot assure you that such policies will be followed or such detective measures will be effective |
| Depending on when we learn of any unauthorized actions and the size of any such transaction involved, we may have to restate our consolidated financial statements for a previously reported period which would seriously harm our business, operating results and financial condition |
| Fluctuations in support and service revenue could decrease our total revenue or decrease our gross margins, which could cause a decrease in our stock price |
| Although our support and service revenue has decreased as a percentage of our total revenue in 2004 and 2005 as compared to 2003, it still represented a higher percentage of our total revenue than in past periods, which negatively affected our gross margins during 2004 and 2005 |
| We anticipate that support and service revenue will continue to represent a significant percentage of our total revenue |
| Support and service revenue has lower gross margins than license revenue, and any increase in the percentage of total revenue represented by support and service revenue or a decrease in license revenue, could have a detrimental effect on our overall gross margins and thus on our operating results |
| Our support and service revenue is subject to a number of risks |
| First, we subcontract some of our consulting, customer support and training services to third-party service providers |
| As a result, our support and service revenue and related margins may vary from period to period, depending on the mix of third-party contract revenue |
| Second, support and service revenue depends in part on ongoing renewals of support contracts by our customers, some of which may not renew their support contracts |
| Finally, support and service revenue could decline further if customers select third-party service providers to install and service our products more frequently than they have in the past |
| If support and service revenue is lower than anticipated, our operating results could fall below the expectations of investors, which could result in a decrease in our stock price |
| Our solutions may not achieve significant market acceptance |
| Continued growth in demand for customer management systems and our new products remains uncertain |
| Even if the market grows, businesses may purchase our competitors’ solutions or develop their own |
| We believe that many of our potential customers are not fully aware of the benefits of customer management systems and that, as a result, these systems have not achieved, and may not achieve, market acceptance |
| We also believe that many of our potential customers perceive the implementation of such a system to require a great deal of time, expense and complexity |
| This perception has been exacerbated by well-publicized failures of certain projects of some of our competitors |
| This, in turn, has caused some potential customers to approach purchases of customer management systems with caution or to postpone their orders or decline to make a purchase altogether |
| We have spent, and will 22 _________________________________________________________________ [71]Table of Contents continue to spend, considerable resources educating potential customers not only about our solutions but also about customer management systems in general |
| Even with these educational efforts, however, continued market acceptance of our solutions may not increase |
| We will not succeed unless we can educate our target market about the benefits of customer management systems and the cost effectiveness, ease of use and other benefits of our solutions |
| If potential customers do not accept the Onyx product family, our business will fail |
| We rely on one product family for the success of our business |
| License revenue from the Onyx product family has historically accounted for nearly all of our license revenue |
| We expect product license revenue from the Onyx product family to continue to account for a substantial majority of our future revenue |
| As a result, factors adversely affecting the pricing of or demand for the Onyx 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 product family and to develop, introduce and establish customer acceptance of new and enhanced versions of the Onyx product family, our business will fail |
| We may be unable to efficiently restructure or expand our sales organization, which could harm our ability to expand our business |
| To date, we have sold our solutions primarily through our direct sales force, with this trend especially pronounced in the North American market |
| Our future revenue growth will depend in large part on recruiting, training and retaining direct sales personnel and expanding our indirect distribution channels |
| These indirect channels include VARs, systems integrators and consulting firms |
| We have experienced and may continue to experience difficulty in recruiting qualified direct sales personnel and in establishing third-party relationships with VARs, systems integrators and consulting firms |
| If our customers cannot successfully implement our products in a timely manner, demand for our solutions will be limited |
| The implementation of our products involves a significant commitment of resources by prospective customers |
| Our customers frequently deploy our products to large numbers of sales, marketing and customer service personnel, which can increase the complexity of the implementation |
| Further, our products are also used in combination with, or integrated to, a number of third-party software applications and programming tools, which may also increase the complexity of the implementation |
| If an implementation is not successful, we may be required to deliver additional consulting services free of charge in order to remedy the problem |
| If our customers have difficulty deploying our products or for any other reason are not satisfied with our products, our operating results and financial condition may be harmed |
| Rapid changes in technology could render our products obsolete or unmarketable, and we may be unable to introduce new products and services successfully and in a timely manner |
| The market for customer management systems 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 could change the way customer management 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 recently introduced new products to the market |
| While we anticipate that these products will be licensed and successfully deployed by our customers, the products may not receive the market acceptance we expect |
| We have delayed enhancements or new product release dates several times in the past, and may be unable to introduce enhancements or new products successfully or in a timely 23 _________________________________________________________________ [72]Table of Contents 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 revenue may decline |
| In addition, customers may defer or forego purchases of our products if we, our competitors or major technology vendors introduce or announce new products or product enhancements |
| 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 in the long term, we will likely need to expand our international operations, particularly in Europe |
| This expansion may be delayed as a result of our desire to minimize expenses |
| If we do expand internationally, it 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 our solutions |
| We, or our VARs, may be unable 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, taxes, tariffs and other trade barriers; • the need to comply with multiple, conflicting and changing laws and regulations; • reduced protection of intellectual property rights and increased liability exposure; and • regional economic, cultural and political conditions, including the direct and indirect effects of terrorist activity and armed conflict in countries in which we do business |
| As noted above, Onyx Japan has incurred substantial losses in previous periods |
| The minority shareholders’ capital account balance at December 31, 2005 was depleted |
| Additional Onyx Japan losses will be absorbed 100prca by us, as compared to 58prca in all prior periods since inception of the joint venture |
| Our absorption of Onyx Japan’s losses at 100prca amounted to dlra215cmam000 during 2005 |
| Additional funding may be required to continue the operation of the joint venture |
| Our joint venture partners are not obligated to participate in any capital call and have indicated that they do not currently intend to invest additional sums in Onyx Japan |
| If Onyx Japan incurs losses in future periods and no additional capital is invested, we may have to further restructure Onyx Japan’s operations |
| Our foreign subsidiaries operate primarily in local currencies, and their results are translated into US dollars |
| We do not currently engage in currency hedging activities, but we may do so in the future |
| Changes in the value of the US dollar relative to foreign currencies have not materially affected our operating results in the past |
| Our operating results could, however, be materially harmed if we enter into license or other contractual agreements involving significant amounts of foreign currencies with extended payment terms if the values of those currencies fall in relation to the US dollar over the payment period |
| We may not realize the expected benefits of future acquisitions and the integration of these acquisitions, should they occur, may distract our management and disrupt our business |
| We have in the past and may in the future acquire complementary companies or technologies |
| Any such acquisition may subject us to a variety of risk, including: • difficulty and cost in combining the operations, technology and personnel of acquired businesses with our operations and personnel; • disruption of our ongoing business and diversion of management’s time and attention to integrating or completing the development or commercialization of any acquired technologies; • impairment of relationships with key customers of acquired businesses due to changes in management and ownership of the acquired businesses; • inability to retain key employees of any acquired businesses; 24 _________________________________________________________________ [73]Table of Contents • the failure of acquired business to meet our expectations with respect to legal or financial contingencies and product quality; • difficulty in maintaining procedures and policies during the integration; and • inability to achieve the anticipated financial goals of the acquired or combined businesses |
| If we do not successfully and timely integrate an acquired business, our business and our operating results could suffer |
| 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 |
| In any event, competitors 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 revenue, delayed or limited market acceptance of our products, increased costs and damage to our reputation |
| Software products as complex as ours frequently contain errors or defects, especially when first introduced or when new versions are released |
| Our customers are particularly sensitive to such defects and errors because of the importance of our solutions to the day-to-day operation of their businesses |
| 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 may not be free from errors after commercial shipments have begun |
| Any errors that are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our reputation, increased service and warranty costs or claims against us |
| 25 _________________________________________________________________ [74]Table of Contents In addition, the operation of our products could be compromised as a result of errors in the third-party software we incorporate into our products |
| It may be difficult for us to correct errors in third-party software because that software is not in our control |
| You may be unable to resell your shares at or above the price at which you purchased them, and our stock price may be volatile |
| Since our initial public offering in February 1999, the price of our common stock has been volatile |
| Our common stock, on a split-adjusted basis, reached a high of dlra176dtta00 per share on March 6, 2000 and traded as low as dlra2dtta24 per share on April 30, 2003 |
| 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: • significant trading activity by shareholders with large holdings in our common stock; • future announcements concerning us or our competitors; • actual or anticipated quarterly variations in operating results; • changes in analysts’ earnings projections or recommendations; • announcements of technological innovations; • the introduction of new products; • changes in product pricing policies by us or our competitors; • proprietary rights litigation or other litigation; or • changes in accounting standards that adversely affect our revenue and earnings |
| In addition, future sales 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 |
| 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 and may expose us to class action securities litigation which, even if unsuccessful, would be costly to defend and distracting to management |
| Our articles of incorporation, bylaws, rights plans and Washington law contain provisions that could discourage a takeover |
| Certain provisions of our restated articles of incorporation and bylaws, our shareholder rights plan and Washington law would make it more difficult for a third party to acquire us, even if doing so would be beneficial for our shareholders |
| This could limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| For example, certain provisions of our articles of incorporation or bylaws: • stagger the election of our board members so that only one-third of our board is up for reelection at each annual meeting; • allow our board to issue preferred stock without any vote or further action by the shareholders; • eliminate the right of shareholders to act by written consent without a meeting, unless the vote to take the action is unanimous; • eliminate cumulative voting in the election of directors; • specify a minimum threshold for shareholders to call a special meeting; • specify that directors may be removed only with cause; and 26 _________________________________________________________________ [75]Table of Contents • specify a supermajority requirement for shareholders to change those portions of our articles that contain the provisions described above |
| In October 1999, we adopted a shareholder rights plan, which is triggered upon commencement or announcement of a hostile tender offer or when any one person or group acquires 15prca or more of our common stock |
| Once triggered, the rights plan would result in the issuance of preferred stock to the holders of our common stock other than the acquirer |
| The holders of this preferred stock would be entitled to ten votes per share on corporate matters |
| In addition, these shareholders receive rights under the rights plan to purchase our common stock, and the stock of the entity acquiring us, at reduced prices |
| We are also subject to certain provisions of Washington law that could delay or make more difficult a merger, tender offer or proxy contest involving us |
| In particular, Chapter 23B19 of the Washington Business Corporation Act prohibits corporations based in Washington from engaging in certain business combinations with any interested shareholder for a period of five years unless specific conditions are met |
| These provisions of our restated articles of incorporation, bylaws and rights plan and Washington law could have the effect of delaying, deferring or preventing a change in control of Onyx, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock |
| The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock |