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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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)
<TABLE>
<S> <C>
DELAWARE 22-3160347
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
ONE INTERNATIONAL BLVD, SUITE 200, MAHWAH, NJ 07495
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(201) 512-1000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On June 30, 1999 there were 17,935,105 shares of the Registrant's Common
Stock outstanding.
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NOVADIGM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 3
Condensed Consolidated Balance Sheets as of June 30, 1999
and March 31, 1999.......................................... 3
Condensed Consolidated Statements of Operations for the
three month periods ended June 30, 1999 and June 30, 1998... 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended June 30, 1999 and June 30, 1998... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities....................................... 16
Item 3. Defaults Upon Senior Securities............................. 16
Item 4. Submission of Matters to A Vote of Security Holders......... 16
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES............................................................ 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVADIGM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
----------- ---------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................. $ 6,517 $ 8,124
Short-term marketable securities.......................... 14,918 13,412
Accounts receivable, net.................................. 7,840 8,586
Prepaid expenses and other current assets................. 1,557 985
-------- --------
Total current assets.............................. 30,832 31,107
Property and equipment, net............................... 1,419 1,396
Other assets.............................................. 923 873
-------- --------
$ 33,174 $ 33,376
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................. $ 5,504 $ 6,240
Deferred revenue.......................................... 3,775 3,873
-------- --------
Total current liabilities......................... 9,279 10,113
Stockholders' equity:
Common stock: 30,000 shares authorized; 17,935 and
17,838 outstanding.................................... 11 11
Additional paid-in capital............................. 65,664 65,476
Accumulated deficit.................................... (41,498) (41,791)
Treasury Stock......................................... 0 (265)
Accumulated comprehensive loss......................... (282) (168)
-------- --------
Total stockholders' equity........................ 23,895 23,263
-------- --------
$ 33,174 $ 33,376
======== ========
</TABLE>
See accompanying notes.
3
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NOVADIGM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
Licenses.................................................. $ 4,175 $ 3,876
Maintenance and services.................................. 3,881 2,682
------- -------
Total revenues.................................... 8,056 6,558
OPERATING EXPENSES:
Cost of maintenance and services.......................... 1,161 1,030
Sales and marketing....................................... 4,019 3,695
Research and development.................................. 1,189 1,223
General and administrative................................ 1,588 1,236
------- -------
Total operating expenses.......................... 7,957 7,184
------- -------
Operating income (loss)..................................... 99 (626)
Interest income, net........................................ 237 109
------- -------
Income (loss) before provision for income taxes............. 336 (517)
Provision for income taxes.................................. 43 2
------- -------
Net income (loss)........................................... $ 293 $ (519)
======= =======
Earnings (loss) per common share -- basic................... $ 0.02 $ (0.03)
======= =======
Weighted average common shares outstanding -- basic......... 17,904 17,471
======= =======
Earnings (loss) per share -- diluted........................ $ 0.02 $ (0.03)
======= =======
Weighted average common and common equivalent shares
outstanding -- diluted.................................... 19,488 17,471
======= =======
</TABLE>
See accompanying notes.
4
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NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 293 $ (519)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 192 67
Decrease in accounts receivable........................ 746 641
Decrease (increase) in prepaid expenses and other
current assets........................................ (572) 40
Increase in other assets............................... (50) (2)
Decrease in accounts payable and accrued liabilities... (736) (1,056)
Decrease in deferred revenue........................... (98) (1,080)
------- -------
Net cash used in operating activities............. (225) (1,909)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (215) (155)
Purchases of held-to-maturity securities.................. (7,703) (7,119)
Proceeds from redemptions of held-to-maturity
securities............................................. 6,197 9,216
------- -------
Net cash provided by (used in) investing
activities....................................... (1,721) 1,942
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of common stock and exercise of
warrants and options................................... 453 131
------- -------
Net cash provided by financing activities......... 453 131
------- -------
Effect of exchange rate changes in cash..................... (114) (16)
------- -------
Net increase (decrease) in cash and cash equivalents........ (1,607) 148
Cash and cash equivalents at the beginning of the period.... 8,124 4,431
------- -------
Cash and cash equivalents at the end of the period.......... $ 6,517 $ 4,579
======= =======
</TABLE>
See accompanying notes.
5
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NOVADIGM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Novadigm, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "Commission").
Certain information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company's management, the statements include all adjustments
(which are of a normal and recurring nature) necessary for the fair presentation
of the financial information set forth therein. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements included within the Company's Form 10-K filed with the Commission on
June 29, 1999 (Reg. No. 0-26156). The interim results presented herein are not
necessarily indicative of the results of operations that may be expected for the
full fiscal year ending March 31, 2000, or any other future period.
2. NET LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 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.
Common equivalent shares were excluded from the calculations of loss per share
for the period ending June 30, 1998 because the effect of including such shares
in the computation would be anti-dilutive.
In accordance with SFAS 128, the following table reconciles income (loss)
and share amounts used to calculate basic earnings per share and diluted
earnings per share.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Numerator:
Net income (loss)........................................... $ 293 $ (519)
======= =======
Denominator:
Weighted average number of common shares
outstanding -- basic...................................... 17,904 17,471
Incremental shares from assumed conversion of options....... 1,584 0
------- -------
Weighted average common and common equivalent shares
outstanding -- diluted.................................... 19,488 17,471
======= =======
Earnings (loss) per share -- basic.......................... $ 0.02 $ (0.03)
======= =======
Earnings (loss) per share -- diluted........................ $ 0.02 $ (0.03)
======= =======
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results. These risks include a history of
operating losses. The Company's quarterly operating results have fluctuated
significantly in the past, and may fluctuate in the future, due to a number of
factors, including the number, size and timing of customer orders, the timing
and market acceptance of the Company's new products, the dependence on
resellers, the level and pricing of international sales, changes in the level of
operating expenses, technological advances and new product introductions by the
Company's competitors, competitive conditions in the industry and foreign
currency exchange rates. In addition, the sales cycle for the Company's products
is lengthy and unpredictable depending upon the interest of the prospective
customer in the Company's products, the size of the order, the decision-making
and acceptance procedures within the customer's organization, the complexity of
implementation and other factors. The Company's operating results may also vary
significantly due to seasonal trends, as a result of efforts by the Company's
direct sales personnel to meet annual quotas, lower international revenues in
the summer months when many European businesses experience lower sales, the
establishment of calendar year capital budgets by prospective customers, as well
as other factors. There can be no assurance that the Company will be able to
achieve or maintain profitability on a quarterly or annual basis in the future.
See "Business Risks" below.
This report should be read in conjunction with the Company's annual report
on Form 10-K as filed with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The Company generates revenues principally from licensing the rights to use
its software products to end users and from sublicense fees received from
resellers. The Company also generates maintenance revenues from support and
software update rights and service revenues from consulting and training
activities performed for license customers.
For the periods indicated, the following table sets forth the percentage of
total revenue represented by the respective line items in the Company's
condensed consolidated statements of operations (unaudited):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
REVENUES:
Licenses.................................................. 51.8% 59.1%
Maintenance and services.................................. 48.2 40.9
------ ------
Total revenues.................................... 100.00 100.00
------ ------
OPERATING EXPENSES:
Cost of maintenance and services.......................... 14.4 15.7
Sales and marketing....................................... 49.9 56.3
Research and development.................................. 14.8 18.7
General and administrative................................ 19.7 18.9
------ ------
Total operating expenses.......................... 98.8 109.6
------ ------
Operating income (loss)..................................... 1.2 (9.6)
Interest income, net........................................ 2.9 1.7
------ ------
Income (loss) before provision for income taxes............. 4.1 (7.9)
Provision for income taxes.................................. 0.5 --
------ ------
Net income (loss)........................................... 3.6% (7.9)%
====== ======
</TABLE>
7
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Total revenues for the Company's first fiscal quarter ended June 30, 1999
are $8.1 million compared to $6.6 million for the same quarter of the previous
year, an increase of $1.5 million or 23%. Revenues attributable to the direct
sales channel in the quarter ended June 30, 1999 are 65% of total revenues
compared to 60% of total revenues for the same quarter last year. Revenues from
North America customers in the quarter ended June 30, 1999 represented 66% of
total revenues compared to 55% of total revenues for the same quarter last year.
The increase in total revenues in the current year quarter over the same quarter
last year is due primarily to higher maintenance and services revenues.
License revenues are $4.2 million or 51.8% of total revenues for the
quarter ended June 30, 1999 compared to $3.9 million or 59.1% of total revenues
for the same quarter last year. License revenues increased in the current year
quarter by $299 thousand or 8% over the same quarter last year. The increase in
license revenues in the current year quarter over the prior year quarter is due
primarily to closing a greater number of license contracts, particularly in
North America. From time to time, the Company accepts guaranteed sublicense fees
from distributors. Distributors pay guaranteed sublicense fees in order to have
the right to sublicense the Company's products to its customers and to receive
training and support services from the Company. At June 30, 1999, approximately
34% of all guaranteed sublicense fees received by the Company had not yet been
relicensed by the Company's distributors to end-users.
Maintenance and service revenues are $3.9 million or 48.2% of total
revenues for the quarter ended June 30, 1999 compared to $2.7 million or 40.9%
of total revenues for the same quarter last year. The increase of maintenance
and service revenues as a percent of total revenues in the current year quarter
over the same quarter last year is due to the rapid growth of both maintenance
and service revenues in the current year quarter. Maintenance and service
revenues increased in the current year quarter by $1.2 million or 45% over the
same quarter last year. The increase in maintenance and service revenues is due
primarily to the increase licensing of the Company's products to new customers
as well as to an increase in the Company's maintenance prices last year.
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.
These direct and indirect costs are primarily comprised of payroll and benefits
for support personnel and field engineers, travel and lodging expenses, third
party consulting fees, and other related overhead. Cost of maintenance and
services is $1.2 million for the quarter ended June 30, 1999 compared to $1.0
million in the same quarter last year. The cost of maintenance and services
increased $131 thousand or 13% in the current year quarter over the same quarter
last year. The increase in the current year quarter is primarily due to higher
staffing levels required to support the 45% increase reported in the maintenance
and services revenues during the same period. The Company expects the cost of
maintenance and services to increase in future quarters to support the growing
demand for the Company's maintenance, consulting and training services.
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 for the quarter ended
June 30, 1999 are $4.0 million compared to $3.7 million for the same quarter
last year. The increase in sales and marketing expenses in the current year
quarter over the same quarter last year is 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 future quarters in order to achieve its growth plans.
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 for both quarters
ended June 30, 1999 and June 30, 1998 are $1.2 million. 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 future quarters.
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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 for the
quarter ended June 30, 1999 are $1.6 million compared to $1.2 million for the
same quarter last year. The increase in general and administrative expenses in
the current year quarter over the same quarter last year is primarily due to
higher legal fees associated with a patent infringement suit alleged by the
Company (See Item 1. Legal Proceedings herein and Item 3. Legal Proceedings in
the Company's Form 10-K for the fiscal year ended March 31, 1999). In addition,
due to the growth of the European sales and support operations, effective with
the quarter ended June 30, 1999, European administrative functions identified as
general and administrative are classified as such. In prior periods, though such
expenses were a smaller expense, they were classified as sales and marketing.
The Company expects general and administrative expenses to increase in future
quarters.
Interest income, net is comprised primarily of interest income earned on
the Company's cash, cash equivalents and investments adjusted for interest
expense, net foreign exchange gain (loss) and other financing expenses. Interest
income is $237 thousand in the quarter ended June 30, 1999 compared to $109
thousand in the same quarter last year, an increase of $128 thousand or 117%.
The increase of interest income, net is due primarily to higher average balances
of cash, cash equivalents and marketable securities.
Provision for income taxes is primarily for federal alternative minimum
taxes and state and foreign income taxes. For the quarter ended June 30, 1999
the provision is approximately $43 thousand compared to $2 thousand in the same
quarter last year. The increase is primarily due to reporting income before a
provision of taxes in the current year quarter compared to a reported loss in
the same quarter last year.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for the three-month period ended June 30, 1999 was
$225 thousand compared to $1.9 million for the same three-month period last
year. The decrease in cash used in operations for the three month period ended
June 30, 1999 is primarily due to reporting net income in the current year
period of $0.3 million compared to a net loss in the prior year period of $0.5
million as well as increased recognition of deferred revenue than in the prior
year quarter.
As of June 30, 1999, the Company had working capital of $21.6 million
including $21.4 million of cash, cash equivalents and short-term marketable
securities. The Company has a revolving line of credit that permits unsecured
borrowings up to $1.0 million through August 1999. As of June 30, 1999, there
were no outstanding loans under the line of credit and the Company was in
compliance with the terms of the agreement.
Property and equipment expenditures for the quarter ended June 30, 1999
were $215 thousand. The Company has committed $293 thousand to spend on property
and equipment for the opening of a Chicago sales office, a corporate training
center in Mahwah, NJ and corporate-wide upgrades on computer equipment. The
Company expects that other purchases of property and equipment throughout the
remainder of the year to be at a rate constant with prior fiscal year.
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 funds
available under the existing line of credit, will be adequate to finance its
operations for the next twelve months.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue creates risks for the Company. If internal
systems do not 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
9
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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
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 progresses.
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 of 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.
10
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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.
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, the last three quarters of fiscal 1999, and the
first quarter of fiscal 2000. 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 effect 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 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.
11
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Rapid Technological Change and Introduction of New Products. The market for
Electronic Software Distribution ("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 fiscal 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 fiscal 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.
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 operations.
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, Internet Services Management ("ISM") or similar solutions with their
offerings, the current and prospective closest competitors of the Company today
fall into four categories:
- Network/Systems Management Framework Vendors. These competitors include
International Business Machines Corporation ("IBM")/Tivoli Systems Inc.
and Computer Associates International Inc. who offer conventional ESD
tools as part of their enterprise frameworks.
- LAN/Desktop Management Suite Vendors. These competitors include vendors
such as Microsoft Corporation, Intel Corporation and Network Associates,
Inc. 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.
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<PAGE> 13
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.
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 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 fiscal 1998 and 1999,
approximately 46% and 47% of the Company's net revenues, respectively, were
derived from its international operations. In the three months ended June 30,
1999, 34% of the Company's revenue was derived from 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 fiscal 1999, two customers, Amdahl
Corporation ("Amdahl") and Esoft, Ltd. ("Esoft") accounted for approximately 17%
and 12% of total revenues, respectively. During 1998, two customers, Amdahl and
Electronic Data Systems Corporation, 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 the
three months ended June 30, 1999, two customers, Motorola, Inc. and Esoft,
accounted for approximately 16% and 11% 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
13
<PAGE> 14
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. In March 1997, the
Company filed suit against Marimba, Inc. alleging that Marimba has infringed on
one of the Company's patents. 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. See "Item 1 -- Legal Proceedings."
The Company does not believe 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. For instance, in July 1999, Marimba filed
suit against the Company alleging that certain of the Company's products
infringe Marimba's patents. See "Item 1 -- Legal Proceedings." The Company
expects that software product developers will 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
14
<PAGE> 15
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.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. 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 filed summary judgement motions, which were heard by
the court in June 1999, but neither of which was granted. A jury trial is
presently scheduled for November 1999 with respect to certain of the claims. A
second trial to address the remaining items has not yet been scheduled.
On July 30, 1999, Marimba, Inc. ("Marimba") filed a complaint against the
Company in U.S. District Court, Northern District of California, San Jose
division alleging that the Company has infringed one of Marimba's patents. The
suit seeks monetary damages as well as an injunction to prevent the Company from
making, using or selling infringing software products. The suit seeks triple
damages under the United States Patent Act.
The Company intends to defend the new Marimba suit vigorously. However, the
Company may not prevail in the above-mentioned litigation. 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. Furthermore, the Company expects to incur
substantial costs in defending against the litigation filed against it by
Marimba. Additionally, the Company anticipates that the costs of prosecuting its
patent infringement litigation against Marimba will increase significantly if
the dispute goes to trial as scheduled in November 1999. It is possible that the
costs of prosecuting and defending the Marimba litigation could substantially
exceed the Company's expectations. Moreover, as a result of such litigation, the
Company may be required to enter into royalty or licensing agreements, that 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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 13, 1999 NOVADIGM, INC.
By: /s/ WALLACE D. RUIZ
------------------------------------
Wallace D. Ruiz
Vice President & Chief Financial
Officer
(principal financial and
chief accounting officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,517
<SECURITIES> 14,918
<RECEIVABLES> 8,403
<ALLOWANCES> 563
<INVENTORY> 0
<CURRENT-ASSETS> 30,832
<PP&E> 5,419
<DEPRECIATION> 4,000
<TOTAL-ASSETS> 33,174
<CURRENT-LIABILITIES> 9,279
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 23,884
<TOTAL-LIABILITY-AND-EQUITY> 33,174
<SALES> 0
<TOTAL-REVENUES> 8,056
<CGS> 0
<TOTAL-COSTS> 7,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (237)
<INCOME-PRETAX> 336
<INCOME-TAX> 43
<INCOME-CONTINUING> 293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
