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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, 2000
|_| 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 28, 2001 was approximately
$59 million. As of February 28, 2001, there were 23,836,733 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 2001 annual meeting of
stockholders scheduled to be held on June 7, 2001 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.
MARIMBA, INC.
Table of Contents
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 7
Item 3. Legal Proceedings.............................................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders............................................ 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 8
Item 6. Selected Consolidated Financial Data........................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 11
Item 7a. Qualitative and Quantitative Disclosures about Market Risk..................................... 22
Item 8. Consolidated Financial Statements and Supplementary Data....................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.......... 39
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 40
Item 11. Executive Compensation......................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 40
Item 13. Certain Relationships and Related Transactions................................................. 40
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................................. 40
Signatures ............................................................................................... 41
PART I
This report 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. When used in this report, words such as "may,"
"might," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential", "intend", "continue," and similar
expressions, are intended to identify forward-looking statements. These
forward-looking statements might include, without limitation, projections of our
future financial performance, our anticipated growth and anticipated trends in
our businesses; the features, benefits and advantages of our products; the
development of new products, enhancements or technologies; business and sales
strategies; developments in our target markets; matters relating to distribution
channels, proprietary rights, facilities needs, competition and litigation;
future gross margins and operating expense levels; and capital needs. These
statements reflect the current views of Marimba or its management with respect
to future events and are subject to risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, our actual results, performance or achievements in
fiscal 2001 and beyond could differ materially from those expressed in, or
implied by, these forward-looking statements. Factors that could cause or
contribute to material differences include, but are not limited to, those
discussed below in Item 7 under the heading "Other Factors Affecting Operating
Results, Liquidity and Capital Resources" and the risks discussed in our other
filings with the Securities and Exchange Commission. We encourage you to read
that section carefully. You should not regard the inclusion of forward-looking
information as a representation by us or any other person that the future
events, plans or expectations contemplated by us will be achieved. Marimba
undertakes no obligation to release publicly any updates or revisions to any
forward-looking statements that may reflect events or circumstances occurring
after the date of this report.
ITEM 1. BUSINESS
Marimba, Inc. was incorporated in Delaware in February 1996. We develop,
market and support systems management software built for e-business. Our
solutions enable companies to expand their market reach, streamline business
processes and strengthen relationships with customers, business partners and
employees. Our Castanet and Timbale product families provide an efficient and
reliable way for enterprises to distribute, update and manage applications and
related data to desktops, servers and devices. 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. Timbale addresses the problems associated with
the management of distributed servers. Our global customer base spans multiple
industry segments including financial services, insurance, retail, manufacturing
and telecommunications. Customers include various industry leaders, including
Bear Stearns, Charles Schwab, The Home Depot, Intuit, ADP, Seagate Technology,
Winstar and Cisco Systems. We market our products worldwide through a
combination of a direct sales force, resellers and distributors.
See "Management Discussion and Analysis of Financial Condition and Results
of Operations" and our "Consolidated Financial Statements and Supplementary
Data," appearing on pages 10 and 22, respectively, for additional financial
information regarding our business.
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.
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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.
Timbale Product Family
The Timbale product family includes two 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.
Timbale for Server Management. Timbale for Server Management manages
rapidly changing content from multiple contributors across heterogeneous
distributed server farms. This product was released for sale in March 2000.
Timbale for Windows Terminal Services. Timbale for Windows Terminal
Services distributes, manages and updates applications, printer drivers, and
operating system fixes in a mixed windows terminal services environment. This
product was released for sale in June 2000.
We generally license the Timbale products on a per server endpoint basis
with the total fee determined, in part, by the number of servers who can obtain
updates using Timbale.
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 synchronization,
replication, personalization, client feedback, bandwidth management and policy
administration. Transmitter mirrors provide
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synchronization of server content. Mirroring provides the ability to replicate
Transmitter content so that an external load balancer can be used to distribute
service requests to multiple Transmitters. 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 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.
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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 56-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
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."
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 products worldwide through a combination of a direct sales
force, resellers and distributors. Our worldwide direct sales, marketing and
business development organizations consisted of 132 individuals as of December
31, 2000, 51 of whom were located at our Mountain View, California headquarters,
73 in regional offices located in California, Georgia, Illinois, Michigan,
Minnesota, New York, Texas and Washington, D.C., and 8 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 products. To achieve these
goals, we have engaged in marketing activities including telemarketing, 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. For the years ended December 31, 2000, 1999 and
1998, export sales to customers outside of the United States were approximately
5%, 8% and 8% of total revenue. 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 25 employees as
of December 31, 2000. We offer a variety of annual support and maintenance
programs for our products, as well as support services designed to meet specific
needs.
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
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these needs. See "Other Factors Affecting Operating Results, Liquidity and
Capital Resources -- We Need to Expand Our Professional Services."
Research and Development
As of December 31, 2000, our engineering organization was comprised of 73
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,
Windows Terminal Service ("WTS") development and server to server management
development.
o 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.
o 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.
o The Castanet development group is focused on developing enterprise-level
products that address application and content distribution, deployment
and management.
o The WTS development group is focused on increasing solutions for WTS
server management. In addition, this group is focusing on ways to save
WTS administrators time on server configuration management.
o 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 $11.1 million in 2000, $8.5 million
in 1999 and $5.8 million in 1998. 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 our products is 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:
o the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
o the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
o the quality of our customer service; and
o 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 and Computer Associates; companies such as
Novadigm, and 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 and content
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 market, we will face increased competition.
Potential competitors may bundle their products or incorporate additional
components 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 U.S. patent and six 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. Such litigation could result in
substantial costs and diversion of resources, could seriously harm our business
and operating results and there can be no assurance that the outcome of this
litigation will be favorable to us.
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.
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Employees
At December 31, 2000, we had a total of 262 employees, 254 of whom were
based in the United States and 8 of whom were based in the United Kingdom. Of
the total, 73 were in research and development, 132 were engaged in sales,
marketing and business development, 25 were engaged in customer support and
training, and 32 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 lease regional offices
located in California, Georgia, Illinois, Michigan, Minnesota, New York, Texas
and Washington, D.C. 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
On March 3, 1997, Novadigm, Inc. filed a complaint against us in the U.S.
District Court for the Northern District of California alleging infringement of
a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm Patent"). On
July 30, 1999, Marimba filed a complaint against Novadigm in the U.S. 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").
Effective November 10, 2000, Marimba and Novadigm executed an agreement settling
both actions. Pursuant to the agreement, the parties have dismissed both actions
without prejudice. Under the agreement, the other terms of the settlement are
confidential.
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, 2000.
7
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 sales prices of the common stock during each quarter since we
went public at $20.00 per share on April 30, 1999:
High Low
------------ ------------
Fiscal 2000:
Fourth Quarter $12.69 $3.13
Third Quarter $27.00 $11.88
Second Quarter $43.50 $11.50
First Quarter $68.88 $37.50
Fiscal 1999:
Fourth Quarter $48.13 $24.31
Third Quarter $51.94 $21.44
Second Quarter $74.38 $30.25
First Quarter - -
On February 28, 2001, the closing price of our common stock on The Nasdaq
National Market was $5.41 per share. As of February 28, 2001, there were
approximately 266 holders of record (not including beneficial holders of our
common stock held in street name) of our common stock.
Dividend Policy
We did not declare nor pay any cash dividends on our capital stock during
the fiscal years ended December 31, 2000, 1999 and 1998, 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 our 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.
8
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of our selected consolidated financial data as
of and for the five years ended December 31, 2000. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this report.
Period from
February 21, 1996
(Inception) to
Year Ended December 31, December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues:
License................................... $31,329 $ 23,637 $ 13,901 $ 5,011 $ --
Service................................... 12,718 7,776 3,184 552 --
-------- -------- -------- -------- --------
Total revenues........................ 44,047 31,413 17,085 5,563 --
Cost of revenues:
License................................... 681 402 75 13 --
Service................................... 4,256 3,036 1,964 621 --
-------- -------- -------- -------- --------
Total cost of revenues................ 4,937 3,438 2,039 634 --
-------- -------- -------- -------- --------
Gross profit................................... 39,110 27,975 15,046 4,929 --
Operating expenses:
Research and development.................. 11,114 8,497 5,773 2,410 515
Sales and marketing....................... 27,758 19,625 12,371 8,054 473
General and administrative................ 12,570 5,066 2,779 2,367 322
Amortization of deferred compensation..... 1,702 1,410 251 -- --
-------- -------- -------- -------- --------
Total operating expenses.............. 53,144 34,598 21,174 12,831 1,310
-------- -------- -------- -------- --------
Loss from operations........................... (14,034) (6,623) (6,128) (7,902) (1,310)
Interest income, net........................... 4,541 2,506 488 338 65
-------- -------- -------- -------- --------
Loss before income taxes....................... (9,493) (4,117) (5,640) (7,564) (1,245)
Provision for income taxes..................... 179 97 41 154 --
-------- -------- -------- -------- --------
Net loss....................................... $ (9,672) $ (4,214) $ (5,681) $ (7,718) $ (1,245)
======== ======== ======== ======== ========
Basic and diluted net loss per share........... $ (.42) $ (.22) $ (.59) $ (1.57) $ (.81)
======== ======== ======== ======== ========
Weighted-average shares of common stock
outstanding used in computing basic and
diluted net loss per share................ 23,200 19,029 9,606 4,912 1,528
======== ======== ======== ======== ========
December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.............................. $ 65,628 $ 65,023 $ 7,825 $ 14,402 $ 2,811
Working capital................................ 59,275 55,707 2,912 8,036 2,464
Total assets................................... 87,408 90,487 14,862 21,898 3,156
Long-term obligations.......................... 153 48 747 211 --
Redeemable convertible preferred stock......... -- -- 18,953 18,953 3,963
Accumulated deficit............................ (28,530) (18,858) (14,644) (8,963) (1,245)
Total stockholders' equity (net capital
deficiency)............................. 66,803 72,639 (13,743) (8,471) (1,235)
9
Quarterly Consolidated Financial Information (unaudited)
(In thousands, except per share data)
The following table presents our operating results for each of the eight
quarters in the two-year period ended December 31, 2000. The information for
each of these quarters is unaudited but has been prepared on the same basis as
the audited consolidated financial statements appearing elsewhere in this
report. In the opinion of management, all necessary adjustments (consisting of
normal recurring adjustments) have been included to present fairly the unaudited
quarterly results when read in conjunction with the audited consolidated
financial statements of our company and the notes thereto appearing in this
report. These operating results are not necessarily indicative of the results
for any future periods.
2000 Q1 Q2 Q3 Q4
---------- ------------ ---------- -----------
Revenues ............................... $10,567 $ 12,116 $ 10,108 $ 11,256
Gross profit ........................... 9,544 10,999 8,928 9,639
Net income (loss) ...................... (659) 1,252 (7,986) (2,279)
Net income (loss) per basic and diluted
common share ....................... $ (.03) $ .05 $ (.34) $ (.10)
1999 Q1 Q2 Q3 Q4
---------- ------------ ---------- -----------
Revenues ............................... $ 6,131 $ 6,887 $ 8,329 $ 10,066
Gross profit ........................... 5,467 6,036 7,530 8,942
Net income (loss) ...................... (1,620) (1,511) (580) (503)
Net income (loss) per basic and diluted
common share ....................... $ (.13) $ (.08) $ (.03) $ (.02)
10
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 report. This report contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in such forward-looking
statements. For a more complete understanding of our financial condition and
results of operations, and some of the risks that could affect future results,
see "Other Factors Affecting Operating Results, Liquidity and Capital Resources"
which begins on page 14 and the risks discussed in our most recent filings with
the Securities and Exchange Commission.
Overview
Marimba is a leading provider of systems management software built for
e-business. Our products enable companies to expand their market reach,
streamline business processes and strengthen relationships with customers,
business partners and employees.
In January 1997, we released our first version of Castanet and since that
time have continued to develop and market the Castanet product line and enhance
the core Castanet infrastructure with additional Castanet products. In the first
half of 2000, Marimba released two products in a new product line called
Timbale. The Timbale products are designed to address many of the server
management challenges inherent in thin-client and Web commerce computing
environments today. The first Timbale product, Timbale for Server Management,
was released for sale in March 2000. The second Timbale product, Timbale for
Windows Terminal Services, was released for sale in June 2000. During 2000,
revenues from the Timbale products accounted for 12% of total license revenues.
There can be no assurance that revenues from the Timbale product line will grow
in the future or that the Timbale products will gain widespread market
acceptance.
Revenues to date have been derived primarily from the license of our
Castanet and Timbale products and to a lesser extent from maintenance and
support, consulting and training services. Customers who license our products
generally purchase maintenance contracts, typically covering a 12-month period.
Additionally, customers may purchase consulting services, 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.
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. Advanced 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.
Since inception, we have made substantial investments in sales, marketing
and research and development to expand and enhance our product lines and
increase the market awareness of Marimba and our products. We have incurred
significant losses since inception and had an accumulated deficit of
approximately $28.5 million at December 31, 2000. We believe that our success
depends on further increasing our customer base and on growth in our market
overall. Accordingly, we intend to continue to invest heavily in sales,
marketing and research and development.
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, growth or financial results. Additionally,
we do not believe that historical growth rates or profitability are necessarily
sustainable, nor indicative of future growth or financial results.
11
Results of Operations
The following table presents selected financial data for the periods
indicated as a percentage of total revenues.
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Consolidated Statement of Operations Data:
Revenues:
License................................. 71.1% 75.2% 81.4%
Service................................. 28.9 24.8 18.6
--------- -------- --------
Total revenues...................... 100.0 100.0 100.0
Cost of revenues:
License................................. 1.5 1.3 0.4
Service................................. 9.7 9.7 11.5
--------- -------- --------
Total cost of revenues.............. 11.2 11.0 11.9
--------- -------- --------
Gross margin................................. 88.8 89.0 88.1
Operating expenses:
Research and development................ 25.2 27.0 33.8
Sales and marketing..................... 63.0 62.5 72.4
General and administrative.............. 28.5 16.1 16.3
Amortization of deferred compensation... 3.9 4.5 1.5
--------- -------- --------
Total operating expenses............ 120.6 110.1 124.0
--------- -------- --------
Loss from operations......................... (31.8) (21.1) (35.9)
Interest income, net......................... 10.3 8.0 2.8
--------- -------- --------
Loss before income taxes..................... (21.5) (13.1) (33.1)
Provision for income taxes................... (0.4) (0.3) (0.2)
--------- -------- --------
Net loss..................................... (21.9)% (13.4)% (33.3)%
========= ======== ========
Years Ended December 31, 2000, 1999 and 1998
Revenues
Total revenues increased $12.6 million, or 40%, from $31.4 million in 1999
to $44.0 million in 2000. Total revenues in 1999 increased $14.3 million, or
84%, from $17.1 million in 1998.
License Revenues. Prior to the release of our Timbale products,
substantially all license revenues were derived from sales of our Castanet
products. For the year ended December 31, 2000, revenues from sales of our
Timbale products accounted for approximately 12% of total license revenues.
License revenues increased $7.7 million, or 33%, from $23.6 million in 1999 to
$31.3 million in 2000. License revenues in 1999 increased $9.7 million, or 70%,
from $13.9 million in 1998.
We attribute the year-to-year increases in license revenues to:
o increased product licenses sold, reflecting higher customer demand for
our Castanet products and in 2000, the introduction of our Timbale
products;
o additional sales to existing customers; and
o growth of our sales organization.
Service Revenues. Service revenues include maintenance and support,
consulting and training. Service revenues increased $4.9 million, or 64%, from
$7.8 million in 1999 to $12.7 million in 2000. Service revenues in 1999
increased $4.6 million, or 144%, from $3.2 million in 1998.
As a percentage of total revenues, service revenues were 29%, 25% and 19% of
total revenues in 2000, 1999 and 1998, respectively. 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 2001, we expect service
revenues to increase
12
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.
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 us. Cost of license revenues was $681,000, $402,000 and
$75,000 in 2000, 1999 and 1998, respectively. The increases from 1999 to 2000
and 1998 to 1999 were due primarily to the increased costs of a third-party
product resold by us. We expect cost of license revenues to increase in absolute
dollar amount during 2001, but to remain a relatively small percentage of total
revenues.
Cost of Service Revenues. Cost of service revenues includes:
o salaries and related expenses of our customer support organization;
o salaries and related expenses of our consultants for billable consulting
engagements;
o cost of third parties contracted to provide consulting services to our
customers; and
o an allocation of our facilities and depreciation expenses.
Cost of service revenues was $4.3 million, $3.0 million and $2.0 million in
2000, 1999 and 1998, representing 33%, 39% and 62% 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 December 31,
1998, 19 employees at December 31, 1999 and grew to 25 employees at December 31,
2000. 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:
o salaries and related costs of our engineering organization;
o fees paid to third-party consultants; and
o 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 $11.1 million, $8.5 million and $5.8 million in 2000, 1999 and
1998, respectively. The increases in research and development expenses were due
primarily to increases in engineering personnel and related costs. We expect
research and development expenses to increase in absolute dollar amount in 2001.
Sales and Marketing. Sales and marketing expenses consist primarily of:
o salaries and related costs of our sales and marketing organizations;
o sales commissions;
o costs of our marketing programs, including public relations,
advertising, trade shows, collateral sales materials, our customer
advisory council and seminars;
o rent and facilities costs associated with our regional and international
sales offices; and
o an allocation of our facilities and depreciation expenses.
13
Sales and marketing expenses were $27.8 million, $19.6 million and $12.4
million in 2000, 1999 and 1998, respectively. The increases in sales and
marketing expenses are due primarily to growth in our sales and marketing
organizations, an increase in sales commissions as sales have increased, an
increase in the number of regional sales offices and expansion of our marketing
programs. We increased the number of sales and marketing personnel from 65
employees at December 31, 1998, to 90 employees at December 31, 1999 and 132
employees at December 31, 2000. Marimba also increased the number of sales
offices from seven at December 31, 1998, to eight at December 31, 1999 and nine
at December 31, 2000. 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 2001.
General and Administrative. General and administrative expenses consist
primarily of:
o costs of our finance, human resources and legal services organizations;
o third-party legal and other professional services fees; and
o an allocation of our facilities and depreciation expenses.
General and administrative expenses were $12.6 million, $5.1 million and
$2.8 million in 2000, 1999 and 1998, respectively. The primary reasons for the
increase in 2000 were the settlement of our patent disputes with Novadigm, Inc.,
an increase in the bad debt provision of approximately $2.1 million and growth
of our administrative organization in support of our overall growth. We
increased our general and administrative personnel from 21 at December 31, 1998,
to 26 at December 31, 1999 and 32 at December 31, 2000.
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. In 2000, we recorded deferred compensation of approximately $1.9
million, net of reduction of $703,000 due to cancelled shares, which represented
the intrinsic value of certain stock awards. Deferred compensation is being
amortized over the vesting periods of the options and stock on a graded vesting
method. We amortized deferred compensation expense of $1.7 million, $1.4 million
and $251,000 for fiscal years 2000, 1999, and 1998, respectively. This
compensation expense relates to options awarded to individuals in all operating
expense categories. The amortization of deferred compensation, net of reductions
of $703,000 in 2000 due to cancelled shares, will approximate $1.6 million in
2001 and $301,000 in 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 $4.5 million,
$2.5 million and $488,000 in 2000, 1999 and 1998, respectively. 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.
Provision for Income Taxes
Our provision for income taxes for the year ended December 31, 2000,
consists of state income and franchise taxes and foreign taxes. For the years
ended December 31, 1999 and 1998, our provision for income taxes is comprised
entirely of foreign taxes. No provision for Federal taxes has been recorded
because we have experienced operating losses from inception through 2000.
As of December 31, 2000, we had Federal net operating loss carryforwards of
approximately $20.0 million. We also had a Federal research and development tax
credit carryforward of approximately $900,000 at that date. The net operating
loss and credit carryforwards will expire at various dates beginning in 2010
through 2020 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.
Liquidity and Capital Resources
As of December 31, 2000, our principal sources of liquidity included
approximately $33.1 million of cash and cash equivalents and $31.4 and $4.2
million of short-term and long-term investments in marketable securities,
respectively. In April 1999, we sold shares of our common stock in our initial
public offering, generating net proceeds of approximately $68.1 million after
offering expenses. Net cash provided by investing activities for the year ended
December 31, 2000 reflects primarily the sale of investment instruments, while
net cash used in investing activities for the year ended December 31, 1999
reflects the investment of approximately $65.9 million of the net proceeds
14
from our initial public offering in marketable securities. Proceeds from other
issuances of common stock of approximately $1.9 million and $2.3 million for the
years ended December 31, 2000 and 1999 are comprised primarily of employee
exercises of stock options. Net cash used in operating activities for the year
ended December 31, 2000 is the result of the net loss for the year and an
increase in accounts receivable, partially offset by an increase in deferred
revenue. Net cash provided by operating activities for the year ended December
31, 1999 primarily reflects an increase in deferred revenue offset by our net
loss and an increase in accounts receivable.
Marimba leases its office facilities under various noncancellable operating
lease agreements. As of December 31, 2001, future minimum lease payments under
noncancellable operating leases for the period 2001 through 2005 will be
approximately $8.6 million.
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 adopted FAS 133 effective January 1, 2001. Because we
currently hold no derivative financial instruments and do not currently engage
in hedging activities, we do not believe that the adoption of FAS 133, as
amended, will have a significant impact on our 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. We believe that our current revenue
recognition policies comply with SAB 101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB No. 25 ("FIN 44"). FIN 44 clarifies the
application of APB 25 and, among other issues clarifies the following: the
definition of an employee for purposes of applying APB 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the accounting
consequence of various modifications to the terms of the previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. The application of FIN 44 has not had a material
impact on our financial position or results of operations.
Other Factors Affecting Operating Results, Liquidity and Capital Resources
The factors discussed below are cautionary statements that identify
important factors that could cause actual results to differ materially from
those anticipated by the forward-looking statements contained in this report.
For more information regarding the forward-looking statements contained in this
report, see the introductory paragraph to Part I on page 1 above.
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 May Incur Future Losses
Our failure to significantly increase our revenues would seriously harm our
business and operating results. Except for the second quarter of 2000, we have
experienced operating losses in each quarter since our inception. There is no
assurance that we will reach sustained profitability. As of December 31, 2000,
we had an accumulated deficit of approximately $28.5 million. We expect to
significantly increase our research and development, sales and marketing and
general and administrative expenses. As a result, we will
15
need to significantly increase our quarterly revenues to offset these increasing
expenses and return to 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.
Fluctuations in Quarterly Operating Results and Absence of Significant Backlog
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 may 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.
A substantial portion of our revenues for most quarters has been booked in
the last month of the quarter and the magnitude of quarterly fluctuations in
operating results may not become evident until late in or even at the end of a
particular quarter. 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. 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 for a particular quarter and are
based, in part, on expectations as to future revenues. As a result, if revenue
levels fall below our expectations for a particular quarter, our operating
results will be adversely affected because only a small portion of our expenses
vary with our revenues. We have historically operated with little product
backlog, because our products are generally delivered as orders are received. As
a result, revenue in any quarter will depend on the volume and timing, and the
ability to fill, orders received in that quarter.
We Expect Significant Increases in Our Operating Expenses
We intend to substantially increase our operating expenses as we:
o Increase our sales and marketing activities, including expanding our
direct sales force;
o Increase our research and development activities;
o Expand our customer support and professional services organizations; and
o Expand our distribution channels.
With these additional expenses, we must significantly increase our revenues
in order to achieve profitability. These expenses will be incurred before we
generate any revenues associated with this increased spending. If we do not
significantly increase revenues from these efforts, our business and operating
results would be adversely affected.
Our Success Depends on Our Castanet Product Family
We expect to continue to derive substantial revenues from our Castanet
product line 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 our Timbale product line 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.
16
We Need to Grow Our Timbale Product Revenues and Develop and Introduce New
Products and Services
During 2000, revenues from our Timbale product line accounted for 12% of
total license revenues. There can be no assurance that the revenues from our
Timbale product line will grow, in absolute amount or as a percentage of total
license revenues, or that our Timbale products will meet customer expectations
or gain widespread market acceptance. To provide comprehensive management
solutions, we will need to develop and introduce new products and services,
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.
We Depend on the Growth of Our Customer Base and Increased Business from Our
Current Customers
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.
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.
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, John Olsen, our Chairman and Chief
Strategy Officer, Kim Polese, and our Chief Technology Officer, Arthur van Hoff.
We have in the past lost senior management personnel. Several members of our
senior management are relatively new to Marimba, and our success will depend in
part on the successful assimilation and performance of these individuals.
We may not be successful in attracting qualified senior management personnel
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 based primarily in the San Francisco Bay Area, we face intense
competition for qualified personnel.
17
We Have a Long Sales Cycle that Depends upon Factors Outside Our Control
A customer's decision to license 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 their 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 of our customers 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 test our products
before they decide whether 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.
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:
o Sellers of enterprise-wide management systems, which include electronic
software distribution;
o Companies that market products that support the distribution of software
applications and content; and
o 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 additional
components into existing products in a manner that discourages users from
purchasing our products. 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 service 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. Such litigation could result in substantial costs
and diversion of resources and could significantly harm our business and
operating results. 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:
18
o Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
o Obtain a license from the holder of the infringed intellectual property
right; and
o 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.
We Depend upon Third-Party Distribution Relationships and Need to Develop New
Relationships
We have a limited number of distribution relationships 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, but is no
longer a reseller of our products. In addition, our original equipment
manufacturer arrangement with Tivoli has recently accounted for a decreasing
percentage of our revenues. During fiscal 2000 and 1999, Tivoli accounted for
less than 10% of our revenues, as compared to 18% of our revenues in fiscal
1998.
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 result in lower fees to Marimba 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. We have historically not
been able to hire employees as quickly as planned. In particular, competition
for qualified sales personnel is intense and we may not be able to hire enough
qualified sales personnel 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, both in
the United States and elsewhere.
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 total service revenues to increase as we continue to provide
support, consulting and training services that complement our products and as
our installed customer base 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 or changes in 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.
19
Export clearances, 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, finance, legal, marketing, sales and operations
organizations. In addition, our growth has resulted, and any future growth will
result, in increased responsibilities for management 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 Our Products 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. 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.
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
20
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 our products 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
our 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 solutions based on new technologies or new
industry standards can quickly render existing solutions obsolete and
unmarketable. Any delays in our ability to develop and release enhanced or new
solutions could seriously harm our business and operating results. Our
technology is complex, and new products, enhancements and services 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.
We Face 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 anticipated levels. 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.
21
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
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:
o obligations of the U.S. government and its agencies;
o investment grade state and local government obligations;
o securities of U.S. corporations rated A1 or AA by Standard and Poors or
the Moody's equivalent; and
o 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, 2000 and
1999. This table does not include money market funds, because those funds are
not subject to market risk.
Maturing during
2001 2002
-------- --------
(in thousands)
December 31, 2000:
Cash equivalents............................. $ 29,300 $ --
Weighted average interest rate......... 6.46% --
Investments.................................. $ 31,407 $ 4,146
Weighted average interest rate......... 6.50% 6.90%
Total........................................ $ 60,707 $ 4,146
Weighted average interest rate......... 6.48% 6.90%
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%
Exchange Rate Sensitivity
We develop products in the United States, and sell our products and services
primarily in North America, Europe and Asia. 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. To date, however, because we
operate primarily in the United States and all sales have been made in US
dollars, we have had no material exposures to foreign currency rate
fluctuations. Accordingly, we have no basis to quantify the risk from
hypothetical changes in foreign currency exchange rates.
22
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MARIMBA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors.......................... 24
Consolidated Balance Sheets................................................ 25
Consolidated Statements of Operations and Comprehensive Loss............... 26
Consolidated Statements of Stockholders' Equity (Net
Capital Deficiency)...................................................... 27
Consolidated Statements of Cash Flows...................................... 28
Notes to Consolidated Financial Statements................................. 29
23
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, 2000 and 1999, and the related consolidated statements
of operations and comprehensive loss, stockholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 2000. 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, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
Palo Alto, California /s/ ERNST & YOUNG LLP
January 12, 2001
24
MARIMBA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
December 31,
2000 1999
------ ------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 33,122 $ 22,263
Short-term investments............................................... 31,407 42,760
Accounts receivable, net of allowances of $2,315 and $104 12,500 7,399
at December 31, 2000 and 1999...................................
Prepaid expenses and other current assets............................ 1,599 1,085
---------- ----------
Total current assets............................................ 78,628 73,507
Property and equipment, net............................................... 4,274 2,955
Long-term investments..................................................... 4,146 13,989
Other assets.............................................................. 360 36
---------- ----------
$ 87,408 $ 90,487
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................. $ 2,881 $ 3,143
Accrued compensation................................................. 4,055 3,279
Current portion of capital lease obligations and -- 59
equipment advances..............................................
Deferred revenue..................................................... 13,516 11,319
---------- ----------
Total current liabilities....................................... 20,452 17,800
Long-term portion of capital lease obligations, advances and
other long-term liabilities.......................................... 153 48
Commitments and contingencies
Preferred stock; $.0001 par value, 10,000 shares authorized,
no shares designated, issued and outstanding -- --
Stockholders' equity:
Common stock; $.0001 par value, 80,000 shares authorized, 23,585
and 23,146 shares issued and outstanding at
December 31, 2000 and 1999...................................... 2 2
Additional paid-in capital........................................... 97,222 93,436
Deferred compensation................................................ (1,882) (1,680)
Cumulative translation adjustment.................................... (42) (22)
Unrealized gain (loss) on investments................................ 33 (239)
Accumulated deficit.................................................. (28,530) (18,858)
---------- ----------
Stockholders' equity............................................ 66,803 72,639
---------- ----------
$ 87,408 $ 90,487
========== ==========
See accompanying notes.
25
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
Year Ended December 31,
2000 1999 1998
-------- -------- --------
Revenues:
License.................................................. $ 31,329 $ 23,637 $ 13,901
Service.................................................. 12,718 7,776 3,184
-------- -------- --------
Total revenues....................................... 44,047 31,413 17,085
Cost of revenues:
License.................................................. 681 402 75
Service.................................................. 4,256 3,036 1,964
-------- -------- --------
Total cost of revenues............................... 4,937 3,438 2,039
-------- -------- --------
Gross profit................................................... 39,110 27,975 15,046
Operating expenses:
Research and development................................. 11,114 8,497 5,773
Sales and marketing...................................... 27,758 19,625 12,371
General and administrative............................... 12,570 5,066 2,779
Amortization of deferred compensation.................... 1,702 1,410 251
-------- -------- --------
Total operating expenses............................. 53,144 34,598 21,174
-------- -------- --------
Loss from operations........................................... (14,034) (6,623) (6,128)
Interest income................................................ 4,562 2,536 518
Interest expense............................................... (21) (30) (30)
-------- -------- --------
Loss before income taxes....................................... (9,493) (4,117) (5,640)
Provision for income taxes..................................... 179 97 41
-------- -------- --------
Net loss....................................................... $ (9,672) $ (4,214) $ (5,681)
========= ========= ========
Other comprehensive loss:
Translation adjustment.................................... (20) (16) (6)
Unrealized gain (loss) on investments..................... 272 (239) --
-------- -------- --------
Comprehensive loss............................................. $ (9,420) $ (4,469) $ (5,687)
========= ========= ========
Basic and diluted net loss per share........................... $ (.42) $ (.22) $ (.59)
========= ========= ========
Weighted-average shares of common stock outstanding used in
computing basic and diluted net loss per share........... 23,200 19,029 9,606
========= ========= ========
See accompanying notes.
26
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands)
Stockholders' Equity (Net Capital Deficiency)
-------------------------------------------------------------------------------------------------
Note Unrealized Stockholders'
Common Stock Additional Receivable Cumulative Gain Equity
--------------- Paid-in From Deferred Translation (loss) on Accumulated (Net Capital
Shares Amount Capital Officer Compensation Adjustment Investments Deficit Deficiency)
------ ------ ------- ------- ------------ ---------- ----------- -------- -----------
Balances at January 1, 1998 ...... 13,067 $ 1 $ 641 $ (150) $ -- $ -- $ -- $(8,963) $ (8,471)
Issuance of common stock upon
exercise of stock options ... 239 -- 230 -- -- -- -- -- 230
Repurchases of common stock ...... (253) -- (56) -- -- -- -- -- (56)
Translation adjustment ........... -- -- -- -- -- (6) -- -- (6)
Interest on note receivable from . -- -- -- (10) -- -- -- -- (10)
an officer
Deferred compensation ............ -- -- 1,367 -- (1,367) -- -- -- --
Amortization of deferred ......... -- -- -- -- 251 -- -- -- 251
compensation
Net loss ......................... -- -- -- -- -- -- -- (5,681) (5,681)
------ ------ -------- ------ -------- -------- -------- -------- --------
Balances at December 31, 1998 .... 13,053 1 2,182 (160) (1,116) (6) -- (14,644) (13,743)
Sale of common stock in initial
public offering, net ........ 3,736 -- 68,075 -- -- -- -- -- 68,075
Conversion of Series A and Series
B redeemable preferred stock
to common stock ............. 5,753 1 18,952 -- -- -- -- -- 18,953
Issuance of common stock upon .... --
exercise of stock options and 632 -- 1,561 -- -- -- -- -- 1,561
warrant
Issuance of common stock under ... --
employee stock purchase plan 42 -- 719 -- -- -- -- -- 719
Repurchases of common stock ...... (70) -- (27) -- -- -- -- -- (27)
Translation adjustment ........... -- -- -- -- -- (16) -- -- (16)
Repayment of note receivable from
an officer .................. -- -- -- 160 -- -- -- -- 160
Unrealized loss on investments ... -- -- -- -- -- -- (239) -- (239)
Deferred compensation ............ -- -- 1,974 -- (1,974) -- -- -- --
Amortization of deferred ......... -- -- -- -- 1,410 -- -- -- 1,410
compensation
Net loss ......................... -- -- -- -- -- -- -- (4,214) (4,214)
------ ------ -------- ------ --------- -------- -------- -------- --------
Balances at December 31, 1999 .... 23,146 2 93,436 -- (1,680) (22) (239) (18,858) 72,639
Issuance of common stock upon
exercise of stock options ... 459 -- 1,099 -- -- -- -- -- 1,099
Issuance of common stock under ... --
employee stock purchase plan 89 -- 924 -- -- -- -- -- 924
Repurchases of common stock ...... (109) -- (140) -- -- -- -- -- (140)
Translation adjustment ........... -- -- -- -- -- (20) -- -- (20)
Unrealized loss on investments ... -- -- -- -- -- -- 272 -- 272
Deferred compensation ............ -- -- 1,903 -- (1,903) -- -- -- --
Amortization of deferred ......... -- -- -- -- 1,701 -- -- -- 1,701
compensation
Net loss ......................... -- -- -- -- -- -- -- (9,672) (9,672)
------ ------ -------- ------ --------- -------- ------- -------- --------
Balances at December 31, 2000 .... 23,585 $ 2 $ 97,222 $ -- $ (1,882) $ (42) $ 33 $(28,530) $ 66,803
====== ====== ======== ====== ========= ======== ======= ======== ========
See accompanying notes.
27
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2000 1999 1998
--------- --------- ---------
Operating activities:
Net loss..................................................... $ (9,672) $ (4,214) $ (5,681)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 1,599 1,233 934
Amortization of deferred compensation............... 1,701 1,410 251
Other............................................... 29 (16) (16)
Changes in operating assets and liabilities:
Accounts receivable, net....................... (5,101) (4,814) 2,006
Unbilled receivables........................... -- 1,036 (1,036)
Prepaid expenses and other current assets...... (514) (714) (123)
Other assets................................... (324) 262 (42)
Accounts payable and accrued liabilities....... (262) 1,747 (544)
Accrued compensation........................... 776 1,575 169
Deferred revenue............................... 2,197 5,800 (2,078)
Other liabilities.............................. 105 13 2
--------- --------- ---------
Net cash provided by (used in) operating activities.......... (9,466) 3,318 (6,158)
--------- --------- ---------
Investing activities:
Capital expenditures, net............................... (2,966) (1,441) (1,280)
Purchases of investments................................ (31,592) (65,863) (7,125)
Proceeds from matured investments....................... 53,060 13,000 3,000
--------- --------- ---------
Net cash provided by (used in) investing activities.......... 18,502 (54,304) (5,405)
--------- --------- ---------
Financing activities:
Proceeds from issuance of common stock, net of
repurchases......................................... 1,883 2,253 174
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
Principal payments under capital lease obligations...... (60) (939) (124)
--------- --------- ---------
Net cash provided by financing activities.................... 1,823 69,549 861
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents......... 10,859 18,563 (10,702)
Cash and cash equivalents at beginning of period............. 22,263 3,700 14,402
--------- --------- ---------
Cash and cash equivalents at end of period................... $ 33,122 $ 22,263 $ 3,700
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 1 $ 30 $ 30
========= ========= =========
Income taxes paid....................................... $ 179 $ 97 $ 41
========= ========= =========
Supplemental disclosure of non-cash investing and
financing activities:
Conversion of redeemable preferred stock to common
stock............................................... $ -- $ 18,953 $ --
========= ========= =========
Deferred stock compensation............................. $1,903 $ 1,974 $ 1,367
========= ========= =========
See accompanying notes.
28
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,
markets and supports systems management software built for e-business. Our
solutions enable companies to expand their market reach, streamline business
processes and strengthen relationships with customers, business partners and
employees. Marimba markets its products worldwide through a combination of a
direct sales force, resellers and OEM partners.
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 $28.5 million at December 31, 2000. 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
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. Marimba recognizes revenue upon delivery to
customers who bundle Marimba's products in their own product offerings and do
not have a right of return. Historically, Marimba has not experienced
significant returns or exchanges of its products from direct sales. 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.
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 as the services
are 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.
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
29
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, 2000 have been expensed as
incurred.
Advertising
Marimba expenses advertising costs as incurred. Advertising expense was $1.2
million, $562,000 and $51,000 for the years ended December 31, 2000, 1999 and
1998.
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, 2000
and 1999 consist primarily of commercial paper, corporate and municipal bonds,
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, 2000 and 1999.
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. 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.
Available-for-sale investments are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ----------- ------------ -----------
(in thousands)
December 31, 2000:
Corporate notes.......................... $ 26,355 $ 20 $ (10) $ 26,365
Debt securities from U.S. Government and
government agencies................. 9,155 42 (9) 9,188
----------- ----------- ------------ -----------
Total investments................... $ 35,510 $ 62 $ (19) $ 35,553
=========== =========== ============ ===========
Short-term investments................... $ 31,410 $ 16 $ (19) $ 31,407
Long-term investments.................... 4,100 46 -- 4,146
----------- ----------- ----------- -----------
Total investments................... $ 35,510 $ 62 $ (19) $ 35,553
=========== =========== =========== ===========
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
=========== =========== =========== ===========
30
The amortized cost and estimated fair value of available-for-sale
investments in debt securities at December 31, 2000, by contractual maturity,
were as follows:
Estimated
Cost Fair Value
---- ----------
(in thousands)
Due in 1 year or less $ 31,410 $ 31,407
Due in 1-2 years 4,100 4,146
-------- --------
Total available-for-sale investments $ 35,510 $ 35,553
======== ========
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 the pro forma disclosures of applying FAS 123 included in Note
6.
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. During the years ended December 31, 2000, 1999 and 1998,
Marimba added approximately $2.1 million, $36,000 and $75,000 to its bad debt
reserves. Total write-offs of uncollectible accounts were $0, $2,000 and $54,000
in these periods. During fiscal 2000, Marimba established a sales return
allowance reserve, in which $237,000 was added to this reserve; there were no
write-offs during 2000.
For the years ended December 31, 2000 and 1999, no single customer
represented more than 10% of total revenues. At December 31, 2000, one customer
represented 40% of accounts receivable and at December 31, 1999, two customers
represented 16% and 19% of accounts receivable. Revenues from one reseller
represented 22% of total revenues for the year ended December 31, 1998. Revenues
to another reseller represented 18% of total revenues for the year ended
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 in one operating segment, the
development and marketing of systems management software and has operations
primarily in the United States. For the years ended December 31, 2000, 1999 and
1998, export sales to customers outside of the United States were $2.1 million,
$2.5 million and $1.3 million.
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. In
accordance with FAS 128, basic and diluted net loss per share have been
31
computed using the weighted-average number of shares of common stock outstanding
during the periods, less shares subject to repurchase.
The following table presents the calculation of basic and diluted net loss
per share:
Year Ended December 31,
2000 1999 1998
-------- -------- --------
(in thousands, except per share data)
Net loss................................................. $(9,672) $ (4,214) $(5,681)
======== ======== ========
Basic and diluted:
Weighted-average shares of common stock
outstanding....................................... 23,391 19,855 13,081
Less weighted-average shares subject to repurchase.... (191) (826) (3,475)
-------- -------- --------
Weighted-average shares of common stock
outstanding used in computing basic and
diluted net loss per share........................ 23,200 19,029 9,606
======== ======== ========
Basic and diluted net loss per share.................. $ (.42) $ (.22) $ (.59)
======== ======== ========
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 4,714,000, 2,861,000 and 1,483,000 shares of common
stock and redeemable convertible preferred stock for the years ended December
31, 2000, 1999, and 1998, 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 adopted 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.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB No. 25 ("FIN 44"). FIN 44 clarifies the
application of APB 25 and, among other issues clarifies the following: the
definition of an employee for purposes of applying APB 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the accounting
consequence of various modifications to the terms of the previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. The application of FIN 44 has not had a material
impact on Marimba's financial position or results of operations.
32
2. Property and Equipment
Property and equipment consist of the following:
December 31,
2000 1999
------- -------
(in thousands)
Furniture and equipment........................... $ 746 $ 764
Computer equipment................................ 5,152 3,325
Purchased software................................ 1,353 1,097
Leasehold improvements............................ 1,061 291
------- -------
8,312 5,477
Accumulated depreciation and amortization......... (4,038) (2,522)
------- -------
Property and equipment, net....................... $ 4,274 $ 2,955
======= =======
Property and equipment at December 31, 2000 and 1999 includes assets under
capitalized leases of approximately $378,000, which were acquired in 2000. These
assets were fully amortized at December 31, 2000.
3. Commitments
Marimba leases its office facilities under various noncancelable operating
lease agreements. As of December 31, 2000, future minimum lease payments under
noncancelable operating leases are as follows:
Operating
Leases
------
(in thousands)
Year ending December 31:
2001.......................................... $ 1,920
2002.......................................... 2,010
2003.......................................... 1,964
2004.......................................... 1,960
2005.......................................... 728
----------
Total minimum lease payments.............. $ 8,582
==========
Marimba's headquarters facility lease expires in April 2005. Rent expense
under operating leases totaled approximately, $2.2 million, $1.8 million and
$1.2 million for the years ended December 31, 2000, 1999 and 1998.
4. 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. In
2000, we recorded deferred compensation of approximately $1.9 million, net of
reductions of $703,000 in 2000 due to cancelled shares, which represented the
intrinsic value of certain restricted stock awards. Deferred compensation is
being amortized over the vesting periods of the options and restricted stock on
a graded vesting method. We amortized deferred compensation expense of $1.7
million, $1.4 million and $251,000 for fiscal years 2000, 1999 and 1998,
respectively. This compensation expense relates to options awarded to
individuals in all operating expense categories. The amortization of our current
deferred compensation, net of reductions of $703,000 in 2000 due to cancelled
shares, will approximate $1.6 million in 2001 and $301,000 in 2002.
33
5. Stockholders' Equity
In 1999, Marimba sold 3,736,000 shares of common stock in an underwritten
public offering for net proceeds of approximately $68.1 million, 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, 2000, 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, 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
Our 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, 2000, 1999 and 1998 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 our 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.
34
6. Stock Option and Other Employee Benefit Plans
1996 Stock Option Plan
In November 1996, the Board of Directors adopted the 1996 Stock Plan (the
"1996 Plan") for issuance of common stock to eligible participants. A total of
6,474,603 shares of common stock were reserved for issuance to eligible
participants under the 1996 Plan. Effective in April 1999 (concurrently with
Marimba's initial public offering), Marimba ceased granting awards under the
1996 Plan. Incentive stock options and nonstatutory stock options could be
granted under the 1996 Plan at prices not less than 100% and 85% of the fair
value on the date of grant. Options granted under the 1996 Plan 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, 2000, 42,266 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"), and a total of 1,250,000 shares
of common stock were originally reserved for issuance to eligible participants
under the 1999 Omnibus Plan. As of January 1st of each plan year, annual
increases to the share reserve are equal to the lesser of 1,250,000 shares or 4%
of the outstanding common stock of Marimba on such date. A total of 2,175,810
shares of common stock were reserved for issuance under the 1999 Omnibus Plan as
of December 31, 2000, and an additional 943,379 shares of common stock were
added to the reserve on January 1, 2001. The types of awards that may be made
under the 1999 Omnibus Plan to eligible participants 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 (and 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 (the "Directors Plan"), and a total of 150,000 shares of
common stock were originally reserved for issuance under the Directors Plan. As
of January 1st of each plan year, the number of shares reserved for issuance is
increased automatically to restore the total number of shares available under
the Directors Plan to 150,000 shares. A total of 165,000 shares of common stock
were reserved for issuance, to non-employee members of the Board of Directors as
of December 31, 2000, and an additional 37,500 shares of common stock were added
to the reserve on January 1, 2001. Under the Directors Plan, each non-employee
director who became a member of the Board of Directors before 1999 received a
fully vested option to purchase 7,500 shares of the Company's common stock on
the effective date of the Company's initial public offering; the exercise price
per share of these options was the initial price offered to the public in the
Company's initial public offering. Each individual who first becomes a
non-employee Board member after the date of the Company's initial public
offering will be granted a fully vested option ("Initial Option") to purchase
15,000 shares of the Company's common stock on the date such individual joins
the Board, provided such individual has not been in the prior employ of the
Company. In addition, at each annual meeting of stockholders of the Company,
each individual who will continue to be a director after such annual meeting
will receive an additional fully vested option ("Annual Option") to purchase
7,500 shares of common stock. Each director who received an Initial Option under
the Directors Plan will first be eligible to receive an Annual Option in the
calendar year that is two years after the calendar year in which the director
received the Initial Option. The exercise price for each option grant will be
equal to the fair market value per share of common stock on the option grant
date.
2000 Supplemental Stock Plan
In March 2000, the Board of Directors adopted the 2000 Supplemental Stock
Plan (the "2000 Plan"). A total of 3,500,000 shares of common stock have been
reserved for issuance to eligible participants under the 2000 Plan, and officers
and directors of Marimba are not eligible to participate in the 2000 Plan. The
types of awards that may be made under the 2000 Plan are nonstatutory options to
purchase shares of common stock and restricted shares. The
35
exercise price for nonstatutory options may not be less than 85% of the fair
market value of Marimba's common stock on the date of grant. In the event of a
change in control of Marimba, an option or award under the 2000 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 2000 Plan.
On July 21, 2000, the Board of Directors approved a 1,000,000 share option
grant to an employee outside of any of Marimba's stock option plans. The options
will become exercisable with respect to the first 25% of the option shares upon
completion of twelve months of continuous service and the balance of the options
shares will vest in a series of successive equal monthly installments upon
completion of each of the next thirty-six months of continuous service
thereafter. The options have a maximum term of ten years measured from the date
of grant and are exercisable at $21.1875 per share, which is equal to the market
price of our shares on the date of grant.
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 January 1, 1998....... 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
Authorized...................... 5,440,810
Granted......................... (5,979,392) 5,979,392 .0001 -- 46.00 17.41
Exercised....................... -- (458,964) .0001 -- 20.00 2.40
Repurchased..................... 108,546 -- -- --
Canceled........................ 2,383,870 (2,383,870) .50 -- 46.00 19.00
----------- -----------
Balance at December 31, 2000..... 2,768,518 6,599,353 $.15 -- $46.00 $ 16.01
=========== ===========
As of December 31, 2000 and 1999, there were 833,352 and 2,585,545 fully
vested and exercisable shares with a weighted average exercise price of $11.32
and $8.56 per share.
36
The following table details outstanding and exercisable options as of
December 31, 2000:
Outstanding Exercisable
--------------------------------------------- ---------------------------
Weighted-Average
Remaining
Range of Number of Contractual Weighted-Averag Number of Weighted-Averag
Exercise Price Shares Life Exercise Price Shares Exercise Price
-------------- ------ ---- -------------- ------ --------------
$ .0001--$4.87 1,225,447 8.90 $ 3.51 392,568 $ 2.42
5.12 399,750 9.85 5.12 0 0
5.25 1,092,500 9.80 5.25 0 0
7.00 -- 15.12 841,579 8.88 14.27 226,275 13.38
16.12 -- 20.00 270,078 9.06 18.03 99,685 19.27
21.19 1,396,500 9.55 21.19 937 21.19
26.25 -- 31.37 870,499 9.11 28.29 111,762 30.69
$39.62 -- $46.00 503,000 9.18 44.66 2,125 40.37
---------- -------
Total 6,599,353 9.30 $ 16.01 833,352 $ 11.32
========== =======
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.
The fair value of each option granted through December 31, 2000 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 estimating 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,
2000 1999 1998
---- ---- ----
Fair value of options............................. $ 16.25 $ 12.87 $ .73
Fair value of restricted shares................... 13.03 -- --
Assumptions:
Risk-free interest rate........................ 5% 6% 5%
Expected life.................................. 3 years 3 years 4 years
Volatility..................................... 140% 101% --
Dividend yield................................. -- -- --
In 2000, Marimba issued 200,000 restricted shares under the 1999 Omnibus
Plan.
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 value of shares granted under our 1999
Employee Stock Purchase Plan (see plan description below) were $10.79 and $13.68
for the years ended December 31, 2000 and 1999, respectively, calculated using
the Black-Scholes pricing model. The following weighted-average assumptions were
used in fiscal 2000: risk-free interest rate of 5%, expected life of 2 years,
volatility of 140% and dividend yield of zero; and in fiscal 1999: risk-free
interest rate of 6%, expected life of 2 years, volatility of 101% and dividend
yield of zero.
37
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 vesting method. Pro
forma information is as follows:
Year Ended December 31,
2000 1999 1998
------------ ------------ -----------
(in thousands, except per share data)
Net loss:
As reported.................................. $ (9,672) $ (4,214) $ (5,681)
============ ============ ===========
Pro forma.................................... $ (36,900) $ (10,532) $ (6,123)
============ ============ ===========
Basic and diluted net loss per share:
As reported................................. $ (.42) $ (.22) $ (.59)
============ ============ ===========
Pro forma................................... $ (1.59) $ (.55) $ (.64)
============ ============ ===========
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"), and a total of 500,000 shares of
common stock was originally reserved for issuance under the Directors Plan. As
of January 1st of each plan year, annual increases to the share reserve are to
equal the lesser of 500,000 shares or 2% of the outstanding common stock of
Marimba on such date. A total of 962,905 shares of common stock were reserved
for issuance under the 1999 Purchase Plan as of December 31, 2000, and an
additional 471,690 shares of common stock were added to the reserve on January
1, 2001. 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 1,500 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. A total of
88,811 shares at an average price of $10.41 and 42,306 shares at a price of
$17.00 were issued under the 1999 Purchase Plan for the years ended December 31,
2000 and 1999, respectively.
7. Income Taxes
Marimba's provision for income taxes for the years ended December 31, 2000,
1999 and 1998 consists entirely of foreign taxes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Marimba's deferred tax assets are as follows:
December 31,
2000 1999
------- -------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards.............. $ 7,900 $ 6,100
Research credit carryforwards................. 1,300 1,100
Deferred revenue.............................. 1,800 900
Other......................................... 3,600 200
------- -------
Total deferred tax assets............. 14,600 8,300
Valuation allowance.................................. (14,600) (8,300)
------- -------
Net deferred tax assets.............................. $ -- $ --
======= =======
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $6.3 million and $2.2 million during 2000 and 1999,
respectively.
38
As of December 31, 2000, Marimba had net operating loss carryforwards for
federal income tax purposes of approximately $20 million, which expire in the
years 2010 through 2020 and federal research and development tax credits of
approximately $900,000, which expire in the years 2012 through 2020.
Utilization of Marimba's net operating loss may be subject to substantial
annual limitations due to the ownership change limitations provided by Internal
Revenue Code and similar state provisions. Such an annual limitation could
result in the expiration of the net operating loss before utilization.
8. Legal Matters
On March 3, 1997, Novadigm, Inc. filed a complaint against us in the U.S.
District Court for the Northern District of California alleging infringement of
a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm Patent"). On
July 30, 1999, Marimba filed a complaint against Novadigm in the U.S. 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").
Effective November 10, 2000, Marimba and Novadigm executed an agreement settling
both actions. Pursuant to the agreement, the parties have dismissed both actions
without prejudice. Under the agreement, the other terms of the settlement are
confidential.
9. Notes Receivable from Officer
In July 2000, in connection with the Company's grant of a restricted stock
bonus of 100,000 shares of the Company's common stock to an executive officer of
the Company, the executive officer received a loan facility for up to $1
million. The loan facility bears interest of 6.6% per annum and is repayable as
to 50% of the outstanding principal amount and accrued interest in September
2002 and as to the remaining principal amount and accrued interest in September
2004. However, repayment of all of the outstanding principal amount and accrued
interest under the loan facility is due upon the earlier of the date that is
three months from the date the executive officer's employment with the Company
ceases for any reason or the closing date of a change in control of the Company.
The loan is secured by the shares of the Company's common stock under the
restricted stock bonus. As of December 31, 2000, the loan facility had not been
drawn down.
10. Comprehensive Income
As of January 1, 1998, we adopted Financial Accounting Standard No. 130
(SFAS 130), "Reporting Comprehensive Income." SFAS 130 established new rules for
the reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in equity of a company during a
period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners
and is to include unrealized gains and losses that have historically been
excluded from net income and reflected instead in equity. We have not had any
such material transactions or events during the periods presented and,
accordingly, comprehensive income is not materially different from net income as
reported in the consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
39
PART III
The information required by this Part III will be provided in our
definitive proxy statement for our 2001 Annual Meeting of Stockholders
(involving the election of directors), which definitive proxy statement will be
filed pursuant to Regulation 14A not later than 120 days following our fiscal
year ended December 31, 2000, and is incorporated herein by this reference to
the following extent:
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 23 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 consolidated
financial statements or notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K.
See Exhibit Index on page 40 of this Form 10-K for the exhibits filed
as part of or incorporated by reference into this Form 10-K.
(b) Reports on Form 8-K
During the quarter ended December 31, 2000, the Company did not file
any reports on Form 8-K.
(c) See Exhibit Index at page 46 of this Form 10-K for the exhibits filed
as part of or incorporated by reference into this Form 10-K.
(d) See the Consolidated Financial Statements and Supplementary Data
beginning on page 23 of this Form 10-K.
40
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.
MARIMBA, INC.
Date: March 27, 2001 By:/s/ Kenneth W. Owyang
---------------------
Kenneth W. Owyang
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 and on the dates indicated:
PRINCIPAL EXECUTIVE OFFICER:
By: /s/ John Olsen Date: March 27, 2001
--------------
John Olsen
President, Chief Executive Officer and Director
PRINCIPAL FINANCIAL/ACCOUNTING OFFICER:
By: /s/ Kenneth W. Owyang Date: March 27, 2001
---------------------
Kenneth W. Owyang
Vice President and Chief Financial Officer
ADDITIONAL DIRECTORS:
By: /s/ Kim K. Polese Date: March 27, 2001
-----------------
Kim K. Polese
Chairman, Chief Strategy Officer and Director
By: /s/ Aneel Bhusri Date: March 27, 2001
----------------
Aneel Bhusri
Director
By: /s/ Raymond J. Lane Date: March 27, 2001
-------------------
Raymond J. Lane
Director
By: /s/ Douglas J. Mackenzie Date: March 27, 2001
------------------------
Douglas J. Mackenzie
Director
By: /s/ Stratton D. Sclavos Date: March 27, 2001
-----------------------
Stratton D. Sclavos
Director
41
MARIMBA, INC.
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
3.1 Third Amended and Restated Certificate of Incorporation of the
Registrant - 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.
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).
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* 1999 Employee Stock Purchase Plan, as amended to date.
10.4 1999 Non-Employee Directors Option Plan - incorporated herein
by reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File No. 333-72353).
10.9 Lease between ilicon, Inc. and Registrant dated February 27,
2000 incorporated herein by reference to Exhibit 10.17 to the
Company's Form 10-K for the fiscal year ended December 31, 1999
file with the Commission on March 27, 2000.
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
- ------------------------
* Filed with this Form 10-K
42