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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
|_| 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 00025683
MARIMBA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0422318
(State of incorporation) (IRS Employer Identification No.)
440 CLYDE AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices, including ZIP code)
(650) 930-5282
(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, $.0001 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. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 10-K. [ ]
The aggregate market value of the Registrant's common stock, $.0001 par value,
held by non-affiliates of the Registrant on February 29, 2000 was approximately
$1.4 billion. As of February 29, 2000, there were 23,281,586 shares of
Registrant's common stock, $.0001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement (the "Proxy Statement") to
be mailed to stockholders in connection with its 2000 annual meeting of
stockholders scheduled to be held on June 8, 2000 are incorporated by reference
into Part III of this report. Except as expressly incorporated by reference, the
Registrant's Proxy Statement shall not be deemed to be part of this report.
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MARIMBA, INC.
TABLE OF CONTENTS
PART I
Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 9
Item 3. Legal Proceedings............................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........................... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 11
Item 6. Selected Consolidated Financial Data.......................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................. 13
Item 7a. Qualitative and Quantitative Disclosures about Market Risk.................... 27
Item 8. Consolidated Financial Statements and Supplementary Data...................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures................................................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 44
Item 11. Executive Compensation........................................................ 44
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 44
Item 13. Certain Relationships and Related Transactions................................ 44
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................ 44
SIGNATURES............................................................................. 45
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PART I
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this document are based on
information available to us on the date hereof. We assume no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those indicated in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed under the heading "Other Factors Affecting Operating Results,
Liquidity and Capital Resources" and the risks discussed in our other Securities
and Exchange Commission filings.
ITEM 1. BUSINESS
Marimba, Inc. was incorporated in Delaware in February 1996. We develop,
market and support Internet-based software management solutions that enable
companies to expand their market reach, streamline business processes and
strengthen relationships with customers, business partners and employees. Our
Castanet product family provides an efficient and reliable way for enterprises
to distribute, update and manage applications and related data over corporate
intranets, extranets and the Internet. Our strategy is to extend the Castanet
foundation to manage the array of infrastructure, systems and components upon
which business applications and services depend. We believe that, by using
Castanet, companies are able to reduce software management costs, deliver
greater functionality to users and provide a robust infrastructure for
mission-critical applications. Our global customer base spans multiple industry
segments including financial services, insurance, retail, manufacturing and
telecommunications. Castanet customers include various industry leaders,
including Bear Stearns, Charles Schwab, The Home Depot, Intuit, ADP, Nortel
Networks, Seagate Technology and Cisco Systems. We market our Castanet products
worldwide through a combination of a direct sales force, resellers and
distributors.
MARIMBA PRODUCTS
Castanet Product Family
The Castanet product family provides a robust framework to distribute, update
and manage applications and related content over corporate intranets, extranets
and the Internet to multiple endpoints. Designed upon an open, extensible
architecture, our Castanet products automatically recover from transmission
errors, provide a variety of security features, reduce network connection time,
allow personalization and are rapidly scalable to a large number of users in
geographically dispersed locations. The Castanet product family is modular,
allowing organizations to add functionality as their e-business management
requirements expand. The Castanet product family is summarized below:
Castanet Infrastructure Suite. The Infrastructure Suite provides the
foundation upon which all other Castanet product suites are built. It provides
the components necessary to distribute, manage and maintain applications across
intranets, extranets and the Internet.
Castanet Production Suite. The Production Suite provides the ability to
package and publish custom or off-the-shelf applications, files and documents
for distribution by the Castanet Infrastructure Suite.
Castanet Management Suite. The Management Suite provides comprehensive
solutions for the management, deployment and maintenance of enterprise-wide
Castanet installations and permits centralized monitoring and control of local
and remote Castanet servers and clients. Optional extensions to the Management
Suite also provide extensive client customization and branding capabilities.
Castanet Inventory Suite. The Inventory Suite simplifies the discovery,
tracking and management of the desktop, server and portable computing resources
within the enterprise. By providing database integration and reporting
capabilities, the suite is designed to allow administrators to generate up to
date information on machines within their domains of control, even if they are
only connected intermittently to a network.
Castanet Subscription Suite. The Subscription Suite is designed to provide
technology managers with the ability to use existing profile information to
define, distribute and enforce a centralized subscription policy that determines
which applications should be made available, installed or deleted from a user's
machine.
We generally license the Castanet Infrastructure and Inventory Suites on a
per user basis with the total fee determined, in part, by the number of
end-users who can obtain updates using Castanet. The license terms also vary
depending on the number of applications to be deployed with Castanet and whether
the computer receiving updates is a server or client computer. Separate licenses
are available for the right to customize the user interface of the client
component of Castanet and to distribute the client and/or server components of
the system to customers, partners or others outside of the customer's own
organization. The Castanet Production, Management and Subscription Suites are
generally licensed on a per user basis, based on the number of individual
systems administrators who will use the components of the suites.
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DocService
DocService. DocService is designed to provide a complete, out-of-the-box
solution for a specific Internet infrastructure management challenge. DocService
automates targeted document delivery across corporate intranets, extranets and
the Internet. DocService makes it easy for corporations to deliver single
documents to single recipients or hundreds of documents to thousands of
recipients, all within an easily managed and organized infrastructure that
supports automatic document updating. We license DocService on a per user basis.
Timbale
Timbale. In February 2000, Marimba announced the Timbale product family,
which includes two new products designed to address many of the server
management challenges inherent in thin-client and Web commerce computing
environments today. Such challenges include reliability for maximum uptime,
efficient content replication for large quantities of data, pre-deployment
control, error detection and rollback capability, and automated scripting for
deployments to large numbers of servers. The first Timbale product, Timbale for
Server Management, was released for sale in March 2000. The second Timbale
product, Timbale for Windows Terminal Services, is scheduled for release later
in 2000. Timbale is licensed based on the number of servers and the servers'
configuration. There can be no assurance that Timbale for Windows Terminal
Services will be released as scheduled, or once released, that the Timbale
products will gain widespread market acceptance.
ARCHITECTURE
The Castanet infrastructure is designed to distribute software and data
efficiently over networks based upon TCP/IP (Transmission Control
Protocol/Internet Protocol), the basic communication protocol of the Internet.
Castanet packages an application as a channel and publishes the application to a
transmitter, which then distributes the channel and subsequent updates across a
network to tuners on client computers.
Channel. A channel is the application and/or related data that is distributed
using Castanet. For example, a channel could consist of a stock-trading
application written in Java or a shrink-wrapped application, including Microsoft
Word and related documents. Each channel has an associated list of properties
that describes its features, including application type, author, copyright
notice, update schedule and entry point. Castanet's application packager
prepares the channel for distribution and inserts a channel adapter that
installs and launches the application in a platform and application specific
manner. The application packager is designed to accommodate a range of
application types, including Java applets, Java Beans, Visual Basic, C, C++ and
shrink-wrapped applications. Using OSD (Open Software Description), a format for
describing the way software programs relate to one another, the application
packager creates a description of the installation process which is based on XML
(eXtensible Markup Language), a format commonly used on the Internet to describe
data and documents. Using this technology, both shrink-wrapped and custom
applications can be installed, updated and repaired without requiring changes to
the original application and without relying on the original application
installer. After the application is packaged as a channel, it is published to
the transmitter for distribution over the network.
Transmitter. The transmitter is the server component of Castanet. It
distributes channels and subsequent updates to the tuner, the Castanet client.
The tuner and transmitter communicate using the Castanet protocol which is
designed to minimize bandwidth requirements for updates over HTTP (Hyper-Text
Transfer Protocol), the protocol used to distribute web pages. The Castanet
protocol uses compression technology that compresses data and applications, and
differential updating which identifies changes in code and updates only the
changed portion. All updates are transactional, interruptible and atomic, which
means that channels on the tuner are always in a functional state even if the
most recent update failed or was interrupted. In addition, interrupted downloads
can be restarted automatically at the point of interruption. Castanet provides
functionality to identify and verify each channel resource and installed
applications. Additional transmitter features include replication,
personalization, client feedback, bandwidth management and policy
administration. Castanet implements user authentication and access control using
passwords or client-side certificates and by leveraging directory services,
including LDAP (Lightweight Directory Access Protocol), or Microsoft's Active
Directory.
Tuner. The tuner is the client component of Castanet. The tuner subscribes to
channels located on the transmitter and downloads, installs and receives updates
of each channel. Once received from a transmitter, channels are stored locally
on the tuner, making the downloaded channel resources instantly accessible
regardless of whether the user is connected to the network. The tuner is
typically configured to run in the background and can manage multiple channels
simultaneously without end-user interaction, updating them as necessary to
present the user with the most recent version. In addition, the tuner's user
interface can be customized to include the brand, logo and other look and feel
elements desired by the customer. The tuner provides a comprehensive set of
features for modem support, bandwidth management, security controls, certificate
management, update scheduling and support for corporate network security
mechanisms.
Using the Castanet protocol, tuners can be redirected automatically to
additional transmitters, serving as repeaters, in order to reduce the load on
the main transmitter and to make more efficient use of available bandwidth. By
adding repeaters, it is possible to provide faster
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download times and to service thousands of simultaneous downloads. Repeaters can
be added and removed dynamically without disrupting the overall service,
allowing for a high level of scalability, improved service quality and
availability. In addition, the use of a caching proxy server, which stores
frequently accessed files on a local disk, can improve the efficiency of
downloads through corporate network security barriers in an intranet or network
into the enterprise.
In addition to the basic Castanet components, a variety of Castanet features
are available for reporting downloads, staging updates, application signing,
resource planning, certificate management, license installation, transmitter
administration, tuner administration and deploying tuner updates. All of these
features are distributed as Castanet channels, and together with the basic
infrastructure components, provide all the necessary functionality to
distribute, manage and maintain mission critical applications and services.
Where appropriate, we provide programming interfaces and software development
kits for customized extensions, allowing customers to tailor the Castanet
solution to their specific needs, or to embed the Castanet technology into
existing applications.
TECHNOLOGY
We believe that our investment in engineering has resulted in technology that
provides us with a strategic advantage. Castanet has been built from the ground
up to provide a robust Internet-based solution. Castanet provides a lightweight,
cross-platform and easy-to-deploy solution that helps solve complex application
deployment and management problems which we believe are not addressed adequately
by existing client-server distribution and management tools.
Castanet makes extensive use of a broad range of technologies, including
Java, TCP/IP, HTTP, LDAP, XML, SSL (Secure Socket Layer), a protocol for secure
transmissions over the Internet, and various digital security technologies. In
addition, we have worked with partners to submit several standards proposals to
the World Wide Web Consortium, including the OSD format jointly developed with
Microsoft and the DRP protocol (HTTP Distribution and Replication Protocol), a
protocol which efficiently distributes data on the Internet, jointly developed
with Netscape, Sun Microsystems, Novell, Inc. and Excite@Home.
The Castanet protocol is designed to distribute applications and data to
multiple intermittently connected endpoints. The protocol is layered on HTTP so
that it can be used from within most secure corporate intranets and networks by
tunneling through an HTTP proxy server. When the user is on line, the tuner
initiates update requests either when requested by the user or automatically
using a predefined update schedule. When an update request is received, the
transmitter quickly determines which files in the channel have changed, and if a
change has occurred, Castanet determines exactly which bytes within those files
have changed. The tuner then downloads the resulting changes, and compression
algorithms are used to further reduce the total download overhead. The
efficiency of the Castanet protocol makes it possible to distribute frequent
updates to large applications and application files with relatively low
bandwidth utilization. The protocol also provides features for user
authentication, personalization of content, the distribution of events and data
from the tuner to the transmitter and the automatic redirection of requests to
repeaters.
Our OSD-based software installation technology provides a cross-platform
framework for installing, updating, and verifying applications in an operating
system specific manner. Applications are delivered with an OSD file that defines
the platforms on which the software runs, as well as the libraries and resources
it requires. In addition, the OSD file contains platform specific extensions
that define the exact installation requirements. For example, on the Microsoft
Windows platform, the OSD file describes exactly which files need to be
installed, which libraries that contain application code need to be updated,
which registry entries need to be set and which system scripts need to be
updated. Once an application is installed, the OSD file can be used to upgrade,
verify and uninstall the application. OSD files are generated automatically
using an installation capture technology, which eliminates the use of the
original application installer. Information technology managers can customize
the OSD script to control the level of user involvement in the resulting
installation.
We have invested significant resources in developing Castanet's security
implementation. Castanet's security features currently include end user
authentication, digital certificates to verify application authenticity and SSL
communications to help protect the integrity and confidentiality of data
transmitted via Castanet. We offer a standard 40-bit encryption implementation
for international use and a 128-bit encryption implementation for domestic use
only. Our security implementation represents a combination of software written
by us and security code licensed to us by various vendors, including encryption
modules licensed from RSA Data Security and an SSL implementation from Netscape.
To further enhance the breadth of our security offerings, we also licensed a
Java-based security implementation. We also have an arrangement with VeriSign
and Thawte for the provision of digital certificates specifically for Castanet
products. See "Other Factors Affecting Operating Results, Liquidity and Capital
Resources -- We Rely on Third-Party Software and Applications."
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Most of our products are implemented using Sun Microsystems' Java programming
language. As a result, we believe that our products are portable, easy to
internationalize, easily reconfigured and efficient. The use of Java has proven
to be an advantage in developing portable components without significantly
increasing the engineering overhead as additional platform support is required.
We believe that our use of and expertise in Java provides us a competitive
advantage. See "Other Factors Affecting Operating Results, Liquidity and Capital
Resources -- We Rely on Third-Party Software and Applications."
SALES, MARKETING AND DISTRIBUTION
We market our Castanet products worldwide through a combination of a direct
sales force, resellers and distributors. Our worldwide direct sales, marketing
and business development organizations consisted of 90 individuals as of
December 31, 1999, 45 of whom were located at our Mountain View, California
headquarters, 38 in regional offices located in California, Georgia, Illinois,
Michigan, New York, Texas and Virginia and 7 in our European office in the
United Kingdom.
Our sales, marketing and distribution approaches are designed to help
customers understand both the business and technical benefits of the products.
We have built an experienced consulting services organization to facilitate the
successful deployment of our products. We intend to expand our consulting
services organization and direct sales force and to establish additional sales
offices domestically and internationally. Competition for sales personnel is
intense, and we may not be able to attract, assimilate or retain additional
qualified personnel in the future. See "Other Factors Affecting Operating
Results, Liquidity and Capital Resources -- We Need to Develop and Expand Our
Sales, Marketing and Distribution Capabilities."
We conduct a variety of marketing programs worldwide to educate our target
market, create awareness and generate leads for our Castanet solutions. To
achieve these goals, we have engaged in marketing activities including
e-business seminars, direct mailings, print and online advertising campaigns and
trade shows. These programs are targeted at key information technology
executives as well as vice presidents of marketing and general managers of
business units. In addition, we conduct comprehensive public relations programs
that include establishing and maintaining relationships with key trade press,
business press and industry analysts as well as an active executive speakers'
bureau. We have also initiated a customer advisory council which provides a
communication channel for regular feedback from key customers to facilitate the
design of products that meet the expanding requirements of our target market.
Markets outside the United States are currently served by our direct sales
office in the United Kingdom as well as independent distributors and resellers
covering countries in Europe and Asia. Our distributors purchase our Castanet
products at discounts from end-user list prices. Sales under the agreements are
denominated in U.S. dollars. Foreign sales are subject to risks, including
exchange rate fluctuations, internal monetary conditions, tariffs, import
licenses, trade policies and domestic and foreign tax policies. For more
information on risks related to foreign sales see "Other Factors Affecting
Operating Results, Liquidity and Capital Resources -- Expanding Internationally
Is Expensive, We May Receive No Benefit from Our Expansion and Our International
Operations are Subject to Governmental Regulation."
We may not be able to enter into agreements or establish relationships with
desired distribution partners on a timely basis, or at all, and our distribution
partners may not devote adequate resources to selling our products. For more
information on risks related to third-party distribution channels see "Other
Factors Affecting Operating Results, Liquidity and Capital Resources -- We Need
to Develop and Expand Our Sales, Marketing and Distribution Capabilities."
CUSTOMER SUPPORT AND TRAINING
Our customer support and training organization consisted of 19 employees as
of December 31, 1999. We offer a variety of annual support and maintenance
programs for our products, as well as support services designed to meet specific
needs such as an option to purchase support on a per-question basis
Customers that license our products typically engage our professional
services organization to assist with support, training and consulting. We
believe that growth in our product sales depends upon our ability to provide our
customers with these services and to educate third-party resellers and
consultants on how to provide similar services. As a result, we plan to increase
the number of our service personnel to meet these needs. Please see "Other
Factors Affecting Operating Results, Liquidity and Capital Resources -- We Need
to Expand Our Professional Services."
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RESEARCH AND DEVELOPMENT
As of December 31, 1999, our engineering organization was comprised of 63
employees responsible for product development, quality assurance, documentation,
localization and porting. Our product development organization is divided into
five groups: Core development, Applications development, Castanet development,
WTS development and Server to Server Management development.
- The Core development group is focused on enhancing the robustness,
reliability, performance and flexibility of our core functionality and
expanding the ability of Castanet to operate with leading operating
systems.
- The Applications development group addresses specific enterprise problems
that can also directly benefit and leverage our product line such as
document management to end users and bi-directional data management
between remote offices and stores.
- The Castanet development group is focused on developing enterprise-level
products that address application and content distribution, deployment and
management.
- The WTS development group is focused on increasing high availability
solutions for WTS server management. In addition, this group is focusing
on ways to save WTS administrators time on server configuration
management.
- The Server to Server Management development group is focused on developing
products that provide centralized control of efficient content replication
across the intranet, extranet and Internet for server-based computing
environments.
These five development groups are supported by the quality assurance,
documentation, localization and porting groups. The quality assurance group
implements a process designed to identify software defects through the entire
development cycle. The documentation group is responsible for end user,
administrator and developer documentation for our products. The localization
group is responsible for internationalizing our products while in development as
well as performing the language-specific localization after the English version
is produced. The porting group is responsible for any changes to the source code
required to allow a product to run on platforms other than the two core
development platforms of Sun Microsystems Solaris and Microsoft Windows.
We believe that our software development team and core technologies represent
a significant competitive advantage. The software development team includes a
number of key members from the engineering team that developed the Java
programming language and Java virtual machines at Sun Microsystems.
A technically skilled, quality oriented and highly productive development
organization will be a key component of the success of new product offerings. We
must continue to attract and retain highly qualified employees to further our
research and development efforts. Our business and operating results could be
seriously harmed if we are not able to hire and retain the required number of
individuals.
Research and development expenses were $8.5 million in 1999, $5.8 million in
1998 and $2.4 million in 1997. To date, substantially all software development
costs have been expensed as incurred and developed by our employees. We believe
that significant investments in research and development are required to remain
competitive. As a consequence, we intend to continue to increase the absolute
amount of our research and development expenditures in the future. For more
information on our research and development expenses, see 'Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We cannot be sure that existing and future development efforts will be
completed within our anticipated schedules or that they will have the features
to make them successful. Future delays or problems in the development of product
enhancements or new products could seriously harm our business and operating
results. Furthermore, despite our testing and testing by our customers, errors
might be found in our products, which we are unable to successfully correct in a
timely and cost-effective manner. If we are not able to develop new products,
enhancements to existing products or correct errors on a timely and
cost-effective basis, or if these new products or enhancements do not have the
features necessary to make them successful, our business and operating results
will be seriously harmed. Furthermore, we currently license externally developed
technology and will continue to evaluate externally developed technologies for
integration into our product lines. Our business and operating results would be
harmed if we are not able to continue licensing such third party products on
commercially reasonable terms. See "Other Factors Affecting Operating Results,
Liquidity and Capital Resources -- Our Success Depends on Our Castanet Product
Family and New Product Development," "-- Software Defects in Castanet Would Harm
Our Business" and "-- We Must Respond to Rapid Technological Change and Evolving
Industry Standards."
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COMPETITION
The market for Internet infrastructure management solutions is new, intensely
competitive and rapidly evolving. We expect competition to continue to increase
both from existing competitors and new market entrants. We believe that our
ability to compete depends on many factors both within and beyond our control,
including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service; and
- the effectiveness of our sales and marketing efforts.
We encounter competition from a number of different sources, including
sellers of enterprise-wide management systems, which include electronic software
distribution, including Tivoli, Computer Associates and BMC Software; companies
such as BackWeb, Novadigm, and Sterling Commerce, through its subsidiary
XcelleNet, which market products that support the distribution of software
applications; and desktop software management suites, such as Microsoft's SMS
and Intel's LanDesk.
In addition, we compete with various methods of application distribution and
management, including thin client systems and the web browser, and with
application server vendors and others which have introduced software
distribution capabilities into their products.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have broader relationships with existing and potential customers
that could be leveraged, to effectively compete against us. These companies also
have more established customer support and professional services organizations
than we do. In addition, these companies may adopt aggressive pricing policies.
As a result, we may not be able to maintain a competitive position against
current or future competitors.
As new participants enter the Internet infrastructure management market, we
will face increased competition. Potential competitors may bundle their products
or incorporate an Internet infrastructure management component into existing
products in a manner that discourages users from purchasing our products.
Furthermore, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Our competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements than we can.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of patent, trademark, trade secret, and copyright law and contractual
restrictions to protect the proprietary aspects of our technology. We presently
have one United States patent and five U.S. patent applications pending, and
several trademark registrations and applications in the United States and some
foreign countries. Our patent and trademark applications might not result in the
issuance of any additional valid patents or trademarks.
We seek to protect our source code for our software, documentation and other
written materials under trade secret and copyright laws. We license our software
under license agreements, which impose restrictions on the licensee's ability to
utilize the software. Finally, we seek to avoid disclosure of our intellectual
property by requiring employees and consultants with access to our proprietary
information to execute confidentiality agreements with us and by restricting
access to our source code. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
obtain and use information that we regard as proprietary. In addition, we sell
our products internationally. The laws of many countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets, and to determine the validity and
scope of the proprietary rights of others. For example, on July 30, 1999 we
filed a complaint against Novadigm alleging patent infringement. Such litigation
could result in substantial costs and diversion of resources and could seriously
harm our business and operating results. The lawsuit is at a preliminary stage,
and we cannot assure you that the outcome of this litigation will be favorable
to us. For a description of our action against Novadigm, please see "Legal
Proceedings - Marimba v. Novadigm."
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Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability to
license the infringed technology, our business and operating results would be
significantly harmed. Currently, we are engaged in litigation with Novadigm
concerning the alleged infringement by us of a patent held by Novadigm which is
described in detail in this section under "Item 3. Legal Proceedings."
EMPLOYEES
At December 31, 1999, we had a total of 198 employees, 191 of whom were based
in the United States and 7 of whom were based in the United Kingdom. Of the
total, 63 were in research and development, 90 were engaged in sales, marketing
and business development, 19 were engaged in customer support and training, and
26 were in administration and finance. None of our employees are subject to a
collective bargaining agreement and we believe that our relations with our
employees are good.
ITEM 2. PROPERTIES
Our principal administrative, sales, marketing, and research and development
facility occupies approximately 47,500 square feet in Mountain View, California
under a lease which expires in April 2005. We also have regional offices located
in California, Georgia, Illinois, Michigan, New York, Texas and Virginia and a
European office in the United Kingdom. We believe that our existing facilities
are adequate for our current needs and that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
ITEM 3. LEGAL PROCEEDINGS
Novadigm v. Marimba
On March 3, 1997, Novadigm filed a complaint against us in the United States
District Court for the Northern District of California, alleging infringement by
us of a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm
Patent"). Novadigm alleges that our infringement relates to specific methods for
updating data and software over a computer network that we use in our Castanet
products. Novadigm later identified claims 1, 4, 5, 23, 24, 25, 31, 33 and 34 of
the Novadigm Patent as being infringed. In its complaint, Novadigm requests
preliminary and permanent injunctions prohibiting us and other specified persons
from making, using or selling any infringing products, and claims damages, costs
and attorneys' fees. The complaint also alleges that we have willfully infringed
the Novadigm Patent and seeks up to triple damages under the United States
Patent Act.
On May 2, 1997, we filed our answer to Novadigm's complaint and filed a
counterclaim against Novadigm. Our answer denies Novadigm's allegations and
asserts defenses to Novadigm's claim. Our counterclaim seeks a declaratory
judgment that we do not infringe the Novadigm Patent and that the Novadigm
Patent is invalid and unenforceable.
On August 25, 1997 and January 26, 1998, we filed motions for summary
adjudication asking the court to rule that one of the relevant claims of the
Novadigm Patent is invalid because it was anticipated by two prior art
references. The court denied our motions in part because (1) discovery was
ongoing, (2) the court had not had an opportunity to construe the relevant
language in the Novadigm Patent and (3) the court found there were triable
issues of fact as to the disclosures in those references.
On December 17, 1998, the court held a claims construction hearing on the
appropriate interpretation of particular terms in the Novadigm Patent, and on
December 28, 1998, the court issued an order defining those terms.
On February 12, 1999, Novadigm detailed its position as to why certain
versions of Castanet infringe the asserted claims of the Novadigm Patent and
contended that the alleged comparison of file level and channel level checksums
in non-optimized updating and the comparison of channel level checksums and
their associated update commands in optimized updating infringes the claims of
the Novadigm Patent. We do not believe that Novadigm accurately states the
functionality of Castanet or establishes that Castanet infringes the Novadigm
Patent.
During March and April 1999, Marimba and Novadigm each filed three
dispositive motions in advance of the April 9, 1999 deadline for filing
dispositive motions in this case. We filed two motions seeking summary judgment
that different versions of Castanet do not infringe the Novadigm Patent and a
motion seeking summary judgment that the Novadigm Patent is invalid because it
was anticipated by a prior art reference. Novadigm filed three motions seeking
to limit certain defenses we could raise at trial. The court denied all of
Marimba's and all of Novadigm's dispositive motions without a hearing.
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The trial in this case is scheduled to commence on November 7, 2000. The
trial date was set following a preliminary trial held in November 1999 in which
the court held that there was insufficient evidence to find that Novadigm had
engaged in "inequitable conduct" in the submission of its patent application. To
date, both parties have substantially completed their factual and expert
discovery.
We believe that we have strong defenses against Novadigm's lawsuit.
Accordingly, we intend to defend this suit vigorously. However, we may not
prevail in this litigation. Litigation is subject to inherent uncertainties,
especially in cases such as this where sophisticated factual issues must be
assessed and complex technical issues must be decided. In addition, cases
similar to this involve issues of law that are evolving, presenting further
uncertainty. Our defense of this litigation, regardless of the merits of the
complaint, has been, and will likely continue to be, time-consuming, costly and
a diversion for our technical and management personnel. In addition, publicity
related to this litigation has in the past, and will likely in the future, have
a negative impact on the sale of our products.
A failure to prevail in the litigation could result in:
- our paying monetary damages, which could be tripled if the infringement is
found to have been willful, and which may include paying an ongoing
royalty to Novadigm for the sales of Castanet products or paying lost
profits to Novadigm for particular sales in which we successfully competed
with Novadigm for a sale;
- the issuance of a preliminary or permanent injunction requiring us to stop
selling Castanet in its current form;
- our having to redesign Castanet, which could be costly and time consuming
and could substantially delay Castanet shipments, assuming that a redesign
is feasible;
- our having to reimburse Novadigm for some or all of its attorneys' fees;
- our having to obtain from Novadigm a license to its patent, which license
might not be made available to us on reasonable terms, particularly
because Novadigm is a competitor; and/or
- our having to indemnify our customers against any losses they may incur
due to the alleged infringement.
Any of these results would seriously harm our business and operating results.
These same results could also occur with respect to our other products which
rely on or are built upon the Castanet infrastructure. Furthermore, we expect to
continue to incur substantial costs in defending against this litigation and
these costs could increase significantly if our dispute goes to trial. It is
possible that these costs could substantially exceed our expectations in future
periods.
Marimba v. Novadigm
On July 30, 1999 Marimba filed a complaint against Novadigm in the United
States District Court for the Northern District of California alleging
infringement by Novadigm of a patent held by us (U.S. Patent No. 5,919,247, the
"Marimba Patent"). Our complaint seeks monetary damages, as well as an
injunction to prevent Novadigm from making, using or selling infringing software
products. Our complaint also alleges that Novadigm has willfully infringed the
Marimba Patent and seeks up to triple damages under the United States Patent
Act. A hearing by the court to construe the meaning of the claims of the Marimba
Patent has been scheduled for October 2, 2000. The lawsuit is at a preliminary
stage, and we cannot assure you that the outcome of this litigation will be
favorable to us. In addition, due to the inherent uncertainties in litigation we
cannot determine the total expense or other harm that we may incur as a result
of litigation, arbitration or settlement of our dispute with Novadigm.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
Our common stock is traded publicly on the Nasdaq National Market under the
symbol "MRBA." The following table sets forth for the periods indicated the
highest and lowest closing prices of the common stock during each quarter since
we went public at $20.00 per share on April 30, 1999:
Three Months Ended
Mar. 31, 1999 Jun. 30, 1999 Sept. 30, 1999 Dec. 31, 1999
Price Range per Share: ------------- ------------- -------------- -------------
High........................... $ -- $ 66.44 $ 48.25 $ 46.06
Low............................ -- 30.44 22.50 28.13
On February 29, 2000, the closing price of the common stock on the Nasdaq
National Market was $60.938 per share. As of February 29, 2000, there were
approximately 281 holders of record (not including beneficial holders of stock
held in street name) of the common stock.
Dividend Policy
We did not declare nor pay any cash dividends on our capital stock during the
fiscal years ended December 31, 1999, 1998 and 1997 and do not expect to do so
in the foreseeable future. We anticipate that all future earnings, if any,
generated from operations will be retained by us to develop and expand our
business. Any future determination with respect to the payment of dividends will
be at the discretion of the Board of Directors and will depend upon, among other
things, our operating results, financial condition and capital requirements, the
terms of then-existing indebtedness, general business conditions and such other
factors as the Board of Directors deems relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Period from
February 21,
1996 (Inception)
to
Year Ended December 31, December 31,
1999 1998 1997 1996
----------- ----------- ----------- ----------------
(in thousands, except per share data)
Consolidated Statements of Operations
Data:
Revenues:
License........................... $23,637 $13,901 $ 5,011 $ --
Service........................... 7,776 3,184 552 --
------- ------- ------- -------
Total revenues................ 31,413 17,085 5,563 --
Cost of revenues:
License........................... 402 75 13 --
Service........................... 3,036 1,964 621 --
------- ------- ------- -------
Total cost of revenues........ 3,438 2,039 634 --
------- ------- ------- -------
Gross profit.......................... 27,975 15,046 4,929 --
Operating expenses:
Research and development.......... 8,497 5,773 2,410 515
Sales and marketing............... 19,625 12,371 8,054 473
General and administrative........ 5,066 2,779 2,367 322
Amortization of deferred
compensation...................... 1,410 251 -- --
------- ------- ------- -------
Total operating expenses...... 34,598 21,174 12,831 1,310
------- ------- ------- -------
Loss from operations.................. (6,623) (6,128) (7,902) (1,310)
Interest income, net.................. 2,506 488 338 65
------- ------- ------- -------
Loss before income taxes.............. (4,117) (5,640) (7,564) (1,245)
Provision for income taxes............ 97 41 154 --
------- ------- ------- -------
Net loss.............................. $(4,214) $(5,681) $(7,718) $(1,245)
======= ======= ======= =======
Basic and diluted net loss per share.. $ (.22) $ (.59) $ (1.57) $ (.81)
======= ======= ======= =======
Weighted-average shares of common
stock outstanding used in
computing basic and diluted net
loss per share.................... 19,029 9,606 4,912 1,528
======= ======= ======= =======
Pro forma basic and diluted net loss
per share (unaudited)............. $ (.37)
=======
Shares used in computing pro forma
basic and diluted net loss per
share (unaudited)................. 15,359
=======
December 31,
1999 1998 1997 1996
---------- ---------- ---------- -------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments....................... $ 65,023 $7,825 $14,402 $2,811
Working capital....................... 55,707 2,912 8,036 2,464
Total assets.......................... 90,487 14,862 21,898 3,156
Long-term obligations................. 48 747 211 --
Redeemable convertible preferred
stock -- 18,953 18,953 3,963
Accumulated deficit................... (18,858) (14,644) (8,963) (1,245)
Total stockholders' equity (net
capital deficiency).............. 72,639 (13,743) (8,471) (1,235)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K. This document contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that might cause such differences include, but are not
limited to, fluctuations in customer demand, our ability to manage our growth,
risks associated with competition and risks identified in our most recent
Securities and Exchange Commission filings, including, but not limited to, those
discussed in this Form 10-K under the heading "Other Factors Affecting Operating
Results, Liquidity and Capital Resources."
OVERVIEW
Marimba is a leading provider of Internet-based software management solutions
that are designed to enable companies to expand their market reach, streamline
business processes and strengthen relationships with customers, business
partners and employees. Our Castanet product family provides an efficient and
reliable way for enterprises to distribute, update and manage applications and
related data over corporate networks and the Internet.
In January 1997, we released our first version of Castanet and, to date, have
derived substantially all our revenues from the license of Castanet and related
services. We licensed Castanet in early 1997 to enterprises primarily for pilot
programs that involved limited deployments. In 1997, we grew our organization by
hiring personnel in key areas, particularly sales, research and development and
marketing. During 1998 and 1999, we continued to develop and market our Castanet
products and enhance the core Castanet infrastructure with additional products.
Also, we licensed Castanet to repeat customers for larger scale production
deployments. During this time period, we continued to make substantial
investments in our internal infrastructure by hiring employees throughout the
organization.
Revenues to date have been derived primarily from the license of our Castanet
products and to a lesser extent from maintenance and support, consulting and
training services. Customers who license Castanet generally purchase maintenance
contracts, typically covering a 12-month period. Additionally, customers may
purchase consulting, which is customarily billed by us at a fixed daily rate
plus out-of-pocket expenses. We also offer training services that are billed on
a per student or per class session basis.
We recognize revenue in accordance with Statement of Position or SOP No. 97-2
"Software Revenue Recognition," as amended by Statement of Position 98-4. In
December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with respect to Certain Transactions. SOP 98-9 amends SOP
97-2 and SOP 98-4 extending the deferral of the application of provisions of SOP
97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. Marimba believes that SOP
98-9 may require more revenue to be deferred for some types of transactions.
License revenues are comprised of perpetual or multiyear license fees which
are primarily derived from contracts with corporate customers and resellers. We
recognize license revenues after execution of a license agreement or receipt of
a definitive purchase order and delivery of the product to end-user customers,
provided that there are no uncertainties surrounding product acceptance, the
license fees are fixed or determinable, collectibility is probable and we have
no remaining obligations with regard to installation or implementation of the
software. Revenues on arrangements with customers who are not the ultimate
users, primarily resellers, are not recognized until the software is sold
through to the end user. If the fee due from the customer is not fixed or
determinable, revenues are recognized as payments become due from the customer.
If collectibility is not considered probable, revenues are recognized when the
fee is collected. Advance payments are recorded as deferred revenue until the
products are delivered, services are provided, or obligations are met. Service
revenues are comprised of revenues from maintenance agreements, consulting and
training fees. Revenues from maintenance agreements are recognized on a
straight-line basis over the life of the related agreement, which is typically
one year. We recognize service revenues from training and consulting as such
services are delivered.
We market our products worldwide primarily through a direct sales force and
also through channel partners and system integrators. Pursuant to an agreement
that expired in December 1999, Tivoli was a reseller of our products. In
addition, we also have an original equipment manufacturer (OEM) agreement with
Tivoli under which Tivoli built upon the Castanet infrastructure to develop a
product called Cross-Site, which was released in April 1999. Revenues from
Tivoli under the OEM agreement are derived from per seat royalties on sales of
Cross-Site that contain the Castanet infrastructure. Tivoli accounted for
approximately 8% and 18% of our revenues in 1999 and 1998. The decrease in
Tivoli revenues as a percentage of total revenues during 1999 as compared to
1998 was due to the growth in Marimba's direct sales, as well as Tivoli's
transition from reselling Castanet to selling Cross-Site. The per seat royalties
under the OEM agreement are less than the per seat prices under our reseller
agreement with Tivoli. There is no assurance that royalties from the sale of
Cross-Site will be sufficient to replace Tivoli's sales of Castanet or be
sustained or continue to grow in the future. Any failure of Cross-Site to
achieve widespread market acceptance could significantly harm our business and
operating results.
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Despite our revenue growth, we have incurred significant losses since
inception and, as of December 31, 1999, we had an accumulated deficit of
approximately $18.9 million. We believe our success depends on further
increasing our customer base and on growth in the Internet infrastructure
management market. Accordingly, we intend to continue to invest heavily in
sales, marketing and research and development. Furthermore, we expect to
continue to incur substantial operating losses, and given our expected increases
in operating expenses, we will require significant increases in revenues before
we become profitable.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our sequential
quarterly revenue growth during 1999 and 1998, we do not believe that historical
growth rates are necessarily sustainable nor indicative of future growth.
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RESULTS OF OPERATIONS
The following table presents selected financial data for the periods
indicated as a percentage of total revenues.
Year Ended December 31,
1999 1998 1997
---------- ---------- -------
Consolidated Statement of Operations
Data:
Revenues:
License.......................... 75.2% 81.4% 90.1%
Service.......................... 24.8 18.6 9.9
------- ------- --------
Total revenues............... 100.0 100.0 100.0
Cost of revenues:
License.......................... 1.3 0.4 0.2
Service.......................... 9.7 11.5 11.2
------- ------- --------
Total cost of revenues....... 11.0 11.9 11.4
------- ------- --------
Gross profit......................... 89.0 88.1 88.6
Operating expenses:
Research and development......... 27.0 33.8 43.3
Sales and marketing.............. 62.5 72.4 144.8
General and administrative....... 16.1 16.3 42.5
Amortization of deferred
compensation..................... 4.5 1.5 --
------- ------- --------
Total operating expenses..... 110.1 124.0 230.6
------- ------- --------
Loss from operations................. (21.1) (35.9) (142.0)
Interest income, net................. 8.0 2.8 6.1
------- ------- --------
Loss before income taxes............. (13.1) (33.1) (135.9)
Provision for income taxes........... (0.3) (0.2) (2.8)
------- ------- --------
Net loss............................. (13.4)% (33.3)% (138.7)%
======= ======= ========
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues
Total revenues increased $14.3 million, or 84%, from $17.1 million in 1998 to
$31.4 million in 1999. Total revenues in 1998 increased $11.5 million, or 207%
from $5.6 million in 1997.
License Revenues. Substantially all license revenues have been derived from
sales of our Castanet products. License revenues increased $9.7 million, or 70%,
from $13.9 million in 1998 to $23.6 million in 1999. License revenues in 1998
increased $8.9 million, or 177%, from $5.0 million in 1997.
We attribute the increase in license revenues in 1999 and 1998 to:
- growth in our customer base;
- additional sales to existing customers; and
- an increase in the average order amount of executed license agreements.
Service Revenues. Service revenues include maintenance and support,
consulting and training. Service revenues increased $4.6 million, or 144%, from
$3.2 million in 1998 to $7.8 million in 1999. Service revenues in 1998 increased
$2.6 million, or 477%, from $552,000 in 1997.
As a percentage of total revenues, service revenues were 25%, 19% and 10% of
total revenues in 1999, 1998 and 1997. The increase in service revenues was due
primarily to increased revenues from customer maintenance contracts. Also, we
increased our consulting service revenues as customers elected to utilize our
consulting organization. During 2000, we expect service revenues to increase in
absolute amount and as a percentage of total revenues. An increased shift in our
revenue mix toward services will negatively impact our gross margins because
service revenues have higher costs and therefore lower margins than license
revenues.
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Costs of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of the
cost of third-party software products that were either integrated into our
products or resold by Marimba. Cost of license revenues were $402,000, $75,000
and $13,000 in 1999, 1998 and 1997. The increase from 1998 to 1999 was due
primarily to the cost of a third party product resold by Marimba. The increase
from 1997 to 1998 was due to a third-party software product that we licensed on
September 30, 1997 and embedded in Castanet. Therefore, in 1997, cost of license
revenues includes costs associated with this license only for the fourth
quarter, whereas 1998 and 1999 include a full year of these costs. We expect
cost of license revenues to increase in absolute dollar amount during 2000, but
to remain a relatively small percentage of total revenues.
Cost of Service Revenues. Cost of service revenues includes:
- salaries and related expenses of our customer support organization;
- salaries and related expenses of our consultants for billable consulting
engagements;
- cost of third parties contracted to provide consulting services to our
customers; and
- an allocation of our facilities and depreciation expenses.
Cost of service revenues were $3.0 million, $2.0 million and $621,000 in
1999, 1998 and 1997, representing 39%, 62% and 113% of service revenue,
respectively. The year-to-year increases in absolute dollars of cost of service
revenues were due primarily to growth in our customer support organization and
an increase in consulting costs commensurate with the increase in consulting
revenues. Our customer support organization had 12 employees at both December
31, 1997 and December 31, 1998 and grew to 19 employees at December 31, 1999.
The year-to-year decreases in cost of service revenues as a percentage of
service revenues were primarily due to the economies of scale in our customer
support organization with costs spread over a larger number of maintenance
customers. We expect our cost of service revenues to increase as we continue to
expand our customer support and consulting organizations. Since service revenues
provide lower gross margins than license revenues, this expansion will
negatively impact our gross margins if our license revenues do not significantly
increase.
Operating Expenses
Research and Development. Research and development expenses, which are
expensed as incurred, consist primarily of:
- salaries and related costs of our engineering organization;
- fees paid to third-party consultants; and
- an allocation of our facilities and depreciation expenses.
We believe that our success is dependent in large part on continued
enhancement of our current products and the ability to develop new,
technologically advanced products that meet the sophisticated requirements of
our customers. Accordingly, we have increased our investment in research and
development in each of the periods since inception. Research and development
expenses were $8.5 million, $5.8 million and $2.4 million in 1999, 1998 and
1997. The increases in research and development expenses were due primarily to
significant increases in engineering personnel and related costs, as well as
increases in third-party consulting costs. We expect research and development
expenses to increase in absolute dollar amount in 2000.
Sales and Marketing. Sales and marketing expenses consist primarily of:
- salaries and related costs of our sales and marketing organizations;
- sales commissions;
- costs of our marketing programs, including public relations, advertising,
trade shows, collateral sales materials, our customer advisory council and
seminars;
- rent and facilities costs associated with our regional and international
sales offices; and
- an allocation of our facilities and depreciation expenses.
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Sales and marketing expenses were $19.6 million, $12.4 million and $8.1
million in 1999, 1998 and 1997. The increases in sales and marketing expenses
are due primarily to significant growth in our sales and marketing
organizations, an increase in sales commissions as sales have increased, an
increase in the number of regional and international sales offices and expansion
of our marketing programs. We increased the number of sales and marketing
personnel from 45 employees at December 31, 1997, 65 employees at December 31,
1998 and 90 at December 31, 1999. Marimba also increased the number of sales
offices from two at December 31, 1997 to seven at December 31, 1998 and December
31, 1999. We expect to continue to invest heavily in sales and marketing in
order to grow revenues and expand our brand awareness. Consequently, we expect
to increase the absolute dollar amount of sales and marketing expenses in 2000.
General and Administrative. General and administrative expenses consist
primarily of:
- costs of our finance, human resources and legal services organizations;
- third-party legal and other professional services fees; and
- an allocation of our facilities and depreciation expenses.
General and administrative expenses were $5.1 million, $2.8 million and $2.4
million in 1999, 1998 and 1997. We attribute the increases in general and
administrative expenses to growth of our administrative organizations in support
of overall growth. We increased our general and administrative personnel from 13
at December 31, 1997 to 21 at December 31, 1998 and 26 at December 31, 1999.
Also, during 1999 we incurred costs associated with being a public company. We
expect the absolute dollar amount of general and administrative expenses to
increase in 2000.
Additionally, we have incurred significant outside legal costs in defense of
Novadigm's complaint against us alleging patent infringement filed in March
1997. During 1999, we incurred significant legal costs associated with several
pre-trial motions and overall trial preparation. We expect to incur significant
additional costs related to this complaint in the future, and these costs will
increase substantially if we go to trial. A trial is currently scheduled for
November 2000. We also expect to incur significant legal costs in the future in
connection with our patent litigation complaint against Novadigm.
Deferred Compensation. We recorded deferred compensation of approximately
$1.4 million in 1998, representing the difference between the exercise prices of
options granted to acquire 940,500 shares of common stock during 1998 and the
deemed fair value for financial reporting purposes of our common stock on the
grant dates. In addition, we granted options to purchase common stock in April
1999 for which we recorded additional deferred compensation of approximately
$2.0 million. Deferred compensation is being amortized over the vesting periods
of the options on a graded vesting method. We amortized deferred compensation
expense of $1.4 million during fiscal 1999 and $251,000 during fiscal 1998. This
compensation expense relates to options awarded to individuals in all operating
expense categories. The amortization of deferred compensation, net of reductions
of $260,000 in February 2000 due to cancelled shares, will approximate $892,000
for 2000, $414,000 for 2001 and $114,000 for 2002.
Interest Income, Net
Interest income, net, consists primarily of interest earned on our cash, cash
equivalents and investments offset by interest expenses associated with our
capital leases and equipment advances. Interest income, net was $2.5 million,
$488,000 and $338,000 in 1999, 1998 and 1997. The increases in interest income,
net, relate primarily to increased invested cash balances from the sale of
common stock in our initial public offering in April 1999 and from our equity
financings in August 1996 and August 1997.
Provision for Income Taxes
Our provision for income taxes for the years ended December 31, 1999, 1998
and 1997 consists entirely of foreign taxes. No provision for federal or state
income taxes has been recorded because we have experienced operating losses from
inception through 1999.
As of December 31, 1999, we had federal net operating loss carryforwards of
approximately $15.6 million. We also had a federal research and development tax
credit carryforward of approximately $700,000 at that date. The net operating
loss and credit carryforwards will expire at various dates beginning in 2011
through 2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations contained
in the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of the net operating loss and credits
before utilization.
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Liquidity and Capital Resources
As of December 31, 1999, our principal sources of liquidity included
approximately $22.3 million of cash and cash equivalents and $56.7 million of
investments in marketable securities. In April 1999, we sold shares of our
common stock in our initial public offering, generating net proceeds of
approximately $68 million, after offering expenses. Net cash used in investing
activities for the year ended December 31, 1999 reflects investment of
approximately $65.9 million of the net proceeds from our initial public offering
in marketable securities. Proceeds from other issuances of common stock of
approximately $2.3 million for the year ended December 31, 1999 is comprised
primarily of employee exercises of stock options. Net cash provided by operating
activities for the year ended December 31, 1999 reflects an increase in deferred
revenue offset by our net loss and an increase in accounts receivable.
We currently anticipate that our current cash, cash equivalents and
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter,
cash generated from operations, if any, may not be sufficient to satisfy our
liquidity requirements. We may therefore need to sell additional equity or raise
funds by other means. Any additional financings, if needed, might not be
available on reasonable terms or at all. Failure to raise capital when needed
could seriously harm our business and operating results. If additional funds are
raised through the issuance of equity securities, the percentage of ownership of
our stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to our common stock.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133, as amended, establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. We are required to adopt FAS 133 effective January 1, 2001.
Because Marimba currently holds no derivative financial instruments and does not
currently engage in hedging activities, we do not currently believe that the
adoption of FAS 133, as amended, will have a significant impact on Marimba's
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 101 ("SAB 101"). This summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition policies comply with SAB 101.
YEAR 2000 COMPLIANCE
Our Product Testing and Licensing
We have tested all of our products for Year 2000 compliance. The tests were
run on all supported platforms for each release and include testing for date
calculation and internal storage of date information with test numbers starting
in 1999 and going over the Year 2000 boundary. Based on these tests, we believe
our products to be Year 2000 compliant with respect to date calculations and
internal storage of date information.
We identified one Year 2000 date-related limitation in earlier versions of
Castanet. Versions of Castanet before version 3.2 display date information to
the user in a manner that uses only two digits to represent a year. A two-digit
display of the Year 2000 could cause a user to believe the year represented was
the Year 1900 instead of the Year 2000. This limitation does not affect either
computation of data in our products or operation of the products. All versions
of Castanet currently being shipped use four digits for the display of date data
and we are not aware of any material problems related to versions of Castanet
prior to version 3.2.
Our Internal Systems
Our remediation of internal systems included those related to product
delivery, customer service, internal and external communications, accounting and
payroll, which we consider critical areas of our business. We have sought vendor
certification for all third-party systems and have applied vendor-supplied Year
2000 compliant upgrades to many of our internal systems.
Costs of Addressing Year 2000 Compliance
Our costs to address Year 2000 compliance have not been significant, nor do
we believe we will incur significant operating expenses or be required to invest
heavily in additional computer system improvements to be Year 2000 compliant.
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Results of Year 2000 Remediation
In late 1999, Marimba completed its remediation and testing of systems. We
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
Our Limited Operating History May Prevent Us From Achieving Success in Our
Business
We were founded in February 1996 and have a limited operating history that
may prevent us from achieving success in our business. The revenues and income
potential of our business and market are unproven. We will encounter challenges
and difficulties frequently encountered by early-stage companies in new and
rapidly evolving markets. We may not successfully address any of these
challenges and the failure to do so would seriously harm our business and
operating results. In addition, because of our limited operating history, we
have limited insight into trends that may emerge and affect our business.
We Have Incurred Losses and We Expect Future Losses
Our failure to significantly increase our revenues would seriously harm our
business and operating results. We have experienced operating losses in each
quarterly and annual period since inception and we expect to incur significant
losses in the future. As of December 31, 1999, we had an accumulated deficit of
$18.9 million. We expect to significantly increase our research and development,
sales and marketing and general and administrative expenses. As a result, we
will need to significantly increase our quarterly revenues to achieve and
maintain profitability. We may not be able to sustain our recent revenue growth
rates. In fact, we may not have any revenue growth, and our revenues could
decline.
Our Quarterly Operating Results Are Volatile and Future Operating Results Remain
Uncertain
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. As a result, we believe that
period-to-period comparisons of our operating results are not meaningful and
should not be relied upon as indicators of our future performance. In the
future, our operating results will likely be below the expectations of
securities analysts and investors. Our failure to meet these expectations would
likely seriously harm the market price of our common stock. Operating results
vary depending on a number of factors, many of which are outside our control.
In addition, we anticipate that the size of customer orders may increase as
we focus on larger business accounts. As a result, a delay in recognizing
revenue, even from just one account, could have a significant negative impact on
our operating results. In the past, a significant portion of our sales have been
realized near the end of a quarter. As a result, a delay in an anticipated sale
past the end of a particular quarter could negatively impact our operating
results.
We generally expect that revenues in the first quarter of each year will be
lower than revenues in the fourth quarter of the preceding year due to the
annual nature of companies' purchasing and budgeting cycles and the year-to-date
structure of our sales incentive program.
Our expense levels are relatively fixed and are based, in part, on
expectations as to future revenues. As a result, if revenue levels fall below
our expectations, our net loss will increase because only a small portion of our
expenses vary with our revenues.
We Expect Significant Increases in Our Operating Expenses
We intend to substantially increase our operating expenses as we:
- Increase our sales and marketing activities, including expanding our
direct sales force;
- Increase our research and development activities;
- Expand our customer support and professional services organizations; and
- Expand our distribution channels.
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With these additional expenses, we must significantly increase our revenues
in order to become profitable. These expenses will be incurred before we
generate any revenues by this increased spending. If we do not significantly
increase revenues from these efforts, our business and operating results would
be seriously harmed.
Our Success Depends on Our Castanet Product Family
We expect to continue to derive substantially all of our revenues from our
Castanet software product family and related services. A decline in the price of
Castanet or our inability to increase sales of Castanet would seriously harm our
business and operating results. We cannot predict Castanet's success. We
periodically update Castanet to make improvements and provide additional
enhancements. New versions of Castanet may not provide the benefits we expect
and could fail to meet customers' requirements or achieve widespread market
acceptance. Furthermore, new products such as DocService and our recently
announced Timbale products could fail to meet customer expectations or achieve
widespread market acceptance.
Our strategy requires Castanet to be highly scalable -- in other words, able
to rapidly increase deployment size from a limited number of end-users to a very
large number of end-users. If we are unable to achieve this level of
scalability, the attractiveness of our products and services would be
diminished.
We Need to Develop and Introduce New Products
To provide a comprehensive Internet infrastructure management solution, we
will need to develop and introduce new products which offer functionality that
we do not currently provide. We may not be able to develop these technologies
and therefore we may not be able to offer a comprehensive Internet
infrastructure management solution. In addition, in the past we have experienced
delays in new product releases, and we may experience similar delays in the
future. If we fail to deploy new product releases on a timely basis, our
business and operating results could be seriously harmed. Furthermore, new
products such as DocService and our recently announced Timbale products could
fail to meet customer expectations or achieve widespread market acceptance.
We Depend on the Growth of Our Customer Base
Our success is substantially dependent on the continued growth of our
customer base. If we fail to increase our customer base, our business and
operating results would be seriously harmed. Our ability to attract new
customers will depend on a variety of factors, including the reliability,
security, scalability and cost-effectiveness of our products and services as
well as our ability to effectively market our products and services.
We Depend on Increased Business from Our Current Customers
If we fail to generate repeat and expanded business from our current
customers, our business and operating results would be seriously harmed. Many of
our customers initially make a limited purchase of our products and services for
pilot programs. These customers may not choose to purchase additional licenses
to expand their use of our products. In addition, as we deploy new versions of
our products or introduce new products, our current customers may not require
the functionality of our new products and may not ultimately license these
products.
Because the total amount of maintenance and support fees we receive in any
period depends in large part on the size and number of licenses that we have
previously sold, any downturn in our software license revenues would negatively
impact our future service revenues. In addition, if customers elect not to renew
their maintenance agreements, our service revenues could be significantly
adversely affected.
Implementation of our products by large customers may be complex and customers
could become dissatisfied if implementation of our products proves difficult,
costly or time consuming
Our products must integrate with many existing computer systems and software
programs used by our customers. Integrating with many other computer systems and
software programs can be complex, time-consuming and expensive and cause delays
in the deployment of our products for such customers. Customers could become
dissatisfied with our products if implementations prove to be difficult, costly
or time-consuming and this could negatively impact our ability to sell our
products.
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We Have a Long Sales Cycle that Depends upon Factors Outside Our Control
A customer's decision to purchase our products typically involves a
significant commitment of resources and is influenced by the customer's budget
cycles. In addition, selling our products requires us to educate potential
customers on its use and benefits. As a result, our products have a long sales
cycle which can take over six months. We face difficulty predicting the quarter
in which sales to expected customers may occur. The sale of our products is also
subject to delays from the lengthy budgeting, approval and competitive
evaluation processes that typically accompany significant capital expenditures.
For example, customers frequently begin by evaluating our products on a limited
basis and devote time and resources to testing our products before they decide
whether or not to purchase a license for deployment. Customers may also defer
orders as a result of anticipated releases of new products or enhancements by us
or our competitors.
We Depend on Our Relationship with Tivoli
Tivoli has been a primary reseller of our products. In March of 1998, we
also entered into an original equipment manufacturer agreement with Tivoli under
which Tivoli built upon the Castanet infrastructure to develop a product called
Cross-Site, which was released in April 1999. Tivoli accounted for approximately
8% and 18% of our revenues in 1999 and 1998. During 1999, revenues from Tivoli
were comprised of royalties on the sales of Cross-Site, as well as revenues from
Tivoli's sales of Castanet. During this period, Tivoli transitioned from selling
Castanet to selling Cross-Site. The per seat royalties under the OEM agreement
are less than the per seat prices under our reseller agreement with Tivoli.
There is no assurance that royalties from the sale of Cross-Site will be
sufficient to replace Tivoli's sales of Castanet or be sustained or continue to
grow in the future. Any failure of Cross-Site to achieve widespread market
acceptance could significantly harm our business and operating results.
Additionally, because Cross-Site is built upon the Castanet infrastructure, we
expect Cross-Site to compete with our Castanet products.
Novadigm Has Claimed that We Infringe Its Intellectual Property
On March 3, 1997, Novadigm filed a complaint against us in the United States
District Court for the Northern District of California, alleging infringement by
us of a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm
Patent"). Novadigm alleges that our infringement relates to methods for updating
data and software over a computer network that we use in our Castanet products.
The complaint also alleges that we have willfully infringed the Novadigm Patent
and seeks up to triple damages under the United States Patent Act. On May 2,
1997, we filed our answer to Novadigm's complaint and filed a counterclaim
against Novadigm.
Litigation is subject to inherent uncertainties. In addition, cases like this
generally involve issues of law that are evolving, presenting further
uncertainty. Our defense of this litigation, regardless of the merits of the
complaint, has been, and will likely continue to be, time-consuming and a
diversion for our personnel. In addition, publicity related to this litigation
has in the past, and will likely in the future, have a negative impact on the
sale of our Castanet products.
A failure to prevail in the litigation could result in:
- Our paying monetary damages, which could be tripled if the infringement is
found to have been willful;
- The issuance of a preliminary or permanent injunction requiring us to stop
selling Castanet in its current form;
- Our having to redesign Castanet, which could be costly and time-consuming
and could substantially delay Castanet shipments, assuming that a redesign
is feasible;
- Our having to reimburse Novadigm for some or all of its attorneys' fees;
- Our having to obtain from Novadigm a license to its patent, which license
might not be made available to us on reasonable terms, particularly
because Novadigm is a competitor; and/or
- Our having to indemnify our customers against any losses they may incur
due to the alleged infringement.
Any of these results would seriously harm our business and operating results.
These same results could also occur with respect to our other products which
rely on or are built upon the Castanet infrastructure. Furthermore, we expect to
continue to incur substantial costs in defending against this litigation and
these costs could increase significantly increase when our dispute goes to
trial. It is possible that these costs could substantially exceed our
expectations in future periods.
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Our Markets Are Highly Competitive
Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. Our failure to maintain
and enhance our competitive position could seriously harm our business and
operating results. We encounter competition from a number of sources, including:
- Sellers of enterprise-wide management systems, which include electronic
software distribution;
- Companies that market products that support the distribution of software
applications; and
- Desktop software management suites.
In addition, we compete with various methods of application distribution and
management, including thin client systems and the web browser, and with
application server vendors and others that have introduced software distribution
capabilities into their products.
Potential competitors may bundle their products or incorporate an Internet
infrastructure management component into existing products in a manner that
discourages users from purchasing our products. For example, we expect that
future releases of Microsoft's Windows operating systems, which manage the
programs on a computer, will include components addressing Internet
infrastructure management functions. Furthermore, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have more extensive customer bases and broader customer
relationships that they could leverage, including relationships with many of our
current and potential customers. These companies also have significantly more
established customer support and professional services organizations than we do.
In addition, these companies may adopt aggressive pricing policies which we are
unable to match. In the past, we have lost potential customers to competitors
for various reasons, including lower prices.
Protection of Our Intellectual Property Is Limited
We rely on a combination of patent, trademark, trade secret and copyright law
and contractual restrictions to protect the proprietary aspects of our
technology. These legal protections afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use our proprietary information.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets and to determine the validity and scope of the
proprietary rights of others. For example, on July 30, 1999 we filed a complaint
against Novadigm alleging patent infringement. Such litigation could result in
substantial costs and diversion of resources and could seriously harm our
business and operating results. The lawsuit is at a preliminary stage, and we
cannot assure you that the outcome of this litigation will be favorable to us.
For a description of our action against Novadigm, please see "Legal Proceedings
- - Marimba v. Novadigm." In addition, we sell our products internationally, and
the laws of many countries do not protect our proprietary rights as well as the
laws of the United States.
We May Be Found to Infringe Proprietary Rights of Others
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, or limit or interfere with our ability to
make, use or sell our products. As a result, we may be found to infringe on the
proprietary rights of others. Furthermore, companies in the software market are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. We could incur substantial costs to defend any
litigation, and intellectual property litigation could force us to do one or
more of the following:
- Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- Obtain a license from the holder of the infringed intellectual property
right; and
- Redesign products or services.
In the event of a successful claim of infringement against us and our failure
or inability to license the infringed technology, our business and operating
results would be significantly harmed. For a description of our current
litigation with Novadigm, Inc. please see "Novadigm Has Claimed that We Infringe
Its Intellectual Property."
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We Depend upon Third-Party Distribution Relationships and Need to Develop New
Relationships
We have a limited number of distribution agreements and we may not be able to
increase our number of distribution relationships or maintain our existing
relationships. For example, Netscape, a former reseller of our products,
accounted for a significant amount of our revenues in 1998 and 1997, but is no
longer a reseller of our products.
Our current agreements with our channel partners do not prevent these
companies from selling products of other companies, including products that may
compete with our products, and do not generally require these companies to
purchase minimum quantities of our products. These distributors could give
higher priority to the products of other companies or to their own products,
than they give to our products. In addition, sales through these channels
generally have a lower price than direct sales. As a result, while the loss of,
or significant reduction in sales volume to any of our current or future
distribution partners could seriously harm our revenues and operating results, a
significant increase in sales through these channels could also negatively
impact our gross margins.
We Need to Develop and Expand Our Sales, Marketing and Distribution Capabilities
We need to expand our marketing and direct sales operations in order to
increase market awareness of our products, market our products to a greater
number of enterprises and generate increased revenues. However, competition for
qualified sales personnel is intense and we may not be able to hire enough
qualified individuals in the future. Our products and services require a
sophisticated sales effort targeted at senior management of our prospective
customers. New hires require extensive training and typically take at least six
months to achieve full productivity. In addition, we have limited experience
marketing our products broadly to a large number of potential customers.
We Need to Expand Our Professional Services
We may not be able to attract, train or retain the number of highly qualified
services personnel that our business needs. We believe that growth in our
product sales depends on our ability to provide our customers with professional
services and to educate third-party resellers and consultants on how to provide
similar services. As a result, we plan to increase the number of our services
personnel to meet these needs. However, competition for qualified services
personnel is intense.
We expect our service revenues to increase in dollar amount as we continue to
provide support, consulting and training services that complement our products
and as our installed base of customers grows. This could negatively impact our
gross margin because margins on revenues derived from services are generally
lower than gross margins on revenues derived from the license of our products.
Expanding Internationally Is Expensive, We May Receive No Benefit from Our
Expansion and Our International Operations Are Subject to Governmental
Regulation
We plan to increase our international sales force and operations. However, we
may not be successful in increasing our international sales. In addition, our
international business activities are subject to a variety of risks, including
the adoption of laws, currency fluctuations, actions by third parties and
political and economic conditions that could restrict or eliminate our ability
to do business in foreign jurisdictions. To date, we have not adopted a hedging
program to protect us from risks associated with foreign currency fluctuations.
Export, and in some cases, import clearances must be obtained before our
products can be distributed internationally. Current or new government laws and
regulations, or the application of existing laws and regulations, could expose
us to significant liabilities, significantly slow our growth and seriously harm
our business and operating results.
We Must Manage Our Growth and Expansion
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Any failure to manage
growth effectively could seriously harm our business and operating results. To
be successful, we will need to implement additional management information
systems, improve our operating, administrative, financial and accounting systems
and controls, train new employees and maintain close coordination among our
executive, engineering, accounting, finance, marketing, sales and operations
organizations. In addition, our growth has resulted, and any future growth will
result, in increased responsibilities for management personnel.
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We Must Retain and Attract Key Personnel
Our success depends largely on the skills, experience and performance of the
members of our senior management and other key personnel, including our
President and Chief Executive Officer, Kim Polese, and our Chief Technical
Officer, Arthur van Hoff. In March 2000, we announced that Mr. Williams intends
to relinquish his position as Executive Vice President, Worldwide Sales and
Chief Operating Officer effective May 1, 2000 to pursue another career
opportunity. Although Mr. Williams will be joining Marimba's board of directors,
at this time we have not named a replacement for Mr. Williams. We may not be
successful in attracting a qualified senior management individual to replace Mr.
Williams or be able to attract, assimilate and retain other key personnel in the
future. None of our senior management or other key personnel is bound by an
employment agreement. If we lose additional key employees and are unable to
replace them with qualified individuals, our business and operating results
could be seriously harmed. In addition, our future success will depend largely
on our ability to continue attracting and retaining highly skilled personnel.
Like other companies in the San Francisco Bay Area, we face intense competition
for qualified personnel.
We Rely on Third-Party Software and Applications
We integrate third-party security and encryption software and digital
certificates as a component of our software. There are inherent limitations in
the use and capabilities of much of the technology that we license from third
parties. As a result, we face a number of challenges in integrating these
technologies into our products. We would be seriously harmed if the providers
from whom we license software ceased to deliver and support reliable products,
enhance their current products or respond to emerging industry standards. In
addition, the third-party software may not continue to be available to us on
commercially reasonable terms or at all. The loss of, or inability to maintain
or obtain this software, could result in shipment delays or reductions.
Furthermore, we might be forced to limit the features available in our current
or future product offerings. Either alternative could seriously harm our
business and operating results.
Almost all of our products are written in Java and require a Java virtual
machine made available by Sun Microsystems, Inc. in order to operate. Sun may
not continue to make these implementations of the Java virtual machines
available at commercially reasonable terms or at all. Furthermore, if Sun were
to make significant changes to the Java language or its Java virtual machine
implementations, or fail to correct defects and limitations in these products,
our ability to continue to improve and ship our products could be impaired. In
the future, our customers may also require the ability to deploy our products on
platforms for which technically acceptable Java implementations either do not
exist or are not available on commercially reasonable terms. Our customers may
also use particular implementations of the Java virtual machine that may not be
technically or commercially acceptable for integration into our products.
Software Defects in Castanet Would Harm Our Business
Complex software products like ours often contain errors or defects,
including errors relating to security, particularly when first introduced or
when new versions or enhancements are released. Our products extensively utilize
digital certificates and other complex technology. Our use of this technology
has in the past and may in the future result in product behavior problems which
may not be anticipated by us or our customers. For example, most versions of
Castanet shipped before Castanet 4.0 contain digital certificates that cause
Castanet and any applications being delivered with Castanet to stop running when
the certificate used expires. We have developed an update which avoids this
problem and have distributed the update to customers. It is possible that we may
not have identified all affected customers. Customers that do not install the
update will experience this problem with respect to any applications they have
deployed with Castanet and signed with a certificate on the date of expiration
of the certificate they elected to use. Defects or errors in current or future
products could result in lost revenues or a delay in market acceptance, which
would seriously harm our business and operating results.
Since many of our customers use our products for business-critical
applications, errors, defects or other performance problems could result in
financial or other damage to our customers and could significantly impair their
operations. Our customers could seek damages for losses related to any of these
issues. For example, we could be subject to claims for losses by customers that
we are unable to identify and notify and, as a result, do not install our update
that avoids the digital certificate problem. A product liability claim brought
against us, even if not successful, would likely be time consuming and costly to
defend and could adversely affect our marketing efforts.
Year 2000 Issues Could Affect Our Business
We have assessed Year 2000 issues with the computer communications, software
and security systems that we use to deliver and manage our products and to
manage our internal operations. If our systems do not operate properly with
respect to date calculations involving the Year 2000 and subsequent dates, we
could incur unanticipated expenses to remedy any problems, which could seriously
harm our business. We may also experience reduced sales of our products as
current or potential customers reduce their budgets for Internet infrastructure
management products due to increased expenditures on their own Year 2000
compliance efforts.
We have identified one Year 2000 date-related limitation in earlier versions of
Castanet. Versions of Castanet before 3.2 display date-related data to the user
in a manner that uses only two digits to represent a year. A two-digit display
of the Year 2000 could cause a user to
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believe the year represented was 1900 instead of 2000. Despite our testing and
correcting, our products, including Castanet 4.0, may contain errors or faults
with respect to the Year 2000.
In late 1999, Marimba completed its remediation and testing of systems. We
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products, our
internal systems, or the products and services of third parties.
Volatility of Stock Price
The market price of our common stock has been and is likely to continue to be
highly volatile. The market price of our common stock may be significantly
affected by factors such as actual or anticipated fluctuations in our operating
results, announcements of technological innovations, new products or new
contracts by us or our competitors, developments with respect to patents or
proprietary rights and related litigation, adoption of new accounting standards
affecting the software industry, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market price for the
common stock of technology companies. These types of broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against such a
company. Such litigation against Marimba could result in substantial costs and a
diversion of our attention and resources and seriously harm our business and
operating results.
Our Future Capital Needs Are Uncertain
We expect that our current cash, cash equivalents and investments will be
sufficient to meet our working capital and capital expenditure needs for at
least twelve months. After that, we may need to raise additional funds, and
additional financing may not be available on favorable terms, if at all. This
could seriously harm our business and operating results. Furthermore, if we
issue additional equity securities, stockholders may experience dilution, and
the new equity securities could have rights senior to those of existing holders
of our common stock. If we cannot raise funds, if needed, on acceptable terms,
we may not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
We Face Challenges Stemming from Our Emerging Markets
The market for Internet infrastructure management software has only recently
begun to develop, is rapidly evolving and will likely have an increasing number
of competitors. We cannot be certain that a viable market for our products will
emerge or be sustainable. If the Internet infrastructure management market fails
to develop, or develops more slowly than expected, our business and operating
results would be seriously harmed.
Furthermore, in order to be successful in this emerging market, we must be
able to differentiate Marimba from our competitors through our product and
service offerings and brand name recognition. We may not be successful in
differentiating Marimba or achieving widespread market acceptance of our
products and services. Furthermore, enterprises that have already invested
substantial resources in other methods of deploying and managing their
applications and services may be reluctant or slow to adopt a new approach that
may replace, limit or compete with their existing systems.
We Depend on Continued Use of the Internet and Growth of Electronic Business
Rapid growth in the use of and interest in the Internet has occurred only
recently. As a result, acceptance and use may not continue to develop at
historical rates, and a sufficiently broad base of consumers may not adopt, and
continue to use, the Internet and other online services as a medium of commerce.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and there exist few
proven services and products.
In addition, the Internet may not be accepted as a long-term commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Our success will depend, in
large part, upon third parties maintaining the Internet infrastructure to
provide a reliable network backbone with the necessary speed, data capacity,
security and hardware necessary for reliable Internet access and services.
We Must Respond to Rapid Technological Change and Evolving Industry Standards
The markets for our Internet infrastructure management solutions are marked by
rapid technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. New products based on new technologies or new industry standards can
quickly render existing products obsolete and unmarketable. Any delays in our
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ability to develop and release enhanced or new products could seriously harm our
business and operating results. Our technology is complex, and new products and
product enhancements can require long development and testing periods. Our
failure to conform to prevailing standards could have a negative effect on our
business and operating results.
Risks Associated with Potential Acquisitions
We may make acquisitions in the future. Acquisitions of companies, products or
technologies entail numerous risks, including an inability to successfully
assimilate acquired operations and products, diversion of management's
attention, loss of key employees of acquired companies and substantial
transaction costs. Some of the products acquired may require significant
additional development before they can be marketed and may not generate revenue
at levels anticipated by us. Moreover, future acquisitions by us may result in
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs and the creation of goodwill or other intangible
assets that could result in significant amortization expense. Any of these
problems or factors could seriously harm our business, financial condition and
operating results.
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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell primarily in North America,
Asia and Europe. As a result, our financial results could be affected by various
factors, including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our products less competitive in
foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our investments
are in short-term instruments.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
- obligations of the U.S. government and its agencies;
- investment grade state and local government obligations;
- securities of U.S. corporations rated A1 or AA by Standard and Poors or
the Moody's equivalent; and
- money market funds, deposits or notes issued or guaranteed by U.S. and
non-U.S. commercial banks meeting particular credit rating and net worth
requirements with maturities of less than two years.
The following table presents the amounts of cash equivalents and investments
that are subject to market risk and the weighted average interest rates, by year
of expected maturity for our investment portfolio as of December 31, 1999 and
1998. This table does not include money market funds because those funds are not
subject to market risk.
Maturing during
2000 2001
-------- --------
(in thousands)
December 31, 1999:
Cash equivalents....................... $ 1,991 $ --
Weighted average interest rate.... 6.26% --
Investments............................ $42,760 $ 13,989
Weighted average interest rate.... 5.60% 6.06%
Total.................................. $44,751 $ 13,989
Weighted average interest rate.... 5.64% 6.06%
Maturing during
1999
-------
(in thousands)
December 31, 1998:
Cash equivalents....................... $ 500
Weighted average interest rate.... 6.01%
Investments............................ $ 4,125
Weighted average interest rate.... 5.33%
Total.................................. $ 4,625
Weighted average interest rate.... 5.40%
Exchange Rate Sensitivity
We operate primarily in the United States and all sales to date have been
made in US dollars. Accordingly, we have had no material exposures to foreign
currency rate fluctuations.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MARIMBA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors .......... 29
Consolidated Balance Sheets ................................ 30
Consolidated Statements of Operations and Comprehensive Loss 31
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency) .. 32
Consolidated Statements of Cash Flows ...................... 33
Notes to Consolidated Financial Statements ................. 34
28
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Marimba, Inc.
We have audited the accompanying consolidated balance sheets of Marimba, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations and comprehensive loss, redeemable convertible preferred stock and
stockholders' equity (net capital deficiency), and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. These 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 as 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 consolidated financial position of Marimba, Inc. at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Palo Alto, California /s/ ERNST & YOUNG LLP
January 14, 2000
29
30
MARIMBA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
December 31,
1999 1998
--------- --------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 22,263 $ 3,700
Short-term investments ......................................... 42,760 4,125
Accounts receivable, net of allowances of $104
and $70 at December 31, 1999 and 1998 ........................ 7,399 2,585
Unbilled receivables ........................................... -- 1,036
Prepaid expenses and other current assets ...................... 1,085 371
-------- --------
Total current assets ......................................... 73,507 11,817
Property and equipment, net ...................................... 2,955 2,747
Long-term investments ............................................ 13,989 --
Other assets ..................................................... 36 298
-------- --------
$ 90,487 $ 14,862
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities ..................... $ 3,143 $ 1,396
Accrued compensation ......................................... 3,279 1,704
Current portion of capital lease obligations and ............. 59 286
equipment advances
Deferred revenue ............................................. 11,319 5,519
-------- --------
Total current liabilities ................................ 17,800 8,905
Long-term portion of capital lease obligations and
equipment advances and other long-term liabilities............ 48 747
Commitments and contingencies
Preferred stock; $.0001 par value, 10,000 shares and 15,000 shares
authorized at December 31, 1999 and 1998, no shares issued
and outstanding in 1999, 1998 shares issuable in series:
Series A redeemable convertible preferred stock, 2,800 shares
designated; no shares and 2,766 shares issued and
outstanding at December 31, 1999 and 1998................. -- 4,055
Series B redeemable convertible preferred stock, 3,050
shares designated; no shares and 2,987 shares issued and
outstanding at December 31, 1999 and 1998................. -- 14,898
Stockholders' equity (net capital deficiency):
Common stock; $.0001 par value, 80,000 and 30,000 shares
authorized at December 31, 1999 and 1998, 23,146 and
13,053 shares issued and outstanding at December 31,
1999 and 1998............................................. 2 1
Additional paid-in capital ................................... 93,436 2,182
Note receivable from officer ................................. -- (160)
Deferred compensation ........................................ (1,680) (1,116)
Cumulative translation adjustment ............................ (22) (6)
Unrealized loss on investments ............................... (239) --
Accumulated deficit .......................................... (18,858) (14,644)
-------- --------
Stockholders' equity (net capital deficiency)............. 72,639 (13,743)
-------- --------
$ 90,487 $ 14,862
======== ========
See accompanying notes.
30
31
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
1999 1998 1997
-------- -------- -------
Revenues:
License........................................ $23,637 $13,901 $5,011
Service........................................ 7,776 3,184 552
------- ------- ------
Total revenues.............................. 31,413 17,085 5,563
Cost of revenues:
License........................................ 402 75 13
Service........................................ 3,036 1,964 621
------- ------- ------
Total cost of revenues...................... 3,438 2,039 634
------- ------- ------
Gross profit........................................ 27,975 15,046 4,929
Operating expenses:
Research and development....................... 8,497 5,773 2,410
Sales and marketing............................ 19,625 12,371 8,054
General and administrative..................... 5,066 2,779 2,367
Amortization of deferred compensation.......... 1,410 251 --
------- ------- ------
Total operating expenses.................... 34,598 21,174 12,831
------- ------- ------
Loss from operations................................ (6,623) (6,128) (7,902)
Interest income..................................... 2,536 518 350
Interest expense.................................... (30) (30) (12)
------- ------- ------
Loss before income taxes............................ (4,117) (5,640) (7,564)
Provision for income taxes.......................... 97 41 154
------- ------- ------
Net loss............................................ $(4,214) $(5,681) $(7,718)
======= ======= =======
Other comprehensive loss:
Translation adjustment.......................... (16) (6) --
Unrealized loss on investments.................. (239) -- --
------- ------- -------
Comprehensive loss.................................. $(4,469) $(5,687) $(7,718)
======= ======= =======
Basic and diluted net loss per share................ $ (.22) $ (.59) $ (1.57)
======= ======= =======
Weighted-average shares of common stock outstanding
used in computing basic and diluted net loss
per share...................................... 19,029 9,606 4,912
======= ======= =======
Pro forma basic and diluted net loss per share
(unaudited).................................... $ (.37)
=======
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)................. 15,359
=======
See accompanying notes.
31
32
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS)
Stockholders' Equity (Net Capital Deficiency)
-------------------------------------------------------
Redeemable
Convertible Note
Preferred Stock Common Stock Additional Receivable
---------------------- ----------------------- Paid-in From
Shares Amount Shares Amount Capital Officer
-------- -------- -------- -------- -------- --------
Balances at December 31,
1996 ..................... 2,699 $ 3,963 10,000 $ 1 $ 9 $ --
Issuance of Series A
redeemable convertible
preferred stock to
officer, net of
issuance costs of $8 ..... 67 92 -- -- -- --
Issuance of Series B
redeemable convertible
preferred stock to
investors, net of
issuance costs of $62 .... 2,987 14,898 -- -- -- --
Issuance of common stock
upon exercise of stock
options .................. -- -- 2,850 -- 495 --
Issuance of common stock
for services ............. -- -- 67 -- 10 --
Issuance of common stock
upon exercise of stock
options by an officer
in exchange for a note
receivable ............... -- -- 300 -- 150 (150)
Repurchases of common stock .. -- -- (150) -- (23) --
Net loss ..................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balances at December 31,
1997 ..................... 5,753 18,953 13,067 1 641 (150)
Issuance of common stock
upon exercise of stock
options .................. -- -- 239 -- 230 --
Repurchases of common stock .. -- -- (253) -- (56) --
Translation adjustment ....... -- -- -- -- -- --
Interest on note receivable
from an officer .......... -- -- -- -- -- (10)
Deferred compensation ........ -- -- -- -- 1,367 --
Amortization of deferred
compensation ............. -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balances at December 31,
1998 ..................... 5,753 18,953 13,053 1 2,182 (160)
Sale of common stock in
initial public offering,
net ..................... -- -- 3,736 -- 68,075 --
Conversion of Series A and
Series B redeemable
preferred stock to
common stock ............. (5,753) (18,953) 5,753 1 18,952 --
Issuance of common stock
upon exercise of stock
options and warrant ...... -- -- 632 -- 1,561 --
Issuance of common stock
under employee stock
purchase plan ............ -- -- 42 -- 719 --
Repurchases of common stock .. -- -- (70) -- (27) --
Translation adjustment ....... -- -- -- -- -- --
Repayment of note
receivable from an
officer .................. -- -- -- -- -- 160
Unrealized loss on
investments .............. -- -- -- -- -- --
Deferred compensation ........ -- -- -- -- 1,974 --
Amortization of deferred
compensation ............. -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balances at December 31,
1999 ..................... -- $ -- 23,146 $ 2 $ 93,436 $ --
======== ======== ======== ======== ======== ========
Stockholders' Equity (Net Capital Deficiency)
---------------------------------------------------------------------------
Stockholders'
Cumulative Unrealized Equity
Deferred Translation Loss on Accumulated (Net Capital
Compensation Adjustment Investments Deficit Deficiency)
-------- -------- -------- -------- --------
Balances at December 31,
1996 ..................... $ -- $ -- $ -- $ (1,245) $ (1,235)
Issuance of Series A
redeemable convertible
preferred stock to
officer, net of
issuance costs of $8 ..... -- -- -- -- --
Issuance of Series B
redeemable convertible
preferred stock to
investors, net of
issuance costs of $62 .... -- -- -- -- --
Issuance of common stock
upon exercise of stock
options .................. -- -- -- -- 495
Issuance of common stock
for services ............. -- -- -- -- 10
Issuance of common stock
upon exercise of stock
options by an officer
in exchange for a note
receivable ............... -- -- -- -- --
Repurchases of common stock .. -- -- -- -- (23)
Net loss ..................... -- -- -- (7,718) (7,718)
-------- -------- -------- -------- --------
Balances at December 31,
1997 ..................... -- -- -- (8,963) (8,471)
Issuance of common stock
upon exercise of stock
options .................. -- -- -- -- 230
Repurchases of common stock .. -- -- -- -- (56)
Translation adjustment ....... -- (6) -- -- (6)
Interest on note receivable
from an officer .......... -- -- -- -- (10)
Deferred compensation ........ (1,367) -- -- -- --
Amortization of deferred
compensation ............. 251 -- -- -- 251
Net loss ..................... -- -- -- (5,681) (5,681)
-------- -------- -------- -------- --------
Balances at December 31,
1998 ..................... (1,116) (6) -- (14,644) (13,743)
Sale of common stock in
initial public offering,
net ..................... -- -- -- -- 68,075
Conversion of Series A and
Series B redeemable
preferred stock to
common stock ............. -- -- -- -- 18,953
Issuance of common stock
upon exercise of stock
options and warrant ...... -- -- -- -- 1,561
Issuance of common stock
under employee stock
purchase plan ............ -- -- -- -- 719
Repurchases of common stock .. -- -- -- -- (27)
Translation adjustment ....... -- (16) -- -- (16)
Repayment of note
receivable from an
officer .................. -- -- -- -- 160
Unrealized loss on
investments .............. -- -- (239) -- (239)
Deferred compensation ........ (1,974) -- -- -- --
Amortization of deferred
compensation ............. 1,410 -- -- -- 1,410
Net loss ..................... -- -- -- (4,214) (4,214)
-------- -------- -------- -------- --------
Balances at December 31,
1999 ..................... $ (1,680) $ (22) $ (239) $(18,858) $ 72,639
======== ======== ======== ======== ========
See accompanying notes.
32
33
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
1999 1998 1997
---- ---- ----
Operating activities:
Net loss .............................................................. $ (4,214) $ (5,681) $ (7,718)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 1,233 934 336
Amortization of deferred compensation ......................... 1,410 251 --
Other ......................................................... (16) (16) --
Changes in operating assets and liabilities:
Accounts receivable, net .................................. (4,814) 2,006 (4,541)
Unbilled receivables ...................................... 1,036 (1,036) --
Prepaid expenses and other current assets.................. (714) (123) (218)
Other assets .............................................. 262 (42) (250)
Accounts payable and accrued liabilities................... 1,747 (544) 1,712
Accrued compensation ...................................... 1,575 169 1,535
Deferred revenue .......................................... 5,800 (2,078) 7,397
Other liabilities ......................................... 13 2 34
-------- -------- --------
Net cash provided by (used in) operating activities................... 3,318 (6,158) (1,713)
-------- -------- --------
Investing activities:
Capital expenditures .............................................. (1,441) (1,280) (2,479)
Purchases of investments .......................................... (65,863) (7,125) --
Sales of investments .............................................. 13,000 3,000 --
-------- -------- --------
Net cash used in investing activities ................................. (54,304) (5,405) (2,479)
-------- -------- --------
Financing activities:
Proceeds from issuance of redeemable convertible preferred stock .. -- -- 14,990
Proceeds from issuance of common stock, net of repurchases ........ 2,253 174 482
Proceeds from sale of common stock in initial public offering,
net .......................................................... 68,075 -- --
Repayment of note receivable from officer ......................... 160 -- --
Proceeds from sale and lease back and equipment advances .......... -- 811 378
Principal payments under capital lease obligations................. (939) (124) (67)
-------- -------- --------
Net cash provided by financing activities ............................. 69,549 861 15,783
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................... 18,563 (10,702) 11,591
Cash and cash equivalents at beginning of period ...................... 3,700 14,402 2,811
-------- -------- --------
Cash and cash equivalents at end of period ............................ $ 22,263 $ 3,700 $ 14,402
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid ..................................................... $ 30 $ 30 $ 12
======== ======== ========
Income taxes paid ................................................. $ 97 $ 41 $ 154
======== ======== ========
Supplemental disclosure of noncash investing and financing
activities:
Common stock issued in exchange for note receivable from officer .. $ -- $ -- $ 150
======== ======== ========
Conversion of redeemable preferred stock to common stock .......... 18,953 -- --
======== ======== ========
Deferred stock compensation ....................................... $ 1,974 $ 1,367 $ --
======== ======== ========
See accompanying notes.
33
34
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Marimba was incorporated in Delaware on February 21, 1996. Marimba develops
and markets Internet-based software management solutions ("Castanet Products"),
that distribute, update, and manage applications and related data over corporate
intranets, extranets and the Internet. Marimba markets its products worldwide
through a combination of a direct sales force, resellers and OEM partners.
Substantially all of Marimba's license revenues are derived from sales of the
Castanet Products. The Castanet Products are the subject of a patent lawsuit.
Marimba believes that it has strong defenses against the lawsuit. However, the
failure of Marimba to prevail could have a material adverse effect on Marimba's
results of operations and financial condition. Currently, no reasonable estimate
can be made of the possible loss or range of loss that may arise from this
lawsuit. See Note 8.
The consolidated financial statements include the accounts of Marimba and its
wholly-owned subsidiary in the United Kingdom. Intercompany accounts and
transactions have been eliminated in consolidation.
Marimba has incurred operating losses to date and had an accumulated deficit
of $18,858,000 at December 31, 1999. Marimba's activities have been primarily
financed through its initial public offering of common stock and earlier private
placements of equity securities. Marimba may need to raise additional capital
through the issuance of debt or equity securities. Such financing may not be
available on terms satisfactory to Marimba, if at all.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from those estimates.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9,
"Software Revenue Recognition." These statements provide guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. SOP 97-2, as amended by SOP 98-4, is effective for Marimba's
transactions entered into subsequent to January 1, 1998. The application of SOP
97-2 and SOP 98-4 has not had a material impact on Marimba's results of
operations.
SOP 98-9 amends SOP 97-2 and 98-4, extending the deferral of the application
of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. Marimba expects that SOP 98-9 may require more revenue to be deferred
for certain types of transactions.
License revenues are comprised of perpetual or multiyear license fees which
are primarily derived from contracts with corporate customers and resellers.
Such revenues are recognized after execution of a license agreement or receipt
of a definitive purchase order, and delivery of the product to end-user
customers, provided that there are no uncertainties surrounding product
acceptance, the license fees are fixed or determinable, collectibility is
probable and Marimba has no remaining obligations with regard to installation or
implementation of the software. Revenue on arrangements with customers who are
not the ultimate users (primarily resellers) is not recognized until the product
is delivered to the end user. If the fee due from the customer is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected. Advance payments are recorded as deferred revenue until the products
are shipped, services are provided, or obligations are met. Marimba's products
do not require significant customization.
Revenue recognized from multiple-element software arrangements are allocated
to each element of the arrangement based on the fair value of the elements, such
as software products, maintenance and support and consulting services. The
determination of fair value is based on objective evidence which is specific to
Marimba.
34
35
Service revenues are comprised of revenue from maintenance agreements,
consulting and training fees. Software maintenance agreements provide technical
support and the right to unspecified upgrades on an if-and-when available basis.
Service revenues from training and consulting are recognized upon completion
of the work to be performed. Revenue from maintenance agreements is deferred and
recognized on a straight-line basis over the life of the related agreement,
which is typically one year.
Unbilled receivables consist of contractually obligated amounts not yet
billable by Marimba.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility, which, for Marimba, is
established upon completion of a working model. Costs incurred by Marimba
between completion of the working model and the point at which the product is
ready for general release have been insignificant. Therefore, all research and
development costs through December 31, 1999 have been expensed as incurred.
Advertising
Marimba expenses advertising costs as incurred. Advertising expense was
$562,000, $51,000 and $63,000 for the years ended December 31, 1999, 1998 and
1997.
Cash, Cash Equivalents and Investments
Cash equivalents consist of financial instruments which are readily
convertible to cash and have original maturities of three months or less at the
time of acquisition. Marimba's cash and cash equivalents as of December 31, 1999
and 1998 consist primarily of commercial paper, and demand deposits and money
market funds held by large financial institutions in the United States. The
carrying value of cash and cash equivalents approximates fair value at December
31, 1999 and 1998.
Marimba classifies, at the date of acquisition, its marketable securities
into available-for-sale categories in accordance with the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Currently, Marimba classifies its securities as available-for-sale
which are reported at fair market value with the related unrealized gains and
losses included in stockholders' equity. Unrealized gains and losses were not
material for the year ended December 31, 1998. Realized gains and losses and
declines in value of securities judged to be other than temporary are included
in interest income. Interest and dividends on all securities are included in
interest income. Investments with maturities between three and twelve months are
considered short-term investments.
35
36
Investments available-for-sale are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(in thousands)
December 31, 1999:
Corporate notes.................. $ 38,935 $ -- $ (163) $ 38,772
Debt securities from U.S.
Government and government
agencies...................... 14,079 -- (69) 14,010
Market auction rate preferred
stock......................... 1,909 -- -- 1,909
Certificates of deposits......... 2,065 -- (7) 2,058
--------- --------- ---------- ---------
Total investments............. $ 56,988 $ -- $ (239) $ 56,749
========= ========= ========== =========
Short-term investments........... $ 42,891 $ -- $ (131) $ 42,760
Long-term investments............ 14,097 -- (108) 13,989
--------- --------- ---------- ---------
Total investments............. $ 56,988 $ -- $ (239) $ 56,749
========= ========= ========== =========
December 31, 1998:
Market auction rate preferred
stock......................... $ 3,100 $ -- $ -- $ 3,100
Corporate notes.................. 1,025 -- -- 1,025
--------- --------- --------- ---------
Total investments............. $ 4,125 $ -- $ -- $ 4,125
========= ========= ========= =========
Short-term investments........... $ 4,125 $ -- $ -- $ 4,125
Long-term investments............ -- -- -- --
--------- --------- --------- --------
Total investments............. $ 4,125 $ -- $ -- $ 4,125
========= ========= ========= =========
Property and Equipment
Marimba records property and equipment at cost and calculates depreciation
using the straight-line method over the estimated useful lives of the assets,
generally three to five years. Leasehold improvements are amortized over the
shorter of the estimated useful lives of the respective assets or the term of
the lease.
Accounting for Stock-Based Compensation
Marimba has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 6, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
when the exercise price of Marimba's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. See pro forma disclosures of applying FAS 123 included in Note 6.
Comprehensive Loss
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. Marimba adopted FAS 130 in the year ended December 31, 1998.
Concentrations of Credit Risk and Other Risks
Financial instruments that subject Marimba to credit risk consist primarily of
uninsured cash, cash equivalents and short-term and long-term investment
balances held at commercial banks and institutions primarily in the United
States and trade receivables from Marimba's customers. Marimba sells to
customers in many different industries. Marimba extends reasonably short credit
terms in most instances and performs ongoing credit evaluations but does not
require collateral. Marimba provides reserves for potential credit losses, and
such losses have been within management's expectations. To date, Marimba's
write-offs of bad debts have not been significant. During the years ended
December 31, 1999, 1998 and
36
37
1997, Marimba added approximately $36,000, $75,000, and $50,000 to its bad debt
reserves. Total write-offs of uncollectible accounts were $2,000, $54,000 and
$1,000 in these periods.
For the year ended December 31, 1999, no single customer represented more
than 10% of total revenues. At December 31, 1999, two customers represented 16%
and 19% of accounts receivable. Revenues from one reseller represented 22% and
18% of total revenues for the years ended December 31, 1998 and 1997. The same
reseller accounted for 57% of accounts receivable at December 31, 1997. Sales to
another reseller represented 18% of total revenues for the year ended December
31, 1998. Two other customers accounted for 48% and 16% of the combined accounts
receivable and unbilled receivables accounts at December 31, 1998.
Segment Information
Marimba has adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 changes the way
companies report selected segment information in annual financial statements and
requires companies to report selected segment information in interim financial
reports to stockholders. Marimba operates solely in one segment, the development
and marketing of network application software, and therefore there is no impact
to Marimba's financial statements of adopting FAS 131. For the years ended
December 31, 1999, 1998 and 1997, export sales to customers outside the United
States were $2,499,000, $1,265,000 and $1,199,000.
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity with
FAS No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of Marimba's initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods presented.
To date, Marimba has not had any issuances or grants for nominal consideration.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during the periods, less shares subject to repurchase. Pro forma basic and
diluted net loss per share, as presented in the statements of operations, has
been computed as described above and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of the redeemable convertible
preferred stock (using the if-converted method) from the original date of
issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share:
Year Ended December 31,
1999 1998 1997
---------- ---------- -------
(in thousands, except per share
data)
Net loss........................................ $ (4,214) $ (5,681) $ (7,718)
======== ======== ========
Basic and diluted:
Weighted-average shares of common stock
outstanding............................. 19,855 13,081 11,474
Less weighted-average shares subject to
repurchase.............................. (826) (3,475) (6,562)
-------- -------- --------
Weighted-average shares of common stock
outstanding used in computing basic
and diluted net loss per share.......... 19,029 9,606 4,912
======== ======== ========
Basic and diluted net loss per share........ $ (.22) $ (.59) $ (1.57)
======== ======== ========
Pro forma (unaudited):
Shares used above........................... 9,606
Pro forma adjustment to reflect
weighted-average effect of the
assumed conversion of redeemable
convertible preferred stock............. 5,753
--------
Shares used in computing pro forma basic
and diluted net loss per share......... 15,359
========
Pro forma basic and diluted net loss per
share................................... $ (.37)
========
37
38
Marimba has excluded all redeemable convertible preferred stock, warrants,
outstanding stock options and shares subject to repurchase by Marimba from the
calculation of diluted loss per share because all such securities are
antidilutive for all periods presented. Weighted-average options and warrants
outstanding to purchase 2,861,000, 1,483,000 and 1,261,000 shares of common and
redeemable convertible preferred stock for the years ended December 31, 1999,
1998, and 1997, were not included in the computation of diluted net loss per
share because the effect would be antidilutive. Such securities, had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS
133, as amended, establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. We are required to adopt FAS 133 effective January 1, 2001.
Because Marimba currently holds no derivative financial instruments and does not
currently engage in hedging activities, we do not currently believe that the
adoption of FAS 133, as amended, will have a significant impact on Marimba's
financial condition, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). This summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. Marimba believes that its current revenue
recognition policies comply with SAB 101.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
1999 1998
-------- --------
(in thousands)
Furniture and equipment....................... $ 764 $ 759
Computer equipment............................ 3,325 2,074
Purchased software............................ 1,097 962
Leasehold improvements........................ 291 241
------ ------
5,477 4,036
Accumulated depreciation and amortization..... (2,522) (1,289)
------ ------
Property and equipment, net................... $2,955 $2,747
====== ======
Property and equipment at December 31, 1999 and 1998 includes assets under
capitalized leases of approximately $378,000. Accumulated amortization related
to leased assets was approximately $378,000 and $280,000 at December 31, 1999
and 1998.
3. LEASES AND COMMITMENTS
In January 1997, as part of a sale-leaseback transaction, Marimba entered
into a $500,000 capital lease line of credit for financing of equipment, which
expired on December 31, 1997. Marimba borrowed $378,000 under the line of
credit. This amount bears interest at a rate of 3.5% and is collateralized by
the equipment purchased. Under the terms of the master lease agreement, Marimba
will have the option to purchase the leased equipment at a negotiated price at
the end of the 36-month lease term. In connection with the capital lease,
Marimba issued a warrant that entitles the holder to purchase 16,865 shares of
common stock. See Note 6.
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Marimba leases its office facilities under various noncancelable operating
lease agreements. As of December 31, 1999, future minimum lease payments under
capital leases and noncancelable operating leases are as follows:
Capital Operating
Leases Leases
------ ------
(in thousands)
Year ending December 31:
2000........................................ $ 60 $ 1,632
2001........................................ -- 1,766
2002........................................ -- 1,855
2003........................................ -- 1,934
2004........................................ -- 1,960
Thereafter.................................. -- 728
---------- --------
Total minimum lease and principal payments $ 60 $ 9,875
========
Amount representing interest.................... (1)
----------
Present value of future payments................ 59
Current portion of capital lease obligations.... (59)
---------
Noncurrent portion.............................. $ --
=========
Marimba's headquarter facility lease expires in April 2000. During the first
quarter of 2000, Marimba's headquarters facility lease was renewed until April
2005 and Marimba also entered into a lease for a regional office. The future
minimum lease payments under these leases are included in the table above. Rent
expense under operating leases totaled approximately, $1,772,000, $1,245,000 and
$375,000 for the years ended December 31, 1999, 1998, and 1997.
4. DEFERRED COMPENSATION
We recorded deferred compensation of approximately $1,367,000 in 1998,
representing the difference between the exercise prices of options granted to
acquire 940,500 shares of common stock during 1998 and the deemed fair value for
financial reporting purposes of our common stock on the grant dates. In April
1999, Marimba granted to employees options to purchase 1,047,000 shares of
common stock at an exercise price of $15.00 per share. Associated with this
grant, we recorded additional deferred compensation of $1,974,000.
Deferred compensation is being amortized over the vesting periods of the
options on a graded vesting method. We amortized deferred compensation expense
of $1,410,000 during fiscal 1999 and $251,000 during fiscal 1998. This
compensation expense relates to options awarded to individuals in all operating
expense categories. The amortization of deferred compensation net of reductions
of $260,000 in February 2000 due to cancelled shares, will approximate $892,000
for 2000, $414,000 for 2001 and $114,000 for 2002.
5. STOCKHOLDERS' EQUITY
On April 30, 1999, Marimba sold 3,548,000 shares of common stock in an
underwritten public offering and on May 4, 1999 sold an additional 188,000
shares through the exercise of the underwriters' over-allotment option for net
proceeds of approximately $68,075,000, after offering expenses. Simultaneously
with the closing of the public offering, all 5,753,566 shares of Marimba's
preferred stock were converted to common stock on a one for one basis.
Additionally, a warrant to purchase 16,865 shares of Series A convertible
preferred stock was converted to a warrant to purchase the same number of common
shares. In December 1999, the warrant was exercised.
As of December 31, 1999, our authorized capital stock consisted of 80,000,000
shares of common stock and 10,000,000 shares of undesignated preferred stock.
The following is a summary description of our capital stock:
Common Stock
The holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of common stock do not have
cumulative voting rights, and, therefore, holders of the remaining shares voting
for the election of directors can elect all of the directors. Subject to
preferences that may be applicable to any outstanding preferred stock, the
holders of common stock are entitled to receive dividends, if any, as may be
declared from time to time by the board of directors out of funds legally
available. In the event of the liquidation, dissolution or winding up of
Marimba, the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities,
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subject to prior distribution rights of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and nonassessable.
Preferred Stock
The board of directors has the authority to issue the preferred stock in one
or more series and to fix the rights, preferences, privileges and related
restrictions, including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of the
series, without further vote or action by the stockholders. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of us without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others.
Dividend Policy
We did not declare nor pay any cash dividends on our capital stock during the
fiscal years ended December 31, 1999, 1998 and 1997 and do not expect to do so
in the foreseeable future. We anticipate that all future earnings, if any,
generated from operations will be retained by us to develop and expand our
business. Any future determination with respect to the payment of dividends will
be at the discretion of the Board of Directors and will depend upon, among other
things, our operating results, financial condition and capital requirements, the
terms of then-existing indebtedness, general business conditions and such other
factors as the Board of Directors deems relevant.
6. STOCK OPTION AND OTHER EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
In November 1996, the Board of Directors adopted the 1996 Stock Option Plan
(the "1996 Plan") for issuance of common stock to eligible participants.
Incentive stock options and nonstatutory stock options may be granted under the
1996 Plan at prices not less than 100% and 85% of the fair value on the date of
grant. Options expire after 10 years. Options under the plan are immediately
exercisable; however, shares issued are subject to Marimba's right to repurchase
such shares at the original issuance price, which right lapses in a series of
installments measured from the vesting commencement date of the option. As of
December 31, 1999, 435,683 shares were subject to repurchase. Options generally
vest and the repurchase rights lapse ratably over a period of three or four
years from the date of grant.
1999 Omnibus Equity Incentive Plan
In March 1999, stockholders approved the adoption of Marimba's 1999 Omnibus
Equity Incentive Plan (the "1999 Omnibus Plan"). A total of 1,250,000 shares of
common stock have been reserved for issuance to eligible participants under the
1999 Omnibus Plan. The types of awards that may be made under the 1999 Omnibus
Plan are options to purchase shares of common stock, stock appreciation rights,
restricted shares and stock units. The exercise price for incentive stock
options may not be less than 100% of the fair market value of Marimba's common
stock on the date of grant (85% for nonstatutory options). In the event of a
change in control of Marimba, an option or award under the 1999 Omnibus Plan
will become fully exercisable and fully vested if the option or award is not
assumed by the surviving corporation or the surviving corporation does not
substitute comparable awards for the awards granted under the 1999 Omnibus Plan.
1999 Non-Employee Directors Option Plan
In March 1999, stockholders approved the adoption of Marimba's Non-Employee
Directors Option Plan. A total of 150,000 shares of common stock have been
reserved for issuance to non-employee members of the Board. Commencing January
1, 2000, the number of shares reserved for issuance will be increased
automatically to restore the total number of shares available under this plan to
150,000 shares.
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A summary of Marimba's stock option activity is as follows:
Options Outstanding
---------------------------------------
Weighted-
Shares Number Price Average
Available Of Per Exercise
for Grant Shares Share Price
--------- ------ ----- -----
Balance at December 31,
1996..................... 1,675,603 1,499,000 $ .15 $ .15
Authorized............... 2,000,000
Granted.................. (2,529,610) 2,529,610 .15-- .75 .31
Exercised................ -- (3,217,110) .15-- .50 .20
Repurchased.............. 150,000 -- -- --
Canceled................. 17,000 (17,000) .15-- .75 .68
---------- -------
Balance at December 31,
1997..................... 1,312,993 794,500 .15-- .75 .41
Authorized............... 1,300,000
Granted.................. (2,017,800) 2,017,800 1.00--8.50 3.54
Exercised................ -- (238,569) .50--2.00 .96
Repurchased.............. 253,417 -- -- --
Canceled................. 381,163 (381,163) .15--3.50 .84
---------- --------
Balance at December 31,
1998..................... 1,229,773 2,192,568 .15--8.50 3.16
Authorized............... 1,400,000
Granted.................. (2,252,750) 2,252,750 10.00--31.38 20.59
Exercised................ -- (615,171) .15--20.00 2.49
Repurchased.............. 70,309 -- -- --
Canceled................. 367,352 (367,352) .50--31.38 10.75
---------- ----------
Balance at December 31, 1999 814,684 3,462,795 $ .15--$31.38 $13.84
========== =========
As of December 31, 1999 and 1998, there were 2,585,545 and 188,289 fully
vested and exercisable shares with a weighted average exercise price of $8.56
and $.57 per share.
The following table details outstanding and exercisable options as of
December 31, 1999:
Outstanding
---------------------------------------------
Weighted- Exercisable
Average -----------------------------
Remaining Weighted- Weighted-
Range of Number of Contractual Average Number of Average
Exercise Price Shares Life Exercise Price Shares Exercise Price
- -------------- ------ ---- -------------- ------ --------------
$ .15 50,000 6.84 $ .15 50,000 $ .15
.50 -- .75 166,944 7.76 .52 166,944 .52
1.00 -- 1.50 111,531 8.12 1.33 111,531 1.33
1.75 -- 2.00 64,828 8.34 1.83 64,828 1.83
3.00 -- 3.50 811,717 8.68 3.14 811,717 3.14
7.00 -- 8.50 214,475 8.96 8.37 214,475 8.37
10.00 -- 15.00 1,078,050 9.28 14.53 1,078,050 14.53
$20.00 -- $31.38 965,250 9.77 28.54 88,000 20.00
--------- ---------
Total 3,462,795 9.09 $ 13.84 2,585,545 $ 8.56
========= =========
Stock Based Compensation
We utilize the intrinsic value-based method to account for all of our
stock-based benefit plans. Pro forma information regarding net loss and net loss
per share is required by FAS 123, and has been determined as if Marimba had
accounted for its employee stock-based benefit plans under the fair value method
of that Statement.
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The fair value of each option granted through December 31, 1999 was estimated
on the date of grant using the minimum value (before Marimba went public) or the
Black-Scholes method. The Black-Scholes option valuation model was developed for
use in estimated the fair vale of traded options that have no vesting
restrictions and are fully transferable. The Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because Marimba's stock-based awards have characteristics
significantly different from those in traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock based awards. The fair value of
Marimba's stock-based awards was estimated using the following weighted-average
assumptions:
Year Ended December 31,
1999 1998 1997
---- ---- ----
Fair value of options.................... $ 12.87 $ .73 $ .06
Assumptions:
Risk-free interest rate............... 6% 5% 6%
Expected life......................... 3 years 4 years 3 years
Volatility............................ 101% -- --
Dividend yield........................ -- -- --
The weighted-average fair value of options granted during 1998 with an
exercise price below the deemed fair value of Marimba's common stock on the date
of grant was $2.07.
The weighted-average fair market values of share granted under our 1999
Employee Stock Purchase Plan (see plan description below) was $13.68 for fiscal
1999 calculated using the Black-Scholes pricing model with the following
weighted-average assumptions: risk-free interest rate of 6%, expected life of 2
years, volatility of 101% and dividend yield of zero.
For purposes of pro forma disclosures, the estimated fair value at grant date
for awards under all stock-based benefit plans is amortized to pro forma expense
over the options vesting period using the graded method. Pro forma information
is as follows:
Year Ended December 31,
1999 1998 1997
---- ---- ----
(in thousands, except per share data)
Net loss:
As reported......................... $ (4,214) $ (5,681) $ (7,718)
========== ========= =========
Pro forma........................... $ (10,532) $ (6,123) $ (7,771)
========== ========= =========
Basic and diluted net loss per share:
As reported........................ $ (.22) $ (.59) $ (1.57)
========== ========= =========
Pro forma.......................... $ (.55) $ (.64) $ (1.58)
========== ========= =========
The effects of applying FAS 123 for pro forma disclosures are not likely to
be representative of the effects on reported net loss for future years.
1999 Employee Stock Purchase Plan
In March 1999, stockholders approved the adoption of Marimba's 1999 employee
stock purchase plan (the "1999 Purchase Plan"). A total of 500,000 shares of
common stock has been reserved for issuance under the 1999 Purchase Plan, plus,
commencing on January 1, 2000, annual increases equal to the lesser of 500,000
shares, 2% of the outstanding common shares on such date or a lesser amount
determined by the Board of Directors. The 1999 Purchase Plan permits eligible
employees to acquire shares of Marimba's common stock through periodic payroll
deductions of up to 10% of base cash compensation. No more than 500 shares may
be purchased by each employee on any purchase date. Each offering period will
have a maximum duration of 24 months. The price at which the common stock may be
purchased is 85% of the lesser of the fair market value of Marimba's common
stock on the first day of the applicable offering period or on the last day of
the respective purchase period. The initial offering period commenced on April
30, 1999 and will end on April 30, 2001. A total of 42,306 shares were issued
under the 1999 Purchase Plan in fiscal year 1999 at a price of $17.00.
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Warrant
In January 1997, in connection with the sale-leaseback transaction, Marimba
issued a warrant that entitles the holder to purchase 16,865 shares of Series A
redeemable convertible preferred stock at an exercise price of $1.48 per share.
In April 1999, this warrant to purchase 16,865 shares of Series A convertible
preferred stock was converted to a warrant to purchase the same number of common
shares. In December 1999, the warrant was exercised and 16,865 shares of common
stock were issued.
7. INCOME TAXES
Marimba's provision for income taxes for the years ended December 31, 1999,
1998 and 1997 consists entirely of foreign taxes.
As of December 31, 1999, Marimba had federal net operating loss carryforwards
of approximately $15,600,000. Marimba also had federal research and development
tax credit carryforwards of approximately $700,000. The net operating loss and
credit carryforwards will expire at various dates beginning in 2011 through
2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of Marimba's deferred tax assets are as follows:
December 31,
1999 1998
---- ----
(in thousands)
Deferred tax assets:
Net operating loss carryforwards.......... $6,100 $4,400
Research credit carryforwards............. 1,100 600
Deferred revenue.......................... 900 900
Other..................................... 200 200
------ ------
Total deferred tax assets......... 8,300 6,100
Valuation allowance............................. (8,300) (6,100)
------ ------
Net deferred tax assets......................... $ -- $ --
====== ======
The valuation allowance for deferred tax assets increased by approximately
$2,500,000 and $3,100,000 in the years ended December 31, 1998 and 1997.
8. LEGAL MATTERS
Novadigm v. Marimba
On March 3, 1997, Novadigm, Inc. filed a complaint against Marimba in the
United States District Court for the Northern District of California, alleging
infringement of a patent held by Novadigm. Novadigm alleges that Marimba's
infringement relates to certain methods for updating data and software over a
computer network used in the Castanet products. In its complaint, Novadigm
requests preliminary and permanent injunctions prohibiting Marimba and other
specified persons from making, using or selling any infringing products, as well
as damages, costs, and attorneys' fees. The complaint also alleges that Marimba
has willfully infringed Novadigm's Patent, and seeks up to triple damages
pursuant to the United States Patent Act.
The trial in this case is scheduled to commence on November 7, 2000. The
trial date was set following a preliminary trial held in November 1999 in which
the court held that there was insufficient evidence to find that Novadigm had
engaged in "inequitable conduct" in the submission of its patent application. To
date, both parties have substantially completed their factual and expert
discovery.
Marimba believes that it has strong defenses against Novadigm's lawsuit.
Accordingly, Marimba intends to defend this suit vigorously. However, Marimba
may not prevail in this litigation. Litigation is subject to inherent
uncertainties, especially in cases such as this where sophisticated factual
issues must be assessed and complex technical issues must be decided. In
addition, cases such as this are likely to involve issues of law that are
evolving, presenting further uncertainty. Marimba's defense of this litigation,
regardless of the merits of the complaint, has been, and will likely continue to
be, time-consuming, costly and a
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diversion for Marimba's technical and management personnel. The failure of
Marimba to prevail in this litigation could have a material adverse effect on
Marimba's liquidity, results of operations and financial condition.
Marimba v. Novadigm
On July 30, 1999 Marimba filed a complaint against Novadigm in the United States
District Court for the Northern District of California alleging infringement by
Novadigm of a patent held by us (U.S. Patent No. 5,919,247, the "Marimba
Patent"). Our complaint seeks monetary damages, as well as an injunction to
prevent Novadigm from making, using or selling infringing software products. Our
complaint also alleges that Novadigm has willfully infringed the Marimba Patent
and seeks up to triple damages under the United States Patent Act.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference from
the section entitled "Proposal No. 1 -- Election of Directors" of the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from
the section entitled "Executive Compensation and Related Information" of the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference from
the section entitled "Stock Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference from
the section entitled "Certain Relationships and Related Transactions" of the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See the Consolidated Financials Statements and Supplementary Data
beginning on page 28 of this Form 10-K.
(2) Financial Statement Schedules No schedules have been filed because
the information required to be set forth therein is not applicable or
is shown in the financial statements or notes thereto.
(3) Exhibits
See Exhibit Index on page 46 of this Form 10-K.
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, the Company did not file any
reports on Form 8-K.
(c) See Exhibit Index at page 46 of this Form 10-K.
(d) See the Consolidated Financial Statements and Supplementary Data
beginning on page 28 of this Form 10-K.
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MARIMBA, INC.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
By: /s/ FRED M. GERSON Date: March 27, 2000
------------------
Fred M. Gerson
Vice President and Chief Financial Officer
Principal Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, on behalf of the Registrant in
the capacities indicated:
By: /s/ KIM K. POLESE Date: March 27, 2000
-----------------
Kim K. Polese
President, Chief Executive Officer and Director
By: /s/ ARTHUR A. VAN HOFF Date: March 27, 2000
----------------------
Arthur A. van Hoff
Chief Technology Officer and Director
By: /s/ ANEEL BHUSRI Date: March 27, 2000
----------------
Aneel Bhusri
Director
By: /s/ RAYMOND J. LANE Date: March 27, 2000
-------------------
Raymond J. Lane
Director
By: /s/ DOUGLAS J. MACKENZIE Date: March 27, 2000
------------------------
Douglas J. Mackenzie
Director
By: /s/ STRATTON D. SCLAVOS Date: March 27, 2000
-----------------------
Stratton D. Sclavos
Director
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MARIMBA, INC.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Form of Third Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
made pursuant to this Registration Statement - incorporated
herein by reference to Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (File No. 333-72353).
3.2 Amended and Restated Bylaws of the Registrant - incorporated herein by reference
to Exhibit 3.4 to the Company's Registration Statement on Form S-1
(File No. 333-72353).
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Form of Registrant's Common Stock certificate - incorporated herein by reference
to Exhibit 4.2 to the Company's Registration Statement on Form S-1
(File No. 333-72353).
4.3 Amended and Restated Investors' Rights Agreement dated August 25, 1997 -
incorporated herein by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1 (File No. 333-72353).
4.4 Form of Amendment and Waiver of Registration Rights under the Amended and
Restated Investors' Rights Agreement - incorporated herein by reference to
Exhibit 4.4 to the Company's Registration Statement on Form S-1
(File No. 333-72353).
4.5 Warrant to purchase shares of Series A Preferred Stock of the
Registrant issued to Lighthouse Capital Partners II, L.P. -
incorporated herein by reference to Exhibit 4.5 to the
Company's Registration Statement on Form S-1 (File No.
333-72353).
10.1 Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive officers -
incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No.
333-72353).
10.2 1999 Omnibus Equity Incentive Plan and forms of agreements thereunder -
incorporated herein by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File No. 333-72353).
10.3 Employee Stock Purchase Plan - incorporated herein by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1 (File No. 333-72353).
10.5 Assignment and Assumption of Sublease between Quickturn Design Systems, Inc. and
ilicon, Inc. dated January 31, 1999 - incorporated herein by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1 (File No. 333-72353).
10.6 Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated May 27, 1998 - incorporated herein by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File No. 333-72353).
10.7(1) Original Equipment Manufacturer Agreement between Tivoli Systems Subsidiary, Inc.
and the Registrant dated March 6, 1998 - incorporated herein by reference to
Exhibit 10.7 to the Company's Registration Statement on Form S-1
(File No. 333-72353).
10.8(1) Amendment No. 1 to Original Equipment Manufacturer Agreement between Tivoli
Systems, Inc. and the Registrant dated February 8, 1999 - incorporated herein by
reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1
(File No. 333-72353).
10.9(1) Reseller Agreement between Tivoli Systems Subsidiary, Inc. and the Registrant
dated August 14, 1997 - incorporated herein by reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (File No. 333-72353).
10.10(1) Amendment No. 1 to Reseller Agreement between Tivoli Systems, Inc. and the
Registrant dated June 1, 1998 - incorporated herein by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 (File No. 333-72353).
10.11 Amendment No. 2 to Reseller Agreement between Tivoli Systems, Inc. and the
Registrant dated June 30, 1998 - incorporated herein by reference to Exhibit
10.11 to the Company's Registration Statement on Form S-1 (File No. 333-72353).
10.12 Reseller License Guide to Reseller Agreement between Tivoli Systems, Inc. and the
Registrant dated November 23, 1998 - incorporated herein by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 (File No. 333-72353).
10.13(1) Pricing Guide to Reseller Agreement between Tivoli Systems, Inc. and the
Registrant dated November
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23, 1998 - incorporated herein by reference to Exhibit 10.13
to the Company's Registration Statement on Form S-1 (File No.
333-72353).
10.14 Amendment No. 3 to Reseller Agreement between Tivoli Systems, Inc. and the
Registrant dated February 9, 1999 - incorporated herein by reference to Exhibit
10.14 to the Company's Registration Statement on Form S-1 (File No. 333-72353).
10.15 Amendment No. 4 to Reseller Agreement between Tivoli Systems, Inc. and the
Registrant dated April 27, 1999 - incorporated herein by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1 (File No. 333-72353).
10.16 Amendment No. 5 to Reseller Agreement between Tivoli Systems, Inc. and the
Registrant dated June 29, 1999 - incorporated herein by reference to the
Company's Quarterly Report on Form 10-Q filed on August 12, 1999.
10.17 Lease between ilicon, Inc. and Registrant dated February 27, 2000.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule (electronic filing only).
99.1 Order of the United States District Court for the Northern District of
California, San Jose Division dated December 28, 1998 -
incorporated herein by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-1 (File No.
333-72353).
- ----------
(1) Confidential treatment requested.
47