MARIMBA INC - 10-Q Quarterly Report

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) Yes x No ¨, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

	June 30, 2002			December 31, 2001(1)
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	19,188		$	26,141
Short-term investments		22,958			16,249
Accounts receivable, net of allowances of $1,478 and $2,358, respectively		3,878			7,791
Prepaid expenses and other current assets		1,120			1,164

Total current assets		47,144			51,345
Property and equipment, net		3,086			3,900
Long-term investments		17,225			18,246
Other assets		367			360

	$	67,822		$	73,851

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	4,325		$	2,378
Accrued compensation		3,169			3,408
Deferred revenue		10,714			10,558

Total current liabilities		18,208			16,344
Long-term liabilities		289			265
Stockholders’ equity:
Common stock		2			2
Additional paid-in capital		101,060			100,523
Deferred compensation		(791	)		(1,542	)
Accumulated other comprehensive income		167			141
Accumulated deficit		(51,113	)		(41,882	)

Stockholders’ equity		49,325			57,242

	$	67,822		$	73,851

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(unaudited)						(unaudited)
Revenues:
License	$	5,050		$	8,281		$	9,018		$	15,264
Service		3,988			3,904			8,081			7,925

Total revenues		9,038			12,185			17,099			23,189
Cost of revenues:
License		2,099			137			2,226			260
Service		1,407			1,462			2,863			3,327

Total cost of revenues		3,506			1,599			5,089			3,587

Gross profit		5,532			10,586			12,010			19,602
Operating expenses:
Research and development		2,042			2,711			4,100			5,966
Sales and marketing		6,775			9,059			13,451			17,928
General and administrative		1,875			1,781			3,440			3,907
Restructuring costs		—			789			—			789
Amortization of deferred compensation		508			526			1,060			1,118

Total operating expenses		11,200			14,866			22,051			29,708

Loss from operations		(5,668	)		(4,280	)		(10,041	)		(10,106	)
Interest income, net		390			651			823			1,682

Loss before income taxes		(5,278	)		(3,629	)		(9,218	)		(8,424	)
Provision for income taxes		4			87			13			108

Net loss	$	(5,282	)	$	(3,716	)	$	(9,231	)	$	(8,532	)

Basic and diluted net loss per share	$	(.22	)	$	(.16	)	$	(.38	)	$	(.36	)

Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share		24,360			23,708			24,290			23,642

	Six Months Ended June 30,
	2002			2001
	(unaudited)
Operating activities:
Net loss	$	(9,231	)	$	(8,532	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		1,000			1,045
Amortization of deferred compensation		1,060			1,118
Loss on disposal of property and equipment		3			—
Changes in operating assets and liabilities:
Accounts receivable, net		3,913			943
Note receivable from officer		—			(782	)
Prepaid expenses and other assets		37			203
Accounts payable and accrued liabilities		1,947			(1,124	)
Accrued compensation		(239	)		(686	)
Long-term liabilities		24			72
Deferred revenue		156			(2,470	)

Net cash used in operating activities		(1,330	)		(10,213	)

Investing activities:
Capital expenditures, net		(189	)		(1,556	)
Purchases of investments		(21,158	)		(35,033	)
Proceeds from matured investments		15,515			39,755

Net cash provided by (used in) investing activities		(5,832	)		3,166

Financing activities:
Proceeds from issuance of common stock, net of repurchases		228			1,050
Proceeds from transfer of financial assets		—			3,853

Net cash provided by financing activities		228			4,903
Effect of exchange rate changes on cash		(19	)		(5	)
Net decrease in cash and cash equivalents		(6,953	)		(2,149	)
Cash and cash equivalents at beginning of period		26,141			33,122

Cash and cash equivalents at end of period	$	19,188		$	30,973

Supplemental disclosure of noncash investing and financing activities
Deferred compensation	$	309		$	36

The accompanying unaudited condensed consolidated financial statements have been prepared by Marimba, Inc. (“Marimba”, the “Company”, “we”, “our” or “us”) and reflect all adjustments, consisting of normal recurring adjustments and the non-recurring adjustments described in Notes 4 and 6, which in the opinion of management are necessary to present fairly the financial position and the results of operations for the interim periods. The balance sheet at December 31, 2001 has been derived from audited financial statements at that date. The financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles. For further information, refer to the Consolidated Financial Statements and Notes thereto included in Marimba’s Annual Report on Form 10-K for the year ended December 31, 2001 filed with the Securities and Exchange Commission on March 28, 2002. Results for the interim periods are not necessarily indicative of results for the fiscal year ending December 31, 2001 or for any future interim or full-year period.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(in thousands, except per share data)
Net loss	$	(5,282	)	$	(3,716	)	$	(9,231	)	$	(8,532	)

Basic and diluted:
Weighted-average shares of common stock outstanding		24,375			23,909			24,306			23,810
Less weighted-average shares subject to repurchase		(15	)		(201	)		(16	)		(168	)

Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share		24,360			23,708			24,290			23,642
Basic and diluted net loss per share	$	(.22	)	$	(.16	)	$	(.38	)	$	(.36	)

Marimba has excluded all 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 outstanding to purchase 7,469,584 and 7,398,316 shares of common stock for the three and six months ended June 30, 2002 , respectively, 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.

Marimba derives its revenues primarily from two sources: (i) license revenues, which consist of software license fees; and (ii) service revenues, which are comprised of fees for maintenance and support, consulting and training. Maintenance and support agreements provide technical support and the right to unspecified upgrades on an if-and-when available basis. Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

Marimba applies the provisions of Statement of Position 97-2 (“SOP 97-2”), “Software Revenue Recognition”, as amended by Statement of Position 98-9 (“SOP 98-9”), “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” to all transactions involving the sale of software products.

In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Marimba applied the provisions of SAB 101 to all revenue transactions for the first two quarters of 2002 and all of fiscal 2001. SAB 101 has not had a material impact on our results of operations, financial position or cash flows.

Marimba sometimes resells third-party software product licenses. Revenues resulting from the resale of third-party software product licenses are recorded gross since we act as the principle in the transaction with the customer. During the three and six-month periods ended June 30, 2002 and 2001, revenues resulting from the resale of third-party product licenses were less than 3% of license revenues.

In accordance with the provisions of Accounting Principles Board Opinion No. 29 (“APB 29”), “Accounting for Nonmonetary Transactions”, Marimba records barter transactions at the fair value of the goods or services provided or received, whichever is more readily determinable in the circumstances. During the first six months of 2002 and 2001, we did not have revenues from barter transactions.

Marimba licenses software products to corporate customers, OEM partners and resellers on a perpetual basis or a term basis. We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is probable.

Marimba uses either a definitive customer purchase order or signed license agreement as evidence of an arrangement. License revenues in arrangements with customers who are not the ultimate users, primarily resellers, are not recognized until the software is sold through to the end-user. Advance payments from resellers for guaranteed minimum commitments are deferred until the software is sold through to the end-user or upon expiration of the specified commitment time period if the minimum commitments have not been met. Delivery generally occurs when license keys and passwords have been made available to the customer through e-mail.

At the time of the transaction, Marimba assesses whether the fee associated with revenue transactions is fixed or determinable and whether or not collection is probable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and our history with the customer or with similar customers. If a significant portion of a fee is due after our normal payment terms, we generally account for the fee as not being fixed or determinable. In these cases, Marimba recognizes revenue as the fees become due.

Marimba assesses the probability of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.

For arrangements with multiple obligations (for example, undelivered maintenance and support), Marimba allocates revenue to each component of the arrangement using the residual value method based on vendor specific objective evidence of the fair value of the undelivered elements, which is specific to Marimba. This means that Marimba defers revenue from the arrangement fee equivalent to the fair value of the undelivered elements. Fair value for the ongoing maintenance and support obligations for our licenses is based upon separate sales of renewals to other customers. Fair value of services, such as training or consulting, is based upon separate sales by us of these services to other customers. Most of our arrangements involve multiple obligations.

Marimba recognizes revenues for maintenance and support ratably over the maintenance term, which is generally one year. Consulting services are generally billed based on daily rates and training services are generally billed on per student or per class session basis. We generally recognize consulting and training revenues as the services are performed.

Two customers accounted for 19% and 11% of total revenues in the second quarter of 2002. In the second quarter of 2001, two customers accounted for 21% and 16% of total revenues. In the first six months of 2002, one customer accounted for 10% of total revenues, and in the comparable period of 2001, two customers accounted for 13% and 11% of total revenues.

In June 2001, Marimba entered into a $5 million receivables purchase facility with a bank, pursuant to which Marimba transferred qualifying accounts receivable to the bank on a non-recourse basis. Transfers under this facility were recorded as sales and accounted for in accordance with Statement of Financial Accounting Standards No. 140 (“FAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” During the second quarter of 2001, Marimba transferred to the bank accounts receivable totaling approximately $3.9 million, which approximated fair value. The transfer of accounts receivable for cash was reported in the consolidated statement of cash flows as a financing activity. During the fourth quarter of 2001, the amount outstanding under the facility was repaid in full. The purchase facility with the bank expired in June 2002.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(in thousands)						(in thousands)
Net loss	$	(5,282	)	$	(3,716	)	$	(9,231	)	$	(8,532	)
Other comprehensive income (loss):
Change in unrealized gains and losses on available-for-sale securities		255			(20	)		45			77
Foreign currency translation adjustment		(14	)		(4	)		(19	)		(5	)

Comprehensive loss	$	(5,041	)	$	(3,740	)	$	(9,205	)	$	(8,460	)

Beginning in April 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York naming Marimba, Inc., certain of its officers and directors, and certain underwriters of the company’s initial public offering (Morgan Stanley & Co., Inc., Credit Suisse First Boston Corp. and Bear Stearns & Co., Inc.) as defendants. The complaints have since been consolidated into a single action, and a consolidated amended complaint was filed in April 2002. The complaint alleges, among other things, that the underwriters of our initial public offering violated the securities laws by failing to disclose certain alleged compensation and tie-in arrangements (such as undisclosed commissions or stock stabilization practices) in the offering’s registration statement. Marimba and certain of its officers and directors are named in the complaint pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The complaint seeks unspecified damages. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding. Marimba intends to defend this litigation vigorously. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of this litigation could have an adverse impact on our business, financial condition and results of operations.

In April 2001, Marimba announced a restructuring plan. The plan involved the elimination across all company departments of approximately 20% of the workforce, or 60 employees and independent contractors. Marimba recorded a charge of $789,000 in the second quarter of 2001 related to the restructuring plan, which consisted of personnel costs of $583,000, facilities and equipment costs of $136,000 and other costs of $70,000. The remaining accrual was $123,000 at June 30, 2002, and is expected to be paid during the remainder of 2002.

On January 25, 2002, options to purchase a total 829,452 shares of Marimba’s common stock were granted under the Marimba, Inc. 2000 Supplemental Stock Plan in exchange for canceled options accepted under the voluntary stock option exchange program offered by Marimba during the period from April 27 to July 23, 2001. The exercise price of the new options is $3.10 per share, the closing price of Marimba’s common stock on the Nasdaq National Market on the date of grant of the new options. The exchange program was designed to comply with Financial Accounting Standards Board Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation”, and did not result in any additional compensation charges or variable plan accounting.

On July 6, 2001, Beck Systems, Inc. filed a complaint against Marimba, Inc. and two of its customers in the United States District Court for the Northern District of Illinois (Beck Systems, Inc. v. Marimba, Inc. et al., Civil Action No. 01 C 5207), alleging infringement of two patents held by Beck Systems. On July 19, 2002, Marimba and Beck Systems, Inc. executed an agreement settling the action, subject to court approval. On July 25, 2002, the court approved the settlement and the parties to the action dismissed the claims against each other in the action with prejudice. Under the terms of the agreement, Marimba obtained a license to Beck Systems’ patents in exchange for consideration consisting of a $2.75 million cash payment and the issuance of 500,000 shares of our common stock. During the quarter ended June 30, 2002, we recorded a charge of $1.9 million to cost of license revenues related to the settlement. The remainder of the settlement costs, which will be partially based upon the closing price of our common stock on the date we issue the shares, which is currently estimated at $1.5 million, will be recorded during the third quarter of 2002 as an intangible asset, and will be amortized to cost of license revenues ratably over five years.

In July 2002, Marimba announced a restructuring plan. The plan involved the elimination across all company departments of approximately 13% of the workforce, or 28 employees and independent contractors. Marimba anticipates recording a charge of between $350,000 and $650,000 in the third quarter of 2002 related to the restructuring plan, which will consist primarily of personnel related costs.

The information in this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934, each as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Marimba’s actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Other Factors Affecting Operating Results, Liquidity and Capital Resources” below. Additional information about factors that could affect future results and events is included in our fiscal 2001 Form 10-K and other reports or submissions filed with the Securities and Exchange Commission. All forward-looking statements in this report are based on information available to Marimba as of the date hereof, and Marimba undertakes no obligation to release publicly any updates or revisions to any such forward-looking statements.

Marimba is a leading provider of software change management solutions. We develop, market and support end-to-end change and configuration management software solutions. Our Desktop/Mobile Management, Server Management and Embedded Management product families provide an efficient and reliable way for enterprises to distribute, update and manage applications and related data to desktops, laptops, servers and devices. Our products help customers reduce their total cost of ownership and improve quality of service by streamlining the distribution and management of applications and content.

In January 1997, we released our first version of the Desktop/Mobile Management products and since that time have continued to develop and market that product line and enhance the core Desktop/Mobile Management infrastructure with additional functionality and complimentary add-on products. In the first half of 2000, Marimba introduced a new product line called Server Management. The Server Management products are designed to address many of the server management challenges inherent in thin client and Web commerce computing environments today. Additionally, Marimba offers Embedded Management products that allow device and software vendors to deliver software fixes, new features and services by embedding Marimba software management capabilities into their devices or applications. During 2001, revenues from the Desktop/Mobile, Server and Embedded Management product lines accounted for 76%, 18% and 6% of total license revenues, respectively. Revenues from the Desktop/Mobile, Server and Embedded Management products lines accounted for 75%, 17% and 8% of total license revenues, respectively, for the six months ended June 30, 2002. During the six months ended June 30, 2001, revenues from our Desktop/Mobile, Server and Embedded Management products lines accounted for 77%, 17% and 6% of total license revenues, respectively.

Revenues to date have been derived primarily from the license of our products and to a lesser extent from support and maintenance, 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 are customarily billed 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.

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 $51.1 million at June 30, 2002. We believe that our success depends on further increasing our customer base and on growth in our market overall. Accordingly, over the long term, 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 indicative of future growth or financial results.

Legal Settlement. On July 25, 2002, the court approved a settlement between Marimba and Beck Systems, as described in Note 6. Under the terms of the agreement for the settlement, Marimba obtained a license to Beck Systems’ patents. The amount charged to cost of license revenues during the quarter ended June 30, 2002 was based on the apportionment of the total amount which related to payment for the alleged past infringement. The remaining amount, which will be recorded as an intangible asset during the third quarter of 2002 and amortized to cost of license revenues over a five-year period, is based on the value of the ongoing license to Beck Systems’ patents. The amounts allocated to the expense and the asset were based, respectively, on our license revenues since inception versus our projection of the revenue relating to the technology, which will occur over the next 5 years. Management’s assumptions about future revenues and the period over which our product will embed the patented technology requires significant judgment. Our revenues have fluctuated in the past and are expected to continue to do so. In addition, it is not clear how long our products will include the patented technology. If we were to change our estimate of future revenues or the period over which our product will embed the patented technology, the apportionment of the settlement amount between the charge relating to the alleged past infringement and the intangible asset would be different.

The following table sets forth certain statements of operations data as a percentage of total revenues for the three and six months ended June 30, 2002 and 2001. This data has been derived from the unaudited condensed consolidated financial statements contained in this report which, in the opinion of management include all adjustments, consisting of normal recurring adjustments and the non-recurring adjustments described in Notes 4 and 6, necessary to present fairly the financial position and results of operations for the interim periods. The operating results for any quarter should not be considered indicative of results of any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Marimba’s Annual Report on Form 10-K for the year ended December 31, 2001.

	Three Months Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
Consolidated Statement of Operations Data:
Revenues:
License	55.9	%	68.0	%	52.7	%	65.8	%
Service	44.1		32.0		47.3		34.2

Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
License	23.2		1.1		13.0		1.1
Service	15.6		12.0		16.7		14.4

Total cost of revenues	38.8		13.1		29.7		15.5

Gross margin	61.2		86.9		70.3		84.5
Operating expenses:
Research and development	22.6		22.2		24.0		25.7
Sales and marketing	75.0		74.3		78.7		77.3
General and administrative	20.7		14.6		20.1		16.8
Restructuring	—		6.5		—		3.4
Amortization of deferred compensation	5.6		4.4		6.2		4.9

Total operating expenses	123.9		122.0		129.0		128.1

Income (loss) from operations	(62.7	)	(35.1	)	(58.7	)	(43.6	)
Interest income, net	4.3		5.3		4.8		7.3

Income (loss) before income taxes	(58.4	)	(29.8	)	(53.9	)	(36.3	)
Provision for income taxes	—		(0.7	)	(0.1	)	(0.5	)

Net income (loss)	(58.4	)%	(30.5	)%	(54.0	)%	(36.8	)%

License Revenues. License revenues decreased $3.2 million, or 39%, to $5.1 million in the second quarter of 2002 from $8.3 million in the second quarter of 2001. License revenues in the six months ended June 30, 2002 decreased 41% to $9.0 million from $15.3 million in the comparable period of 2001. As a percentage of total revenues, license revenues decreased to 56% and 53% of total revenues in the three and six-month periods ended June 30, 2002, respectively, from 68% and 66% in each of the comparable periods of 2001. The reduction of license revenues for the comparative three and six month periods was due to a decrease in product licenses sold, reflecting the impact of the general economic slowdown in the United States, primarily through delays in customers’ IT purchases and lengthening sales cycles.

Service Revenues. Service revenues include maintenance and support, consulting and training. Service revenues in the second quarter of 2002 were $4.0 million, compared to service revenues of $3.9 million in the second quarter of 2001. Service revenues in the six months ended June 30, 2002 were $8.1 million, compared to service revenues of $7.9 million in the equivalent period of 2001. As a percentage of total revenues, service revenues increased to 44% and 47% of total revenues in the three and six-month periods ended June 30, 2002, respectively, from 32% and 34% in each of the comparable periods of 2001. The increase in service revenues as a percentage of total revenues was due primarily to lower total revenues during the three and six months ended June 30, 2002.

Cost of License Revenues. Cost of license revenues generally consists of the cost of third-party software products that were either integrated into our products or resold by Marimba. Cost of license revenues related to the cost of third-party products was less than 2% of total revenues in the three and six-month periods ended June 30, 2002 and 2001. In addition, we recorded a charge to cost of license of $1.9 million during the second quarter of 2002 in relation to a legal settlement, which involved a patent license. We expect to record additional ratable charges to cost of license revenues over the next five years due to the recording of an intangible asset in August of 2002 in relation to the same legal settlement, which is currently estimated at $1.5 million.

Cost of Service Revenues. Cost of service revenues during the second quarter of 2002 were $1.4 million, compared to cost of service revenues of $1.5 million in the second quarter of 2001. For the first six months of 2002, cost of service revenues decreased $460,000, or 14%, to $2.9 million from $3.3 million for the comparable period of 2001. The decrease in cost of service revenues was due primarily to operating efficiencies and an overall decrease in sales.

Research and Development. Research and development (“R&D”) expenses decreased $669,000, or 25%, to $2.0 million in the second quarter of 2002 from $2.7 million in the second quarter of 2001. For the first six months of 2002, research and development expenses decreased $1.9 million, or 31%, to $4.1 million from $6.0 million in the comparable period of 2001. R&D expenses decreased in absolute dollars due primarily to our decision to focus on Marimba’s core change and configuration management products and the resulting discontinuance of Marimba.net (a managed hosting service) and closure of our Houston, Texas development facility that had previously been dedicated to performance management product development.

Sales and Marketing. Sales and marketing (“S&M”) expenses decreased $2.3 million, or 25%, to $6.8 million in the second quarter of 2002 from $9.1 million in the second quarter of 2001. For the first six months of 2002, sales and marketing expenses decreased $4.5 million, or 25%, to $13.5 million from $17.9 million in the comparable period of 2001. S&M expenses decreased in absolute dollars due primarily to fewer promotional activities, lower incentive compensation as a result of lower license revenues and a decrease in travel and entertainment expenses.

General and Administrative. General and administrative (“G&A”) expenses were $1.9 million in the second quarter of 2002, compared to G&A expenses of $1.8 million in the second quarter of 2001. For the first six months of 2002, G&A expenses decreased $467,000, or 12% to $3.4 million from $3.9 million in the comparable period of 2001. G&A expenses decreased in absolute dollars over the six-month period due primarily to the restructuring that took place in April 2001.

Deferred Compensation. In connection with the grant of employee stock options, we recorded deferred compensation representing the difference between the exercise prices of options granted and the deemed fair value for financial reporting purposes of our common stock on the respective grant dates. We also recorded deferred compensation for certain restricted stock awards granted below the deemed fair value for financial reporting purposes of our common stock on the respective grant date. The charge is amortized over the vesting periods of the options based on a graded vesting method. Amortization of deferred compensation was $508,000 and $1.1 million for the three and six months ended June 30, 2002 and $526,000 and $1.1 million for the three and six months ended June 30, 2001, respectively.

Interest Income, Net. Interest income, net, was $390,000 and $651,000 for the quarters ended June 30, 2002 and 2001, respectively. For the first six months of 2002, interest income, net decreased $859,000, or 51% to $823,000 from $1.7 million in the comparable period of 2001. The decrease was due primarily to lower invested cash balances and the decline in interest rates.

As of June 30, 2002, our principal sources of liquidity included approximately $19.2 million of cash and cash equivalents and $40.2 million of investments in short and long-term investments in marketable securities. Net cash used in operating activities for the first six months of 2002 of $1.3 million primarily reflects our net loss for the period and increases in accounts payable and accrued liabilities, largely offset by a decrease in accounts receivable due to better than usual collection results.

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.

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 this Item 2 above.

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 continue to 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.

Our failure to significantly increase our revenues would seriously harm our business and operating results. There is no assurance that we will return to profitability. As of June 30, 2002, we had an accumulated deficit of approximately $51.1 million. We expect over the long term to increase our research and development, sales and marketing and general and administrative expenses. As a result, we will need to increase our quarterly revenues to offset these increasing expenses. Our total revenues have declined in 2002 to date compared to 2001 and we may not be able to increase our revenues.

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. Our operating results have been below the expectations of securities analysts and investors in the past and could be so in the future. Our failure to meet these expectations would likely harm the market price of our common stock. Operating results vary depending on a number of factors, many of which are outside our control. Our operating results may also depend on general economic factors, including an economic slowdown or recession.

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. 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.

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 our ability to fill, orders received in that quarter.

Our business is subject to the effects of general economic conditions and, in particular, market conditions in the industries that we serve. We believe that our operating results are being adversely impacted by recent unfavorable general economic conditions and reductions in corporate IT spending. In addition, since many of our customers may be suffering adverse effects of the general economic slowdown, we may find that collecting accounts receivable from existing or new customers will take longer than we expect or that some accounts receivable will become uncollectable. If these economic conditions do not improve, or if we experience a worsening in general economic conditions or corporate IT spending, our business and operating results could continue to be adversely impacted.

With these additional expenses, we must significantly increase our revenues in order to achieve and sustain 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.

We expect to continue to derive a substantial portion of our revenues from our Desktop/Mobile Management product line and related services. A decline in the price of our Desktop/Mobile Management products or our inability to increase sales of these products would seriously harm our business and operating results. We cannot predict the success of our Desktop/Mobile Management products. We periodically update our Desktop/Mobile Management products to make improvements and provide additional enhancements. New versions of this product line may not provide the benefits we expect and could fail to meet customers’ requirements or achieve widespread market acceptance.

Our strategy requires our Desktop/Mobile Management products 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 continue to achieve this level of scalability, the attractiveness of our products and services would be diminished.

During 2001, revenues from our Server and Embedded Management product lines accounted for 18% and 6% of total license revenues, respectively. Revenues from our Server and Embedded Management product lines accounted for 17% and 8% of total license revenues, respectively, during the six months ended June 30, 2002. During the six months ended June 30, 2001, revenues from our Server and Embedded Management product lines accounted for 17% and 6% of total license revenues, respectively. There can be no assurance that the revenues from each of these product lines will grow, in absolute amount or as a percentage of total license revenues, or that our Server Management products and Embedded Management products will meet customer expectations or gain widespread market acceptance. To provide comprehensive systems 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 systems management solution. In addition, we have, in the past, experienced delays in new product releases, and we may experience similar delays in the future. If we fail to release new product on a timely basis, our business and operating results could be seriously harmed.

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 provided by 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, the downturn in our software license revenues negatively impacts our future service revenues. Any future downturn in our license revenues would also harm our future service revenues. Our support and maintenance programs are sold on an annual basis. Renewal of annual support and maintenance is generally at the customer’s election. If customers elect not to renew their support and maintenance agreements, our service revenues could be significantly adversely impacted. If support and maintenance revenues were to decline, or not grow as rapidly as expected, Marimba would need to increase its license revenues and other service revenues in order to make up for the decline in support and maintenance revenues.

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. Our current agreements with our distribution partners typically 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.

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, costly and time consuming, and can 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.

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, Richard Wyckoff, and our Vice President of Worldwide Sales, Matt Thompson. We have in the past lost senior management personnel. Several members of our senior management are relatively new to Marimba, including Messrs. Wyckoff and Thompson, 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 in the software industry, we face intense competition for qualified personnel.

A customer’s decision to license our products typically involves a significant commitment of resources and is influenced by the customer’s budget cycles and internal approval procedures for IT purchases. In addition, selling our products requires us to educate potential customers on our product’s 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. In addition, sales cycles are generally lengthening during the current economic slowdown. Customers may also defer orders as a result of anticipated releases of new products or enhancements by us or our competitors.

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.

Most 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.

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.

Other companies, including our competitors, may obtain patents or other proprietary rights that could prevent, limit or interfere with our ability to make, use or sell our products. As a result, we may be found to infringe 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 have been involved in two such patent infringement suits in the past.

We are a party to the securities class action litigation described in Part II, Item 1—“Legal Proceedings” of this report. The defense of this litigation may increase our expenses and divert our management’s attention and resources, and an adverse outcome in this litigation could seriously harm our business and results of operations. In addition, we may in the future be the target of other securities class action or similar litigation.

We need to expand our direct sales and marketing efforts in order to increase market awareness of our products, market our products to a greater number of enterprises and generate increased revenues. 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. There is no assurance that new sales representatives will ultimately become productive. In prior quarters, Marimba’s license revenues have often resulted from contracts closed by just a few sales representatives. If Marimba were to lose qualified and productive sales personnel, our revenues could be adversely impacted. Furthermore, the cost of hiring and training replacement sales personnel could be significant.

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. Over the long term, we plan to increase the number of our services personnel to meet these needs. However, competition for qualified services personnel is intense. We may not be able to attract, train or retain the number of highly qualified services personnel that our business needs.

Over the long term, 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.

We plan to increase our international sales force and operations, and expanding internationally is expensive. However, we may not be successful in increasing our international sales force or sales revenue. 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.

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 integrate third-party 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 in order to operate. Vendors offering these Java virtual machines may not continue to make these implementations of the Java virtual machines available at commercially reasonable terms or at all. Furthermore, if Sun Microsystems, Inc. were to make significant changes to the Java language, if significant changes were to be made to Java virtual machine implementations of Sun Microsystems, Inc. and other vendors or if they 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 machines that may not be technically or commercially acceptable for integration into our products.

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 our current or future products or in products comparable to ours could result in lost or delayed revenues, 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. 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.

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, other material litigation involving Marimba, changes in our management or other key employees, adoption of new accounting standards affecting the software industry, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for the common stock of technology companies. These types of broad market fluctuations may adversely affect the market price of our common stock.

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 have experienced, in the past, credit-related issues with certain of our existing and proposed customers, primarily due to the economic slowdown in the United States. Should we have more customers than we anticipate with liquidity issues, or if payment is not received on a timely basis, our business, operating results and general financial condition could be seriously harmed.

The market for certain of 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 these products will emerge or be sustainable. If this 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. In addition, enterprises that have already invested substantial resources in other methods of deploying and managing their applications, content and/or services may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems.

The markets for our software change and configuration management solutions are characterized 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 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 use of a substantial portion of our cash and investment balances, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in significant impairment charges or amortization expense. Any of these problems or factors could seriously harm our business, financial condition and operating results.

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. A portion of our sales are currently transacted in British Pounds and Euros, thereby potentially affecting our financial position, results of operations and cash flows due to fluctuation in exchange rates. Near-term changes in exchange rates may have a material impact on our future revenues, earnings, fair values or cash flows. We have not engaged in foreign currency hedging transactions during the six months ended June 30, 2002. There can be no assurance that a sudden and significant change in the value of the British Pound or Euro would not seriously harm our financial condition and results of operations.

In July 2002, Marimba agreed to issue 500,000 shares of common stock to Beck Systems, Inc. as part of the settlement of litigation pending between the two companies. The shares were issued in reliance on the exemption provided under Section 3(a)(10) of the Securities Act of 1933, as amended. The court in which the litigation was pending approved the exchange of the Marimba shares in connection with the settlement after a hearing as to the fairness of the exchange.

	For	Withheld	Unvoted
Kim K. Polese	19,357,233	775,445	0
Richard C. Wyckoff	19,568,457	526,221	0
Aneel Bhusri	20,058,755	53,923	0
Eric J. Keller	19,451,266	661,412	0
Raymond J. Lane	20,058,418	54,260	0
Douglas J. MacKenzie	20,056,518	54,360	0
Stratton D. Sclavos	19,456,916	655,762	0
Anthony Zingale	20,053,491	59,187	0

Delaware		77-0422318
(State of incorporation)		(IRS Employer Identification No.)

		Page No.

Part I.	Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001	1

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001	2

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001	3

	Notes to Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Qualitative and Quantitative Disclosure About Market Risk	22

Part II.	Other Information

Item 1.	Legal Proceedings	23

Item 2.	Changes in Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 5.	Other Information	24

Item 6.	Exhibits and Reports on Form 8-K	24

Signature		25

	Operating Leases
	(in thousands)
Less than 1 year	$	1,896
1 to 3 years		3,629
4 to 5 years		26

Total minimum lease payments	$	5,551


For:		20,073,794
Against:		27,305
Abstain:		11,579
Unvoted:		0

MARIMBA, INC.

By:		/s/ ANDREW CHMYZ
		Andrew Chmyz Acting Vice P resident, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

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