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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1996
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 Identification No.)
incorporation or organization)
185 BERRY STREET, SUITE 3515, SAN FRANCISCO, CA 94107
(Address of principal executive offices) (Zip Code)
(415) 541-8420
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on May 31,
1996, as reported on Nasdaq National Market was approximately $132,745,914
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliates status is not necessarily a conclusive determination for other
purposes.
On May 31, 1996, there were 17,445,946 shares of the registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Stockholders to
be held September 13, 1996.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................................... 3
Item 2. Properties.................................................................. 11
Item 3. Legal Proceedings........................................................... 12
Item 4. Submission of Matters to a Vote of Securities Holders....................... 12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.... 14
Item 6. Selected Financial Data..................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 16
Item 8. Financial Statements and Supplementary Data................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 21
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 21
Item 11. Executive Compensation...................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 21
Item 13. Certain Relationships and Related Transactions.............................. 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 22
SIGNATURES............................................................................. 24
POWER OF ATTORNEY...................................................................... 25
SIGNATURES............................................................................. 25
"Novadigm" and "Novadigm Enterprise Desktop Manager" are registered
trademarks of Novadigm, Inc., and "Enterprise Desktop Manager", "EDM: Manager,"
"EDM: Administrator," "EDM: Server," "EDM: Client" and "Cybervalet" are
trademarks of Novadigm, Inc. This filing also includes trademarks of companies
other than Novadigm Inc.
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PART I
This report includes a number of forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These forward looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "anticipates", believes", "expects", "intends", "future" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
ITEM 1. BUSINESS
Novadigm, Inc. ("Novadigm" or the "Company") is a provider of automated
software management solutions that reduce the cost and complexity of managing
enterprise client/server and internet computing environments. The Company's
products, collectively known as Enterprise Desktop Manager(TM) ("EDM"), automate
the "continuous configuration" of distributed software across thousands of
desktops and servers for medium and large organizations in the financial
services, government, transportation, telecommunications, healthcare, utilities
and other industries. The Company's solutions are highly scaleable and
interoperable, and therefore uniquely suitable for managing rapidly changing
business software across large distributed corporate and public networks.
Novadigm's patented technologies for software management allow for high levels
of automation in managing distributed software configurations, ensuring that the
right software is available to the right users at the right time without manual
intervention. Through Novadigm's professional services organization and network
of certified service partners, the Company provides customers with project
management, systems implementation and training services.
BACKGROUND
As data, networking, personal computing devices and software development
technologies have evolved over the last decade, the application of those
technologies to the information needs of medium and large enterprises have
changed significantly. In less than a decade, the core computing assets of these
organizations have moved out of the back office onto thousands of desktops and
into millions of homes. The data that fuels core information systems is now
distributed to users across lines of business and departments worldwide. More
computing power resides on user desktops than in data centers. And, the software
that runs the day to day operations of many businesses is now increasingly being
distributed to field operations and virtual offices to improve customer services
and time-to-market for new products.
This rapid evolution of distributed information technology ("IT") assets
has fundamentally altered the software management landscape. Today, there exists
a growing demand for automating the management of distributed software that,
much like distributed data management in the 1980s and distributed
network/systems management in the early 1990s, require new technologies and
approaches to reduce the cost and complexity of administration and increase the
reliability, serviceability and availability of managing this strategic IT
asset. To support these emerging needs, software management solutions have
evolved rapidly from host-centric tools that address only the datacenter model
of computing to distributed, object-based management environments that are
capable of addressing the unique scale and dynamic nature of the new models of
client/server and internet computing.
The relatively standardized information technology of the 1980's was
characterized by centralized mainframe data centers supporting
business-critical, transaction-based applications (the "datacenter model").
However, as a result of the increasing power and declining cost of computing and
networking technologies, the datacenter model gave way to a new enterprise-wide
computing model characterized by widely distributed, heterogeneous
infrastructures supporting desktop, workgroup and client/server applications
deployed across PCs, departmental and enterprise servers (the "client/server
model"). As processing power increasingly moved to the individual, large-scale
networks that support information retrieval from distributed databases and
business-to-business or business-to-consumer applications have increasingly
become a focal point of
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computing, providing far ranging access through PCs to information residing on
thousands of servers (the "internet model").
These shifts in corporate computing are precipitating corresponding shifts
in the management software that enables IT administrators and IT service
providers to control the operational characteristics of their network computing
environments. In the datacenter model, management software focused on managing
the data and related network equipment with the principal goals of efficiency,
reliability, availability and serviceability. In contrast, the client/server and
internet models present many challenges that datacenter management software was
not intended to address. These challenges include the distributed nature of the
environments, which may include thousands of users deployed across widely
dispersed geographical locations; a heterogeneous computing environment
involving multiple platforms, network protocols, applications, systems software
and databases that may vary significantly within a particular location or user
group; and the high rate of change to contents and configurations that are
inherent within distributed computing environments.
As organizations move their business-critical applications from mainframes
with a single shared copy of systems software and application programs to
distributed environments with different copies of the systems software and
application programs on each desktop, software deployment and change management
have emerged as new and critical needs. To meet these needs, information
management professionals must focus on a new class of "software management"
capabilities that automate the process of installing applications on distributed
servers and desktops based on current user configuration requirements, available
versions and enterprise policies for access. Once client/server or
internet-based applications are installed, this "configuration" process must be
complemented with an equally automated "change" process to adjust user contents
based on changes in software versions, desktop environments and access or
licensing policies.
In response to these new software management needs, many vendors have
responded by introducing an assortment of electronic software distribution
("ESD") products to market. Typically provided as a component of a suite of
systems management solutions, these products are generally based on
point-to-point file transfer technology together with an automated central
scheduling program that directs the file transfer "events" to the proper user or
workgroup, and a procedural "scripting" language to perform installation
procedures when the file arrives at the identified destination. The
implementation of these ESD products is typically dependent upon an IT
administrator who must create or modify lists of specific users and
corresponding lists of files to be sent to such users, and who must script
programs to control and customize the installation of the files once they reach
their identified destination. In small, relatively simple networks with low
rates of change, this "list/event" approach is a superior alternative to manual
software installation. However, the time, complexity and cost of implementing
the list/event approach increases dramatically in large distributed computing
environments. Rather than automating the complex processes necessary for
management of the distributed applications on client desktops and servers,
typical ESD products simply automate the transportation events for individual
components. As a result, the use of ESD products technology still requires an IT
administrator to manually perform the configuration, change and policy
activities needed to prepare the list and event input required for file transfer
control and installation. These "semi-automated" activities become impracticable
to perform properly when applied to the number of desktops, servers and
applications required even by medium-sized distributed computing environments.
More recently, systems management vendors who specialize in other more
traditional systems management activities have attempted to solve the software
management problem by including conventional ESD technologies in their product
"suites." However, these suites, which were typically designed to automate and
integrate "event-oriented" systems management processes such as alert handling,
problem tracking, and performance monitoring continue to rely on conventional
ESD technologies and therefore remain subject to the limitations inherent in a
list/event-based solution. These limitations principally include a high level of
manual configuration, change and policy activities by IT administrators,
particularly in medium to large distributed computing environments, as well as
the attendant costs and delays -- and ultimately, impracticability -- associated
with this degree of manual intervention.
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In view of these fundamental limitations of ESD products, the Company
believes that the widespread adoption of the client/server and internet model in
medium and large organizations requires software management technologies that
effectively addresses process automation, scale, complexity and heterogeneity.
This technology must be highly adaptable to the customer's existing base of
installed computing platforms, systems management tools and application
development processes and must be scaleable to support large distributed
computing environments. This technology must also be easily extensible to new
platforms, management tools and development technologies to facilitate the
orderly and timely adaptation of customer IT infrastructures and applications to
dynamic business needs and IT opportunities.
THE NOVADIGM SOLUTION
The Company offers an automated solution to software management for
organizations with complex distributed computing environments. Novadigm's EDM
manages the deployment and ongoing change management of distributed applications
with an integrated suite of software applications that enable systems
administrators to automatically deploy and synchronize software components
residing on thousands of distributed desktops and servers. The suite includes
configuration management, change management, version management, distribution
management, security management and asset management applications. The Company's
products are highly scaleable and are designed to allow IT professionals and IT
service providers to effectively manage complex software configurations across
large-scale public and private networks.
The following are key attributes of the EDM solution that distinguish EDM
from other software management products:
Inherently object-oriented. EDM addresses the challenges of the
client/server and internet models of computing through the use of
object-oriented technology, a technique by which software "objects" --
collections of data and procedures for processing that data -- are used as
building blocks to model real-world objects and systems. The use of
object-oriented technology throughout the EDM infrastructure and
applications allows all EDM activities to be controlled on a fully
automated basis from a single integrated enterprise "object model" of an IT
environment. This object model organizes and contains within the objects
comprising the model all information concerning how activities are
performed and objects are implemented. As a result, extremely large and
complex configurations of software components can be automatically deployed
and maintained across all EDM-supported "client" platforms simply by
connecting related icons. This inherently object-oriented foundation of EDM
differs fundamentally from the "object-based" technology used by many
systems management vendors offering ESD products. This object-based
approach typically confines the object orientation to a graphical user
interface that is placed in front of non-object-oriented processes, thus
failing to enable the efficiencies and automation that characterize EDM.
Configuration and change automation. Software program versions
specific to the individual client environment are automatically distributed
and installed as dictated by administrative requirements. As program
versions and client environments change, affected clients are reconfigured
and adjusted to correspond to all of the changes, thus automating
administrative processes while continuously verifying the accuracy of
client configurations.
Policy control and auditability. EDM's use of object technology for
policy-based control allows customers to efficiently and concisely define
and maintain policies controlling the deployment of software to authorized
clients. For example, an IT administrator may implement an enterprise-wide
policy permitting access to certain financial databases only to a selected
workgroup within an organization's finance department. Changes to policies
implemented within EDM or derived by EDM from external sources cause
components to be automatically installed or de-installed on all affected
clients. Administrative control over any EDM object can be distributed as
appropriate to designated users across a customer's organization, thus
ensuring that only authorized persons can change usage policies or
application components.
Scalability and performance. EDM's patented "distributed object
differencing" technology automatically calculates the effects of policy,
component and client environment changes upon each client
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platform, and in connection with each calculation, automatically transports
only the changed software components for each client. Object differencing
eliminates the manual listing and scripting activities required by the ESD
approach, where administrators must either calculate and program the effect
of changes on each desktop, or assume that all changes must be sent to
every desktop, with resulting impact on network traffic (as well as on
reliability and auditability, since that assumption is usually incorrect).
Once the object differencing process has calculated the precise changes
needed by each desktop, EDM's distributed object transport allows
transported components to be automatically "cached" at multiple locations
and transported using a combination of network protocols simultaneously to
further optimize network performance.
The Company believes that its technology and products establish a new
standard for software management and provide its customers with an effective
means for managing enterprise client/server and internet computing environments.
The Company also believes that the technology embodied in the Company's EDM
products provides significant improvements over the list/event approach used by
many systems management vendors of ESD products. These improvements include the
complete automation of the deployment and ongoing change management requirements
of distributed software, enhanced scalability to support the high number of
servers and desktops found in large organizations and significant reductions in
cost through elimination of manual installation and administration procedures,
with resulting high levels of enterprise-wide system reliability, availability,
serviceability and auditability.
THE NOVADIGM STRATEGY
The Company's objective is to be the leading provider of automated software
management solutions to medium and large organizations that are implementing new
software for the client/server and internet models of computing. Key components
of the Company's strategy are to:
Maintain Technology Leadership. The Company has developed a unique
"object differencing" technology for software management that the Company
believes distinguishes its products from those of other vendors. The
Company's products are object-oriented throughout and incorporate the
patented technologies to enable a highly automated, scaleable
infrastructure for managing the initial deployment and ongoing maintenance
of enterprise applications. The Company plans to continue investing
significant resources in research and development, both to enhance the
features and functionality of its existing EDM product base and to develop
new products.
Focus on Software Management. The Company sells an integrated suite
of software management products that enable system administrators to
automatically deploy and synchronize software components that reside across
large-scale private and public networks. The Company's software management
suite includes configuration management, change management, version
management, distribution management, security management and asset
management. The Company intends to continue to concentrate on exploiting
the product strengths of EDM in complex distributed environments and to
develop enhancements and new applications that are responsive to the
software management needs of medium and large organizations.
Focus on Interoperability. The Company's products distribute software
management services across more than a dozen enterprise computing
platforms, including server platforms such as AIX, HP-UX, MVS, NCR, SUN,
Novell, OS/2, NT, and Web servers; and desktop platforms such as Windows,
Windows95, Windows NT, DOS, OS/2, AIX, SUN, HP-UX, NCR, Macintosh, Novell
and internet desktops. Information between components is communicated
through TCP/IP, SNA, IPX, and NetBIOS protocols. The Company's strategy is
to continue to port its products to new platforms and protocols and to
integrate them with systems management applications of other vendors.
Because substantially all of the software code for EDM is common across all
operating environments, the Company can typically complete a port of EDM to
a new operating system platform within several months. The Company intends
to continue porting EDM to major platforms used by its customers. See
"Products."
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Expand Multiple Channels of Distribution. In order to penetrate the
global market for software management, the Company has established multiple
channels of distribution: a direct field sales organization of
telemarketers, sales professionals, presentation specialists, account
managers and field systems engineers, and indirect sales channels of OEMs,
VARs, systems integrators, distributors and smaller resellers. The
Company's strategy is to expand these channels of distribution, with
particular emphasis on indirect channels both domestically and
internationally, including distributors in key foreign markets.
PRODUCTS
The Company's EDM solution includes a distributed, object-oriented
management platform, a suite of software management applications, and a set of
customer 'Adapters' for integrating development, applications management and
network/systems management environments. Combined, the environment automates the
management of distributed software across thousands of desktops and servers for
organizations with heterogeneous platforms and diverse application requirements.
The EDM Software Management Suite is comprised of six integrated
applications: Configuration Management, Change Management, Version Management,
Distribution Management, Security Management and Asset Management.
Configuration Management. Enables systems administrators to assign
software and services to individual users or workgroups by "connecting"
them as related objects. EDM automatically decides "who gets what"
according to defined enterprise management policies, job functions,
geographic differences and hardware configurations. This process replaces
the need for manual desktop setup procedures.
Change Management. Automates the process of identifying, packaging,
delivering and controlling versions of configuration updates to the
desktop. When an application component, management policy or client desktop
environment changes, EDM uses "object differencing" technology to
synchronize changes automatically at the object level, thereby ensuring
that actual desktop contents conform to authorized configurations.
Version Management. Integrates configuration and change management
together with application development activities that generate new versions
of software programs, providing the automatic deployment of new versions of
programs without manual intervention.
Distribution Management. Integrates the configuration and change
management process by providing facilities to transport, install or
de-install, activate, synchronize, present and execute new or changed
applications on the desktop automatically according to authorized
configurations. Object-oriented (as opposed to file-oriented) transport
methods make the distribution process conceptually easier by permitting the
encapsulation of files or application scripts into objects.
Security Management. Ensures that enterprise security policies are
taken into account when controlling sessions on, or distributing software
applications to, client desktops. Using direct interfaces to existing
enterprise security packages, EDM eliminates the need for manual,
list-based security processes or third-party PC security alternatives.
Asset Management. Provides facilities for auditors, license
administrators or help-desk support personnel to audit desktop contents on
a periodic or on-demand basis. Inventory reports can be generated by user,
workgroup, department or enterprise-wide, eliminating the need for manual
desktop inventory procedures.
The EDM management platform is comprised of four integrated components:
EDM:Manager, EDM:Administrator, EDM:Server and EDM:Client.
EDM:Manager is the central component of EDM. A multi-domain object
repository and engine, EDM:Manager configures and synchronizes distributed
objects -- application components, desktop configurations, policy
relationships -- across the enterprise. Using EDM:Administrator, EDM:Manager's
central
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database repository, stored on an enterprise server, is configured to
automatically manage the transfer of objects to and from EDM:Server environments
and EDM:Client desktops.
EDM:Administrator is an object-oriented systems management facility that IT
administrators use to configure EDM:Manager. EDM:Administrator's graphical user
interface ("GUI") makes it easy to work with the objects stored on EDM:Manager's
central repository. IT administrators drag and drop object icons to change
desktop configurations, to distribute new versions of software applications or
to establish or revise access policy relationships.
EDM:Server is a multi-purpose, intermediate object server for coordinating
the management of EDM:Client desktops. Residing on a local-area or department
network, EDM:Server enables a multi-tiered distribution environment, accessing
and staging distributed software configurations from the EDM:Manager on
distributed platforms and using high-speed LAN communications to update
EDM:Client desktops.
EDM:Client provides an object-oriented environment for configuring and
changing distributed software components at the desktop. Operating as an
extension of the PC operating environment, EDM:Client automatically discovers
current desktop contents and synchronizes application versions with new or
updated configurations residing on EDM:Server or EDM:Manager.
EDM is distributed across 13 computing platforms:
COMPONENT PLATFORMS
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EDM:Manager........... AIX, HP-UX, MVS, SUN, NCR, NT, OS/2
EDM:Administrator..... Windows, Windows95, Windows NT, OS/2, AIX, HP-UX, SUN,
NCR, and Macintosh
EDM:Server............ Novell, AIX, HP-UX, SUN, NCR, NT, OS/2
EDM:Client............ Windows, Windows95, Windows NT, OS/2, DOS, AIX, HP-UX,
SUN, NCR, Macintosh, Novell, Internet
Communication between components is supported through a variety of
protocols, including TCP/IP, SNA, IPX, and NetBIOS.
Extensions for EDM ("EDM Adapters") allow customers, systems integrators
and independent software vendors ("ISVs") to incorporate development, systems
management and desktop tools into the EDM environment. EDM Adapters are now
available for products such as A+ESM (Amdahl), ClearCase (Atria), PVCS
(Intersolv), AR System (Remedy), NetView, CID and TME (IBM), OpenView (HP),
PowerBuilder (Powersoft), Developer/2000 (Oracle), New Era (Informix), NatSys
(Nat Systems), ACF/2 and Top-Secret (Computer Associates), ARGIS (Janus
Technologies), and SMS (Microsoft) as well as a wide variety of desktop tools
from major PC vendors, including Microsoft Office and Lotus SmartSuite. With the
EDM Adapters, these products are easily integrated as objects in the EDM:Manager
central repository, automatically integrated into EDM's 'continuous
configuration' process for deploying software, and managed enterprise-wide from
an EDM:Administrator workstation using simple GUI "drag and drop" connections.
CUSTOMERS AND APPLICATIONS
The Company's principal customers include medium to large business
organizations with widely deployed and complex client/server and internet
computing environments. As of March 31, 1996, the Company's EDM products had
been directly licensed by the Company to 67 customers, and had been licensed
through the Company's OEM and distributor relationships to 13 customers.
During fiscal 1996 the Company had two customers, each who accounted for
over ten percent of the total revenues. Amdahl Corporation ("Amdahl"), an OEM
and distributor of the Company's products (see "Sales and Marketing"), accounted
for approximately 39.8% of total revenues for fiscal 1996, and the International
Business Machines Corporation ("IBM") (see "Customer Service and Support"),
accounted for approximately 11.6% of the Company's revenues for fiscal 1996.
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SALES AND MARKETING
The Company markets its software and services through its direct sales
force, both in the United States and Europe, and through its indirect channels
comprised of OEMs, VARs, systems integrators and distributors throughout the
world. The Company's direct sales activities in North America are managed from
the Company's offices in Mahwah, New Jersey; its indirect sales activities are
managed from the Company's offices in San Francisco, California; and its
European direct sales activities are managed from the Company's facilities in
Paris, France. For fiscal 1996, revenues from direct and indirect sales
accounted for 55.6% and 44.4%, respectively, of total revenues, and revenues
from domestic and international sales accounted for 79.3% and 20.7%,
respectively, of total revenues.
The Company's direct sales activities in North America emphasize direct
contact of target customers by an experienced sales force supported by both
in-house and outside contracted telemarketing support services. The North
America direct sales organization includes a qualified staff of system engineers
to provide pre-sale and post-sale support services.
The Company's direct sales activities in its European markets have
emphasized improvements in the identification and generation of qualified
prospective customer leads at the beginning phase of the sales cycle through
concentration on directed telemarketing and teleprospecting activities. The
leads generated from the tele-business force, consisting of Company employees,
are given to the Company's sales organization, which is divided into specialized
teams of presentation specialists, account managers and post-sales systems
engineers that work together to provide an integrated "solution selling"
approach to the customer. These teams work with local partners retained by the
Company and trained as "Novadigm Certified Partners" ("NCPs"). The NCPs are
assigned the principal responsibility of providing post-sale training, support,
maintenance and service. The Company believes that the sales strategies and
practices implemented for its European markets have been effective in
establishing a market presence for the Company's products.
The Company's indirect channel organization is based on business
arrangements with OEMs, VARs, systems integrators and distributors which are
selected and trained by the Company to provide marketing and post-sale support,
maintenance and service for the Company's products. These business arrangements
are also useful to the Company in identifying product enhancements and
developments that are responsive to customer and market requirements. The
Company believes that it has been successful in minimizing marketing conflicts
between its direct and indirect sales channels.
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 provides for Amdahl to pay the
Company $8 million in non-refundable, guaranteed sublicense fees in quarterly
installments during the first year of the agreement. Continuation of the
agreement beyond the first year requires Amdahl to pay $4 million in non-
refundable, guaranteed sublicense fees in each of the subsequent two years.
There can be no assurance that Amdahl will extend this agreement beyond the
first year. The Company recognized $7.4 million in guaranteed sublicense fees in
fiscal 1996.
The Company to date has concentrated on establishing a market for its
products in the North America, Europe, and Japan. As part of the Company's
strategy to expand its direct and indirect channels of distribution, the Company
initiated expansion plans in the rest of the Pacific Rim as well as in Latin
America.
The marketing activities of the Company are designed to generate qualified
leads and to supply the Company's sales channels with positioning, presentation
materials, and product collateral to help generate and develop qualified
customer prospects. Lead generation activities include seminars, trade shows,
direct mailers, advertising and public relations activities.
CUSTOMER SERVICE AND SUPPORT
The Company offers a range of support programs and services that complement
the Company's automated software management products. The Company believes that
its support programs and services are
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critical to providing customers with solutions that reduce the cost and
complexity of managing hundreds or thousands of distributed desktop
environments.
The Company provides all customers with telephone hotline, fax and E-mail
access to its technical support staff, with additional support provided by the
Company's NCPs, VARs, systems integrators and OEMs. The Company's technical
support staff not only provides assistance in diagnosing problems, but works
closely with customers to address systems implementation and integration issues
and assists in increasing the efficiency of their enterprise systems. The
Company also maintains a network bulletin board of custom EDM procedures,
enhancements and maintenance that can be browsed and downloaded.
The Company offers regional and on-site training programs covering object
technologies and EDM implementation strategies to its customers, NCPs, VARs,
OEMs, systems integrators and distributors.
The Company's professional services organization and a growing number of
independent certified EDM service providers are available to consult with
customers on project planning and systems implementation and integration.
Revenues from services accounted for 25% of fiscal 1996 total revenues.
During fiscal 1996 the Company entered into an agreement with IBM which
provides payment for services rendered in prior periods and for ongoing
consulting and support for a research project through March 1997, and the
resolution of outstanding business disputes.
PRODUCT DEVELOPMENT
Since its inception, the Company has emphasized and made substantial
investments in product development. In fiscal years 1994, 1995 and 1996, the
Company's total research and development expenses were approximately $3.2
million, $3.3 million and $4.4 million, respectively. To date, the Company has
not capitalized its software development costs.
The Company anticipates that in the future, it will continue to commit
substantial resources to research and development. The Company believes that its
future success will depend in large part on its ability to maintain and enhance
the functionality of its current line of products and to develop and introduce
new products that keep pace with technological developments, achieve market
acceptance and respond to an ever-expanding range of customer requirements. The
Company intends to enhance its existing product offerings and to introduce new
products for the enterprise systems management market. In developing these new
products and product enhancements, the Company makes extensive use of its own
development tools and object-oriented technology. Although the Company expects
to develop certain of its new products and product enhancements internally, the
Company may acquire technology and/or products from third parties or consultants
when considerations of time or cost dictate.
If the next release of EDM or any potential new products and enhancements
do not achieve market acceptance, or if for technological or other reasons, the
Company is unable to develop, introduce and sell its products in a timely
manner, the Company's business operating results will be materially and
adversely affected.
COMPETITION
Competition in the software management market is rapidly evolving. Current
and prospective competitors of the Company generally fall into two categories:
(i) hardware and ISV management tools vendors, including IBM, Hewlett Packard
Company and Computer Associates International, Inc. who offer tactical ESD tools
as components of their network/systems management suites; and (ii) vendors of
workgroup and LAN-based ESD products, such as Microsoft Corporation, Symantec
Corp., and McAfee, Inc. Most of the Company's competitors have longer operating
histories than does the Company, and many have significantly greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and larger customer installed bases.
The Company believes that it competes effectively in the software
management market on the basis of technological innovation, product
functionality and features, product quality and reliability, ease of product
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adoption and use, corporate and product reputation, end-user support and price.
However, there can be no assurance that the Company will be able to continue to
compete effectively in the software management market or that its profitability
or financial performance will not be adversely affected by increased
competition. Moreover, there can be no assurance that either existing or new
competitors will not develop products that are superior to the Company's
products or other technologies offering significant advantages over the
Company's technology, which could have a material adverse effect on the
Company's operating and financial results.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company has filed one United States patent application covering the
'continuous configuration' process used in the Company's enterprise software
management products. The Company has received a "Notice of Allowance" from the
U.S. Patent Office for its application and expects the patent to be issued.
There can be no assurance that the Company will develop additional proprietary
technologies that are patentable, that any issued patent will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. Moreover, there can be no assurance that
protective measures taken by the Company will prevent misappropriation of its
proprietary technology, and such measures may not preclude competitors from
developing products with features similar to those of the Company's products.
Furthermore, effective copyright and trade secret protection may be limited or
unavailable under the laws of certain foreign jurisdictions. The Company also
relies on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures, contractual provisions and technical measures to
protect its proprietary rights in its products.
Although the Company believes that its products and trademarks do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company with
respect to current or future products. Any such claims, whether with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or license
agreements, provided such agreements were available on reasonable terms or at
all.
Defense of any lawsuit or failure to obtain any required license could have
a material, adverse effect on the Company's business, operating results and
financial condition. The Company believes, however, that given the rapid pace of
technological change in the industry, factors such as the technical expertise,
knowledge and innovative skill of the Company's management and technical
personnel, the Company's name recognition, the timeliness and quality of the
support services it provides and its ability to offer frequent product
enhancements and to develop, introduce and market new products are more
significant in maintaining the Company's competitive technology leadership
position.
EMPLOYEES
As of March 31, 1996, the Company had a total of 149 employees, including
49 in product development, 87 in sales and marketing and 13 in general and
administration. A total of 116 employees are based in the United States and 33
employees are based in Europe. None of the Company's employees is represented by
a labor union. The Company has not experienced work stoppages and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
The Company conducts its operations in the North America principally out of
its facilities in Mahwah, New Jersey, Lisle, Illinois and San Francisco,
California, and in Western Europe out of its facilities in Paris, France. The
Company occupies approximately 17,635 square feet at its New Jersey facilities,
which are used principally for product development, and sales and support;
approximately 4,153 square feet in Illinois, which is used primarily for
marketing, and sales and support; and approximately 1,800 square feet at its
California facilities, which are used principally for financial and
administrative functions. The Company's facilities in France are comprised of
approximately 8,729 square feet and are used to support the Company's European
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operations. The Company also has sales and support offices in Dallas, Los
Angeles, Phoenix, and Bethesda, Maryland.
ITEM 3. LEGAL PROCEEDINGS
On February 15, 1996, a complaint was filed in the U.S. District Court of
Northern California, against the Company for trademark infringement and unfair
competition. The complaint, among other things, seeks to restrain and enjoin the
Company from using its registered trademark, "Novadigm" as well as unspecified
monetary damages. The Company does not believe it has any liability with respect
to the claims involved in the dispute. The Company's insurance carrier has
notified the Company that under its policy it will indemnify the Company for
damages and legal costs up to the policy limits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers as of March 31, 1996, are as follows:
OFFICER
NAME AGE POSITION SINCE
- - ------------------------------ --- ---------------------------------------------------- -------
Albion J. Fitzgerald.......... 47 Chairman of the Board, Chief Executive Officer, and 1992
President
Robert B. Anderson............ 40 Executive Vice President, Chief Operating Officer, 1992
Secretary and Director
Wallace D. Ruiz............... 44 Vice President, Finance, Treasurer and Chief 1995
Financial Officer
Robert Ernens................. 39 Managing Director, Europe 1994
Joseph J. Fitzgerald(1)....... 34 Director of Development 1992
Michael P. Conti.............. 40 Vice President, North America Sales 1994
Thomas V. Harmon.............. 49 Vice President, Operations 1995
Stuart A. Jacobson............ 38 Vice President, Indirect Channels 1994
Philip J. Myers............... 37 Vice President, Marketing 1993
- - ---------------
(1) appointed to Vice President of Development effective June 7, 1996.
Albion Fitzgerald co-founded the Company in February 1992, serving as
Chairman since that time, and currently as Chief Executive Officer and
President. Mr. Fitzgerald has previously served as Chief Technology Officer. In
May 1990, Mr. Fitzgerald founded Fitzgerald Associates, the Company's
predecessor, and served as the chief architect in the development of EDM
technology. From 1988 to 1990, Mr. Fitzgerald was Director of Advanced
Technology for Pansophic Systems, Inc., a manufacturer of systems and
applications software. Mr. Fitzgerald founded and served as President of
ASI/TeleMetrix, Inc., from 1985 to 1988, and was the chief architect of
Teleview, a session manager product.
Robert Anderson joined the Company in June 1992 and currently serves as
Executive Vice President, Chief Operating Officer, Secretary and as a director.
From 1990 to 1992, Mr. Anderson served as Senior Vice President at Stratagem, an
investment banking firm specializing in mergers, acquisitions and divestitures
in the software industry. Prior to Stratagem, Mr. Anderson was employed as a
Vice President in the Corporate Finance Software Specialty Group at Sutro &
Company.
Wallace Ruiz joined the Company in May 1995 as Vice President, Finance,
Treasurer and Chief Financial Officer. From September 1993 until joining the
Company, he was Vice President, Treasurer and Chief Financial Officer of Unisa
Holdings, Inc., a designer, marketer, and retailer of women's fashion
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footwear. From June 1989 until August 1993, Mr. Ruiz was employed as Vice
President and Chief Financial Officer of L. Luria & Son, Inc., a publicly held
retail chain. Mr. Ruiz is a Certified Public Accountant. He is the
brother-in-law of Albion Fitzgerald.
Robert Ernens has served as Managing Director of Novadigm Europe, SARL, a
wholly-owned subsidiary of Novadigm, Inc. in Europe, since January 1994. Prior
to joining the Company, Mr. Ernens served from August 1992 until December 1993
as an advisor to the board of Acme On Software SA, a French based system
software distribution company that he founded in 1990. From August 1990 until
July 1992, he served as Managing Director of Goal Systems International, the
subsidiary of Goal Systems Inc., a publicly held software company. From April
1989 to July 1990, he served as General Manager of three subsidiaries of
Econocom International, a privately held European leasing company and from
September 1986 until March 1989, Mr. Ernens served as Vice President of Sales
for the IBM Systems Software Division of Computer Associates France, the French
subsidiary of Computer Associates International, Inc., a publicly held software
company.
Joseph Fitzgerald co-founded the Company in February 1992. Since that time
he has served as Director of Development. From May 1988 until November 1991 he
was employed by Pansophic Systems, Inc. as a Senior Architect. Prior to joining
Pansophic he worked for ASI/Telemetrix Inc., a software company, for eight
years, most recently as a Senior Developer. Mr. Fitzgerald is the brother of
Albion Fitzgerald.
Michael Conti joined the Company in July 1994 as Vice President of North
American Sales. For one year prior to joining the Company, he was Vice
President, Sales of Image Business Systems, a start-up imaging company. Prior to
that he spent four years as a regional vice president for Intersolv, Inc., a
publicly held software company.
Thomas Harmon joined the Company as Vice President, Operations, in April
1995, after eighteen months directing Novadigm operations projects as a
management consultant. From October 1988 through May 1993, Mr. Harmon was an
independent management consultant at Montefiore Medical Center where he directed
a project to implement major new clinical and financial systems. From October
1980 through October 1988, Mr. Harmon served as Director of New York
University's computing center, managing NYU's business and administrative
computing as well as implementing and operating the University-wide network. In
prior years, Mr. Harmon served as Associate Director -- Long Range Planning at
NYU Medical Center, and managed accounts in the Corporate Banking Group at
Citibank.
Stuart Jacobson joined the Company in August 1994 and currently serves as
Vice President, Indirect Channels. Prior to joining the Company, Mr. Jacobson
served as Managing Director, International and General Manager Worldwide
Distribution for ViewStar Corporation, a private document management work flow
software vendor. Mr. Jacobson has also held various sales and management
positions at Oracle Corporation since 1986, including Group Manager of Asia
Pacific Operation.
Philip Myers joined the Company in December 1993 as Vice President,
Marketing after having supported the Company's initial product launch as a
marketing consultant since October 1992. From November 1991 through December
1993, Mr. Myers was President of Marketing Strategic Services, a marketing
consulting firm. From October 1990 to November 1991, Mr. Myers served as Vice
President of Marketing and General Manager of the workstation line of business
at Pansophic Systems, Inc. From February 1987 to October 1990, Mr. Myers was
employed as a Director of Product Marketing at Viasoft, a CASE re-engineering
software company
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's stock has been traded on the Nasdaq National Market since the
Company's initial public offering on July 13, 1995 under the Nasdaq symbol NVDM.
The following table sets forth, for the periods indicated, the high and low
closing sales prices for the Company's common stock as reported by Nasdaq:
FISCAL YEAR ENDED MARCH 31, 1996 HIGH LOW
------------------------------------------------------------ ---- ----
Second Quarter.............................................. $24 $16 3/8
Third Quarter............................................... $28 1/2 $15 1/8
Fourth Quarter.............................................. $30 1/4 $12
As of March 31, 1996, there were approximately 92 holders of record of the
Company's common stock.
The Company has never paid cash dividends on its common stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
NOVADIGM, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
------------------------------------------------
FY92(1) FY93 FY94 FY95 FY96
------ ------- ------- -------- -------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues
Licenses.................................... $ -- $ -- $ 1,044 $ 8,488 $18,775
Services.................................... -- -- 82 840 6,241
------ ------- ------- -------- -------
Total revenues............................ -- -- 1,126 9,328 25,016
------ ------- ------- -------- -------
Operating Expenses:
Cost of services............................ -- -- 34 344 2,630
Sales and marketing......................... -- 530 2,347 5,706 10,961
Research and development.................... 29 1,088 3,222 3,338 4,426
General and administrative.................. 42 270 474 1,392 3,230
Compensation charge related to escrow
shares.................................... -- -- -- 18,900(2) --
------ ------- ------- -------- -------
Total operating expenses.................. 71 1,888 6,077 29,680 21,247
------ ------- ------- -------- -------
Operating income (loss)........................ (71) (1,888) (4,951) (20,352) 3,769
Interest income and other, net................. -- 22 52 122 1,428
------ ------- ------- -------- -------
Income (loss) before provision for income
taxes....................................... (71) (1,866) (4,899) (20,230) 5,197
Provision for income taxes..................... -- -- -- -- 160
------ ------- ------- -------- -------
Net income (loss).............................. $ (71) $(1,866) $(4,899) $(20,230) $ 5,037
====== ======= ======= ======== =======
Net income (loss) per common share............. $(0.02) $ (0.18) $ (0.38) $ (1.40) $ 0.28
====== ======= ======= ======== =======
Weighted average common and common share
equivalents................................. 3,403 10,351 13,060 14,424 17,916
MARCH 31,
------------------------------------------------
FY92 FY93 FY94 FY95 FY96
------ ------- ------- -------- -------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 528 $ 2,008 $ 2,249 $ 1,012 $13,361
Working capital................................ 444 1,853 2,091 3,879 29,831
Total assets................................... 636 2,245 3,148 6,560 50,132
Deferred revenue............................... -- -- 248 871 4,509
Long-term obligations.......................... -- -- -- -- --
Stockholders' equity........................... 551 2,015 2,220 4,066 42,522
- - ---------------
(1) Period from February 18, 1992 (date of inception) to March 31, 1992
(2) Represents a non-recurring, non-cash compensation charge incurred upon the
achievement of certain cash flow requirements under an escrow arrangement
imposed on founder's shares in connection with the Company's public offering
on the Vancouver Stock Exchange in September 1992. See Note 6 of Notes to
Consolidated Financial Statements.
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NOVADIGM, INC.
QUARTERLY FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- --------- -------- --------- -------- ---------
Revenues:
Licenses........................... $ 616 $ 1,397 $2,488 $ 3,987 $3,521 $ 4,697 $4,747 $ 5,810
Services........................... 102 112 244 382 948 667 2,250 2,376
------- ------ ------ -------- ------ ------ ------ ------
Total revenues................... 718 1,509 2,732 4,369 4,469 5,364 6,997 8,186
Operating expenses:
Cost of services................... 47 49 100 148 271 231 891 1,237
Sales and marketing................ 960 1,215 1,493 2,038 2,352 2,758 2,789 3,062
Research and development........... 645 773 1,104 816 933 1,116 1,085 1,292
General and administrative......... 330 299 336 427 463 703 1,125 939
Compensation charge related to
escrow shares.................... 18,900
------- ------ ------ -------- ------ ------ ------ ------
Total operating expenses......... 1,982 2,336 3,033 22,329 4,019 4,808 5,890 6,530
------- ------ ------ -------- ------ ------ ------ ------
Operating income (loss).............. (1,264) (827) (301) (17,960) 450 556 1,107 1,656
Interest income and other, net....... 7 10 28 77 23 371 545 489
------- ------ ------ -------- ------ ------ ------ ------
Income (loss) before provision for
income taxes....................... (1,257) (817) (273) (17,883) 473 927 1,652 2,145
Provision for income taxes........... 13 23 60 64
------- ------ ------ -------- ------ ------ ------ ------
Net income (loss).................... $(1,257) $ (817) $ (273) $(17,883) $ 460 $ 904 $1,592 $ 2,081
======= ====== ====== ======== ====== ====== ====== ======
Net income (loss) per common share... (0.09) (0.06) (0.02) (1.21) 0.03 0.05 0.09 0.11
Weighted average common and common
share equivalent(s)............... 13,946 14,372 14,536 14,825 16,124 18,317 18,713 18,685
AS A PERCENTAGE OF TOTAL
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- --------- -------- --------- -------- --------- -------- ---------
Revenues:
Licenses........................... 85.8% 92.6% 91.1% 91.3% 78.8% 87.6% 67.8% 71.0%
Services........................... 14.2 7.4 8.9 8.7 21.2 12.4 32.2 29.0
------- ------ ------ -------- ------ ------ ------ ------
Total revenues................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services................... 6.5 3.3 3.7 3.4 6.0 4.3 12.7 15.1
Sales and marketing................ 133.7 80.5 54.6 46.6 52.6 51.4 39.9 37.4
Research and development........... 89.8 51.2 40.4 18.7 20.9 20.8 15.5 15.8
General and administrative......... 46.0 19.8 12.3 9.8 10.4 13.1 16.1 11.5
Compensation share related to
escrow shares.................... 0.0 0.0 0.0 432.6 0.0 0.0 0.0 0.0
------- ------ ------ -------- ------ ------ ------ ------
Total operating expenses......... 276.0 154.8 111.0 511.1 89.9 89.6 84.2 79.8
------- ------ ------ -------- ------ ------ ------ ------
Operating income (loss).............. (176.0) (54.8) (11.0) (411.1) 10.1 10.4 15.8 20.2
Interest income and other, net....... 0.9 0.7 1.0 1.8 0.5 6.9 7.8 6.0
------- ------ ------ -------- ------ ------ ------ ------
Income (loss) before provision for
income taxes....................... (175.1) (54.1) (10.0) (409.3) 10.6 17.3 23.6 26.2
Provision for income taxes........... 0.0 0.0 0.0 0.0 0.3 0.4 0.8 0.8
------- ------ ------ -------- ------ ------ ------ ------
Net income (loss).................... (175.1)% (54.1)% (10.0)% (409.3)% 10.3% 16.9% 22.8% 25.4%
======= ====== ====== ======== ====== ====== ====== ======
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion of Analysis of Financial Condition and Results
of Operation includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward looking statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results or those anticipated. The Company's quarterly
operating results have in the past, and may in the future, fluctuate
significantly due to a number of factors, including the number and size of
customer orders the Company is
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able to obtain in any particular quarter, the 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. 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, in part to, efforts of the Company's direct
sales personnel to meet annual quotas, lower international revenues in the
summer months when many European businesses experience lower sales,
establishment of calendar year capital budgets by prospective customers, as well
as other factors. In addition, reference should be made to other risk factors
described from time to time in the Company's periodic reports filed with the SEC
under the Securities and Exchange Act of 1934, as amended.
OVERVIEW
The Company designs, markets and supports an automated solution to software
management in medium and large organizations with complex distributed computing
environments. The Company was incorporated in February 1992. Through September
1993, the Company's primary efforts were devoted to product development. In
October 1993, Version 1.0 of EDM was released for general availability. Since
its first release, the Company has continued to develop EDM by adding new
features, applications and platforms. Versions 2.0 and 2.1 of EDM were released
in February and June 1994, respectively. In June 1995, the Company released
version 3.0 and in December 1995, the Company released its current
version of EDM, version 3.1.
All period references in the discussion below are to fiscal periods of the
Company based on its fiscal year ending March 31.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth the percentage of
total revenues represented by the respective line items in the Company's
statement of operations.
YEAR ENDED MARCH 31,
---------------------------
1994 1995 1996
------ ------ -----
Revenues:
Licenses................................................ 92.7% 91.0% 75.0%
Services................................................ 7.3 9.0 25.0
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Cost of services........................................ 3.0 3.7 10.5
Sales and marketing..................................... 208.4 61.2 43.8
Research and development................................ 286.1 35.8 17.7
General and administrative.............................. 42.1 14.9 12.9
Compensation charge related to escrow shares............ -- 202.6 --
----- ----- -----
Total operating expenses........................ 539.6 318.2 84.9
----- ----- -----
Operating income (loss)................................. (439.6) (218.2) 15.1
----- ----- -----
Interest income and other, net............................ 4.6 1.3 5.7
----- ----- -----
Income (loss) before provision for income taxes........... (435.0) (216.9) 20.8
Provision for income taxes................................ -- -- 0.6
----- ----- -----
Net income (loss)......................................... (435.0)% (216.9)% 20.2%
===== ===== =====
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REVENUES
The Company generates revenues principally from licensing the rights to use
its software products to end users and from sublicense fees reported to the
Company by resellers, including certain guaranteed sublicense fees. The Company
also generates service revenues from consulting and training activities
performed for license customers and maintenance revenues from support and
software update rights. Service revenues accounted for 7.3% of total revenues in
1994, 9.0% in 1995 and 25% in 1996. The Company expects that service revenues
will remain approximately at its current percentage of total revenues during the
next twelve months.
The Company's total revenues increased by $8.2 million to $9.3 million in
1995, an increase of 745% over 1994. In 1996, total revenues increased $15.7
million to $25 million, or an increase of 169% over 1995. The increase in total
revenues from 1994 to 1995 is attributable to the inclusion of a full year of
product licensing in 1995 since EDM was not commercially available until the
third quarter of 1994, increased levels of licensing of the Company's products
and the continuing expansion of the Company's sales and marketing organization.
The higher revenues in 1996 as compared to 1995 were due primarily to the
growing acceptance of the EDM, particularly with Release 3.0 having become
generally available in June 1995, the signing of a non-exclusive OEM and
distribution agreement with Amdahl which provided guaranteed sublicense fees in
1996 of which $7.4 million was included in license revenues, and $5.4 million
higher service revenues. The higher service revenues in 1996 over 1995 is
primarily due to the signing of an agreement with IBM in December 1995 which
provided payment for services rendered in prior periods and for ongoing services
through the fourth quarter of 1997, and the resolution of outstanding business
disputes; higher maintenance fees associated with a growing installed base; and
consulting services provided by the Company's professional services
organization.
The Company established a subsidiary in France during the first quarter of
1995. International revenues in 1995 were 27.1% of total revenues and 20.1% in
1996. Though international revenues increased in 1996 over 1995, as a percentage
of total revenues it declined due to the rapid growth of revenues from U.S.
indirect sales channels and professional services. The Company plans to continue
to develop international sales through both its direct and indirect sales
channels and believes that international sales will increase as a percentage of
total revenues. During the fourth quarter of 1996 the Company signed agreements
with three distributors, one in the United States, one in the United Kingdom and
the other in Japan.
During 1994, three customers accounted for approximately 21.4%, 13.8% and
12.0% of total revenues, respectively. During 1995, two different customers
accounted for approximately 37.0% and 12.3% of total revenues, respectively.
During 1996, two customers accounted 39.8% and 11.6%, respectively.
The Company typically ships its products following acceptance of a purchase
order and a fully executed license agreement, and, as a result, has little or no
backlog.
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
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typically provide for sublicense fees payable to the Company based on a percent
of the Company's list price. Reseller arrangements may include an initial
non-refundable payment in the form of guaranteed sublicense fees. Guaranteed
sublicense fees from resellers are recognized as revenue upon shipment of the
master copy of all software to which the guaranteed sublicense fees relate if
there are no significant post-delivery obligations, the reseller is creditworthy
and if the terms of the agreement are such that the payment obligation is not
subject to price adjustment, is non-cancelable and non-refundable and due within
90 days. These guaranteed sublicense fees are applied against sublicense fees
reported by the reseller in relicensing the Company's products to end users. The
Company recognized $1.9 million in guaranteed sublicense fees under such
agreements in 1995 and $7.4 million in 1996. There were no guaranteed sublicense
fees in 1994.
Revenue for support and software update rights is recognized ratably over
the term of the support period. If maintenance is included in a license
agreement, such amounts are unbundled from the license fee at their fair market
value based on the value established by independent 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 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.
OPERATING EXPENSES
Cost of Services. Cost of services includes the direct and indirect costs
of providing training, technical support and consulting services to the
Company's customers. Cost of services consists primarily of payroll and benefits
for field engineers and support personnel, other related overhead and third
party consulting fees. Cost of services were $.03 million in 1994, $.3 million
in 1995 and $2.6 million in 1996, or 41.5%, 41.0% and 42.1% of the related
service revenues for these periods, respectively. The increases in the cost of
services are due primarily to higher staffing levels of the professional
services and customer support organizations to serve the growing installed base
of customers. Cost of services as a percent of related service revenue in 1996
benefited from the inclusion of approximately $1 million of revenue for services
delivered to IBM in prior periods and for which associated costs were recognized
in prior periods. The Company expects cost of services to increase as a
percentage of related service revenues during the next twelve months.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, related benefits, commissions, travel and other costs associated with
the Company's sales and marketing efforts. Sales and marketing expenses were
$2.3 million, $5.7 million, and $11.0 million in 1994, 1995, and 1996,
respectively. As a percentage of total revenues in 1994, 1995, and 1996, sales
and marketing expenses represented 208.4%, 61.2%, and 43.8%, respectively. The
increase in the dollar amount of expenses is due to an increase in sales
commissions associated with higher levels of revenues, an increase in the number
of employees, including in particular an increase in sales personnel to enhance
the Company's domestic and international direct and indirect sales activities,
overhead and other costs related to the increase in employees, and the costs
associated with establishing a subsidiary in France in 1995. Sales and marketing
expenses are expected to increase in dollar amount in future periods, but should
continue to decline as a percentage of total revenues, if the Company achieves
its revenue expectations in future periods.
Research and Development. 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 $3.2 million, $3.3 million, and $4.4 million in 1994,
1995, and 1996, respectively. As a percentage of total revenues in 1994, 1995,
and 1996, research and development expenses represented 286.0%, 35.8%, and
17.7%, respectively. This increase in the dollar amount of expenses is due to
increases in the number of employees and related expenses to support the
continued enhancement, design and development of the Company's software
products, quality assurance and documentation. The Company believes that a
significant investment in research and development activities is essential to
provide for the Company's future growth. Accordingly, the Company anticipates
that it will continue to invest resources to further enhance and develop its
products. The Company believes that research and development expenses will
19
20
increase in dollar amount in future periods, but should decline as a percentage
of total revenues, if the Company achieves its revenue expectations in future
periods.
Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which the Company defines as establishment of a
working model. Amounts which could have been capitalized under this statement
were immaterial in all periods presented. Therefore, the Company has expensed
all software development costs as incurred.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services such
as legal and accounting. General and administrative expenses were $0.5 million,
$1.4 million, and $3.2 million in 1994, 1995, and 1996, respectively. As a
percentage of total revenues in 1994, 1995, and 1996, general and administrative
expenses represented 42.1%, 14.9%, and 12.9%, respectively. The increase in the
dollar amount of expenses is due to an increase in the number of employees and
expansion of the Company's facilities to support the Company's growth. As a
percentage of total revenues, general and administrative expenses have declined
due to a greater increase in revenues compared to general and administrative
spending.
Interest Income and Other, Net. Interest income and other, net is
comprised primarily of interest income earned on the Company's cash equivalents
and investments. Interest income was $.05 million, $.1 million and $1.4 million
in 1994, 1995 and 1996, respectively. Interest income increased from 1995 to
1996 due primarily to interest income earned on the investment of the proceeds
from the sale of common stock in the Company's initial public offering in July
1995.
Income Taxes. The Company did not record a provision for income taxes in
1994 or 1995 due to net losses incurred for both book and tax purposes for those
years. In 1996, the Company recorded a provision for income taxes of
approximately $0.2 million associated with federal and state alternative minimum
taxes. The effective tax rate in 1996 of approximately 3.1% reflects the
estimated realization of deferred tax assets. As of March 31, 1996, the Company
had net deferred tax assets of approximately $1.1 million. The Company has
provided a full valuation allowance due to the uncertainty surrounding the
timing of the realization of the net deferred tax assets. As of March 31, 1996,
the Company had federal net operating loss carryforwards of $.4 million, which
expire in various periods through 2010. The Company's ability to utilize the net
operating loss carryforwards in future years may be limited in some
circumstances, including significant changes in ownership interests, due to
certain provisions of the Internal Revenue Code of 1986.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.7 million and $4.0 million in
1994 and 1995, respectively. In 1996, operating activities provided $6.6 million
in net cash primarily as a result of a net income. Cash used for operations
decreased from 1994 to 1995 due primarily to lower net losses before the
non-cash "compensation charge related to escrow shares" in 1995, partially
offset by an increase in accounts receivable. The accounts receivable balance
increased from $4.5 million as of March 31, 1995 to $7.9 million as of March 31,
1996. The increase was due to the revenue growth during the year. As of March
31, 1996, the Company did not have any material commitments for capital
expenditures.
Since inception, the Company's operations and purchases of property and
equipment have been funded primarily from the sale of Common Stock. In September
1992, the Company completed a public offering of 1,500,000 shares of Common
Stock at a price of $1.07 per share on the Vancouver Stock Exchange. Net
proceeds from the offering were $1.3 million. Subsequent to the offering, the
Company had three private placements representing approximately 1,619,000 shares
of its Common Stock which resulted in aggregate net proceeds of $4.5 million. In
connection with the Canadian offering and subsequent private placements, the
Company issued warrants to the purchasers. As of March 31, 1995, all of the
warrants have been exercised for approximately 2,218,000 shares of Common Stock
resulting in net proceeds to the Company of an additional $5.5 million. In July
of 1995, the Company completed a public offering in the United States of
2,875,000 shares of common stock (which included 500,000 shares sold by
stockholders) at $15 per share, resulting in net proceeds to the Company of
approximately $32.2 million after offering costs. During 1996, the Company
20
21
received $1.2 million from employee optionees who had exercised options under
the Company's stock option plan.
The Company entered into a $1,000,000, unsecured revolving line of credit
agreement with a bank which expires in July 1996. Borrowings bear interest at
the bank's reference rate (8.25% as of March 31, 1996). The agreement has a
number of covenants including requirements for the Company to maintain tangible
net worth of $5,000,000, minimum working capital of $3,000,000, a minimum
current ratio of 2 to 1, a requirement for profitability for the fiscal year and
a limitation on annual capital expenditures of $1,000,000. In addition, the
agreement includes a provision that prohibits the Company from paying dividends.
The Company and the lender entered into an amended agreement that adjusted the
limitation on annual capital expenditures under the agreement as of March 31,
1996 and for the remainder of the agreement. As of March 31, 1996, the Company
was in compliance with the financial covenants contained in the amended
agreement and had no outstanding loans under the agreement.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required by
this item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held September 13, 1996, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive officers
is set forth in Part I of this Report. The information required by this item
concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Exchange Act" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Beneficial Security Ownership of Management and Certain
Beneficial Owners" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section captioned "Certain Transactions With Management" contained in the Proxy
Statement.
21
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form:
1. Financial Statements:
PAGE NUMBER
-----------
Report of Independent Public Accountants.............................. 26
Consolidated Balance Sheets --
As of March 31, 1995 and 1996....................................... 27
Consolidated Statements of Operations --
For the Three Years Ended March 31, 1994, 1995, and 1996............ 28
Consolidated Statements of Stockholders' Equity --
For the Three Years Ended March 31, 1994, 1995, and 1996............ 29
Consolidated Statements of Cash Flows --
For the Three Years Ended March 31, 1994, 1995, and 1996............ 30
Notes to Consolidated Financial Statement............................. 31
2. Financial Statement Schedule:
For the Years Ended March 31, 1994, 1995, and 1996:
II -- Valuation and Qualifying Accounts
Additional schedules are not required under the related schedule
instructions or are inapplicable, and therefore have been omitted.
3. Exhibits
3.1* Certificate of Incorporation of Registrant, as amended.
3.2* Bylaws of Registrant, as amended.
10.1* Facility lease dated as of November 2, 1993, as amended, by and between
International Crossroad Holding Corp. and the Registrant.
10.2 Second amendment to the facility lease, dated October 3, 1995, by and
between International Crossroad Holding Corp. and the Registrant.
10.3*+ OEM Software Licensing and Distribution Agreement dated June 13, 1995
between the Registrant and Amdahl Corporation.
10.4* 1992 Stock Option Plan and form of Stock Option Agreement.
10.5* 1995 Employee Stock Purchase Plan and form of Subscription Agreement.
10.6* Employment Agreement dated as of August 10, 1992 by and between H. Kent
Petzold and the Registrant.
10.7* Deferred Compensation Agreement dated as of August 10, 1992, as amended,
by and between H. Kent Petzold and the Registrant.
10.8* Stock Option Agreement and Notice of Stock Option Grant dated as of
August 10, 1992 by and between H. Kent Petzold and the Registrant.
10.9* Amendment to Employment Agreement and Stock Option Agreements dated as of
May 18, 1995 by and among H. Kent Petzold and the Registrant, and Albion
J. Fitzgerald, Shannon Ruiz, Joseph J. Fitzgerald and Brian J. McAlister.
10.10* Form of Indemnification Agreement entered into between Registrant and its
officers and directors.
21.1* Subsidiary of Registrant.
22
23
23.1 Consent of Arthur Andersen L.L.P.
24.1 Power of Attorney (see page 24)
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedule. See Item 14(a)(2) above.
- - ---------------
* Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 33-92746) as declared effective by the
Commission on July 13, 1995.
+ Confidential treatment has been granted with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
23
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NOVADIGM, INC.
(Registrant)
/s/ WALLACE D. RUIZ
--------------------------------------
Wallace D. Ruiz
Vice President, Finance, Treasurer,
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: June 28, 1996
24
25
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Wallace D. Ruiz, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below on June 28, 1996 by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
SIGNATURE TITLE DATE
- - ----------------------------------- ----------------------------------- ---------------
/s/ ALBION J. FITZGERALD Chairman of the Board, Chief
- - ----------------------------------- Executive Officer and President June 28, 1996
Albion J. Fitzgerald (Principal Executive Officer)
/s/ WALLACE D. RUIZ Vice President Finance, Treasurer, June 28, 1996
- - ----------------------------------- and Chief Financial Officer
Wallace D. Ruiz (Principal Financial and Accounting
Officer)
/s/ ROBERT B. ANDERSON Executive Vice President, Chief June 28, 1996
- - ----------------------------------- Operating Officer, Secretary and
Robert B. Anderson Director
/s/ DENNIS DECOSTE Director June 28, 1996
- - -----------------------------------
Dennis DeCoste
/s/ BRIAN J. MCALISTER Director June 28, 1996
- - -----------------------------------
Brian J. McAlister
/s/ H. KENT PETZOLD Director June 28, 1996
- - -----------------------------------
H. Kent Petzold
25
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO NOVADIGM, INC.:
We have audited the accompanying consolidated balance sheets of Novadigm,
Inc. (a Delaware corporation) and subsidiary as of March 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Novadigm, Inc. and
subsidiary as of March 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule under item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 26, 1996
26
27
NOVADIGM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH MARCH
31, 31,
1995 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 1,012 $ 13,361
Restricted cash...................................................... 300 --
Short-term marketable securities..................................... -- 14,827
Accounts receivable.................................................. 4,526 7,883
Prepaid expenses and other current assets............................ 292 1,057
----- -----
Total current assets......................................... 6,130 37,128
Property and equipment, net.......................................... 369 1,302
Long-term marketable securities...................................... -- 11,428
Other assets......................................................... 61 274
----- -----
$ 6,560 $ 50,132
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................. $ 1,055 $ 1,672
Accrued payroll and other compensation............................... 568 1,429
Deferred revenue..................................................... 628 4,196
----- -----
Total current liabilities.................................... 2,251 7,297
----- -----
Long-term deferred revenue............................................. 243 313
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized -- 5,000 shares
Outstanding -- none............................................. -- --
Common stock, $0.001 par value
Authorized -- 30,000 shares
Outstanding -- 14,827 shares in 1995 and 17,402 shares in
1996.............................................................. 8 11
Additional paid-in capital........................................... 31,457 64,877
Notes receivable from stockholders................................... (325) (325)
Cumulative translation adjustment.................................... (8) (12)
Accumulated deficit.................................................. (27,066) (22,029)
----- -----
Total stockholders' equity................................... 4,066 42,522
----- -----
$ 6,560 $ 50,132
===== =====
The accompanying notes are an integral part of these consolidated balance
sheets.
27
28
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1994 1995 1996
------- -------- -------
REVENUES:
Licenses................................................... $ 1,044 $ 8,488 $18,775
Services................................................... 82 840 6,241
------- -------- -------
Total revenues..................................... 1,126 9,328 25,016
------- -------- -------
OPERATING EXPENSES:
Cost of services........................................... 34 344 2,630
Sales and marketing........................................ 2,347 5,706 10,961
Research and development................................... 3,222 3,338 4,426
General and administrative................................. 474 1,392 3,230
Compensation charge related to escrow shares............... -- 18,900 --
------- -------- -------
Total operating expenses........................... 6,077 29,680 21,247
------- -------- -------
Operating income (loss).................................... (4,951) (20,352) 3,769
Interest income and other, net............................... 52 122 1,428
------- -------- -------
Income (loss) before provision for income taxes.............. (4,899) (20,230) 5,197
Provision for income taxes................................... -- -- 160
------- -------- -------
Net income (loss)............................................ $(4,889) $(20,230) $ 5,037
======= ======== =======
Net income (loss) per share.................................. $ (.38) $ (1.40) $ 0.28
======= ======== =======
Weighted average number of common shares..................... 13,060 14,424 17,916
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
28
29
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE TOTAL
----------------- PAID-IN FROM TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS ADJUSTMENT DEFICIT EQUITY
------ ------ ---------- ------------ ---------- ----------- -------------
Balance at March 31,
1993...................... 12,197 $ 5 $ 4,402 $ (455) $ -- $ (1,937) $ 2,015
Sale of common stock and
exercise of warrants, net
of issuance costs......... 1,675 2 4,986 -- -- -- 4,988
Exercise of stock options... 70 -- 68 -- -- -- 68
Payments on notes
receivable................ -- -- -- 48 -- -- 48
Net loss.................... -- -- -- -- -- (4,899) (4,899)
------ --- ------- ----- --- -------- --------
Balance at March 31,
1994...................... 13,942 7 9,456 (407) -- (6,836) 2,220
Sale of common stock and
exercise of warrants, net
of issuance costs......... 870 1 3,018 -- -- -- 3,019
Exercise of stock options... 2 -- 9 -- -- -- 9
Payments on notes
receivable................ -- -- -- 82 -- -- 82
Purchase of software in
exchange for stock........ 13 -- 74 -- -- -- 74
Foreign currency translation
adjustment................ -- -- -- -- (8) -- (8)
Additional paid-in capital
related to escrow
shares.................... -- -- 18,900 -- -- -- 18,900
Net loss.................... -- -- -- -- -- (20,230) (20,230)
------ --- ------- ----- --- -------- --------
Balance at March 31,
1995...................... 14,827 8 31,457 (325) (8) (27,066) 4,066
Initial public offering of
common stock, net of
issuance costs of
$3,424.................... 2,375 2 32,199 -- -- -- 32,201
Exercise of stock options... 200 1 1,221 -- -- -- 1,222
Foreign currency translation
adjustment................ -- -- -- -- (4) -- (4)
Net income.................. -- -- -- -- -- 5,037 5,037
------ --- ------- ----- --- -------- --------
Balance at March 31,
1996...................... 17,402 $ 11 $ 64,877 $ (325) $(12) $ (22,029) $ 42,522
====== === ======= ===== === ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
30
NOVADIGM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
---------------------------------
1994 1995 1996
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(4,899) $(20,230) $ 5,037
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization.......................... 155 177 510
Compensation charge related to escrow shares........... -- 18,900 --
Software acquired in exchange for common stock......... -- 74 --
Decrease (increase) in restricted cash................. -- (300) 300
Increase in accounts receivable........................ (650) (3,876) (3,357)
Decrease (increase) in prepaid expenses and other
current
assets............................................... 16 (232) (765)
Increase in other assets............................... -- (61) (213)
Increase in accounts payable and accrued payroll and
other compensation................................... 450 943 1,478
Increase in deferred revenue........................... 248 623 3,638
------- -------- --------
Net cash provided by (used in) operating
activities...................................... (4,680) (3,982) 6,628
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (183) (357) (1,443)
Purchases of held-to-maturity securities.................. -- -- (36,101)
Proceeds from redemptions of held-to-maturity
securities............................................. -- -- 9,846
------- -------- --------
Net cash used in investing activities............. (183) (357) (27,698)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of common stock and exercise of
warrants and options................................... 5,056 3,028 33,423
Payment on notes receivable from stockholders............. 48 82 --
------- -------- --------
Net cash provided by financing activities......... 5,104 3,110 33,423
------- -------- --------
Effect of exchange rate on changes in cash.................. -- (8) (4)
------- -------- --------
Net increase (decrease) in cash and cash equivalents... 241 (1,237) 12,349
Cash and cash equivalents at the beginning of the period.... 2,008 2,249 1,012
------- -------- --------
Cash and cash equivalents at the end of the period..... $ 2,249 $ 1,012 $ 13,361
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITY:
Cash paid for interest...................................... $ -- $ -- $ 2
Cash paid for income taxes.................................. $ 3 $ 5 $ 115
The accompanying notes are an integral part of these consolidated financial
statements.
30
31
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. THE COMPANY
Novadigm, Inc. (the Company) was incorporated in Delaware in February 1992.
The Company, operating in a single industry segment, offers a suite of systems
management software applications focused on software management in medium and
large organizations with complex distributed computing environments.
Prior to 1994, the Company's primary efforts related to completing the
development of its software products, designing and implementing a marketing
program and obtaining financing to support its operations. In September of 1992,
the Company completed a public offering of its common stock on the Vancouver
Stock Exchange (see Note 5). During the second quarter of 1994, the Company
commenced commercial sales of its products. In the first quarter of fiscal 1995,
the Company established a wholly owned subsidiary, Novadigm Europe SARL, in
France to act as a sales and service office to the European marketplace. In July
of 1995, the Company completed a public offering of its common stock on the
Nasdaq National Market. The Company is subject to a number of risks, including
dependence on key individuals, potential competition from larger and more
established companies and the ability to penetrate the market with new products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany accounts and transactions have
been eliminated.
Translation of Foreign Currencies
The functional currency of the Company's subsidiary is the local currency.
Accordingly, all assets and liabilities are translated into U.S. dollars at
current exchange rates as of the respective balance sheet date. Revenue and
expense items are translated at the average rates prevailing during the period.
Cumulative translation gains and losses are reported as a separate component of
stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1 (SOP 91-1), "Software Revenue Recognition." The
Company generates revenue from licensing the rights to use its software products
to end users, porting its product to hardware manufacturers operating
environments and sublicense fees from resellers (including certain guaranteed
sublicense fees). The Company also generates revenues from consulting and
training services performed for license customers and revenue from support and
software update rights (maintenance).
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.
31
32
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reseller arrangements may include an initial non-refundable payment in the form
of guaranteed sublicense fees. Guaranteed sublicense fees from resellers are
recognized as revenue upon shipment of the master copy of all software to which
the guaranteed sublicense fees relate if there are no significant post-delivery
obligations, the reseller is creditworthy and if the terms of the agreement are
such that the payment obligation is not subject to price adjustment, is
non-cancelable and non-refundable and due within 90 days. These guaranteed
sublicense fees are applied against sublicense fees reported by the reseller in
relicensing the Company's products to end users. The Company recognized $7.4
million in guaranteed sublicense fees under such agreements in 1996 and $1.9
million in 1995. There were no guaranteed sublicense fees in 1994.
Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such amounts
are unbundled from the license fee at its 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.
Cost of licenses consist of media and tapes on which product is delivered.
Such costs are not material and are included in research and development
expenses in the accompanying consolidated statements of operations.
Cost of services consists primarily of payroll and benefits for field
engineers and support personnel, other related overhead and third-party
consulting fees.
Deferred revenue primarily relates to maintenance, consulting, and other
professional services which have been paid by the customers prior to the
performance of those services.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Adoption of SFAS No. 115
In April 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). In accordance with SFAS 115, the Company's
marketable securities which are composed of commercial paper, government and
government-backed notes and corporate notes are classified as held-to-maturity.
Held-to-maturity securities represent those securities that the Company has both
a positive intent and ability to hold to maturity and are carried at amortized
cost.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of temporary cash investments,
marketable securities and accounts receivable. The Company has investment
policies that restrict placement of these investments to financial institutions
evaluated as highly creditworthy. The Company generally does not require
collateral on trade accounts receivable as the Company's customer base consists
of large, well established companies and governmental entities. As of March 31,
1996, approximately 54% of accounts receivable is concentrated with four
customers who are large, well-established companies that the Company has
determined are creditworthy. As of March 31, 1995 and March 31, 1996, the
Company concluded that an allowance for doubtful accounts was not required.
32
33
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables Denominated in Foreign Currencies
At March 31, 1996, the Company has $0.4 million of receivables from foreign
customers which are denominated in various foreign currencies. Receivables
denominated in foreign currencies in fiscal 1995 were $1.2 million. The
transactions are initially recorded based upon the historical exchange rate. At
the end of each reporting period, the Company revalues the receivables based
upon the current rate of exchange and reflects the related transaction gains and
losses in other income and expense. The net translation losses during fiscal
1995 and 1996 were not material.
Marketable Securities
Held-to maturity securities at March 31, 1996 are summarized as follows:
MATURITIES OF:
-----------------------------------------
OVER ONE YEAR, BUT
ONE YEAR OR LESS LESS THAN FIVE YEARS
---------------- --------------------
U.S. government and government backed securities...... $ 3,497 $ 2,074
Commercial paper...................................... 6,292 --
Corporate notes....................................... 5,038 9,354
------- -------
$ 14,827 $ 11,428
======= =======
Proceeds from redemption of held-to-maturity securities were approximately
$9.8 million in 1996. At March 31, 1996, approximately $6.2 million of
held-to-maturity securities with original maturities of three months or less
are included in cash and cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable approximate their
fair values.
Property and Equipment
Property and equipment is stated at historical cost and consists of the
following at March 31, 1995 and 1996 (in thousands):
MARCH 31,
------------------
1995 1996
------ ------
Computer equipment and software................................... $ 653 1,746
Furniture and fixtures............................................ 151 334
Leasehold improvements............................................ 42 209
---- ------
846 2,289
Less: Accumulated depreciation and amortization................... (477) (987)
---- ------
$ 369 $ 1,302
==== ======
33
34
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets as follows:
Computer equipment and software......... 1 to 3 years
Furniture and fixtures.................. 5 years
Leasehold improvements.................. 3 years (lesser of lease term or
estimated useful life)
Software Development Costs
Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased of Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which the Company defines as establishment of a
working model. Capitalized software development costs require a continuing
assessment of their recoverability. This assessment requires considerable
judgment by management with respect to various factors including, but not
limited to, anticipated future gross product revenues, estimated economic lives
and changes in software and hardware technology. Amounts which could have been
capitalized under this statement, after consideration of the above factors, were
immaterial to the Company's results of operations and financial position.
Therefore, the Company has expensed all software development costs and included
those costs in research and development expenses in the accompanying
consolidated statements of operations.
Net Income (Loss) per Share
Net income (loss) per share has been computed using the weighted average
number of common shares outstanding during all periods presented. Equivalent
shares for stock options and warrants have been included using the treasury
stock method and have not been included in the computation if their effect is
anti-dilutive.
Reclassifications
Certain 1995 balances have been reclassified to conform to the 1996
presentation.
3. REVOLVING LINE OF CREDIT AGREEMENT
The Company entered into a $1,000,000, unsecured revolving line of credit
agreement with a bank which expires in July 1996. Borrowings bear interest at
the bank's reference rate (8.25% as of March 31, 1996). The agreement has a
number of covenants including requirements for the Company to maintain tangible
net worth of $5,000,000, minimum working capital of $3,000,000, a minimum
current ratio of 2 to 1, a requirement for profitability for the fiscal year and
a limitation on annual capital expenditures of $1,000,000. In addition, the
agreement includes a provision that prohibits the Company from paying dividends.
The Company and the lender entered into an amended agreement that adjusted the
limitation on annual capital expenditures under the agreement as of March 31,
1996 and for the remainder of the agreement. As of March 31, 1996, the Company
was in compliance with the financial covenants contained in the amended
agreement and had no outstanding loans under the agreement.
4. COMMITMENTS AND CONTINGENCIES
The Company has various leases for its facilities under noncancelable
operating lease agreements. Rent expense incurred under these agreements in
1994, 1995 and 1996 was approximately $130,000, $329,000 and $534,000,
respectively.
During 1996, the Company entered into an amendment of the lease for its
headquarters. Under the amendment, the Company extended the lease term for its
original leased space and entered into a
34
35
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitment for additional space. Future minimum commitments under all facility
leases are as follows (in thousands):
YEAR ENDING MARCH 31,
------------------------------------------------------------
1997.............................................. $ 607
1998.............................................. 513
1999.............................................. 528
2000.............................................. 395
2001.............................................. 213
thereafter........................................ 784
------
$3,040
======
The Company is a defendant in a certain legal matter which is normal for the
industry in which the Company operates. Management believes that this matter
will not have a material adverse impact on the Company's financial position and
results of operations.
5. COMMON STOCK
In September 1992, the Company completed a public offering of 1,500,000
shares of common stock at a price of $1.07 per share on the Vancouver Stock
Exchange (the Canadian Offering). In connection with the Canadian Offering, the
Company granted 600,000 warrants to purchase common stock at $1.07 per share.
Net proceeds to the Company after commissions and other issuance costs were
approximately $.88 per share or $1.3 million. The warrants were exercised in
September and November of 1992.
During fiscal 1993, the Company sold 700,000 shares of common stock at $.65
per share, which was the fair market value at the date of grant, to employees in
exchange for promissory notes. Payment of the notes are due four years from the
date of issuance or upon termination of employment, whichever is earlier, and
are secured by the underlying common stock. The shares are subject to repurchase
by the Company, at the Company's option, upon termination of employment for any
reason. One quarter of the shares are released from this repurchase option on
the first anniversary of the note issuance and 1/48th of the shares are released
each month thereafter. As of March, 1996, no shares were subject to repurchase.
On December 10, 1994, the Company acquired technology and marketing rights
to certain software in exchange for 13,000 shares of the Company's common stock.
The cost of the software acquired has been expensed in research and development
expenses in the accompanying consolidated statements of operations in accordance
with SFAS No. 86 since technological feasibility has not been established.
In July of 1995, the Company completed a public offering in the United
States of 2,875,000 shares of common stock (which included 500,000 shares sold
by stockholders) at $15 per share, resulting in net proceeds to the Company of
approximately $32.2 million after offering costs. The Company's shares trade on
the Nasdaq National Market.
6. COMPENSATION CHARGE RELATED TO ESCROW SHARES
As a condition of the public offering of shares of the Company's Common
Stock on the Vancouver Stock Exchange in September 1992, 1,500,000 shares of the
Company's outstanding Common Stock were required by the British Columbia
Securities Commission (BCSC) to be placed in escrow. To satisfy this
requirement, the founding stockholders of the Company agreed to place in escrow
a portion of the shares held by them. The escrowed shares included 850,000
shares held by two outside directors and 650,000 shares contributed on a pro
rata basis by three employees. These shares were eligible for release from
escrow upon the earlier of the
35
36
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
achievement by the Company of certain levels of positive cash flow, as defined
by BCSC regulations, or the expiration of ten years. The cash flow requirements
for release of the escrowed shares were met at March 31, 1995.
In accordance with SEC positions on similar escrow share arrangements, the
arrangement required by the BCSC was deemed to be compensatory for all shares
contributed to the escrow. Accordingly, the Company has recorded a
non-recurring, non-cash charge to earnings of $18.9 million in the quarter ended
March 31, 1995, which represented the fair value of the shares at the time the
positive cash flow requirements were met in March 1995.
7. STOCK OPTIONS AND STOCK PURCHASE PLAN
Under the Company's 1992 Stock Option Plan (the Plan) options may be
granted to employees and directors. Options granted under the Plan may be either
incentive stock options or non-statutory stock options. Options are granted at
no less than fair market value at the date of grant based upon the price per
share of the Company's stock on the Nasdaq National Market. Option terms may not
exceed five years and vesting is determined by the Board of Directors for each
individual grant (generally 4 years). The Plan will continue in effect until
June 9, 2002 unless terminated sooner.
The following table summarizes the option activity (in thousands, except
per share amounts):
AVAILABLE
FOR OPTIONS PRICE
GRANT OUTSTANDING PER SHARE
--------- ----------- -----------------------
BALANCE AT MARCH 31, 1993............................. 466 625 $ .78 - $ 2.55
Authorized.......................................... 304 -- $ -
Granted............................................. (924) 924 $ 3.58 - $ 9.83
Exercised........................................... -- (70) $ .93
Canceled............................................ 410 (410) $ 3.93 - $ 9.83
------ -----
BALANCE AT MARCH 31, 1994............................. 256 1,069 $ .78 - $ 5.01
Authorized.......................................... 805 -- $ -
Granted............................................. (627) 627 $ 3.57 - $11.50
Exercised........................................... -- (2) $ 4.65
Canceled............................................ 8 (8) $ 4.65 - $ 5.01
------ -----
BALANCE AT MARCH 31, 1995............................. 442 1,686 $ .78 - $11.50
Authorized.......................................... 1,000 --
Granted............................................. (1,264) 1,264 $13.75 - $28.38
Exercised........................................... -- (183) $ 2.42 - $12.75
Canceled............................................ 210 (210) $ .96 - $10.50
------ -----
BALANCE AT MARCH 31, 1996............................. 388 2,557 $ .96 - $28.38
At March 31, 1996, 669,700 options are vested and 2,945,000 shares of
common stock are reserved for future issuance under the Plan. The weighted
average exercise price of options outstanding at March 31, 1996 is $10.04 per
share.
During fiscal 1994, the Company canceled 400,000 options with prices
ranging from $6.26 to $9.83 that had been granted during 1994 and replaced them
with 400,000 options at $5.01 each. The effect of this transaction is treated as
a cancellation of the old options and the grant of new options in accordance
with the provisions of the Plan.
36
37
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 17, 1995 the Board of Directors adopted the Company's Employee Stock
Purchase Plan (the "Purchase Plan"), which was approved by the stockholders at
the Company's annual meeting on November 17, 1995. A total of 1,000,000 shares
of Common Stock was reserved for issuance under the Purchase Plan. The purchase
plan covers substantially all employees in the United States. The participants'
purchase price is the lower of 85% of the closing price on the first trading day
of the six-month trade period or the last trade day of the period. During 1996,
approximately 17,000 shares were purchased under the purchase plan. At March 31,
1996, the Company has reserved approximately 983,000 shares for future issuance.
8. INCOME TAXES
The Company accounts for income taxes pursuant to SFAS No. 109. This
Statement provides for a liability approach to accounting for income taxes under
which deferred income taxes are provided based upon enacted tax laws and rates
applicable to the periods in which taxes become payable. The Company adopted the
provisions of SFAS No. 109 in fiscal 1993 and the adoption had no impact on the
Company's financial statements.
The components of the provision for income taxes are as follows (in
thousands):
1994 1995 1996
---- ---- ----
Current
U.S. federal................................................. $-- $-- $112
State and local.............................................. -- -- 48
--- --- ----
Total Current........................................ -- -- 160
--- --- ----
Deferred
U.S. federal................................................. -- -- --
State and local.............................................. -- -- --
--- --- ----
Total Deferred....................................... -- -- --
--- --- ----
Foreign........................................................ -- -- --
Provision for income taxes..................................... $-- $-- $160
=== === ====
The components of the net deferred tax asset at March 31, 1995 and 1996 are
as follows (in thousands):
1995 1996
------- -------
Deferred tax assets:
Net operating loss carryforwards............................... $ 2,511 $ 126
Net capitalized start-up costs................................. 410 279
Accrued liabilities............................................ 138 378
Other.......................................................... (47) 287
------- -------
Total deferred tax assets.............................. 3,012 1,069
Valuation allowance.............................................. (3,012) (1,069)
------- -------
Net deferred tax asset................................. $ -- $ --
======= =======
As of March 31, 1996 the Company has net operating loss carryforwards for
federal income tax reporting purposes of approximately $400,000. These
carryforwards expire in various periods from 2007 to 2010. The Company's ability
to utilize the net operating loss carryforwards in future years may be limited
in some circumstances, including significant changes in ownership interests, due
to certain provisions of the Internal Revenue Code of 1986.
37
38
NOVADIGM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes for the year ended March 31, 1996 differs
from the statutory U.S. federal income tax rate due to the following:
Provision at U.S. statutory rate............................................. 35.0%
State income taxes, net of federal benefit................................... 3.2%
Other........................................................................ 2.2%
Change in valuation allowance................................................ (37.3)%
---
3.1%
===
9. MAJOR CUSTOMERS AND INTERNATIONAL SALES
In fiscal 1995, the Company established a wholly-owned subsidiary in France
that acts as a sales representative for the Company's operations in Europe. All
license agreements are entered into between the parent company and its
customers, and all license fees are paid directly to the parent company. United
States operations include revenues and results of operations in the United
States as well as export revenues from all customers recognized on a worldwide
basis. The subsidiary's revenues consist primarily of commission payments from
the parent company for services performed for the benefit of the parent company
at a rate of 50% of European sales. Such payments are eliminated in the
consolidated financial statements. Identifiable assets are those assets that can
be directly associated with a particular geographic area and subsidiary.
Geographic information for the fiscal years ended March 31, 1995 and March
31, 1996 are as follows. No similar information is applicable for fiscal year
1994 since there were no foreign operations in that year.
OPERATING INCOME IDENTIFIABLE
REVENUES (LOSS) ASSETS
------------------- ------------------- ------------------
1995 1996 1995 1996 1995 1996
------- ------- ------- ------- ------ -------
United States................... $ 9,328 $24,397 $(1,106) $ 5,886 $6,602 $53,048
Europe.......................... 1,144 1,691 (346) (2,117) 297 2,026
Eliminations.................... (1,144) (1,072) -- -- (339) (4,942)
---- ----- ---- ---- ---- -----
Total Company.............. $ 9,328 $25,016 $(1,452) $ 3,769 $6,560 $50,132
==== ===== ==== ==== ==== =====
During 1994, three customers accounted for approximately 21.4%, 13.8% and
12.0% of the total revenues, respectively. During 1995, two different customers
accounted for approximately 37.0% and 12.3% of total revenues, respectively.
During 1996, two customer accounted for approximately 39.8% and 11.6%,
respectively, of total revenues.
Export sales, consisting of sales to customers in foreign countries, were
13.8%, 27.1% and 12.3% of total revenues in 1994, 1995 and 1996, respectively.
Export sales to Canada were 13.8%, .9% and .1% of total revenues in 1994, 1995
and 1996, respectively. Export sales to Italy were 12.6% and 2.8% of total
revenues in 1995 and 1996, respectively. There were no sales to Italy in 1994.
38
39
SCHEDULE II
NOVADIGM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO AT END
CLASSIFICATION PERIOD OPERATIONS WRITEOFFS OF PERIOD
- - ----------------------------------------------- ------------ ---------- --------- ---------
Allowance for Doubtful Accounts
Year Ended:
March 31, 1994............................... -- -- -- --
March 31, 1995............................... -- -- -- --
March 31, 1996............................... -- 344 (344) --