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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2002

 

¨   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 000-25683

 

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.  x

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  ¨  No  x

 

The aggregate market value of the registrant’s common stock, $.0001 par value, held by non-affiliates of the registrant on June 28, 2002 was approximately $18 million. As of February 28, 2003, there were 25,319,009 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 2003 annual meeting of stockholders scheduled to be held on June 5, 2003 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.

 



Table of Contents

 

MARIMBA, INC.

 

TABLE OF CONTENTS

 

    

PART I

    

Item 1.

  

Business

  

3

Item 2.

  

Properties

  

10

Item 3.

  

Legal Proceedings

  

10

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

10

    

PART II

    

Item 5.

  

Market for Registrant’s Common Equity and Related Stockholder Matters

  

11

Item 6.

  

Selected Financial Data

  

12

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

  

14

Item 7a.

  

Quantitative and Qualitative Disclosures About Market Risk

  

33

Item 8.

  

Financial Statements and Supplementary Data

  

34

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

  

60

    

PART III

    

Item 10.

  

Directors and Executive Officers of the Registrant

  

61

Item 11.

  

Executive Compensation

  

61

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

61

Item 13.

  

Certain Relationships and Related Transactions

  

61

Item 14.

  

Controls and Procedures

  

61

    

PART IV

    

Item 15.

  

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  

62

Signatures

  

63

Certifications

  

65

 

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PART I

 

The information in this report contains forward-looking statements which are subject to safe harbors created under the U.S. federal securities laws. 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, including statements that refer to projections of our future financial performance, anticipated revenue growth, profitability, capital needs, competition and market share growth, the development of new products and technologies and market acceptance of such products or technologies, business and sales strategies, developments in our target markets, matters relating to distribution channels and partnerships, proprietary rights, litigation, and other trends in our businesses. In addition, 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 materially from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed below in Item 7 under the heading “Other Factors Affecting Operating Results, Liquidity and Capital Resources”. 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. All forward-looking statements in this report are based on information available to Marimba as of the date of this report, and Marimba undertakes no obligation to release publicly any updates or revisions to any such forward-looking statements, except as otherwise required by law.

 

ITEM 1.    BUSINESS

 

Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of information technology (“IT”) ownership and improve quality of IT service by streamlining the distribution and management of software applications and content. Our customer base spans multiple industries, including financial services, healthcare, insurance, manufacturing and telecommunications. We market our products worldwide through a combination of a direct sales force and resellers.

 

See “Management Discussion and Analysis of Financial Condition and Results of Operation” and our “Financial Statements and Supplementary Data,” appearing in Items 7 and 8 of this report, respectively, for additional financial information regarding our business.

 

Marimba Products

 

Marimba’s products allow companies to perform policy-based distributions, updates, and repairs of software applications on desktops, laptops, servers and devices. Additional functionality includes the ability to collect and track system, hardware and software configuration data. Our products help IT organizations provide their end-user community with higher service levels while reducing the cost of managing their IT assets. Our bandwidth management, scalability, personalization and built-in security functionality allow corporations to use the Internet to reduce the complexity and cost of distributing, managing and updating their software applications and data on endpoints that are both inside and outside a customer’s corporate firewall. Marimba’s product families include the following:

 

Desktop/Mobile Management Product Family

 

Marimba’s Desktop/Mobile Management product family is an enterprise-level change management solution that allows corporations to manage the lifecycle of software on desktops, laptops and handheld devices across the Internet and other networks. This solution gives IT departments the ability to automate the deployment of software applications, operating system patches and security updates through defined policies. Once software is deployed, the on-going maintenance and repair of that software is automated to promote standardization. Our Desktop/Mobile Management solution also provides an inventory and audit capability, which enables IT

 

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departments to automate the collection of hardware and software configuration information from desktops, laptops, and handheld devices. This information can be stored in a central location for used in software license compliance, security compliance, asset management, desktop refresh planning and helpdesk diagnostic purposes.

 

Server Management Product Family

 

Marimba’s Server Management product family provides IT departments with a solution to automate administrative tasks such as provisioning and deployment of applications and operating system patches, replication of code and content, and the ability to perform remote commands. These functions have been optimized for a variety of server environments, from file and print servers in remote locations, to clusters of servers in data centers. Our Server Management solution allows administrators to manage large numbers of servers with heterogeneous Windows, Linux, and other UNIX server platforms from a single console. Our solution also provides an inventory and audit capability tailored to the server environments, which enables IT departments to automate the collection of hardware and software configuration information from remote servers. This information can be stored in a central location for used in resource planning, server consolidation planning, patch management, and helpdesk diagnostic purposes.

 

Embedded Management Product Family

 

Marimba’s Embedded Management products allow device manufacturers and independent software vendors to transparently deliver software updates, software patches, new features and new services over the Internet and other networks by embedding Marimba management capabilities into their devices or software applications.

 

Architecture

 

The Marimba infrastructure is designed to distribute software and data efficiently over networks based upon TCP/IP (Transmission Control Protocol/Internet Protocol) and HTTP (Hyper-text Transfer Protocol), the basic communication protocol of the Internet. Marimba 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 desktop computers, laptops, servers and devices.

 

Channel.    A channel is the application and/or related data that is distributed using Marimba’s products. For example, a channel could consist of a stock-trading application written in Java or a shrink-wrapped application. Each channel has an associated list of properties that describes its features, including application type, author, copyright notice, update schedule and entry point. Marimba’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 shrink-wrapped applications, Java applets, Visual Basic, C and C++ applications, and applications packaged using the Windows Installer format (MSI). 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-side component of the Marimba infrastructure. It distributes channels and subsequent updates to the tuner, the Marimba client. The tuner and transmitter communicate using the Marimba protocol, which is designed to substantially minimize bandwidth requirements for updates over HTTP (Hyper-Text Transfer Protocol), the protocol used to distribute web pages. The Marimba 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,

 

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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. Marimba’s technology 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 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. Marimba products implement 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-side component of the Marimba infrastructure. The tuner subscribes to channels located on the transmitter and downloads and installs 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 set of features for modem support, bandwidth management, security controls, certificate management, update scheduling and support for corporate network security mechanisms.

 

Using the Marimba protocol, tuners can be redirected automatically to additional transmitters, serving as repeaters, in order to reduce the load on the main transmitter, to provide fault tolerance, 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 Marimba components, a variety of features are available for reporting deployment status, asset tracking, license compliance, policy-based distribution, 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 Marimba channels, and together with the basic infrastructure components, provide the necessary functionality to distribute, manage and maintain mission critical software applications and services. Where appropriate, we provide programming interfaces and software development kits for customized extensions, allowing customers to tailor the Marimba solution to their specific needs or to embed Marimba technology into existing applications.

 

Technology

 

We believe that our investment in engineering has resulted in technology that provides us with a strategic advantage. Marimba products have been built from the ground up to provide a robust Internet-based solution. Marimba provides a lightweight, cross-platform and easy-to-deploy solution that helps solve complex software application deployment and management problems which we believe are not addressed adequately by existing client-server distribution and management tools.

 

Marimba products make extensive use of a broad range of technologies, including Java, JSP, TCP/IP, HTTP, LDAP, XML, SSL (Secure Socket Layer, a protocol for secure transmissions over the Internet), and various digital security technologies. Most of our products are implemented using Sun Microsystems’ Java programming language. As a result, we believe that our products are portable, 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

 

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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.”

 

The Marimba Protocol

 

The Marimba 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 online, 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, Marimba’s technology 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 Marimba protocol makes it possible to distribute frequent updates to large software 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.

 

Cross Platform Framework

 

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.

 

Security Features

 

We have invested significant resources in developing Marimba’s security implementation. Marimba’s security features currently include end user authentication, digital certificates and signing technology to verify application authenticity, and SSL communications to help protect the integrity and confidentiality of data transmitted via Marimba’s products. 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. In addition, we have an arrangement with VeriSign for the provision of digital certificates specifically for Marimba products. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We Rely on Third-Party Software and Applications.”

 

Customers

 

Our customer base spans multiple industry segments including financial services, government, insurance, retail, manufacturing and telecommunications. When selling to potential customers, our Desktop/Mobile Management products are usually targeted at the IT organization, our Server Management products our usually targeted at either the IT organization or the data center operations function, and our Embedded Management products our usually targeted at the product managers for the device or software which will embed our technology. For the years ended December 31, 2002, 2001 and 2000, no single customer represented more than 10% of total revenues.

 

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Sales and Marketing

 

We market our products worldwide through a direct sales force and indirectly through resellers. Our worldwide direct sales, professional services, and marketing organizations consisted of 87 individuals as of December 31, 2002, 28 of whom were located at our Mountain View, California headquarters, 43 in regional offices located in California, Georgia, Illinois, New York and Texas, 14 in the United Kingdom and 2 in France.

 

Our direct sales force currently targets primarily large and medium sized accounts within North America, the UK and France. Smaller accounts in these regions, and all accounts in other regions of Europe and Asia, are primarily targeted through independent resellers. For the years ended December 31, 2002, 2001 and 2000, sales to customers outside of the United States were approximately 16%, 8% and 5% of total revenue. For information on risks related to foreign sales, see “Other Factors Affecting Operating Results, Liquidity and Capital Resources—Our Operating Results and Financial Condition May be Materially Harmed if We Are Not Successful At Expanding Internationally.”

 

Our customers typically engage our professional services organizations to assist with the implementation and deployment of our products, and we have built an experienced consulting services organization to facilitate this. 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, over the long term, we believe that increases in product revenues would require us to increase the number of our service personnel to meet these needs.

 

Our marketing efforts are designed to help customers understand both the business and technical benefits of the products. We conduct a variety of marketing programs 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 and financial executives as well as general managers of business units. In addition, we conduct public relations programs that include establishing and maintaining relationships with key trade press, business press and industry analysts.

 

Alliances and Partnerships

 

We have a limited number of distribution relationships for our products with systems integrators and other resellers. Our resellers generally purchase our products at discounts from end-user list prices, and sales under these agreements are generally denominated in U.S. dollars. This indirect sales channel has recently contributed a greater portion of our revenues, and our reliance on these relationships may increase. We believe that the support of these resellers for our products may become increasingly important in influencing new customers’ decisions to license our products. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—Failure to Further Develop and Sustain Our Indirect Sales Channel and Third-Party Distribution Relationships Could Limit or Prevent Future Growth.”

 

We also have several marketing and technology partnerships with leading software providers, including providers of products that are complementary to ours. These partnerships include joint sales and marketing relationships that provide us access to potential sales to large enterprises that we might not otherwise have access to, as well as product integration and other relationships. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We Rely on Third-Party Marketing and Technology Relationships For Future Sales Growth.”

 

Customer Support and Training

 

Our customer support and training organization consisted of 23 employees as of December 31, 2002. Our support and maintenance programs are generally priced as a percentage of software license fees and provide

 

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customers with telephone and email support, as well as software updates to the products. We primarily offer the following annual support and maintenance programs for our products:

 

Bronze Service.    This service provides customers with technical assistance on installation and basic product questions via e-mail and/or telephone, as well as access to our customer support engineers. With this service, customers also receive the latest product updates as they become generally available.

 

Silver Service.    This program includes all the features of the Bronze Service offering with the addition of coverage 24 hours a day, every day of the week.

 

Gold Service.    Designed for mission-critical applications, the Gold Service program provides customers with all the features of the Silver Service plus proactive support from designated technical account managers and certain other benefits.

 

Research and Development

 

As of December 31, 2002, our engineering organization was comprised of 43 employees. Our product development organization is divided into development groups organized along our product lines. These development groups are supported by quality assurance and documentation groups. The quality assurance group works with the development group to identify software defects through the entire development cycle. The documentation group is responsible for end user, administrator and developer documentation for our products.

 

We believe that our software development team and core technologies represent a significant competitive advantage. A technically skilled, quality oriented and productive development organization will be a key component to 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 a strong development team.

 

Research and development expenses were $7.9 million in 2002, $10.5 million in 2001 and $11.1 million in 2000. To date, substantially all software development costs have been expensed as incurred. We believe that significant investments in research and development are required to remain competitive. As we expand, we intend to increase the absolute amount of our research and development expenditures. For more information on our research and development expenses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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:

 

    the ease of use, performance, features, price and reliability of our solutions as compared to those of our competitors;

 

    the timing and market acceptance of new solutions and enhancements to existing solutions developed by us and our competitors;

 

    the quality of our customer service; and

 

    the effectiveness of our sales and marketing efforts.

 

We encounter competition from a number of different sources, including sellers of enterprise-wide management systems, which include electronic software distribution, including Tivoli and Computer Associates; companies such as Novadigm and ON Technology, which market products that support the distribution of

 

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software applications; and other software management suites, such as LanDesk, Altiris, and Microsoft’s SMS. We also face competition from our customers’ information technology groups and other internal development efforts.

 

Many 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 and resellers which could be leveraged to more effectively compete against us. These companies may also have more established customer support and professional services organizations than we do. In addition, our competitors 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 been granted five U.S. patents and have seven U.S. patent applications pending, which might not result in the issuance of any additional valid patents. We also have several trademark registrations in the United States and some foreign countries.

 

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 and could seriously harm our business and operating results. There can be no assurance that the outcome of any such litigation would 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, and we have been involved in two such patent infringement suits in the past. We could incur substantial costs to defend any future intellectual property litigation, and in the event of a future successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be significantly harmed. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We May Be Found to Infringe Proprietary Rights of Others.”

 

Employees

 

At December 31, 2002, we had a total of 175 employees, 159 of whom were based in the United States and 16 of whom were based in Europe. Of the total, 43 were in research and development, 87 were engaged in sales and marketing, 23 were engaged in customer support and training, and 22 were in administration and finance.

 

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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 U.S. offices located in California, Georgia, Illinois, New York, and Texas, as well as European offices in the United Kingdom and France. 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

 

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 registration statement filed in connection with the offering. Marimba and certain of its officers and directors were 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, attorney and expert fees, and other unspecified litigation costs. 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. In July 2002, the defendants in the consolidated actions filed motions to dismiss all of the cases in the litigation (including the case involving Marimba). On February 19, 2003, the court ruled on the motions and granted Marimba’s motion to dismiss the claims against it under Section 10(b) and Rule 10b-5. The motions to dismiss the claims under Section 11 were denied as to virtually all of the defendants in the consolidated cases, including Marimba. In addition, the Marimba individual defendants in the litigation each signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002. Marimba intends to defend this litigation vigorously. However, due to the early stage of this litigation and the inherent uncertainties of litigation in general, we cannot accurately predict the ultimate outcome of the litigation or the range of any potential damages or costs to Marimba relating to this litigation. Any unfavorable outcome of this litigation could have a material adverse impact on our business, financial condition and results of operations.

 

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, 2002.

 

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PART II

 

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED

                  STOCKHOLDER MATTERS

 

Price Range of Common Stock

 

Our common stock is traded publicly on The Nasdaq National Market under the symbol “MRBA.” The following table sets forth for the periods indicated the highest and lowest sales prices of the common stock during each quarter of the last two fiscal years:

 

    

High


  

Low


Fiscal 2002:

             

Fourth Quarter

  

$

1.77

  

$

1.10

Third Quarter

  

$

1.85

  

$

1.21

Second Quarter

  

$

3.15

  

$

1.50

First Quarter

  

$

3.42

  

$

2.60

Fiscal 2001:

             

Fourth Quarter

  

$

3.50

  

$

1.15

Third Quarter

  

$

3.67

  

$

1.29

Second Quarter

  

$

3.95

  

$

1.87

First Quarter

  

$

8.31

  

$

3.03

 

On February 28, 2003, the closing price of our common stock on The Nasdaq National Market was $1.49 per share. As of February 28, 2003, there were approximately 264 holders of record (not including beneficial holders of our common stock held in street name) of our common stock.

 

Dividend Policy

 

We have not declared nor paid any cash dividends on our capital stock since inception and we do not expect to do so in the foreseeable future. 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.

 

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ITEM 6.    SELECTED FINANCIAL DATA

 

The following is a summary of our selected consolidated financial data as of and for the five years ended December 31, 2002. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report. Historical results may not be indicative of future results.

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(in thousands, except per share data)

 

Consolidated Statements of Operations Data:

                                            

Revenues:

                                            

License

  

$

18,223

 

  

$

27,801

 

  

$

31,329

 

  

$

23,637

 

  

$

13,901

 

Service

  

 

17,004

 

  

 

16,229

 

  

 

12,718

 

  

 

7,776

 

  

 

3,184

 

    


  


  


  


  


Total revenues

  

 

35,227

 

  

 

44,030

 

  

 

44,047

 

  

 

31,413

 

  

 

17,085

 

Cost of revenues:

                                            

License

  

 

2,737

 

  

 

595

 

  

 

681

 

  

 

402

 

  

 

75

 

Service

  

 

5,829

 

  

 

5,940

 

  

 

4,256

 

  

 

3,036

 

  

 

1,964

 

    


  


  


  


  


Total cost of revenues

  

 

8,566

 

  

 

6,535

 

  

 

4,937

 

  

 

3,438

 

  

 

2,039

 

    


  


  


  


  


Gross profit

  

 

26,661

 

  

 

37,495

 

  

 

39,110

 

  

 

27,975

 

  

 

15,046

 

Operating expenses

  

 

38,990

 

  

 

51,557

 

  

 

52,251

 

  

 

34,598

 

  

 

21,174

 

Net loss

  

$

(10,854

)

  

$

(11,487

)

  

$

(8,779

)

  

$

(4,214

)

  

$

(5,681

)

Basic and diluted net loss per share

  

$

(0.44

)

  

$

(0.48

)

  

$

(0.38

)

  

$

(0.22

)

  

$

(0.59

)

    


  


  


  


  


Weighted-average shares of common stock outstanding used in computing basic and diluted net loss
per share

  

 

24,427

 

  

 

23,943

 

  

 

23,200

 

  

 

19,029

 

  

 

9,606

 

    


  


  


  


  


                                              
    

December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(in thousands)

 

Consolidated Balance Sheet Data:

                                            

Cash, cash equivalents, short-term and long-term investments

  

$

50,264

 

  

$

60,109

 

  

$

68,071

 

  

$

79,012

 

  

$

7,825

 

Working capital (current assets, less current
liabilities)

  

 

31,526

 

  

 

36,676

 

  

 

57,296

 

  

 

54,292

 

  

 

1,556

 

Total assets

  

 

62,369

 

  

 

73,851

 

  

 

87,408

 

  

 

90,487

 

  

 

14,862

 

Long-term liabilities

  

 

953

 

  

 

1,610

 

  

 

1,033

 

  

 

1,463

 

  

 

2,103

 

Redeemable convertible preferred stock

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

18,953

 

Accumulated deficit

  

 

(49,978

)

  

 

(39,124

)

  

 

(27,637

)

  

 

(18,858

)

  

 

(14,644

)

Total stockholders’ equity (net capital deficiency)

  

 

48,728

 

  

 

57,242

 

  

 

66,803

 

  

 

72,639

 

  

 

(13,743

)

 

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Table of Contents

 

Supplementary Data

 

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, 2002. 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 may not be indicative of the results for any future periods.

 

2002

  

Q1


    

Q2


    

Q3


    

Q4


 

Revenues

  

$

8,061

 

  

$

9,038

 

  

$

8,572

 

  

$

9,555

 

Gross profit

  

 

6,479

 

  

 

5,532

 

  

 

6,736

 

  

 

7,915

 

Net income (loss)

  

 

(3,949

)

  

 

(5,282

)

  

 

(1,824

)

  

 

201

 

Net income (loss) per basic and diluted common share

  

$

(0.16

)

  

$

(0.22

)

  

$

(0.07

)

  

$

0.01

 

2001

  

Q1


    

Q2


    

Q3


    

Q4


 

Revenues

  

$

11,004

 

  

$

12,185

 

  

$

10,006

 

  

$

10,835

 

Gross profit

  

 

9,016

 

  

 

10,586

 

  

 

8,538

 

  

 

9,355

 

Net loss

  

 

(4,686

)

  

 

(3,693

)

  

 

(1,625

)

  

 

(1,483

)

Net loss per basic and diluted common share

  

$

(0.20

)

  

$

(0.15

)

  

$

(0.07

)

  

$

(0.06

)

 

Timing Differences Due to Estimates

 

The timing of expenses in our fiscal 2002 results was significantly impacted by management estimates, particularly in the fourth quarter. Specifically, included in expense during the first and second quarter of 2002 was an accrual of executive and employee bonuses for fiscal 2002. Subsequent to year-end, we determined that certain of the accrued bonuses would not be paid, and as a result we reversed this accrual in the fourth quarter results, which had the effect of reducing our expenses in the fourth quarter by approximately $605,000. Additionally, at December 31, 2002, we analyzed our past returns history, and combined with changed business practices we determined that a returns reserve was no longer appropriate. As a result of this analysis, the entire reserve was reversed in the fourth quarter of 2002, resulting in a net increase to license revenue of $620,000 in the fourth quarter, and of $527,000 during the entire fiscal year of 2002. Taken together, the reversal of the bonus accrual and the reversal of the returns reserve had a positive impact of $1.2 million on our results in the fourth quarter, taking us from a net loss position to a net profit for the quarter.

 

Statement Regarding Use of Non-GAAP Financial Measures

 

In addition to providing financial results calculated and presented in accordance with generally accepted accounting principles, or GAAP, we sometimes present historical or forward-looking information regarding our financial performance, financial position or cash flows that excludes one or more of the following three items: (i) amortization of deferred compensation, (ii) settlement of disputes or litigation, and (iii) restructuring costs associated with workforce reductions. We believe that presentation of financial information excluding these items is useful to investors, because it facilitates their comparison of our current results of operations with those previously reported under this format, and more generally because we believe that including these charges could distort trends in our results of operations. In addition, in preparing operating plans and forecasts, management relies in part on trends in our historical results of operations exclusive of these items. However, our presentation of non-GAAP results should not be viewed as a substitute for our financial results determined in accordance with GAAP.

 

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Table of Contents

 

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 Financial Data” and our Consolidated Financial Statements and Notes thereto included elsewhere in this report. As referenced in the first paragraph of Part I, 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 and trends that could affect future results, see “Other Factors Affecting Operating Results, Liquidity and Capital Resources” in this Item 7.

 

Overview

 

Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of information technology (“IT”) ownership and improve quality of IT service by streamlining the distribution and management of software applications and content. Our customer base spans multiple industries, including financial services, healthcare, insurance, manufacturing and telecommunications. We market our products worldwide through a combination of a direct sales force and resellers.

 

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, although recently support revenue has comprised a larger percentage of our revenues. 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 $50.0 million at December 31, 2002. We believe that our future success depends in part on our ability to increase 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 meaningful and should not be relied upon as indications of future performance, growth or financial results. Additionally, historical trends may not be indicative of future growth or financial results.

 

Critical Accounting Policies and Estimates

 

Discussion and analysis of Marimba’s financial condition and results of operation are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We consider the accounting policies described below to be our critical accounting policies. See Note 1 of the financial statements for more information about these critical accounting policies, as well as descriptions of other significant accounting policies. Actual results may differ materially from these estimates under different assumptions or conditions.

 

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Table of Contents

 

Revenue Recognition.    We derive our revenues primarily from two sources: license revenues, which consist of software license fees; and service revenues, which are comprised of fees for maintenance and support, consulting and training. Revenue recognition rules are complex, and require our management to exercise judgment and make a number of estimates. For example, most of our contracts contain multiple element arrangements, which require us to make assumptions and judgments in order to allocate the total price among the various elements we must deliver, to determine whether vendor-specific evidence of fair value exists for each element and to determine whether and when each element has been delivered. We also evaluate whether a risk of concession exists with regards to specific contracts or customers, and also whether there is any material risk of customer non-payment or product returns. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. Revenue that we cannot recognize in a particular period is reflected on our balance sheet as deferred revenue and recognized over time as the applicable revenue recognition criteria are satisfied. These estimates are made based upon all of the information available to us at the time. Material differences may result in the amount and timing of our revenue for any given period if different judgments are made or different estimates are utilized.

 

Allowance for Doubtful Accounts.    The allowance for doubtful accounts is established through a charge to our general and administrative expenses. This allowance is for estimated losses resulting from the inability of our customers to make required payments. It is a significant estimate and is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in aggregate, and current economic conditions that may affect a customer’s ability to pay or suggest that a particular market sector is more prone to liquidity issues. The use of different estimates or assumptions could produce different allowance balances. If the financial condition of our customers were to deteriorate subsequent to the date of our arrangements with them, this could result in an impairment of their ability to make payments and additional allowances would be required.

 

Returns.    Prior to December 31, 2002, we maintained a returns reserve, established through a debit to license revenue. The reserve was for estimated losses resulting from the possibility of product returns by customers. At December 31, 2002, we analyzed our past returns history, and combined with changed business practices we determined that a reserve was no longer appropriate. As a result of this analysis, the entire reserve was reversed in the fourth quarter of 2002, resulting in a net increase to license revenue of $620,000 during the fourth quarter and $527,000 during fiscal year 2002. If in the future we experience customer returns, this may materially negatively impact our business.

 

Compensation Accruals.    Marimba records an accrual of compensation expenses which reflects compensation earned but not paid prior to the end of each period. The primary components of this accrual are commissions related to sales, variable compensation programs for non-executives, and executive bonuses. These compensation programs may contain elements that are based upon both quarterly and annual performance, and we are required to estimate these payouts based upon the knowledge we have at the time we report our results. The use of different judgments and estimates could have the affect of increasing or decreasing reported compensation costs in any given period. In particular, estimates of annual results made when recording charges early in any fiscal year could, if proven incorrect, result in significant adjustments in later parts of the year as events unfold and our estimates are refined. For example, during fiscal 2002 we accrued executive and employee bonuses during the first and second quarter. Subsequent to year-end, we determined that certain accrued bonuses would not be paid, and as a result we reversed these accruals in the fourth quarter results, which had the effect of reducing our expenses in the fourth quarter by approximately $605,000.

 

July 2002 Legal Settlement. On July 25, 2002, the court approved a settlement between Marimba and Beck Systems, as described in the notes to the financial statements. 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 was recorded as acquired

 

15


Table of Contents

technology during the third quarter of 2002 and is being amortized to cost of license revenues over a five-year period, represents the proportion of the total settlement relating to the future benefit to Marimba 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 that we expect to generate over the next 5 years. Management’s assumptions about future revenues and the period over which our product will embed the patented technology required 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 had made a different 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 acquired technology asset would have been different.

 

Acquired Technology.    We review our acquired technology for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. We do not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

 

Contingencies and Litigation.    We are sometimes subject to proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of loss contingency required, if any, for these matters is made after careful analysis of each individual matter. Established loss contingencies may change and new loss contingencies may be established as the facts and circumstances of each matter changes.

 

Results of Operation

 

The following table presents selected financial data for the periods indicated as a percentage of total revenues:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Statement of Operations Data:

                    

Revenues:

                    

License

  

51.7

%

  

63.1

%

  

71.1

%

Service

  

48.3

 

  

36.9

 

  

28.9

 

    

  

  

Total revenues

  

100.0

 

  

100.0

 

  

100.0

 

Cost of revenues:

                    

License

  

7.8

 

  

1.4

 

  

1.5

 

Service

  

16.5

 

  

13.4

 

  

9.7

 

    

  

  

Total cost of revenues

  

24.3

 

  

14.8

 

  

11.2

 

    

  

  

Gross margin

  

75.7

 

  

85.2

 

  

88.8

 

Operating expenses

  

110.7

 

  

117.1

 

  

118.6

 

Net loss

  

(30.8

)%

  

(26.1

)%

  

(19.9

)%

    

  

  

 

16


Table of Contents

 

Revenues

 

The following table presents selected revenue data for the periods indicated:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(in thousands)

 

Revenues:

      

License

  

$

18,223

 

  

$

27,801

 

  

$

31,329

 

Service

  

 

17,004

 

  

 

16,229

 

  

 

12,718

 

    


  


  


Total revenues

  

$

35,227

 

  

$

44,030

 

  

$

44,047

 

Percentage of total revenues:

                          

License

  

 

52

%

  

 

63

%

  

 

71

%

Service

  

 

48

 

  

 

37

 

  

 

29

 

 

Total revenues in 2002 were $35.2 million, compared to revenues of $44.0 million in both 2001 and 2000. The decrease in total revenues was due to a decrease in license revenues, partially offset by an increase in service revenues. The decrease in license revenues and increase in service revenues are discussed below.

 

License Revenues.    License revenues decreased $9.6 million, or 34%, to $18.2 million in 2002 from $27.8 million in 2001. License revenues decreased $3.5 million, or 11%, to $27.8 million in 2001 from $31.3 million in 2000. License revenues in fiscal 2002 included $527,000 from the reversal of our sales return allowance reserve, based on our evaluation of our past history of returns. Overall, the decrease in license revenues since 2000 was due primarily to a generally weak IT spending environment that led to lower deal sizes and longer sales cycles.

 

The following table presents the license revenues derived from each of our product lines as a percentage of total license revenues (note that prior to 2001, sales of Embedded Management products were included with the Desktop/Mobile Management product line):

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Percentage of total license revenues:

                    

Desktop/Mobile Management

  

76

%

  

76

%

  

88

%

Server Management

  

19

 

  

18

 

  

12

 

Embedded Management

  

5

 

  

6

 

  

—  

 

 

Service Revenues.    Service revenues include support and maintenance, consulting and training. Service revenues increased $775,000, or 5%, to $17.0 million in 2002 from $16.2 million in 2001. Service revenues in 2001 increased $3.5 million, or 28%, to $16.2 million from $12.7 million in 2000. The increase in service revenues since 2000 was due primarily to the increase in support and maintenance revenues. Support and maintenance revenues are driven by new license sales and by renewals of existing annual maintenance contracts. The downturn in sales of licenses during 2002 may negatively impact service revenues in the future. The following table presents the components of service revenues as a percentage of service revenues for the periods indicated:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Percentage of total service revenues:

                    

Consulting

  

17

%

  

18

%

  

26

%

Support and maintenance

  

78

 

  

77

 

  

69

 

Training

  

5

 

  

5

 

  

5

 

 

 

17


Table of Contents

As a percentage of total revenues, service revenues were 48%, 37% and 29% of total revenues in 2002, 2001 and 2000, respectively. The increase in service revenues as a percentage of total revenues was due primarily to lower license revenues since 2000.

 

International.    Revenues outside the United States represented approximately 16%, 8% and 5% of total revenues in 2002, 2001 and 2000, respectively. International revenues increased by $2.0 million, or 55%, to approximately $5.5 million in 2002 when compared to 2001. In 2001, international revenues increased by $1.4 million, or 67%, to approximately $3.4 million from $2.1 million in 2000. The increase in revenues outside the United States was due primarily to our sales and marketing efforts in Europe and more specifically to our expansion in the United Kingdom and France. The following table presents our revenues by regions as a percentage of total revenues:

 

      

Year Ended December 31,


 
      

2002


    

2001


    

2000


 

Revenue:

                      

United States

    

85

%

  

92

%

  

95

%

Europe

    

12

 

  

6

 

  

3

 

Other regions

    

3

 

  

2

 

  

2

 

 

Costs of Revenues

 

Cost of License Revenues.    Cost of license revenues consists primarily of the cost of third-party software technology that was either integrated into our products or resold by us. Cost of license revenues was $2.7 million, $595,000 and $681,000 in 2002, 2001 and 2000, respectively. The increase in cost of license revenues in 2002 was due primarily to a $1.9 million charge recorded in the second quarter of 2002 in relation to the legal settlement of a patent dispute, which involved a patent license, and to a lesser extent an increase in sales of third party products. We expect to record additional charges to cost of license revenues of approximately $85,000 per quarter over the next five years in connection with this patent settlement. The following table presents our gross margin on license revenues:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(in thousands)

 

License revenues

  

$

18,223

 

  

$

27,801

 

  

$

31,329

 

Cost of license revenues

  

 

2,737

 

  

 

595

 

  

 

681

 

    


  


  


Gross margin on license revenues

  

$

15,486

 

  

$

27,206

 

  

$

30,648

 

Gross margin on license revenues as a percentage of license revenues

  

 

85

%

  

 

98

%

  

 

98

%

 

Cost of Service Revenues.    Cost of service revenues includes:

 

    salaries and related expenses of our customer service and training organizations;

 

    salaries and related expenses of our consultants for billable consulting engagements;

 

    cost of third parties contracted to provide consulting services to our customers; and

 

    an allocation of our facilities, depreciation and certain other overhead expenses.

 

Cost of service revenues was $5.8 million, $5.9 million and $4.3 million in 2002, 2001 and 2000, representing 34%, 37% and 33% of service revenue, respectively. The increase in 2001 over 2000 was due primarily to growth in our customer service and training organizations, higher fees paid to a third party that provides after hours telephone support for our customers and an increase in the costs of providing our consulting

 

18


Table of Contents

services, commensurate with the increase in consulting revenues. The following table presents our gross margin on service revenues:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(in thousands)

 

Service revenues

  

$

17,004

 

  

$

16,229

 

  

$

12,718

 

Cost of service revenues

  

 

5,829

 

  

 

5,940

 

  

 

4,256

 

    


  


  


Gross margin on service revenues

  

$

11,175

 

  

$

10,289

 

  

$

8,462

 

Gross margin on service revenues as a percentage of service

    revenues

  

 

66

%

  

 

63

%

  

 

67

%

 

Gross Margin

 

Gross margin was 76%, 85% and 89% in 2002, 2001 and 2000, respectively. During 2002, the gross margin was negatively impacted by a $1.9 million charge in cost of license revenues related to a legal settlement involving a patent license, and by the decrease in license revenues as a percentage of total revenues.

 

Operating Expenses

 

Research and Development.    Research and development expenses, which are expensed as incurred, consist primarily of:

 

    salaries and related costs of our engineering organization;

 

    fees paid to third-party consultants, if any; and

 

    an allocation of our facilities, depreciation and certain other overhead expenses.

 

We believe that our success is dependent in large part on the continued enhancement of our current products and the ability to develop new, technologically advanced products that meet the sophisticated requirements of our customers. Research and development expenses were $7.9 million, $10.5 million and $11.1 million in 2002, 2001 and 2000, respectively. The decrease in absolute dollars was due primarily to workforce reductions announced in July 2002 and April 2001, as well as our decisions during the second quarter of 2001 to discontinue the development of a hosting service and separately close our Houston development facility. Over time, we plan to increase our expenses in research and development activities as we continue to enhance our products.

 

Sales and Marketing.    Sales and marketing expenses consist primarily of:

 

    salaries and related costs of our sales and marketing organizations;

 

    sales commissions;

 

    costs of our marketing programs, including public relations, advertising, trade shows, collateral sales materials, and seminars;

 

    rent and facilities costs associated with our regional and international sales offices; and

 

    an allocation of our facilities, depreciation and certain other overhead expenses.

 

Sales and marketing expenses were $24.1 million, $32.0 million and $27.8 million in 2002, 2001 and 2000, respectively. From 2001 to 2002, sales and marketing expenses decreased in absolute dollars due primarily to fewer promotional activities, reductions of headcount in sales management, and lower commissions as a result of lower sales. From 2000 to 2001, sales and marketing expenses increased due primarily to growth in the sales organization during the first half of 2001, expansion of Marimba’s sales operation in the United Kingdom and telemarketing expenses. Over time, we expect to increase our investment in sales and marketing in our efforts to grow revenues and expand our brand awareness.

 

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Table of Contents

 

General and Administrative.    General and administrative expenses consist primarily of:

 

    costs of our finance, human resources and legal services organizations;

 

    insurance premiums and third-party legal and other professional services fees; and

 

    an allocation of our facilities, depreciation and certain other overhead expenses.

 

General and administrative expenses were $5.7 million, $7.9 million and $12.6 million in 2002, 2001 and 2000, respectively. General and administrative expenses decreased in absolute dollars from 2001 to 2002 due primarily to reductions of headcount and general cost cutting measures. General and administrative expenses were higher in 2000 compared with 2001 due primarily to the settlement of patent disputes and an increase in the bad debt provision of approximately $2.1 million in 2000.

 

Restructuring.    In April 2001, we eliminated approximately 20% of our workforce, or 60 employees and independent contractors across all company departments. We recorded a charge of $789,000 in the second quarter of 2001 related to the restructuring plan. Of this amount, $666,000 of the restructuring accrual was reduced by cash payments made during the year ended December 31, 2001 and the remaining balance of $123,000 was reversed out in 2002 once we determined that all outstanding obligations had been settled.

 

In July 2002, we eliminated approximately 12% of our workforce, or 24 employees, across all company departments. We recorded a restructuring charge of $200,000 in connection with this plan, which consisted of charges of $323,000 for severance and benefits related to the workforce reduction, offset by a $123,000 adjustment from the charge for our April 2001 restructuring plan.

 

Deferred Compensation.    We record deferred compensation representing the difference between the exercise prices of options granted to acquire shares of common stock and the deemed fair value for financial reporting purposes of our common stock on the grant dates. We also record deferred compensation to represent the intrinsic value of certain restricted stock awards. Deferred compensation is amortized over the vesting periods of the options and stock using the graded vesting method.

 

In 2000, we recorded deferred compensation of approximately $1.0 million (net of reduction of $1.6 million due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. In 2001, we recorded deferred compensation of approximately $21,000 (net of reduction of $2.4 million due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. In 2002, we recorded a reversal in deferred compensation of approximately $204,000 (net of reduction of $513,000 due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. Deferred compensation is being amortized over the vesting periods of the stock options and stock using the graded vesting method.

 

We amortized deferred compensation expense, net of gains resulting from the forfeiture of stock options and repurchase of shares due to employee departures, of $1.1 million, $361,000 and $809,000 for fiscal years 2002, 2001 and 2000, respectively. This compensation expense relates to stock options and stock awarded to individuals in all operating expense categories.

 

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Interest Income and Other Expenses, Net

 

Interest income, net, consists primarily of interest earned on our cash, cash equivalents and investments offset by other miscellaneous expenses. Interest income, net was $1.6 million, $2.8 million and $4.5 million in 2002, 2001 and 2000, respectively. The decrease in interest income, net, from 2000 to 2001 to 2002 was due primarily to lower invested cash balances and lower interest rates.

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(in thousands):

 

Average cash, short-term and long-term investments

  

$

55,450

 

  

$

64,656

 

  

$

73,844

 

Interest income

  

$

1,536

 

  

$

2,817

 

  

$

4,562

 

Average return

  

 

2.8

%

  

 

4.4

%

  

 

6.2

%

 

Provision for Income Taxes

 

Marimba’s provision for income taxes for the years ended December 31, 2002, 2001 and 2000 consists of state income, franchise taxes and foreign taxes. No provision for Federal taxes has been recorded, because we have experienced operating losses from inception through 2002.

 

As of December 31, 2002, we had Federal net operating loss carryforwards of approximately $49.0 million. We also had a Federal research and development tax credit carryforward of approximately $1.2 million at that date. The net operating loss and credit carryforwards will expire at various dates beginning in 2011 through 2021 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 and this annual limitation may result in the expiration of the net operating loss and credits before utilization.

 

Liquidity and Capital Resources

 

As of December 31, 2002, our principal sources of liquidity included approximately $11.7 million of cash and cash equivalents and $24.6 and $13.9 million of short-term and long-term investments in marketable securities, respectively.

 

Cash equivalents consisted of financial instruments, which are readily convertible to cash and have maturities of three months or less at the time of acquisition. Investments with remaining maturities of less than one year are considered short-term and the ones with maturities longer than one year are considered long-term investments. Investments are reported at fair market value and are managed by professional investment managers.

 

Net cash used in operating activities decreased to $8.2 million during 2002 from $11.6 million in 2001, due primarily to a smaller decrease in deferred revenues from 2002 to 2001, compared to the decrease from 2000 to 2001, and to lower direct personnel expenses due to restructuring measures. Net cash used in investing activities increased to $6.5 million in 2002 from $569,000 in 2001 due primarily to net purchases of short-term investments and the acquisition of technology in relation to the legal settlement of a patent dispute. Net cash provided by financing activities decreased from $5.1 million in 2001 to $337,000 in 2002, due to lower proceeds from stock option exercises in 2002 and a $3.9 million receivable balance under a purchase facility with a bank in 2001.

 

Total liquidity and capital resources decreased by $9.8 million from 2001 to 2002 and by $8.0 million from 2000 to 2001. This decrease in total capital resources is primarily due to cash used in operating activities and to a $2.75 million cash payment in relation to the legal settlement of a patent dispute in 2002.

 

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Year Ended December 31,


    

2002


  

2001


  

2000


    

(in thousands)

Cash and cash equivalent

  

$

11,704

  

$

26,139

  

$

33,122

Short-term investments

  

 

24,643

  

 

16,054

  

 

30,803

Long-term investments

  

 

13,917

  

 

17,916

  

 

4,146

    

  

  

Total capital resources

  

$

50,264

  

$

60,109

  

$

68,071

 

Our primary contractual obligations consist of noncancellable operating lease agreements. As of December 31, 2002, future minimum lease payments under noncancellable operating leases for the period 2003 through 2005 are expected to be approximately $4.6 million, as presented in the table below:

 

      

Operating

Leases


      

(in thousands)

Year ending December 31:

        

2003

    

 

1,935

2004

    

 

1,960

2005

    

 

715

2006 and thereafter

    

 

—  

      

Total minimum lease payments

    

$

4,610

      

 

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. However, it is possible that we could experience unexpected cash requirements that would force us to seek financing, or at some point in the future we may otherwise seek financing to support our long-term operations. In any such event, we may seek to sell additional equity or debt securities or obtain a credit facility. Any additional financing, 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.

 

Approval of Non-Audit Services

 

During the quarter ended December 31, 2002, there were no additional non-audit services performed by Marimba’s independent accountants that had not been previously approved by the audit committee.

 

Recent Accounting Pronouncements

 

On July 30, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). The standard replaces EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 is effective prospectively to exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of this statement to have a material effect on our financial position or results of operations.

 

In November 2002, the FASB issued FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that we recognize the fair value for guarantee and indemnification arrangements issued or modified by us after December 31, 2002, if these

 

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arrangements are within the scope of the Interpretation. In addition, we must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under previously existing generally accepted accounting principles, in order to identify if a loss has occurred. If we determine it is probable that a loss has occurred, then any such estimable loss would be recognized under those guarantees and indemnifications. Some of the software licenses that we have granted contain provisions that indemnify licensees of the software from damages and costs resulting from claims alleging that our software infringes the intellectual property rights of a third party. We have historically received only a limited number of requests for indemnification under these provisions and have not been required to make material payments pursuant to these provisions. Accordingly, we have not recorded a liability related to these indemnification provisions. We will be required to implement the provisions of FIN 45 as of January 1, 2003 and do not believe that FIN 45 will have a material impact on our financial position, results of operations or cash flows.

 

On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), “Accounting for Stock-Based Compensation—Transition and Disclosure”. Statement 148 amends FASB statement No. 123’s fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, “Interim Financial Reporting”, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. We have adopted the disclosure provisions for this Form 10-K. We will continue to account for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” using the “intrinsic value” method. Accordingly, the adoption of SFAS 148 is not anticipated to have a material effect on our financial position or results of operations.

 

For a description of the other accounting pronouncements that may apply to our financial results, see note 1 to The Notes to Consolidated Financial Statements in Part II, Item 8 of this report.

 

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 of this report.

 

We Have Incurred Losses and May Incur Future Losses

 

Our total revenues declined in 2002 compared to 2001 and 2000, and we may not be able to increase our revenues. We have never generated a quarterly operating profit, and we had an accumulated deficit as of December 31, 2002 of approximately $50.0 million. Even if we do achieve profitability in the future, we may not be able to sustain or increase profitability in the long run. Our history of losses may cause some of our potential and/or actual customers to question our viability, which may in turn hamper our ability to sell some of our products or collect receivables.

 

Fluctuations in Our Quarterly Operating Results Could Adversely Affect Our Stock Price

 

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.

 

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A substantial portion of our revenues for most quarters has been recorded in the last month of the quarter and the magnitude of quarterly fluctuations in operating results may not become evident until late in or towards the end of a particular quarter. As a result, a delay in recognizing revenue, even from a single account, could seriously harm 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 as 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 of, and our ability to fill, orders received in that quarter.

 

We generally expect that revenues in the first and third quarters of each year will not substantially exceed, and may be lower than, revenues in the immediate prior quarter due to the annual nature of companies’ purchasing and budgeting cycles and the year-to-date structure of our sales incentive program. To the extent that seasonality makes it more difficult to predict our revenues, the volatility of our stock price may increase.

 

Our Revenues in Any Quarter Depend on a Small Number of Relatively Large Orders

 

Our quarterly revenues are especially subject to fluctuation because they depend on the completion of relatively large license transactions. For example, during the fourth quarter of fiscal 2002, one transaction accounted for more than 20% of our overall license revenues for that quarter. This dependence on large orders makes our net revenue and operating results more likely to vary from quarter to quarter, and more difficult to predict, because the loss of any particular large order is significant. As a result, our operating results could suffer if any large orders are delayed or canceled in any future period.

 

We Are Subject to the Effects of General Economic and Geopolitical Conditions and Reductions in Corporate IT Spending, and the Current Economic Downturn May Continue to Adversely Impact Our Business

 

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 and geopolitical conditions and reductions in corporate IT spending. Recent political turmoil in many parts of the world, including terrorist and military actions, may continue to put pressure on global economic conditions. Our customers’ decisions to purchase our products are discretionary and subject to their internal budgets and purchasing processes. In addition, since many of our customers may be suffering adverse effects from 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 uncollectible. If these conditions do not improve, or if they deteriorate further, our business and operating results are likely to continue to be adversely impacted.

 

Our Success Depends on our Desktop/Mobile Management Product Family

 

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.

 

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We Need to Continue to Enhance and Develop Our Server Management and Embedded Management Product and Develop New Products and Services

 

There can be no assurance that the revenues from our newer products, Server Management and Embedded Management, will grow in absolute amount or as a percentage of total license revenues. In addition, we cannot assure you that our Server Management products and Embedded Management products will meet customer expectations or gain widespread market acceptance.

 

To provide comprehensive software change 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 software change 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 products 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 provided by our new products and may not ultimately license these products.

 

Our Ability to Grow and Sustain Service Revenues Depends on New License Customers and Service Contract Renewals

 

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 negatively impacts our future service revenues. Our license revenues decreased during 2002, which could lead to a decrease in service revenues in 2003 and beyond.

 

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, we would need to increase our license revenues and other service revenues in order to make up for the decline in support and maintenance revenues.

 

Failure to Further Develop and Sustain Our Indirect Sales Channel and Third-Party Distribution Relationships Could Limit or Prevent Future Growth

 

We have a limited number of distribution relationships for our products with systems integrators and other resellers, and we may not be able to increase our number of distribution relationships or maintain our existing relationships. We are relying in part on the growth of our indirect sales channel for future revenue growth, and if this does not continue to develop, our ability to grow our revenues may be materially harmed.

 

 

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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. Some of these relationships are governed by agreements that can be terminated by either party with little or no prior notice. 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. The loss of, or significant reduction in, sales volume to any of our current or future distribution partners as a result of any of these or other factors could seriously harm our revenues and operating results.

 

We Rely on Third-Party Marketing and Technology Relationships For Future Sales Growth

 

We currently have several marketing and technology relationships. These relationships include joint sales and marketing relationships that provide us access to potential sales to large enterprises that we might not otherwise have access to, as well as product integration and other relationships. If we cannot maintain successful marketing and technology relationships or if we fail to enter into additional marketing and technology relationships, we could have difficulty expanding the sales of our products and our growth might be limited. Our marketing and technology relationships are generally not documented in writing, or are governed by agreements that can be terminated by either party with little or no prior notice. In addition, companies with which we have marketing or technology relationships may promote products of several different companies, including those of our competitors. If these companies choose not to promote our products or if they develop, market or recommend applications that compete with our products, our business would be harmed.

 

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, 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 Business and Financial Performance Depends on Our Ability to 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. We have recently had changes in our senior management. 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 in the U.S. is bound by an employment agreement. 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 competition for qualified personnel. To compete, we believe that we must provide personnel with a competitive compensation package, including stock options. The recent downturn in the trading price of our stock has reduced the incentive effect of many of our previously-granted stock options. If we lose senior management or key employees and are unable to replace them with qualified individuals, our business and operating results could be seriously harmed.

 

If Requirements Relating to Accounting Treatment For Employee Stock Options Are Changed, We May Be Forced to Change Our Business Practices

 

We currently account for the issuance of stock options under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” If proposals currently under consideration by administrative and governmental authorities

 

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are adopted, we may be required to treat the value of the stock options granted to employees as a compensation expense. As a result, we could decide to decrease the number of employee stock options which we would grant. This could affect our ability to retain existing employees and attract qualified candidates, and increase the cash compensation we would have to pay to them. In addition, such a change could have a negative effect on our earnings.

 

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 and internal approval procedures for IT purchases. In addition, selling our products requires us to educate potential customers on our products’ uses and benefits. As a result, our products have a long sales cycle, which can take over six months, and sales cycles are generally lengthening during the current economic slowdown. 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 and are Experiencing Consolidation, and Our Operating Results and Financial Condition Could Be Materially Harmed if We Are Unable to Compete Effectively

The markets for our products are highly competitive, and we expect this competition to persist and intensify in the future. We compete against both new entrants into our markets as well as existing companies. Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter competition from a number of sources, including:

 

    Sellers of enterprise-wide management systems, which include electronic software distribution;

 

    Companies that market products that support the distribution of software applications and content;

 

    Desktop software management products;

 

    Application server vendors and others that have introduced software distribution capabilities into their products; and

 

    Our potential customers’ own information technology departments and internal development efforts.

 

Many 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. Many 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. Furthermore, these companies may have greater brand name recognition that we do. To achieve widespread market acceptance, we will need to further establish the Marimba brand and be able to differentiate our product and service offerings from those of our competitors.

 

Contributing to these challenges, our industry has been subject to consolidation, which subjects us to competition with larger companies offering integrated solutions and a wider breadth of products. Potential competitors may bundle their products or incorporate additional components into existing products in a manner that discourages users from purchasing our products. Alliances among competitors or between competitors and other large software companies present similar competitive challenges. As a result of consolidation or alliances, these competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can.

 

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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.

 

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. To the extent that we have sufficient resources to pursue such litigation, it 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 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 could incur substantial costs to defend any intellectual property litigation, and any such litigation could result in one or more of the following:

 

    Our paying monetary damages, which could be tripled if the infringement is found to have been willful;

 

    The issuance of a preliminary or permanent injunction requiring us to stop selling one or more of our products in their current forms;

 

    Our having to redesign one or more of our products, which could be costly and time-consuming and could substantially delay shipments, assuming that a redesign is feasible;

 

    Our having to reimburse the holder of the infringed intellectual property for some or all of its attorneys’ fees and costs;

 

    Our having to obtain from the holder licenses to its intellectual property, which licenses might not be made available to us on reasonable terms; or

 

    Our having to indemnify our customers against any losses they may incur due to the alleged infringement.

 

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 Are Involved in a Securities Class Action Litigation and Are At Risk of Additional Similar Litigation

 

We are a party to the securities class action litigation described in Part I, Item 3—“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.

 

Our Products and Services Require a Sophisticated Sales Effort

 

Over the long term, as our business grows, we may need to expand our sales and marketing efforts in order to increase market awareness of our products, market our products to a greater number of enterprises and

 

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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, our license revenues have often resulted from contracts closed by just a few sales representatives. If we 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 Need to Expand Our Professional Services

 

We believe that growth in our product sales partly 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 we grow, we plan to increase our services personnel to meet these needs. However, due to the competition for qualified services personnel, we may not be able to attract, train or retain the number of highly qualified services personnel that our business needs.

 

Our Operating Results and Financial Condition May be Materially Harmed if We Are Not Successful At Expanding Internationally

 

We plan to increase our international sales force and operations. Expanding internationally requires significant management attention and financial resources, and we may not grow our revenues enough to cover these expenses. For any such expansion, we will also need to, among other things, expand our international sales channel management and support organizations and develop relationships with international service providers and additional distributors and system integrators. In addition, as international operations become a larger part of our business, we could encounter, on average, greater difficulty with collecting accounts receivable, longer sales cycles and collection periods, greater seasonal reductions in business activity and increases in our tax rates. Furthermore, products may need to be localized, or customized to meet the needs of local users, before they can be sold in particular foreign countries. Developing localized versions of our products for foreign markets is difficult and could take longer than we anticipate.

 

In addition, our international business activities are subject to a variety of risks, including the adoption of or changes in laws, currency fluctuations 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 Rely on Third-Party Software and Applications

 

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

 

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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 exis 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.

 

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 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.

 

We offer performance warranties with the purchase of a license for our software products. Such warranties typically require us to repair or replace a defective or non-conforming product reported to us during the applicable warranty period, or if repairing or replacing the product is commercially impracticable, to return the license fees paid for the defective or non-conforming product. We do not currently reserve for possible products returns. Because of this, any future product returns that require us to return amounts paid to us, especially from large customers or with respect to large transactions, could have a material adverse effect on our business and operating results.

 

In addition, 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 or warranty claim brought against us, even if not successful, would likely be time consuming and costly to defend and could adversely affect our marketing efforts.

 

Our Stock Price Is Likely to Continue to be Volatile

 

The market price of our common stock has been and is likely to continue to be 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. Furthermore, our common stock is thinly traded, which contributes significantly to the volatility of our stock price. Due to the low trading volume of our stock, stockholders may not be able to purchase or sell shares, particularly large blocks of shares, as quickly and as inexpensively as if the trading volume were higher. Volatility in the price of our common stock may adversely affect its market price.

 

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. However, it is possible that we could experience unexpected cash requirements that would force us to seek financing, or at some point in the future we may otherwise seek financing to support our long-term operations. In any such event, we may seek to sell additional equity or debt securities or obtain a credit facility. This could seriously harm our business and operating results.

 

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Table of Contents

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 Credit-Related Issues with Certain of Our Customers and We May Not Achieve Anticipated Revenue if We Need to Defer a Significant Amount of Revenue

 

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. Because a small number of customers account for a large portion of our revenue in any given quarter, the credit-worthiness of our largest customers is critical to our cash flows. At December 31, 2002, three customers represented 28%, 13% and 12% of net accounts receivable, and at December 31, 2001, four customers represented 18%, 13%, 13% and 13% of net accounts receivable. We wrote off $1.0 million in uncollectible accounts during fiscal 2002, which had been previously reserved in 2001. 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.

 

We Must Respond to Rapid Technological Change and Evolving Industry Standards

 

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 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 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.

 

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Table of Contents

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE 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 most of our investments are in marketable securities with maturities less than two years.

 

Our investment policy requires us to invest funds in excess of current operating requirements in:

 

    obligations of the U.S. government and its agencies;

 

    investment grade state and local government obligations;

 

    securities of U.S. corporations that, when purchased, are rated A1 or AA by Standard and Poor’s or the Moody’s equivalent; and

 

    money market funds, deposits or notes issued or guaranteed by U.S. and non-U.S. commercial banks meeting particular credit rating and net worth requirements with maturities of less than two years.

 

The following table presents the amounts of cash equivalents and investments that are subject to market risk and the weighted average interest rates, by year of expected maturity, for our investment portfolio as of December 31, 2002 and 2001. This table does not include money market funds, because those funds are not subject to market risk.

 

    

Maturing during


 
    

2003


      

2004


 
    

(in thousands)

 

December 31, 2002:

                   

Cash equivalents

  

$

9,148

 

    

$

 

Weighted average interest rate

  

 

0.85

%

    

 

 

Long-term and short-term investments

  

$

24,643

 

    

$

13,917

 

Weighted average interest rate

  

 

2.52

%

    

 

2.09

%

Total

  

$

33,791

 

    

$

13,917

 

Weighted average interest rate

  

 

2.07

%

    

 

2.09

%

    

Maturing during


 
    

2002


      

2003


 
    

(in thousands)

 

December 31, 2001:

                   

Cash equivalents

  

$

20,841

 

    

$

 

Weighted average interest rate

  

 

1.77

%

    

 

 

Long-term and short-term investments

  

$

16,054

 

    

$

17,916

 

Weighted average interest rate

  

 

3.74

%

    

 

3.88

%

Total

  

$

36,895

 

    

$

17,916

 

Weighted average interest rate

  

 

2.63

%

    

 

3.88

%

 

Exchange Rate Sensitivity

 

We develop products primarily 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 fluctuations 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 twelve months ended December 31, 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.

 

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Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

MARIMBA, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Ernst & Young LLP, Independent Auditors

  

34

Consolidated Balance Sheets

  

35

Consolidated Statements of Operations

  

36

Consolidated Statements of Stockholders’ Equity

  

37

Consolidated Statements of Cash Flows

  

38

Notes to Consolidated Financial Statements

  

39

 

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Table of Contents

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, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

 

/s/    ERNST & YOUNG LLP

 

San Francisco, California

January 17, 2003

 

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Table of Contents

MARIMBA, INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value data)

 

    

December 31,


 
    

2002


    

2001


 

ASSETS

                 

Current assets:

                 

Cash and cash equivalents

  

$

11,704

 

  

$

26,139

 

Short-term investments

  

 

24,643

 

  

 

16,054

 

Accounts receivable, net of allowances of $750 and $2,358 at December 31, 2002 and 2001

  

 

6,546

 

  

 

7,791

 

Prepaid expenses and other current assets

  

 

1,321

 

  

 

1,691

 

    


  


Total current assets

  

 

44,214

 

  

 

51,675

 

Property and equipment, net

  

 

2,333

 

  

 

3,900

 

Long-term investments

  

 

13,917

 

  

 

17,916

 

Acquired technology

  

 

1,536

 

  

 

 

Other assets

  

 

369

 

  

 

360

 

    


  


    

$

62,369

 

  

$

73,851

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

                 

Accounts payable

  

$

465

 

  

$

365

 

Accrued liabilities

  

 

1,576

 

  

 

2,013

 

Accrued compensation

  

 

2,348

 

  

 

3,408

 

Deferred revenue

  

 

8,299

 

  

 

9,213

 

    


  


Total current liabilities

  

 

12,688

 

  

 

14,999

 

Deferred rent

  

 

286

 

  

 

265

 

Deferred revenues non-current

  

 

667

 

  

 

1,345

 

    


  


Total long-term liabilities

  

 

953

 

  

 

1,610

 

Stockholders’ equity:

                 

Preferred stock; $.0001 par value, 10,000 shares authorized, no shares designated, issued and outstanding

  

 

 

  

 

 

Common stock; $.0001 par value, 80,000 shares authorized, 25,201 and 24,142 shares issued and outstanding at December 31, 2002 and 2001, respectively

  

 

2

 

  

 

2

 

Additional paid-in capital

  

 

98,728

 

  

 

97,765

 

Deferred compensation

  

 

(239

)

  

 

(1,542

)

Accumulated other comprehensive income

  

 

215

 

  

 

141

 

Accumulated deficit

  

 

(49,978

)

  

 

(39,124

)

    


  


Stockholders’ equity

  

 

48,728

 

  

 

57,242

 

    


  


    

$

62,369

 

  

$

73,851

 

    


  


 

 

See accompanying notes.

 

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Table of Contents

MARIMBA, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Revenues:

                          

License

  

$

18,223

 

  

$

27,801

 

  

$

31,329

 

Service

  

 

17,004

 

  

 

16,229

 

  

 

12,718

 

    


  


  


Total revenues

  

 

35,227

 

  

 

44,030

 

  

 

44,047

 

Cost of revenues:

                          

License

  

 

2,737

 

  

 

595

 

  

 

681

 

Service

  

 

5,829

 

  

 

5,940

 

  

 

4,256

 

    


  


  


Total cost of revenues

  

 

8,566

 

  

 

6,535

 

  

 

4,937

 

    


  


  


Gross profit

  

 

26,661

 

  

 

37,495

 

  

 

39,110

 

Operating expenses:

                          

Research and development

  

 

7,948

 

  

 

10,508

 

  

 

11,114

 

Sales and marketing

  

 

24,060

 

  

 

31,965

 

  

 

27,758

 

General and administrative

  

 

5,683

 

  

 

7,934

 

  

 

12,570

 

Restructuring costs

  

 

200

 

  

 

789

 

  

 

 

Amortization of deferred compensation

  

 

1,099

 

  

 

361

 

  

 

809

 

    


  


  


Total operating expenses

  

 

38,990

 

  

 

51,557

 

  

 

52,251

 

    


  


  


Loss from operations

  

 

(12,329

)

  

 

(14,062

)

  

 

(13,141

)

Interest income

  

 

1,536

 

  

 

2,817

 

  

 

4,562

 

Interest and other income (expenses)

  

 

18

 

  

 

(43

)

  

 

(21

)

    


  


  


Loss before income taxes

  

 

(10,775

)

  

 

(11,288

)

  

 

(8,600

)

Provision for income taxes

  

 

79

 

  

 

199

 

  

 

179

 

    


  


  


Net loss

  

$

(10,854

)

  

$

(11,487

)

  

$

(8,779

)

    


  


  


Basic and diluted net loss per share

  

$

(0.44

)

  

$

(0.48

)

  

$

(0.38

)

    


  


  


Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share

  

 

24,427

 

  

 

23,943

 

  

 

23,200

 

    


  


  


 

See accompanying notes.

 

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Table of Contents

 

MARIMBA, INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

    

Common Stock


  

Additional

Paid-in

Capital


    

Deferred

Compensation


      

Accumulated

Other

Comprehensive

Income (Loss)


    

Accumulated

Deficit


    

Stockholders’

Equity


    

Comprehensive

Income (Loss)


 
    

Shares


    

Amount


                   

Balances at January 1, 2000

  

23,146

 

  

 

2

  

 

93,436

 

  

 

(1,680

)

    

 

(261

)

  

 

(18,858

)

  

 

72,639

 

  

$

(4,469

)

                                                                 


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 restricted common stock

  

(109

)

  

 

  

 

(141

)

  

 

 

    

 

 

  

 

 

  

 

(141

)

        

Translation adjustment

  

 

  

 

  

 

 

  

 

 

    

 

(20

)

  

 

 

  

 

(20

)

  

$

(20

)

Unrealized gain on investments

  

 

  

 

  

 

 

  

 

 

    

 

272

 

  

 

 

  

 

272

 

  

 

272

 

Deferred compensation, net of cancellation adjustment

  

 

  

 

  

 

1,011

 

  

 

(1,011

)

    

 

 

  

 

 

  

 

 

        

Amortization of deferred compensation

  

 

  

 

  

 

 

  

 

809

 

    

 

 

  

 

 

  

 

809

 

        

Net loss

  

 

  

 

  

 

 

  

 

 

    

 

 

  

 

(8,779

)

  

 

(8,779

)

  

 

(8,779

)

    

  

  


  


    


  


  


  


Balances at December 31, 2000

  

23,585

 

  

 

2

  

 

96,329

 

  

 

(1,882

)

    

 

(9

)

  

 

(27,637

)

  

 

66,803

 

  

$

(8,527

)

                                                                 


Issuance of common stock upon exercise of stock options

  

323

 

  

 

  

 

594

 

  

 

 

    

 

 

  

 

 

  

 

594

 

        

Issuance of common stock under employee stock purchase plan

  

338

 

  

 

  

 

715

 

  

 

 

    

 

 

  

 

 

  

 

715

 

        

Issuance of stock option for services

         

 

  

 

120

 

  

 

 

    

 

 

  

 

 

  

 

120

 

        

Repurchases of restricted common stock

  

(104

)

  

 

  

 

(14

)

  

 

 

    

 

 

  

 

 

  

 

(14

)

        

Deferred compensation, net of cancellation adjustment

  

 

  

 

  

 

21

 

  

 

(21

)

    

 

 

  

 

 

  

 

 

        

Translation adjustment

  

 

  

 

  

 

 

  

 

 

    

 

(9

)

  

 

 

  

 

(9

)

  

$

(9

)

Unrealized gain on investments

  

 

  

 

  

 

 

  

 

 

    

 

159

 

  

 

 

  

 

159

 

  

 

159

 

Amortization of deferred compensation

  

 

  

 

  

 

 

  

 

361

 

    

 

 

  

 

 

  

 

361

 

        

Net loss

  

 

  

 

  

 

 

  

 

 

    

 

 

  

 

(11,487

)

  

 

(11,487

)

  

 

(11,487

)

    

  

  


  


    


  


  


  


Balances at December 31, 2001

  

24,142

 

  

$

2

  

$

97,765

 

  

$

(1,542

)

    

$

141

 

  

$

(39,124

)

  

$

57,242

 

  

$

(11,337

)

    

  

  


  


    


  


  


  


Issuance of common stock upon exercise of stock options and grant of restricted common shares

  

297

 

  

 

  

 

1

 

  

 

 

    

 

 

  

 

 

  

 

1

 

        

Issuance of common stock under employee stock purchase plan

  

285

 

  

 

  

 

371

 

  

 

 

    

 

 

  

 

 

  

 

371

 

        

Issuance of common stock in connection with legal settlement and acquired technology

  

500

 

  

 

  

 

830

 

  

 

 

    

 

 

  

 

 

  

 

830

 

        

Repurchases of restricted common stock

  

(23

)

  

 

  

 

(35

)

  

 

 

    

 

 

  

 

 

  

 

(35

)

        

Deferred compensation, net of cancellation adjustment

  

 

  

 

  

 

(204

)

  

 

204

 

    

 

 

  

 

 

  

 

 

        

Translation adjustment

  

 

  

 

  

 

 

  

 

 

    

 

(21

)

  

 

 

  

 

(21

)

  

 

(21

)

Unrealized gain on investments

  

 

  

 

  

 

 

  

 

 

    

 

95

 

  

 

 

  

 

95

 

  

 

95

 

Amortization of deferred compensation

  

 

  

 

  

 

 

  

 

1,099

 

    

 

 

  

 

 

  

 

1,099

 

        

Net loss

  

 

  

 

  

 

 

  

 

 

    

 

 

  

 

(10,854

)

  

 

(10,854

)

  

 

(10,854

)

    

  

  


  


    


  


  


  


Balances at December 31, 2002

  

25,201

 

  

$

2

  

$

98,728

 

  

$

(239

)

    

$

215

 

  

$

(49,978

)

  

$

48,728

 

  

$

(10,780

)

    

  

  


  


    


  


  


  


 

See accompanying notes.

 

 

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Table of Contents

MARIMBA, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Operating activities:

                          

Net loss

  

$

(10,854

)

  

$

(11,487

)

  

$

(8,779

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                          

Depreciation

  

 

1,864

 

  

 

2,096

 

  

 

1,599

 

Amortization of deferred compensation

  

 

1,099

 

  

 

361

 

  

 

809

 

Amortization of acquired technology

  

 

171

 

  

 

 

  

 

 

Issuance of stock option for services

  

 

 

  

 

120

 

  

 

 

Issuance of common stock in connection with legal settlement

  

 

830

 

  

 

 

  

 

 

Loss on disposal of property and equipment

  

 

13

 

  

 

64

 

  

 

49

 

Changes in operating assets and liabilities:

                          

Accounts receivable, net

  

 

1,245

 

  

 

856

 

  

 

(5,101

)

Prepaid expenses and other current assets

  

 

370

 

  

 

435

 

  

 

(514

)

Other assets

  

 

(9

)

  

 

 

  

 

(324

)

Accounts payable

  

 

100

 

  

 

(715

)

  

 

(128

)

Accrued liabilities

  

 

(437

)

  

 

212

 

  

 

(134

)

Accrued compensation

  

 

(1,060

)

  

 

(647

)

  

 

776

 

Deferred revenue

  

 

(1,592

)

  

 

(2,958

)

  

 

2,197

 

Deferred rent

  

 

21

 

  

 

112

 

  

 

105

 

    


  


  


Net cash provided by (used in) operating activities

  

 

(8,239

)

  

 

(11,551

)

  

 

(9,445

)

    


  


  


Investing activities:

                          

Acquired technology in connection with legal settlement

  

 

(1,707

)

  

 

 

  

 

 

Capital expenditures, net

  

 

(310

)

  

 

(1,786

)

  

 

(2,966

)

Purchases of investments

  

 

(38,160

)

  

 

(63,820

)

  

 

(31,592

)

Proceeds from matured investments

  

 

33,665

 

  

 

65,037

 

  

 

53,060

 

    


  


  


Net cash provided by (used in) investing activities

  

 

(6,512

)

  

 

(569

)

  

 

18,502

 

    


  


  


Financing activities:

                          

Proceeds from issuance of common stock, net of repurchases

  

 

337

 

  

 

1,295

 

  

 

1,883

 

Proceeds from transfer of financial assets

  

 

 

  

 

3,853

 

  

 

 

Principal payments under capital lease obligations

  

 

 

  

 

 

  

 

(60

)

    


  


  


Net cash provided by financing activities

  

 

337

 

  

 

5,148

 

  

 

1,823

 

    


  


  


Effect of exchange rate changes on cash

  

 

(21

)

  

 

(9

)

  

 

(20

)

Net increase (decrease) in cash and cash equivalents

  

 

(14,437

)

  

 

(6,981

)

  

 

10,859

 

Cash and cash equivalents at beginning of year

  

 

26,141

 

  

 

33,122

 

  

 

22,263

 

    


  


  


Cash and cash equivalents at end of year

  

$

11,704

 

  

$

26,141

 

  

$

33,122

 

    


  


  


Supplemental disclosure of cash flow information:

                          

Interest paid

  

$

 

  

$

4

 

  

$

1

 

    


  


  


Income taxes paid

  

$

17

 

  

$

199

 

  

$

179

 

    


  


  


Cash paid for technology acquisition

  

$

2,750

 

  

$

 

  

$

 

    


  


  


Supplemental disclosure of non-cash investing and financing activities:

                          

Deferred compensation, net of cancellation adjustment

  

$

(204

)

  

$

21

 

  

$

1,011

 

    


  


  


Issuance of stock for technology acquisition

  

$

830

 

  

$

 

  

$

 

    


  


  


 

See accompanying notes.

 

39


Table of Contents

 

MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies

 

Description of Business

 

Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of information technology (“IT”) ownership and improve quality of IT service by streamlining the distribution and management of software applications and content. Our customer base spans multiple industries, including financial services, healthcare, insurance, manufacturing and telecommunications. We market our products worldwide through a combination of a direct sales force and resellers.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Marimba and its wholly-owned subsidiaries in the United Kingdom and France. Intercompany accounts and transactions have been eliminated in consolidation.

 

Marimba has incurred operating losses to date and had an accumulated deficit of $50.0 million at December 31, 2002. Marimba’s activities have been primarily financed through its initial public offering of common stock and earlier private placements of equity securities. If Marimba is ultimately unable to achieve profitability and positive cash flows from operations, it 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.

 

Reclassification

 

Certain previously reported amounts have been reclassified to conform to the current year presentation format with no impact on net income. All financial information has been reclassified to conform to this presentation.

 

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. On an on-going basis, we evaluate these estimates and judgments, including those related to revenue recognition, bad debts, returns, and litigation. Actual results could differ materially from those estimates.

 

Revenue Recognition

 

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 updates on an if-and-when available basis.

 

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 license 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,

 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 fiscal 2002 and 2001. The implementation of SAB 101 has not had a material impact on our results of operations, financial position or cash flows.

 

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 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 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. We do not request collateral from our customers. 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 we defer revenue from the arrangement fee equivalent to the fair value of the undelivered elements. Fair values for the ongoing maintenance and support obligations for our licenses are 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’s arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period.

 

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.

 

Research and Development

 

Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86 (“FAS 86”), “Accounting for the Costs of Computer Software to Be

 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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. To date, costs incurred by Marimba between completion of the working model and the point at which the product is ready for general release have been insignificant and charged to expense as incurred.

 

Advertising

 

Marimba expenses advertising costs as incurred. Advertising expense was $54,000, $819,000 and $1.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Cash, Cash Equivalents and Investments

 

Cash equivalents consisted 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, 2002 and 2001 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. Investments with remaining maturities of more than three months and less than one year are considered short-term investments. Investments with remaining maturities longer than one year are considered long-term investments. All investments classified as long-term mature during 2004. The carrying value of cash, cash equivalents and investments approximates fair value.

 

    

Year Ended December 31,


    

2002


  

2001


  

2000


    

(in thousands)

Cash and cash equivalent

  

$

11,704

  

$

26,139

  

$

33,122

Short-term investments

  

 

24,643

  

 

16,054

  

 

30,803

Long-term investments

  

 

13,917

  

 

17,916

  

 

4,146

    

  

  

Total capital resources

  

$

50,264

  

$

60,109

  

$

68,071

Interest receivable

  

$

524

  

$

527

  

$

604

 

Marimba classifies, at the date of acquisition, its marketable securities as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115 (“FAS 115”), “Accounting for Certain Investments in Debt and Equity Securities”. Available-for-sale securities are reported at fair market value with the related unrealized gains and losses included in stockholders’ equity. Paid interest and paid dividends on all securities are included in interest income and interest receivable is included in other current assets.

 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Available-for-sale investments are summarized as follows:

 

    

Amortized

Cost


  

Gross Unrealized Gains


  

Gross

Unrealized

Losses


    

Fair Value


December 31, 2002:

    

Corporate notes

  

$

20,665

  

$

196

  

$

(1

)

  

$

20,860

Market auction rate preferred stock

  

 

  

 

  

 

 

  

 

Debt securities from U.S. Government and government agencies

  

 

17,608

  

 

92

  

 

 

  

 

17,700

    

  

  


  

Total investments

  

$

38,273

  

$

288

  

$

(1

)

  

$

38,560

    

  

  


  

Short-term investments

  

$

24,455

  

$

188

  

$

 

  

$

24,643

Long-term investments

  

 

13,818

  

 

100

  

 

(1

)

  

 

13,917

    

  

  


  

Total investments

  

$

38,273

  

$

288

  

$

(1

)

  

$

38,560

    

  

  


  

December 31, 2001:

                             

Corporate notes

  

$

22,128

  

$

182

  

$

(15

)

  

$

22,295

Market auction rate preferred stock

  

 

1,150

  

 

  

 

 

  

 

1,150

Debt securities from U.S. Government and government agencies

  

 

10,500

  

 

25

  

 

 

  

 

10,525

    

  

  


  

Total investments

  

$

33,778

  

$

207

  

$

(15

)

  

$

33,970

    

  

  


  

Short-term investments

  

$

16,009

  

$

46

  

$

(1

)

  

$

16,054

Long-term investments

  

 

17,769

  

 

161

  

 

(14

)

  

 

17,916

    

  

  


  

Total investments

  

$

33,778

  

$

207

  

$

(15

)

  

$

33,970

    

  

  


  

 

The cost of securities sold is based on the specific identification method.

 

At December 31, 2002, the amortized cost and estimated fair values of short-term and long-term investments (excluding cash equivalents) by contractual maturity were as follows:

 

    

Amortized

Cost


  

Fair Value


    

(in thousands)

Less than one year

  

$

24,455

  

$

24,643

Mature in 1-2 year

  

 

13,818

  

 

13,917

Mature in 3-4 years

  

 

  

 

    

  

Total investments

  

$

38,273

  

$

38,560

    

  

 

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. Repairs and maintenance costs are expensed as incurred.

 

Income Taxes

 

Marimba accounts for income taxes using the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109 (“FAS 109”), “Accounting for Income Taxes.” Under the asset and

 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

liability method, a current tax asset or liability is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Marimba has recorded a full valuation allowance as of December 31, 2002, because we believe it is more likely than not that our deferred tax assets will not be realized in the foreseeable future.

 

Accounting for Stock-Based Compensation

 

Marimba has elected to follow Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, 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 (“FAS 123”), “Accounting for Stock-Based Compensation”, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 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.

 

Stock options issued to non-employees are accounted for in accordance with FAS 123 and Emerging Issues Task Force Issue No. 96-18 (“EITF 96-18”), “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction With Selling, Goods or Services.”

 

The following table summarizes relevant information as to reported results under the Company’s intrinsic value method of accounting for stock awards, with supplemental information as if the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” had been applied:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(in thousands, except per share data)

 

Net loss as reported

  

$

(10,854

)

  

$

(11,487

)

  

$

(8,779

)

Add: Stock-based compensation included in reported net loss

  

 

1,099

 

  

 

361

 

  

 

809

 

Deduct: Total stock-based compensation cost under SFAS 123

  

 

(5,287

)

  

 

(2,324

)

  

 

(28,037

)

    


  


  


Pro forma net loss

  

$

(15,042

)

  

$

(13,450

)

  

$

(36,007

)

Basic and diluted net loss per share:

                          

Reported net loss per common share

  

$

(.44

)

  

$

(.48

)

  

$

(.38

)

    


  


  


Pro forma net loss per common share

  

$

(.62

)

  

$

(.56

)

  

$

(1.55

)

    


  


  


 

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 performs ongoing credit evaluations of customers, but does not generally require collateral. We grant credit terms to most customers ranging from 30 to 90 days, however in some instances Marimba may provide longer payment terms.

 

For the years ended December 31, 2002, 2001 and 2000, no single customer represented more than 10% of total revenues. At December 31, 2002, three customers represented 28%, 13% and 12% of net accounts receivable, and at December 31, 2001, four customers represented 18%, 13%, 13% and 13% of net accounts receivable.

 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Accounts Receivable Risks

 

Marimba’s accounts receivable are subject to both collections risks and returns risks. Our gross accounts receivable is reserved against these risks through an allowance for doubtful accounts and a returns reserve.

 

The allowance for doubtful accounts is established through a charge to general and administrative expenses. This allowance is for estimated losses resulting from the inability of our customers to make required payments. It is a significant estimate and is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in aggregate, and current economic conditions that may affect a customer’s ability to pay or suggest that a particular market sector is more prone to liquidity issues. The use of different estimates or assumptions could produce different allowance balances. If the financial condition of our customers were to deteriorate, subsequent to the date of our arrangements with them, this could result in an impairment of their ability to make payments and additional allowances would be required.

 

Prior to December 31, 2002, we maintained a returns reserve, established through a debit to license revenue. The reserve was for estimated losses resulting from the possibility of product returns by customers. At December 31, 2002, we analyzed our past returns history and determined that we had insignificant history of returns to serve as a quantitative basis for our reserve. As a result of this analysis, the entire reserve was reversed in the fourth quarter of 2002, resulting in a net increase to license revenue of $527,000 during fiscal year 2002. If in the future we experience customer returns, this may materially negatively impact our business.

 

The following table presents the allowance for doubtful accounts and the returns reserve for 2002, 2001 and 2000:

 

    

Allowance

for Doubtful

Accounts


    

Returns

Reserve


    

Total Accounts Receivable

Reserves


 
    

(in thousands)

 

Balance at January 1, 2000

  

$

104

 

  

$

 

  

$

104

 

Additions

  

 

2,144

 

  

 

237

 

  

 

2,381

 

Adjustments

  

 

(263

)

           

 

(263

)

Write-offs

  

 

 

  

 

 

  

 

 

    


  


  


Balance at December 31, 2000

  

 

1,985

 

  

 

237

 

  

 

2,222

 

    


  


  


Additions

  

 

172

 

  

 

290

 

  

 

462

 

Adjustments

  

 

 

  

 

 

  

 

 

Write-offs

  

 

(326

)

  

 

 

  

 

(326

)

    


  


  


Balance at December 31, 2001

  

 

1831

 

  

 

527

 

  

 

2,358

 

    


  


  


Additions

  

 

 

  

 

 

  

 

 

Adjustments

  

 

(40

)

  

 

(527

)

  

 

(567

)

Write-offs

  

 

(1,041

)

  

 

 

  

 

(1,041

)

    


  


  


Balance at December 31, 2002

  

$

750

 

  

$

 

  

$

750

 

    


  


  


 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Accrued Warranty

 

Marimba maintains a warranty accrual in the event that we incur expenses associated with customer claims made under the warranty provisions of their license agreement. The following table reflects the activity with our warranty accrual:

 

      

Accrued

Warranty


      

(in thousands)

Balance at January 1, 2000

    

$

115

Increase to warranty accrual

    

 

151

Expenses incurred under warranty

    

 

      

Balance at December 31, 2001

    

$

266

      

Increase to warranty accrual

    

 

93

Expenses incurred under warranty

    

 

Balance at December 31, 2002

    

$

359

      

 

Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.

 

Financing

 

In June 2001, Marimba entered into a $5 million receivables purchase facility with a bank, pursuant to which Marimba could transfer qualifying accounts receivables 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. All amounts under this facility were repaid in full, and the purchase facility expired in June 2002.

 

Segment Information

 

Marimba operates in one operating segment, the development and marketing of change management software, and has operations in the United States and Europe. For the years ended December 31, 2002, 2001 and 2000, sales in Europe were approximately 12%, 6% and 3% of total revenue, respectively.

 

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Table of Contents

MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The following table presents our revenues by regions:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(in thousands)

 

Revenue:

                    

United States

  

$

29,753

  

84.5

%

  

$

40,507

  

92.0

%

  

$

41,933

  

95.2

%

Europe

  

 

4,342

  

12.3

 

  

 

2,466

  

5.6

 

  

 

1,365

  

3.1

 

Other regions

  

 

1,132

  

3.2

 

  

 

1,057

  

2.4

 

  

 

749

  

1.7

 

    

  

  

  

  

  

Total revenues

  

$

35,227

  

100.0

%

  

$

44,030

  

100.0

%

  

$

44,047

  

100.0

%

 

Net Loss Per Share

 

Basic and diluted net loss per common share are presented in conformity with Statement of Financial Accounting Standards No. 128 (“FAS 128”), “Earnings Per Share”, for all periods presented. In accordance with FAS 128, basic and diluted net loss per share have been computed by dividing the net loss by weighted-average shares of common stock outstanding during the periods, less weighted average shares subject to repurchase.

 

The following table presents the calculation of basic and diluted net loss per share:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(in thousands, except per share data)

 

Net loss

  

$

(10,854

)

  

$

(11,487

)

  

$

(8,779

)

    


  


  


Basic and diluted:

                          

Weighted-average shares of common stock outstanding

  

 

24,484

 

  

 

24,012

 

  

 

23,391

 

Less weighted-average shares subject to repurchase

  

 

(57

)

  

 

(69

)

  

 

(191

)

    


  


  


Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share

  

 

24,427

 

  

 

23,943

 

  

 

23,200

 

    


  


  


Basic and diluted net loss per share

  

$

(0.44

)

  

$

(0.48

)

  

$

(0.38

)

    


  


  


 

Marimba has excluded all outstanding stock options from the calculation of diluted loss per share because all such securities are antidilutive for all periods presented. Weighted-average options outstanding to purchase 7,078,000, 6,220,000, and 4,714,000 shares of common stock for the years ended December 31, 2002, 2001 and 2000, 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.

 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Accumulated Other Comprehensive Income (Loss)

 

Comprehensive income (loss) is defined as net loss as adjusted by changes in equity such as foreign currency translation adjustments and unrealized gains and losses that have historically been excluded from net income (loss) and reflected instead in equity. As of December 31, the components of accumulated other comprehensive income (loss) reflected in the Statement of Stockholders’ Equity were as follows:

 

    

2002


    

2001


    

2000


 
    

(in thousands)

 

Unrealized gain on available-for-sale securities

  

$

287

 

  

$

192

 

  

$

33

 

Foreign currency translation adjustment

  

 

(72

)

  

 

(51

)

  

 

(42

)

    


  


  


Accumulated other comprehensive income (loss)

  

$

215

 

  

$

141

 

  

$

(9

)

    


  


  


 

Acquired Technology

 

On July 19, 2002, Marimba executed an agreement settling patent litigation brought against the Company. Under the terms of the agreement, Marimba obtained a license to patents in exchange for consideration consisting of a $2.75 million cash payment and the issuance of 500,000 shares of our common stock. The portion of the settlement which related to payment for alleged past infringement was expensed to cost of license during the quarter ended June 30, 2002, in the amount of $1.9 million. In the quarter ended September 30, 2002, we recorded an acquired technology asset of $1.7 million, representing the proportion of the total settlement relating to the future benefit to Marimba of the ongoing license to the acquired patent. This asset is being amortized to cost of license revenues ratably over five years, the estimated remaining useful life of the license.

 

Foreign Currency

 

The functional currency of all our foreign subsidiaries is the local currency. Assets and liabilities of our foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenue, costs and expenses are translated at average rates of exchange in effect during the year. We report translation gains and losses as a separate component of stockholders’ equity. We include net gains and losses resulting from foreign exchange transactions in the statement of operations and they were immaterial in all periods presented.

 

Recent Accounting Pronouncements

 

In June 2001, the EITF issued EITF Issue No. 00-25 (“EITF 00-25”), “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products”, effective for periods beginning after December 15, 2001. EITF 00-25 addresses whether consideration from a vendor to a reseller is (a) an adjustment of the selling prices of the vendor’s products and, therefore, should be deducted from revenue when recognized in the vendor’s statement of operations or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost or expense when recognized in the vendor’s statement of operations. Upon application of EITF 00-25, financial statements for prior periods presented for comparative purposes should be reclassified to comply with the income statement display requirements. We adopted EITF-00-25 during the first quarter of 2002, and it did not have a material effect on our operating results or financial position.

 

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141, Business Combinations (“FAS 141”). FAS 141 establishes new standards for accounting and reporting business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. We adopted this statement during the first quarter of 2002.

 

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MARIMBA, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets”, which supersedes Accounting Principles Board Opinion No. 17 (“APB 17”), “Intangible Assets”. FAS 142 establishes new standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. We adopted this statement during 2002. SFAS 142 did not have a material effect on our operating results or financial position.

 

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial Accounting Standards No. 121 (“FAS 121”), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ”, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 (“APB 30”), “Reporting the Results of Operations” for a disposal of a segment of a business. We adopted FAS 144 as of January 1, 2002 and do not believe that the adoption of the Statement had a significant impact on our financial position or results of operations.

 

In September 2001, the EITF issued EITF Issue No. 01-09 (“EITF 01-09”), “Accounting for Consideration Given by Vendor to a Customer or a Reseller of the Vendor’s Products”, which is a codification of EITF 00-14, EITF 00-25 and EITF 00-22, “Accounting for Points and Certain Other Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to be Delivered in the Future”. Marimba is currently assessing the impact of the adoption of these issues on our financial statements.

 

In November 2001, the FASB issued a Staff Announcement, Topic D-103 and the EITF issued EITF Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”, which concluded that the reimbursement of “out-of-pocket” expenses should be classified as revenue in the statement of operations for financial reporting periods beginning after December 15, 2001 and comparative financial statements for prior periods should be reclassified to comply with the guidance in this announcement. Effective January 1, 2002, we applied this announcement and EITF issue but did not reclassify “out-of-pocket” expenses for prior years, as they were immaterial. Marimba currently records “out-of-pocket” expenses in cost of service revenues and records the reimbursement of such expenses in service revenues. In fiscal 2002, we recorded $306,000 of such revenues. The announcement and EITF issue had no impact on gross profit or net loss.

 

On July 30, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (FAS No. 146). The standard replaces EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 is effective prospectively to exit or disposal activities initiated after December 31, 2002

 

In November 2002, the FASB issued FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that we recognize the fair value for guarantee and indemnification arrangements issued or modified by us after December 31, 2002, if these arrangements are within the scope of the Interpretation. In addition, we must continue to monitor the conditions that are subject to the guarantees and indemnifications, as required under previously existing generally accepted accounting principles, in order to identify if a loss has occurred. If we determine it is probable that a loss has occurred, then any such estimable loss would be recognized under those guarantees and indemnifications. Some of the software licenses that we have granted contain provisions that indemnify licensees of the software

 

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from damages and costs resulting from claims alleging that our software infringes the intellectual property rights of a third party. We have historically received only a limited number of requests for indemnification under these provisions and have not been required to make material payments pursuant to these provisions. Accordingly, we have not recorded a liability related to these indemnification provisions. We will be required to implement the provisions of FIN 45 as of January 1, 2003 and do not believe that FIN 45 will have a material impact on our financial position, results of operations or cash flows.

 

On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (FAS 148), “Accounting for Stock-Based Compensation – Transition and Disclosure”. FAS 148 amends FASB statement No. 123’s fair value method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure provisions of FAS 123 and APB Opinion No. 28, “Interim Financial Reporting”, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. We have adopted the disclosure provisions for this report. We will continue to account for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, using the “intrinsic value” method. Accordingly, the adoption of SFAS 148 is not anticipated to have a material effect on our financial position or results of operations.

 

2.    Property and Equipment

 

Property and equipment consist of the following:

 

    

December 31,


 
    

2002


    

2001


 
    

(in thousands)

 

Furniture and equipment

  

$

1,598

 

  

$

1,585

 

Computer equipment

  

 

5,997

 

  

 

5,819

 

Purchased software

  

 

1,340

 

  

 

1,321

 

Leasehold improvements

  

 

1,191

 

  

 

1,141

 

    


  


    

 

10,126

 

  

 

9,866

 

Accumulated depreciation

  

 

(7,793

)

  

 

(5,966

)

    


  


Property and equipment, net

  

$

2,333

 

  

$

3,900

 

    


  


 

3.    Commitments

 

Marimba’s contractual obligations consist of noncancellable operating lease agreements. As of December 31, 2002, future minimum lease payments under noncancellable operating leases are as follows:

 

      

Operating Leases


      

(in thousands)

Year ending December 31:

        

2003

    

 

1,935

2004

    

 

1,960

2005

    

 

715

2006 and thereafter

    

 

—  

      

Total minimum lease payments

    

$

4,610

      

 

Marimba’s headquarters facility lease expires in April 2005. Rent expense under operating leases totaled approximately, $2.5 million, $3.1 million and $2.4 million for the years ended December 31, 2002, 2001 and 2000, respectively.

 

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MARIMBA, INC.

 

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4.    Deferred Compensation

 

We record deferred compensation representing the difference between the exercise prices of options granted to acquire shares of common stock and the deemed fair value for financial reporting purposes of our common stock on the grant dates. We also record deferred compensation to represent the intrinsic value of certain restricted stock awards. This compensation relates to individuals in all operating expense categories.

 

Deferred compensation is amortized over the vesting periods of the options and stock using the graded vesting method. The graded vesting method can result in amortization of deferred compensation at a schedule which is faster then the shares actually vest. As a result, when an employee is terminated prior to full vesting we record a credit to deferred compensation armortization expense, which reflects the difference between the amount of deferred compensation we have previously amortized for this employee less the amount the employee had actually vested upon termination. A summary of Marimba’s deferred compensation activity is as follows:

 

    

Deferred Compensation


 
    

(in thousands)

 

Balance at January 1, 2000

  

$

1,680

 

Increase due to new grants

  

 

2,606

 

Decrease due to terminations

  

 

(1,595

)

Amortization

  

 

(809

)

    


Balance at December 31, 2000

  

 

1,882

 

    


Increase due to new grants

  

 

2,450

 

Decrease due to terminations

  

 

(2,429

)

Amortization

  

 

(361

)

    


Balance at December 31, 2001

  

 

1,542

 

    


Increase due to new grants

  

 

310

 

Decrease due to terminations

  

 

(514

)

Amortization

  

 

(1,099

)

    


Balance at December 31, 2002

  

$

239

 

    


 

5.    Stockholders’ Equity

 

As of December 31, 2002, 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.

 

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Marimba has reserved shares of common stock for future issuance as follows:

 

      

December 31,

2002


      

(in thousands)

Exercise of options

    

11,284

Issuance of common stock under the employee stock purchase plan

    

1,163

      

Total

    

12,447

      

 

Preferred Stock

 

Marimba’s Board of Directors has the authority to issue 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 the company 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

 

Marimba did not declare nor pay any cash dividends on our capital stock during the fiscal years ended December 31, 2002, 2001 and 2000, and does not expect to do so in the foreseeable future. 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.

 

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 originally 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. 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. 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. Effective in September 2001, the stockholders approved an amendment to the 1999 Omnibus Plan

 

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which increased the number of shares reserved for issuance under the 1999 Omnibus Plan by the number of shares that are available for issuance under the 1996 Stock Plan, up to a maximum of 2,103,973 shares. A total of 5,997,849 shares of common stock were reserved for issuance under the 1999 Omnibus Plan as of December 31, 2002, and an additional 1,008,050 shares of common stock were added to the reserve on January 1, 2003. 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.

 

In 2002, Marimba issued 100,000 restricted shares under the 1999 Omnibus Plan and repurchased 22,967 under this plan.

 

2000 Supplemental Stock Plan

 

Shares Subject to 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 originally reserved for issuance to eligible participants under the 2000 Plan. As of December 31, 2002, 2,889,943 option shares were outstanding under the 2000 Plan, and 474,641 shares were available for future grant.

 

Eligibility.    Options and restricted shares, referred to collectively as awards, may be granted under the 2000 Plan to employees, consultants, independent contractors and advisors of Marimba. Officers and directors of Marimba are not eligible to participate in the 2000 Plan.

 

Terms of Awards.    Marimba’s compensation committee determines many of the terms and conditions of each award granted under the 2000 Plan, including the number of shares for which the award will be granted, and, if applicable, the exercise price of the award and the periods during which the award may be exercised. Each award is evidenced by an agreement in such form as the committee approves and is subject to the following conditions, as described in further detail in the plan:

 

Vesting and Exercisability:    Awards become vested and exercisable, as applicable, within such periods, or upon such events, as determined by the compensation committee in its discretion and as set forth in the related stock option or restricted stock agreement. To date, as a matter of practice, awards under the plan have generally been subject to a four-year vesting period (which means, in the case of restricted shares, that the right of repurchase by the company that applies to such shares lapses over such time period). Options terminate ten years or less from the date of grant.

 

Exercise Price:    The exercise price of each option granted may not be less than 85% of the fair market value of the shares of Marimba common stock on the date of the grant.

 

Tax Status:    All options granted under the plan are non-qualified stock options.

 

Method of Exercise:    The option exercise price is typically payable in cash or by check, but may also be payable, at the discretion of the committee, in a number of other forms of consideration, including cancellation of indebtedness, fully paid shares of Marimba common stock, delivery of a promissory note, through a “same day sale,” through a “margin commitment,” or any combination of the foregoing.

 

Termination of Employment:    Awards cease vesting on the date of termination of service or death of the participant. Options granted under the plan generally expire three months after the termination of the

 

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optionee’s service to Marimba, except in the case of death or disability, in which case the options generally may be exercised up to 12 months following the date of death or termination of service. However, if the optionee is terminated for cause (i.e. for committing an alleged criminal act or intentional tort against Marimba), that optionee’s options expire upon termination. Restricted shares which have not yet vested are subject to a right of repurchase by the company, generally within 60 days after termination of employment, at the original purchase price of the shares by the participant.

 

Change of Control:    In the event of a change of control of Marimba (as defined in the plan), then the buyer may either assume the outstanding awards or substitute equivalent awards. In the event the buyer fails to assume or substitute awards issued under the plan, all awards will become fully vested and exercisable.

 

Term and Amendment of the Plan.    The term of the plan commenced on the date the plan was adopted in March 2000, and will end upon termination by the Board of Directors. The plan may be amended or terminated without stockholder approval.

 

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. An additional 37,500, 85,000 and 82,500 shares of common stock were added to the reserve on January 1,2001, 2002 and 2003, respectively. Under the Directors Plan, as amended in September 2001:

 

    each non-employee director who becomes a member of the Board of Directors is automatically granted an option to purchase 30,000 shares upon becoming a director. The option vests 50% upon each of the two anniversaries following the date of grant, provided that the director has served continuously on the Board;

 

    beginning two years after receipt of the initial grant described above, each incumbent non-employee director will be automatically granted an option to purchase 10,000 shares at the date of each annual stockholders meeting if the director is serving on the Board of Directors at the time of such meeting. The option vests in full one year from the date of grant, provided that the director has served continuously on the Board during such period; and

 

    each incumbent non-employee director who is a member of a committee of the Board will automatically be granted an option to purchase 2,500 shares for each committee on which the director is serving. The option vests in full one year from the date of grant, provided that the director has served continuously on the applicable committee during such period.

 

The exercise price for each option grant is equal to the fair market value per share of common stock on the option grant date. In the event of a change of control of Marimba, the vesting of each option that is not assumed by the acquirer will accelerate as to 100% of the unvested shares. If the acquirer does assume an option but the holder does not become a director of the acquirer, then the vesting of the option will accelerate as to 50% of the unvested shares.

 

Stock Option Exchange

 

During the period from April 27 to July 23, 2001, Marimba offered a voluntary stock option exchange program to its employees, and a total of 1,369,500 shares of the Marimba’s common stock were accepted for

 

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exchange under the program. Members of our Board of Directors and our executive officers, however, were not eligible to participate in the program. Under the program, Marimba employees were given the opportunity, if they so chose, to cancel outstanding stock options previously granted to them at an exercise price of at least $7.50 per share, in exchange for new options to be granted no earlier than six months and one day after July 23, 2001; provided, however, that options granted on or after January 23, 2001 (even if they had an exercise price under $7.50 per share) had also to be exchanged if the option holder chose to exchange one or more options granted prior to January 23, 2001 at an exercise price of at least $7.50 per share. The number of shares subject to the new options were determined by applying an exchange ratio in the range of 1:1 to 1:2 (i.e., one new option share for every two canceled option shares) based on the exercise price of the canceled option. On January 25, 2002, new options to purchase a total 829,452 shares of Marimba’s common stock were granted under the 2000 Plan in exchanged for the canceled options accepted for exchange under the program. The exercise price of these 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. 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 to result in any additional compensation charges or variable plan accounting.

 

A summary of Marimba’s stock option activity for all of its option plans and other option grants is as follows:

 

           

Options Outstanding


    

Shares

Available

for Grant


    

Number

of

Shares


    

Weighted-

Average

Exercise

Price


Balance at January 1, 2000

  

814,684

 

  

3,462,795

 

  

$

13.84

Authorized

  

5,440,810

 

             

Granted

  

(5,979,392

)

  

5,979,392

 

  

 

17.41

Exercised

  

—  

 

  

(458,964

)

  

 

2.40

Repurchased

  

108,546

 

  

—  

 

  

 

—  

Canceled

  

2,383,870

 

  

(2,383,870

)

  

 

19.00