<PAGE> 1
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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER: 0-26156
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.)
ONE INTERNATIONAL BLVD, SUITE 200, MAHWAH, NJ 07495
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(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, 2000 there were 18,867,934 shares of the Registrant's Common
Stock outstanding.
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<PAGE> 2
NOVADIGM, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 1
Condensed Consolidated Balance Sheets as of June 30, 2000
and March 31, 2000........................................ 1
Condensed Consolidated Statements of Operations for the
three month periods ended
June 30, 2000 and June 30, 1999............................. 2
Condensed Consolidated Statements of Cash Flows for the
three month periods ended
June 30, 2000 and June 30, 1999............................. 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 6
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
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............................ 17
SIGNATURES............................................................ 18
</TABLE>
i
<PAGE> 3
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,
2000 2000
----------- ---------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 4,718 $ 3,670
Short-term marketable securities............................ 21,609 21,348
Accounts receivable, net.................................... 10,627 15,544
Prepaid expenses and other current assets................... 1,449 1,144
------- -------
Total current assets.............................. 38,403 41,706
Property and equipment, net................................. 1,832 1,894
Intangible Asset............................................ 16,082 --
Other assets................................................ 4,458 780
------- -------
$60,775 $44,380
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 7,115 $ 7,953
Deferred revenue............................................ 5,190 4,712
------- -------
Total current liabilities......................... 12,305 12,665
Stockholders' equity:
Common stock: 30,000 shares authorized; 19,748 and 18,590
issued as of June 30, 2000 and March 31, 2000............. 20 11
Additional paid-in capital................................ 88,197 68,691
Accumulated deficit....................................... (39,145) (36,648)
Accumulated comprehensive loss............................ (602) (339)
------- -------
Total stockholders' equity........................ 48,470 31,715
------- -------
$60,775 $44,380
======= =======
</TABLE>
See accompanying notes.
1
<PAGE> 4
NOVADIGM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
REVENUES:
Licenses.................................................. $ 3,791 $4,175
Maintenance and services.................................. 4,512 3,881
------- ------
Total revenues.................................... 8,303 8,056
OPERATING EXPENSES:
Cost of maintenance and services.......................... 1,705 1,161
Sales and marketing....................................... 5,580 4,019
Research and development.................................. 2,108 1,189
General and administrative................................ 1,584 1,588
------- ------
Total operating expenses.......................... 10,977 7,957
------- ------
Operating income (loss)..................................... (2,674) 99
Interest income, net........................................ 326 237
------- ------
Income (loss) before provision for income taxes............. (2,348) 336
Provision for income taxes.................................. 149 43
------- ------
Net income (loss)........................................... $(2,497) $ 293
======= ======
Earnings (loss) per common share -- basic................... $ (0.13) $ 0.02
======= ======
Weighted average common shares outstanding -- basic......... 18,722 17,904
======= ======
Earnings (loss) per share -- diluted........................ $ (0.13) $ 0.02
======= ======
Weighted average common and common equivalent shares
outstanding-diluted....................................... 18,722 19,488
======= ======
</TABLE>
See accompanying notes.
2
<PAGE> 5
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(2,497) $ 293
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization.......................... 259 192
Decrease in accounts receivable........................ 4,917 746
Increase in prepaid expenses and other current
assets................................................ (305) (572)
Increase in intangible assets.......................... (287) --
Increase in other assets............................... (1,178) (50)
Decrease in accounts payable and accrued liabilities... (838) (736)
Increase (decrease) in deferred revenue................ 478 (98)
------- -------
Net cash provided by (used in) operating
activities....................................... 549 (225)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (197) (215)
Purchases of held-to-maturity securities.................. (12,356) (7,703)
Proceeds from redemptions of held-to-maturity
securities............................................. 12,095 6,197
------- -------
Net cash used in investing activities............. (458) (1,721)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of common stock and exercise of
warrants and options................................... 1,220 453
------- -------
Net cash provided by financing activities......... 1,220 453
------- -------
Effect of exchange rate changes in cash..................... (263) (114)
------- -------
Net increase (decrease) in cash and cash equivalents........ 1,048 (1,607)
Cash and cash equivalents at the beginning of the period.... 3,670 8,124
------- -------
Cash and cash equivalents at the end of the period.......... $ 4,718 $ 6,517
======= =======
</TABLE>
See accompanying notes
3
<PAGE> 6
NOVADIGM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Novadigm, Inc. 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
our 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 Novadigm's audited consolidated financial statements included
within our Form 10-K filed with the Commission on June 27, 2000 (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, 2001, or any other future period.
2. NET LOSS PER SHARE
We 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
ended June 30, 2000 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,
----------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Numerator:
Net income (loss)......................................... $(2,497) $ 293
======= =======
Denominator:
Weighted average number of common shares
outstanding -- basic................................... 18,722 17,904
Incremental shares from assumed conversion of options..... -- 1,584
------- -------
Weighted average common and common equivalent shares
outstanding -- diluted................................. 18,722 19,488
======= =======
Earnings (loss) per share -- basic.......................... $ (0.13) $ 0.02
======= =======
Earnings (loss) per share -- diluted........................ $ (0.13) $ 0.02
======= =======
</TABLE>
3. ALLIANCE WITH HEWLETT-PACKARD COMPANY
During the quarter ended June 30, 2000, we entered into an alliance
agreement with Hewlett-Packard Company ("HP") to integrate, market and sell our
software and content management products with HP's OpenView management solutions
for the enterprise and service providers markets. As part of the agreement, we
issued 940,000 shares of common stock to HP and a warrant for an additional
250,000 shares of common stock. Both the shares issued and the warrant contained
restrictions.
4
<PAGE> 7
NOVADIGM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the agreement, and for a fee of $2,500,000, HP was provided a
one-year, limited license to upgrade certain existing customers to our Radia
product. The fair value of the equity issued, less the cash received from HP,
was recorded as an intangible asset at June 30, 2000, and will be amortized over
the initial term of the agreement, two years. Included in the warrant is a
provision that reduces the exercise price of the warrant to $0 if HP attains
certain revenue milestones. Should HP meet those milestones, the intangible
asset will be adjusted and the new amount will be amortized for the remainder of
the term.
5
<PAGE> 8
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 relate to anticipated
future events or conditions that are subject to numerous risks and
uncertainties. As a result of these risks and uncertainties, our actual results
could differ materially from historical results or anticipated results. Some of
these risks and uncertainties are discussed under the caption "Business Risks"
below. We encourage our shareholders and prospective investors in our Common
Stock to consider these risks carefully.
This report should be read in conjunction with our annual report on Form
10-K for the fiscal year ended March 31, 2000, as filed with the Securities and
Exchange Commission.
OVERVIEW
We design, market and support technology solutions that deliver, update and
maintain software and content across the extended enterprise. Our principal
customers include medium to large organizations with widely deployed and
heterogeneous business-to-employee, business-to-business and
business-to-consumer networks. Novadigm was incorporated in February 1992.
Through September 1993, our primary efforts were devoted to product development.
In October 1993, Version 1.0 of our EDM product was released for general
availability. Since its first release, we have 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, we released Radia Software Manager, an
Internet-based software and content management solution and in November 1998, we
announced the general availability of Radia Version 2.0 as well as the Radia
Application Manager. In October 1999, we announced Radia e-wrap for application
service providers (ASPs) and in April 2000 we announced the e-wrap retail suite.
We generate license revenues from licensing the rights to use our software
products to end users and sublicense fees from resellers, including certain
guaranteed sublicense fees. We also generate maintenance and service revenues
from providing renewable support and software update rights services
(maintenance) and from consulting and training activities performed for license
customers.
During our fiscal year ended March 31, 2000, approximately 14% of our total
revenues were generated through our distribution agreement with Amdahl
Corporation. As of March 31, 2000, we terminated our OEM and distribution
agreement with Amdahl. Although our license revenues did decline for the quarter
ended June 30, 2000 relative to the prior year's quarter, we do not believe this
decline was attributable to the termination of the OEM and distribution
agreement with Amdahl. In addition, we do not currently expect the termination
of our agreement with Amdahl to have an adverse effect on our revenues in future
periods. In recent quarters, license revenue from Amdahl has declined and
license contracts closed by Amdahl were accomplished with our direct sales
force. Amdahl customers having licensed our products are expected to continue to
renew their maintenance agreements.
Revenues from perpetual software license agreements are recognized as
revenue upon shipment of the software if there are no significant post-delivery
obligations, pricing is fixed and determinable, 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. We enter into reseller arrangements that typically provide
for sublicense fees payable to Novadigm based on a percent of our 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 Novadigm's products to end-users. We recognized no guaranteed
sublicense fees in the revenue of the quarter ending June 30, 2000. At June 30,
2000, approximately 90% of all such guaranteed sublicense fees had been
relicensed by our resellers to end-users.
6
<PAGE> 9
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 our 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.
GEOGRAPHIC SEGMENT INFORMATION
We market our products and related services to customers in North America,
Europe, the Pacific Rim, Africa and South America. Our international revenue
represents products shipped from the United States directly to end-users outside
the United States. We do not sell products directly to our international
subsidiaries.
The following table presents revenue information by geographic area for the
three-month periods ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
North America and all other................................ $4,686 $5,305
Europe, the Middle East and Africa......................... 3,617 2,751
------ ------
Total............................................ $8,303 $8,056
====== ======
</TABLE>
The following table presents total asset information by geographic area at
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
North America and all other.............................. $52,214 $26,613
Europe, the Middle East and Africa....................... 8,561 6,561
------- -------
Total.......................................... $60,775 $33,174
======= =======
</TABLE>
RESULTS OF OPERATIONS
We generate revenues principally from licensing the rights to use our
software products to end-users and from sublicense fees received from resellers.
We also generate maintenance revenues from support and software update rights
and service revenues from consulting and training activities performed for
license customers.
7
<PAGE> 10
For the periods indicated, the following table sets forth the percentage of
total revenue represented by the respective line items in our condensed
consolidated statements of operations (unaudited):
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED JUNE 30,
---------------
2000 1999
------ -----
<S> <C> <C>
REVENUES:
Licenses.................................................. 45.7% 51.8%
Maintenance and services.................................. 54.3 48.2
------ -----
Total revenues.................................... 100.0 100.0
------ -----
OPERATING EXPENSES:
Cost of maintenance and services.......................... 20.5 14.4
Sales and marketing....................................... 67.2 49.9
Research and development.................................. 25.4 14.8
General and administrative................................ 19.1 19.7
------ -----
Total operating expenses.......................... 132.2 98.8
------ -----
Operating income (loss)..................................... (32.2) 1.2
Interest income, net........................................ 3.9 2.9
------ -----
Income (loss) before provision for income taxes............. (28.3) 4.1
Provision for income taxes.................................. 1.8 0.5
------ -----
Net income (loss)........................................... (30.1)% 3.6%
====== =====
</TABLE>
Total revenues for our fiscal quarter ended June 30, 2000 were $8.3 million
compared to $8.1 million for the same quarter of the previous year, an increase
of $0.2 million or 3%. Revenues attributable to the direct sales channel in the
quarter ended June 30, 2000 were 83% of total revenues compared to 65% of total
revenues for the same quarter last year. Revenues from North America customers
in the quarter ended June 30, 2000 represented 56% of total revenues compared to
66% 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 to
higher maintenance and services revenues.
License revenues were $3.8 million or 45.7% of total revenues for the
quarter ended June 30, 2000 compared to $4.2 million or 51.8% of total revenues
for the same quarter last year. License revenues decreased in the current year
quarter by $384 thousand or 9% over the same quarter last year. The decrease in
license revenues in the current year quarter over the prior year quarter is due
primarily to closing fewer license contracts in North America and the inability
to close some license contracts that were expected to close in the current
quarter.
Maintenance and service revenues were $4.5 million or 54.3% of total
revenues for the quarter ended June 30, 2000 compared to $3.9 million or 48.2%
of total revenues for the same quarter last year. The increase in 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 growth of both maintenance and
service revenues in the current year quarter and lower reported license revenues
in the quarter ended June 30, 2000. Maintenance and service revenues increased
in the current year quarter by $631 thousand or 16% over the same quarter last
year. The increase in maintenance and service revenues for the quarter is due
primarily to the increased demand for our consulting and training services
associated with a growing customer base and the high rate of renewal of
maintenance service contracts by our customers.
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 our 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
$1.7 million for the quarter ended June 30, 2000 compared to $1.2 million in the
same quarter last year. The cost of maintenance and services increased $544
thousand or 47% in the current
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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
increase reported in the maintenance and services revenues during the same
period. We expect the cost of maintenance and services to increase in future
quarters to support the growing demand for our maintenance, consulting and
training services.
Sales and marketing expenses consist primarily of salaries, related
benefits, commissions, travel and other costs associated with our sales and
marketing efforts. Sales and marketing expenses for the quarter ended June 30,
2000 were $5.6 million compared to $4.0 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 North
American and European direct sales force. We expect sales and marketing expenses
to increase in future quarters as we continue to invest in the growth of our
sales and marketing organizations.
Research and development expenses consist primarily of salaries, related
benefits, consultant fees and other costs associated with our research and
development efforts. Research and development expenses for quarters ended June
30, 2000 and June 30, 1999 are $2.1 million and $1.2 million, respectively. The
higher costs in the in the current year quarter as compared to the same quarter
last year were due to the continuing development of our products to operate on
additional platforms and the increase in headcount to support those efforts. We
believe that a significant investment in research and development activities is
essential to provide for our future growth, particularly research and
development relating to our Internet activities. We anticipate that we will
continue to invest resources to further enhance and develop our products, and we
anticipate growth in research and development expense in future quarters.
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 both
quarters ended June 30, 2000 and June 30, 1999 were $1.6 million. We expect
general and administrative expenses to increase in future quarters as we build
corporate infrastructure and as we approach the trial for the defense of our
patent (See "Part II, Item 1. Legal Proceedings").
Interest income, net is comprised primarily of interest income earned on
our cash, cash equivalents and investments adjusted for interest expense, net
foreign exchange gain (loss) and other financing expenses. Interest income was
$326 thousand in the quarter ended June 30, 2000 compared to $237 thousand in
the same quarter last year, an increase of $89 thousand or 38%. The increase of
interest income, net is due primarily to higher average balances of cash, cash
equivalents and marketable securities and higher interest rates.
Provision for income taxes is primarily for federal alternative minimum
taxes and state and foreign income taxes. For the quarter ended June 30, 2000
the provision is approximately $149 thousand compared to $43 thousand in the
same quarter last year. The increase is primarily due to reporting income in the
current year quarter in a European subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the three-month period ended June 30, 2000
was $549 thousand compared to $225 thousand of cash used in operations for the
same three-month period last year. The increase in cash provided by operations
for the three-month period ended June 30, 2000 is primarily due to a decrease in
accounts receivable offset by a reported net loss, an increase in other assets
and a decrease in accounts payable and accrued liabilities. In addition, the
cash increase was also attributable to the proceeds from the sales of common
stock and exercise of options.
As of June 30, 2000, we had working capital of $26.1 million including
$26.3 million of cash, cash equivalents and short-term marketable securities. We
have a revolving line of credit that permits unsecured borrowings up to $1.0
million through August 2000. As of June 30, 2000, there were no outstanding
loans under the line of credit and we were in compliance with the terms of the
agreement.
Property and equipment expenditures for the quarter ended June 30, 2000
were $197 thousand. The Company had no material commitments to purchase property
and equipment at June 30, 2000, and we expect
9
<PAGE> 12
that other purchases of property and equipment throughout the remainder of the
year to be at a rate constant with the prior fiscal year.
Although it is difficult for us to predict future liquidity requirements
with certainty, we believe that our 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 our operations for the next
twelve months. Although operating activities may provide cash in certain
periods, to the extent we experience growth in the future, we anticipate that
our operating and investing activities may use cash. Consequently, any such
future growth may require us 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. We have reported an operating loss for every
quarter since our incorporation in February 1992 except for the four consecutive
quarters of each of fiscal 1996 and fiscal 2000, and the last three-quarters of
1999. We cannot predict our future operating results with any accuracy, and
there can be no assurance that we will be able to obtain profitability on a
quarterly or annual basis in the future, or if obtained, that such profitability
will be sustainable.
Fluctuations in Quarterly Results; Seasonality. Our 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 our new products,
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 our competitors and competitive conditions in the
industry. Revenues received from our individual customers vary significantly
based on the size of the product installation. Customer orders for our products
have ranged from $25,000 to over $4 million, and have averaged from
approximately $200,000 to $400,000. As a result, our quarterly operating results
are likely to be significantly affected by the number and size of customer
orders we are able to obtain in any particular quarter. In addition, the sales
cycle for our 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 our 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.
We generally ship orders as received and as a result typically have 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, we have recognized the substantial majority of our
quarterly license revenues in the last weeks or week of each quarter. In
addition, because our 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.
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. Our future success will depend in large
part on our ability to enhance our 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 us to make
substantial investments in research and product development. During 2000, among
other research and development expenditures, we allocated research and
development funding to the development of Novadigm's e-wrap technology for ASP's
and additional platforms in operating systems. We intend to continue to allocate
funding to these development projects throughout 2001. If we fail to anticipate
or respond adequately to technological developments and customer requirements,
and in particular advances in client/server enterprise hardware platforms,
internet
10
<PAGE> 13
applications and platforms, operating systems and systems management
applications, or any significant delays in product development or introduction,
this could result in a loss of competitiveness or could materially and adversely
affect our operating results. There can be no assurance that any product
enhancements or new products we develop 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 our
existing products and thereby adversely affect our operating results. If future
releases of new products and enhancements do not achieve market acceptance, the
business, financial condition and results of our operations will be materially
and adversely affected.
Software products as complex as those offered by Novadigm may contain
undetected errors or failures that, despite our significant testing, are
discovered only after a product has been installed and used by customers.
Although our 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 our
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 our products, or loss of existing customers, any of which
could adversely affect the business, financial condition and results of our
operations.
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, our current and prospective closest
competitors today fall into four categories:
Network/Systems Management Framework Vendors. These competitors
include International Business Machines Corporation/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, 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 XcelleNet,
Inc.
Many of our competitors have longer operating histories and many may have
significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger installed customer
bases. Novadigm's current and future competitors could introduce products with
more features, greater functionality and lower prices than our products. These
competitors could also bundle existing or new products with other, more
established products in order to compete with us. Our 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 Novadigm could attempt to increase their presence in
this market by acquiring or forming strategic alliances with competitors or
business partners of ours. There can be no assurance that we will be able to
compete successfully or that competition will not have a material adverse effect
on our business, operating results or financial condition.
Volatility. The market for Novadigm's common stock is highly volatile. The
trading price of our 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 us or our
competitors, changes in prices to Novadigm's or our competitors' products and
services, changes in product mix, change in our revenue and revenue growth rates
for us 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 we do business or relating to us
specifically have resulted, and could in the future result in, an immediate and
adverse effect on the market price of our common stock. In addition, the stock
market has from time to time experienced extreme price and
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<PAGE> 14
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 our common stock. In the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. We may in
the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources,
which could have material adverse effect on our business, operating results and
financial condition.
Risks Related to International Revenues. In fiscal 2000, approximately 41%
of Novadigm's net revenues were derived from its international operations. In
the three months ended June 30, 2000, 44% of our revenue was derived from
international operations. International revenues are a significant percentage of
Novadigm's revenues and we plan to continue to develop international sales,
primarily through our European operations. Our 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 2000 one customer, Amdahl, accounted
for approximately 14% of total revenues. In the three months ended June 30,
2000, no client accounted for more that 10% of total revenues. In June 1995,
Novadigm 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 Novadigm 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 Novadigm, 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.
Amdahl renewed the agreement for fiscal 2000. Amdahl failed to meet the minimum
royalty commitment for fiscal 2000 and we terminated the agreement effective
March 31, 2000. We do not currently believe the termination of the OEM and
distribution agreement with Amdahl will result in a material decline in
revenues.
Dependence on Proprietary Technology; Risks of Infringement. Our success
will be, heavily dependent upon proprietary technology. We rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary rights. We seek
to protect our software, documentation and other written materials under trade
secret and copyright laws, which provide only limited protection. Despite these
precautions taken by us, it may be possible for unauthorized third parties to
copy aspects of our current or future products or to obtain and use information
that either regards as proprietary. In particular, we may provide our respective
licensees with access to our 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 we are able to determine the extent to which
piracy of our 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 Novadigm 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 Novadigm (See "Part II, Item 1. Legal Proceedings" hereof).
We do not believe that any of our 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 our current or future
products. For instance, in July 1999, Marimba filed suit against us alleging
that certain of
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<PAGE> 15
Novadigm's products infringe Marimba's patents (See "Part II, Item 1. Legal
Proceedings" hereof). We expect 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 us 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 Novadigm.
Product Liability. The license agreements, which we enter with our
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 we have not experienced any
product liability claims to date, the sale and support of our products may
entail the risk of such claims, and there can be no assurance that we will not
be subject to such claims in the future. A product liability claim brought
against Novadigm could have a material adverse effect on our respective
businesses, results of operations, and financial condition.
Retention of Executives and Key Employees. Our future success depends upon
the contributions of our 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 our 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 our executives or key
employees could have a material adverse effect on our operating results. We also
believe our future success will depend in large part upon our ability to attract
and retain additional highly skilled personnel.
Improving Operational Systems to Grow the Business. We have expanded our
operations rapidly since inception. We intend to continue to expand in the
foreseeable future to pursue existing and potential market opportunities. This
rapid growth places a significant demand on management and operational
resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures and controls on a timely basis. If we fail
to implement and improve these systems, our business, operating results and
financial condition will be materially adversely affected.
Potential Future Acquisitions. We may acquire other businesses in the
future, which would complicate our management tasks. We may need to integrate
widely dispersed operations that have different and unfamiliar corporate
cultures. These integration efforts may not succeed or may distract management's
attention from existing business operations. Our failure to successfully manage
future acquisitions could adversely affect our business. Existing stockholders
may be diluted if we finance the acquisitions by issuing equity securities.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments consist of cash and cash equivalents, short-term
investments, trade accounts and contracts receivable and accounts payable. We
consider investments in highly liquid instruments purchased with a remaining
maturity of 90 days or less at the date of purchase to be cash equivalents. Our
exposure to market risk for changes in interest rates relates primarily to our
short-term investments and short-term obligations. As a result, we do not expect
fluctuations in interest rates to have a material impact on the fair value of
these securities. We do not use derivative financial instruments in our
investment portfolio.
The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. dollars. However, we do
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. These currencies have been relatively stable
against the U.S. dollar for the past several years. Foreign currency
fluctuations have not had a material impact historically on our revenues or
results of operations. Currently, we have operations in the United Kingdom,
France and Germany and conduct transactions in the local currency of each
location. Although we currently derive no material revenues from highly
inflationary economies, we are expanding our presence in international markets
outside Europe, including the Pacific Rim and Latin America, whose currencies
have tended to fluctuate more relative to the
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<PAGE> 16
U.S. dollar. There can be no assurance that European currencies will remain
stable relative to the U.S. dollar or that future fluctuations in the value of
foreign currencies will not have a material adverse effect on our business,
operating results, revenues and financial condition. To date, the impact of
fluctuations in these currencies resulted in transaction losses of $263 thousand
for the quarter ended June 30, 2000.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that we do not have material market risk exposure. Our investment
policy requires us to invest funds in excess of current operating requirements
in obligations of the U.S. government and its agencies, investment grade state
and local government obligations securities of U.S. corporations rated A1 or P1
by Standard & Poors or the Moody's equivalents, and/or money market funds,
deposits or notes issued or guaranteed by U.S. commercial banks meeting certain
credit rating and net worth requirements.
At June 30, 2000, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by large institutions in the U.S.,
and our short-term investments were invested in corporate debt maturing in less
than 90 days.
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<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
I. Novadigm, Inc., v. Marimba, Inc., Case No. CV-97-20194-JW-PVT
This case involves Novadigm's United States Patent No. 5,581,764 (the "764
patent"), which relates generally to electronic software distribution. The "764
patent" was issued on December 3, 1996. Novadigm filed its complaint in this
case on March 3, 1997, alleging infringement of the patent by the "Castanet"
electronic software distribution product sold by Marimba, Inc. ("Marimba").
Novadigm presently asserts that Marimba infringes nine claims of the "764
patent" (claims 1, 4, 5, 23, 24, 25, 31, 33, and 34). The case is assigned to
the Honorable James Ware in the San Jose Division of the U.S. District Court.
The case has completed the discovery and summary judgment motion stages,
and was the subject of a first phase bifurcated trial from November 15-18, 1999.
A brief summary of certain procedural events is as follows. On May 2, 1997,
Marimba filed an answer in which it contested the infringement, enforceability,
and validity of the "764 patent." Marimba also sought a declaratory judgment, in
its counter-claim, that the "764 patent" is invalid, unenforceable, and not
infringed by Marimba, and that Novadigm is estopped from claiming infringement
by Marimba. A case management conference was held on July 1, 1997, when the
Court set a schedule for discovery and motions.
Early on in the case, Marimba twice sought summary adjudication that claim
1 of the "764 patent" was anticipated by alleged prior art references (that is,
the claim was invalid). In orders dated October 23, 1997 and February 26, 1998,
the Court summarily denied Marimba's motions without prejudice. The parties
conducted fact and expert discovery in the case beginning in late 1997 and
continuing until mid-1999. A claims construction ("Markman") hearing was
conducted in December 1998, and Judge Ware issued his ruling on claims
construction shortly thereafter.
In the first half of 1999, both sides submitted expert reports, and
conducted depositions of the experts. In March and April, 1999, the parties
filed three additional summary judgment motions each. Marimba filed a third
motion seeking to invalidate the "764 patent" in view of a third prior art
reference. (Marimba did not refile its earlier invalidity motions although the
Court had given Marimba permission to do so.) Marimba also filed two motions
seeking declarations that its products did not infringe the asserted claims of
the patent. Novadigm filed three motions for summary adjudication seeking to
strike certain of Marimba's invalidity defenses. In a series of orders in June
and July, 1999, the Court denied all six motions.
The Court conducted a preliminary pretrial conference in July, 1999 and
decided to bifurcate the trial. The first phase of the trial, on Marimba's
inequitable conduct defenses, was held before the Court (without a jury) on
November 15-18, 1999.
On January 4, 2000, the Court ruled in Novadigm's favor, finding that no
inequitable conduct occurred and dismissing Marimba's inequitable conduct
defense and counterclaim. On January 19, 2000, Marimba filed a motion for leave
to file a motion for reconsideration of the January 4 ruling, and a motion to
certify the ruling to the U.S. Court of Appeals for the Federal Circuit for an
immediate appeal. The Court has since denied both motions.
The case is now scheduled to proceed to a jury trial on the remaining
issues (validity and infringement to be decided first, then damages if the jury
decides that Marimba is liable). The Court has set a date for the jury trial
beginning on November 7, 2000. However, before then, Marimba obtained leave from
the Court to file a motion for summary judgment of invalidity of the patent on
the grounds of an alleged best mode violation. Marimba filed the motion on May
1, 2000, and the Court took the matter under submission. The motion was heard on
June 12, 2000. On August 7, 2000, the Court issued an order denying Marimba's
motion for summary judgement of invalidity for best mode violation. The case is
currently scheduled to go to trial on November 7, 2000.
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<PAGE> 18
II. Marimba, Inc. v. Novadigm, Inc., Case No. CV-99-20894-JW
This case involves Marimba's U.S. Patent No. 5,919,247 (the "247 patent").
The "247 patent" issued on July 6, 1999, based upon a filing date of July 24,
1996. Marimba filed its complaint in this case on July 30, 1999, alleging that
Novadigm infringed the "247 patent." The complaint did not specify which claims
of the patent were allegedly infringed, or which Novadigm products allegedly
infringe the patent. Novadigm's answer to the complaint was filed at the end of
September. In Novadigm's answer, Novadigm contested the infringement and
validity of the "247 patent." Novadigm also sought a declaratory judgment, in
its counter-claim, that the "247 patent" is invalid and not infringed by
Novadigm.
Novadigm notes that it has been selling its EDM product long before the
July, 1996 filing of Marimba's patent application. Novadigm had been selling
versions of EDM containing the updating methods which are the subject of
Novadigm's "764 patent" since 1994. Novadigm believes that the updating
technology used in its current products (sold since the "247 patent" issued) is
the same technology as that used in its updating products sold since 1994. Since
those 1994 sales predate the filing of Marimba's patent by two years, they are
prior art to Marimba's patent to the extent that Marimba's patent may have any
relevance to Novadigm's products. Novadigm does not believe there is anything
new in the products it is currently selling which could form a basis for any
infringement charge which was not also present in its pre-existing technology.
Thus, if the "247 patent" does not apply to Novadigm's products, there would be
no infringement. If the patent does apply to Novadigm's technology, then it
would apply equally well to Novadigm's preexisting product and sales, and the
patent would not be valid. In either event, in Novadigm's view there would
appear to be no basis for the filing of Marimba's complaint. To date, Marimba
has refused to identify anything which allegedly is new in Novadigm's current
products which could infringe the patent and which were not in Novadigm's
pre-1996 products.
In any event, the case is at a very early stage. Discovery has just begun.
All of the claim construction procedures, expert witness reports, and motions
are in the future. The Court held a case management conference on December 9,
1999. The Court did not set a deadline for the completion of discovery or a
trial date. The Court did schedule a claims construction hearing on October 2,
2000; the parties will be exchanging claims construction disclosures and
briefing between now and that hearing. It is presently anticipated that this
hearing will be continued to a later date.
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
On June 30, 2000 we entered into an alliance agreement with Hewlett-Packard
Company ("HP") pursuant to which we issued 940,000 shares of our common stock
and a warrant for additional 250,000 shares of our common stock to HP. This
issuance was made in reliance on the exemptions from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
set forth in Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 5, 2000, we issued a press release announcing that (i) Novadigm and
Hewlett-Packard Company ("HP") had entered into a strategic alliance to
integrate, market and sell our software and content management products with
HP's OpenView management solutions for the enterprise and service providers
markets and (ii) HP will become an equity owner of Novadigm (See Form 8-K as
filed with the Securities and Exchange Commission on July 19, 2000).
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<PAGE> 19
Pursuant to the Alliance Agreement, Novadigm and HP will (i) integrate the
products of Novadigm and HP OpenView, (ii) jointly market and make available to
existing and prospective customers the products of Novadigm and HP OpenView, as
integrated, and (iii) provide customers the opportunity to replace HP OpenView's
Desktop Administrator ("DTA") products and services with Novadigm's Radia
products and services. In addition, under the Alliance Agreement, Novadigm
agreed to issue to HP 940,000 shares (the "Consideration Shares") of Novadigm's
common stock and a warrant for an additional 250,000 shares (the "Warrant
Shares") of common stock (See Form 8-K as filed with the Securities and Exchange
Commission on July 19, 2000).
Concurrently with the execution of the Alliance Agreement, Novadigm and HP
also entered into a Stockholder Rights Agreement providing certain registration
rights to HP with respect to the Consideration Shares and the Warrant Shares and
subjecting the Consideration Shares and the Warrant Shares to certain
restrictions on transfer and distribution control measures. In addition,
Novadigm and HP entered into a distribution agreement which, for a fee of
$2,500,000, provides a one-year, limited license to HP to upgrade certain
existing DTA customers to the Radia product (See Form 8-K as filed with the
Securities and Exchange Commission on July 19, 2000).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports
On July 19, 2000, we filed a Form 8-K under Item 5, Other Information.
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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 14, 2000 NOVADIGM, INC.
By: /s/ WALLACE D. RUIZ
------------------------------------
Wallace D. Ruiz
Vice President & Chief Financial
Officer
(principal financial and chief
accounting
officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
19
