<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 SEPTEMBER 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.)
</TABLE>
ONE INTERNATIONAL BLVD, SUITE 200, MAHWAH, NJ 07495
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING 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 September 30, 2000 there were 20,208,739 shares of the Registrant's
Common Stock outstanding.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2000 and March 31, 2000................................... 1
Condensed Consolidated Statements of Operations for the
three-month and six-month periods ended September 30, 2000
and September 30, 1999.................................... 2
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended September 30, 2000 and September 30,
1999...................................................... 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 5
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities....................................... 15
Item 3. Defaults upon Senior Securities............................. 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES............................................................ 16
</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>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,730 $ 3,670
Short-term marketable securities............................ 25,993 21,348
Accounts receivable, net.................................... 12,977 15,544
Prepaid expenses and other current assets................... 1,884 1,144
-------- --------
Total current assets.............................. 42,584 41,706
Property and equipment, net................................. 1,836 1,894
Intangible assets........................................... 14,071 --
Other assets................................................ 1,960 780
-------- --------
$ 60,451 $ 44,380
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $ 7,908 $ 7,953
Deferred revenue............................................ 3,847 4,712
-------- --------
Total current liabilities......................... 11,755 12,665
Stockholders' equity:
Common stock: 30,000 shares authorized; 20,209 and 18,590
issued as of September 30, 2000 and March 31, 2000,
respectively.............................................. 20 11
Additional paid-in capital................................ 89,924 68,691
Accumulated deficit....................................... (40,367) (36,648)
Accumulated comprehensive loss............................ (881) (339)
-------- --------
Total stockholders' equity........................ 48,696 31,715
-------- --------
$ 60,451 $ 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>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Licenses.......................................... $ 7,998 $ 6,991 $11,789 $11,166
Maintenance and services.......................... 4,625 4,336 9,137 8,217
------- ------- ------- -------
Total revenues............................ 12,623 11,327 20,926 19,383
OPERATING EXPENSES:
Cost of maintenance and services.................. 2,141 1,250 3,846 2,411
Sales and marketing............................... 6,119 5,276 11,699 9,295
Research and development.......................... 2,161 1,696 4,269 2,885
General and administrative........................ 1,812 1,909 3,396 3,497
Amortization of intangible........................ 2,010 -- 2,010 --
------- ------- ------- -------
Total operating expenses.................. 14,243 10,131 25,220 18,088
------- ------- ------- -------
Operating income (loss)............................. (1,620) 1,196 (4,294) 1,295
Interest income, net................................ 425 195 751 432
------- ------- ------- -------
Income (loss) before provision for income taxes..... (1,195) 1,391 (3,543) 1,727
Provision for income taxes.......................... 27 80 176 123
------- ------- ------- -------
Net income (loss)................................... $(1,222) $ 1,311 $(3,719) $ 1,604
======= ======= ======= =======
Earnings (loss) per share -- basic.................. $ (0.06) $ 0.07 $ (0.19) $ 0.09
======= ======= ======= =======
Weighted average common shares
outstanding -- basic.............................. 19,957 18,039 19,343 17,972
======= ======= ======= =======
Earnings (loss) per share -- diluted................ $ (0.06) $ 0.07 $ (0.19) $ 0.08
======= ======= ======= =======
Weighted average common and common equivalent shares
outstanding -- diluted............................ 19,957 19,998 19,343 19,828
======= ======= ======= =======
</TABLE>
See accompanying notes.
2
<PAGE> 5
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (3,719) $ 1,604
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Depreciation expense................................... 339 414
Amortization expense................................... 2,011 --
Decrease (increase) in accounts receivable............. 2,567 (335)
Increase in prepaid expenses and other current
assets................................................ (740) (594)
Increase in intangible asset........................... (287) --
Increase in other assets............................... (1,180) (283)
Decrease in accounts payable and accrued liabilities... (45) (72)
Decrease (increase) in deferred revenue................ (865) 622
-------- --------
Net cash provided by (used in) operating
activities...................................... (1,919) 1,356
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (281) (839)
Purchases of held-to-maturity securities.................. (32,895) (19,193)
Proceeds from redemptions of held-to-maturity
securities............................................. 28,250 16,098
-------- --------
Net cash provided by (used in) investing
activities...................................... (4,926) (3,934)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of common stock and exercise of
options................................................... 5,447 1,362
-------- --------
Net cash provided by financing activities......... 5,447 1,362
-------- --------
Effect of exchange rate changes on cash..................... (542) 22
-------- --------
Net decrease in cash and cash equivalents................... (1,940) (1,194)
Cash and cash equivalents at the beginning of the period.... 3,670 8,124
-------- --------
Cash and cash equivalents at the end of the period.......... $ 1,730 $ 6,930
======== ========
</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. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share 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 periods ended September 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 (loss) per share and diluted
earnings (loss) per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA) ------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)................................. $(1,222) $ 1,311 $(3,719) $ 1,604
======= ======= ======= =======
Denominator:
Weighted average number of common shares
outstanding -- basic........................... 19,957 18,039 19,343 17,972
Incremental shares from assumed conversion of
stock options.................................. -- 1,959 -- 1,856
------- ------- ------- -------
Weighted average common and common equivalent
shares outstanding -- diluted.................. 19,957 19,998 19,343 19,828
======= ======= ======= =======
Earnings (loss) per share -- basic.................. $ (0.06) $ 0.07 $ (0.19) $ 0.09
======= ======= ======= =======
Earnings (loss) per share -- diluted................ $ (0.06) $ 0.07 $ (0.19) $ 0.08
======= ======= ======= =======
</TABLE>
3. SUBSEQUENT EVENTS
On March 3, 1997, Novadigm filed a complaint alleging infringement of
Patent No. 5,581,764 by the "Castanet" electronic software distribution product
sold by Marimba, Inc. ("Marimba"). On July 30, 1999, Marimba filed a complaint
alleging that unspecified Novadigm products infringed Marimba's U.S. Patent No.
5,919,247. On November 10, 2000, Novadigm and Marimba signed a memorandum of
understanding settling their pending patent disputes, and each company has
agreed to dismiss their patent infringement lawsuit against the other party.
Under the settlement agreement, the terms of the settlement are confidential.
4
<PAGE> 7
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. Forward looking statements include, but are not limited
to, the following: Overview: We do not currently expect the termination of our
agreement with Amdahl to have an adverse effect on our license revenues in
future periods. Amdahl customers, having licensed our products, are expected to
continue to renew their maintenance agreements; Cost of maintenance and
services: 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, as well as to enable partners to implement projects for our
customers: Sales and marketing expenses: We expect sales and marketing expenses
to increase in future periods to support the alliance agreement with
Hewlett-Packard Company as well as our growth plans; Research and development
expenses: Though we anticipate that we will continue to invest resources to
further enhance and develop our products we do not anticipate significant growth
in research and development expense in the remainder of the fiscal year; General
and administrative expenses: We expect general and administrative expenses to
increase in the third fiscal quarter due to preparations for the trial for the
defense of our patent (See "Part II, Item. I. Legal Proceedings"), and in future
quarters as we build corporate infrastructure; Liquidity and Capital Resources:
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, will be adequate to finance our operations
and the repurchase of our common shares for at least 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; and Qualitative and Quantitative Disclosures
about Market Risk: As a result, we do not expect fluctuations in interest rates
to have a material impact on the fair value of these securities.
All forward-looking statements included in this document are based on
information available to us on the date hereof and we assume no obligation to
update any such forward-looking statement. 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 stockholders 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 and Form 10-Q for the fiscal quarter ended June 30, 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 Radia 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.
5
<PAGE> 8
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. We do not currently expect the termination of our
agreement with Amdahl to have an adverse effect on our license 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. However, Amdahl is not renewing maintenance
on unsold licenses it has prepaid and purchased with the intent to sublicense to
its customers.
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 revenue for the quarter ending September 30, 2000. At
September 30, 2000, approximately 90% of all such guaranteed sublicense fees had
been relicensed by our resellers to end-users.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such services
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of 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 and six-month periods ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
(IN THOUSANDS) ------- ------- ------- -------
<S> <C> <C> <C> <C>
North America and all other......................... $ 6,836 $ 6,897 $11,521 $12,202
Europe and Africa................................... 5,787 4,430 9,405 7,181
------- ------- ------- -------
Total..................................... $12,623 $11,327 $20,926 $19,383
======= ======= ======= =======
</TABLE>
6
<PAGE> 9
The following table presents total asset information by geographic area at
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
2000 1999
(IN THOUSANDS) ------- -------
<S> <C> <C>
North America and all other................................. $53,314 $31,368
Europe and Africa........................................... 7,137 5,546
------- -------
Total............................................. $60,451 $36,914
======= =======
</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.
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>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES:
Licenses.................................................. 63.4% 61.7% 56.3% 57.6%
Maintenance and services.................................. 36.6 38.3 43.7 42.4
----- ----- ----- -----
Total revenues.................................... 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of maintenance and services.......................... 17.0 11.0 18.4 12.4
Sales and marketing....................................... 48.4 46.6 55.9 48.0
Research and development.................................. 17.1 15.0 20.4 14.9
General and administrative................................ 14.4 16.8 16.2 18.0
Amortization of intangible................................ 15.9 -- 9.6 --
----- ----- ----- -----
Total operating expenses.......................... 112.8 89.4 120.5 93.3
----- ----- ----- -----
Operating income (loss)..................................... (12.8) 10.6 (20.5) 6.7
Interest income, net........................................ 3.3 1.7 3.6 2.2
----- ----- ----- -----
Income (loss) before provision for income taxes............. (9.5) 12.3 (16.9) 8.9
Provision for income taxes.................................. 0.2 0.7 0.8 0.6
----- ----- ----- -----
Net income (loss)........................................... (9.7)% 11.6% (17.7)% 8.3%
===== ===== ===== =====
</TABLE>
Total revenues for our second fiscal quarter ended September 30, 2000 were
$12.6 million compared to $11.3 million for the same quarter of the previous
year, an increase of approximately $1.3 million or 12%. Revenues attributable to
the direct sales channel in the quarter ended September 30, 2000 were 78% of
total revenues compared to 53% of total revenues for the same quarter last year.
Revenues from North America customers in the quarter ended September 30, 2000
represented 54% of total revenues compared to 61% of total revenues for the same
quarter last year. Total revenues for the six-month period ended September 30,
2000 were $20.9 million compared to $19.4 million for the same period of the
previous year, an increase of approximately $1.5 million or 8%. Revenues
attributable to the direct sales channel in the six-month period ended September
30, 2000 were 80% of total revenues compared to 58% of total revenues for the
same period last year. Revenues from North America customers in the six-month
period ended September 30, 2000 represented 55% of total revenues compared to
63% of total revenues for the same period last year. The increase in total
revenues in the current year quarter and six-month period over the same quarter
and six-month period last year, respectively, is due to closing more license
contracts and completing more billable consulting services in the current year
periods as compared with last year.
7
<PAGE> 10
License revenues were $8.0 million or 63.4% of total revenues for the
quarter ended September 30, 2000 compared to $7.0 million or 61.7% of total
revenues for the same quarter last year. License revenues for the six month
period ended September 30, 2000 were $11.8 million or 56.3% of total revenues
compared to $11.2 million or 57.6% of total revenues for the same period last
year. The increases in license revenues for the quarter and six-month periods
ended September 30, 2000 were primarily attributable to closing a greater number
of contracts and at a higher average price. Also, there continues to be
increased demand for the Company's products by new customers and existing
customers and more effective corporate marketing programs.
Maintenance and service revenues were $4.6 million or 36.6% of total
revenues for the quarter ended September 30, 2000 compared to $4.3 million or
38.3% of total revenues for the comparable quarter last year. Maintenance and
service revenues for the six-month period ended September 30, 2000 were $9.1
million or 43.7% of total revenues compared to $8.2 million or 42.4% of total
revenues for the comparable period last year. The increase in maintenance and
service revenues for the quarter and six month periods ended September 30, 2000,
is due primarily to the increased demand for our consulting and training
services associated with a growing customer base. Maintenance revenues have not
grown as much in the quarter ended September 30, 2000 compared with the same
quarter last year due primarily to the non-renewal of maintenance by Amdahl on
prepaid licenses which had not been relicensed to their 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 our
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 $2.1 million or 46% of maintenance and service revenues for the
quarter ended September 30, 2000 compared to $1.3 million or 29% of maintenance
and service revenues for the quarter ended September 30, 1999. Cost of
maintenance and services for the six-month period ended September 30, 2000 was
$3.8 million or 42% of maintenance and service revenues compared to $2.4 million
or 29% of maintenance and service revenues for the same period last year. The
higher cost of maintenance and services in the quarter and six-month periods
ended September 30, 2000, as compared to the same periods of the prior year, was
primarily due to an increase in personnel to handle the projected revenue growth
and the increased utilization of third party consulting firms. 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 as well as
to enable partners to implement projects for our customers.
Sales and marketing expenses consist primarily of salaries, related
benefits, commissions, travel, consultant fees, and other costs associated with
our sales and marketing efforts. Sales and marketing expenses for the quarter
ended September 30, 2000 were $6.1 million or 48.4% of total revenues as
compared to $5.3 million or 46.6% of total revenues for the same period last
year. Sales and marketing expenses for the six-month period ended September 30,
2000 were $11.7 million or 55.9% of total revenues as compared to $9.3 million
or 48.0% of total revenues for the same period last year. The increase in the
quarter and the six-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
six-month periods. We expect sales and marketing expenses to increase in future
periods to support the alliance agreement with Hewlett-Packard Company as well
as our growth plans.
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 were $2.2 million or
17.1% of total revenues for the quarter ended September 30, 2000 compared to
$1.7 million or 15.0% of total revenues for the same period last year. Research
and development expenses for the six-month periods ended September 30, 2000 and
September 30, 1999 were $4.3 million or 20.4% of total revenues and $2.9 million
or 14.9% of total revenues, respectively. The higher costs in the quarter and
six-month periods were due to an increase in personnel to handle the further
development of our products to operate on additional platforms. Though we
anticipate that we will continue to invest resources to further enhance and
develop our products we do not anticipate significant growth in research and
development expense in the remainder of the fiscal year.
8
<PAGE> 11
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 $1.8 million or 14.4%
of total revenues for the quarter ended September 30, 2000 compared to $1.9
million or 16.8% of total revenues for the same period last year. General and
administrative expenses for the six-month period ended September 30, 2000 were
$3.4 million or 16.2% of total revenues compared to $3.5 million or 18% of total
revenues for the same period of last year. The decrease in general and
administrative expenses in the current year quarter over the same quarter last
year is primarily due to lower legal fees associated with our patent
infringement litigation. We expect general and administrative expenses to
increase in the third fiscal quarter due to preparations for the trial for the
defense of our patent (See "Part II, Item 1. Legal Proceedings"), and in future
quarters as we build corporate infrastructure.
Interest income, net is comprised primarily of interest income earned on
our cash, cash equivalents and marketable securities adjusted for interest
expense, net foreign exchange gain (loss) and other financing expenses. Net
interest income was $425,000 and $751,000 for the quarter and six-month periods
ended September 30, 2000, respectively, compared to $195,000 and $432,000 for
the same periods of last year, respectively. Interest income increased for the
quarter and six-month periods ended September 30, 2000 due primarily to higher
average balances of cash, cash equivalents and marketable securities.
Provision for income taxes is primarily for federal, state and foreign
income taxes. For the quarter ended September 30, 2000 the provision is
approximately $27,000 compared to $80,000 in the same quarter last year. For the
six-month period ended September 30, 2000, the provision was approximately
$176,000 compared to $123,000 for the same six-month period of last year. The
decrease in the current year quarter as compared to the same quarter last year
is due to reporting a loss in the current year quarter as compared to income in
the same quarter last year. The increase for the six-month period ended
September 30, 2000 as compared to the same period last year is due to reporting
income in a European subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for the six-month period ended September 30, 2000
was $1.9 million compared to cash provided by operations of $1.4 million for the
same period last year. The decrease in cash provided by operations of $3.3
million for the six-month period ended September 30, 2000 compared to the same
period last year was primarily due to a reported net loss for the six-month
period.
As of September 30, 2000, we had working capital of $30.8 million including
$27.7 million of cash, cash equivalents and short-term marketable securities.
Through September 30, 2000, we had a revolving line of credit that permitted
unsecured borrowings up to $1.0 million. The line of credit expired. Alternative
credit facilities are being evaluated.
Property and equipment expenditures were $84,000 and $281,000 for the
quarter and six-month periods ended September 30, 2000, respectively. We had no
material commitments to purchase property and equipment at September 30, 2000
and we expect to purchase property and equipment throughout the remainder of the
fiscal year at a rate consistent with the prior fiscal year.
In October 2000, we announced our intention to repurchase up to 500,000 of
our outstanding common shares. The repurchases will be effected from
time-to-time and no time limit has been placed on the direction of the
repurchase program.
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, will be adequate to finance our
operations and the repurchase of our common shares for at least 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.
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<PAGE> 12
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
fiscal 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 $150,000 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 applications and platforms, operating systems and systems management
applications, or experience 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 us may contain undetected
errors or failures that, despite our significant testing, are discovered only
after a product has been installed and used by customers.
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<PAGE> 13
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. Our 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 our 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 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 six months ended September 30, 2000, 45% 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
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<PAGE> 14
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 and six month periods
ended September 30, 2000, no client accounted for more than 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 license revenues. We do not expect
Amdahl to renew maintenance on the unsold prepaid licenses it bought to
relicense to its customers.
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 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
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<PAGE> 15
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 attract
and 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 our products and market and sell our
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. Our future success will depend in large part upon our ability
to attract and retain additional highly skilled personnel. We are presently
searching for a number of senior management positions including President/Chief
Operating Officer. We may not be successful in attracting qualified candidates.
The inability to recruit and retain a President and other senior managers will
adversely affect the future success of Novadigm.
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. Though these currencies have been relatively
stable against the U.S. dollar for the past several years, they have generally
devalued against the U.S. dollar throughout 2000. 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, where currencies have
tended to fluctuate more relative to the U.S. dollar. There can be no assurance
that we will be able to develop effective hedging programs in the event of
material devaluation of European currencies relative to the U.S. dollar.
Continued devaluation of the currencies may 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
$542 thousand for the 6-month period ended September 30, 2000.
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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 September 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
On March 3, 1997, Novadigm filed a complaint alleging infringement of
Patent No. 5,581,764 by the "Castanet" electronic software distribution product
sold by Marimba, Inc. ("Marimba"). On July 30, 1999, Marimba filed a complaint
alleging that unspecified Novadigm products infringed Marimba's U.S. Patent No.
5,919,247. On November 10, 2000, Novadigm and Marimba signed a memorandum of
understanding settling their pending patent disputes, and each company has
agreed to dismiss their patent infringement lawsuit against the other party.
Under the settlement agreement, the terms of the settlement are confidential.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2000 Annual Meeting of Stockholders on September 15,
2000. The following matters were approved by the stockholders by the votes
indicated below:
<TABLE>
<CAPTION>
VOTES VOTES BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
a. Election of four directors to serve for the
ensuing year as follows:
Albion J. Fitzgerald........................... 14,336,337 -- 494,239 --
Robert B. Anderson............................. 14,337,613 -- 492,963 --
H. Kent Petzold................................ 14,220,013 -- 610,563 --
Deborah Doyle McWhinney........................ 14,337,683 -- 492,893 --
b. To approve and adopt the Company's 2000 Stock
Option Plan under which 1,500,000 shares of the
Company's Common Stock will initially be
reserved for issuance.......................... 8,306,613 2,690,837 7,601 3,825,525
c. To ratify the appointment of Arthur Andersen
LLP as independent auditors of Novadigm for the
fiscal year ending March 31, 2001.............. 14,789,708 30,855 10,013 --
</TABLE>
ITEM 5. OTHER INFORMATION
None
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
relating to the Alliance Agreement between Novadigm and Hewlett-Packard
Company entered into on June 30, 2000.
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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: November 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 NO. DESCRIPTION
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
