<PAGE> 1
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 DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-26156
NOVADIGM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
(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 December 31, 1999 there were 18,378,588 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
Condensed Consolidated Balance Sheets as of December 31, 1999
and March 31, 1999 3
Condensed Consolidated Statements of Income for the three-
month and nine-month periods ended December 31, 1999 and
December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the nine-
month periods ended December 31, 1999 and December 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVADIGM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ --------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,719 $ 8,124
Short-term marketable securities 16,423 13,412
Accounts receivable, net 13,570 8,586
Prepaid expenses and other current assets 1,210 985
-------- --------
Total current assets 37,922 31,107
Property and equipment, net 1,866 1,396
Other assets 1,077 873
-------- --------
$ 40,865 $ 33,376
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 7,448 $ 6,240
Deferred revenue 4,273 3,873
-------- --------
Total current liabilities 11,721 10,113
Stockholders' equity:
Common stock: 30,000 shares authorized; 18,394 and 17,838
issued as of December 31, 1999 and March 31, 1999,
respectively 11 11
Additional paid-in capital 67,760 65,476
Accumulated deficit (38,389) (41,791)
Treasury stock 0 (265)
Accumulated comprehensive loss (238) (168)
-------- --------
Total stockholders' equity 29,144 23,263
-------- --------
$ 40,865 $ 33,376
======== ========
</TABLE>
See accompanying notes.
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NOVADIGM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Licenses $ 7,629 $ 5,566 $18,795 $15,201
Maintenance and services 4,449 2,820 12,666 7,632
------- ------- ------- -------
Total revenues 12,078 8,386 31,461 22,833
OPERATING EXPENSES:
Cost of maintenance and services 1,437 1,071 3,848 2,922
Sales and marketing 5,849 4,169 15,144 12,109
Research and development 1,509 1,229 4,394 3,685
General and administrative 1,692 1,392 5,189 3,861
------- ------- ------- -------
Total operating expenses 10,487 7,861 28,575 22,577
------- ------- ------- -------
Operating income 1,591 525 2,886 256
Interest income, net 309 153 741 436
------- ------- ------- -------
Income before provision for income taxes 1,900 678 3,627 692
Provision for income taxes 102 5 225 7
------- ------- ------- -------
Net income $ 1,798 $ 673 $ 3,402 $ 685
======= ======= ======= =======
Earnings per share-basic $ 0.10 $ 0.04 $ 0.19 $ 0.04
======= ======= ======= =======
Weighted average common shares outstanding-basic 18,273 17,570 18,073 17,514
======= ======= ======= =======
Earnings per share-diluted $ 0.09 $ 0.04 $ 0.17 $ 0.04
======= ======= ======= =======
Weighted average common and common equivalent
shares outstanding - diluted 20,966 18,919 20,245 18,007
======= ======= ======= =======
</TABLE>
See accompanying notes.
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NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,402 $ 685
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Depreciation and amortization 637 676
Increase in accounts receivable, net (4,984) (4,932)
Increase in prepaid expenses and other current assets (225) (28)
(Increase) decrease in other assets (204) 118
Increase (decrease) in accounts payable and accrued liabilities 1,208 (279)
Increase in deferred revenue 400 161
-------- --------
Net cash provided by (used in) operating activities 234 (3,599)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,107) (398)
Purchases of held-to-maturity securities (31,194) (21,158)
Proceeds from redemptions of held-to-maturity securities 28,183 24,799
-------- --------
Net cash provided by (used in) investing activities (4,118) 3,243
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of options 2,549 965
-------- --------
Net cash provided by financing activities 2,549 965
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (70) 1
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,405) 610
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 8,124 4,431
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 6,719 $ 5,041
======== ========
</TABLE>
See accompanying notes.
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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. EARNINGS 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.
In accordance with SFAS 128, the following table reconciles net income and
share amounts used to calculate basic earnings per share and diluted earnings
per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,798 $ 673 $ 3,402 $ 685
======== ======== ======== ========
Denominator:
Weighted average number of common shares
outstanding - basic 18,273 17,570 18,073 17,514
Incremental shares from assumed conversion of
options 2,693 1,349 2,172 493
-------- -------- -------- --------
Weighted average common and common equivalent
shares outstanding - diluted 20,966 18,919 20,245 18,007
======== ======== ======== ========
Earnings per share - basic $ 0.10 $ 0.04 $ 0.19 $ 0.04
======== ======== ======== ========
Earnings per share - diluted $ 0.09 $ 0.04 $ 0.17 $ 0.04
======== ======== ======== ========
</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 for the fiscal year ended March 31, 1999, as filed with the Securities
and Exchange Commission.
OVERVIEW
The Company designs, markets and supports technology solutions that
efficiently and reliably deliver, update and maintain software and content
across the extended enterprise. The Company's principal customers include medium
to large organizations with widely deployed and heterogeneous
business-to-employee ("B2E"), business-to-business ("B2B") and
business-to-customer ("B2C") networks. The Company was incorporated in February
1992. Through September 1993, the Company's primary efforts were devoted to
product development. In October 1993, Version 1.0 of Enterprise Desktop Manager
("EDM(TM)") was released for general availability. Since its first release, the
Company has continued to develop EDM by adding new features, applications and
platforms. Version 2.0 of EDM was released in February 1994, Version 3.0 in June
1995, and Version 4.0 was released in October 1997. In November 1997, the
Company released Radia(R) Software Manager, an Internet-based software and
content management solution and in November 1998, the Company announced the
general availability of Radia Software Manager Version 2.0 as well as the Radia
Application Manager. In October 1999, the Company announced Radia E-wrap(TM) for
ASPs to address the requirements for providing software to application service
providers (ASPs), independent software vendors (ISVs) and enterprise information
technology (IT) providers as subscription services.
The Company generates license revenues from licensing the rights to use
its software products to end users and sublicense fees from resellers. The
Company also generates maintenance and service revenues from providing renewable
support and software update rights services (maintenance) and from consulting
and training activities performed for license customers.
Revenues from perpetual software license agreements are recognized as
revenue upon shipment of the software if there are no significant post-delivery
obligations, payment is due within one year and collectibility is probable. If
an acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. The Company
enters into reseller arrangements that typically provide for sublicense fees
payable to the Company based on a percent of the Company's list price. Reseller
arrangements may include non-refundable payments in the form of
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guaranteed sublicense fees. Guaranteed sublicense fees from resellers are
recognized as revenue upon shipment of the master copy of all software to which
the guaranteed sublicense fees relate if there are no significant post-delivery
obligations, the reseller is creditworthy and if the terms of the agreement are
such that the payment obligation is not subject to price adjustment, is
non-cancelable and non-refundable and due within 90 days. These guaranteed
sublicense fees are applied against sublicense fees reported by the reseller in
relicensing the Company's products to end-users.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such services
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of the Company's
software products. Such services generally do not include customization or
modification of the underlying software code. If included in a license
agreement, such services are unbundled at their fair market value based on the
value established by the independent sale of such services to customers.
Revenues from consulting and training services are recognized as services are
performed.
GEOGRAPHIC SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), disclosures about
segments of an enterprise and related information, effective for fiscal years
beginning after December 31, 1997. SFAS 131 supersedes Statement of Financial
Accounting Standards No. 14 ("SFAS 14"), Financial Reporting for Segments of a
Business Enterprise. SFAS 131 changes current practice under SFAS 14 by
establishing new standards to report information about operating segments in
annual and interim financial statements based on the approach that management
utilized to organize the segments within the Company for management reporting
and decision-making.
The Company markets its products and related services to customers in North
America, Europe, the Pacific Rim, Africa and South America. The Company's
international revenue represents products shipped from the United States
directly to end-users outside the United States. The Company does not sell
products directly to its international subsidiaries.
The following table presents revenue information by geographic area for the
three and nine-month periods ended December 31, 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
North America and all other ...... $ 7,643 $ 5,392 $19,845 $12,028
Europe and Africa ................ 4,435 2,994 11,616 10,805
------- ------- ------- -------
Total ........................ $12,078 $ 8,386 $31,461 $22,833
======= ======= ======= =======
</TABLE>
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<PAGE> 9
The following table presents long-lived-asset information by geographic area
at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
1999 1998
------ ------
<S> <C> <C>
(IN THOUSANDS)
North America and all other .......... $1,054 $ 195
Europe and Africa .................... 53 203
------ ------
Total ............................ $1,107 $ 398
====== ======
</TABLE>
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 income (unaudited):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Licenses 63.2% 66.4% 59.7% 66.6%
Maintenance and services 36.8 33.6 40.3 33.4
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of maintenance and services 11.9 12.8 12.2 12.8
Sales and marketing 48.4 49.7 48.1 53.0
Research and development 12.5 14.7 14.0 16.1
General and administrative 14.0 16.4 16.5 17.0
------ ------ ------ ------
Total operating expenses 86.8 93.6 90.8 98.9
------ ------ ------ ------
Operating income 13.2 6.4 9.2 1.1
Interest income, net 2.5 1.8 2.3 1.9
------ ------ ------ ------
Income before provision for income taxes 15.7 8.2 11.5 3.0
Provision for income taxes 0.8 0.1 0.7 --
------ ------ ------ ------
Net income 14.9% 8.1% 10.8% 3.0%
====== ====== ====== ======
</TABLE>
Total revenues for the Company's third fiscal quarter ended December 31,
1999 were $12.1 million compared to $8.4 million for the same quarter of the
previous year, an increase of $3.7 million or 44%. Revenues attributable to the
direct sales channel in the quarter ended December 31, 1999 were 82% of total
revenues compared to 72% of total revenues for the same quarter last year.
Revenues from North America customers in the quarter ended December 31, 1999
represented 63% of total revenues compared to 64% of total revenues for the same
quarter last year. Total revenues for the nine-month period ended December 31,
1999 were $31.5 million compared to $22.8 million for the same period of the
previous year, an increase of $8.7 million or 38%. Revenues attributable to the
direct sales channel in the nine-month ended December 31, 1999 were 67% of total
revenues compared to 55% of total revenues for the same period last year.
Revenues from North America customers in the nine-month period ended December
31, 1999 represented 63% of total revenues compared to 53% of total revenues for
the same period last year. The increase in total revenues in the current year
quarter and nine-month period over the same quarter and nine-
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month period last year, respectively, is due to increased licensing of the
Company's products resulting in higher license, maintenance and services
revenues.
License revenues were $7.6 million or 63.2% of total revenues for the
quarter ended December 31, 1999 compared to $5.6 million or 66.4% of total
revenues for the same quarter last year. License revenues for the nine-month
period ended December 31, 1999 were $18.8 million or 59.7% of total revenues
compared to $15.2 million or 66.6% of total revenues for the same period last
year. The increase in license revenues for the quarter and nine-month periods
ended December 31, 1999 were primarily attributable to closing a greater number
of contracts. There continues to be increased demand for the Company's products
by both new customers and existing customers, more effective corporate marketing
programs, and the expansion of the Company's sales force in North America and
Europe. 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 December 31, 1999,
approximately 66% of all guaranteed sublicense fees received by the Company had
been relicensed by the Company's distributors to end-users.
Maintenance and service revenues for the quarter ended December 31, 1999
exceeded maintenance and service revenues for the same quarter of the prior year
by 58%. Maintenance and service revenues were $4.4 million or 36.8% of total
revenues for the quarter ended December 31, 1999 compared to $2.8 million or
33.6% of total revenues for the comparable quarter last year. Maintenance and
service revenues for the nine-month period ended December 31, 1999 exceeded
maintenance and service revenues for the same nine-month period of the prior
year by 66%. Maintenance and service revenues for the nine-month period ended
December 31, 1999 were $12.7 million or 40.3% of total revenues compared to $7.6
million or 33.4% of total revenues for the comparable period last year. The
higher maintenance and service revenues for the quarter and nine-month periods
is due primarily to the increased demand for the Company's consulting and
training services associated with the higher licensing activity with new
customers, particularly at the close of the calendar year 1999; the increase in
the Company's customer base; and the high rate of renewal of maintenance
contracts by 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, maintenance and technical support and consulting services to the
Company's customers. Cost of maintenance and services consist primarily of
payroll, related benefits, and travel for field engineers and support personnel,
other related overhead and third party consulting fees. Cost of maintenance and
services were $1.4 million or 32% of maintenance and service revenues for the
quarter ended December 31, 1999 compared to $1.1 million or 38% of maintenance
and service revenues for the quarter ended December 31, 1998. Cost of
maintenance and services for the nine-month period ended December 31, 1999 was
$3.8 million or 30% of maintenance and service revenues compared to $2.9 million
or 38% of maintenance and service revenues for the same period last year. The
higher cost of maintenance and services in the quarter and nine-month periods
ended December 31, 1999, as compared to the same periods of the prior year, was
primarily due to an increase in personnel to handle the 58% and the 66% increase
in the maintenance and service revenues in the quarter and nine-month periods
ended December 31, 1999 compared to the same quarter and nine-month periods of
the prior year, respectively. 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, consultant fees, and other costs associated with
the Company's sales and marketing efforts. Sales and marketing expenses for the
quarter ended December 31, 1999 were $5.8 million or 48.4% of total revenues
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as compared to $4.2 million or 49.7% of total revenues for the same period last
year. Sales and marketing expenses for the nine-month period ended December 31,
1999 were $15.1 million or 48.1% of total revenues as compared to $12.1 million
or 53.0% of total revenues for the same period last year. The increase in the
quarter and the nine-month periods this year as compared to the same periods
last year was primarily due to increased staffing levels as well as higher
compensation costs resulting from higher reported revenues in the quarter and
nine-month periods. The Company expects sales and marketing expenses to increase
in future periods in support of 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 were $1.5 million or
12.5% of total revenues for the quarter ended December 31, 1999 compared to $1.2
million or 14.7% of total revenues for the same period last year. Research and
development expenses for the nine-month periods ended December 31, 1999 and
December 31, 1998 were $4.4 million or 14.0% of total revenues and $3.7 million
or 16.1% of total revenues, respectively. The higher costs in the quarter and
nine-month periods were due to the continuing development of the Company's
products to operate on additional platforms and the development of products to
address the infrastructure requirements of application service providers (ASPs),
independent software vendors (ISVs) and enterprise information technology (IT)
providers. The Company anticipates that it will continue to invest resources to
further enhance and develop its products, though the Company does not anticipate
significant growth in research and development expense in the next several
quarters.
General and administrative expenses consist primarily of salaries,
related benefits, travel and fees for professional services such as legal,
consulting and accounting. General and administrative expenses were $1.7 million
or 14.0% of total revenue for the quarter ended December 31, 1999 compared to
$1.4 million or 16.4% of total revenues for the same period last year. General
and administrative expenses for the nine-month period ended December 31, 1999
were $5.2 million or 16.5% of total revenues compared to $3.9 million or 17.0%
of total revenues for the same period of 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 "Part II, Item 1. Legal Proceedings" herein and
"Part I, 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 current fiscal year, 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 marketable securities adjusted for
interest expense, net foreign exchange gain (loss) and other financing expenses.
Net interest income was $309,000 and $741,000 for the quarter and nine-month
periods ended December 31, 1999, respectively, compared to $153,000 and $436,000
for the same periods of last year, respectively. Interest income increased for
the quarter and nine-month period ended December 31, 1999 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. The Company utilizes a net-operating
loss carryforward that significantly reduces the Company's effective income tax
rate. For the quarter ended December 31, 1999 the provision is approximately
$102,000 compared to $5,000 in the same quarter last year. For the nine-month
period ended December 31, 1999, the provision was approximately $225,000
compared to $7,000 for the same nine-month period of last year. The increases
are primarily due to reporting higher income in the current year quarter and
nine-month periods compared to the same periods of last year.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the nine-month period ended December 31,
1999 was $234,000 compared to cash used in operations of $3.6 million for the
same period last year. The $3.8 million increase in cash provided by operations
for the nine-month period ended December 31, 1999 compared to the same period
last year was primarily due to a higher net income and a higher accounts payable
and accrued liabilities balance in the current year period.
As of December 31, 1999, the Company had working capital of $26.2
million including $23.1 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 September 2000. As of December
31, 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 were $268,000 and $1.1 million for
the three-month and nine-month periods ended December 31, 1999, respectively.
The Company had no material commitments to purchase property and equipment at
December 31, 1999 and expects to purchase property and equipment throughout the
remainder of the fiscal year at a rate consistent with the 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 amounts
available under the Company's revolving line of credit, will be adequate to
finance its operations for at least the next twelve months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities may use cash. Consequently, any such future growth may
require the Company to obtain additional equity or debt financing, which may not
be available on commercially reasonable terms or which may be dilutive.
YEAR 2000 COMPLIANCE
To date, the Company has not experienced any disruption of its business
or key systems as a result of year 2000 problems. Nor has the Company been
informed of any year 2000 problems encountered by its customers relating to
their use of the Company's products. It is possible, however, that the Company
or its customers may encounter year 2000 problems later this year. If such
problems were to arise, the Company might incur substantial costs or the
interruption in or a failure of certain normal business activities or
operations, which would hurt the Company's business. If the Company's customers
experience year 2000 related problems as a result of their use of the Company's
products, then those customers could assert claims for damages which, if
successful, could result in significant costs to the Company or adversely affect
its ability to sell its products.
BUSINESS RISKS
History of Operating Losses. The Company has a history of reporting
operating losses. 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
12
<PAGE> 13
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.
Rapid Technological Change and Introduction of New Products. The market
for software and content management (Electronic Software Distribution ("ESD"),
Internet Services Management ("ISM"), etc.) 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 and nine months of fiscal 2000, among other
research and development expenditures, the Company allocated research and
development funding to the development of its most recent release of Radia
Software Manager, version 2.0, Radia Application Manager, Radia E-wrap(TM) for
ASPs, an integrated LDAP adapter, support for IBM 4690 and SCO Unix devices, as
well as enhancements to EDM. The Company intends to continue to
13
<PAGE> 14
allocate funding to these development projects throughout the remainder of
fiscal 2000. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements, and in particular advances
in 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, 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 E-wrap(TM) technology, broader product
line for software and content management, patented fractional differencing
technology, desired-state technological innovation, unique adaptive
configuration functionality, higher product implementation success rates, and
extensive customer support. Novadigm differentiates its products in the market
based on results that have proven its products are capable of distributing and
managing software and content faster, across larger and more diverse
environments, with higher reliability and greater adaptability.
Many of the Company's competitors have longer operating histories than
the Company, and many may have significantly greater financial, technical,
sales, marketing and other resources, as well as greater
14
<PAGE> 15
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. For the years ending March 31,
1998 and 1999, approximately 46% and 47% of the Company's net revenues,
respectively, were derived from its international operations. In the nine-months
ended December 31, 1999, 37% 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. In the fiscal year ended March 31, 1999, two
customers, Amdahl Corporation ("Amdahl") and Esoft, Ltd. ("Esoft") accounted for
approximately 17% and 12% of total revenues, respectively. In fiscal 1998, two
customers, Amdahl and Electronic Data Systems Corporation, accounted for
approximately 31% and 10% of total revenues, respectively. During fiscal 1997,
two customers, IBM and Amdahl, accounted for approximately 23% and 16% of total
revenues, respectively. In the nine-months ended December 31, 1999, one
customer, Amdahl, accounted for approximately 18% of total revenues. 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. Although Amdahl renewed the agreement at the end of 1999, there can be
no assurance that Amdahl will extend this agreement in subsequent years.
15
<PAGE> 16
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. However, 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 "Part II, Item 1. Legal Proceedings" hereof).
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 "Part II, Item 1. Legal Proceedings" hereof).
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE> 17
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 completed.
Both parties filed summary judgment motions, which were heard by the court in
June 1999, but neither of which was granted.
Because of a crowded calendar and because Marimba had asserted certain
inequitable conduct defenses which are decided by the court and not by the jury,
the court bifurcated 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 the Company'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. As of February 8, 2000, the court had not ruled on the motion
for leave to file a motion for reconsideration. The hearing on the motion to
certify is presently set for February 28, 2000.
If the court reverses its January 4 ruling and rules in Marimba's favor,
that would dispose of the case. Assuming the court's ruling stands and the court
does not stay the case pending an appeal, the case will then 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.
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 Marimba's U.S. Patent No.
5,919,247 (the "247 Patent"). 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 complaint did not specify which claims of the patent were allegedly
infringed, or which of the Company's products allegedly infringe the patent. The
Company's answer to the complaint was filed at the end of September 1999. In the
Company's answer, it contested the infringement and validity of the "247
Patent". The Company also sought a declaratory judgment, in its counter-claim,
that the "247 Patent" is invalid and not infringed by the Company.
The case regarding the "247 Patent" is at a very early stage and discovery
has just begun. While the court held a case management conference on December 9,
1999, it 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.
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 regarding the "764 Patent" goes to trial as scheduled in November
2000. 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
17
<PAGE> 18
27.1 Financial Data Schedule
(b) Reports
None
18
<PAGE> 19
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: February 14, 2000 NOVADIGM, INC.
By: /s/ Wallace D. Ruiz
-----------------------------------------
Wallace D. Ruiz
Vice President & Chief Financial Officer
(principal financial and chief accounting
officer)
19
<PAGE> 20
Exhibit Index
27.1 Financial Data Schedule
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<FISCAL-YEAR-END> MAR-31-2000
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<SECURITIES> 16,423
<RECEIVABLES> 14,683
<ALLOWANCES> 1,113
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<CURRENT-ASSETS> 37,922
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0
<COMMON> 11
<OTHER-SE> 29,133
<TOTAL-LIABILITY-AND-EQUITY> 40,865
<SALES> 0
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<OTHER-EXPENSES> 9,050
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