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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
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: 0-26156
NOVADIGM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 22-3160347
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION
ORGANIZATION) NO.)
ONE INTERNATIONAL BLVD., SUITE 200, MAHWAH, NJ 07495
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(201) 512-1000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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. [X]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of 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 10K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on June 7,
1999, as reported on Nasdaq National Market was approximately $105,901,000.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliates status is not necessarily a conclusive determination for other
purposes.
On June 7, 1999, there were 17,933,179 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Stockholders
which is scheduled to be held September 17, 1999.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Securities Holders....... 13
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 8. Financial Statements and Supplementary Data................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 26
Item 11. Executive Compensation...................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26
Item 13. Certain Relationships and Related Transactions.............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K......................................................... 27
SIGNATURES............................................................ 29
POWER OF ATTORNEY..................................................... 30
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Among the marks owned by Novadigm, Inc., "Novadigm," "Novadigm Enterprise
Desktop Manager" and "Radia" are registered trademarks and "Enterprise Desktop
Manager," "EDM: Manager," "EDM: Administrator," "EDM: Server" and "EDM: Client"
are trademarks. This filing also includes trademarks of companies other than
those of Novadigm, Inc.
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PART I
This report includes a number of forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "anticipates," "believes," "expects," "intends," "future" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements and are advised
to review the risks and uncertainties set forth under "Business Risks" in Part
II, Item 7.
ITEM 1. BUSINESS
Novadigm, Inc. ("Novadigm" or the "Company") is a provider of technology
solutions that efficiently and reliably deliver, update and maintain software
and content across the extended enterprise. Novadigm has become an industry
leader in reducing software ownership costs while at the same time reducing
time-to-market for infrastructure and application deployment across any
business-to-employee ("B2E"), business-to-business ("B2B") or
business-to-consumer ("B2C") network -- from client/server to the Internet to
public e-commerce terminals. Novadigm customers report software management
savings of 80% or more and time-to-market improvement of 70% or more. Novadigm's
suite of products share a common architecture and work seamlessly together as
the only end-to-end solution that can reliably and scalably deploy and manage
the full range of today's software and content. Novadigm's solution deploys and
manages software and content as a self-installing, self-updating, self-repairing
continuous flow, on a wide range of computing devices (fixed and mobile) over
virtually any kind of network, from the core of the enterprise out to virtually
any end-point of the extended enterprise. By managing this range of customer
environments and business needs, Novadigm technology is a critical enabler of
the evolving enterprise, optimizing companies' existing technology investments
while facilitating their rapid migration from client/server-generation
environments to the Internet generation. Novadigm's customers include Fortune
1000 companies in the financial services, insurance, transportation,
telecommunications, healthcare, and utilities industries; government agencies;
large independent software vendors; and information technology ("IT") service
providers around the world.
Because Novadigm's product suite is based on a common object-oriented
platform and is seamlessly integrated, IT professionals can manage multiple
locations and diverse environments with a single solution. Enterprise Desktop
Manager(TM) ("EDM"), which is optimized for the enterprise, centrally manages
the distribution, configuration, updating and maintenance of software and
content across distributed PCs, servers, point-of-sale ("POS") devices and
automated teller machines ("ATMs"); and the RADIA(TM) products ("Radia"), which
are optimized for the Internet, provide automated updating and maintenance for
subscribers' web-hosted applications and content. EDM and Radia use Novadigm's
unique 'desired-state' management technology to automate the deployment and
management of software and content across complex environments with reliability
typically reported by customers as greater than 99%. In addition, our products
use our patented component-level differencing technology as well as byte-level
differencing, thereby deploying only the minimal software and content parts
necessary for updates and corrections. This ensures minimal impact to networks
and rapid application delivery across tens of thousands of devices.
BACKGROUND
Novadigm's software and computer-based content deployment and management
solutions serve a number of related and overlapping markets that the continuing
extension of the enterprise is drawing together. These markets incorporate
numerous user communities, including corporate employees, remote/mobile users,
customers, partners, suppliers, and customers of public e-commerce terminals
such as ATMs and POS devices.
This collection of markets is commonly characterized as Electronic Software
Distribution ("ESD"), a large and rapidly growing segment of the systems
management marketplace that arose in the early 1990s. The ESD market as a whole
is expected by International Data Corporation to grow from $1.47 billion in 1998
to approximately $4 billion by the year 2003. ESD is generally used to describe
a broad class of software tools
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that attempt to meet one or more of the business requirements to deploy
infrastructure, business applications and personal productivity software within
the enterprise and across the Internet. In the Internet space, emerging market
segments which are often categorized within ESD include Internet Application
Management and the Internet Services Management ("ISM") infrastructure market.
ESD includes a wide range of technology solutions that focus on one or more
types of software or content (such as operating systems, productivity tools,
business-critical software, graphical documents, etc.), one or more kinds of
networks (local area networks ("LANs"), wide area networks ("WANs"), virtual
area networks ("VANs"), intranets, extranets or the Internet), and one or more
audiences (such as in-house knowledge workers, remote/mobile workers, Internet
users, etc.). As semi-automated tools based on older technologies, most ESD
products are low-powered, platform-specific, specialized for a certain type of
software or user environment, limited in scalability, and typically enforce
standardization at the expense of user personalization. These approaches are
often labor-intensive, error-prone and non-replicable (i.e., any changes in
software, user configuration or environment require a great deal of manual
rework). As a result, they cannot be scaled across large implementations, cannot
deliver the application deployment speed required in the current business world,
exact high implementation and operational costs, and, at enterprise scale,
suffer a significant failure rate -- pegged at 75% by the GartnerGroup. What
characterizes these solutions and their vendors competitively is the degree of
usability, flexibility, level of automation, scalability, and reliability which
they provide, and the range of software and content, computing devices, and
environments that they can effectively manage.
Novadigm believes that software and content management solutions that
automate the 'end-to-end' process of discovering, tracking, configuring,
deploying, updating, correcting and maintaining software and content across
large-scale networks both inside and outside of corporate firewalls are
fundamental to the future of software. These solutions must be fast, scalable,
reliable and highly adaptable to each customer's individual applications, user
audiences, and existing base of computing platforms and they must support the
dynamic and rapidly changing requirements of the business. One of the key
changes underway in the enterprise is its transformation from a
firewall-enclosed environment into an extended enterprise that is reaching out
to a rapidly growing population of remote/mobile users and -- via extranets, the
Internet and e-commerce technologies -- is directly linking companies with
suppliers and customers, wherever they may be. Because this transformation
cannot be completed suddenly, given the complexity of the technology
environments of most enterprises and their heavy investments in existing
technologies, Novadigm also believes that flexible software and content
management solutions that can provide an evolutionary bridge from existing to
emerging technologies and environments is now a critical competitive factor in
today's software-intensive enterprises.
THE NOVADIGM SOLUTION
Novadigm provides an enterprise-proven solution that can:
- automate the deployment, updating and continuous maintenance of the full
range of today's software and content, including shrink-wrapped and
custom-built applications written in any language or composed of any type
of distributed component, such as C++, Visual Basic, Common Object
Request Broker Architecture ("CORBA"), etc., Y2K patches and virus
protection files, operating systems, registry keys, icons, embedded
links, digital information, graphics, and full motion video
- across virtually any kind of enterprise network using a variety of
protocols, including existing enterprise LANs, WANs, VANs, as well as
intranets, extranets and the Internet, and a variety of authentication
and security techniques
- to the widest range of enterprise computing devices, including PCs, UNIX
workstations, Macs, file, application and Web servers and ATMs/POS
devices.
Novadigm meets the requirements of today's extended enterprises for
solutions that can manage their rapidly expanding scale, that can deliver the
high level of reliability that e-commerce demands, and that can handle the
heterogeneity of computing devices in use today, with flexible, scalable, highly
reliable automated software and content management. Faster, more adaptable, more
quickly implemented, and easier and more
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cost-effective to operate than conventional ESD tools and recent market entries,
Novadigm's products allow IT professionals and service providers to effectively
manage heterogeneous environments across any large-scale public and private
network using existing service provider policies for automatically controlling
the distribution and maintenance of software and content.
The following are key attributes of Novadigm technology that distinguish it
from other software management products:
Reliable Desired-State Automation. Novadigm's pioneering
'desired-state' approach dynamically discovers the 'actual state' of each
corporate user's, workgroup's, department's, or Internet-based consumer's
software, configurations and content and compares this in real-time with
its 'desired state.' If there is a difference between the two, Novadigm's
patented differencing technology automatically determines the precise
component-level changes that are required and sends only those changes to
the user's computer.
Adaptive Configuration Management. Novadigm's technology can
automatically configure customized software packages and content for highly
personalized user environments and install them as dictated by
administrative policies or user preferences. As program versions and user
environments and preferences change, the affected user's actual-state is
automatically differenced and reconfigured to correspond to the
desired-state of operation, thus eliminating the need for manual user or
administrator involvement.
Policy- and Subscription-Based Controls and Auditability. Novadigm's
products use policy-based access models to allow IT administrators to
efficiently and concisely define entitlements controlling the deployment of
software to authorized users or subscribers. For example, within the
enterprise, an IT administrator may implement a policy permitting access to
certain financial databases only to a selected workgroup within an
organization's finance department. In an e-commerce environment,
subscribers would be automatically provided with software and content based
on their entitlement in the customer database, without any additional
activity required by an administrator. Subsequent changes to policies and
entitlements cause software and content to be automatically installed,
changed or de-installed for all affected users, again without any
administrator intervention. This seamless integration between changing
entitlements and automated fulfillment is essential to meeting the
personalized needs of subscribers in large-scale enterprise and e-commerce
environments.
Scalability, Performance and Mobility. Novadigm's differencing
processes calculate the precise changes needed by each device, assuring a
minimum of network traffic and wait-time for bandwidth-constrained
enterprise networks and remote/mobile and Internet users. Novadigm's
distributed object infrastructure allows components to be "cached" at
multiple locations and automatically provided to a user as needed,
transparently and efficiently, using a combination of network protocols and
offline media simultaneously to further optimize network performance.
Rapid Deployment and Ease of Use. In addition to the shared
architecture of Novadigm's product suite, the flexible nature of its
distributed object technology, and the ease of defining desired state,
Novadigm solutions include a variety of capabilities to ensure rapid
deployment of complete software and content management solutions. Once
installed, Novadigm's solutions can be operated by a very small group of
administrators to rapidly deploy large numbers of software and content
applications very quickly to tens of thousands of users. For example,
customers have implemented and deployed EDM and large portfolios of
applications to as many as 10,000 computers in one month.
Novadigm believes that its technology and products establish a new standard
for software and content management, and provide its customers with the most
effective means for managing the next generation of B2E, B2B, and B2C
applications and content, over both enterprise networks and the Internet.
Novadigm's unique technology completely automates the deployment and ongoing
change management requirements of distributed software and content, ensures the
necessary scalability to support the high and growing numbers of servers, PCs,
mobile laptops, ATMs and POS devices found in large organizations, and
significantly reduces costs by eliminating manual installation and
administration. These advancements result in faster deployments,
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lower total cost of ownership ("TCO"), and higher levels of personalization,
reliability, scalability, and auditability -- key competitive factors for
enterprises today and into the future.
THE NOVADIGM STRATEGY
Novadigm's objective is to maintain and expand its position as the leading
provider of desired-state software and content management solutions for the
extended enterprise. Key components of the Company's strategy include:
Maintaining Technology Leadership. Novadigm believes that its unique
"desired-state" management and patented "fractional differencing"
technologies together with its end-to-end integrated product set and broad
platform coverage distinguish its solutions from those of other vendors.
The Company will continue to develop enhancements to existing products as
well as new products that are responsive to the software and content
management needs of organizations extending their Internet-based B2E, B2B
and B2C networks.
Increasing Market Share Leadership. Novadigm's current customer base
is comprised of 240 large enterprise customers across major industries
worldwide. The Company's strategy is to continue to increase its customer
base and market share in the enterprise, Internet, mobile, and ATM/POS
arenas by exploiting its competitive technology strengths, expanding its
sales and partnering channels in the large enterprise marketplace, and
developing additional selling channels to reach beyond the large enterprise
market to small and medium enterprises, software publishers and services
and content providers.
Expanding Customer Relationships. Novadigm believes that its proven
value in meeting the needs of its growing customer base, together with the
broad range of software and content management capabilities in its
integrated product line, positions it to be a provider of strategic
enabling solutions to its customers as they extend their enterprise
infrastructures to include Internet-based applications and services.
Novadigm's strategy is to expand its relationships and licenses with
existing customers by providing "plug-in" solutions which facilitate their
rapid deployment of new Internet infrastructures and applications.
TECHNOLOGY
Novadigm's products share a common object-oriented architecture and
'desired-state' automation approach, implemented within a distributed management
"engine" that automatically determines which software and content components are
required for each individual user at the time of a configuration update. A key
capability of this object-oriented architecture is that it can be easily
extended by Novadigm, its customers, and partners, without programming, to
manage any customer-defined or industry-standard software component (including
C, C++, Visual Basic, Java, ActiveX, CORBA, Component object model, and
JavaScript) or content format (such as registry directory, Hypertext mark-up
language, Extensible mark-up language, multi-media, full motion video and
animation). The benefit of this approach is that it enables Novadigm and its
customers to quickly deploy emerging technologies and manage rapidly
proliferating kinds of software across diverse and evolving platforms.
Environment Discovery Process. A facility that dynamically audits
managed computer environments on an on-demand or scheduled basis, creating
inventory summaries of hardware and software contents for individual
subscribers, workgroups, or departments.
Policy/Entitlement Authentication/Authorization. A facility that
dynamically authenticates a subscriber and determines the subscriber's
entitlement to applications or services by one or more of a wide variety of
characteristics such as userid, job function, department, geographic
location, hardware configuration, subscription registration or customer
database.
Application Component Configuration. A facility that dynamically
determines the current versions of application software or content
components appropriate for each managed computer environment.
Using this 'desired-state' engine, Novadigm's products can rapidly and
precisely compute and compare the discovered actual state of each of these three
dimensions with the personalized desired state of the managed computer's
software and content. The resulting differences indicate without manual
intervention what updates or changes are required, allowing components to be
deployed and updated significantly faster,
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more efficiently, and with higher levels of reliability, adaptability and
scalability than conventional non-desired-state ESD products. The engine itself
is integrated within the entire Novadigm product suite as a shared set of
"foundation" components which are installed in varying combinations in customer
networks. These components consist of:
Management Servers: Server-based components containing a distributed
multi-domain object repository that synchronizes distributed
objects -- application components, computer configurations, policy
relationships -- across the network. This repository is configured with a
variety of automated and graphical tools to include the packages, policies
and configuration requirements necessary to automatically manage the
transfer of objects to and from other Novadigm-managed servers and client
computers. Multiple management servers may be deployed in "n-tier"
configurations across enterprise and Internet networks as desired to
support large numbers of users and large volumes of software and content,
to optimize limited network connections, and to allow for distributed
administration.
Managed Clients: Lightweight components resident on managed computers
that communicate with Novadigm's management servers to identify, obtain,
install, repair and delete software or content. Operating as an extension
of standard PC or Internet operating environments, the managed client
automatically discovers current managed computer contents and synchronizes
application versions with new or updated configurations residing on the
management server.
Administrators: Components resident on the administrator's desktop
used to manage the object-repository and the engine. The administrator
component contains a variety of graphical tools and utility programs used
by customer administrators and technical staff to publish software and
content components, specify policies and entitlements for users, and
control the overall operation of the management servers and managed client
components.
These foundation components can be distributed across a variety of
computing platforms:
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Management Servers Windows NT, AIX, HP-UX, MVS, SUN, Novell, OS/2
Managed Clients Windows (3.1, 95, 98), Windows NT, OS/2, AIX, HP-UX, SUN,
Novell, Macintosh, NCR/GIS
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Communication between components is supported through a variety of
protocols, including TCP/IP, SNA, IPX, and NetBIOS.
A unique capability of Novadigm's object-oriented architecture is that it
allows customers, systems integrators, outsourcers and application vendors to
integrate their own custom development, systems management and desktop
management tools into the Novadigm foundation infrastructure through the use of
"Adapters" without requiring special application programming interfaces ("APIs")
or third party vendor coding. Novadigm currently provides a variety of Adapters
including:
Network/Systems Management Frameworks. Novadigm's software and
content management capabilities are integrated directly with the event,
security and performance management environments of International Business
Machines Corporation ("IBM")/Tivoli Systems Inc.'s ("Tivoli") TME10,
Computer Associates International, Inc.'s ("Computer Associates")
Unicenter, and Hewlett-Packard Company's ("Hewlett-Packard") OpenView.
Security and Policy/Entitlement. Novadigm's policy management
environment integrates with lightweight directory access protocol
("LDAP")-based directory servers, such as Microsoft Corporation's
("Microsoft") Active Directory, Novell Inc.'s ("Novell") NDS and other
vendor LDAP servers, as well as with Microsoft's NT Domain Manager, IBM's
RACF, Computer Associates ACF2 and Top Secret, and Oracle Corporation,
("Oracle"), Sybase, Inc. ("Sybase") and Microsoft SQL-based databases, to
enable single source points of control for user authentication, access
policies and subscriber entitlement.
Problem/Help Desk Management. Novadigm's dynamic desktop
configuration management facilities are integrated with problem management
environments such as Remedy Corporation's AR system to integrate problem
tracking and inventory discovery data.
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Custom-Built Application Management. Configuration management models
for custom software developed in-house using Rational Software
Corporation's PureAtria's ClearCase and Merant, Inc.'s PVCS are integrated
directly into the distribution process, enabling changes in all phases of
application development to be synchronized with deployment across pilot
groups and throughout the entire enterprise once development is complete.
PRODUCTS
All Novadigm products are installed within customer environments upon the
shared technology foundation. This facilitates seamless integration among
individual products, sharing and reuse of software, content and
policy/entitlement definitions among different audiences, and minimized use of
machine, network and staff resources required to manage complex extended
enterprise implementations. Novadigm products built upon the common foundation
consist of:
Enterprise Desktop Manager -- An "administrator managed" solution
which enables IT organizations to centrally manage infrastructure,
productivity and application software and content within enterprise WAN and
LAN networks and across dialup/remote connections.
Radia Application Manager -- A "provider managed" solution enabling
enterprise and Internet application providers to deploy self-managing
software to subscribers (employees, affiliates, partners and customers)
over intranets, extranets and the Internet without subscriber or
administrator involvement. Providers can select, install/deinstall and
update their software and content automatically on a scheduled or
just-in-time basis transparently to subscribers.
Radia Software Manager -- A "subscriber managed" solution enabling
self-service software and content management for knowledge workers within
the extended enterprise, as well as to subscribers selecting software and
content from Internet-based providers. Subscribers can select,
install/deinstall and update their own elective software and content
automatically or on-demand without provider involvement.
Novadigm has announced its intention to deliver additional Radia products.
The Company expects to release the Radia products, which are currently in
various stages of customer testing, in the near future.
Novadigm's future success will depend in large part on the Company's
ability to develop and introduce new products that keep pace with technological
developments, achieve market acceptance and respond to customer requirements
that are constantly evolving. Any failure by the Company to anticipate or
respond adequately to technological developments and customer requirements, or
any significant delays in product development or introduction, could result in a
loss of competitiveness and could materially and adversely affect the Company's
operating results. There can be no assurance that any of the new products the
Company plans to introduce will in fact be completed, or completed on time, or
ultimately brought to market, or if brought to market, gain market acceptance.
CUSTOMERS AND APPLICATIONS
Novadigm's principal customers include medium to large enterprises with
widely deployed and heterogeneous B2E, B2B and B2C networks. As of March 31,
1999, Novadigm's products had been licensed directly by the Company or through
distributors to 240 customers worldwide.
Novadigm supports the software management requirements of a wide range of
industries, including banking, consumer products and services, financial
services, government, insurance, Internet services, manufacturing, retail,
technology, telecommunications, transportation, and utilities. Customers include
AT&T Corp., Banca Commerciale Italiana, BMC Software, Inc., British
Telecommunications plc, Electronic Data Systems, Limited, FMR Corp. (Fidelity
Investments), Florists' Transworld Delivery, Inc. ("FTD"), The Gap, Inc., the
Inland Revenue Service, J. Sainsbury PLC, KeySpan Corporation, Lockheed Martin
Corporation, J.C. Bradford and Company, Metropolitan Life Insurance Company, NBA
Properties, Inc. (the National Basketball Association), Northwest Airlines
Corporation, The Prudential Insurance Company of America, Sony Corporation,
Sybase, Telstra Corporation and Wells Fargo & Company.
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Novadigm's products manage a broad range of software and content for its
customers, including business critical applications such as enterprise resource
planning (ERP) software from SAP AG, The Baan Company, Oracle, and PeopleSoft,
Inc. and sales force automation software from companies such as Siebel Systems,
Inc.; content found on new e-commerce terminals such as ATMs and POS devices
including full motion video and animation; personal productivity tools,
browsers, virus checkers and utilities such as those from Microsoft, Netscape
Communications Corp., Lotus Development Corporation, Network Associates, Inc.
("Network Associates") and Symantec Corporation; and just-in-time applications
including applets, supply chain systems, and e-commerce sales interfaces for
Web-based consumers. The Company's customers also use Novadigm's products to
upgrade operating systems and/or migrate to new operating systems, as well as to
deploy patches to help ensure existing software is Y2K-compliant or virus
inoculated.
During fiscal 1999, the Company had two customers which each accounted for
over ten percent of the total revenues. Amdahl Corporation ("Amdahl"), an
original equipment manufacturer ("OEM") and distributor of the Company's
products (see "Sales and Marketing"), accounted for approximately 17% of total
revenues for fiscal 1999 and Esoft, Ltd. ("Esoft"), a reseller, systems
integrator and services provider in the United Kingdom ("UK"), accounted for
approximately 12% of total revenues for fiscal 1999.
SALES AND MARKETING
Novadigm markets its software and services through its direct sales force
and indirect channels comprised of OEMs, value added resellers ("VARs"), systems
integrators, outsourcers and distributors, in North America, Europe, the Pacific
Rim, South America, Middle East and Africa. Novadigm's North American and
international sales activities, other than in Europe, the Middle East and Africa
("EMEA"), are managed from the Company's offices in Emeryville, California,
Mahwah, New Jersey, and Chicago, Illinois; and sales activities for EMEA are
managed from the Company's centers in Paris, France, Odiham, UK, and Hamburg and
Munich, Germany. For fiscal 1999, revenues from direct and indirect sales
accounted for 61% and 39%, respectively, of total revenues, and revenues from
domestic and international sales accounted for 53% and 47%, respectively, of
total revenues.
Novadigm's direct sales activities have emphasized improvements in
identifying and generating qualified prospective customer leads at the beginning
phase of the sales cycle through concentrating on direct mail and
teleprospecting activities. The leads generated from the telemarketing process
are given to the Company's sales organization, which is divided into specialized
teams of pre-sales specialists, account managers and post-sales service
consultants that work together to provide an integrated selling approach to the
customer. The Company's indirect channels are based on business arrangements
with OEMs, VARs, systems integrators, outsourcers and distributors which are
selected and trained by the Company to provide marketing, sales, post-sale
support and services for the Company's products. These business arrangements are
also useful to the Company in identifying product enhancements and developments
that are responsive to customer and market requirements. The Company believes
that it has been successful in minimizing marketing conflicts between its direct
and indirect sales channels.
Novadigm participates in the beta programs and partnering programs of the
industry's market leaders, including Microsoft, Compaq Computer Corporation and
Siebel Systems, Inc. With its relationship with Beyond.com Corporation, the
Company is developing additional selling channels to reach beyond the large
enterprise market to small and medium enterprises. Novadigm intends to continue
to expand these technology, marketing and selling relationships.
In June 1995, the Company entered into a seven-year, non-exclusive OEM and
distribution agreement with Amdahl. Under the agreement, Amdahl may sublicense
EDM throughout the world as part of its bundled solution and sublicense EDM
stand-alone to a limited worldwide market. Novadigm agreed to provide limited
technical support and training. The agreement required Amdahl to pay the Company
a minimum royalty of $8 million in fiscal 1996; and $4 million in each of fiscal
1997 and fiscal 1998. The agreement was amended in March 1997, instead requiring
Amdahl to pay $2 million in minimum royalties in each of fiscal 1997 and fiscal
1998; and minimum royalties of $3 million in each of fiscal 1999 and fiscal
2000. In the event of a change of control of the Company, the amended agreement
allows Amdahl the right to terminate the agreement and recover unused guaranteed
sublicense fees at the time of termination to the
9
<PAGE> 10
extent they were also outstanding on March 31, 1997. Amdahl renewed the
agreement for fiscal 2000. There can be no assurance that Amdahl will extend
this agreement in subsequent years.
Novadigm to date has concentrated on establishing a market for its products
in North America, Europe, Japan, South Africa, South America, Australia, Israel,
Scandinavia, and Korea. Novadigm's marketing activities are designed to generate
qualified leads and to supply sales channels with positioning, presentation
materials, and product collateral to help generate and develop qualified
customer prospects. Lead generation activities include seminars, trade shows,
direct mailings, advertising and public relations activities.
CUSTOMER SERVICE AND SUPPORT
To facilitate implementation and integration of its products, Novadigm
offers a range of support programs and services that complement its software and
content management products.
Novadigm provides all customers with telephone hotline, fax and e-mail
access to its technical support staff, with additional support provided by the
Company's OEMs, VARs, systems integrators, outsourcers, and distributors.
Novadigm's technical support staff not only provides assistance in diagnosing
problems, but works closely with customers to address systems implementation and
integration issues and assists in increasing the efficiency of their enterprise
systems. Novadigm also maintains a comprehensive solution-based web site of
technical information on EDM and Radia. In addition, through the web site,
Novadigm customers have the ability to download maintenance updates, submit
problem reports and enhancements, and participate in a user discussion forum.
Novadigm offers regional and on-site training programs covering object
technologies and product implementation strategies to its customers, OEMs, VARs,
systems integrators, outsourcers and distributors.
Novadigm's professional services organization and a growing number of
service providers are available to consult with customers on project planning
and systems implementation and integration. Revenues from maintenance and
services accounted for 35% of fiscal 1999 total revenues.
PRODUCT DEVELOPMENT
Since its inception, Novadigm has focused on, and made substantial
investments in, product development. In fiscal 1999, Novadigm's total research
and development expenses were approximately $4.9 million. To date, Novadigm has
not capitalized any software development costs.
Novadigm anticipates that it will continue to commit substantial resources
to research and development, believing that its future success depends in large
part on its ability to maintain and enhance the functionality of its current
line of products and to develop and introduce new products that keep pace with
technological developments, achieve market acceptance and respond to an
ever-expanding range of customer requirements. The Company intends to enhance
its existing product offerings and to introduce new products for the enterprise
software and content management market. The Company's new product development
effort is focused on products which address the unique requirements of the
extended enterprise. In developing these new products and product enhancements,
the Company makes extensive use of its own development tools and object-oriented
technology. Although Novadigm expects to develop certain of its new products and
product enhancements internally, the Company may acquire technology and/or
products from third parties or consultants when considerations of time or cost
dictate.
If the next release of EDM, or any of the Radia products, or any potential
new products and enhancements do not achieve market acceptance, or if for
technological or other reasons the Company is unable to develop, introduce and
sell its products in a timely manner, the Company's business, financial
condition and results of operations will be materially and adversely affected.
10
<PAGE> 11
COMPETITION
Competition in the software and content management market is diverse and
rapidly changing. While a variety of vendors have offered some form of ESD, ISM
or similar solutions with their offerings, the closest competitors of the
Company today fall into three categories:
Network/Systems Management Framework Vendors. These competitors
include IBM/Tivoli and Computer Associates who offer conventional ESD tools
as part of their enterprise frameworks.
LAN/Desktop Management Suite Vendors. These competitors include
vendors such as Microsoft, Intel Corporation and Network Associates, who
offer workgroup-based conventional ESD tools as part of a LAN
administration package.
Internet ESD Vendors. These competitors (also known as ISM providers)
include companies such as Marimba, Inc., and BackWeb Technologies Ltd.
originally "push" technology companies that have redefined themselves to
take advantage of the Internet services market.
Mobile Management Suite Vendors. These competitors include Sterling
Commerce, Inc.
Novadigm believes that it competes effectively with all of these vendors in
its target market on the basis of its broader product line for software and
content management, patented fractional differencing technology, desired-state
technological innovation, unique adaptive configuration functionality, higher
product implementation success rates, and extensive customer support. Novadigm
differentiates its products in the market based on results that have proven its
products are capable of distributing and managing software and content faster,
across larger and more diverse environments, with higher reliability and greater
adaptability.
However, there can be no assurance that the Company will be able to
continue to compete effectively in the software management market or that its
profitability or financial performance will not be adversely affected by
increased competition. Many of Novadigm's competitors have longer operating
histories, and many have significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
customer installed bases. Moreover, there can be no assurance that either
existing or new competitors will not develop products that are superior to the
company's products or other technologies offering significant advantages over
the Company's technology, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
In December 1996, Novadigm was issued a patent from the U.S. Patent Office
for key components of its 'desired-state' management process used in the
Company's software and content management products. There can be no assurance
that the Company will develop additional proprietary technologies that are
patentable, that any issued patent will provide the Company with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the Company's ability to do business.
Moreover, there can be no assurance that protective measures taken by the
Company will prevent misappropriation of its proprietary technology, and such
measures may not preclude competitors from developing products with features
similar to those of the Company's products. Furthermore, effective copyright and
trade secret protection may be limited or unavailable under the laws of certain
foreign jurisdictions. The Company also relies on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures, contractual
provisions and technical measures to protect its proprietary rights in its
products.
Although the Company believes that its products and trademarks do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company with
respect to current or future products. Any such claims, whether with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or license
agreements, provided such agreements were available on reasonable terms or at
all.
Defense of any lawsuit or failure to obtain any required license could have
a material, adverse effect on the Company's business, operating results and
financial condition. The Company believes, however, that given
11
<PAGE> 12
the rapid pace of technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of the Company's management
and technical personnel, the Company's name recognition, the timeliness and
quality of the support services it provides and its ability to offer frequent
product enhancements and to develop, introduce and market new products are more
significant in maintaining the Company's competitive technology leadership
position.
EMPLOYEES
As of March 31, 1999, Novadigm had a total of 159 full-time employees,
including 20 in customer support and services, 41 in product development, 72 in
sales and marketing, 26 in general and administration. A total of 129 employees
are based in the United States and 30 employees are based in Europe. None of the
Company's employees are represented by a labor union. The Company has not
experienced work stoppages and considers its relations with its employees to be
good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Novadigm's executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
<S> <C> <C> <C>
Albion J. Fitzgerald......... 51 Chairman of the Board and Chief Executive Officer 1992
Michael R. Carabetta......... 50 President and Chief Operating Officer 1998
Robert B. Anderson........... 44 Executive Vice President, Secretary and Director 1992
Joseph J. Fitzgerald......... 37 Vice President, Development 1992
Wallace D. Ruiz.............. 48 Vice President, Treasurer and Chief Financial Officer 1995
</TABLE>
Albion J. Fitzgerald co-founded Novadigm in February 1992, serving as
Chairman since that time, and currently as Chief Executive Officer. Mr.
Fitzgerald has previously served as Chief Technology Officer and President. In
May 1990, Mr. Fitzgerald founded Fitzgerald Associates, Novadigm's predecessor,
and served as the chief architect in the development of the desired-state
management and fractional differencing technologies that are the basis of both
EDM and Radia.
Michael R. Carabetta joined Novadigm in February 1998 as President and
Chief Operating Officer. From 1994 until joining Novadigm, Mr. Carabetta was
Vice President and General Manager of the Amdahl Corporation. He was responsible
for Amdahl's Open Enterprise Systems division and later responsible for the A+
software and services business unit. From 1983 to 1994, Mr. Carabetta was with
Digital Equipment Corporation, serving first as Product Line Manager and later
as Vice President, Financial & Cross Industry Applications.
Robert B. Anderson joined Novadigm in June 1992 as Vice President, Chief
Financial Officer, Secretary and as a director. He currently serves as Executive
Vice President, Secretary and as a director.
Joseph J. Fitzgerald co-founded Novadigm in February 1992. Since that time
he has served as Director of Development, and as of June 1996, Vice President of
Development. Mr. Fitzgerald is the brother of Albion Fitzgerald.
Wallace D. Ruiz joined Novadigm in May 1995 as Vice President, Treasurer
and Chief Financial Officer. From September 1993 until joining Novadigm, he was
Vice President, Treasurer and Chief Financial Officer of Unisa Holdings, Inc., a
designer, marketer, and retailer of women's fashion footwear. Mr. Ruiz is a
certified public accountant. Mr. Ruiz is the brother-in-law of Albion
Fitzgerald.
ITEM 2. PROPERTIES
Novadigm's headquarters are located in Mahwah, New Jersey. Novadigm
conducts its operations in North America principally out of leased facilities in
Mahwah; Chicago; and Emeryville, California; and in Western Europe out of its
facilities in Paris, France. The Company occupies approximately 30,223 square
feet at its Mahwah facilities, which are used principally for product
development, east coast sales, marketing and support, and general
administration; and approximately 3,463 square feet at its California
facilities, which are used principally for west coast sales, marketing and
support. Novadigm's facilities in France are comprised of
12
<PAGE> 13
approximately 8,729 square feet and are used to support the Company's European
operations. Novadigm also has sales and support offices in Odiham, UK; and
Munich and Hamburg, Germany. The Company believes that its current facilities
are adequate for its needs and will be adequate to meet its needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On March 3, 1997, Novadigm sued Marimba, Inc. for infringement of the
Company's U.S. Patent No. 5,581,764 (the "764 Patent") in the U.S. District
Court for the Northern District of California. Novadigm alleges that Marimba's
Castanet Software product infringes the "764 Patent." On May 2, 1997, Marimba
filed an answer to Novadigm's complaint and a counterclaim, denying the
Company's allegations and seeking a declaration that the "764 Patent" is
invalid, not infringed, and unenforceable. Discovery in the case is nearing
completion. Both parties have filed summary judgment motions, which are expected
to be heard by the court in June, 1999. If the summary judgement motions do not
dispose of the case, trial is presently scheduled for September 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's stock has been traded on the Nasdaq National Market since the
Company's initial public offering on July 13, 1995 under the Nasdaq symbol NVDM.
The following table sets forth, for the periods indicated, the high and low
sales prices for the Company's common stock as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter............................................... $ 5 1/2 $ 3 1/8
Second Quarter.............................................. $ 7 7/16 $ 3 5/16
Third Quarter............................................... $ 7 $ 3 11/16
Fourth Quarter.............................................. $ 4 5/8 $ 3 5/16
FISCAL YEAR ENDED MARCH 31, 1999
First Quarter............................................... $ 4 7/16 $ 3 1/8
Second Quarter.............................................. $ 4 9/16 $ 3 1/16
Third Quarter............................................... $10 $ 3 13/16
Fourth Quarter.............................................. $11 15/16 $ 6 1/2
</TABLE>
As of June 7, 1999, there were approximately 110 holders of record of the
Company's common stock.
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the Company is prohibited from paying dividends under its revolving line of
credit agreement.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Consolidated Financial Statements and Notes to Consolidated
Financial Statements and other financial information included elsewhere in the
report.
NOVADIGM, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues
Licenses...................................... $ 8,488 $18,775 $ 12,117 $ 15,728 $20,743
Maintenance and services...................... 840 6,241 10,261 7,667 11,319
-------- ------- -------- -------- -------
Total revenues........................ 9,328 25,016 22,378 23,395 32,062
-------- ------- -------- -------- -------
Operating Expenses:
Cost of maintenance and services.............. 344 2,630 6,275 6,971 4,352
Sales and marketing........................... 5,706 10,961 17,123 14,680 16,274
Research and development...................... 3,338 4,426 6,212 6,843 4,936
General and administrative.................... 1,392 3,230 4,979 4,964 5,383
Compensation charge related to
escrow shares(1)........................... 18,900 -- -- -- --
Restructuring charge(2)....................... -- -- 1,829 -- --
-------- ------- -------- -------- -------
Total operating expenses.............. 29,680 21,247 36,418 33,458 30,945
-------- ------- -------- -------- -------
Operating income (loss)......................... (20,352) 3,769 (14,040) (10,063) 1,117
Interest income and other, net.................. 122 1,428 1,597 978 665
-------- ------- -------- -------- -------
Income (loss) before provision (benefit) for
income taxes.................................. (20,230) 5,197 (12,443) (9,085) 1,782
Provision (benefit) for income taxes............ -- 160 59 (68) 25
-------- ------- -------- -------- -------
Net income (loss)............................... $(20,230) $ 5,037 $(12,502) $ (9,017) $ 1,757
======== ======= ======== ======== =======
Earnings (loss) per share-basic................. $ (1.40) $ 0.30 $ (0.72) $ (0.52) $ 0.10
======== ======= ======== ======== =======
Weighted average common shares
outstanding -- basic.......................... 14,424 16,566 17,409 17,392 17,580
======== ======= ======== ======== =======
Earnings (loss) per share -- diluted............ $ (1.40) $ 0.28 $ (0.72) $ (0.52) $ 0.10
======== ======= ======== ======== =======
Weighted average common and common
equivalents shares outstanding -- diluted..... 14,424 17,928 17,409 17,392 18,384
======== ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 1,012 $13,361 $ 7,984 $ 4,431 $ 8,124
Working capital............................... 3,879 29,831 24,983 17,326 20,994
Total assets.................................. 6,560 50,132 36,342 28,876 33,376
Deferred revenue.............................. 871 4,509 946 2,518 3,873
Stockholders' equity.......................... 4,066 42,522 29,800 20,044 23,263
</TABLE>
- ---------------
(1) Represents a non-recurring, non-cash compensation charge incurred upon the
achievement of certain cash flow requirements under an escrow arrangement
imposed on founder's shares in connection with the Company's public offering
on the Vancouver Stock Exchange in September 1992.
(2) See Note 10 of Notes to Consolidated Financial Statements.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. Such forward-looking statements include, but are not limited to the
last sentences of the first paragraph under "Revenue," the last sentences of
"Cost of maintenance and services," "Sales and marketing," "Research and
development" and "General and administrative," the statements under "Year 2000
compliance" and the last paragraph under "Liquidity and capital resources."
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed under "Business Risks" below, that could cause actual
results to differ materially from historical or anticipated results.
OVERVIEW
The Company designs, markets and supports technology solutions that
efficiently and reliably deliver, update and maintain software and content
across the extended enterprise. The Company's principal customers include medium
to large organizations with widely deployed and heterogeneous B2E, B2B and B2C
networks. The Company was incorporated in February 1992. Through September 1993,
the Company's primary efforts were devoted to product development. In October
1993, Version 1.0 of EDM was released for general availability. Since its first
release, the Company has continued to develop EDM by adding new features,
applications and platforms. Version 2.0 of EDM was released in February 1994,
Version 3.0 in June 1995, and Version 4.0 was released in October 1997. In
November 1997, the Company released Radia Software Manager, an Internet-based
software and content management solution and in November 1998, the Company
announced the general availability of Radia Version 2.0 as well as the Radia
Application Manager.
The Company generates license revenues from licensing the rights to use its
software products to end users and sublicense fees from resellers, including
certain guaranteed sublicense fees. The Company also generates maintenance and
service revenues from providing renewable support and software update rights
services (maintenance) and from consulting and training activities performed for
license customers.
Revenues from perpetual software license agreements are recognized as
revenue upon shipment of the software if there are no significant post-delivery
obligations, payment is due within one year and collectibility is probable. If
an acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. The Company
enters into reseller arrangements that typically provide for sublicense fees
payable to the Company based on a percent of the Company's list price. Reseller
arrangements may include non-refundable payments in the form of guaranteed
sublicense fees. Guaranteed sublicense fees from resellers are recognized as
revenue upon shipment of the master copy of all software to which the guaranteed
sublicense fees relate if there are no significant post-delivery obligations,
the reseller is creditworthy and if the terms of the agreement are such that the
payment obligation is not subject to price adjustment, is non-cancelable and
non-refundable and due within 90 days. These guaranteed sublicense fees are
applied against sublicense fees reported by the reseller in relicensing the
Company's products to end-users. The Company recognized approximately $5.4
million in guaranteed sublicense fees under all such agreements in fiscal 1999,
approximately $0.4 million in fiscal 1998, and approximately $3.9 million in
fiscal 1997. At March 31, 1999, approximately 63% of all such guaranteed
sublicense fees had been relicensed by the Company's resellers to end-users.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such services
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of the Company's
software products. Such services generally do not include customization or
modification of the underlying software code. If included in a license
agreement, such services are unbundled at their fair market value based on the
value established by the independent sale of such services to customers.
Revenues from consulting and training services are recognized as services are
performed.
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<PAGE> 17
ALL PERIOD REFERENCES IN THE DISCUSSION BELOW ARE TO FISCAL PERIODS OF THE
COMPANY BASED ON ITS FISCAL YEAR ENDING MARCH 31.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth the percentage of
total revenues represented by the respective line items in the Company's
statements of operations.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
REVENUES:
Licenses.................................................. 54.1% 67.2% 64.7%
Maintenance and services.................................. 45.9 32.8 35.3
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
OPERATING EXPENSES:
Cost of maintenance and services.......................... 28.0 29.8 13.6
Sales and marketing....................................... 76.5 62.7 50.7
Research and development.................................. 27.8 29.3 15.4
General and administrative................................ 22.2 21.2 16.8
Restructuring charge...................................... 8.2 -- --
----- ----- -----
Total operating expenses.......................... 162.7 143.0 96.5
----- ----- -----
Operating income (loss)..................................... (62.7) (43.0) 3.5
----- ----- -----
Interest income and other, net.............................. 7.1 4.2 2.1
----- ----- -----
Income (loss) before provision (benefit) for income taxes... (55.6) (38.8) 5.6
Provision (benefit) for income taxes........................ 0.3 (0.3) 0.1
----- ----- -----
Net income (loss)........................................... (55.9)% (38.5)% 5.5%
===== ===== =====
</TABLE>
REVENUES
The Company generates revenues principally from licensing the rights to use
its software products to end-users and from sublicense fees reported to the
Company by resellers, including certain guaranteed sublicense fees. The Company
also generates maintenance and service revenues from providing renewable support
and software update rights services and from consulting and training activities
performed for license customers. Maintenance and service revenues accounted for
45.9% of total revenues in 1997, 32.8% in 1998, and 35.3% in 1999, respectively.
Though the Company expects maintenance and service revenues to increase in terms
of absolute dollars in 2000 as compared to 1999, the Company expects maintenance
and service revenues as a percentage of total revenues to decline in 2000 as a
result of its emphasis on licensing activities.
Total revenues were $22.4 million, $23.4 million, and $32.1 million in
1997, 1998, and 1999, respectively. Total revenues increased 4.5% in 1998 over
1997 and increased 37.0% in 1999 over 1998.
License revenues were $12.1 million, $15.7 million, and $20.7 million in
1997, 1998 and 1999, respectively. License revenues increased 29.8% in 1998 over
1997 and increased 31.8% in 1999 over 1998. License revenues increased in both
1998 and 1999 over the previous years, respectively, due to improving market
acceptance of the Company's products as a result of the release of new versions
of EDM and Radia; the expansion of the direct sales force in North America and
Europe; the reacquisition of distribution rights in the United Kingdom in 1997;
the opening of a sales and support office in Germany in 1998; the expansion of
the Company's international distributor channel to 13 countries; the
establishment of numerous large enterprise reference accounts; and exploiting
ATM, POS and mobile computing markets.
Maintenance and service revenues were $10.3 million, $7.7 million, and
$11.3 million in 1997, 1998 and 1999, respectively. Maintenance and service
revenues declined 25.3% in 1998 compared to 1997 and increased 46.7% in 1999
over 1998. The decline in maintenance and service revenues in 1998 as compared
to 1997 was primarily due to the expiration of the Company's agreement with IBM
in March 1997 which provided
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<PAGE> 18
$5.1 million in service revenues in 1997. The increase in maintenance and
service revenues in 1999 over 1998 was due primarily to a 68.6% increase in
maintenance revenues associated with licensing with 66 new customers in 1999 and
due to an increase in the Company's maintenance prices during 1999. Consulting
and training revenues increased 13.4% in 1999 over 1998 due to providing
implementation and training services to new license customers.
During 1999, two customers, Amdahl and Esoft accounted for approximately
17% and 12% of total revenues, respectively. During 1998, two customers, Amdahl
and EDS, accounted for approximately 31% and 10% of total revenues,
respectively. During 1997, two customers, IBM and Amdahl, accounted for
approximately 23% and 16% of total revenues, respectively.
The Company typically ships its products following a fully executed license
agreement, and acceptance of a purchase order, and, as a result, has little or
no backlog.
OPERATING EXPENSES
Cost of maintenance and services includes the direct costs of customer
support and update rights, and the direct and indirect costs of providing
training, technical support and consulting services to the Company's customers.
Cost of maintenance and services consists primarily of payroll and benefits for
field engineers and support personnel, travel and lodging expenses, third party
consulting fees, and other related overhead. Cost of maintenance and services
was $6.3 million, $7.0 million, and $4.4 million in 1997, 1998 and 1999,
respectively. The cost of maintenance and services increased 11.1% in 1998 over
1997 and decreased 37.6% in 1999 as compared to 1998. The reason for the
increase in 1998 over 1997 was due to higher staffing levels and an increased
use of outside consultants. In March 1998, the Company reorganized the technical
services department, reducing the personnel and the use of outside consultants.
The Company expects the cost of maintenance and services to increase in 2000
both as a percentage of service revenues and in absolute dollars.
Sales and marketing expenses consist primarily of salaries, related
benefits, commissions, travel and other costs associated with the Company's
sales and marketing efforts. Sales and marketing expenses were $17.1 million,
$14.7 million, and $16.3 million in 1997, 1998 and 1999, respectively. Sales and
marketing expenses declined 14.3% in 1998 as compared to 1997 and increased
10.9% in 1999 over 1998. The decrease in 1998 from 1997 was primarily the result
of the restructuring program initiated in March 1997, which among other things
included the closing of sales, support and marketing offices, revamping
marketing programs and the reorganization of sales and marketing organizations.
The increase in sales and marketing expenses in 1999 over 1998 was primarily due
to the expansion of the European direct sales force as well as higher commission
expense associated with the recording of higher revenue. The Company expects
sales and marketing expenses to increase in 2000 compared to 1999 due to the
sales programs put into place in 1999.
Research and development expenses consist primarily of salaries, related
benefits, consultant fees and other costs associated with the Company's research
and development efforts. Research and development expenses were $6.2 million,
$6.8 million, and $4.9 million in 1997, 1998 and 1999, respectively. Research
and development expenses increased 10.2% in 1998 over 1997 and decreased 27.9%
in 1999 as compared to 1998. The dollar increase in 1998 was due primarily to
salary increases and the contracting of consultants to assist with the
introduction and release of EDM version 4.0 and Radia. The decrease in research
and development in 1999 as compared to 1998 was due primarily to a significant
reduction in the use of outside consultants contracted in 1998 to assist in the
development of EDM version 4.0 and Radia. The Company believes that a
significant investment in research and development activities is essential to
provide for the Company's future growth, particularly research and development
relating to the Company's Internet activities. The Company anticipates that it
will continue to invest resources to further enhance and develop its products,
and anticipates growth in research and development expense in 2000.
Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which the Company defines as establishment of a
working model. Amounts which could have been capitalized under this statement
were immaterial in all periods presented. Therefore, the Company has expensed
all software development costs as incurred.
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<PAGE> 19
General and administrative expenses consist primarily of salaries, related
benefits, travel and fees for professional services such as consulting, legal,
accounting and recruiting fees. General and administrative expenses were $5.0
million, $5.0 million, and $5.4 million in 1997, 1998 and 1999, respectively.
General and administrative expenses remained unchanged in 1998 as compared to
1997 and increased 8.4% in 1999 over 1998. The increase in 1999 over 1998 is due
primarily to higher compensation costs due to expanding Company's management and
to higher legal fees associated with a patent infringement suit alleged by the
Company. See Item 3. Legal Proceedings. The Company expects general and
administrative expenses to increase in 2000.
Restructuring charge. The Company implemented a restructuring program
during the fourth quarter of 1997 to more closely align the Company's operating
expenses with its revenue model, and recorded a charge of $1.8 million related
to restructuring costs during this period. The program terminated or relocated
29 employees, principally in the sales and marketing departments, causing the
closing of five regional sales offices and the Chicago-based marketing office,
the restructuring of European operations, and the integration of North American
channels marketing into the existing North American sales and services
organization. The restructuring program was completed during 1998.
INTEREST INCOME AND OTHER, NET.
Interest income and other, net is comprised primarily of interest income
earned on the Company's cash, cash equivalents and investments. Interest income
was $1.6 million, $1.0 million, and $0.7 million in 1997, 1998 and 1999,
respectively. Interest income and other, net declined 38.8% in 1998 as compared
to 1997 and declined 32.0% in 1999 as compared to 1998. The decline of interest
income and other, net in both 1998 and 1999 as compared to the previous year,
respectively, is due primarily to lower average balances of cash and marketable
securities in both years compared to the prior year average balances.
INCOME TAXES.
The Company recorded a provision for income taxes of approximately $59
thousand in 1997 primarily for federal and state alternative minimum taxes; an
income tax benefit of $68 thousand in 1998 for state tax refunds; and a
provision for income taxes of approximately $25 thousand in 1999 for federal and
state alternative minimum taxes. As of March 31, 1999, the Company had net
deferred tax assets of approximately $8.1 million. The Company has provided a
full valuation allowance due to the uncertainty surrounding the timing of the
realization of the net deferred tax assets. As of March 31, 1999, the Company
had federal net operating loss carryforwards of approximately $15.4 million,
which expire in various periods through 2013. The Company's ability to utilize
the net operating loss carryforwards in future years may be limited in some
circumstances, including significant changes in ownership interests, due to
certain provisions of the Internal Revenue Code of 1986.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue creates risks for the Company. If internal
systems do no correctly recognize and process data information beyond the Year
1999, there could be an adverse impact on the company's operations. There are
two other related issues which could also lead to incorrect calculations or
failures: (1) some systems' programming assigns special meaning to certain
dates, such as 9/9/99, and (2) the Year 2000 is a leap year. As used in this
section, "Year 2000 capable" means that when used properly and in conformity
with the product information provided by the company, and when used with Year
2000 capable computer systems, the product will accurately store, display,
process, provide, and/or receive data from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the Company's product properly
exchanges the data with the Company's product.
Internal Systems. To address these Year 2000 issues with its internal
systems, the Company has initiated a program that is designed to deal with the
Company's internal management information systems and its embedded systems (e.g.
phones, and security systems). The program includes both assessment and
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<PAGE> 20
remediation proceeding in parallel and the Company currently plans to have
changes to those management and critical systems completed and tested by the
third quarter of 1999. These activities are intended to encompass all major
categories of systems used by the Company, including sales and financial systems
and embedded systems. The program has completed its assessment phase, which
identified a number of systems that had date dependencies. None of the systems
are considered by the Company to be mission critical. 95% of the date
dependencies have already been remediated. In almost all cases the fixes
involved updating software or firmware. The unremediated date dependencies
involve desktop workstations, and are expected to be fully remediated by the
third quarter of 1999.
Products. The Company has determined that the most recent versions of its
products do not have any date dependencies that could give rise to Year 2000
capability problems. The Company plans to evaluate new products as they are
developed. Because its products have no date dependencies that could give rise
to Year 2000 capability problems, the Company does not believe it is legally
responsible for cost incurred by customers related to ensuring their Year 2000
capability.
Suppliers. The Company is also working with key suppliers of products and
services to determine whether their operations and products are Year 2000
capable and to monitor their progress toward Year 2000 capability. The Company
identified four vendors that could materially impact the Company's business if
they experienced significant Year 2000 problems. These include the Company's
electric power, local telephone, long distance and Internet service providers.
The Company has obtained verbal assurances from each of these suppliers of
services that they comply with industry standards for Year 2000 readiness.
Costs. The Company is incurring various costs to provide customer support
and customer satisfaction services regarding Year 2000 issues and it is
anticipated that these expenditures will continue through 1999 and thereafter.
The costs incurred to date related to the Company's Year 2000 assessment and
remediation programs have not been material. The cost which will be incurred by
the Company regarding the implementation of Year 2000 compliant internal
information systems, answering and responding to customer requests related to
Year 2000 issues, including both incremental spending and redeployed resources,
is currently not expected to exceed $150,000. The total cost estimate does not
include potential costs related to any customer or other claims or the cost of
internal software and hardware replaced in the normal course of business. In
some instances, the installation schedule of new software and hardware in the
normal course of business is being accelerated to also afford a solution to Year
2000 capability issues. The total cost estimate is based on the current
assessment of the projects and is subject to change as the project progress.
Based on currently available information, management does not believe that the
Year 2000 matters discussed above related to internal information technology or
embedded systems of key suppliers' systems or products fold to customers will
have material impact on the Company's financial condition or overall trends in
results of operations. However, the Company cannot guarantee that the Year 2000
situation will not negatively impact the Company. In addition, the failure to
ensure Year 2000 capability by a supplier or another third party could have a
material adverse effect on the Company. The Company's Year 2000 compliance
programs have been conducted internally, without the use independent
verification or validation processes. These assessment and compliance programs
have not caused the deferral by the Company of other information technology
projects.
The Company's most reasonably likely worst case Year 2000 scenario is that
the Company experiences key service interruptions due to Year 2000 problems.
The Company has addressed potential problem areas with internal systems and
with suppliers and other third parties. It is expected that assessment,
remediation and contingency planning activities will be ongoing throughout 1999
with the goal of appropriately resolving all material internal systems and third
party issues.
INFLATION
The effects of inflation on the Company's financial position has not been
significant to date.
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<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
In 1997 and 1998, net cash used in operating activities was $9.1 million
and $7.7 million, respectively, and was due primarily to the net loss in each
year. Net cash provided by operating activities in 1999 was $1.6 million
primarily as a result of net income and an increase in deferred revenue. The
accounts receivable balance, net of the allowance for doubtful accounts
increased $2.2 million to $8.6 million as of March 31, 1999. The increase in
accounts receivable was primarily due to the higher revenues during 1999. As of
March 31, 1999, the Company did not have any material commitments for capital
expenditures.
In July 1995, the Company completed a public offering in the United States
of 2,875,000 shares of common stock (which included 500,000 shares sold by
stockholders) at $15 per share, resulting in net proceeds to the Company of
approximately $32.2 million, after offering costs. The Company received
approximately $1.0 million and $0.4 million in 1997 and 1998, respectively, and
paid approximately $0.6 million in 1999 from options exercised by optionees
under the Company's stock option plans.
In May 1996, the Board of Directors approved the repurchase of up to
500,000 shares of the Company's common stock. As of March 31, 1998, the Company
had repurchased 500,000 shares, expending approximately $3.1 million. The
repurchased shares have been accounted for as treasury stock and at March 31,
1999, all but 42,981 shares were used to fulfill commitments to optionees who
had exercised options under the Company's stock option plan.
In December 1994, the Company entered into an unsecured revolving line of
credit agreement with a bank. The agreement has been renewed annually and at
March 31, 1999 the available line of credit was $1.0 million, expiring in
September 1999. Borrowings bear interest at the bank's reference rate (7.75% as
of March 31, 1999). The agreement has a number of financial covenants which the
Company is required to meet. The Company had no outstanding borrowings under the
agreement as of March 31, 1999.
Although it is difficult for the Company to predict future liquidity
requirements with certainty, the Company believes that its existing cash and
marketable securities balances, together with cash from operations and amounts
available under the Company's revolving line of credit, will be adequate to
finance its operations for at least the next twelve months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities may use cash. Consequently, any such future growth may
require the Company to obtain additional equity or debt financing, which may not
be available on commercially reasonable terms or which may be dilutive.
BUSINESS RISKS
History of Operating Losses. The Company has reported an operating loss for
every quarter since its incorporation in February 1992 except for the four
consecutive quarters of 1996 and the last three-quarters of 1999. There can be
no assurance that the Company will be able to sustain profitability on a
quarterly or annual basis in the future.
Retention of Executives and Key Employees. The Company's future success
depends upon the contributions of its executives and key employees. The
inability to retain executives and certain key employees in research and
development and sales and marketing could have a significant adverse affect on
the Company's ability to develop new products and versions of its products and
market and sell its products in the marketplace. The loss of the services of one
or more of the Company's executives or key employees could have a material
adverse effect on the Company's operating results. The Company also believes its
future success will depend in large part upon its ability to attract and retain
additional highly skilled personnel.
Fluctuations in Quarterly Results; Seasonality. The Company's quarterly
operating results have fluctuated in the past and are expected to fluctuate
significantly in the future due to a number of factors, including, among others,
the size and timing of customer orders, the timing and market acceptance of new
products by the Company, the level and pricing of international sales, foreign
currency exchange rates, changes in the level of operating expenses,
technological advances and new product introductions by the Company's
competitors and competitive conditions in the industry. Revenues received from
individual customers of the Company vary
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significantly based on the size of the product installation. Customer orders for
the Company's products have ranged from $25,000 to over $4 million, and have
averaged several hundred thousand dollars. As a result, the Company's quarterly
operating results are likely to be significantly affected by the number and size
of customer orders the Company is able to obtain in any particular quarter. In
addition, the sales cycle for the Company's products is lengthy and
unpredictable, and may range from a few months to over a year, depending upon
the interest of the prospective customer in the Company's products, the size of
the order (which may involve a significant commitment of capital by the
customer), the decision-making and acceptance procedures within the customer's
organization, the complexity of implementation and other factors.
The Company generally ships orders as received and as a result typically
has little or no backlog. Quarterly revenues and operating results therefore
depend upon the volume and timing of orders received during the quarter, which
are difficult to forecast. Historically, the Company has recognized the
substantial majority of its quarterly license revenues in the last weeks or week
of each quarter. In addition, because the Company's expenditure levels for
product development and other operating expenses are based in large part on
anticipated revenues, a substantial portion of which are not typically generated
until the end of each quarter, the timing and amount of revenues associated with
orders have caused, and may continue to cause, significant variations in
operating results from quarter to quarter.
The Company's operating results are also expected to vary significantly due
to seasonal trends. Historically, the Company has realized a greater percentage
of its annual revenues in its fourth quarter, and a lower percentage in the
first and second quarters. The Company believes that this seasonality is in part
a result of efforts of the Company's direct sales personnel to meet annual sales
quotas, and in part a result of lower international revenues in the summer
months when many businesses in Europe experience lower sales. In addition,
capital budgets of the Company's customers, which tend to concentrate spending
activity at calendar year-end, have had, and may continue to have, a seasonal
influence in the Company's quarterly operating results. The Company expects that
its operating results will continue to fluctuate in the future as a result of
these and other factors, and that seasonality may increase if the Company's
efforts to expand its international sales are successful. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."
Rapid Technological Change and Introduction of New Products. The market for
ESD products is characterized by rapid technological advances, changes in
customer requirements and frequent new product introductions and enhancements.
The Company's future success will depend in large part on the Company's ability
to enhance its current products and to develop and introduce new products that
keep pace with technological developments, achieve market acceptance and respond
to customer requirements that are constantly evolving. Responding to rapid
technological change and the need to develop and introduce new products to meet
customers' expanding needs will require the Company to make substantial
investments in research and product development. During 1999, among other
research and development expenditures, the Company allocated research and
development funding to the development of its most recent release of Radia,
version 2.0, an integrated LDAP adapter, as well as enhancements to EDM. The
Company intends to continue to allocate funding to these development projects
throughout 2000. Any failure by the Company to anticipate or respond adequately
to technological developments and customer requirements, and in particular
advances in client/server enterprise hardware platforms, internet applications
and platforms, operating systems and systems management applications, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or could materially and adversely affect the Company's
operating results. There can be no assurance that any product enhancements or
new products developed by the Company will gain market acceptance.
The failure to develop on a timely basis new products or product
enhancements could cause customers to delay or refrain from purchasing the
Company's existing products and thereby adversely affect the Company's operating
results. If future releases of new products and enhancements do not achieve
market acceptance, the Company's business, financial condition and results of
operations will be materially and adversely affected. See
"Business -- Products."
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<PAGE> 23
Software products as complex as those offered by the Company may contain
undetected errors or failures that, despite significant testing by the Company,
are discovered only after a product has been installed and used by customers.
Although the Company's business has not been materially and adversely affected
by any such errors to date, there can be no assurance that errors will not be
found in the Company's products in the future. Such errors could cause delays in
product introductions and shipments, require design modifications, result in
loss of or delay in market acceptance of the Company's products, or loss of
existing customers, any of which could adversely affect the Company's business,
financial condition and results of operation.
Competition. Competition in the software and content management market is
diverse and rapidly changing. While a variety of vendors have offered some form
of ESD, ISM or similar solutions with their offerings, the current and
prospective closest competitors of the Company today fall into three categories:
Network/Systems Management Framework Vendors. These competitors
include IBM/Tivoli and Computer Associates who offer conventional ESD tools
as part of their enterprise frameworks.
LAN/Desktop Management Suite Vendors. These competitors include
vendors such as Microsoft, Intel Corporation and Network Associates, who
offer workgroup-based conventional ESD tools as part of a LAN
administration package.
Internet ESD Vendors. These competitors (also known as ISM providers)
include companies such as Marimba, Inc., and BackWeb Technologies Ltd.
originally "push" technology companies that have redefined themselves to
take advantage of the Internet services market.
Mobile Management Suite Vendors. These competitors include Sterling
Commerce, Inc.
Novadigm believes that it competes effectively with all of these vendors in
its target market on the basis of its broader product line for software and
content management, patented fractional differencing technology, desired-state
technological innovation, unique adaptive configuration functionality, higher
product implementation success rates, and extensive customer support. Novadigm
differentiates its products in the market based on results that have proven its
products are capable of distributing and managing software and content faster,
across larger and more diverse environments, with higher reliability and greater
adaptability.
Many of the Company's competitors have longer operating histories than the
Company, and many may have significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
installed customer bases. The Company's current and future competitors could
introduce products with more features, greater functionality and lower prices
than the Company's products. These competitors could also bundle existing or new
products with other, more established products in order to compete with the
Company. The Company's focus on software and content management products may be
a disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the software and content management market develops, a number of
companies with significantly greater resources than those of the Company could
attempt to increase their presence in this market by acquiring or forming
strategic alliances with competitors or business partners of the Company. There
can be no assurance that the Company will be able to compete successfully or
that competition will not have a material adverse effect on the Company's
business, operating results or financial condition. See
"Business -- Competition."
Volatility. The market for the Company's common stock is highly volatile.
The trading price of the Company's common stock has been and could in the future
be subject to wide fluctuations in response to quarterly variations in operating
and financial results, announcements of technological innovations or new
products by the Company or its competitors, changes in prices of the Company's
or its competitors' products and services, changes in product mix, change in the
Company's revenue and revenue growth rates for the Company as a whole or for
individual geographic areas, products or product categories, as well as other
events or factors. Statements or changes in opinions, ratings, or earnings
estimates made by brokerage firms or industry analysts relating to the market in
which the Company does business or relating to the Company specifically have
resulted, and could in the future result in, an immediate and adverse effect on
the market price of the Company's common stock. In addition, the stock market
has from time to time experienced
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extreme price and volume fluctuations which have particularly affected the
market price for the securities of many high technology companies and which
often have been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Company's
common stock.
Risks Related to International Revenues. In 1998 and 1999, approximately
46% and 47% of the Company's net revenues, respectively, were derived from its
international operations. International revenues are a significant percentage of
the Company's revenues and the Company plans to continue to develop
international sales, primarily through its European operations. The Company's
operations and financial results could be significantly affected by factors
associated with international operations, such as changes in foreign currency
exchange rates, uncertainties relative to regional economic circumstances,
longer payment cycles, greater difficulty in accounts receivable collection,
changes in regulatory requirements and product localization requirements, as
well as by other factors associated with international activities.
Customer Concentration. During 1999, two customers, Amdahl and Esoft
accounted for approximately 17% and 12% of total revenues, respectively. During
1998, two customers, Amdahl and EDS, accounted for approximately 31% and 10% of
total revenues, respectively. During 1997, two customers, IBM and Amdahl,
accounted for approximately 23% and 16% of total revenues, respectively. In June
1995, the Company entered into a seven-year, non-exclusive OEM and distribution
agreement with Amdahl. Under the agreement Amdahl can sublicense EDM throughout
the world as part of their bundled solution and sublicense EDM stand-alone to a
limited worldwide market. Novadigm agreed to provide limited technical support
and training. The agreement required Amdahl to pay the Company $8 million in
minimum royalties in 1996; and $4 million in minimum royalties in each of 1997
and 1998. The agreement was amended in March 1997, instead requiring Amdahl to
pay $2 million in minimum royalties in each of 1997 and 1998; and minimum
royalties of $3 million in each of 1999 and 2000. In the event of a change of
control of the Company, the amended agreement allows Amdahl the right to
terminate the agreement and recover unused guaranteed sublicense fees at the
time of the termination, to the extent they were also outstanding at March 31,
1997. Though Amdahl renewed the agreement at the end of 1999, there can be no
assurance that Amdahl will extend this agreement in subsequent years. Although
the Company believes that its dependence on its relationship with Amdahl has
become less significant over time as the Company expands the number of companies
participating in its indirect marketing channels, the disruption of the
Company's relationship with Amdahl could materially and adversely affect the
Company's operating results and financial condition.
Dependence on Proprietary Technology; Risks of Infringement. The success of
the Company will be, heavily dependent upon proprietary technology. The Company
relies primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which provide
only limited protection. Despite precautions taken by the Company, it may be
possible for unauthorized third parties to copy aspects of its current or future
products or to obtain and use information that either regards as proprietary. In
particular, the Company may provide its respective licensees with access to its
proprietary information underlying its licensed applications. There can be no
assurance that such means of protecting their proprietary rights will be
adequate or that their competitors will not independently develop similar or
superior technology. Policing unauthorized use of software is difficult and,
while the Company is able to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
proprietary rights of the Company to the same extent as do the laws of the
United States. Litigation may be necessary in the future to enforce their
intellectual property rights, to protect trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the business, results of operations, and financial condition
of any or all of the Company.
The Company is not aware that any of its software product offerings
infringes the proprietary rights of third parties. There can be no assurance,
however, that third parties will not claim infringement with respect to current
or future products of the Company. The Company expects that software product
developers will
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increasingly be subject to infringement claims as the number of products and
competitors in their industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time consuming, result in costly litigation, cause product shipment
delays, or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
acceptable terms or at all, which could have a material adverse effect on the
business, results of operations, and financial condition of the Company.
Product Liability. The license agreements, which the Company enters with
its customers typically, contain provisions designed to limit exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in such license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of their
products may entail the risk of such claims, and there can be no assurance that
the Company will not be subject to such claims in the future. A product
liability claim brought against the Company could have a material adverse effect
on its respective businesses, results of operations, and financial condition.
Year 2000 Implications. Many currently installed computer systems and
software products are unable to distinguish 21st century dates from 20th century
dates. Beginning in the year 2000, these date code fields will need to
distinguish 21st century dates from 20th century dates, and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company is aware that
some of its internal systems are not Year 2000 compliant and the Company is in
the process of assessing the impact of replacing or upgrading these systems. The
Company has on occasion warranted, and generally represents to its customers,
that the newer version of its products, EDM version 4.0 and Radia are free from
Year 2000 defects. There can be no assurance that the Company's products are
Year 2000 compliant, or that the Company's products will not be integrated with,
or otherwise interact with, non-compliant software. The foregoing could expose
the Company to claims from its customers and result in the loss of or delay in
market acceptance of the Company's products, increased service and warranty
costs to the Company and payment by the Company of compensatory or other
damages, any of which events could have a material adverse effect on the
Company's business, operating results and financial condition. Although the
Company believes that the cost to replace or upgrade its internal systems to be
Year 2000 compliant will not have a material adverse effect on its business, the
failure of any third-party systems to operate properly with regard to the Year
2000 and thereafter could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, the
purchasing patterns of potential customers may be affected by Year 2000 issues
as companies expend significant resources to correct their current systems for
Year 2000 compliance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held September 17, 1999, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive officers
is set forth in Part I, Item 1 of this Report. The information required by this
item concerning compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the section captioned "Compliance with Section
16(a) of the Exchange Act" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Beneficial Security Ownership of Management and Certain
Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section captioned "Certain Relationships and Related Transactions" contained in
the Proxy Statement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
1. Financial Statements:
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets -- As of March 31, 1999 and
1998........................................................ F-3
Consolidated Statements of Operations -- For the Years Ended
March 31, 1999, 1998 and 1997............................... F-4
Consolidated Statements of Stockholders' Equity -- For the
Years Ended March 31, 1999, 1998 and 1997................... F-5
Consolidated Statements of Cash Flows -- For the Years Ended
March 31, 1999, 1998 and 1997............................... F-6
Notes to Consolidated Financial Statements.................. F-7
2. Financial Statement Schedule:
For the Years Ended March 31, 1999, 1998 and 1997:
II -- Valuation and Qualifying Accounts..................... S-1
Additional schedules are not required under the related
schedule instructions or are inapplicable, and therefore
have been omitted.
</TABLE>
3. Exhibits
<TABLE>
<C> <S>
3.1* Certificate of Incorporation of Registrant, as amended.
3.2* Bylaws of Registrant, as amended.
10.1*+ OEM Software Licensing and Distribution Agreement dated June
13, 1995 between the Registrant and Amdahl Corporation.
(originally filed as Exhibit 10.8).
10.2**+ Amendment 1 dated December 20, 1996 to the OEM Software
Licensing and Distribution Agreement dated June 13, 1995
between the Registrant and Amdahl Corporation.
10.3**+ Amendment 2 dated March 31, 1997 to OEM Software Licensing
and Distribution Agreement dated June 13, 1995 between the
Registrant and Amdahl Corporation.
10.4**** 1992 Stock Option Plan, as amended and form of Stock Option
Agreement.
10.5* 1995 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.6* Employment Agreement dated as of August 10, 1992 by and
between H. Kent Petzold and the Registrant.
10.7* Deferred Compensation Agreement dated as of August 10, 1992,
as amended, by and between H. Kent Petzold and the
Registrant.
10.8* Stock Option Agreement and Notice of Stock Option Grant
dated as of August 10, 1992 by and between H. Kent Petzold
and the Registrant.
10.9* Amendment to Employment Agreement and Stock Option
Agreements dated as of May 18, 1995 by and among H. Kent
Petzold and the Registrant, and Albion J. Fitzgerald,
Shannon Ruiz, Joseph J. Fitzgerald and Brian J. McAlister.
10.10* Form of Indemnification Agreement entered into between
Registrant and its officers and directors.
</TABLE>
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<TABLE>
<C> <S>
10.11 Management Retention Agreement dated August 17, 1998 by and
between the registrant and Robert B. Anderson.
10.12*** Loan Agreement dated September 1, 1998 between the
Registrant and Coast Commercial Bank.
10.13** Facility lease dated as of March 14, 1997, by and between
Crossroad Developers Associates, LLC and the Registrant
10.14** Employment Agreement effective as of April 1, 1997 by and
between the Registrant and Wallace D. Ruiz.
10.15*** Offer letter dated February 9, 1998 by and between the
registrant and Michael R. Carabetta.
10.16*** Separation Agreement and Mutual Release dated April 1, 1998
by and between the registrant and Stuart Jacobson.
10.17*** Agreement dated February 13, 1998 by and between the
registrant and Stuart Jacobson.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see page 30)
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 33-92746) as declared effective by the
Commission on July 13, 1995.
** Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997.
*** Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998.
**** Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (file no. 333-67877).
+ Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K:
None.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedule. See Item 14(a)(2) above.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NOVADIGM, INC.
(Registrant)
By /s/ WALLACE D. RUIZ
------------------------------------
Wallace D. Ruiz
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: June 29, 1999
29
<PAGE> 30
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Wallace D. Ruiz, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below on June 29, 1999 by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALBION J. FITZGERALD Chairman of the Board and June 29, 1999
- ----------------------------------------------------- Chief Executive Officer
Albion J. Fitzgerald (Principal Executive Officer)
/s/ WALLACE D. RUIZ Vice President, Treasurer and June 29, 1999
- ----------------------------------------------------- Chief Financial Officer
Wallace D. Ruiz (Principal Financial and
Accounting Officer)
/s/ ROBERT B. ANDERSON Executive Vice President, June 29, 1999
- ----------------------------------------------------- Secretary and Director
Robert B. Anderson
/s/ DEBORAH DOYLE MCWHINNEY Director June 29, 1999
- -----------------------------------------------------
Deborah Doyle McWhinney
/s/ H. KENT PETZOLD Director June 29, 1999
- -----------------------------------------------------
H. Kent Petzold
</TABLE>
30
<PAGE> 31
NOVADIGM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss)............................................. F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO NOVADIGM, INC.:
We have audited the accompanying consolidated balance sheets of Novadigm,
Inc. (a Delaware corporation) and subsidiaries as of March 31, 1999 and 1998,
and the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity and cash flows for each of the three years in the
period ended March 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Novadigm, Inc. and
subsidiaries as of March 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule listed in the
index to financial statement schedules is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
April 28, 1999
F-2
<PAGE> 33
NOVADIGM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,124 $ 4,431
Short-term marketable securities.......................... 13,412 14,534
Accounts receivable, net of allowance for doubtful
accounts of $783 in 1999 and $770 in 1998.............. 8,586 6,352
Prepaid expenses and other current assets................. 985 841
-------- --------
Total current assets.............................. 31,107 26,158
Property and equipment, net............................... 1,396 1,763
Other assets.............................................. 873 955
-------- --------
$ 33,376 $ 28,876
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,770 $ 2,094
Accrued liabilities....................................... 642 1,578
Accrued payroll and other compensation.................... 2,828 2,642
Deferred revenue.......................................... 3,873 2,518
-------- --------
Total current liabilities......................... 10,113 8,832
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized -- 5,000 shares
Issued -- none......................................... -- --
Common stock, $0.001 par value
Authorized -- 30,000 shares
Issued -- 17,838 shares in 1999 and 17,471 shares in
1998.................................................. 11 11
Additional paid-in capital................................ 65,476 66,087
Accumulated deficit....................................... (41,791) (43,548)
Treasury stock, 43 shares in 1999, 410 shares in 1998..... (265) (2,527)
Accumulated Comprehensive Income (loss)................... (168) 21
-------- --------
Total stockholders' equity........................ 23,263 20,044
-------- --------
$ 33,376 $ 28,876
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
F-3
<PAGE> 34
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
REVENUES:
Licenses.................................................. $20,743 $ 15,728 $ 12,117
Maintenance and services.................................. 11,319 7,667 10,261
------- -------- --------
Total revenues.................................... 32,062 23,395 22,378
------- -------- --------
OPERATING EXPENSES:
Cost of maintenance and services.......................... 4,352 6,971 6,275
Sales and marketing....................................... 16,274 14,680 17,123
Research and development.................................. 4,936 6,843 6,212
General and administrative................................ 5,383 4,964 4,979
Restructuring charge...................................... -- -- 1,829
------- -------- --------
Total operating expenses.......................... 30,945 33,458 36,418
------- -------- --------
Operating income (loss)..................................... 1,117 (10,063) (14,040)
Interest income and other, net.............................. 665 978 1,597
------- -------- --------
Income (loss) before provision (benefit) for income taxes... 1,782 (9,085) (12,443)
Provision (benefit) for income taxes........................ 25 (68) 59
------- -------- --------
Net income (loss)........................................... $ 1,757 $ (9,017) $(12,502)
======= ======== ========
Earnings (loss) per share -- basic.......................... $ .10 $ (.52) $ (.72)
======= ======== ========
Weighted average common shares outstanding -- basic......... 17,580 17,392 17,409
======= ======== ========
Earnings (loss) per share -- diluted........................ $ .10 $ (.52) $ (.72)
======= ======== ========
Weighted average common and common equivalent shares
outstanding -- diluted.................................... 18,384 17,392 17,409
======= ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------
1999 1998 1997
------ ------- --------
<S> <C> <C> <C>
Net income (loss)........................................... $1,757 $(9,017) $(12,502)
Cumulative translation adjustment......................... (189) 17 16
------ ------- --------
Comprehensive income (loss)................................. $1,568 $(9,000) $(12,486)
====== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
F-4
<PAGE> 35
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE ACCUMULATED TOTAL
--------------- PAID-IN FROM ACCUMULATED TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT STOCK INCOME (LOSS) EQUITY
------ ------ ---------- ------------ ----------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1996..................... 17,402 $11 $64,877 $ (325) $(22,029) $ -- $ (12) $42,522
Exercise of stock
options................ 145 -- 982 -- -- -- -- 982
Purchases of treasury
stock.................. (231) -- -- -- -- (1,543) -- (1,543)
Reduction of notes
receivable............. -- -- -- 325 -- -- -- 325
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 16 16
Net loss................. -- -- -- -- (12,502) -- -- (12,502)
------ --- ------- -------- -------- ------- ------- -------
Balance at March 31,
1997..................... 17,316 11 65,859 -- (34,531) (1,543) 4 29,800
Exercise of stock
options................ 334 -- 387 -- -- -- -- 387
Purchases of treasury
stock.................. (269) -- -- -- -- (1,535) -- (1,535)
Sales of treasury
stock.................. 90 -- (159) -- -- 551 -- 392
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 17 17
Net loss................. -- -- -- -- (9,017) -- -- (9,017)
------ --- ------- -------- -------- ------- ------- -------
Balance at March 31,
1998..................... 17,471 11 66,087 (43,548) (2,527) 21 20,044
Exercise of stock
options................ 367 -- (611) -- -- 2,262 -- 1,651
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (189) (189)
Net income............... -- -- -- -- 1,757 -- -- 1,757
------ --- ------- -------- -------- ------- ------- -------
Balance at March 31,
1999..................... 17,838 $11 $65,476 $ -- $(41,791) $ (265) $ (168) $23,263
====== === ======= ======== ======== ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
F-5
<PAGE> 36
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 1,757 $ (9,017) $(12,502)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities --
Depreciation and amortization......................... 887 1,104 946
Increase (decrease) in allowance for doubtful
accounts............................................ 13 (532) 1,302
Decrease (increase) in accounts receivable............ (2,247) (1,088) 1,849
Decrease (increase) in prepaid expenses and other
current assets...................................... (143) (237) 453
Decrease (increase) in other assets................... 82 (253) (428)
Increase (decrease) in accounts payable and accrued
liabilities......................................... (261) 1,699 301
Increase in accrued payroll and other compensation.... 186 413 800
Increase (decrease) in accrued restructuring costs.... -- (1,394) 1,394
Increase (decrease) in deferred revenue............... 1,355 1,572 (3,563)
Decrease in notes receivable from stockholders........ -- -- 325
-------- -------- --------
Net cash (used in) provided by operating
activities..................................... 1,629 (7,733) (9,123)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (520) (1,281) (1,230)
Purchases of held-to-maturity securities................. (31,176) (17,752) (20,338)
Proceeds from redemptions of held-to-maturity
securities............................................ 32,298 23,952 25,859
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 602 4,919 4,291
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of common stock and exercise
of warrants and options............................... 1,651 779 982
Purchases of treasury stock.............................. -- (1,535) (1,543)
-------- -------- --------
Net cash (used in) provided by financing
activities..................................... 1,651 (756) (561)
-------- -------- --------
Effect of exchange rate on changes in cash................. (189) 17 16
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 3,693 (3,553) (5,377)
Cash and cash equivalents at the beginning of the period... 4,431 7,984 13,361
-------- -------- --------
Cash and cash equivalents at the end of the period......... $ 8,124 $ 4,431 $ 7,984
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY:
Cash paid for interest................................... $ -- $ 18 $ 2
Cash paid for income taxes............................... $ -- $ -- $ --
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
F-6
<PAGE> 37
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. THE COMPANY
Novadigm, Inc. (the "Company") was incorporated in Delaware in February
1992. The Company designs, markets and supports technology solutions that
efficiently and reliably deliver, update and maintain software and content
across the extended enterprise. The Company's principal customers include medium
to large organizations with widely deployed and heterogeneous B2E, B2B and B2C
networks.
Prior to 1994, the Company's primary efforts related to completing the
development of its software products, designing and implementing a marketing
program and obtaining financing to support its operations. In September 1992,
the Company completed a public offering of its common stock on the Vancouver
Stock Exchange. During the second quarter of fiscal 1994, the Company commenced
commercial sales of its products. In June 1994, March 1998 and June 1998, the
Company established wholly owned subsidiaries in France, Germany and the United
Kingdom, respectively, to act as sales and service offices to the European
marketplace. In July 1995, the Company completed a public offering of its common
stock on the Nasdaq National Market. The Company is subject to a number of
risks, including a history of operating losses, dependence on key individuals,
potential competition from larger and more established companies, customer
concentration and the ability to penetrate the market with new products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated.
Translation of Foreign Currencies
The functional currency of the Company's subsidiaries is its local
currency. Accordingly, all assets and liabilities are translated into U.S.
dollars at current exchange rates as of the respective balance sheet date.
Revenue and expense items are translated at the average rates prevailing during
the period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Revenues
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 97-2, "Software Revenue Recognition." The Company
generates license revenues from licensing the rights to use its software
products to end users and sublicense fees from resellers, including certain
guaranteed sublicense fees. The Company also generates maintenance and service
revenues from providing renewable support and software update rights services
(maintenance) and from consulting and training activities performed for license
customers.
F-7
<PAGE> 38
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
Revenues from perpetual software license agreements are recognized upon
shipment of the software if there are no significant post-delivery obligations,
payment is due within one year and collectibility is probable. If an acceptance
period is required, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period. The Company enters into
reseller arrangements that typically provide for sublicense fees payable to the
Company based on a percentage of the Company's list price. Reseller arrangements
may include an initial non-refundable payment in the form of guaranteed
sublicense fees. Guaranteed sublicense fees from resellers are recognized as
revenue upon shipment of the master copy of all software to which the guaranteed
sublicense fees relate if there are no significant post-delivery obligations,
the reseller is creditworthy and if the terms of the agreement are such that the
payment obligation is not subject to price adjustment, is non-cancelable and
non-refundable and due within 90 days. These guaranteed sublicense fees are
applied against sublicense fees reported by the reseller in relicensing the
Company's products to end-users. The Company recognized $5.4 million, $0.4
million and $3.9 million in guaranteed sublicense fees under all such agreements
in 1999, 1998 and 1997, respectively. At March 31, 1999, approximately 63% of
all such guaranteed sublicense fees had been relicensed by the Company's
resellers to end-users.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such amounts
are unbundled from the license fee at their fair market value based on the value
established by independent sales of such maintenance to customers. Service
revenues are primarily related to consulting services performed under separate
service arrangements related to the installation and implementation of the
Company's software products and the training of customer personnel. Such
services generally do not include customization or modification of the
underlying software code. If included in a license agreement, such services are
unbundled at their fair market value based on the value established by the
independent sale of such services to customers. Revenues from consulting and
training services are recognized as services are performed.
Cost of licenses consist of media and tapes on which the product is
delivered. Such costs are not material and are included in research and
development expenses in the accompanying consolidated statements of operations.
Cost of maintenance and services includes the direct and indirect costs of
providing technical support, consulting and training services to the Company's
customers. Cost of maintenance and services consists primarily of payroll and
benefits for field engineers and support personnel, other related overhead and
third party consulting fees.
Deferred revenue primarily relates to maintenance, consulting, and training
services which have been paid by the customers prior to the performance of those
services.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of temporary cash investments,
marketable securities and accounts receivable. The Company has investment
policies that restrict placement of these investments to financial institutions
evaluated as highly creditworthy. The Company generally does not require
collateral on trade accounts receivable as the Company's customer base consists
of large, well-established companies and governmental entities. As of March 31,
1999 and 1998, approximately 23% and 46%, respectively, of accounts receivable
are concentrated
F-8
<PAGE> 39
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
with 2 customers who are large, well-established companies that the Company has
determined are creditworthy.
Marketable Securities
In April 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). In accordance with SFAS 115, the Company's
marketable securities which are composed of commercial paper, government and
government-backed notes and corporate notes are classified as held-to-maturity.
Held-to-maturity securities represent those securities that the Company has both
a positive intent and ability to hold to maturity and are carried at amortized
cost.
Held-to maturity securities at March 31, 1999 (in thousands) of $13,412
were invested in commercial paper with a variety of large, well-established and
highly rated companies.
Proceeds from redemption of held-to-maturity securities were approximately
$33.6 million in 1999. At March 31, 1999, approximately $3.5 million of
held-to-maturity securities with original maturities of three months or less
were included in cash and cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable approximate their
fair values.
Property and Equipment
Property and equipment is stated at historical cost and consists of the
following at March 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Company cars................................................ $ 354 $ 308
Computer equipment and software............................. 3,963 3,556
Furniture and fixtures...................................... 505 463
Leasehold improvements...................................... 381 357
------- -------
5,203 4,684
Less: Accumulated depreciation and amortization............. (3,807) (2,921)
------- -------
$ 1,396 $ 1,763
======= =======
</TABLE>
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment and software.............. 3 years
Company cars................................. 4 years
Furniture and fixtures....................... 5 years
5 years (lesser of lease term or estimated
Leasehold improvements....................... useful life)
</TABLE>
Long-Lived Assets
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets" ("SFAS
121"). SFAS 121 requires, among other things, that an entity review its
long-lived assets and certain related intangibles for impairment whenever
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. As a
F-9
<PAGE> 40
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
result of its review, the Company does not believe that any impairment currently
exists related to its long-lived assets.
Software Development Costs
Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which the Company defines as establishment of a
working model. Capitalized software development costs require a continuing
assessment of their recoverability. This assessment requires considerable
judgment by management with respect to various factors including, but not
limited to, anticipated future gross product revenues, estimated economic lives
and changes in software and hardware technology. Amounts which could have been
capitalized under this statement, after consideration of the above factors, were
immaterial to the Company's results of operations and financial position.
Therefore, the Company has expensed all software development costs and included
those costs in research and development expenses in the accompanying
consolidated statements of operations.
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
which requires the presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS"). Basic EPS is calculated by dividing
income available to common shareholders by the weighted average number of shares
of common stock outstanding during the period. Diluted EPS is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period adjusted to reflect potentially
dilutive securities.
In accordance with SFAS 128, the following table reconciles income and
share amounts used to calculate basic earnings per share and diluted earnings
per share.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
NUMERATOR:
Net income (loss) -- basic and diluted............ $ 1,757 $(9,017) $(12,502)
-------- ------- --------
DENOMINATOR:
Weighted average number of common shares
outstanding -- basic........................... 17,580 17,392 17,409
Incremental shares from assumed conversion of
options........................................... 804 -- --
-------- ------- --------
Weighted average common and common equivalent
shares outstanding -- diluted.................. 18,384 17,392 17,409
======== ======= ========
EARNINGS (LOSS) PER SHARE -- BASIC.................. $ .10 $ (.52) $ (.72)
======== ======= ========
EARNINGS (LOSS) PER SHARE -- DILUTED................ $ .10 $ (.52) $ (.72)
======== ======= ========
</TABLE>
3. REVOLVING LINE OF CREDIT AGREEMENT
The Company entered into a $1.0 million unsecured revolving line of credit
agreement with a bank, which expires in September 1999. Borrowings bear interest
at the bank's reference rate (7.75% as of March 31, 1999). The agreement
includes a provision that prohibits the Company from paying dividends and
requires the Company to meet certain financial covenants. As of March 31, 1999,
the Company had no outstanding borrowings under the agreement.
F-10
<PAGE> 41
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
4. COMMITMENTS AND CONTINGENCIES
The Company has various leases for its facilities under non-cancelable
operating lease agreements. Rent expense incurred under these agreements in
fiscal 1999, 1998 and 1997 was approximately $1,059, $928 and $659,
respectively.
During 1997, the Company entered into an amendment of the lease for its
headquarters. Under the amendment, the Company extended the lease term for its
original leased space and entered into a commitment for additional space. Future
minimum commitments under all facility leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------
<S> <C>
2000.............................................. $ 825
2001.............................................. 658
2002.............................................. 146
------
$1,629
======
</TABLE>
The Company is contingently liable with respect to lawsuits and other
matters which arise in the normal course of business. Management believes that
the outcome of such contingencies will not have a material adverse effect on the
Company's financial position or results of operations.
5. COMMON STOCK
In July of 1995, the Company completed a public offering in the United
States of 2,875,000 shares of common stock (which included 500,000 shares sold
by stockholders) at $15 per share, resulting in net proceeds to the Company of
approximately $32.2 million after offering costs. The Company's shares trade on
the Nasdaq National Market.
In May of 1996, the Board of Directors approved the repurchase of up to
500,000 shares of the Company's common stock. As of March 31, 1998, the Company
repurchased 500,000 shares, expending approximately $3.1 million. Approximately
369,000 and 90,000 of these shares were resold by the Company in fiscal 1999 and
1998, respectively for the exercise of stock options under the Company's stock
option plan.
6. STOCK OPTIONS AND STOCK PURCHASE PLAN
Under the Company's 1992 Stock Option Plan, as amended (the "Plan"), the
Board of Directors may grant incentive and nonqualified stock options to
employees, directors and consultants. Incentive options are granted at no less
than fair market value at the date of grant based upon the price per share of
the Company's stock on the Nasdaq National Market. Nonqualified options are
granted at no less than 85% of fair market value at the date of grant. Option
terms may not exceed five years and vesting is determined by the Board of
Directors for each individual grant (generally four years). In June 1998, the
Board of Directors approved an amendment to the Plan allowing for option terms
of up to ten years, excluding options granted to officers and directors. The
Plan will continue in effect until June 9, 2002, unless terminated sooner.
During fiscal 1998, the shareholders approved an amendment to the Plan
increasing the number of shares of common stock reserved for issuance under the
Plan to 5,200,000 shares.
F-11
<PAGE> 42
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
The following table summarizes the option activity (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING GRANT PRICE
----------- -----------
<S> <C> <C>
BALANCE AT MARCH 31, 1996................................... 2,557 $15.82
Granted................................................... 3,109 5.32
Exercised................................................. (108) 6.06
Canceled.................................................. (2,485) 6.21
------ ------
BALANCE AT MARCH 31, 1997................................... 3,073 $ 5.23
Granted................................................... 1,325 4.04
Exercised................................................. (341) 1.76
Canceled.................................................. (706) 5.43
------ ------
BALANCE AT MARCH 31, 1998................................... 3,351 $ 5.05
Granted................................................... 1,432 4.07
Exercised................................................. (309) 4.66
Canceled.................................................. (789) 5.18
------ ------
BALANCE AT MARCH 31, 1999................................... 3,685 $ 4.35
====== ======
</TABLE>
At March 31, 1999, 1,398,060 options are vested and exercisable and
4,187,072 shares of common stock are reserved for future issuance under the
Plan. The weighted average exercise price of exercisable options at March 31,
1999 is $4.66 per share.
During fiscal 1997, the Company canceled 1,945,000 options with prices
ranging from $6.88 to $28.38 that had been granted prior to October 1996 and
replaced them with 1,945,000 options at $5.25 each, which was the market price
at the date of repricing. The effect of this transaction is treated as a
cancellation of the old options and the grant of new options in accordance with
the provisions of the Plan. The new options had the vesting period extended by
three months.
On May 17, 1995 the Board of Directors adopted the Company's Employee Stock
Purchase Plan (the "Purchase Plan"), which was approved by the stockholders at
the Company's annual meeting on November 17, 1995. A total of 1,000,000 shares
of Common Stock was reserved for issuance under the Purchase Plan. The Purchase
Plan covers substantially all employees in the United States. The participants'
purchase price is the lower of 85% of the closing price on the first trading day
of the six-month trade period or the last trade day of the period. Approximately
58,000 shares and 75,000 shares were purchased by employees under the Purchase
Plan in fiscal 1999 and 1998, respectively. At March 31, 1999, the Company has
reserved approximately 805,000 shares for future issuance.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", which establishes a fair value-based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company adopted SFAS 123 in fiscal 1997 and in accordance with
the provisions of SFAS 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option and stock purchase plans. Had
compensation cost for
F-12
<PAGE> 43
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
these plans been determined consistent with SFAS 123, the Company's net loss and
loss per share would have resulted in the following pro forma amounts indicated
in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Net income (loss) (in thousands):
As reported....................................... $ 1,757 $ (9,017) $(12,502)
Pro forma......................................... $(1,312) $(14,681) $(20,526)
Net income (loss) per share -- basic
As reported....................................... $ .10 $ (0.52) $ (0.72)
Pro forma......................................... $ (0.07) $ (0.84) $ (1.18)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The weighted average fair values of options granted fiscal 1999, 1998 and
1997 were $2.81, $3.04 and $5.32, respectively. The options outstanding at March
31, 1999, have exercise prices between $2.45 and $8.25, with a weighted average
exercise price of $4.54 and a weighted average remaining contractual life of 3.0
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1999, 1998 and 1997: risk free interest
rates ranged from 6.1% to 6.4%, expected dividend yields of 0%, expected lives
of 5.0 years and expected volatility of 90%.
7. INCOME TAXES
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109") "Accounting for Income Taxes". SFAS
109 provides for an asset and liability approach to accounting for income taxes
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which taxes become payable.
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current
U.S. Federal.............................................. $26 $ -- $(12)
State and local........................................... (1) (68) 71
--- ---- ----
Total Current..................................... $25 $(68) 59
--- ---- ----
Deferred
U.S. Federal.............................................. -- -- --
State and local........................................... -- -- --
--- ---- ----
Total Deferred.................................... -- -- --
--- ---- ----
Foreign..................................................... -- -- --
Provision (benefit) for income taxes........................ $25 $(68) $ 59
=== ==== ====
</TABLE>
F-13
<PAGE> 44
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
The components of the net deferred tax asset at March 31, 1999 and 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $6,151 $6,864
Other operating reserves.................................. 530 525
Accrued liabilities and other............................. 519 325
Tax credit carryforwards.................................. 432 423
Depreciation.............................................. 422 322
------ ------
Total deferred tax assets......................... 8,054 8,459
Valuation allowance......................................... (8,054) (8,459)
------ ------
Net deferred tax asset................................. $ -- $ --
====== ======
</TABLE>
As of March 31, 1999 the Company has net operating loss carryforwards for
federal income tax reporting purposes of approximately $15.4 million. These
carryforwards expire in various periods through 2013. The Company's ability to
utilize the net operating loss carryforwards in future years may be limited in
some circumstances, including significant changes in ownership interests, due to
certain provisions of the Internal Revenue Code of 1986.
The provision (benefit) for income taxes for the years ended March 31
differs from the statutory U.S. Federal income tax rate due to the following:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Provision (benefit) at U.S. statutory rate.................. (35.0)% (35.0)%
State income taxes, net of federal benefit.................. 0.4 (0.7)
Change in valuation allowance............................... 35.0 35.0
----- -----
0.4% (0.7)%
===== =====
</TABLE>
8. MAJOR CUSTOMERS
During 1999, two customers, Amdahl and Esoft accounted for approximately
17% and 12% of total revenues, respectively. During 1998, two customers, Amdahl
and EDS, accounted for approximately 31% and 10% of total revenues,
respectively. During 1997, two customers, IBM and Amdahl, accounted for
approximately 23% and 16% of total revenues, respectively.
In June 1995, the Company entered into a seven-year, non-exclusive OEM and
distribution agreement with Amdahl. Under the agreement, Amdahl can sublicense
EDM throughout the world as part of its bundled solution and sublicense EDM
stand-alone to a limited worldwide market. Novadigm agreed to provide limited
technical support and training. The agreement required Amdahl to pay the Company
$8 million in minimum royalties in fiscal 1996; and $4 million in minimum
royalties in each of fiscal 1997 and fiscal 1998. The agreement was amended in
March 1997, instead requiring Amdahl to pay $2 million in minimum royalties in
each of fiscal 1997 and fiscal 1998; and minimum additional royalties of $3
million in each of fiscal 1999 and fiscal 2000. In the event of a change of
control of the Company, the amended agreement allows Amdahl the right to
terminate the agreement and recover unused guaranteed sublicense fees at the
time of termination, to the extent they were also outstanding on March 31, 1997.
Though Amdahl renewed the agreement at the end of 1999, there can be no
assurance that Amdahl will extend this agreement in subsequent years. The
Company recognized no guaranteed sublicense fees from Amdahl in 1999 and 1998,
and $1.8 million in fiscal 1997.
F-14
<PAGE> 45
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
9. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, ("SFAS 131"), disclosures
about segments of an enterprise and related information, effective for fiscal
years beginning after December 31, 1997. SFAS 131 supersedes Statement of
Financial Accounting Standards No. 14, ("SFAS 14"), Financial Reporting for
Segments of a Business Enterprise. SFAS 131 changes current practice under SFAS
14 by establishing new standards to report information about operating segments
in annual and interim financial statements based on the approach that management
utilizes to organize the segments within the Company for management reporting
and decision making.
The Company's software products and related services are developed and
marketed to support heterogeneous client/server and Internet computing
environments for medium and large-scale enterprises. The Company markets its
products and related services to customers in North America, Europe, the Pacific
rim, Africa and South America. The Company's international revenue represents
products shipped from the United States directly to end-users outside the Untied
States. The Company does not sell products directly to its international
subsidiaries.
Revenue and long-lived-asset information by geographic area as of and for
the year ended:
<TABLE>
<CAPTION>
LONG-LIVED
REVENUE ASSETS
------- ----------
<S> <C> <C>
March 31, 1999:
North America & all other................................. $23,032 $27,125
Europe and Africa......................................... 9,030 6,251
------- -------
Total............................................. $32,062 $33,376
======= =======
March 31, 1998:
North America & all other................................. $22,654 $26,445
Europe and Africa......................................... 741 2,431
------- -------
Total............................................. $23,395 $28,876
======= =======
March 31, 1997:
North America & all other................................. $21,380 $35,932
Europe and Africa......................................... 998 410
------- -------
Total............................................. $22,378 $36,342
======= =======
</TABLE>
10. RESTRUCTURING CHARGE
The Company recorded a $1.8 million restructuring charge in fiscal 1997 to
reflect reorganization of the North American and European sales and marketing
organizations.
The significant provisions included in the restructuring charge (in
thousands) were:
<TABLE>
<S> <C>
Reorganization of European sales channel and organization... $1,015
Reorganization of U.S. sales and marketing, including
severance and office closings............................. 814
------
$1,829
======
</TABLE>
The restructuring charge included severance for the termination of 29
employees, the costs to close and consolidate five regional sales offices and
the Chicago-based marketing office, and the costs to realign distribution
channels in Europe. As of March 31, 1997, no material payments had been made
under the restructuring program. During fiscal 1998, the above restructuring
charges were paid in full.
F-15
<PAGE> 46
NOVADIGM, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO RECOVERIES AT END
CLASSIFICATION PERIOD OPERATIONS (WRITEOFFS) OF PERIOD
-------------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended:
March 31, 1997............................... $ -- $1,278 $ 25 $1,302
March 31, 1998............................... 1,302 553 (1,085) 770
March 31, 1999............................... 770 556 (543) 783
</TABLE>
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
--------- ------------------------------------------------------------ ------------
<C> <S> <C>
3.1* Certificate of Incorporation of Registrant, as amended.
3.2* Bylaws of Registrant, as amended.
10.1*+ OEM Software Licensing and Distribution Agreement dated June
13, 1995 between the Registrant and Amdahl Corporation.
(originally filed as Exhibit 10.8).
10.2**+ Amendment 1 dated December 20, 1996 to the OEM Software
Licensing and Distribution Agreement dated June 13, 1995
between the Registrant and Amdahl Corporation.
10.3**+ Amendment 2 dated March 31, 1997 to OEM Software Licensing
and Distribution Agreement dated June 13, 1995 between the
Registrant and Amdahl Corporation.
10.4**** 1992 Stock Option Plan, as amended and form of Stock Option
Agreement.
10.5* 1995 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.6* Employment Agreement dated as of August 10, 1992 by and
between H. Kent Petzold and the Registrant.
10.7* Deferred Compensation Agreement dated as of August 10, 1992,
as amended, by and between H. Kent Petzold and the
Registrant.
10.8* Stock Option Agreement and Notice of Stock Option Grant
dated as of August 10, 1992 by and between H. Kent Petzold
and the Registrant.
10.9* Amendment to Employment Agreement and Stock Option
Agreements dated as of May 18, 1995 by and among H. Kent
Petzold and the Registrant, and Albion J. Fitzgerald,
Shannon Ruiz, Joseph J. Fitzgerald and Brian J. McAlister.
10.10* Form of Indemnification Agreement entered into between
Registrant and its officers and directors.
10.11 Management Retention Agreement dated August 17, 1998 by and
between the registrant and Robert B. Anderson.
10.12*** Loan Agreement dated September 1, 1998 between the
Registrant and Coast Commercial Bank.
10.13** Facility lease dated as of March 14, 1997, by and between
Crossroad Developers Associates, LLC and the Registrant
10.14** Employment Agreement effective as of April 1, 1997 by and
between the Registrant and Wallace D. Ruiz.
10.15*** Offer letter dated February 9, 1998 by and between the
registrant and Michael R. Carabetta.
10.16*** Separation Agreement and Mutual Release dated April 1, 1998
by and between the registrant and Stuart Jacobson.
10.17*** Agreement dated February 13, 1998 by and between the
registrant and Stuart Jacobson.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
--------- ------------------------------------------------------------ ------------
<C> <S> <C>
24.1 Power of Attorney (see page 30)
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 33-92746) as declared effective by the
Commission on July 13, 1995.
** Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1997.
*** Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998.
**** Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-8 (file no. 333-67877).
+ Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 10.11
NOVADIGM, INC.
MANAGEMENT RETENTION AGREEMENT
This Management Retention Agreement (the "Agreement") is made and entered into
by and between Robert B. Anderson (the "Employee") and Novadigm, Inc. (the
"Company"), effective as of the latest date set forth by the signatures of the
parties hereto below (the "Effective Date").
RECITALS
The Board of Directors of the Company (the "Board") believes that it is
imperative to provide the Employee with certain severance benefits upon
Employee's involuntary termination of employment other than for cause which
provides the Employee with enhanced financial security and provides incentive
and encouragement to the Employee to remain with the Company.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the date that all
obligations of the parties hereto with respect to this Agreement have been
satisfied.
2. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law, and may be terminated by either the Company or the Employee at
any time, with or without cause.
3. Severance Benefits.
(a) Involuntary or Constructive Termination other than for Cause. If the
Employee's employment terminates as a result of Involuntary or Constructive
Termination other than for Cause (as defined herein), then (i) the principal
amount then outstanding on the Employee's loan from the Company represented by
the promissory note dated July 21, 1996 with a stated principal amount of
$226,450.00 (the "Promissory Note") shall be forgiven in full, including any
accrued interest, (ii) the principal amount then outstanding on the Employee's
loan from the Company from January 1997 of $38,000.00 shall be forgiven in
full, including any accrued interest, and (iii) Employee shall be fully
"grossed-up" for any income and social security taxes (but not for any golden
parachute excise taxes under Section 4999 of the Internal Revenue Code) arising
from such loan forgiveness.
(b) Other Terminations of Employment. In the event the Employee's
employment voluntarily terminates for any reason or involuntarily terminates
for Cause (as defined herein), then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other written agreements with the Company.
<PAGE> 2
4. Definitions
(a) Definition of Cause. "Cause" means (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee
and intended to result in personal enrichment of the Employee, (ii) Employee's
conviction of, or plea of nolo contendere to, a felony, (iii) a willful act by
the Employee which constitutes gross misconduct and which is injurious to the
Company, or (iv) following delivery to the Employee of a written demand for
performance from the Company which describes the basis for the Company's belief
that the Employee has not substantially performed his duties, continued
violations by the Employee of the Employee's obligations to the Company.
(b) Involuntary or Constructive Termination. "Involuntary or Constructive
Termination" shall mean (i) without the Employee's express written consent, the
assignment to the Employee of any duties or the significant reduction of the
Employee's duties, either of which is inconsistent with the Employee's position
with the Company and responsibilities in effect immediately prior to such
assignment, or the removal of the Employee from such position and
responsibilities; (ii) without the Employee's express written consent, a
substantial reduction, without good business reasons, of the facilities and
perquisites available to the Employee immediately prior to such reduction;
(iii) a reduction by the Company in the Base Compensation of the Employee as in
effect immediately prior to such reduction; (iv) a material reduction by the
Company in the kind or level of employee benefits to which the Employee is
entitled immediately prior to such reduction with the result that the
Employee's overall benefits package is significantly reduced; (v) without the
Employee's express written consent, any relocation of the Employee's job or
office more than 40 miles from the Employee's then current job or office; (vi)
any purported termination of the Employee by the Company which is not effected
for Disability or for Cause, or any purported termination for which the grounds
relied upon are not valid; or (vii) the failure of the Company to obtain the
assumption of this Agreement by any successors contemplated in Section 5 below.
5. Successors.
(a) Company's Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Company's business and/or assets
shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets.
(b) Employee's Successors. The terms of this Agreement and all rights of
the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
Page 2
<PAGE> 3
6. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered, when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid or when sent via Federal Express or
similar overnight delivery service. In the case of the Employee, notices shall
be addressed to him at the home address which he most recently communicated to
the Company in writing. In the case of the Company, notices shall be addressed
to its corporate headquarters, and all notices shall be directed to the
attention of its Secretary.
7. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to mitigate
the amount of any payment or benefit contemplated by this Agreement, nor shall
any such payment or benefit be reduced by any earnings that the Employee may
receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of
the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof. This Agreement, along with the Promissory
Note and related Security Agreement, represents the entire understanding of the
parties hereto with respect to the subject matter hereof and supersedes all
prior arrangements and understandings regarding same.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision hereof, which shall remain in full force and effect.
(f) Withholding. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes to the extent
required by law.
(g) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together will constitute
one and the same instrument.
Page 3
<PAGE> 4
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
set forth below.
COMPANY: NOVADIGM, INC.
/s/ ALBION FITZGERALD
--------------------------------
Albion Fitzgerald
Date: August 17, 1998
---------------------------
EMPLOYEE: /s/ ROBERT B. ANDERSON
--------------------------------
Robert B. Anderson
Date: August 17, 1998
---------------------------
Page 4
<PAGE> 1
EXHIBIT 21.1
NOVADIGM, INC.
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary Country of Incorporation
- ----------------------------------------------------------------
<S> <C>
Novadigm Europe, SARL France
Novadigm UK, Limited England
Novadigm Deutschland, GmbH Germany
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Novadigm, Inc.:
As independent public accountants, we hereby consent to the incorporation in
this Form 10-K of our report dated April 28, 1999. It should be noted that we
have not audited any financial statements of the company subsequent to March
31, 1999 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
June 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 8,124
<SECURITIES> 13,412
<RECEIVABLES> 9,369
<ALLOWANCES> 783
<INVENTORY> 0
<CURRENT-ASSETS> 31,107
<PP&E> 5,203
<DEPRECIATION> 3,807
<TOTAL-ASSETS> 33,376
<CURRENT-LIABILITIES> 10,113
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 23,252
<TOTAL-LIABILITY-AND-EQUITY> 33,376
<SALES> 0
<TOTAL-REVENUES> 32,062
<CGS> 0
<TOTAL-COSTS> 4,352
<OTHER-EXPENSES> 26,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (665)
<INCOME-PRETAX> 1,782
<INCOME-TAX> 25
<INCOME-CONTINUING> 1,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,757
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
