<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1999.
REGISTRATION NO. 333-72353
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MARIMBA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0422318
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
440 CLYDE AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 930-5282
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
KIM K. POLESE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MARIMBA, INC.
440 CLYDE AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 930-5282
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
SCOTT C. DETTMER, ESQ. GORDON K. DAVIDSON, ESQ.
BENNETT L. YEE, ESQ. DAVID K. MICHAELS, ESQ.
BRANDI L. GALVIN, ESQ. CYNTHIA E. GARABEDIAN, ESQ.
AMY S. COHEN, ESQ. FENWICK & WEST LLP
GUNDERSON DETTMER STOUGH TWO PALO ALTO SQUARE
VILLENEUVE FRANKLIN & HACHIGIAN, LLP PALO ALTO, CALIFORNIA 94306
155 CONSTITUTION DRIVE (650) 494-0600
MENLO PARK, CALIFORNIA 94025
(650) 321-2400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
- ------------------------------------------------------------------------------------------------------------------
Common Stock, $0.0001 par value......................... $69,000,000 $19,182
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
(2) A fee of $15,666 was previously paid by the Registrant pursuant to Rule
457(o) promulgated under the Securities Act in connection with the filing of
the registration statement on February 12, 1999. Pursuant to Rule 457(b)
under the Securities Act, such fee is being credited against the
registration fee, and accordingly, an additional $4,795 is being paid in
connection with the registration statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued April 7, 1999
4,000,000 Shares
LOGO
COMMON STOCK
MARIMBA, INC. IS OFFERING 3,548,000 SHARES OF ITS COMMON STOCK AND THE SELLING
STOCKHOLDERS
LISTED ON PAGES 63 - 64 ARE OFFERING 452,000 SHARES. THIS IS OUR INITIAL PUBLIC
OFFERING
AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE
INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $13 AND $15 PER SHARE.
-------------------------
WE HAVE FILED AN APPLICATION FOR THE COMMON STOCK TO BE QUOTED ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "MRBA."
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-------------------------
PRICE $ A SHARE
-------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS MARIMBA, INC. STOCKHOLDERS
-------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Per Share................. $ $ $ $
Total..................... $ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Marimba and the selling stockholders have granted the underwriters the
right to purchase up to an additional 600,000 shares of common stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of common stock to purchasers on , 1999.
-------------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
BT ALEX. BROWN
HAMBRECHT & QUIST
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 5
Special Note Regarding
Forward-Looking Statements........ 17
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Consolidated Financial
Data.............................. 21
Management's Discussion And Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.......................... 50
Certain Transactions................ 61
Principal And Selling
Stockholders...................... 63
Description Of Capital Stock........ 65
Shares Eligible For Future Sale..... 68
Underwriters........................ 70
Legal Matters....................... 72
Experts............................. 72
Additional Information.............. 73
Index To Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------
We were incorporated in Delaware in February 1996. Our principal executive
offices are located at 440 Clyde Avenue, Mountain View, California 94043, and
our telephone number is (650) 930-5282.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
Unless otherwise indicated, all information in this prospectus (1) gives
effect to the conversion of all outstanding shares of preferred stock into
shares of common stock effective upon the closing of the offering, (2) assumes
no exercise of the underwriters' over-allotment option and (3) assumes no
exercise of an outstanding warrant to purchase 16,865 shares of our common
stock.
Until , 1999, all dealers that buy, sell or trade our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
------------------------
Marimba(R) and Castanet(TM) are our trademarks. This prospectus also
contains trademarks of other companies.
2
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Marimba and the common stock being sold in this offering
and our financial statements and notes thereto appearing elsewhere in this
prospectus.
MARIMBA, INC.
Marimba is a leading provider of Internet-based software management
solutions that enable companies to expand their market reach, streamline
business processes and strengthen relationships with customers, business
partners and employees. Our Castanet product family provides an efficient and
reliable way for enterprises to distribute, update and manage applications and
related data over corporate intranets, extranets and the Internet.
Companies are increasingly relying on the Internet to deliver business
critical applications and services to users inside and outside the enterprise.
As the Internet has evolved as a business tool, demands on its infrastructure
have grown and the enterprise computing environment is becoming more complex.
Furthermore, as business applications are increasingly being advertised and
delivered as services, companies and their customers are demanding the same high
levels of availability, ease of use and quality of service that they expect from
common utilities, such as electricity and telephone systems. This has created
significant software management challenges. As a result, a need has arisen for a
new management solution designed specifically for the Internet.
Marimba develops Internet services management solutions that enable
companies to deploy and manage e-business applications and services, which
encompass business-to-business, business-to-employee and business-to-consumer
communications and transactions over corporate intranets, extranets and the
Internet. Castanet centralizes and automates the ongoing distribution and
management of applications and services. We believe that by using Castanet,
organizations can leverage the Internet to reduce software management costs,
deliver greater functionality and improve customer loyalty. We intend to extend
the Castanet foundation to manage the array of infrastructure, systems and
components upon which business applications and services depend. The key
elements of our strategy are to extend our technological leadership position,
target companies and service providers conducting e-business, expand our
worldwide distribution channels and expand our professional service
capabilities.
Our global customer base spans multiple industry segments including
financial services, insurance, retail, manufacturing and telecommunications.
Castanet customers include such industry leaders as Bear Stearns, Charles
Schwab, EarthLink, The Home Depot, Intuit, Ingram Micro, Seagate Technology and
Sun Microsystems. We market our Castanet product worldwide through a combination
of a direct sales force, resellers and distributors.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us...................... 3,548,000 shares
Common stock offered by the selling
stockholders.................................. 452,000 shares
Common stock to be outstanding after the
offering...................................... 22,745,775 shares(1)
Over-allotment option........................... 600,000 shares
Use of proceeds................................. Working capital and general corporate purposes.
See "Use of Proceeds."
Dividend policy................................. We do not anticipate paying cash dividends in
the foreseeable future.
Proposed Nasdaq National Market symbol.......... MRBA
</TABLE>
- -------------------------
(1) Based on the number of shares outstanding as of March 31, 1999. Excludes
1,959,930 shares of common stock issuable upon exercise of outstanding
options and warrants as of March 31, 1999 at a weighted average exercise
price of $4.099.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
FEBRUARY 21, 1996 DECEMBER 31,
(INCEPTION) TO ------------------
DECEMBER 31, 1996 1997 1998
----------------- ------- -------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ -- $ 5,563 $17,085
Loss from operations........................................ (1,310) (7,902) (6,128)
Net loss.................................................... (1,245) (7,718) (5,681)
Basic and diluted net loss per share........................ $ (.81) $ (1.57) $ (.59)
Weighted-average shares of common stock outstanding used in
computing basic and diluted net loss per share............ 1,528 4,912 9,606
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (.37)
Shares used in computing pro forma basic and diluted net
loss per common share (unaudited)......................... 15,359
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 7,825 $ 52,109
Working capital............................................. 2,912 47,355
Total assets................................................ 14,862 59,146
Long-term portion of capital lease obligations and equipment
advances, and other long-term liabilities................. 747 95
Redeemable convertible preferred stock...................... 18,953 --
Stockholders' equity (net capital deficiency)............... (13,743) 50,305
</TABLE>
- -------------------------
(1) Adjusted to reflect our sale of 3,548,000 shares of common stock in this
offering, at an assumed initial public offering price of $14.00 per share
and after deducting estimated underwriting discounts and commissions and
offering expenses payable by us and the application of our net proceeds from
this offering.
4
<PAGE> 6
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAY PREVENT US FROM ACHIEVING SUCCESS IN OUR
BUSINESS
We were founded in February 1996 and have a limited operating history. We
began offering our Castanet product in January 1997 and released Castanet 4.0 in
March 1999. As a result, we have a limited operating history. The revenues and
income potential of our business and market are unproven. We will encounter
challenges and difficulties frequently encountered by early-stage companies in
new and rapidly evolving markets. We may not successfully address any of these
challenges. These challenges include our:
- Dependence on our Castanet product family;
- Dependence on the growth of our new and evolving markets;
- Need to expand our customer base;
- Need to develop new products;
- Need to compete effectively;
- Need to manage expanding operations;
- Need to expand our sales and professional services organizations;
- Need to establish and maintain reseller, systems integrator and original
equipment manufacturer relationships; and
- Dependence on key personnel.
We may not be successful in meeting any of these challenges, and the
failure to do so would seriously harm our business and operating results. In
addition, because of our limited operating history, we have limited insight into
trends that may emerge and affect our business.
WE HAVE INCURRED LOSSES AND WE EXPECT FUTURE LOSSES
We have experienced operating losses in each quarterly and annual period
since inception. We incurred net losses of $1.2 million for the period ended
December 31, 1996, $7.7 million for the year ended December 31, 1997 and $5.7
million for the year ended December 31, 1998. As of December 31, 1998, we had an
accumulated deficit of $14.6 million, and we expect to incur significant losses
in the future. We expect to continue to incur significant research and
development, sales and marketing and general and administrative expenses and we
expect these expenses to increase in dollar amount in 1999. As a result, we will
need to generate significant increases in our quarterly revenues to achieve and
maintain profitability. Although our revenues have grown in recent quarters, we
may not be able to sustain these growth rates. In fact, we may not have any
revenue growth, and our revenues could decline. Our failure to significantly
increase our revenues would seriously harm our business and operating results.
See "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
5
<PAGE> 7
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND FUTURE OPERATING RESULTS
REMAIN UNCERTAIN
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. We believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of future performance. Our operating results will
likely be below the expectations of securities analysts and investors in some
future quarter or quarters. Our failure to meet such expectations would likely
seriously harm the market price of our common stock.
Operating results vary depending on a number of factors, many of which are
outside of our control. These factors include:
- The number and timing of large orders, a small number of which can
significantly affect our revenues;
- The level of market acceptance for our products, particularly our
newly-introduced Castanet 4.0;
- The effectiveness of our reseller, systems integrator and original
equipment manufacturing partners, particularly Tivoli Systems, Inc., in
selling our Castanet products;
- Changes in pricing by us or our competitors;
- Changes in our customers' budgets;
- Potential seasonality in our sales;
- The cost of our litigation with Novadigm, Inc.; and
- General economic factors.
In addition, we anticipate that the size of customer orders may increase as
we focus on larger business accounts. As a result, a delay in the recognition of
revenue, even from just one account, could have a significant negative impact on
our operating results. In the past, a significant portion of our sales have been
realized near the end of a quarter. As a result, a delay in an anticipated sale
past the end of a particular quarter could negatively impact our operating
results.
We generally expect that revenues in the first quarter of each year will be
lower than revenues in the fourth quarter of the preceding year. We believe this
trend will be primarily due to the annual nature of budgetary, purchasing and
sales cycles.
Our expense levels are relatively fixed and are based, in part, on
expectations as to future revenues. As a result, if revenue levels fall below
our expectations, our net income (loss) will decrease (increase) because only a
small portion of our expenses vary with our revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE EXPECT SIGNIFICANT INCREASES IN OUR OPERATING EXPENSES
We intend to substantially increase our operating expenses as we:
- Increase our sales and marketing activities, including expanding our
direct sales force;
- Increase our research and development activities;
- Increase our general and administrative expenses;
- Expand our customer support and professional services organizations; and
- Expand our distribution channels.
With these additional expenses, we must significantly increase our revenues
in order to become profitable. We anticipate that these expenses will
significantly precede any revenues generated by such increased spending. If we
do not significantly increase revenues from these efforts, our business and
operating results would be seriously harmed. Although our revenues have grown
from 1997 to 1998, we may not maintain this rate of revenue growth. In fact, we
may not have any revenue growth, and our revenues could decline. Our efforts to
enhance our products and expand our sales and marketing
6
<PAGE> 8
activities, direct and indirect distribution channels and professional services
may be more expensive than we currently anticipate. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
OUR SUCCESS DEPENDS ON OUR CASTANET PRODUCT FAMILY AND NEW PRODUCT
DEVELOPMENT
We expect to continue to derive substantially all of our revenues from our
Castanet software product family and related services. A decline in the price of
Castanet or our inability to increase sales of Castanet would seriously harm our
business and operating results. We cannot predict Castanet's life cycle for
several reasons, including:
- The recent emergence of the market for Internet services management
solutions;
- The level of acceptance of our new products and product enhancements;
- The risk of technological changes; and
- Future competition.
Our strategy requires Castanet to be highly scalable -- in other words,
able to rapidly increase deployment size from a limited number of end-users to a
very large number of end-users. If we are unable to achieve this level of
scalability, the attractiveness of our products and services would be
diminished.
In addition, to provide a comprehensive Internet services management
solution, we will need to develop and introduce new technologies and product
suites and offer functionality that we do not currently provide. We may not be
able to expand our product offerings or develop a comprehensive Internet
services management solution. In March 1999 we introduced Castanet 4.0, which is
designed to provide customers with additional functionality. Castanet 4.0 may
not provide the benefits we expect, and Castanet 4.0 could fail to meet
customers' requirements or achieve widespread market acceptance. In the past, we
have experienced delays in new product releases, and we may experience similar
delays in the future. If we fail to deploy new product releases on a timely
basis, our business and operating results could be seriously harmed.
WE DEPEND ON THE GROWTH OF OUR CUSTOMER BASE
Our success is substantially dependent on the continued growth of our
customer base and the retention of our current customers. 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 such products
and services. In the past, we have lost potential customers to competitors for
various reasons, including lower prices.
WE DEPEND ON INCREASED BUSINESS FROM OUR CURRENT CUSTOMERS
We depend on increased business from our current customers. If we fail to
generate repeat and expanded business from our customers, our business and
operating results would be seriously harmed. Most of our current customers
initially purchase a license for a small portion of our products and services
for pilot programs. Even if these pilot programs are successful, customers may
not purchase additional licenses to expand their use of Castanet. Purchases of
expanded licenses will depend on our customers' success in deploying Castanet,
their satisfaction with the product and our support services and their
perception of competitive alternatives. In addition, as we deploy new versions
of Castanet or introduce new product suites, our current customers may not
require the functionality of our new products and may not ultimately license
such products.
The terms of our standard license arrangements provide for a one-time
license fee and a prepayment of one year of software maintenance and support
fees. The maintenance agreement is renewable at the option of the customer.
Because the total amount of maintenance and support fees we receive in any
7
<PAGE> 9
period depends in large part on the size and number of licenses that we have
previously sold, any downturn in our software license revenues would negatively
impact our future service revenues. In addition, if customers elect not to renew
their maintenance agreements, our service revenues would be adversely affected.
WE HAVE A LONG SALES CYCLE THAT DEPENDS UPON FACTORS OUTSIDE OUR CONTROL
A customer's decision to purchase Castanet typically involves a significant
commitment of resources and is influenced by the customer's budget cycles. In
addition, selling Castanet requires us to educate potential customers on its use
and benefits. As a result, our products have a long sales cycle which can take
over six months, and we face difficulty predicting the quarter in which sales to
expected customers may occur. The sale of our products is also subject to delays
from the lengthy budgeting, approval and competitive evaluation processes that
typically accompany significant capital expenditures. For example, customers
frequently begin by evaluating our products on a limited basis and devote time
and resources to testing our products before they decide whether or not to
purchase a license for deployment. Customers may also defer orders as a result
of anticipated releases of new products or enhancements by us or our
competitors.
WE DEPEND ON OUR RELATIONSHIP WITH TIVOLI
Tivoli, a subsidiary of International Business Machines Corporation, has
been a reseller of our products since 1997. Tivoli accounted for $3.1 million,
or approximately 18% of our revenues in 1998. This includes $1.9 million, or
approximately 40% of our revenues, in the third quarter of 1998 and $1.1
million, or approximately 19% of our revenues, in the fourth quarter of 1998.
Because a significant amount of our revenues has been and is expected to be
derived from Tivoli, we are dependent on our relationship with Tivoli. Any
disruption of our relationship with Tivoli would seriously harm our business and
operating results.
In March 1998, we entered into an original equipment manufacturer agreement
with Tivoli under which Tivoli is building upon the Castanet infrastructure to
develop a product called Cross-Site. We expect Tivoli to release Cross-Site in
1999. As a result, we expect to generate revenues from royalties on sales of
Cross-Site beginning in 1999 and expect that revenues from Tivoli's resale of
Castanet will rapidly decrease and become insignificant as Tivoli transitions
its efforts to the sale of Cross-Site. The per seat payment under our original
equipment manufacturer agreement will be less than the per seat payment under
our reseller agreement with Tivoli. In addition, the change in our relationship
with Tivoli from a reseller relationship to an original equipment manufacturer
relationship will require significantly increased ongoing technological
assistance to, and collaboration with Tivoli to support the integration of
Castanet into Cross-Site. This collaboration may be unsuccessful.
Tivoli might be unable to introduce Cross-Site by its expected release
date. Furthermore, because Cross-Site is a new product, Tivoli might fail to
successfully market and sell Cross-Site. Any failure of Cross-Site to achieve
widespread market acceptance could significantly harm our business and operating
results. Our reseller agreement with Tivoli expires upon the earlier of May 1,
1999 or written notice provided to us by Tivoli. If the release of Cross-Site is
delayed beyond May 1, 1999, Tivoli would no longer resell our Castanet products
unless we and Tivoli extended the term of the reseller agreement. Furthermore,
it is possible for Tivoli to terminate the reseller agreement prior to the
release of Cross-Site. Because Cross-Site is built upon the Castanet
infrastructure, we expect Cross-Site to compete with our Castanet products. For
a more detailed description of our relationship with Tivoli, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business -- Sales, Marketing and Distribution."
NOVADIGM HAS CLAIMED THAT WE INFRINGE ITS INTELLECTUAL PROPERTY
On March 3, 1997, Novadigm filed a complaint against us in the United
States District Court for the Northern District of California, alleging
infringement by us of a patent held by Novadigm
8
<PAGE> 10
(U.S. Patent No. 5,581,764, the "Novadigm Patent"). Novadigm alleges that our
infringement relates to certain methods for updating data and software over a
computer network that we use in our Castanet products. The complaint also
alleges that we have willfully infringed the Novadigm Patent and seeks up to
triple damages pursuant to the United States Patent Act. On May 2, 1997, we
filed our answer to Novadigm's complaint and filed a counterclaim against
Novadigm.
On October 3, 1997, we received an opinion from our outside patent opinion
counsel, Blakely, Sokoloff, Taylor & Zafman, LLP, that Castanet 1.0 did not
infringe the Novadigm Patent. Since then, we have released three new major
versions of Castanet. However, we do not believe that any changes to Castanet
made in the newer versions cause Castanet to infringe any claim of the Novadigm
Patent.
We believe that we have strong defenses against Novadigm's lawsuit.
Accordingly, we intend to defend this suit vigorously. However, we may not
prevail in this litigation.
Litigation is subject to inherent uncertainties. In addition, cases such as
this are likely to involve issues of law that are evolving, presenting further
uncertainty. Our defense of this litigation, regardless of the merits of the
complaint, has been, and will likely continue to be, time-consuming, costly and
a diversion for our technical and management personnel. In addition, publicity
related to this litigation has in the past, and will likely in the future, have
a negative impact on the sale of our Castanet products.
A failure to prevail in the litigation could result in:
- Our paying monetary damages, which could be tripled if the infringement
is found to have been willful;
- The issuance of a preliminary or permanent injunction requiring us to
stop selling Castanet in its current form;
- Our having to redesign Castanet, which could be costly and time-consuming
and could substantially delay Castanet shipments, assuming that such a
redesign is feasible;
- Our having to reimburse Novadigm for some or all of its attorneys' fees;
- Our having to obtain from Novadigm a license to its patent, which license
might not be made available to us on reasonable terms, particularly
because Novadigm is a competitor; or
- Our having to indemnify our customers against any losses they may incur
due to the alleged infringement.
Any of these results would seriously harm our business, and results of
operations and financial condition. Furthermore, we expect to continue to incur
substantial costs in defending against this litigation and these costs could
increase significantly if our dispute goes to trial. It is possible that these
costs could substantially exceed our expectations in future periods. For a more
detailed description of this litigation please see "Business -- Legal
Proceedings."
OUR MARKETS ARE HIGHLY COMPETITIVE
Our markets are new, rapidly evolving and highly competitive, and we expect
such competition to persist and intensify in the future. Our failure to maintain
and enhance our competitive position within our markets could seriously harm our
business and operating results. We encounter current or potential competition
from a number of sources, including:
- Sellers of enterprise-wide management systems, which include electronic
software distribution, such as Tivoli, Computer Associates, Inc. and BMC
Software, Inc.;
- Companies such as BackWeb Technologies, Inc., Novadigm, and Sterling
Commerce, Inc., through its subsidiary XcelleNet, Inc., which market
products that support the distribution of software applications; and
- Desktop software management suites, such as Microsoft's SMS and Intel's
LanDesk.
9
<PAGE> 11
In addition, we compete with various methods of application distribution
and management, including the web browser, and with application server vendors
and others that have introduced software distribution capabilities into their
products.
As new participants enter the Internet services management market, we will
face increased competition. In addition, potential competitors may bundle their
products or incorporate an Internet services management component into existing
products in a manner that discourages users from purchasing our products. For
example, we expect that future releases of Microsoft's Windows operating
systems, which manage the programs on a computer, will include components
addressing Internet services management functions. Furthermore, new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share. Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have more extensive customer bases and broader customer
relationships that they could leverage, including relationships with many of our
current and potential customers. These companies also have significantly more
established customer support and professional services organizations than we do.
In addition, these companies may adopt aggressive pricing policies. As a result,
we may not be able to maintain a competitive position against current or future
competitors.
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 for our
technology. 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. 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. Any
litigation could result in substantial costs and diversion of resources and
could seriously 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 to as great an extent as do the laws of the United States.
Our means of protecting our proprietary rights may not be adequate, and our
competitors could independently develop similar technology.
WE MAY BE FOUND TO INFRINGE PROPRIETARY RIGHTS OF OTHERS
Our success and ability to compete are dependent on our ability to operate
without infringing upon the proprietary rights of others. Other companies,
including our competitors may obtain patents or other proprietary rights that
would prevent, or limit or interfere with our ability to make, use or sell our
products. As a result, we may be found to infringe on the proprietary rights of
others. Furthermore, companies in the software market are increasingly bringing
suits alleging infringement of their proprietary rights, particularly patent
rights. Any parties asserting rights against us would force us to defend
ourselves or our customers against alleged infringement of intellectual property
rights. We could incur substantial costs to defend any such litigation, and
intellectual property litigation could force us to do one or more of the
following:
- Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- Obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology; and
- Redesign those products or services that incorporate such technology.
10
<PAGE> 12
In the event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our business and
operating results would be significantly harmed. Currently, we are engaged in
litigation with Novadigm concerning the alleged infringement by us of a patent
held by Novadigm. For a more detailed description of this litigation, see
"Business -- Legal Proceedings."
WE DEPEND UPON THIRD-PARTY DISTRIBUTION RELATIONSHIPS AND NEED TO DEVELOP
NEW RELATIONSHIPS
Our sales strategy requires that we establish multiple indirect marketing
channels in the United States and internationally through resellers and systems
integrators, and that we increase the number of customers licensing our products
through these channels. As a result, we depend upon third-party distribution
relationships, such as our relationship with Tivoli, and need to develop new
relationships. We have a limited number of agreements with companies in these
channels, and we may not be able to increase our number of distribution
relationships or maintain our existing relationships. For example, Netscape, a
reseller of our products, accounted for $1.0 million, or approximately 18% of
our revenues in 1997, and $3.8 million, or approximately 22% of our revenues in
1998. Netscape is no longer an active reseller of our products, and we do not
expect material revenues from Netscape in the future.
Our current agreements with our channel partners do not prevent these
companies from selling products of other companies, including products that may
compete with our products, and do not generally obligate these companies to
purchase minimum quantities of our products. These distributors could give
higher priority to the products of other companies or to their own products,
than they give to our products. In addition, sales through these channels
generally have a lower price than direct sales. Accordingly, while the loss of,
or significant reduction in sales volume to any of our current or future channel
partners could seriously harm our revenues and operating results, a significant
increase in sales through these channels could also negatively impact our gross
margins. For additional information regarding our third-party distribution
relationships see "Business -- Sales, Marketing and Distribution."
WE NEED TO DEVELOP AND EXPAND OUR SALES, MARKETING AND DISTRIBUTION
CAPABILITIES
We need to expand our marketing and direct sales operations in order to
increase market awareness of our products, market Castanet to a greater number
of enterprises and generate increased revenues. We must be successful in this
endeavor if we are to expand our customer base. In the future, we anticipate
that our revenues from direct sales efforts will increase as a percentage of
revenues as compared to revenues derived from our third-party resellers and
distributors. Therefore, we are expanding our direct sales force and plan to
hire additional sales personnel. However, competition for qualified sales
personnel is intense. Our products and services require a sophisticated sales
effort targeted at senior management of our prospective customers. New hires
will require extensive training and typically take at least six months or more
to achieve full productivity. Our recent hires may not be as productive as
necessary, and we may not be able to hire enough qualified individuals in the
future. In addition, we have limited experience marketing our products broadly
to a large number of potential customers. For additional information regarding
our direct sales operations see "Business -- Sales, Marketing and Distribution."
WE NEED TO EXPAND OUR PROFESSIONAL SERVICES
Customers that license our products typically engage our professional
services organization to assist with support, training and consulting. We may
not be able to attract, train or retain the number of highly qualified services
personnel that our business needs. We believe that growth in our product sales
depends on our ability to provide our customers with these services and to
educate third-party resellers and consultants on how to provide similar
services. As a result, we plan to increase the number of our services personnel
to meet these needs. However, competition for qualified services personnel is
intense. We operate in new markets, and there is a limited number of people who
have acquired the skills needed to provide the services that our customers
demand. For additional information regarding our professional services see
"Business -- Customer Support and Training."
11
<PAGE> 13
We expect our service revenues to increase in dollar amount as we continue
to provide support, consulting and training services that complement our
products and as our installed base of customers grows. This could negatively
impact our gross margin because margins on revenues derived from services are
generally lower than margins on revenues derived from the license of Castanet.
EXPANDING INTERNATIONALLY IS EXPENSIVE, WE MAY RECEIVE NO BENEFIT FROM OUR
EXPANSION AND OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO GOVERNMENTAL
REGULATION
We received approximately 22% of our total revenues in 1997 and
approximately 7% of our total revenues in 1998 from sales to customers located
outside of North America. We plan to increase our international sales force and
expand our operations abroad. However, we may not be successful in increasing
our sales to new or current international customers. In addition, our
international business activities are subject to a variety of risks, including
the adoption of laws, actions by third parties and political and economic
conditions that could restrict or eliminate our ability to do business in
foreign jurisdictions. Although we currently transact business in U.S. dollars,
if we transact business in foreign currencies in the future, we will become
subject to the risks associated with transacting in foreign currencies,
including potential negative effects of exchange rate fluctuations. To date, we
have not adopted a hedging program to protect us from risks associated with
foreign currency fluctuations. For additional information on our foreign
currency risks, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Qualitative and Quantitative Disclosure about
Market Risk."
Governmental regulation and requirements influence our sales
internationally. For example, export, and in certain cases, import clearances
must be obtained before Castanet can be distributed internationally. Current or
new government laws and regulations, or the application of existing laws and
regulations, including those related to property ownership, content and
taxation, could expose us to significant liabilities, significantly slow our
growth or otherwise seriously harm our business and operating results.
WE MUST MANAGE OUR GROWTH AND EXPANSION
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Any failure to manage
growth effectively could seriously harm our business and results of operations.
We have grown from 20 employees at December 31, 1996 to 145 employees at
December 31, 1998. We have also opened seven sales offices and have
significantly expanded our operations. To be successful, we will need to
implement additional management information systems, improve our operating,
administrative, financial and accounting systems and controls, train new
employees and maintain close coordination among our executive, engineering,
accounting, finance, marketing, sales and operations organizations. In addition,
our growth has resulted, and any future growth will result, in increased
responsibilities for management personnel.
WE MUST RETAIN AND ATTRACT KEY PERSONNEL
Our success depends largely on the skills, experience and performance of
the members of our senior management and other key personnel, including our
President and Chief Executive Officer, Kim Polese, and our Chief Technical
Officer, Arthur van Hoff. None of our senior management or other key personnel
is bound by an employment agreement. If we lose one or more of these key
employees, our business and operating results could be seriously harmed. In
addition, our future success will depend largely on our ability to continue
attracting and retaining highly skilled personnel. Like other companies in the
San Francisco Bay Area, we face intense competition for qualified personnel. We
may not be successful in attracting, assimilating or retaining qualified
personnel in the future. See "Management."
WE RELY ON THIRD-PARTY SOFTWARE AND APPLICATIONS
We integrate third-party security and encryption software and digital
certificates as a component of our software. There are inherent limitations in
the use and capabilities of much of the technology that we
12
<PAGE> 14
license from third parties. Furthermore, this technology is relatively new and
is highly complex. As a result, we face a number of challenges in integrating
these technologies into Castanet. 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,
third-party product introductions and technological changes. We use third-party
digital certificates to verify the identity of the sender of data over the
Internet. As digital certificate technology evolves we will be required to make
changes to our software so that it can continue to work with the digital
certificates. In addition, the third-party software may not continue to be
available to us on commercially reasonable terms. The loss of, or inability to
maintain or obtain such software, could result in shipment delays or reductions
until we develop, identify, license and integrate equivalent software.
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. See "Business -- Proprietary Rights and
Licensing."
Almost all of our products are written in Java and require a Java virtual
machine in order to operate. Although we currently ship almost all of our
products with implementations of Java virtual machines made available free of
charge by Sun Microsystems, Inc., Sun may not continue to make these
implementations available at commercially reasonable terms or at all.
Furthermore, if Sun were to make significant changes to the Java language or its
Java virtual machine implementations, or fail to correct defects and limitations
in such products, our ability to continue to improve and ship our products could
be impaired. In the future, our customers may also require the ability to deploy
our products on platforms for which technically acceptable Java implementations
either do not exist or are not available on commercially reasonable terms. Our
customers may also use particular implementations of the Java virtual machine
that may not be technically or commercially acceptable for integration into our
products.
SOFTWARE DEFECTS IN CASTANET WOULD HARM OUR BUSINESS
Complex software products such as ours often contain errors or defects,
including errors relating to security, particularly when first introduced or
when new versions or enhancements are released. In the past, we have discovered
defects in our products and provided product updates to our customers to address
such defects. Despite internal testing and testing by current and potential
customers, Castanet and other future products may contain serious defects,
including security breaches and Year 2000 errors. Such defects or errors in
current or future products, including Castanet 4.0, which was recently released,
could result in lost revenues or a delay in market acceptance, which would
seriously harm our business and results of operations.
Castanet extensively utilizes digital certificates and other complex
technology. Our use of this technology has in the past and may in the future
result in product behavior problems which may not be anticipated by us or our
customers. For example, most versions of Castanet shipped prior to Castanet 4.0
contain digital certificates that cause Castanet and any applications being
delivered with Castanet to stop running when the certificate used expires. We
have developed an update which avoids this problem and are in the process of
notifying customers of the issue and distributing the update. It is possible
that we may not be able to identify all affected customers and provide them with
the update. Customers that do not install the update will experience this
problem with respect to Castanet itself on June 24, 1999, and, with respect to
any applications they have deployed with Castanet and signed with a certificate,
on the date of expiration of the certificate they elected to use.
Since many of our customers use our products for mission-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. Although our license agreements typically contain provisions designed to
limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate our limitation of liability
provisions. For example, we could be subject to claims for losses by customers
that we are unable to identify and notify and, as a result, do not install our
update that avoids the digital
13
<PAGE> 15
certificate problem. We have not experienced any product liability claims to
date. However, a product liability claim brought against us, even if not
successful, would likely be time consuming and costly to defend and could
adversely affect our marketing efforts.
YEAR 2000 ISSUES COULD AFFECT OUR BUSINESS
We are in the process of assessing any Year 2000 issues with the computer
communications, software and security systems that we use to deliver and manage
our products and to manage our internal operations. If our systems do not
operate properly with respect to date calculations involving the Year 2000 and
subsequent dates, we could incur unanticipated expenses to remedy any problems,
which could seriously harm our business.
Customers' purchasing plans could be affected by Year 2000 issues if they
need to expend significant resources to correct their existing systems. This
situation may result in reduced funds available to implement new systems based
upon our products. As a result, some customers may defer the license of our
products until after the Year 2000. A decrease in demand for our products due to
customers' Year 2000 issues would seriously harm our business and operating
results.
We have identified one Year 2000 date-related limitation in earlier
versions of Castanet. Versions of Castanet prior to 3.2 display date-related
data to the user in a manner that uses only two digits to represent a year. A
two-digit display of the Year 2000 could cause a user to believe the year
represented was 1900 instead of 2000. This limitation does not affect either
computation of data in our products or operation of the products. All versions
of Castanet currently being shipped use four digits for the display of date
data. Despite our testing and remediating, our products, including Castanet 4.0,
may contain errors or faults with respect to the Year 2000. Our efforts to
address Year 2000 issues are described in more detail in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
OUR FUTURE CAPITAL NEEDS ARE UNCERTAIN
We expect the net proceeds from this offering and borrowings under our
credit facility to be sufficient to meet our working capital and capital
expenditure needs for at least twelve months. After that, we may need to raise
additional funds, and additional financing may not be available on favorable
terms, if at all. This could seriously harm our business and operating results.
Further, if we issue additional equity securities, stockholders may experience
dilution, and the new equity securities could have rights, preferences or
privileges 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. See "Use of Proceeds,"
"Dilution" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
WE ARE CONTROLLED BY EXISTING STOCKHOLDERS
On completion of this offering, executive officers and directors and their
affiliates will beneficially own, in the aggregate, approximately 40.8% of our
outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could have the effect of delaying or preventing a third
party from acquiring control over us. We plan to reserve up to 6.5% of the
shares offered in this offering under a directed share program for certain
directors, suppliers, customers and others who have a relationship with us under
which such persons would be able to purchase shares in this offering at the
initial public offering price. For information regarding the ownership of our
outstanding stock by our executive officers and directors and their affiliates,
see "Principal and Selling Stockholders."
14
<PAGE> 16
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For
information regarding these provisions, see "Description of Capital Stock."
RISKS RELATED TO OUR INDUSTRY
WE FACE CHALLENGES STEMMING FROM OUR EMERGING MARKETS
The market for Internet services management software has only recently
begun to develop, is rapidly evolving and will likely have an increasing number
of competitors. This market may not continue to develop and may not grow. If the
Internet services management market fails to develop, or develops more slowly
than expected, our business and operating results would be seriously harmed.
Furthermore, in order to be successful in this emerging market, we must be
able to differentiate ourself from competition through our product and service
offerings and brand name recognition. We may not be successful in
differentiating ourself or achieving widespread market acceptance of our
products and services. Expanding our product and service offerings and
stimulating brand name recognition will also require significant additional
expenses and development, operations and management resources. Our failure to
stimulate brand name recognition or to generate satisfactory revenues from these
expanded products or services to offset related increased costs could seriously
harm our business and operating results. We expect to continue expending
significant marketing and sales resources to educate prospective customers about
the uses and benefits of our products and services specifically, and the
benefits of e-business generally. Enterprises that have already invested
substantial resources in other methods of deploying and managing their
applications and services may be reluctant or slow to adopt a new approach that
may replace, limit or compete with their existing systems.
Any of these factors could inhibit the growth of our business generally and
the market's acceptance of our products and services in particular. Accordingly,
we cannot be certain that a viable market for our products will emerge or be
sustainable.
WE DEPEND ON CONTINUED USE OF THE INTERNET AND GROWTH OF ELECTRONIC
BUSINESS
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of business
and communication by our target customers. Rapid growth in the use of and
interest in the Internet has occurred only recently. As a result, acceptance and
use may not continue to develop at historical rates, and a sufficiently broad
base of consumers may not adopt, and continue to use, the Internet and other
online services as a medium of commerce. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty, and there exist few proven services and products.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Our success will depend, in
large part, upon third parties maintaining the Internet infrastructure to
provide a reliable network backbone with the necessary speed, data capacity,
security and hardware necessary for reliable Internet access and services.
To the extent that the Internet continues to experience increased numbers
of users, increased frequency of use or increased bandwidth requirements of
users, the Internet infrastructure may not be able to support the demands placed
on it and the performance or reliability of the Internet could be adversely
affected. In addition, the Internet could lose its viability due to delays in
the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Further, critical issues concerning the Internet, including
security, reliability, data corruption, cost, ease of use, accessibility,
quality and speed of service, remain unresolved and could adversely affect the
use of the Internet for business applications. Changes in or insufficient
15
<PAGE> 17
availability of telecommunications services that support the Internet also could
result in slower response times and adversely affect usage of the Internet
generally.
WE MUST RESPOND TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS
The markets for our Internet services management solutions are marked by
rapid technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changes in customer demands and evolving industry
standards. New products based on new technologies or new industry standards can
quickly render existing products obsolete and unmarketable. Any delays in
developing and releasing enhanced or new products could seriously harm our
business and results of operations. To succeed, we will need to enhance our
current products and develop new products on a timely basis to keep pace with
technological developments and to satisfy increasingly sophisticated
requirements of our customers. Our technology is complex, and new products and
product enhancements can require long development and testing periods.
Although we currently intend to support emerging standards, we may not be
able to conform to these new standards in a timely fashion. We also may not be
successful in developing and marketing new products or product enhancements that
respond to technological change, evolving industry standards or customer
requirements. Our failure to conform to prevailing standards could have a
negative effect on our business and operating results.
RISKS RELATED TO THIS OFFERING
NO PUBLIC MARKET FOR OUR COMMON STOCK CURRENTLY EXISTS AND OUR STOCK PRICE
MAY FLUCTUATE AFTER THIS OFFERING
An active public market for our common stock may not develop or be
sustained after the offering. Although the initial public offering price will be
determined based on several factors, the market price for our common stock will
vary from the initial offering price after this offering. See "Underwriters."
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control, including:
- Quarterly variations in operating results;
- Changes in financial estimates by securities analysts;
- Announcements by us or our competitors of new products, significant
contracts, acquisitions or strategic relationships;
- Additions or departures of key personnel;
- Any future sales of our common stock or other securities; and
- Stock market price and volume fluctuations, which are particularly common
among securities of Internet-related companies.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may be the target of similar litigation in the future. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business and operating results.
FUTURE SALES OF SHARES COULD AFFECT OUR STOCK PRICE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of March 31, 1999, upon completion of
this offering, we will have outstanding 22,745,775 shares of common stock. Other
than the shares of common stock sold in this offering, no shares will be
eligible for sale in the public market immediately. Our stockholders will be
subject to agreements with the underwriters or Marimba that restrict their
ability to transfer their stock for 180 days from the date of this prospectus.
16
<PAGE> 18
After these agreements expire, an additional 18,745,775 shares will be eligible
for sale in the public market. See "Shares Eligible for Future Sale."
NEW STOCKHOLDERS WILL INCUR SUBSTANTIAL DILUTION AS A RESULT OF THIS
OFFERING
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock. As a result,
investors purchasing common stock in this offering will incur immediate
substantial dilution. In addition, we have issued options to acquire common
stock at prices significantly below the initial public offering price. To the
extent such outstanding options are ultimately exercised, there will be further
dilution to investors in this offering. See "Dilution."
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING
We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion as to how we will spend the
proceeds, and stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this offering,
in our operations or external investments, to yield a favorable return. See "Use
of Proceeds."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as may, will,
should, expect, plan, anticipate, believe, estimate, predict, potential or
continue, the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the Risk Factors section. These factors
may cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results
or to changes in our expectations.
17
<PAGE> 19
USE OF PROCEEDS
Our net proceeds from the sale of the 3,548,000 shares of common stock we
are offering are estimated to be $45.1 million, assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $47.5 million. We will not receive any of the proceeds
from the sale of shares of common stock by the selling stockholders. We expect
to use $811,000 of the net proceeds to repay equipment advances outstanding
under a credit facility that currently bears interest at 7.75% per year and to
use the balance for general corporate purposes, including working capital. A
portion of the net proceeds may also be used for the acquisition of businesses,
products and technologies that are complementary to ours. We have no current
plans, agreements or commitments for such acquisitions and are not currently
engaged in any negotiations for any such transaction. Pending such uses, we will
invest the net proceeds of this offering in short-term, investment grade,
interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since inception and do not intend to
pay any cash dividends in the foreseeable future. In addition, the terms of our
credit agreement prohibit the payment of dividends on our capital stock.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
(1) on an actual basis (2) on a pro forma basis, after giving effect to the
conversion of all outstanding shares of preferred stock into common stock and
(3) as adjusted to reflect our receipt of the estimated net proceeds from our
sale of 3,548,000 shares of common stock in this offering at an assumed initial
offering price of $14.00 per share, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses, the filing of a new
certificate of incorporation after the closing of this offering and the
application of our proceeds from this offering:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term liabilities, less current portion(1).......... $ 747 $ 747 $ 95
-------- -------- --------
Redeemable convertible preferred stock, $.0001 par
value, 15,000,000 shares authorized, 5,753,566 shares
outstanding actual; 15,000,000 shares authorized, no
shares outstanding pro forma; 10,000,000 shares
authorized, no shares outstanding as adjusted......... 18,953 -- --
-------- -------- --------
Stockholders' equity (net capital deficiency):
Common Stock, $.0001 par value, 30,000,000 shares
authorized, 13,052,262 shares outstanding actual;
30,000,000 shares authorized, 18,805,828 shares
outstanding pro forma; 80,000,000 shares
authorized, 22,353,828 shares outstanding as
adjusted(2)........................................ 2,183 21,136 66,231
Note receivable from officer............................ (160) (160) (160)
Deferred compensation................................... (1,116) (1,116) (1,116)
Translation adjustment.................................. (6) (6) (6)
Accumulated deficit..................................... (14,644) (14,644) (14,644)
-------- -------- --------
Total stockholders' equity (net capital
deficiency)...................................... (13,743) 5,210 50,305
-------- -------- --------
Total capitalization.......................... $ 5,957 $ 5,957 $ 50,400
======== ======== ========
</TABLE>
- -------------------------
(1) See Notes 3 and 4 of Notes to Consolidated Financial Statements for a
description of our capital leases and bank arrangements.
(2) The share numbers exclude:
- 2,192,568 shares of common stock issuable upon exercise of stock options
outstanding as of December 31, 1998 at a weighted average exercise price of
$3.16 per share;
- 1,229,773 shares of common stock available for issuance under our 1996
Stock Plan;
- 16,865 shares of common stock issuable upon the exercise of a warrant
outstanding as of December 31, 1998 at an exercise price of $1.48 per
share;
- 2,000,000 shares of common stock available for issuance under our 1999
Omnibus Equity Incentive Plan;
- 500,000 shares of common stock available for issuance under our 1999
employee stock purchase plan; and
- 150,000 shares of common stock available for issuance under our 1999
Non-Employee Directors Option Plan.
See "Management -- Employee Benefit Plans," and Notes 6 and 9 of "Notes to
Consolidated Financial Statements" for a description of our equity plans.
19
<PAGE> 21
DILUTION
Our pro forma net tangible book value as of December 31, 1998 was $5.2
million, or approximately $.28 per share. Net tangible book value per share
represents the amount of stockholders' equity, less intangible assets, divided
by 18,805,828 shares of common stock outstanding after giving effect to the
conversion of all outstanding shares of preferred stock into shares of common
stock upon completion of this offering.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to our sale
of 3,548,000 shares of common stock in this offering at an assumed initial
offering price of $14.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses, our net
tangible book value as of December 31, 1998 would have been $50.3 million or
$2.25 per share. This represents an immediate increase in net tangible book
value of $1.97 per share to existing stockholders and an immediate dilution in
net tangible book value of $11.75 per share to purchasers of common stock in the
offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share as of December
31, 1998.................................................. $ .28
Increase per share attributable to new investors............ 1.97
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.25
------
Dilution per share to new investors......................... $11.75
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31,
1998, after giving effect to the conversion of all outstanding shares of
preferred stock into common stock upon completion of this offering, the
differences between the existing stockholders and the purchasers of shares in
the offering (at the assumed initial offering price of $14.00 per share) with
respect to the number of shares purchased from us, the total consideration paid
and the average price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 18,805,828 84.1% $19,727,000 28.4% $ 1.05
New stockholders............................... 3,548,000 15.9 49,672,000 71.6 $14.00
---------- ----- ----------- -----
Totals............................... 22,353,828 100.0% $69,399,000 100.0%
========== ===== =========== =====
</TABLE>
The following table sets forth the effect of sales by selling stockholders
on existing and new stockholders:
<TABLE>
<CAPTION>
SHARES HELD ASSUMING
SHARES HELD PRIOR TO THE SHARES HELD AFTER THE EXERCISE OF OVER-
OFFERING OFFERING ALLOTMENT OPTION
------------------------- --------------------- ---------------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
------------ --------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders................ 18,805,828 100.0% 18,353,828 82.1% 17,941,828 79.6%
New stockholders..................... -- 0 4,000,000 17.9 4,600,000 20.4
---------- ----- ---------- ----- ---------- -----
Total...................... 18,805,828 100.0% 22,353,828 100.0% 22,541,828 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
For a description of the stock owned by the selling stockholders see
"Principal and Selling Stockholders."
As of December 31, 1998, there were options outstanding to purchase a total
of 2,192,568 shares of common stock at a weighted average exercise price of
$3.16 per share. In addition, as of December 31, 1998, there was a warrant
outstanding to purchase 16,865 shares of common stock at an exercise price of
$1.48 per share. To the extent outstanding options or warrants are exercised,
there will be further dilution to new investors. For a description of our equity
plans see "Management -- Employee Benefit Plans" and Note 6 of Notes to
Consolidated Financial Statements.
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the inception period ended December 31, 1996 and the fiscal
years ended 1997 and 1998, and the consolidated balance sheet data at December
31, 1997 and 1998 are derived from audited consolidated financial statements
included elsewhere in this prospectus that have been audited by Ernst & Young
LLP, independent auditors. The consolidated balance sheet data at December 31,
1996 are derived from audited consolidated financial statements not included
herein. Historical results are not necessarily indicative of future results. The
pro forma consolidated balance sheet data as of December 31, 1998 is unaudited
and reflects the assumed conversion of all outstanding shares of preferred stock
into common stock upon the consummation of this offering.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 21, 1996
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1996 1997 1998
----------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License................................................... $ -- $ 5,011 $13,901
Service................................................... -- 552 3,184
------- ------- -------
Total revenues.................................... -- 5,563 17,085
Cost of revenues:
License................................................... -- 13 75
Service................................................... -- 621 1,964
------- ------- -------
Total cost of revenues............................ -- 634 2,039
------- ------- -------
Gross profit................................................ -- 4,929 15,046
------- ------- -------
Operating expenses:
Research and development.................................. 515 2,410 5,773
Sales and marketing....................................... 473 8,054 12,371
General and administrative................................ 322 2,367 2,779
Amortization of deferred compensation..................... -- -- 251
------- ------- -------
Total operating expenses.......................... 1,310 12,831 21,174
------- ------- -------
Loss from operations........................................ (1,310) (7,902) (6,128)
Interest income, net........................................ 65 338 488
------- ------- -------
Loss before income taxes.................................... (1,245) (7,564) (5,640)
Provision for income taxes.................................. -- 154 41
------- ------- -------
Net loss.................................................... $(1,245) $(7,718) $(5,681)
======= ======= =======
Basic and diluted net loss per share........................ $ (.81) $ (1.57) $ (.59)
======= ======= =======
Weighted-average shares of common stock outstanding used in
computing basic and diluted net loss per share............ 1,528 4,912 9,606
======= ======= =======
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (.37)
=======
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)................................ 15,359
=======
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AS
DECEMBER 31, OF
--------------------------------------- DECEMBER 31,
1996 1997 1998 1998
----------------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.... $ 2,811 $14,402 $ 7,825 $ 7,825
Working capital...................................... 2,464 8,036 2,912 2,912
Total assets......................................... 3,156 21,898 14,862 14,862
Long-term portion of capital lease obligations and
equipment advances, and other long-term
liabilities........................................ -- 211 747 747
Redeemable convertible preferred stock............... 3,963 18,953 18,953 --
Accumulated deficit.................................. (1,245) (8,963) (14,644) (14,644)
Total stockholders' equity (net capital
deficiency)........................................ (1,235) (8,471) (13,743) 5,210
</TABLE>
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements. Our
actual results may differ significantly from those projected in the forward-
looking statements. Factors that might cause future results to differ materially
from those projected in the forward-looking statements include, but are not
limited to, those discussed below and elsewhere is this prospectus, particularly
in "Risk Factors."
OVERVIEW
Marimba is a leading provider of Internet-based software management
solutions that enable companies to expand their market reach, streamline
business processes and strengthen relationships with customers, business
partners and employees. Our Castanet product family provides an efficient and
reliable way for enterprises to distribute, update and manage applications and
related data over corporate intranets, extranets and the Internet.
We were incorporated in February 1996 and began operations in August 1996.
During the period from February 1996 through December 31, 1996 (the "1996
Inception Period"), we were a development stage enterprise and had no revenues.
Our operating activities during this period related primarily to developing our
products, building our corporate infrastructure and raising capital.
In January 1997, we released our first version of Castanet and, to date,
have derived substantially all our revenues from the license of Castanet and
related services. We licensed Castanet in early 1997 to enterprises primarily
for pilot programs that involved limited deployments. In 1997, we grew our
organization by hiring personnel in key areas, particularly sales, research and
development and marketing. During 1998, we continued to develop and market our
Castanet products and enhanced the core Castanet infrastructure with products
that provided greater centralized management control and the ability to
distribute applications written in leading programming languages. Also in 1998,
we sold several licenses of Castanet to repeat customers for larger scale
production deployments. During this time period, we continued to make
substantial investments in our internal infrastructure by hiring employees
throughout the organization. In March 1999 we released Castanet 4.0, which
provides enhanced Internet services management capabilities.
Revenues to date have been derived primarily from the license of our
Castanet products and to a lesser extent from maintenance and support,
consulting and training services. Customers who license Castanet generally
purchase maintenance contracts, typically covering a 12-month period.
Additionally, customers may purchase consulting, which is customarily billed by
us at a fixed daily rate plus out-of-pocket expenses. We also offer training
services that are billed on a per student or per class session basis.
We recognize software license revenue in accordance with Statement of
Position 97-2 "Software Revenue Recognition," as amended by Statement of
Position 98-4. These statements provide guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions and are
effective for our transactions entered into after January 1, 1998. The
application of SOP 97-2 has not had a material impact on our results of
operations.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with respect to Certain Transactions. SOP 98-9
amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. We have not yet determined the effect of the final adoption of SOP
98-9 on our financial condition or results of operations. However,
22
<PAGE> 24
Marimba believes that SOP 98-9 may require more revenue to be deferred for
certain types of transactions.
License revenues are comprised of perpetual or multiyear license fees which
are primarily derived from contracts with corporate customers and resellers. We
recognize license revenues after execution of a license agreement or receipt of
a definitive purchase order and delivery of the product to end-user customers,
provided that there are no uncertainties surrounding product acceptance, the
license fees are fixed and determinable, collectibility is probable and we have
no remaining obligations. Revenues on arrangements with customers who are not
the ultimate users, primarily resellers, are not recognized until the software
is sold through to the end user. If the fee due from the customer is not fixed
or determinable, revenues are recognized as payments become due from the
customer. If collectibility is not considered probable, revenues are recognized
when the fee is collected. Advance payments are recorded as deferred revenue
until the products are delivered, services are provided, or obligations are met.
Service revenues are comprised of revenues from maintenance agreements,
consulting and training fees. Revenues from maintenance agreements are
recognized on a straight-line basis over the life of the related agreement,
which is typically one year. We recognize service revenues from training and
consulting upon completion of the work to be performed.
We market our products worldwide through a combination of a direct sales
force, resellers, system integrators and distributors. Tivoli has been a
reseller of our products and accounted for $3.1 million, or approximately 18% of
our revenues in 1998. This includes $1.9 million, or approximately 40% of our
revenues, in the third quarter of 1998 and $1.1 million, or approximately 19% of
our revenues, in the fourth quarter of 1998. Our reseller agreement with Tivoli
provides for the resale of our products at substantial discounts from list
price. Consequently, the gross margin on such sales is generally lower than the
gross margin on our direct sales.
We have an original equipment manufacturer agreement with Tivoli under
which Tivoli is building upon the Castanet infrastructure to develop a product
called Cross-Site. Any revenues from Tivoli under this agreement will be from
per seat royalty payments on sales of Cross-Site that contain the Castanet
infrastructure. The per seat payments under this agreement will be less than the
per seat payments we currently have under our reseller agreement with Tivoli. We
expect to generate revenues from royalties on sales of Cross-Site beginning in
1999 and expect that revenues from the resale of Castanet pursuant to the Tivoli
reseller agreement will rapidly decrease and become insignificant. Any failure
of Cross-Site to achieve widespread market acceptance could significantly harm
our business and operating results. For additional information on our
relationship with Tivoli see "Risk Factors -- We Depend on Our Relationship With
Tivoli" and "Business -- Sales, Marketing and Distribution."
We entered into a reseller agreement with Netscape in July 1997. Sales by
Netscape accounted for $1.0 million, or approximately 18% of our revenues in
1997, and $3.8 million, or approximately 22% of our revenues in 1998. A majority
of the $3.8 million of 1998 revenues was recognized in the first half of 1998,
with only $1.3 million in revenue recognized in the second half of 1998.
Netscape is no longer an active reseller, and we do not expect any material
revenues from Netscape in the future.
In 1997 and 1998, revenues attributable to customers outside of North
America accounted for approximately 22% and 7% of our total revenues. We plan to
expand our international operations significantly, particularly in Europe,
because we believe international markets represent a significant growth
opportunity. The expansion of our international operations will be subject to a
variety of risks that could significantly harm our business and results of
operations.
Despite our revenue growth, we have incurred significant losses since
inception and, as of December 31, 1998, we had an accumulated deficit of
approximately $14.6 million. We believe our success depends on further
increasing our customer base and on growth in the emerging Internet services
management market. Accordingly, we intend to continue to invest heavily in
sales, marketing and
23
<PAGE> 25
research and development. Furthermore, we expect to continue to incur
substantial operating losses at least through 1999, and our expected increase in
operating expenses will require significant increases in revenues before we
become profitable.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our sequential
quarterly revenue growth during 1998, we do not believe that historical growth
rates are necessarily sustainable or indicative of future growth.
RESULTS OF OPERATIONS
The following table sets forth selected financial data for the periods
indicated as a percentage of total revenues. Data for the 1996 Inception Period
is not presented because we had no revenues during that period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1998
------ -----
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License................................................... 90.1% 81.4%
Service................................................... 9.9 18.6
------ -----
Total revenues.............................................. 100.0 100.0
Cost of revenues:
License................................................... 0.2 0.4
Service................................................... 11.2 11.5
------ -----
Total cost of revenues...................................... 11.4 11.9
------ -----
Gross profit................................................ 88.6 88.1
Operating expenses:
Research and development.................................. 43.3 33.8
Sales and marketing....................................... 144.8 72.4
General and administrative................................ 42.5 16.3
Amortization of deferred compensation..................... -- 1.5
------ -----
Total operating expenses.................................... 230.6 124.0
------ -----
Loss from operations........................................ (142.0) (35.9)
Interest income, net........................................ 6.1 2.8
------ -----
Loss before income taxes.................................... (135.9) (33.1)
Provision for income taxes.................................. (2.8) (0.2)
------ -----
Net loss.................................................... (138.7)% (33.3)%
====== =====
</TABLE>
1996 INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES
Total revenues increased $11.5 million, or 207%, from $5.6 million in 1997
to $17.1 million in 1998. We had no revenues during the 1996 Inception Period.
24
<PAGE> 26
License Revenues. Substantially all license revenues have been derived from
sales of our Castanet products and increased $8.9 million, or 177%, from $5.0
million in 1997 to $13.9 million in 1998. We attribute the increase in license
revenues from 1997 to 1998 to:
- growth in our customer base;
- additional sales to existing customers; and
- an increase in the average contract amount of executed license
agreements.
Service Revenues. Service revenues include maintenance and support,
consulting and training. Service revenues increased $2.6 million, or 477%, from
$552,000 in 1997 to $3.2 million in 1998. As a percentage of total revenues,
service revenues increased from 10% of total revenues in 1997 to 19% of total
revenues in 1998. The increase in service revenues was due primarily to
increased revenues from customer maintenance contracts. Also, we increased our
consulting service revenues as customers elected to utilize our consulting
organization. During 1999, we expect service revenues to increase in absolute
amount and as a percentage of total revenues. An increased shift in our revenue
mix toward services would negatively impact our gross margins because service
revenues have higher costs and therefore lower margins than license revenues.
COSTS OF REVENUES
Cost of License Revenues. Cost of license revenues consists primarily of
the fees for third-party software products integrated into our products. Cost of
license revenues increased from $13,000 in 1997 to $75,000 in 1998. We had no
cost of license revenues in 1996. The increase from 1997 to 1998 was due to a
third-party software product that we licensed on September 30, 1997 and embedded
in Castanet. Therefore, in 1997, cost of license revenues includes costs
associated with this license only for the fourth quarter, whereas 1998 includes
a full year of such costs. We expect cost of license revenues to increase in
absolute amount during 1999, but to remain a relatively small percentage of
total revenues.
Cost of Service Revenues. Cost of service revenues includes:
- salaries and related expenses of our customer support organization;
- salaries and related expenses of our consultants for billable consulting
engagements;
- cost of third parties contracted to provide consulting services to our
customers; and
- an allocation of our facilities and depreciation expenses.
Cost of service revenues increased from $621,000 in 1997 to $2.0 million in
1998, representing 113% and 62% of service revenue. The increase in absolute
dollars of cost of service revenues from 1997 to 1998 was due primarily to
growth in our customer support organization and an increase in consulting costs
commensurate with the increase in consulting revenues. Our customer support
organization had no employees at January 1, 1997 and grew to 12 employees at
both December 31, 1997 and December 31, 1998. We had no cost of service revenues
in 1996. We expect our cost of service revenues to increase as we continue to
expand our customer support and consulting organizations. Since service revenues
provide lower gross margins than license revenues, this expansion would
negatively impact our gross margins if our license revenues do not significantly
increase.
OPERATING EXPENSES
Research and Development. Research and development expenses, which are
expensed as incurred, consist primarily of:
- salaries and related costs of our engineering organization;
- fees paid to third-party consultants; and
25
<PAGE> 27
- an allocation of our facilities and depreciation expenses.
We believe that our success is dependent in large part on continued
enhancement of our current products and the ability to develop new,
technologically advanced products that meet the sophisticated requirements of
our customers. Accordingly, we have increased our investment in research and
development in each of the periods since inception. Research and development
expenses increased from $515,000 in the 1996 Inception Period to $2.4 million in
1997 and $5.8 million in 1998. The increases in research and development
expenses were due to significant increases in engineering personnel and related
costs, as well as increases in third-party consulting costs. We expect research
and development expenses to increase in absolute amount in 1999.
Sales and Marketing. Sales and marketing expenses consist primarily of:
- salaries and related costs of our sales and marketing organizations;
- sales commissions;
- costs of our marketing programs, including public relations, advertising,
trade shows, collateral sales materials, our customer advisory council
and seminars;
- rent and facilities costs associated with our regional and international
sales offices; and
- an allocation of our facilities and depreciation expenses.
We have significantly increased our sales and marketing expenses since the
1996 Inception Period. Sales and marketing expenses increased from $473,000 in
the 1996 Inception Period to $8.1 million in 1997 and $12.4 million in 1998. The
increases in sales and marketing expenses are due primarily to significant
growth in our sales and marketing organizations, an increase in sales
commissions as sales have increased, an increase in the number of regional and
international sales offices and expansion of our marketing programs. We
increased the number of sales and marketing personnel from six employees at
December 31, 1996 to 45 employees at December 31, 1997 and 65 employees at
December 31, 1998. Marimba also increased the number of sales offices from one
at December 31, 1996 to two at December 31, 1997 and to seven at December 31,
1998. Sales commission expense increased by 54% from 1997 to 1998. There was no
sales commission expense in 1996. We expect to continue to invest heavily in
sales and marketing in order to grow revenues and expand our brand awareness.
Consequently, we expect to increase the absolute dollar amount of sales and
marketing expenses in 1999.
General and Administrative. General and administrative expenses consist
primarily of:
- costs of our finance, human resources and legal services organizations;
- third-party legal and other professional services fees; and
- an allocation of our facilities and depreciation expenses.
General and administrative expenses increased from $322,000 in the 1996
Inception Period to $2.4 million in 1997 and $2.8 million in 1998. We attribute
the increases in general and administrative expenses to growth of our
administrative organizations in support of overall growth. We increased our
general and administrative personnel from 13 at December 31, 1997 to 21 at
December 31, 1998. We expect the absolute dollar amount of general and
administrative expenses to increase in 1999.
Additionally, we have incurred significant outside legal costs in defense
of Novadigm's complaint against us alleging patent infringement filed in March
1997. We expect to incur significant additional costs related to this complaint
in the future, and these costs will increase substantially if we go to trial. A
trial is currently scheduled for September 1999.
Deferred Compensation. We recorded deferred compensation of approximately
$1.4 million in 1998, representing the difference between the exercise prices of
options granted to acquire 940,500 shares
26
<PAGE> 28
of common stock during 1998 and the deemed fair value for financial reporting
purposes of our common stock on the grant dates. We amortized deferred
compensation expense of $251,000 during fiscal 1998. This compensation expense
relates to options awarded to individuals in all operating expense categories.
Total deferred compensation at December 31, 1998 of $1.1 million is being
amortized over the vesting periods of the options on a graded vesting method.
The amortization of deferred compensation recorded will approximate $592,000 for
1999, $310,000 for 2000, $159,000 for 2001 and $55,000 for 2002.
INTEREST INCOME, NET
Interest income, net consists primarily of interest earned on our cash,
cash equivalents and short term investments offset by interest expenses
associated with our capital leases and equipment advances. Interest income, net
increased from $65,000 in the 1996 Inception Period to $338,000 in 1997 and
$488,000 in 1998. The increases in interest income, net relate primarily to
increased invested cash balances from our equity financings in August 1996 and
August 1997.
PROVISION FOR INCOME TAXES
Our provision for income taxes for the years ended December 31, 1997 and
1998 consists entirely of foreign withholding taxes. No provision for federal or
state income taxes has been recorded because we experienced net losses from
inception through 1998.
As of December 31, 1998, we had federal net operating loss carryforwards of
approximately $11.1 million. We also had a federal research and development tax
credit carryforward of approximately $400,000 at that date. The net operating
loss and credit carryforwards will expire at various dates beginning in 2011
through 2018, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations contained
in the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of the net operating loss and credits
before utilization.
27
<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly operating results for
the four quarters of 1998. You should read the following table together with our
Consolidated Financial Statements and related Notes in this prospectus. We have
prepared this unaudited information on the same basis as the audited
Consolidated Financial Statements. This table includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. You should not draw any conclusions about our future results
from the operating results for any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
License..................................... $ 2,491 $ 3,155 $ 3,804 $ 4,451
Service..................................... 519 526 929 1,210
------- ------- ------- -------
Total revenues................................ 3,010 3,681 4,733 5,661
Cost of revenues:
License..................................... 17 16 16 26
Service..................................... 488 396 482 598
------- ------- ------- -------
Total cost of revenues........................ 505 412 498 624
------- ------- ------- -------
Gross profit.................................. 2,505 3,269 4,235 5,037
Operating expenses:
Research and development.................... 1,211 1,311 1,545 1,706
Sales and marketing......................... 2,082 2,715 3,638 3,936
General and administrative.................. 750 527 596 906
Amortization of deferred
compensation............................. -- -- 73 178
------- ------- ------- -------
Total operating expenses...................... 4,043 4,553 5,852 6,726
------- ------- ------- -------
Loss from operations.......................... (1,538) (1,284) (1,617) (1,689)
Interest income, net.......................... 149 128 125 86
------- ------- ------- -------
Loss before income taxes...................... (1,389) (1,156) (1,492) (1,603)
Provision for income taxes.................... -- -- (4) (37)
------- ------- ------- -------
Net loss...................................... $(1,389) $(1,156) $(1,496) $(1,640)
======= ======= ======= =======
</TABLE>
Revenues grew in each quarter of 1998 as demand for our products and
services increased. Commensurate with revenue growth, cost of license revenues
and cost of service revenues have generally increased from quarter to quarter.
Cost of service revenues was higher in the quarter ended March 31, 1998 relative
to the following two quarters due to travel, facilities rental and equipment
costs associated with providing an off-site training course.
From inception, we have increased the level of spending throughout the
organization. We intend to increase our sales and marketing, research and
development and general and administrative expenses. We anticipate that these
expenses could significantly precede any revenues generated by such increased
spending. If we do not experience significantly increased revenues from these
efforts, our business and operating results would be seriously harmed.
General and administrative expenses were higher in the first and fourth
quarters of 1998 than in the second and third quarters of 1998 primarily due to
higher legal expenses incurred in defense of
28
<PAGE> 30
Novadigm's complaint against us alleging patent infringement. We expect to incur
significant additional costs related to this complaint in the future, and these
costs will substantially increase if we go to trial.
Our quarterly operating results have fluctuated significantly and we expect
that future operating results will be subject to similar fluctuations. In the
past a significant portion of our sales have been realized near the end of the
quarter. Accordingly, a delay in an anticipated sale past the end of a
particular quarter could negatively impact our results of operations for that
quarter. In addition, we generally expect that revenues in the first quarter of
each year will be lower than the fourth quarter of the preceding year. We
believe this trend will be primarily due to the annual nature of budgetary,
purchasing and sales cycles.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the private placement of
our equity securities through which we have raised net proceeds of approximately
$19.0 million. We have also financed our operations through equipment lease
financing and bank borrowings. At December 31, 1998, our principal sources of
liquidity included approximately $7.8 million of cash, cash equivalents and
short term investments and a credit facility with a bank. This credit facility
provides us up to $6.5 million in total borrowings, of which $4.0 million of
borrowings are available for loans of up to 80% of our eligible accounts
receivable, $1.0 million is available under a non-formula based advance and $1.5
million is available for equipment advances. As of December 31, 1998, we had
$811,000 in outstanding borrowings for equipment advances. Borrowings under this
credit facility are provided at the bank's prime rate and are secured by
substantially all of our assets.
The credit facility requires Marimba to maintain a minimum liquidity ratio
of not less than 1.50 to 1.00. The minimum liquidity ratio is defined as the sum
of unrestricted cash and cash equivalents divided by the aggregate amount of
equipment advances outstanding under the credit facility. We were in compliance
with the minimum liquidity ratio as of December 31, 1998 and February 28, 1999.
The credit facility also requires Marimba to maintain minimum tangible net
worth of at least $10 million. Tangible net worth is defined as our tangible
assets less total liabilities, plus deferred revenue. As of December 31, 1998,
we were in compliance with the minimum tangible net worth requirement. However,
as of February 28, 1999, Marimba's tangible net worth was less than the required
$10 million. The bank granted us a waiver of this covenant for February 28,
1999. Furthermore, we expect to be in compliance with this requirement at March
31, 1999 and for the duration of the credit facility which expires on May 26,
1999. We intend to repay this credit facility using a portion of the net
proceeds from this offering.
Cash used in operations increased from $877,000 in the 1996 Inception
Period to $1.5 million in 1997 and $6.1 million in 1998 primarily due to our net
losses which were partially offset by increases in deferred revenues and
accounts receivable in 1997 and decreases in deferred revenues and accounts
receivable in 1998.
Cash used in investing activities increased from $285,000 in the 1996
Inception Period to $2.7 million in 1997 and $5.4 million in 1998. We have made
substantial investments in computer equipment, computer software, office
furniture and leasehold improvements. In addition, cash used in investing
activities during 1998 included net purchases of short-term investments of $4.1
million.
Net cash provided by financing activities was $4.0 million in the 1996
Inception Period, $15.8 million in 1997 and $861,000 in 1998. Net cash from
financing activities during the 1996 Inception Period resulted primarily from
the sale of preferred stock. Net cash from financing activities during 1997
resulted primarily from the sale of preferred stock and from the sale of common
stock issued upon exercise of stock options. During 1998, net cash from
financing activities resulted primarily from the sale of common stock issued
upon exercise of stock options and proceeds from equipment advances. We
29
<PAGE> 31
expect to fund future operating expenses from revenues received from the sale of
our products and services and the proceeds of this offering.
We currently anticipate that the net proceeds from this offering, together
with our current cash, cash equivalents, short-term investments and credit
facility, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. However, we
may need to raise additional funds in future periods through public or private
financings, or other arrangements to fund our operations and potential
acquisitions, if any, over a long-term basis until we achieve profitability, if
ever. Any such additional financings, if needed, might not be available on
reasonable terms or at all. Failure to raise capital when needed could seriously
harm our business and results of operations. If additional funds are raised
through the issuance of equity securities, the percentage of ownership of our
stockholders would be reduced. Furthermore, such equity securities might have
rights, preferences or privileges senior to our common stock.
YEAR 2000 COMPLIANCE
BACKGROUND OF YEAR 2000 ISSUES
Many currently installed computer and communications systems and software
products are unable to distinguish 21st century dates from 20th century dates.
This situation could result in system failures or miscalculations causing
disruptions in the operations of any business. As a result, many companies'
software and computer and communications systems may need to be upgraded or
replaced to comply with such Year 2000 requirements.
CUSTOMER REPRESENTATIONS AND WARRANTIES
We generally represent and warrant to our customers that the occurrence of
the date January 1, 2000 and any related leap-year issues will not cause our
products to fail to operate properly. In some cases, this warranty includes
representations regarding the ability of our product to store, display,
calculate, compute and otherwise process date-related data. Our warranty
generally applies only to our products and excludes failures resulting from the
combination of our products with other software or hardware or from the use of
our software in a manner not in accordance with the related documentation.
If we breach this warranty, remedies in most cases include commercially
reasonable efforts to replace the software and to advise the customer how to
achieve substantially the same functionality through different procedures, as
well as payment of money damages, subject to certain limitations.
OUR PRODUCT TESTING AND LICENSING
We have tested all of our products for Year 2000 compliance. We derived our
testing method from our review and analysis of the Year 2000 testing practices
of other software vendors, relevant industry Year 2000 compliance standards and
the specific functionality and operating environment of our products. The tests
are run on all supported platforms for each release and include testing for date
calculation and internal storage of date information with test numbers starting
in 1999 and going over the Year 2000 boundary. Based on these tests, we believe
our products to be Year 2000 compliant with respect to date calculations and
internal storage of date information.
We have identified one Year 2000 date-related limitation in earlier
versions of Castanet. Versions of Castanet prior to version 3.2 display certain
data to the user in a manner that uses only two digits to represent a year. A
two-digit display of the Year 2000 could cause a user to believe the year
represented was the Year 1900 instead of the Year 2000. This limitation does not
affect either computation of data in our products or operation of the products.
All versions of Castanet currently being shipped use four digits for the display
of date data.
30
<PAGE> 32
INTERACTION OF OUR PRODUCTS WITH THIRD-PARTY SOFTWARE
Our products contain, operate with and depend on third-party code that we
may not be able to independently verify is Year 2000 compliant. Substantially
all of our products interface with and depend on Sun's JVM (Java Virtual
Machine). Sun has indicated that the version of the JVM on which Castanet 3.0,
Castanet 4.0, and all later versions depend, is Year 2000 compliant, but Sun has
made no such statement regarding earlier versions of the JVM. Our products also
contain and depend on software licensed to us from RSA Data Security, Inc.,
Netscape, VeriSign, Inc. and Phaos Technology Corporation. Although each of
those companies has made representations that the licensed code is Year 2000
compliant, we may not be able to verify this by independent testing. Finally,
our products also interact with external sources such as other software programs
and operating systems which may not be Year 2000 compliant or which may not
provide date data to our products in a manner that is Year 2000 compliant. Any
interaction with third-party software which is not Year 2000 compliant could
cause our products to fail to properly operate or to properly process date
information.
OUR INTERNAL SYSTEMS
Although we do not have a formal contingency plan to address Year 2000
issues, we are in the preliminary stages of assessing our internal risks
associated with the Year 2000 issue. We are working internally and with
third-party vendors to assure that we are prepared for the Year 2000. We have
inventoried our internal software and hardware systems, as well as products and
services provided by third-party vendors. These systems include those related to
product delivery, customer service, internal and external communications,
accounting and payroll, which we consider critical areas of our business. We are
seeking vendor certification for all third-party systems and plan to develop a
detailed risk assessment and action plan that will include testing of both
critical systems and systems for which no certification has been obtained. The
identification, certification and risk assessment phases of our Year 2000
project are expected to be completed by the end of April 1999. Subsequent phases
will include our own tests, tests conducted by third-party consultants and the
development of contingency plans and/or corrective solutions for systems which
have been identified to be noncompliant. We expect these phases will continue
through the first half of 1999.
COSTS OF ADDRESSING YEAR 2000 COMPLIANCE
To date, our costs to address Year 2000 compliance have not been
significant. Based on our preliminary evaluations, we do not believe we will
incur significant operating expenses or be required to invest heavily in
computer system improvements to be Year 2000 compliant. Although we have not yet
developed an exact estimate of such costs, we expect the total costs to be less
than $100,000. However, significant uncertainty exists concerning the potential
costs and effects associated with Year 2000 compliance. Any Year 2000 compliance
problem experienced by us or our customers could decrease demand for our
products which could seriously harm our business, operating results and
financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. We expect that the adoption of SOP No. 98-1 will
not have a material impact on our financial position or results of operations.
We will be required to implement SOP No. 98-1 for the year ending December 31,
1999.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
31
<PAGE> 33
adopted. We expect that the adoption of SOP No. 98-5 will not have a material
impact on our financial position or results of operations. We will be required
to implement SOP No. 98-5 for the year ending December 31, 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a material
impact on our financial position or results of operations. We will be required
to implement SFAS No. 133 for the year ending December 31, 2000.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell in North America, Asia
and Europe. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As all sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
- obligations of the U.S. government and its agencies;
- investment grade state and local government obligations;
- securities of U.S. corporations rated A1 or AA by Standard and Poors or
the Moody's equivalent; and
- money market funds, deposits or notes issued or guaranteed by U.S. and
non-U.S. commercial banks meeting certain credit rating and net worth
requirements with maturities of less than two years.
At December 31, 1998, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by large institutions in the U.S.
and our short-term investments were invested in corporate debt and equity
securities maturing in less than one year.
32
<PAGE> 34
BUSINESS
OVERVIEW
Marimba is a leading provider of Internet-based software management
solutions that enable companies to expand their market reach, streamline
business processes and strengthen relationships with customers, business
partners and employees. Our Castanet product family provides an efficient and
reliable way for enterprises to distribute, update and manage applications and
related data over corporate intranets, extranets and the Internet. Our strategy
is to extend the Castanet foundation to manage the array of infrastructure,
systems and components upon which business applications and services depend. We
believe that, by using Castanet, companies are able to leverage the Internet
more efficiently by reducing software management costs, delivering greater
functionality and improving customer loyalty. Our global customer base spans
multiple industry segments including financial services, insurance, retail,
manufacturing and telecommunications. Castanet customers include such industry
leaders as Bear Stearns, Charles Schwab, EarthLink, The Home Depot, Intuit,
Ingram Micro, Nortel Networks, Seagate Technology and Sun Microsystems. We
market our Castanet products worldwide through a combination of a direct sales
force, resellers and distributors.
INDUSTRY BACKGROUND
In today's intensely competitive business environment, companies
aggressively seek new ways to leverage information technology for competitive
advantage. The Internet has emerged as a crucial business tool, offering the
prospect of ubiquitous, easy-to-use and cost-effective connectivity to anyone,
anywhere, internal or external to the corporate network. As the commercial use
of the Internet grows, companies are delivering increasingly sophisticated
services to a rapidly expanding audience. As a result, demands on the Internet
infrastructure have grown and the enterprise computing environment is evolving
and becoming increasingly complex. Today, companies are extending their
enterprises and starting to use the Internet to connect to their business
partners and customers in fundamentally new ways. Organizations are leveraging
the Internet to deliver services that extend their business processes to
networked, mobile and remote employees, customers, suppliers, vendors,
distributors and other partners.
This emerging use of the Internet by businesses, which is often referred to
as "e-business," encompasses business-to-business, business-to-employee and
business-to-consumer communications and transactions. As they adopt e-business,
companies are integrating, co-locating and redistributing their business
processes with those of their strategic partners and customers. By linking these
business processes across the extended enterprise, companies are creating a new
type of service offering for their strategic partners and customers that
requires the ability to deliver business applications and information
dynamically. For example, by directly sharing the information and analysis of an
inventory management application, companies and their suppliers and distributors
can manage supply chain issues in real-time. Alternatively, by providing online
applications such as financial portfolio management, companies can offer
personalized, up-to-date account information that creates immediate value for
their customers. When companies are able to offer easy-to-access, compelling,
up-to-date applications and information as services, they create closer business
relationships, new efficiencies and significant strategic advantages. As a
result of these benefits, the e-business market is large and growing rapidly.
International Data Corporation, an independent research firm, estimates that
e-commerce, the subset of e-business that encompasses the sale of goods and
services over the Internet, will grow from $32 billion in 1998 to $426 billion
in 2002.
In embracing e-business, companies are extending their information
technology infrastructure beyond the organization and moving their core business
applications and processes to the Internet. Prior to the commercial adoption of
the Internet as a business platform, corporations primarily focused on
connecting the physical computing network infrastructure within their own
organizations and deploying application software to automate internal business
processes. As companies now extend their enterprise
33
<PAGE> 35
information technology infrastructure, they face significant new challenges. In
an e-business environment where corporate information technology domains are
being extended, application availability, security and performance are dependent
on the management of a complex, heterogeneous array of systems and services. In
addition, the dynamic nature of e-business requires companies to ensure that
applications and information are up to date. As companies' e-business services
grow, they must be able to rapidly scale their services to thousands, or even
millions, of users. These users are often only intermittently connected to the
network and may be outside the corporation's control. The public nature of the
Internet also exposes the enterprise to heightened security risks. Finally, as
e-business applications are increasingly being advertised and delivered as
services, organizations and their customers are demanding the same high levels
of availability, ease of use and quality of service that they expect from common
utilities such as electricity and telephone systems.
The evolution of enterprise computing to an Internet-based infrastructure
is creating enormous complexity for organizations and producing significant
challenges, similar to those faced by companies as they moved from mainframe
computing to client-server environments. At that time, the need to manage
complex client-server environments gave rise to a large market for network and
systems management solutions. However, these solutions were not designed for an
Internet-based infrastructure. As a result, they do not adequately address
challenges such as connectivity, management of endpoints outside of the firewall
and security requirements of a public network, and massive scalability, all of
which are critically important when delivering services across the Internet.
These challenges have created the need for a new Internet services
management solution that supports e-business services across the extended
enterprise. A complete Internet services management solution would provide not
only the management of e-business applications on an ongoing basis, but also
management of the infrastructure upon which those applications depend. For
example, an e-business platform would typically be comprised of a set of
business applications, plus components such as web servers, database management
systems, application servers and software security systems. A complete Internet
services management solution will ultimately enable an information technology
department to first deploy and then manage, maintain and monitor this e-business
infrastructure across companies, domains and geographies.
THE MARIMBA SOLUTION
Marimba is a leading provider of Internet-based software management
solutions that enable companies to expand their market reach, streamline
business processes and strengthen relationships with customers, business
partners and employees. Our Internet services management solutions help solve
complex deployment and management problems that we believe are not adequately
addressed by existing client-server based distribution and management products.
An essential foundation of a complete Internet services management solution is
the ability to effectively deliver and manage applications and information
throughout the extended enterprise. Built from the ground up to provide a robust
Internet-based infrastructure, our Castanet software product family provides
automated distribution, transparent updates and ongoing management of e-business
applications, application-related data, business rules, documents and services
throughout the extended enterprise. Our Castanet product family is modular,
allowing organizations to plug-in functionality as their e-business requirements
expand. In addition, Castanet is designed to provide the reliability,
performance and security that organizations require for their mission-critical
e-business applications and services. As a result, we believe our customers are
able to leverage their networks more efficiently and obtain greater
functionality from their business applications.
34
<PAGE> 36
We believe that the benefits of our Castanet solution will address the
Internet services management needs of leading corporations and service
providers. Key benefits of this solution include:
Reduces Total Cost of Managing the Extended Enterprise. Castanet
facilitates the centralized management of the extended enterprise by enabling
automated, electronic distribution, installation and updates of applications and
related data. In so doing, we believe that Castanet lowers information
technology costs by reducing resources previously required to manually
distribute and customize software. Castanet can further reduce support costs by
removing the burden of software installation and management from the end-user
and by automatically synchronizing application versions across multiple users.
In addition, by replacing only the applications or data that have changed,
Castanet enables rapid and efficient updates, thereby reducing network
connection charges and enabling corporations to realize increased benefits from
their network bandwidth investment.
Increases Efficiency of the Extended Enterprise. Castanet provides
organizations with a simple and rapid way to distribute new or updated
applications and information across a complex, distributed and heterogeneous
computing environment. Through access control and policy management, Castanet
enables the collaborative exchange of applications and data among users and
across companies. By enabling organizations to extend access to their data and
applications across the extended enterprise, we believe that Castanet can
increase the efficiency and usefulness of an organization's information and
technology assets. Employees, customers, suppliers, vendors and other partners
can receive the most recent and relevant data directly, reducing an
organization's support requirements. Mobile users can work off-line and receive
the latest updates when they connect to the network. By enabling rapid,
transparent updates, Castanet can reduce the time and frustration often
associated with obtaining software and data updates remotely. In addition,
because users automatically receive the most current information, organizations
can reduce the inefficiency caused by outdated information and applications.
Provides Robust Infrastructure for Mission-Critical Applications. Castanet
enables companies to distribute and update mission-critical applications
throughout the extended enterprise in a reliable and efficient manner. When
corporations transmit sensitive e-business applications and data across public
or private networks, precautions must be taken to authenticate user identity,
verify application and data integrity, and protect data confidentiality.
Castanet provides comprehensive security functionality, including digital
certificates, encryption and end-user access control. Castanet can rapidly scale
to allow organizations to distribute applications and upgrades to large numbers
of users in geographically dispersed locations. We believe this architecture
helps organizations improve application performance and reduce network traffic.
If a download is interrupted, Castanet can automatically restart at the point of
interruption when it reconnects without corrupting the original application or
file.
Enhances Customer Relationships. As corporations extend their enterprise to
customers, business partners and employees worldwide, it is becoming
increasingly important to deliver personalized services, content and user
interfaces to individual customers or target groups. Castanet enables the
tailoring of services through automatic identification of target user groups, or
through server extensions which allow the automated selection of code and
content. In addition, Castanet provides the ability to create and package custom
user interfaces. Using the customization and branding functions available with
Castanet, information technology and operational managers can define and enforce
consistent application configurations and branding across the extended
enterprise. We believe that each of these capabilities allows companies to
strengthen their brand and offer more compelling Internet-based services,
thereby increasing their customer loyalty.
STRATEGY
Our objective is to become the leading provider of Internet services
management solutions. We are pioneering this new and emerging market and have
established a foundation upon which we can build to
35
<PAGE> 37
address the growing needs of the extended enterprise. The key elements of our
strategy to achieve our objective are:
Extend Technological Leadership Position. We are the first company to
provide an integrated product suite that has been designed from the ground up to
provide e-business application distribution and management solutions across the
extended enterprise. We believe that our application distribution and management
solutions provide us with a first mover advantage and an essential foundation
for a comprehensive Internet services management solution. We intend to advance
our technological leadership by investing significant resources in research and
development. In addition, by implementing and actively promoting new industry
standards, we intend to facilitate widespread adoption of Castanet by
enterprises conducting e-business.
Target Companies and Service Providers Conducting E-business. We intend to
expand adoption of Castanet by focusing our efforts on selling to large
companies in industry sectors where the deployment of e-business solutions
provides a key competitive advantage. While many large companies are now
engaging in some form of e-business, we believe that Castanet is particularly
attractive to companies in industry sectors such as financial services,
insurance, health care, manufacturing, retail, technology and telecommunications
given their sophisticated technological needs. We believe that our experience in
successfully providing Castanet solutions to industry-leading companies provides
us a competitive advantage in selling Castanet to potential customers. Castanet
provides an enabling infrastructure for application service providers and
Internet service providers to distribute and remotely manage applications
services simply, efficiently and at a low cost.
Expand Worldwide Sales. We believe that international markets represent a
significant growth opportunity as organizations seek global e-business
solutions. We currently have a direct sales presence in North America and
Europe. In the Asia/Pacific region, we sell our Castanet products through third-
party distributors. We intend to expand our direct sales force and to establish
additional sales offices domestically and internationally. In addition, we plan
to complement our current distribution channels with selected resellers, system
integrators and joint marketing partners to expand our market reach.
Expand Professional Services. We believe that our experienced team of
consultants, support engineers and training staff provide a key competitive
advantage in the sale of the Castanet solution. We intend to expand this team
and continue to invest in the advanced level of training required to provide
superior service to our customer base. In addition, we believe that the complex
and strategic nature of Internet services management software provides us with a
significant opportunity to provide consulting services to customers to help them
successfully develop, deploy and maintain their e-business applications.
36
<PAGE> 38
CASTANET PRODUCT FAMILY
The Castanet product family provides a robust framework to distribute,
update and manage applications and related data over corporate intranets,
extranets and the Internet to multiple endpoints, including servers, desktops
and mobile systems. Designed upon an open, extensible architecture, our Castanet
products are fault tolerant, provide a variety of security features, are
bandwidth efficient, allow personalization and are rapidly scalable to a large
number of users in geographically dispersed locations. The Castanet product
family is modular, allowing organizations to add functionality as their
e-business management requirements expand. Each generation of Castanet has
introduced additional functionality including Castanet 4.0, released in March
1999, which added the Castanet Inventory Suite and Castanet Subscription Suite.
The Castanet product family is summarized below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CASTANET PRODUCT FAMILY BENEFITS
<S> <C>
- --------------------------------------------------------------------------------------------------------
CASTANET INFRASTRUCTURE SUITE: - Supports multiple applications across
heterogeneous computing environments, in one
The Infrastructure Suite provides the foundation integrated solution
upon which all other Castanet product suites are
built. It provides the components necessary to - Provides security features to authenticate users
distribute, manage and maintain applications and help protect data integrity and
across intranets, extranets and the Internet. confidentiality
- Provides bandwidth efficiency, lowering network
connection costs
- Supports mobile and remote users, who may be
only intermittently connected to the network
- Supports personalization, making it easy to
install and manage appropriate application
versions for each user
- Rapidly scales to a large number of users in
geographically dispersed locations
- Utilizes open standards and extends to meet
changing user requirements
- --------------------------------------------------------------------------------------------------------
CASTANET PRODUCTION SUITE: - Automates the application publishing process
The Production Suite provides the ability to - Provides easy-to-use interfaces for defining the
package and publish custom or off-the-shelf way applications are configured
applications, files and documents for
distribution by the Castanet Infrastructure - Reduces software and platform dependencies
Suite.
- Provides the ability to customize the
application installation process to shield end
users from software installation complexities
- --------------------------------------------------------------------------------------------------------
CASTANET MANAGEMENT SUITE: - Helps trouble-shoot and test Castanet
deployments
The Management Suite provides comprehensive
solutions for the management, deployment and - Streamlines application rollouts across multiple
maintenance of enterprise-wide Castanet organizations
installations. The suite permits centralized
monitoring and control of local and remote - Provides usage reports and log files
Castanet servers and clients. Optional extensions
to the Management Suite also provide extensive - Strengthens brand awareness by allowing
client customization and branding capabilities. information technology managers and business
organizations to customize user interfaces
- --------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CASTANET PRODUCT FAMILY BENEFITS
<S> <C>
- --------------------------------------------------------------------------------------------------------
CASTANET INVENTORY SUITE: - Automates collection of inventory information,
including application, network, computer
The Inventory Suite simplifies the discovery, hardware and operating system information
tracking and management of the desktop, server
and portable computing resources within the - Supports intermittently connected computing
enterprise. By providing database integration and resources, providing network managers with
reporting capabilities, the suite is designed to greater inventory accuracy and administrative
allow administrators to generate up to date control
information on machines within their domains of
control, even if they are only connected - Provides the ability to view inventory
intermittently to a network. information and perform searches
- Supports relational database storage for
enterprise-wide access, data consolidation and
reporting
- Enables customization of inventory parameters
and schedules
- --------------------------------------------------------------------------------------------------------
CASTANET SUBSCRIPTION SUITE: - Streamlines definition of enterprise-wide
The Subscription Suite is designed to provide application subscription policies based on user
corporate IT managers with the ability to use profiles
existing profile information to define,
distribute and enforce a centralized subscription - Automates distribution and enforcement of
policy that determines which applications should enterprise-wide application subscription policies
be made available, installed or deleted from a
user's machine. - Integrates with user profile information from
multiple sources
- Supports multiple application subscription
modes, from notification of availability to
automatic installation
- Enables customization of subscription parameters
and schedules
- --------------------------------------------------------------------------------------------------------
</TABLE>
We generally license the Castanet Infrastructure Suite on a per user basis
with the total fee determined, in part, by the number of end-users who can
obtain updates using Castanet. The license terms also vary depending on the
number of applications to be deployed with Castanet and whether the computer
receiving updates is a server or client computer. Separate licenses are
available for the right to customize the user interface of the client component
of Castanet and to distribute the client and/or server components of the system
to customers, partners or others outside of the customer's own organization. The
Castanet Management and the Production Suites are generally licensed on a per
user basis, based on the number of individual systems administrators who will
use the components of the suites. We intend to license the Castanet Inventory
Suite in a manner similar to the Castanet Infrastructure Suite and we intend to
license the Castanet Subscription Suite in a manner similar to the Castanet
Management and Production Suites.
38
<PAGE> 40
ARCHITECTURE
The Castanet infrastructure is designed to distribute software and data
efficiently over networks based upon TCP/IP (Transmission Control
Protocol/Internet Protocol), the basic communication protocol of the Internet.
Castanet packages an application as a channel and publishes the application to a
Transmitter, which then distributes the channel and subsequent updates across a
network to Tuners on client computers. The fundamental components of the
architecture are illustrated below: LOGO
Channel. A channel is the application and/or related data that is
distributed using Castanet. For example, a channel could consist of a
stock-trading application written in Java or a shrink-wrapped application, such
as Microsoft Word and related documents. Each channel has an associated list of
properties that describes its features, such as application type, author,
copyright notice, update schedule and entry point. Castanet's application
packager prepares the channel for distribution and inserts a channel adapter
that installs and launches the application in a platform and application
specific manner. The application packager is designed to accommodate a range of
application types, including Java applets, Java Beans, Visual Basic, C, C++ and
shrink-wrapped applications. Using OSD (Open Software Description), a format for
describing the way software programs relate to one another, the application
packager creates a description of the installation process which is based on XML
(eXtensible Markup Language), a format commonly used on the Internet to describe
data and documents. Using this technology, both shrink-wrapped and custom
applications can be installed, updated and repaired without requiring changes to
the original application and without relying on the original application
installer. After the application is packaged as a channel, it is published to
the Transmitter for distribution over the network.
Transmitter. The Transmitter is the server component of Castanet. It
distributes channels and subsequent updates to the Tuner, the Castanet client.
The Tuner and Transmitter communicate using the Castanet protocol which is
designed to minimize bandwidth requirements for updates over HTTP (Hyper-Text
Transfer Protocol), the protocol used to distribute web pages. The Castanet
protocol uses compression technology that compresses data and applications, and
differential updating which identifies changes in code and updates only the
changed portion. All updates are transactional, interruptible and atomic, which
means that channels on the Tuner are always in a functional state even if the
most recent update failed or was interrupted. In addition, interrupted downloads
can be restarted automatically at the point of interruption. Castanet provides
functionality to identify and verify each channel resource and installed
applications. Additional Transmitter features include replication,
personalization, client feedback, bandwidth management and policy
administration. Castanet implements user authentication and
39
<PAGE> 41
access control using passwords or client-side certificates and by leveraging
directory services, such as LDAP (Lightweight Directory Access Protocol), or
Microsoft's Active Directory.
Tuner. The Tuner is the client component of Castanet. The Tuner subscribes
to channels located on the Transmitter and downloads, installs and receives
updates of each channel. Once received from a Transmitter, channels are stored
locally on the Tuner, making the downloaded channel resources instantly
accessible regardless of whether the user is connected to the network. The Tuner
is typically configured to run in the background and can manage multiple
channels simultaneously without end-user interaction, updating them as necessary
to present the user with the most recent version. In addition, the Tuner's user
interface can be customized to include the brand, logo and other look and feel
elements desired by the customer. The Tuner provides a comprehensive set of
features for modem support, bandwidth management, security controls, certificate
management, update scheduling and firewall support.
The Castanet distribution architecture can be scaled rapidly to a large
number of end users using replication and caching technology. The illustration
below describes an example of how applications can be deployed globally to
multiple end users:
LOGO
Using the Castanet protocol, Tuners can be redirected automatically to
additional Transmitters, serving as repeaters, in order to reduce the load on
the main Transmitter and to make more efficient use of available bandwidth. By
adding repeaters, it is possible to provide faster download times and to service
thousands of simultaneous downloads. Repeaters can be added and removed
dynamically without disrupting the overall service, allowing for a high level of
scalability, improved service quality and availability. In addition, the use of
a caching proxy server, which stores frequently accessed files on a local disk,
can improve the efficiency of downloads through corporate firewalls into the
enterprise.
In addition to the basic Castanet components, a variety of Castanet
features are available for reporting downloads, staging updates, application
signing, resource planning, certificate management, license installation,
Transmitter administration, Tuner administration and deploying Tuner updates.
All of these features are distributed as Castanet channels, and together with
the basic infrastructure components, provide all the necessary functionality to
distribute, manage and maintain mission critical applications and services.
Where appropriate, we provide programming interfaces and software develop-
40
<PAGE> 42
ment kits for customized extensions, allowing customers to tailor the Castanet
solution to their specific needs, or to embed the Castanet technology into
existing applications.
TECHNOLOGY
We believe that our investment in engineering has resulted in technology
that provides us with a strategic advantage. Castanet has been built from the
ground up to provide a robust Internet-based solution. Castanet provides a
lightweight, cross-platform and easy-to-deploy solution that helps solve complex
application deployment and management problems which we believe are not
addressed adequately by existing client-server distribution and management
tools.
Castanet makes extensive use of a broad range of technologies, including
Java, TCP/IP, HTTP, LDAP, XML, SSL (Secure Socket Layer), a protocol for secure
transmissions over the Internet, and various digital security technologies. In
addition, we have worked with partners to submit several standards proposals to
the World Wide Web Consortium, including the OSD format jointly developed with
Microsoft and the DRP protocol (HTTP Distribution and Replication Protocol), a
protocol which efficiently distributes data on the Internet, jointly developed
with Netscape, Sun Microsystems, Novell, Inc. and @Home Network.
The Castanet protocol is designed to distribute applications and data to
multiple intermittently connected endpoints. The protocol is layered on HTTP so
that it can be used from within most corporate firewalls by tunneling through an
HTTP proxy server. When the user is on line, the Tuner initiates update requests
either when requested by the user or automatically using a predefined update
schedule. When an update request is received, the Transmitter quickly determines
which files in the channel have changed, and if a change has occurred, Castanet
determines exactly which bytes within those files have changed. The Tuner then
downloads the resulting changes, and compression algorithms are used to further
reduce the total download overhead. The efficiency of the Castanet protocol
makes it possible to distribute frequent updates to large applications and
application files with relatively low bandwidth utilization. The protocol also
provides features for user authentication, personalization of content, the
distribution of events and data from the Tuner to the Transmitter and the
automatic redirection of requests to repeaters.
Our OSD-based software installation technology provides a cross-platform
framework for installing, updating, and verifying applications in an operating
system specific manner. Applications are delivered with an OSD file that defines
the platforms on which the software runs, as well as the libraries and resources
it requires. In addition, the OSD file contains platform specific extensions
that define the exact installation requirements. For example, on the Microsoft
Windows platform, the OSD file describes exactly which files need to be
installed, which libraries that contain application code need to be updated,
which registry entries need to be set and which system scripts need to be
updated. Once an application is installed, the OSD file can be used to upgrade,
verify and uninstall the application. OSD files are generated automatically
using an installation capture technology, which eliminates the use of the
original application installer. Information technology managers can customize
the OSD script to control the level of user involvement in the resulting
installation.
We have invested significant resources in developing Castanet's security
implementation. Castanet's security features currently include end user
authentication, digital certificates to verify application authenticity and SSL
communications to help protect the integrity and confidentiality of data
transmitted via Castanet. We offer a standard 40-bit encryption implementation
for international use and a 128-bit encryption implementation for domestic use
only. Our security implementation represents a combination of software written
by us and security code licensed to us by various vendors, including encryption
modules licensed from RSA Data Security and an SSL implementation from Netscape.
To further enhance the breadth of our security offerings, we also recently
licensed a Java-based security implementation. We also have an arrangement with
VeriSign for the provision of digital certificates
41
<PAGE> 43
specifically for Castanet products. See "Risk Factors -- We Rely on Third-Party
Software and Applications."
Most of our products are implemented using Sun Microsystems' Java
programming language. As a result, we believe that our products are extremely
portable, easy to internationalize, easily reconfigured and efficient. The use
of Java has proven to be a major advantage in developing portable components
without significantly increasing the engineering overhead as additional platform
support is required. We believe that our use of and expertise in Java provides
us a competitive advantage. See "Risk Factors -- 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.
The following is a representative list of companies that have purchased over
$100,000 of Castanet products and services:
American Management
Systems
Arthur Andersen
Bear Stearns & Co.
Caterpillar
Charles Schwab
Cisco Systems
CSX
Cytec Industries
Daimler Chrysler
EarthLink Network
Eddie Bauer
Edward Jones
Encanto Networks
Fireman's Fund
Ford Motor Company
Fujitsu
GE Medical Systems
Guardian Life Insurance
H&R Block
Hitachi IT
The Home Depot
Ingram Micro
Instinet
Intuit
Itochu
MECA Software
Merck & Co.
Mitchell International
Morgan Stanley Dean
Witter & Co.
Samsung SDS
Seagate Technology
SegaSoft Networks
Sony Marketing
Sun Microsystems
SBC Warburg
Dillon Read
The Thompson Financial
Company
Toshiba
US WEST
Wausau Insurance
The following examples span intranet, extranet and Internet e-business
applications, and illustrate how organizations are relying on Castanet to
provide a management infrastructure for business-to-employee,
business-to-business, and business-to-customer networked communications and
transactions.
Business-to-Employee (Intranet Applications). The Home Depot and Cytec
sought to lower cost of operations, automate application installation and
maintenance and improve controlled access to information within their intranet
environments. These organizations are utilizing Castanet to distribute, manage
and maintain critical line-of-business applications to their employees, whether
they reside in headquarter locations, remote offices or field locations. The
Home Depot selected Castanet to automate deployment of its custom design
applications to 760 stores worldwide. Cytec relies on Castanet to manage its
supply chain application accessed daily by hundreds of employees in North
America.
Business-to-Business (Extranet Applications). Seagate Technology and Ingram
Micro rely on Castanet's built-in security, bandwidth efficiency,
personalization features and support for disconnected use for combined intranet
and extranet applications. Seagate Technology is utilizing Castanet to deliver
and update business applications such as sales forecasting and pricing
information to its internal sales management, mobile sales force and external
OEM and distributor partners. Ingram Micro is utilizing Castanet to deploy and
maintain electronic commerce services to its network of resellers.
Business-to-Customer (Internet Applications). Intuit and OnSale were
challenged with providing Internet applications to a large number of end users
where bandwidth efficiency, cross platform support and incremental,
transactional updates are key. Intuit embedded Castanet into its Quicken 99
personal finance software to enable its installed base of 10.5 million online
users to receive software and information updates transparently. OnSale, a
leading Internet auction retailer with over one million registered users, built
its BidWatch application on Castanet's infrastructure in order to collect and
display real-time bid information for up to 1,000 simultaneously active users.
42
<PAGE> 44
Many of our customers have gained measurable cost saving benefits through
their deployment of Castanet. We engaged the Hurwitz Group, an industry analyst
and research firm, to work with us to assess the amount of time required for
Castanet to pay for itself, or achieve a break-even return on investment for
selected customers. The cost savings include both reductions in costs that the
customer has achieved or expects to achieve, as well as anticipated costs that
the customer expects to avoid, by deploying Castanet. These cost saving data are
based on data provided by the customers, and have not been independently
verified. The following examples demonstrate the expected payback period for
Castanet in three diverse customer deployments.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
USE OF INITIAL ESTIMATED MONTHLY NET PAYBACK
CUSTOMER CASTANET INVESTMENT COST SAVINGS PERIOD(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Major Distribute and manage sales $ 200,000 People savings: $ 21,000 2 months
Manufacturer productivity applications Hardware savings: $5,000
to its remote/mobile sales Network bandwidth
force and channel partners. utilization
savings: $121,800
Total: $147,800
- ------------------------------------------------------------------------------------------------------------
Computer Equipment Distribute all internal $1,000,000 People savings: $165,000 4 months
Manufacturer business applications to Hardware savings: $122,000
employees connected to Total: $287,000
worldwide corporate
network.
- ------------------------------------------------------------------------------------------------------------
Major Retail Distribute, update and $2,000,000 People savings: $ 86,000 12 months
Corporation manage Windows applications Hardware savings: $ 25,000
over T1 lines to global Support call
retail network. savings: $ 60,000
Total: $171,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the total amount of anticipated time needed for the organization
to recoup initial investment in terms of monthly cost savings.
SALES, MARKETING AND DISTRIBUTION
We market our Castanet products worldwide through a combination of a direct
sales force, resellers and distributors. Our worldwide direct sales, marketing
and business development organizations consisted of 72 individuals as of March
31, 1999, 43 of whom were located at our Mountain View, California headquarters,
23 in regional offices located in California, Georgia, Illinois, Michigan, New
York and Texas and six in our European office in the United Kingdom.
Our sales, marketing and distribution approaches are designed to help
customers understand both the business and technical benefits of the products.
We have built an experienced consulting services organization to facilitate the
successful deployment of our products. We intend to expand our consulting
services organization and direct sales force and to establish additional sales
offices domestically and internationally. Competition for sales personnel is
intense, and we may not be able to attract, assimilate or retain additional
qualified personnel in the future. See "Risk Factors -- We Need to Develop and
Expand Our Sales, Marketing and Distribution Capabilities."
We conduct a variety of marketing programs worldwide to educate our target
market, create awareness and generate leads for our Castanet solutions. To
achieve these goals, we have engaged in marketing activities such as e-business
seminars, direct mailings, print and online advertising campaigns and trade
shows. These programs are targeted at key information technology executives as
well as vice presidents of marketing and general managers of business units. In
addition, we conduct comprehensive public relations programs that include
establishing and maintaining relationships with key trade press, business press
and industry analysts as well as an active executive speakers' bureau. We have
established and enforced consistent branding guidelines for all of our channel
partners in order to solidify our market position. We have also initiated a
customer advisory council which provides a communication channel for regular
feedback from key customers to facilitate the design of products that meet the
expanding requirements of our target market.
43
<PAGE> 45
Tivoli has been a reseller of our products since 1997. We also have an
original equipment manufacturer agreement with Tivoli under which Tivoli is
building upon the Castanet infrastructure to develop a product called
Cross-Site. Any revenues from Tivoli under this original equipment manufacturer
agreement will be from per seat royalty payments on sales of Cross-Site that
contain the Castanet infrastructure. We expect Tivoli to release Cross-Site in
1999. However, the release of Cross-Site could be subject to significant delay.
Furthermore, because Cross-Site is a new product, Tivoli might fail to
successfully market and sell Cross-Site, and the level of demand for Cross-Site
is uncertain. Our reseller agreement with Tivoli expires upon the earlier of May
1, 1999 or written notice provided to us by Tivoli. If the release of Cross-Site
is delayed beyond May 1, 1999, Tivoli would no longer resell our Castanet
product unless we and Tivoli extended the term of the reseller agreement.
Furthermore, it is possible for Tivoli to terminate the reseller agreement prior
to the release of Cross-Site. For a more detailed description of the risks of
our relationship with Tivoli, see "Risk Factors -- We Depend on Our Relationship
with Tivoli."
Netscape, a reseller of our products, accounted for $1.0 million, or
approximately 18%, of our revenues in 1997, and $3.8 million, or approximately
22% of our revenues in 1998. A majority of the $3.8 million of 1998 revenues was
recognized in the first half of 1998, with only $1.3 million in revenues
recognized in the second half of 1998. Netscape is no longer an active reseller,
and we do not expect material revenues from Netscape in the future.
Markets outside the United States are currently served by our direct sales
office in the United Kingdom as well as independent distributors and resellers
covering certain countries in Europe and Asia. Our distributors purchase our
Castanet products at discounts from end-user list prices. Sales under the
agreements are denominated in U.S. dollars. Foreign sales are subject to risks,
including exchange rate fluctuations, internal monetary conditions, tariffs,
import licenses, trade policies and domestic and foreign tax policies. See "Risk
Factors -- Expanding Internationally Is Expensive, We May Receive No Benefit
from Our Expansion and Our International Operations are Subject to Governmental
Regulation."
We may not be able to enter into agreements or establish relationships with
desired distribution partners on a timely basis, or at all, and our distribution
partners may not devote adequate resources to selling our products. See "Risk
Factors -- We Need to Develop and Expand Our Sales, Marketing and Distribution
Capabilities."
CUSTOMER SUPPORT AND TRAINING
Our customer support and training organization consisted of 15 employees as
of March 31, 1999. We offer a variety of customer support services to meet
specific needs including an option to purchase support on a per-question basis
or an annual subscription service that provides customers with the latest
product updates as they become available. In addition, we also offer the
following annual service packages:
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 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
early access to product beta releases and proactive support from designated
technical account managers.
Customers that license our products typically engage our professional
services organization to assist with support, training and consulting. We
believe that growth in our product sales depends on our ability to provide our
customers with these services and to educate third-party resellers and
consultants on how
44
<PAGE> 46
to provide similar services. As a result, we plan to increase the number of our
service personnel to meet these needs. See "Risk Factors -- We Need to Expand
Our Professional Services."
RESEARCH AND DEVELOPMENT
As of March 31, 1999, our engineering organization was comprised of 51
employees responsible for product development, quality assurance, documentation,
localization and porting. Our development organization is divided into four
groups: infrastructure and production tools, management tools, applications and
advanced development.
- The infrastructure and production tools group is focused on enhancing the
functionality, reliability, performance and flexibility of our products
and expanding the ability of Castanet to operate with leading operating
systems.
- Our management tools group is focused on developing enterprise-level
products that address additional Internet services management functions
to complement our current product family, and to expand our coverage of
the Internet services management market. These products are being
developed to add functionality to our existing product family by allowing
customers to collect system and application inventory information,
control subscription and configuration and monitor the status of
endpoints.
- The applications group focuses on developing solutions such as document
management to end users and bi-directional data management between remote
offices and stores, to address specific enterprise problems that will
directly benefit and leverage our product line.
- Our advanced development group defines architecture and engages in
speculative and forward-looking engineering with the intention that the
results may become products in the future.
These four development groups are supported by the quality assurance,
documentation, localization and porting groups. The quality assurance group
implements a process designed to identify software defects through the entire
development cycle. The documentation group is responsible for end user,
administrator and developer documentation for our products. The localization
group is responsible for internationalizing our products while in development as
well as performing the language-specific localization after the English version
is produced. The porting group is responsible for any changes to the source code
required to allow a product to run on platforms other than the two core
development platforms of Solaris and Windows.
We believe that our software development team and core technologies
represent a significant competitive advantage. The software development team
includes a number of key members from the engineering team that developed the
Java programming language and Java virtual machines at Sun Microsystems.
A technically skilled, quality oriented and highly productive development
organization will be a key component of the success of new product offerings. We
must attract and retain highly qualified employees to further our research and
development efforts. Our business and operating results could be seriously
harmed if we are not able to hire and retain the required number of such
individuals. See "Risk Factors -- We Must Retain and Attract Key Personnel."
Research and development expenses were $2.4 million in 1997 and $5.8
million in 1998. To date, substantially all software development costs have been
expensed as incurred and developed by our employees. We believe that significant
investments in research and development are required to remain competitive. As a
consequence, we intend to continue to increase the absolute amount of our
research and development expenditures in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
45
<PAGE> 47
We cannot be sure that existing and future development efforts will be
completed within our anticipated schedules or that they will have the features
to make them successful. Future delays or problems in the development of product
enhancements or new products could seriously harm our business and operating
results. Furthermore, despite our testing and testing by our customers, errors
might be found in our products, which we are unable to successfully correct in a
timely and cost-effective manner. If we are not able to develop new products,
enhancements to existing products or correct errors on a timely and
cost-effective basis, or if such new products or enhancements do not have the
features necessary to make them successful, our business and operating results
will be seriously harmed. Furthermore, we currently license certain externally
developed technology and will continue to evaluate externally developed
technologies for integration into our product lines. See "Risk Factors -- Our
Success Depends on Our Castanet Product Family and New Product Development,"
"-- Software Defects in Castanet Would Harm Our Business" and "-- We Must
Respond to Rapid Technological Change and Evolving Industry Standards."
COMPETITION
The market for Internet services management solutions is new, intensely
competitive and rapidly evolving. We expect competition to continue to increase
both from existing competitors and new market entrants. We believe that our
ability to compete depends on many factors both within and beyond our control,
including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service; and
- the effectiveness of our sales and marketing efforts.
We encounter current or potential competition from a number of different
sources, including sellers of enterprise-wide management systems, which include
electronic software distribution, such as Tivoli, Computer Associates and BMC
Software; companies such as BackWeb, Novadigm, and Sterling Commerce, through
its subsidiary XcelleNet, which market products that support the distribution of
software applications; and desktop software management suites, such as
Microsoft's SMS and Intel's LanDesk.
In addition, we compete with various methods of application distribution
and management, including the web browser, and with application server vendors
and others which have introduced software distribution capabilities into their
products.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have broader customer relationships that could be leveraged,
including relationships with many of our customers. These companies also have
more established customer support and professional services organizations than
we do. In addition, these companies may adopt aggressive pricing policies. As a
result, we may not be able to maintain a competitive position against current or
future competitors.
As new participants enter the Internet services management market, we will
face increased competition. Potential competitors may bundle their products or
incorporate an Internet services management component into existing products in
a manner that discourages users from purchasing our products. Furthermore, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Our competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements than we can.
46
<PAGE> 48
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 three U.S. patent applications, and several trademark registrations and
applications in the United States and certain foreign countries. Our patent and
trademark applications might not result in the issuance of any valid patents or
trademarks. We seek to protect our source code for our software, documentation
and other written materials under trade secret and copyright laws. We license
our software pursuant to signed 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. Any such resulting litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business operating results.
Our success and ability to compete are also dependent on our ability to
operate without infringing upon the proprietary rights of others. In the event
of a successful claim of infringement against us and our failure or inability to
license the infringed technology, our business and operating results would be
significantly harmed. Currently, we are engaged in litigation with Novadigm
concerning the alleged infringement by us of a patent held by Novadigm which is
described in detail in this section under "Legal Proceedings."
LEGAL PROCEEDINGS
On March 3, 1997, Novadigm filed a complaint against us in the United
States District Court for the Northern District of California, alleging
infringement by us of a patent held by Novadigm (U.S. Patent No. 5,581,764, the
"Novadigm Patent"). Novadigm alleges that our infringement relates to certain
methods for updating data and software over a computer network that we use in
our Castanet products. Novadigm later identified claims 1, 4, 5, 23, 24, 25, 31,
33 and 34 of the Novadigm Patent as being infringed. In its complaint, Novadigm
requests preliminary and permanent injunctions prohibiting us and other
specified persons from making, using or selling any infringing products, and
claims damages, costs and attorneys' fees. The complaint also alleges that we
have willfully infringed the Novadigm Patent and seeks up to triple damages
pursuant to the United States Patent Act.
On May 2, 1997, we filed our answer to Novadigm's complaint and filed a
counterclaim against Novadigm. Our answer denies Novadigm's allegations and
asserts defenses to Novadigm's claim. Our counterclaim seeks a declaratory
judgment that we do not infringe the Novadigm Patent and that the Novadigm
Patent is invalid and unenforceable. On October 3, 1997, we received an opinion
from outside patent opinion counsel, Blakely, Sokoloff, Taylor & Zafman, LLP,
that Castanet 1.0 did not infringe the Novadigm Patent. Since then, we have
released three new major versions of Castanet. However, we do not believe that
any changes to Castanet made in the newer versions cause Castanet to infringe
any claim of the Novadigm Patent.
On August 25, 1997 and January 26, 1998, we filed motions for summary
adjudication asking the court to rule that one of the relevant claims of the
Novadigm Patent is invalid because it was anticipated by two prior art
references. In response to each motion, Novadigm argued that the motion was
premature
47
<PAGE> 49
because it pre-dated certain claim construction proceedings, because only
limited discovery had been taken, and because our motion failed to demonstrate
that we were entitled to summary adjudication. The court denied our motions in
part because (1) discovery was ongoing, (2) the court had not had an opportunity
to construe the relevant language in the Novadigm Patent and (3) the court found
there were triable issues of fact as to the disclosures in those references. The
court stated that we could re-file our motions once discovery has been
substantially completed and after it had held a claims construction hearing.
On December 17, 1998, the court held a claims construction hearing on the
appropriate interpretation of certain terms in the Novadigm Patent, and on
December 28, 1998, the court issued an order setting forth its ruling on the
interpretation of those terms.
On January 19, 1999, Novadigm detailed its position as to why Castanet
Version 1.1 infringes the asserted claims of the Novadigm Patent and contended
that the alleged comparison of file level and channel level checksums in
non-optimized updating and the comparison of channel level checksums and their
associated update commands in optimized updating infringes the claims of the
Novadigm Patent. Novadigm's claim is not limited to Version 1.1, and Novadigm
has also stated that it believes that all or some code from subsequent versions
of Castanet work substantially the same way. We do not believe that Novadigm
accurately states the functionality of Castanet Version 1.1 or establishes that
Castanet Version 1.1 infringes the Novadigm Patent. We also do not believe that
the relevant portions of other versions of Castanet work in substantially the
same way or infringe on any claim of the Novadigm Patent. However, it is
possible that Novadigm may allege additional ways in which Castanet infringes
claims of the Novadigm Patent in the future.
To date, both parties have conducted substantial discovery. We expect that
in the first half of 1999, the parties will complete discovery, including the
exchange of expert reports. If the court does not enter judgment based on any
dispositive motions, a jury trial of this action is currently scheduled to begin
in September 1999.
We believe that we have strong defenses against Novadigm's lawsuit.
Accordingly, we intend to defend this suit vigorously. However, we may not
prevail in this litigation. Litigation is subject to inherent uncertainties,
especially in cases such as this where sophisticated factual issues must be
assessed and complex technical issues must be decided. In addition, cases such
as this are likely to involve issues of law that are evolving, presenting
further uncertainty. Our defense of this litigation, regardless of the merits of
the complaint, has been, and will likely continue to be, time-consuming, costly
and a diversion for our technical and management personnel. In addition,
publicity related to this litigation has in the past, and will likely in the
future, have a negative impact on the sale of our Castanet products.
A failure to prevail in the litigation could result in:
- our paying monetary damages, which could be tripled if the infringement
is found to have been willful, and which may include paying an ongoing
royalty to Novadigm for the sales of Castanet products or paying lost
profits to Novadigm for particular sales in which we competed with
Novadigm and closed a sale;
- the issuance of a preliminary or permanent injunction requiring us to
stop selling Castanet in its current form;
- our having to redesign Castanet, which could be costly and time consuming
and could substantially delay Castanet shipments, assuming that such a
redesign is feasible;
- our having to reimburse Novadigm for some or all of its attorneys' fees;
- our having to obtain from Novadigm a license to its patent, which license
might not be made available to us on reasonable terms, particularly
because Novadigm is a competitor; or
48
<PAGE> 50
- our having to indemnify our customers against any losses they may incur
due to the alleged infringement.
Any of these results would seriously harm our business, results of
operations and financial condition. Furthermore, we expect to continue to incur
substantial costs in defending against this litigation and these costs could
increase significantly if our dispute goes to trial. It is possible that these
costs could substantially exceed our expectations in future periods.
EMPLOYEES
At March 31, 1999, we had a total of 162 employees, 156 of whom were based
in the United States and 6 of whom were based in the United Kingdom. Of the
total, 51 were in research and development, 72 were engaged in sales, marketing
and business development, 15 were engaged in customer support and training, and
24 were in administration and finance. None of our employees is subject to a
collective bargaining agreement and we believe that our relations with our
employees are good.
FACILITIES
Our principal administrative, sales, marketing, and research and
development facility occupies approximately 47,500 square feet in Mountain View,
California pursuant to a lease which expires in April 2000. We also have
regional offices located in California, Georgia, Illinois, Michigan, New York
and Texas and a European office in the United Kingdom. We believe that our
existing facilities are adequate for our current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
49
<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors, and their ages as of
April 1, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kim K. Polese............... 37 President, Chief Executive Officer and Director
Arthur A. van Hoff.......... 36 Chief Technology Officer and Director
Steven P. Williams.......... 36 Executive Vice President, Worldwide Sales and
Chief Operating Officer
Fred M. Gerson.............. 48 Vice President, Finance and Chief Financial Officer
Thomas E. Banahan........... 40 Vice President, Business Development
Robert E. Currie............ 31 Vice President, Engineering
Jacqueline Ross............. 41 Vice President, Marketing
Jonathan Payne.............. 34 Senior Engineer
Sami Shaio.................. 35 Senior Engineer
Aneel Bhusri(2)............. 33 Director
Raymond J. Lane(1).......... 52 Director
Douglas J. 39 Director
Mackenzie(1)(2)...........
Stratton D. Sclavos(2)...... 37 Director
</TABLE>
- ---------------
(1) Member of compensation committee
(2) Member of audit committee
Kim K. Polese, a founder of Marimba, has served as President, Chief
Executive Officer and a director of Marimba since our inception in February
1996. Prior to co-founding Marimba, Ms. Polese served in several marketing
positions at Sun Microsystems, an enterprise networking company, from January
1989 until January 1996, most recently as Senior Product Manager. From January
1986 to December 1998, Ms. Polese was a Technical Support Engineer for
Intellicorp, Inc., an expert systems software company. Ms. Polese received her
B.A. in Biophysics from the University of California at Berkeley.
Arthur A. van Hoff, a founder of Marimba, has served as Chief Technology
Officer and a director of Marimba since our inception in February 1996. Prior to
co-founding Marimba, from February 1993 until February 1996, Mr. van Hoff held
various engineering positions at Sun Microsystems, most recently as Senior Staff
Engineer. Mr. van Hoff received his M. Phil. in Computer Science from
Strathclyde University in Glasgow, Scotland and a postgraduate degree in
Computer Science from Hogere Informatica Opleiding in Enschede, Holland.
Steven P. Williams has served as Marimba's Executive Vice President,
Worldwide Sales and Chief Operating Officer since April 1999 and as our Vice
President, Worldwide Sales since November 1996. Prior to joining Marimba, Mr.
Williams served as Vice President, Western Sales from March 1996 to November
1996 and before that as Director, Western Sales from March 1992 to March 1996,
for Tivoli, a systems management software company. Mr. Williams received his
B.S. in Electrical Engineering from California Polytechnic State University, San
Luis Obispo.
Fred M. Gerson has served as Marimba's Vice President, Finance and Chief
Financial Officer since October 1997. Prior to joining Marimba, Mr. Gerson
served as Vice President and Chief Financial Officer for Maxis, Inc., a consumer
entertainment software company, from November 1994 to October 1997, and from
November 1992 to November 1994, he served as Vice President and Chief Financial
Officer of Farallon Computing, Inc. (currently Netopia, Inc.), a communications
software and hardware
50
<PAGE> 52
company. Mr. Gerson received his B.A. in Economics from City University of New
York-Brooklyn College and his M.B.A. from New York University.
Thomas E. Banahan has served as Marimba's Vice President, Business
Development since December 1996. Mr. Banahan was Vice President, Worldwide Sales
of Spyglass, Inc., an Internet software and service provider, from August 1994
to November 1996, and from March 1988 to July 1994, he was a Vice President of
Sales of Comdisco, Inc., a technology services company. Mr. Banahan received his
B.A. in Business Economics from the University of California, Santa Barbara.
Robert E. Currie has served as Marimba's Vice President, Engineering since
August 1996. From December 1988 to January 1995, Mr. Currie held various
engineering positions at Digidesign, Inc., a digital audio technology company
(currently a division of Avid Technology), most recently as Vice President,
Software Engineering. Mr. Currie received his B.S. in Electrical Engineering and
Computer Science from the University of California at Berkeley.
Jacqueline Ross has served as Marimba's Vice President, Marketing since
August 1998. From June 1996 to July 1998, Ms. Ross served as Vice President,
Marketing for Check Point Software Technologies, Ltd., a provider of secure
enterprise networking solutions. From January 1995 to May 1996, Ms. Ross was
Vice President, Marketing of Cambio Networks Inc., an enterprise management
software company, and prior to that served as the Director of Field Marketing at
Hughes LAN Systems, a hardware vendor, from July 1991 to December 1994. Ms. Ross
received her B.A. and B.B.A. from Kent State University and her M.B.A. from
Stanford University.
Jonathan Payne, a founder of Marimba, has served as a Senior Engineer for
Marimba since our inception in February 1996. Prior to co-founding Marimba, Mr.
Payne was a Senior Engineer at Starwave Corporation, an Internet services
company, from February 1995 to February 1996. From June 1988 until February
1995, Mr. Payne served in various engineering positions at Sun Microsystems. Mr.
Payne received his B.A. in Cognitive Science from the University of Rochester.
Sami Shaio, a founder of Marimba, has served as a Senior Engineer of
Marimba since our inception in February 1996. Prior to co-founding Marimba, from
May 1989 until February 1996, Mr. Shaio held various engineering positions at
Sun Microsystems, most recently as Senior Staff Engineer. Mr. Shaio received his
A.B. and A.M. in Linguistics, as well as his B.S. in Computer Science, from
Stanford University. Mr. Shaio received his M.S. in Computer Science from the
University of Michigan.
Aneel Bhusri has served as a director of Marimba since February 1999. Mr.
Bhusri has served as the Senior Vice President of Product Strategy, Business
Development and Marketing for PeopleSoft, an enterprise software company, since
April 1997. Prior to his current position at PeopleSoft, Mr. Bhusri served as
Senior Vice President of Product Strategy from November 1995 to April 1997. From
April 1995 to November 1995, Mr. Bhusri served as Vice President of Product
Strategy and from August 1993 to April 1995 as Director of Product Strategy.
Prior to joining PeopleSoft, Mr. Bhusri was an associate at Norwest Venture
Capital from June 1992 to March 1993. From 1988 to 1991, he was a financial
analyst in Morgan Stanley's Corporate Finance Department. Mr. Bhusri received
his B.S. in Electrical Engineering and his B.A. in Economics from Brown
University, and his M.B.A. from Stanford University.
Raymond J. Lane has served as a director of Marimba since October 1997. Mr.
Lane has been the President and Chief Operating Officer of Oracle Corporation, a
database software company, since January 1997. Prior to his position as
President and Chief Operating Officer, Mr. Lane served as the Executive Vice
President of Worldwide Operations for Oracle from October 1993 to January 1997,
and has been a Director of Oracle since June 1995. Mr. Lane served as a Senior
Vice President of Oracle USA from June 1992 to October 1993. Before joining
Oracle, Mr. Lane served as Senior Vice President and Managing Partner of the
Worldwide Information Technology Group at Booz, Allen & Hamilton, a management
consulting firm, from July 1986 to May 1992. He served on the Booz, Allen &
Hamilton
51
<PAGE> 53
Executive Committee and its Board of Directors from April 1987 to May 1992. Mr.
Lane is also a member of the Board of Trustees of Carnegie Mellon University.
Mr. Lane received his B.S. in Math from West Virginia University.
Douglas J. Mackenzie has served as a director of Marimba since August 1996.
Since June 1989, Mr. Mackenzie has been employed with Kleiner Perkins Caufield &
Byers, a venture capital firm, of which he has been a General Partner since
1994. Prior to joining Kleiner Perkins, Mr. Mackenzie held senior level sales,
marketing, and operations positions in Eczel Corporation, a reseller of
microcomputer products, from October 1983 to August 1987. From March 1982 to
October 1983, Mr. Mackenzie served as a management consultant at Booz, Allen &
Hamilton. Mr. Mackenzie serves as a director of Visio Corporation, a business
drawing and diagramming software company, as well as several private
technology-based companies. Mr. Mackenzie received his A.B. in Economics and his
M.S. in Industrial Engineering from Stanford University and his M.B.A. from
Harvard University.
Stratton D. Sclavos has served as a director of Marimba since February
1999. Mr. Sclavos has been the President, Chief Executive Officer and a director
of VeriSign since he joined VeriSign in July 1995. From October 1993 to June
1995, Mr. Sclavos was Vice President, Worldwide Marketing and Sales of Taligent,
Inc., a software development company that was a joint venture among Apple
Computer, Inc., IBM and Hewlett-Packard. From May 1992 to September 1993, Mr.
Sclavos was Vice President of Worldwide Sales and Business Development of GO
Corporation, a pen-based computer company. Mr. Sclavos is also a director and a
member of the compensation committee of Network Solutions, Inc. Mr. Sclavos
received his B.S. degree in Electrical and Computer Engineering from the
University of California, Davis.
BOARD COMMITTEES
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to the executive officers and directors of Marimba and our
subsidiary including stock compensation and loans. In addition, the compensation
committee reviews and makes recommendations on bonus and stock compensation
arrangements for all of our employees. As part of these responsibilities the
compensation committee also administers our 1996 Stock Plan, 1999 Omnibus Equity
Incentive Plan and 1999 employee stock purchase plan. The current members of the
compensation committee are Messrs. Lane and Mackenzie.
Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including our internal audit and control functions, the results and scope of the
annual audit and other services provided by our independent auditors and our
compliance with legal matters that have a significant impact on our financial
reports. The audit committee also consults with management and our independent
auditors prior to the presentation of financial statements to stockholders and,
as appropriate, initiates inquiries into aspects of our financial affairs. In
addition, the audit committee has the responsibility to consider and recommend
the appointment of, and to review fee arrangements with, our independent
auditors. The current members of the audit committee are Messrs. Bhusri,
Mackenzie and Sclavos.
DIRECTOR COMPENSATION
Certain directors who are not our employees have received grants of options
to purchase shares of our common stock. Upon and following this offering,
non-employee directors will receive automatic option grants under our 1999
Non-Employee Directors Option Plan.
52
<PAGE> 54
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Messrs. Lane and Mackenzie. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member of
the board of directors or compensation committee of any other company, and no
such interlocking relationship has existed in the past.
INDEMNIFICATION
Our Third Amended and Restated Certificate of Incorporation, to be
effective after the closing of this offering, includes a provision that
eliminates the personal liability of our directors and officers for monetary
damages for breach of fiduciary duty as a director or officer, except for
liability:
- for any breach of the director's or officer's duty of loyalty to us or
our stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director or officer derived an
improper personal benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
- we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors; and
- we must advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding to the fullest extent permitted by
Delaware law, subject to very limited exceptions.
We have also entered into indemnification agreements with our officers and
directors containing provisions that may require us to indemnify such officers
and directors against liabilities that may arise by reason of their status or
service as directors or officers, other than liabilities arising from willful
misconduct of a culpable nature, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
53
<PAGE> 55
EXECUTIVE COMPENSATION
The following table sets forth compensation information for 1998 paid by us
for services by our Chief Executive Officer and our four other highest-paid
executive officers whose total salary and bonus for such fiscal year exceeded
$100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Kim K. Polese............................ $130,000 -- -- $930(1)
President and Chief Executive Officer
Steven P. Williams(2).................... 125,000 125,000 50,000 --
Executive Vice President, Worldwide
Sales and Chief Operating Officer
Thomas E. Banahan........................ 125,000 $100,000 -- --
Vice President, Business Development
Robert E. Currie......................... 137,000 -- 70,000 --
Vice President, Engineering
Fred M. Gerson........................... 165,000 -- -- --
Vice President, Finance and
Chief Financial Officer
</TABLE>
- -------------------------
(1) Represents premiums paid by us for term life insurance.
(2) Mr. Williams was our Vice President, Worldwide Sales during 1998.
54
<PAGE> 56
The following table sets forth each grant of stock options during 1998 to
our Chief Executive Officer and our four other highest-paid executive officers.
No stock appreciation rights were granted to these individuals during 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS GRANTED APPRECIATION FOR
OPTIONS TO EMPLOYEES EXERCISE OPTION TERM(4)
GRANTED IN FISCAL PRICE EXPIRATION ---------------------
NAME (#)(1) YEAR(2) ($/SH)(3) DATE 5% 10%
---- ---------- --------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kim K. Polese............... -- -- -- -- -- --
Steven P. Williams.......... 50,000 2.5 8.50 12/17/08 267,280 677,341
Thomas E. Banahan........... -- -- -- -- -- --
Robert E. Currie............ 50,000 2.5% $3.00 08/27/08 $ 94,334 $239,061
20,000 1.0 1.00 01/06/08 12,578 31,875
Fred M. Gerson.............. -- -- -- -- -- --
</TABLE>
- -------------------------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchased under the options may be repurchased by us at the original
exercise price paid per share if the optionee ceases service with us before
vesting in such shares. For Mr. Currie's option covering 50,000 shares and
Mr. Williams' option covering 50,000 shares, the repurchase right lapses and
the optionee vests as to 25% of the option shares upon completion of 12
months of service from the vesting start date, and the balance of the option
shares vests in a series of equal monthly installments over the next three
years of service thereafter. For Mr. Currie's option covering 20,000 shares,
the repurchase right lapses and he vests as to 33 1/3% of the option shares
upon completion of 12 months of service from the vesting start date, and the
balance of the option shares vests in a series of equal monthly installments
over the next two years of service thereafter. The option shares will fully
vest if Marimba is acquired in a merger or asset sale, unless our repurchase
right with respect to the unvested option shares is transferred to the
acquiring entity. Each of the options has a ten-year term, but the term may
end earlier if the optionee ceases service with Marimba.
(2) Based on a total of 2,017,800 option shares granted to our employees under
our 1996 Stock Plan during 1998.
(3) The exercise price is equal to the fair market value of our common stock as
valued by our board of directors on the date of grant. The exercise price
may be paid in cash, in shares of our common stock valued at fair market
value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. We may also finance the
option exercise by lending the optionee sufficient funds to pay the exercise
price for the purchased shares.
(4) The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the exercise price on the date of grant
appreciates at the indicated rate for the entire term of the option and that
the option is exercised at the exercise price and sold on the last day of
its term at the appreciated price.
55
<PAGE> 57
The following table sets forth for our Chief Executive Officer and our four
other highest-paid executive officers the number and value of securities
underlying unexercised options that are held by such executive officers as of
December 31, 1998. No options or stock appreciation rights were exercised by
such executive officers in 1998, and no stock appreciation rights were
outstanding at the end of that year.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR AT FISCAL YEAR
END(#)(1) END($)(2)
---------------------- --------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- -------- ---------- -------- --------
<S> <C> <C> <C> <C>
Kim K. Polese................................. -- -- -- --
Steven P. Williams............................ 19,444 80,556 155,552 244,448
Thomas E. Banahan............................. -- -- -- --
Robert E. Currie.............................. 6,667 63,333 $ 50,003 $374,998
Fred M. Gerson................................ -- -- -- --
</TABLE>
- -------------------------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchased under the options may be repurchased by us at the original
exercise price paid per share if the optionee ceases service with us before
vesting in such shares. The heading Vested refers to shares that are no
longer subject to our repurchase right; the heading Unvested refers to
shares subject to our repurchase right as of December 31, 1998.
(2) Based on the fair market value of our common stock at the end of 1998 of
$8.50 per share, less the exercise price payable for such shares.
EMPLOYEE BENEFIT PLANS
1999 OMNIBUS EQUITY INCENTIVE PLAN
Our 1999 Omnibus Equity Incentive Plan was adopted by our board of
directors on February 2, 1999. We will also seek stockholder approval of this
plan. We have reserved 1,250,000 shares of our common stock for issuance under
the 1999 Omnibus Equity Incentive Plan. As of January 1 of each year, starting
in 2000, the number of shares reserved for issuance under our 1999 Omnibus
Equity Incentive Plan will be increased automatically by 4% of the total number
of shares of common stock then outstanding or, if less, 1,250,000 shares. No
options have yet been granted under the 1999 Omnibus Equity Incentive Plan.
Under the 1999 Omnibus Equity Incentive Plan, the individuals eligible to
receive awards are:
- employees;
- non-employee members of the board of directors; and
- consultants.
The types of awards that may be made under the 1999 Omnibus Equity
Incentive Plan are:
- options to purchase shares of common stock;
- stock appreciation rights;
- restricted shares; and
- stock units.
Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for such favorable
tax treatment. With limited restrictions, if shares awarded under the 1999
56
<PAGE> 58
Omnibus Equity Incentive Plan are forfeited, those shares will again become
available for new awards under the 1999 Omnibus Equity Incentive Plan.
The compensation committee of our board of directors administers the 1999
Omnibus Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of our 1999 Omnibus
Equity Incentive Plan. The committee has the discretion to determine which
eligible individuals are to receive any award, and to determine the type,
number, vesting requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999
Omnibus Equity Incentive Plan may not be less than 100% of the fair market value
of our common stock on the option grant date. The exercise price for
non-statutory options granted under the 1999 Omnibus Equity Incentive Plan may
not be less than 85% of the fair market value of our common stock on the option
grant date.
Our 1999 Omnibus Equity Incentive Plan provides that no participant may
receive options or stock appreciation rights covering more than 100,000 shares
in the same year, except that a newly hired employee may receive options or
stock appreciation rights covering up to 300,000 shares in the first year of
employment.
The exercise price may be paid with:
- cash;
- outstanding shares of common stock;
- the cashless exercise method through a designated broker;
- a pledge of shares to a broker; or
- a promissory note.
The purchase price for newly issued restricted shares awarded under the
1999 Omnibus Equity Incentive Plan may be paid with:
- cash;
- a promissory note; or
- the rendering of past services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock appreciation rights in return for
the grant of new options or stock appreciation rights. The new option or right
may have the same or a different number of shares and the same or a different
exercise price.
If a change in control of Marimba occurs, an option or other award under
the 1999 Omnibus Equity Incentive Plan will become fully exercisable and fully
vested if the option or award is not assumed by the surviving corporation or its
parent or if the surviving corporation or its parent does not substitute
comparable awards for the awards granted under the 1999 Omnibus Equity Incentive
Plan.
A change in control includes:
- a merger or consolidation of Marimba after which our then-current
stockholders own less than 50% of the surviving corporation;
- a sale of all or substantially all of our assets;
- a proxy contest that results in replacement of more than one-half of our
directors over a 24-month period; or
- an acquisition of 50% or more of our outstanding stock by a person other
than a person related to Marimba, such as a corporation owned by our
stockholders.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Omnibus Equity Incentive Plan shall be
57
<PAGE> 59
assumed by the surviving corporation or its parent, shall be continued by
Marimba if it is the surviving corporation, shall have accelerated vesting and
then expire early, or shall be cancelled for a cash payment.
Our board of directors may amend or terminate the 1999 Omnibus Equity
Incentive Plan at any time. If our board amends the plan, stockholder approval
of the amendment will be sought only if required by an applicable law. The 1999
Omnibus Equity Incentive Plan will continue in effect indefinitely unless the
board decides to terminate the plan earlier.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our employee stock purchase plan on February
2, 1999. We will also seek stockholder approval of this plan. We have reserved
500,000 shares of our common stock for issuance under our 1999 employee stock
purchase plan. As of January 1 each year, starting in 2000, the number of shares
reserved for issuance under our 1999 employee stock purchase plan will be
increased automatically by 2% of the total number of shares of common stock then
outstanding or, if less, 500,000 shares. Our 1999 employee stock purchase plan
is intended to qualify under Section 423 of the Internal Revenue Code.
Eligible employees may begin participating in the 1999 employee stock
purchase plan at the start of an offering period. Each offering period lasts 24
months. Two overlapping offering periods will start on May 1 and November 1 of
each calendar year. However, the first offering period will start on the
effective date of this offering and end on April 30, 2001. Purchases of our
common stock will occur on April 30 and October 31 of each calendar year during
an offering period.
Our 1999 employee stock purchase plan will be administered by the
compensation committee of our board of directors. Each of our employees is
eligible to participate if he or she is employed by us for more than 20 hours
per week and for more than five months per year.
Our 1999 employee stock purchase plan permits each eligible employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions may not exceed 10% of the employee's cash compensation. The initial
period during which payroll deductions may be contributed will begin on the
effective date of this offering and end on October 31, 1999. Each participant
may purchase up to 500 shares on any purchase date.
The price of each share of common stock purchased under our 1999 employee
stock purchase plan will be 85% of the lower of:
- the fair market value per share of our common stock on the date
immediately before the first date of the applicable offering period; or
- the fair market value per share of our common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- the price offered to the public in this offering; or
- the fair market value per share of our common stock on the purchase date.
Employees may end their participation in the 1999 employee stock purchase
plan at any time. Participation ends automatically upon termination of
employment with Marimba.
If a change in control of Marimba occurs, our 1999 employee stock purchase
plan will end, and shares will be purchased with the payroll deductions
accumulated to date by participating employees, unless this plan is assumed by
the surviving corporation or its parent. Our board of directors may amend or
terminate the 1999 employee stock purchase plan at any time. If our board of
directors increases the number of shares of common stock reserved for issuance
under the 1999 employee stock purchase plan, it must seek the approval of our
stockholders.
58
<PAGE> 60
1999 NON-EMPLOYEE DIRECTORS OPTION PLAN
Our board of directors adopted our 1999 Non-Employee Directors Option Plan
on February 2, 1999. We will also seek stockholder approval of this plan. Only
the non-employee members of our board of directors will be eligible for
automatic option grants under this plan.
We have reserved 150,000 shares of our common stock for issuance under our
1999 Non-Employee Directors Option Plan. As of January 1 each year, starting in
2000, the number of shares reserved for issuance under our 1999 Non-Employee
Directors Option Plan will be increased automatically to restore the total
number of shares available under this plan to 150,000 shares. No shares have yet
been issued under our 1999 Non-Employee Directors Option Plan.
The compensation committee of our board of directors will make any
administrative determinations under our 1999 Non-Employee Directors Option Plan.
No discretionary decisions will be made by the compensation committee under this
plan.
The exercise price for options granted under our 1999 Non-Employee
Directors Option Plan may be paid in cash or in outstanding shares of our common
stock. Options may also be exercised on a cashless basis through the same-day
sale of the purchased shares.
Each individual who became a member of our board of directors as a
non-employee director before 1999 will receive a fully vested option for 7,500
shares of our common stock on the effective date of this offering. The exercise
price of this option will be the initial price offered to the public in this
offering.
Each individual who first joins our board of directors as a non-employee
director after the effective date of this offering will receive at that time a
fully vested option for 15,000 shares of our common stock. In addition, at each
of our annual stockholders meetings, beginning in 2000, each non-employee
director who will continue to be a director after that meeting will
automatically be granted at that meeting a fully vested option for 7,500 shares
of our common stock. However, any non-employee director who receives an option
for 15,000 shares under this plan will first become eligible to receive the
annual option for 7,500 shares at the annual meeting that occurs at any time
during the year that is two calendar years after the year in which he or she
received the option for 15,000 shares. For example, if a director received the
option for 15,000 shares at any time in 1999, the director will first become
eligible to receive the option for 7,500 shares at the annual stockholders
meeting occurring in 2001. The exercise price of each option will be equal to
the fair market value of our common stock on the option grant date.
Our board of directors may amend or modify the 1999 Non-Employee Directors
Option Plan at any time. The 1999 Non-Employee Directors Option Plan will
terminate on February 1, 2009, unless our board of directors decides to
terminate the plan sooner.
CHANGE OF CONTROL ARRANGEMENTS
We granted to Mr. Gerson options to purchase an aggregate of 300,000 shares
of our common stock at an exercise price of $.50 per share. The first option for
250,000 shares vested as to one-third of the shares subject to the option on the
first anniversary of Mr. Gerson's employment start date and the remainder vests
in equal monthly installments for twenty-four months thereafter. The second
option for 50,000 shares vests in equal monthly installments for thirty-six
months commencing November 3, 1998.
If there is a merger or asset sale of Marimba after the first twelve months
of Mr. Gerson's employment and Mr. Gerson is constructively terminated within
twelve months of the merger or asset sale, Mr. Gerson will vest in 50% of the
remaining unvested shares subject to both options. Following the acceleration of
both options, the remaining unvested shares subject to such options will vest in
accordance with the original vesting schedules, as if the remaining shares were
the only shares subject to the options.
59
<PAGE> 61
All options and other awards granted under our 1996 Stock Plan and our 1999
Omnibus Equity Incentive Plan, including options granted to our executive
officers, will become fully vested if a change in control of Marimba occurs,
unless the options or awards are assumed by the surviving corporation or its
parent or if the surviving corporation or its parent substitutes comparable
options or awards for options or awards granted under our plans.
60
<PAGE> 62
CERTAIN TRANSACTIONS
Since our incorporation in February 1996, we have issued and sold
securities to the following persons who are our executive officers, directors or
principal stockholders.
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED PREFERRED COMMON
INVESTOR(1) STOCK(2) STOCK(3) STOCK
----------- --------- --------- ---------
<S> <C> <C> <C>
Kim K. Polese(4)........................................... -- -- 2,500,000
Arthur A. van Hoff(4)...................................... -- -- 2,500,000
Steven P. Williams......................................... 67,458 -- 316,000
Thomas E. Banahan.......................................... -- -- 316,000
Robert E. Currie........................................... -- -- 300,000
Fred M. Gerson............................................. -- -- 300,000
Jonathan Payne(4).......................................... -- -- 2,500,000
Sami Shaio(4).............................................. -- -- 2,500,000
Raymond J. Lane............................................ -- 19,971 --
Kleiner Perkins Caufield & Byers(5)........................ 2,698,412 199,712 --
</TABLE>
- -------------------------
(1) See "Principal and Selling Stockholders" for more detail on shares held by
these purchasers.
(2) The per share purchase price for our Series A preferred stock was $1.4824.
(3) The per share purchase price for our Series B preferred stock was $5.0072.
(4) Each of Kim K. Polese, Arthur A. van Hoff, Jonathan Payne and Sami Shaio,
our founders, entered into a Restricted Common Stock Purchase Agreement,
dated February 21, 1996, with us. The per share purchase price for these
shares of common stock was $.001.
(5) Kleiner Perkins Caufield & Byers includes the following entities managed by
Kleiner Perkins: KPCB Java Fund, L.P., KPCB Information Sciences Zaibatsu
Fund II, L.P., Kleiner Perkins Caufield & Byers VIII, L.P and KPCB VIII
Founders Fund, L.P. Douglas J. Mackenzie, a director of Marimba, is a
general partner of Kleiner Perkins.
In addition, we have granted options to certain of our executive officers.
See "Management -- Executive Compensation."
SERIES A FINANCING
On August 8, 1996, we issued an aggregate of 2,698,412 shares of Series A
preferred stock at a per share purchase price of $1.4824 to three investors,
each of which is an entity affiliated with Kleiner Perkins, one of our principal
stockholders. Douglas J. Mackenzie, a member of our board of directors, is a
general partner of Kleiner Perkins. On January 28, 1997, we issued 67,458 shares
of Series A preferred stock at a per share purchase price of $1.4824 to Steven
P. Williams, our Executive Vice President, Worldwide Sales and Chief Operating
Officer.
SERIES B FINANCING
On August 25 and 28, 1997, we issued an aggregate of 2,895,829 shares of
Series B preferred stock at a per share purchase price of $5.0072 to ten
investors, including entities affiliated with Kleiner Perkins. On September 23,
October 23 and November 21, 1997, we issued an aggregate of 71,896 shares of
Series B preferred stock at a per share purchase price of $5.0072 to four
investors. On October 7, 1997, we issued 19,971 shares of Series B preferred
stock at a per share purchase price of $5.0072 to Raymond J. Lane, a member of
our board of directors.
61
<PAGE> 63
LOANS FROM CERTAIN DIRECTORS AND EXECUTIVE OFFICERS
Each of our founders, Kim K. Polese, Arthur A. van Hoff, Jonathan Payne,
and Sami Shaio, provided a short-term loan to us in return for a promissory
note, dated March 7, 1996, issued to each founder. Each such note was in the
principal sum of $12,500 and accrued simple interest at the rate of 5.32% per
year. In addition, Mr. Shaio loaned an additional $14,000 to us in return for a
promissory note, dated July 17, 1996, which accrued simple interest at the rate
of 5.32% per annum. We repaid each of these loans in August 1996.
LOAN TO EXECUTIVE OFFICER
On November 11, 1997, we loaned $149,970 to Fred M. Gerson, secured by a
stock pledge agreement, in connection with his purchase of 300,000 shares of our
common stock. This note accrued interest at the rate of 5.69% per annum. The
principal balance of this note and accrued interest was paid in full in January
1999. See "Executive Compensation -- Change of Control Arrangements."
STOCK OPTION GRANTS TO CERTAIN DIRECTORS
On September 18, 1997, we granted to Raymond J. Lane an option to purchase
75,000 shares of common stock at a per share exercise price of $.50 under our
1996 Stock Plan. Mr. Lane's option is subject to three-year vesting, in which he
becomes vested in 33 1/3% of the option shares upon completion of 12 months of
service and in the balance of the option shares in a series of equal monthly
installments upon the completion of each of the next 24 months of service. On
February 2, 1999, we granted to each of Aneel Bhusri and Stratton D. Sclavos an
option to purchase 20,000 shares of common stock at a per share exercise price
of $10.00 pursuant to our 1996 Stock Plan. Messrs. Bhusri's and Sclavos' options
were fully vested upon grant.
INDEMNIFICATION
We have entered into an indemnification agreement with each of our officers
and directors. See "Management -- Indemnification" for a description of the
indemnification available to our officers and directors under our Third Amended
and Restated Certificate of Incorporation, to be effective after the closing of
this offering and our bylaws.
------------------------
We believe that the transactions above were made on terms no less favorable
to us than could have been obtained from unaffiliated third parties. All future
transactions, including loans between us and our officers, directors, principal
stockholders and their affiliates will be approved by a majority of the board of
directors, including a majority of the independent and disinterested outside
directors on the board of directors, and will continue to be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
62
<PAGE> 64
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth selected information regarding beneficial
ownership of our outstanding common stock as of March 31, 1999 and as adjusted
to reflect the sale of the common stock offered hereby for: (1) each of our
directors, our chief executive officer and our four other highest-paid executive
officers; (2) all of our directors and executive officers as a group; and (3)
each other person known by us to own beneficially more than 5% of our common
stock. Except as otherwise indicated, we believe that the beneficial owners of
the common stock listed below, based on information furnished by such owners,
have sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING
NAME AND ADDRESS OF ------------------------- BEING -------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT(1)(2) OFFERED NUMBER PERCENT(1)(2)
------------------- --------- ------------- ------- --------- -------------
<S> <C> <C> <C> <C> <C>
Kim K. Polese..................... 2,486,072 12.9% 124,300 2,361,772 10.4%
Steven P. Williams(3)(4).......... 483,458 2.5 -- 483,458 2.1
Thomas E. Banahan................. 316,000 1.6 -- 316,000 1.4
Robert E. Currie(3)............... 370,000 1.9 -- 370,000 1.6
Fred M. Gerson(5)................. 300,000 1.6 -- 300,000 1.3
Arthur A. van Hoff................ 2,480,000 12.9 124,000 2,356,000 10.4
Aneel Bhusri(3)................... 20,000 0.1 -- 20,000 .09
Raymond J. Lane(3)................ 94,971 0.5 -- 94,971 .42
Douglas J. Mackenzie(6)........... 2,898,124 15.1 -- 2,898,124 12.7
c/o Kleiner Perkins Caufield &
Byers 2750 Sand Hill Road Menlo
Park, CA 94025
Stratton D. Sclavos(3)............ 20,000 0.1 -- 20,000 .09
OTHER 5% STOCKHOLDERS
Jonathan Payne(7)................. 2,476,000 12.9 123,700 2,352,300 10.3
Sami Shaio........................ 2,439,200 12.7 80,000 2,359,200 10.4
Entities Affiliated with Kleiner
Perkins Caufield & Byers........ 2,898,124 15.1 -- 2,898,124 12.7
2750 Sand Hill Road Menlo Park,
CA 94025
All directors and executive
officers as a group (11
persons)(8)..................... 9,768,625 49.4 248,300 9,520,325 40.8
</TABLE>
- -------------------------
(1) Assumes no exercise of the underwriters' over-allotment option. If the
underwriters' over-allotment option is exercised, up to an additional
412,000 shares may be sold by certain selling stockholders as follows: Kim
K. Polese 124,300; Arthur A. van Hoff 124,000; Jonathan Payne 123,700; and
Sami Shaio 40,000.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Common stock subject to options
exercisable within 60 days of March 31, 1999 are deemed outstanding for
purposes of computing the percentage ownership of the person holding such
option but are not deemed outstanding for purposes of computing the
percentage ownership of any other person. Except where indicated, and
subject to community property laws where applicable, the persons in the
table above have sole voting and investment power with respect to all common
stock shown as beneficially owned by them. Unless otherwise indicated, the
address of each holder of more than 5% of our common stock listed in the
table is c/o Marimba, Inc., 440 Clyde Ave., Mountain View, CA 94043.
63
<PAGE> 65
(3) The following table indicates those people whose total number of
beneficially owned shares include shares subject to options exercisable
within 60 days of March 31, 1999:
<TABLE>
<CAPTION>
Shares Subject to Options
-------------------------
<S> <C>
Robert E. Currie............................................ 70,000
Steven P. Williams.......................................... 100,000
Aneel Bhusri................................................ 20,000
Raymond J. Lane............................................. 75,000
Stratton D. Sclavos......................................... 20,000
</TABLE>
(4) Includes 1,500 shares held as custodian for Zachary P. Williams and 1,500
shares held as custodian for Natalia J. Williams.
(5) Includes 5,000 shares held as custodian for Stacey B. Gerson and 5,000
shares held as custodian for Hilary I. Gerson. Mr. Gerson disclaims
beneficial ownership of such shares.
(6) Represents 1,988,745, 72,453, 76,131 and 760,795 shares of common stock held
of record by KPCB Java Fund, L.P., KPCB Information Sciences Zaibatsu Fund
II, L.P., KPCB VIII Founders Fund, L.P., and Kleiner Perkins Caufield &
Byers VIII, L.P., respectively. Mr. Mackenzie, a director of Marimba, is a
general partner of Kleiner Perkins. Mr. Mackenzie disclaims beneficial
ownership of shares held by Kleiner Perkins except to the extent of his
pecuniary interest arising from his interest in Kleiner Perkins.
(7) Includes 1,538 shares held as custodian for Madeline M. Payne.
(8) Includes 585,000 shares subject to options which are exercisable within 60
days of March 31, 1999, 5,000 shares held by Mr. Gerson as custodian for
Stacey B. Gerson and 5,000 shares held as custodian for Hilary I. Gerson,
and 1,500 shares held by Mr. Williams as custodian for Zachary P. Williams
and 1,500 shares held as custodian for Natalia J. Williams.
64
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 80,000,000 shares of common stock,
$.0001 par value, and 10,000,000 shares of undesignated preferred stock, $.0001
par value, after giving effect to the amendment of our Second Amended and
Restated Certificate of Incorporation to delete references to Series A preferred
stock and Series B preferred stock following conversion of such preferred stock
into common stock upon the closing of this offering.
The following is a summary description of our capital stock. Our bylaws and
our Third Amended and Restated Certificate of Incorporation, to be effective
after the closing of this offering, provide further information about our
capital stock.
COMMON STOCK
As of March 31, 1999, there were 13,444,209 shares of common stock
outstanding that were held of record by approximately 187 stockholders. There
will be 22,745,775 shares of common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and assuming no exercise after March 31,
1999 of outstanding options, after giving effect to the sale of the shares of
common stock to the public offered hereby and the conversion of our preferred
stock into common stock at a one-to-one ratio.
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 ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available. See "Dividend Policy." In the event of the liquidation,
dissolution or winding up of Marimba, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
Upon filing our Third Amended and Restated Certificate of Incorporation
after the closing of this offering, we will authorize 10,000,000 shares of
preferred stock. The board of directors has the authority to issue the preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, 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 such series, without further vote or action by the stockholders. The issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of us without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. At present, we have no plans to issue any of our
preferred stock.
WARRANTS
Immediately following the closing of this offering, there will be an
outstanding warrant to purchase a total of 16,865 shares of common stock at
$1.48 per share. This warrant expires on January 31, 2004.
65
<PAGE> 67
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
Upon filing after the closing of this offering, our Third Amended and
Restated Certificate of Incorporation will provide that, all stockholder actions
must be effected at a duly called meeting and not by a consent in writing. The
bylaws provide that, except as otherwise required by law or by our Third Amended
and Restated Certificate of Incorporation, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the board
of directors, or by the president or at the request of stockholders holding at
least 30% of our capital stock. These provisions of our Third Amended and
Restated Certificate of Incorporation and bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the board of directors and in the policies formulated by the
board of directors and to discourage certain types of transactions that may
involve an actual or threatened change of control. These provisions are designed
to reduce our vulnerability to an unsolicited acquisition proposal. The
provisions also are intended to discourage certain tactics that may be used in
proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for our shares and, as a consequence, they also
may inhibit fluctuations in the market price of our shares that could result
from actual or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in our management.
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
66
<PAGE> 68
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of 15,181,300 shares of common stock will
be entitled to rights with respect to the registration of such shares under the
Securities Act. Under the terms of the agreement between us and the holders of
such registrable securities, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include their shares of such
common stock in the registration. Holders of 5,753,566 shares of the registrable
securities are also entitled to certain demand registration rights pursuant to
which they may require us to file a registration statement under the Securities
Act at our expense with respect to our shares of common stock, and we are
required to use our best efforts to effect such registration. Further, the
holders of such demand rights may require us to file additional registration
statements on Form S-3. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration and our
right not to effect a requested registration within six months following the
initial offering of our securities, including this offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is U.S. Stock
Transfer Corporation.
67
<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 22,745,775 shares of common
stock outstanding, assuming no exercise of options after March 31, 1999. Of
these shares, the 4,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
that any shares held by persons that directly or indirectly control, or are
controlled by, or are under common control with us, may generally only be sold
in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 18,745,775 shares of common stock are deemed restricted
shares under Rule 144. The number of shares of common stock available for sale
in the public market is limited by restrictions under the Securities Act and
lock-up agreements under which the holders of such shares have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Morgan Stanley
& Co. Incorporated. On the date of this prospectus, no shares other than the
4,000,000 shares offered hereby will be eligible for sale. Beginning 180 days
after the date of this prospectus, or earlier with the consent of Morgan Stanley
& Co. Incorporated, 18,745,775 restricted shares will become available for sale
in the public market subject to the limitations of Rule 144 of the Securities
Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock,
approximately 227,458 shares after giving effect to this offering, and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 of the
Securities Act are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is not
our affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, would be entitled to sell such
shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act. However, the transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of such shares.
Prior to this offering, there has been no public market for our common
stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional common stock will have on the
market price of our common stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
OPTIONS
As of March 31, 1999, options to purchase a total of 1,943,065 shares of
common stock pursuant to the 1996 Stock Plan were outstanding and exercisable.
All of the shares subject to options are subject to lock-up agreements. See
"Lock-up Agreements." An additional 1,087,329 shares of common stock were
available as of March 31, 1999 for future option grants or direct issuances
under the 1996 Stock Plan. However, as of the date of this offering, our 1996
Stock Plan terminates and no future options will be granted under this plan. In
addition, in February, 1999, 2,000,000 shares were reserved for issuance under
our 1999 Omnibus Equity Incentive Plan, 500,000 shares were reserved for
issuance under our 1999 employee stock purchase plan and 150,000 shares were
reserved for issuance under our 1999 Non-
68
<PAGE> 70
Employee Directors Option Plan. See "Management -- Employee Benefit
Plans -- 1999 Omnibus Equity Incentive Plan," "-- 1999 employee stock purchase
plan," and "-- 1999 Non-Employee Directors Option Plan" and Notes 6 and 9 of
Notes to Consolidated Financial Statements.
Rule 701 under the Securities Act provides that shares of common stock
acquired on the exercise of outstanding options may be resold by persons other
than our affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period. We intend to file one or
more registration statements on Form S-8 under the Securities Act to register
all shares of common stock subject to outstanding stock options and common stock
issued or issuable under our 1996 Stock Plan. We expect to file the registration
statement covering shares offered pursuant to the 1996 Stock Plan and the 1999
employee stock purchase plan and 1999 Omnibus Equity Incentive Plan
approximately 30 days after the closing of this offering. Such registration
statements are expected to become effective upon filing. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to the lock-up agreements, if applicable.
69
<PAGE> 71
UNDERWRITERS
Under the terms and subject to conditions contained in an underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Credit Suisse First Boston Corporation, BT Alex. Brown
Incorporated and Hambrecht & Quist LLC are acting as representatives, have
severally agreed to purchase, and Marimba and the selling stockholders have
agreed to sell to the underwriters, severally, the respective number of shares
of our common stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Credit Suisse First Boston Corporation......................
BT Alex. Brown Incorporated.................................
Hambrecht & Quist LLC.......................................
---------
Total............................................. 4,000,000
=========
</TABLE>
The underwriters and the representatives are collectively referred to as
the underwriters and the representatives. The underwriters are offering the
shares of common stock subject to their acceptance of the shares from Marimba
and the selling stockholders and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of our common stock offered by us in this
offering are subject to the approval of legal matters by their counsel and to
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by us in this offering, other than those covered
by the over-allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of the prospectus and part to certain dealers at a price that represents a
concession not in excess of $ per share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
Marimba and the selling stockholders have granted to the underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase up
to an aggregate of 600,000 additional shares of common stock at the public
offering price set forth on the cover page of the prospectus, less underwriting
discounts and commissions. The underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered hereby. To the extent such option
is exercised, each underwriter will become obligated, subject to limited
conditions, to purchase approximately the same percentage of such additional
shares of common stock as the number set forth next to such underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all underwriters in the preceding table. If the
underwriters' option is exercised in full, the total price to the public for
this offering would be $ , the total underwriters' discounts and
commissions would be $ , the total proceeds to Marimba would be
$ and the total proceeds to the selling stockholders would be
$ .
The underwriters have informed Marimba that each principal underwriter in
this offering may, subject to the approval of Morgan Stanley & Co. Incorporated,
sell to discretionary accounts over which such principal underwriter exercises
discretionary authority. The underwriters have further informed
70
<PAGE> 72
Marimba that they estimate that such sales will not exceed in the aggregate five
percent of the total number of shares of common stock offered by them.
Marimba has applied to list the common stock on the Nasdaq National Market
under the symbol "MRBA."
At the request of Marimba, the underwriters will reserve up to 260,000
shares of common stock to be offered hereby for sale, at the initial public
offering price, to directors, officers, employees, business associates and
related persons of Marimba. The number of shares of common stock available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares which are not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered hereby.
Marimba, our selling stockholders, directors, executive officers, and
certain other stockholders and optionholders have each agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, he will not, during the period ending 180 days after the date of
this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock; or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or similar arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by Marimba of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- transactions by any person other than Marimba relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares;
- the granting of stock options pursuant to existing Marimba employee
benefit plans, provided that such options do not become exercisable and
such options do not vest during such 180-day period; or
- certain gifts, distributions or transfers to trusts, provided that
transferees in transactions described in this clause enter into lock-up
agreements similar to those described in the previous paragraph.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may agree to sell or
allot more shares than the 4,000,000 shares of common stock Marimba and the
selling stockholders have agreed to sell them. This over-allotment would create
a short position in the common stock for the underwriters' account. To cover any
over-allotments or to stabilize the price of the common stock, the underwriters
may bid for, and purchase, shares of common stock in the open market. Finally,
the underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the common stock in the offering, if
the syndicate repurchases previously distributed common stock in transactions to
cover syndicate short positions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the common
stock above
71
<PAGE> 73
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
Marimba, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
In October 1997, Marimba sold 2,987,696 shares of Series B preferred stock.
An affiliate of Hambrecht & Quist LLC, one of the underwriters in this offering,
purchased 39,943 shares of Series B preferred stock, which are convertible into
39,943 shares of common stock, on the same terms as the other purchasers of
Series B preferred stock.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be determined by
negotiations between Marimba and the representatives. Among the factors to be
considered in determining the initial public offering price will be:
- the future prospects of Marimba and its industry in general;
- sales, earnings and certain other financial operating information of
Marimba in recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to those of Marimba.
The estimated public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and other
factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Marimba by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo
Park, California. Certain legal matters in connection with the offering will be
passed upon for the underwriters by Fenwick & West LLP, Palo Alto, California.
As of the date of this prospectus, members and employees of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, beneficially owned an aggregate of
23,610 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, for the period from February
21, 1996 (inception) to December 31, 1996, and for each of the years in the
two-year period ended December 31, 1998 as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given upon the
authority of such firm as experts in accounting and auditing.
72
<PAGE> 74
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits to the registration
statement. For further information with respect to Marimba and our common stock
we offer hereby, reference is made to the registration statement and the
exhibits filed as a part of the registration statement. Statements contained in
this prospectus concerning the contents of any contract or any other document
referred to may be only summaries of such documents. The exhibits to this
registration statement should be referenced for the complete contents of these
contracts and documents. Each such statement is qualified in all respects by
such reference to such exhibit. The registration statement, including the
exhibits thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such office after payment of fees prescribed by the Commission. The
Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants, including
us, that file electronically with the Commission. The address of the site is
http://www.sec.gov.
73
<PAGE> 75
MARIMBA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Financial Statements
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations and Comprehensive
Loss................................................... F-4
Consolidated Statements of Redeemable Convertible
Preferred Stock and Stockholders' Equity (Net Capital
Deficiency)............................................ F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 76
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, 1997 and 1998, and the related consolidated statements
of operations and comprehensive loss, redeemable convertible preferred stock and
stockholders' equity (net capital deficiency), and cash flows for the period
from inception (February 21, 1996) to December 31, 1996 and for the years ended
December 31, 1997 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well 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, 1997 and 1998, and the consolidated results of its operations
and its cash flows for the period from inception (February 21, 1996) to December
31, 1996 and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 13, 1999
F-2
<PAGE> 77
MARIMBA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------- DECEMBER 31,
1997 1998 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $14,402 $ 3,700
Short-term investments................................. -- 4,125
Accounts receivable, net of allowances of $49 and $70
at December 31, 1997 and 1998........................ 4,591 2,585
Unbilled receivables................................... -- 1,036
Prepaid expenses and other current assets.............. 248 371
------- --------
Total current assets.............................. 19,241 11,817
Property and equipment, net................................. 2,401 2,747
Other assets................................................ 256 298
------- --------
$21,898 $ 14,862
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities............... $ 1,940 $ 1,396
Accrued compensation................................... 1,535 1,704
Current portion of capital lease obligations and
equipment advances................................... 133 286
Deferred revenue....................................... 7,597 5,519
------- --------
Total current liabilities......................... 11,205 8,905
Long-term portion of capital lease obligations and equipment
advances, and other long-term liabilities................. 211 747
Commitments and contingencies
Redeemable convertible preferred stock, 15,000 shares
authorized at December 31, 1997 and 1998, $.0001 par
value, issuable in series:
Series A redeemable convertible preferred stock, 2,800
shares designated; 2,766 shares issued and
outstanding at December 31, 1997 and 1998 and none
pro forma (liquidation preference at December 31,
1998 of $4,100)...................................... 4,055 4,055 $ --
Series B redeemable convertible preferred stock, 3,050
shares designated; 2,987 shares issued and
outstanding at December 31, 1997 and 1998 and none
pro forma (liquidation preference at December 31,
1998 of $14,960)..................................... 14,898 14,898 --
Stockholders' equity (net capital deficiency):
Common stock, 30,000 shares authorized, $.0001 par
value; 13,067 and 13,053 shares issued and
outstanding at December 31, 1997 and 1998, and 18,806
shares issued and outstanding pro forma.............. 642 2,183 21,136
Note receivable from officer........................... (150) (160) (160)
Deferred compensation.................................. -- (1,116) (1,116)
Cumulative translation adjustment...................... -- (6) (6)
Accumulated deficit.................................... (8,963) (14,644) (14,644)
------- -------- --------
Stockholders' equity (net capital deficiency)..... (8,471) (13,743) $ 5,210
------- -------- ========
$21,898 $ 14,862
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 78
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 21, YEAR ENDED
1996) TO DECEMBER 31,
DECEMBER 31, ------------------
1996 1997 1998
------------- ------- -------
<S> <C> <C> <C>
Revenues:
License.............................................. $ -- $ 5,011 $13,901
Service.............................................. -- 552 3,184
------- ------- -------
Total revenues............................................ -- 5,563 17,085
Cost of revenues:
License.............................................. -- 13 75
Service.............................................. -- 621 1,964
------- ------- -------
Total cost of revenues.................................... -- 634 2,039
------- ------- -------
Gross profit.............................................. -- 4,929 15,046
Operating expenses:
Research and development............................. 515 2,410 5,773
Sales and marketing.................................. 473 8,054 12,371
General and administrative........................... 322 2,367 2,779
Amortization of deferred compensation................ -- -- 251
------- ------- -------
Total operating expenses.................................. 1,310 12,831 21,174
------- ------- -------
Loss from operations...................................... (1,310) (7,902) (6,128)
Interest income........................................... 66 350 518
Interest expense.......................................... (1) (12) (30)
------- ------- -------
Loss before income taxes.................................. (1,245) (7,564) (5,640)
Provision for income taxes................................ -- 154 41
------- ------- -------
Net loss.................................................. (1,245) (7,718) (5,681)
Other comprehensive loss:
Translation adjustment............................... -- -- (6)
------- ------- -------
Comprehensive loss........................................ $(1,245) $(7,718) $(5,687)
======= ======= =======
Basic and diluted net loss per share...................... $ (.81) $ (1.57) $ (.59)
======= ======= =======
Weighted-average shares of common stock outstanding used
in computing basic and diluted net loss per share....... 1,528 4,912 9,606
======= ======= =======
Pro forma basic and diluted net loss per share
(unaudited)............................................. $ (.37)
=======
Shares used in computing pro forma basic and diluted net
loss per share (unaudited).............................. 15,359
=======
</TABLE>
See accompanying notes.
F-4
<PAGE> 79
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
-------------------------------------------
REDEEMABLE
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK RECEIVABLE
---------------- --------------- FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT OFFICER COMPENSATION
------ ------- ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders..................... -- $ -- 10,000 $ 10 $ -- $ --
Issuance of Series A redeemable
convertible preferred stock
to investors, net of issuance
costs of $38................. 2,699 3,963 -- -- -- --
Net loss....................... -- -- -- -- -- --
----- ------- ------ ------ ----- -------
Balances at December 31,
1996......................... 2,699 3,963 10,000 10 -- --
Issuance of Series A redeemable
convertible preferred stock
to officer, net of issuance
costs of $8.................. 67 92 -- -- -- --
Issuance of Series B redeemable
convertible preferred stock
to investors, net of issuance
costs of $62................. 2,987 14,898 -- -- -- --
Issuance of common stock upon
exercise of stock options.... -- -- 2,850 495 -- --
Issuance of common stock for
services..................... -- -- 67 10 -- --
Issuance of common stock upon
exercise of stock options by
an officer in exchange for a
note receivable.............. -- -- 300 150 (150) --
Repurchases of common stock.... -- -- (150) (23) -- --
Net loss....................... -- -- -- -- -- --
----- ------- ------ ------ ----- -------
Balances at December 31,
1997......................... 5,753 18,953 13,067 642 (150) --
Issuance of common stock upon
exercise of stock options.... -- -- 239 230 -- --
Repurchases of common stock.... -- -- (253) (56) -- --
Translation adjustment......... -- -- -- -- -- --
Interest on note receivable
from an officer.............. -- -- -- -- (10) --
Deferred compensation.......... -- -- -- 1,367 -- (1,367)
Amortization of deferred
compensation................. -- -- -- -- -- 251
Net loss....................... -- -- -- -- -- --
----- ------- ------ ------ ----- -------
Balances at December 31,
1998......................... 5,753 $18,953 13,053 $2,183 $(160) $(1,116)
===== ======= ====== ====== ===== =======
<CAPTION>
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
-----------------------------------------
TOTAL
STOCKHOLDERS'
CUMULATIVE EQUITY
TRANSLATION ACCUMULATED (NET CAPITAL
ADJUSTMENT DEFICIT DEFICIENCY)
----------- ----------- -------------
<S> <C> <C> <C>
Issuance of common stock to
founders..................... $-- $ -- $ 10
Issuance of Series A redeemable
convertible preferred stock
to investors, net of issuance
costs of $38................. -- -- --
Net loss....................... -- (1,245) (1,245)
--- -------- --------
Balances at December 31,
1996......................... -- (1,245) (1,235)
Issuance of Series A redeemable
convertible preferred stock
to officer, net of issuance
costs of $8.................. -- -- --
Issuance of Series B redeemable
convertible preferred stock
to investors, net of issuance
costs of $62................. -- -- --
Issuance of common stock upon
exercise of stock options.... -- -- 495
Issuance of common stock for
services..................... -- -- 10
Issuance of common stock upon
exercise of stock options by
an officer in exchange for a
note receivable.............. -- -- --
Repurchases of common stock.... -- -- (23)
Net loss....................... -- (7,718) (7,718)
--- -------- --------
Balances at December 31,
1997......................... -- (8,963) (8,471)
Issuance of common stock upon
exercise of stock options.... -- -- 230
Repurchases of common stock.... -- -- (56)
Translation adjustment......... (6) -- (6)
Interest on note receivable
from an officer.............. -- -- (10)
Deferred compensation.......... -- -- --
Amortization of deferred
compensation................. -- -- 251
Net loss....................... -- (5,681) (5,681)
--- -------- --------
Balances at December 31,
1998......................... $(6) $(14,644) $(13,743)
=== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 80
MARIMBA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 21, YEAR ENDED
1996) TO DECEMBER 31,
DECEMBER 31, ------------------
1996 1997 1998
------------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... $(1,245) $(7,718) $(5,681)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 21 336 934
Amortization of deferred compensation................. -- -- 251
Other................................................. -- -- (16)
Changes in operating assets and liabilities:
Accounts receivable, net............................ (50) (4,541) 2,006
Unbilled receivables................................ -- -- (1,036)
Prepaid expenses and other current assets........... (31) (218) (123)
Accounts payable and accrued liabilities............ 228 1,712 (544)
Accrued compensation................................ -- 1,535 169
Deferred revenue.................................... 200 7,397 (2,078)
Other liabilities................................... -- 34 2
------- ------- -------
Net cash used in operating activities............ (877) (1,463) (6,116)
------- ------- -------
INVESTING ACTIVITIES
Capital expenditures....................................... (278) (2,479) (1,280)
Other assets............................................... (7) (250) (42)
Purchases of short-term investments........................ -- -- (7,125)
Sales of short-term investments............................ -- -- 3,000
------- ------- -------
Net cash used in investing activities............ (285) (2,729) (5,447)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of redeemable convertible preferred
stock.................................................... 3,963 14,990 --
Proceeds from issuance of common stock, net of
repurchases.............................................. 10 482 174
Proceeds from sale and lease back and equipment advances... -- 378 811
Principal payments under capital lease obligations......... -- (67) (124)
------- ------- -------
Net cash from financing activities............... 3,973 15,783 861
------- ------- -------
Net increase (decrease) in cash and cash equivalents....... 2,811 11,591 (10,702)
Cash and cash equivalents at beginning of period........... -- 2,811 14,402
------- ------- -------
Cash and cash equivalents at end of period................. $ 2,811 $14,402 $ 3,700
======= ======= =======
Supplemental disclosure of cash flow information
Interest paid.............................................. $ 1 $ 12 $ 30
======= ======= =======
Income taxes paid.......................................... $ -- $ 154 $ 41
======= ======= =======
Supplemental disclosure of noncash financing activities
Common stock issued in exchange for note receivable from
officer.................................................. $ -- $ 150 $ --
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 81
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Marimba was incorporated in Delaware on February 21, 1996. Marimba develops
and markets Internet-based software management solutions ("Castanet Products"),
that distribute, update, and manage applications and related data over corporate
intranets, extranets and the Internet. Marimba markets its products worldwide
through a combination of a direct sales force and OEM/distributor partners.
Substantially all of Marimba's license revenues are derived from sales of the
Castanet Products. The Castanet Products are the subject of a patent lawsuit.
Marimba believes that it has strong defenses against the lawsuit. However, the
failure of Marimba to prevail could have a material adverse effect on Marimba's
results of operations and financial condition. Currently, no reasonable estimate
can be made of the possible loss or range of loss that may arise from this
lawsuit. See Note 8.
The consolidated financial statements include the accounts of Marimba and
its wholly owned subsidiary in the United Kingdom. Intercompany accounts and
transactions have been eliminated in consolidation.
Marimba has incurred operating losses to date and had an accumulated
deficit of $14,644,000 at December 31, 1998. Marimba's activities have been
primarily financed through private placements of equity securities. Marimba may
need to raise additional capital through the issuance of debt or equity
securities. Such financing may not be available on terms satisfactory to
Marimba, if at all.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Revenue Recognition
License revenues are comprised of perpetual or multiyear license fees which
are primarily derived from contracts with corporate customers and resellers.
Such revenues are recognized after execution of a license agreement or receipt
of a definitive purchase order, and delivery of the product to end-user
customers, provided that there are no uncertainties surrounding product
acceptance, the license fees are fixed and determinable, collectibility is
probable and Marimba has no remaining obligations. Revenue on arrangements with
customers who are not the ultimate users (primarily resellers) is not recognized
until the product is delivered to the end user. If the fee due from the customer
is not fixed or determinable, revenue is recognized as payments become due from
the customer. If collectibility is not considered probable, revenue is
recognized when the fee is collected. Advance payments are recorded as deferred
revenue until the products are shipped, services are provided, or obligations
are met. Marimba's products do not require significant customization.
Service revenues are comprised of revenue from maintenance agreements,
consulting and training fees. Software maintenance agreements provide technical
support and the right to unspecified upgrades on an if-and-when available basis.
Revenue from maintenance agreements is deferred and recognized on a
straight-line basis over the life of the related agreement, which is typically
one year. Service revenues from training and consulting are recognized upon
completion of the work to be performed.
F-7
<PAGE> 82
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (continued)
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9,
"Software Revenue Recognition." These statements provide guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. SOP 97-2, as amended by SOP 98-4, is effective for Marimba's
transactions entered into subsequent to January 1, 1998. The application of SOP
97-2 and SOP 98-4 has not had a material impact on Marimba's results of
operations.
SOP 98-9 amends SOP 97-2 and 98-4, extending the deferral of the
application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999. Marimba has not yet determined the effect of the final adoption
of SOP 98-9 on its financial condition or results of operations. However, SOP
98-9 may require more revenue to be deferred for certain types of transactions.
Unbilled receivables consist of contractually obligated amounts not yet
billable by the Company.
Research and Development
Research and development expenditures are generally charged to operations
as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility, which, for Marimba, is
established upon completion of a working model. Costs incurred by Marimba
between completion of the working model and the point at which the product is
ready for general release have been insignificant. Therefore, through December
31, 1998, all research and development costs have been expensed as incurred.
Cash, Cash Equivalents and Short-Term Investments
Cash equivalents consist of financial instruments which are readily
convertible to cash and have original maturities of three months or less at the
time of acquisition. Marimba's cash and cash equivalents as of December 31, 1998
consist primarily of demand deposits and money market funds held by large
financial institutions in the United States. The carrying value of cash and cash
equivalents approximates fair value at December 31, 1997 and 1998.
Marimba classifies, at the date of acquisition, its marketable securities
into available-for-sale categories in accordance with the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Currently, Marimba classifies its securities as available-for-sale
which are reported at fair market value with the related unrealized gains and
losses included in stockholders' equity. Unrealized gains and losses were not
material for all periods presented. Realized gains and losses and declines in
value of securities judged to be other than temporary are included in interest
income. Interest and dividends on all securities are included in interest
income.
Investments with maturities between three and twelve months are considered
short-term investments. Short-term investments consist of corporate notes and
market auction rate preferred stocks.
F-8
<PAGE> 83
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash, Cash Equivalents and Short-Term Investments (continued)
The cost (which approximates fair value) of Marimba's investments at
December 31, 1998 consisted of commercial paper ($500,000), corporate notes
($1,025,000) and market auction rate preferred stock ($3,100,000).
The following is a reconciliation of Marimba's cash, cash equivalents and
short-term investments to the balance sheet classifications:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Amounts included in cash and cash equivalents........ $ -- $ 500
Short-term investments............................... -- 4,125
------- ------
Total investments.......................... -- 4,625
Money market fund.................................... 14,402 2,689
Demand deposits...................................... -- 511
------- ------
Total cash, cash equivalents and short-term
investments............................. $14,402 $7,825
======= ======
</TABLE>
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
term of the lease.
Accounting for Stock-Based Compensation
Marimba has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 6, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB Opinion No. 25,
when the exercise price of Marimba's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. See pro forma disclosures of applying FAS 123 included in Note 6.
Comprehensive Loss
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. Marimba adopted FAS 130 in the year ended December 31, 1998.
F-9
<PAGE> 84
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 investment balances held at
commercial banks and institutions primarily in the United States and trade
receivables from Marimba's customers. Marimba sells to customers in many
different industries. Marimba extends reasonably short credit terms in most
instances and performs ongoing credit evaluations but does not require
collateral. Marimba provides reserves for potential credit losses, and such
losses have been within management's expectations. To date, Marimba's write-offs
of bad debts have not been significant. During the years ended December 31, 1997
and 1998, Marimba added approximately $50,000 and $75,000 to its bad debt
reserves. Total write-offs of uncollectible accounts were $1,000 and $54,000 in
these periods.
Revenues from one reseller represented 18% and 22% of total revenues for
the years ended December 31, 1997 and 1998. However, as of December 31, 1998
this customer will no longer be an active reseller of our products. The same
reseller accounted for 57% of accounts receivable at December 31, 1997. Sales to
another reseller represented 18% of total revenues for the year ended December
31, 1998. Two other customers accounted for 48% and 16% of the combined accounts
receivable and unbilled receivables accounts at December 31, 1998.
Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 changes the way
companies report selected segment information in annual financial statements and
requires companies to report selected segment information in interim financial
reports to stockholders. FAS 131 is effective beginning in Marimba's year ended
December 31, 1998. Marimba operates solely in one segment, the development and
marketing of network application software, and therefore there is no impact to
Marimba's financial statements of adopting FAS 131. For the years ended December
31, 1997 and 1998, sales to customers outside the United States were $1,199,000
and $1,265,000. The majority of these sales were to customers in Asia.
Net Loss Per Share
Basic and diluted net loss per common share are presented in conformity
with FAS No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of Marimba's initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods presented.
To date, Marimba has not had any issuances or grants for nominal consideration.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Pro forma basic and
diluted net loss per share, as presented in the statements of operations, has
been computed as described above and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of the redeemable convertible
preferred stock (using the if-converted method) from the original date of
issuance.
F-10
<PAGE> 85
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Share (continued)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED
(FEBRUARY 21, 1996) DECEMBER 31,
TO -----------------
DECEMBER 31, 1996 1997 1998
------------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss........................................... $(1,245) $(7,718) $(5,681)
======= ======= =======
Basic and diluted:
Weighted-average shares of common stock
outstanding................................. 10,000 11,474 13,081
Less weighted-average shares subject to
repurchase.................................. (8,472) (6,562) (3,475)
------- ------- -------
Weighted-average shares used in computing
basic and diluted net loss per common
share....................................... 1,528 4,912 9,606
------- ------- -------
Basic and diluted net loss per common share... $ (.81) $ (1.57) $ (.59)
======= ======= =======
Pro forma:
Shares used above............................. 9,606
Pro forma adjustment to reflect
weighted-average effect of the assumed
conversion of redeemable convertible
preferred stock (unaudited)................. 5,753
-------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)...... 15,359
-------
Pro forma basic and diluted net loss per share
(unaudited)................................. $ (.37)
=======
</TABLE>
Marimba has excluded all redeemable convertible preferred stock, warrants,
outstanding stock options and shares subject to repurchase by Marimba from the
calculation of diluted loss per share because all such securities are
antidilutive for all periods presented. Weighted-average options and warrants
outstanding to purchase 375,000, 1,261,000, and 1,483,000 shares of common and
redeemable convertible preferred stock for the years ended December 31, 1996,
1997, and 1998, were not included in the computation of diluted net loss per
share because the effect would be antidilutive. Such securities, had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by this prospectus is consummated, all of the
redeemable convertible preferred stock outstanding will automatically be
converted into common stock. Unaudited pro forma stockholders' equity at
December 31, 1998, as adjusted for the assumed conversion of redeemable
F-11
<PAGE> 86
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unaudited Pro Forma Stockholders' Equity (continued)
convertible preferred stock based on the shares of redeemable convertible
preferred stock outstanding at December 31, 1998, is disclosed on the balance
sheet.
Recent Accounting Pronouncements
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). Marimba is required to adopt
FAS 133 for the year ending December 31, 2000. FAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because Marimba
currently holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of FAS 133 is expected to have no
material impact on Marimba's financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities
capitalize certain costs related to internal use software once certain criteria
have been met. Marimba is required to implement SOP 98-1 for the year ending
December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact
on Marimba's financial condition or results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment...................... $1,191 $ 759
Computer equipment........................... 1,440 3,036
Leasehold improvements....................... 125 241
------ -------
2,756 4,036
Accumulated depreciation and amortization.... (355) (1,289)
------ -------
Property and equipment, net.................. $2,401 $ 2,747
====== =======
</TABLE>
Property and equipment at December 31, 1997 and 1998 includes assets under
capitalized leases of approximately $378,000. Accumulated amortization related
to leased assets was approximately $223,000 and $280,000 at December 31, 1997
and 1998.
3. LEASES AND COMMITMENTS
In January 1997, as part of a sale-leaseback transaction, Marimba entered
into a $500,000 capital lease line of credit for financing of equipment, which
expired on December 31, 1997. Marimba borrowed $378,000 under the line of
credit. This amount bears interest at a rate of 3.5% and is collateralized by
the equipment purchased. Under the terms of the master lease agreement, Marimba
will have the option to purchase the leased equipment at a negotiated price at
the end of the 36-month lease term. In connection
F-12
<PAGE> 87
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES AND COMMITMENTS (CONTINUED)
with the capital lease, Marimba issued a warrant that entitles the holder to
purchase 16,865 shares of Series A redeemable convertible preferred stock (see
Note 6).
Marimba leases its office facilities under various noncancelable operating
lease agreements. Marimba's primary facility lease expires in 2000.
As of December 31, 1998, future minimum lease payments under capital leases
and noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Years ending December 31:
1999........................................................ $ 133 $1,370
2000........................................................ 60 517
2001........................................................ -- 140
2002........................................................ -- 148
2003 and thereafter......................................... -- 421
----- ------
Total minimum lease and principal payments........ 193 $2,596
======
Amount representing interest................................ (6)
-----
Present value of future payments............................ 187
Current portion of capital lease obligations................ (127)
-----
Noncurrent portion.......................................... $ 60
=====
</TABLE>
Rent expense under operating leases totaled approximately $61,000,
$375,000, and $1,245,000 for the years ended December 31, 1996, 1997, and 1998.
4. BANK ARRANGEMENTS
In May 1998, Marimba entered into a credit agreement with a bank which
provides for revolving credit loans, letters of credit, and nonformula and
equipment advance facilities aggregating up to $6,500,000. The loans and
advances are secured by substantially all of Marimba's assets. All of the credit
facilities bear interest at a rate equal to the prime rate (7.75% at December
31, 1998). The credit agreement contains certain financial and reporting
covenants, including a restriction on the payment of dividends. Marimba was in
compliance with these covenants at December 31, 1998.
The amount available under the revolving credit facility is limited to the
lower of $4,000,000 and an amount equal to 80% of eligible accounts receivable,
which available amount is reduced by the amount of outstanding letters of
credit. Under the agreement, letters of credit can be drawn up to an amount not
to exceed $500,000. As of December 31, 1998, no revolving credit loans had been
borrowed or letters of credit issued.
Marimba may borrow up to $1,000,000 under the nonformula-based advance. As
of December 31, 1998, no amounts have been borrowed under this facility.
The equipment advance facility provides Marimba with the ability to borrow
up to $1,500,000. Principal and interest are due in monthly installments
beginning in June 1999 and ending in May 2002. As of December 31, 1998, Marimba
had $811,000 of outstanding borrowings under the facility. The fair
F-13
<PAGE> 88
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BANK ARRANGEMENTS (CONTINUED)
value of the equipment advance is estimated based on current interest rates
available to Marimba for debt instruments with similar terms, degrees of risk,
and remaining maturities. The carrying value of the equipment advance
approximates its fair value.
Principal payments under this equipment advance are as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................................ $ 159
2000........................................................ 270
2001........................................................ 270
2002........................................................ 112
-----
Total payments.................................... 811
Less current portion........................................ (159)
-----
Long-term portion........................................... $ 652
=====
</TABLE>
5. PREFERRED STOCK
Marimba is authorized to issue up to 15,000,000 shares of preferred stock,
issuable in series, with the rights and preferences of each designated series to
be determined by Marimba's Board of Directors. To date, 2,800,000 and 3,050,000
shares have been designated as Series A and Series B redeemable convertible
preferred stock (the "Series A and Series B preferred stock").
Each share of Series A and Series B preferred stock is convertible, at the
option of the holder, into one share of common stock, subject to certain
adjustments for dilutive issuances. Outstanding shares of convertible preferred
stock automatically convert into common stock upon the closing of an
underwritten public offering of common stock under the Securities Act of 1933 in
which Marimba receives at least $12,500,000 in gross proceeds and the price per
share is at least $7.51.
Series A and Series B preferred stockholders are entitled to noncumulative
dividends of $.12 and $.40 per share. Dividends will be paid only when declared
by the Board of Directors out of legally available funds. No dividends have been
declared as of December 31, 1998.
Series A and Series B preferred stockholders are entitled to receive, upon
a liquidating event, an amount per share equal to the issuance price, plus all
declared but unpaid dividends. Thereafter, the remaining assets and funds, if
any, shall be distributed among the holders of Series A and Series B preferred
stock and common stock pro rata based on the number of shares of common stock
held by each (assuming conversion of all such Series A and Series B preferred
stock). If any assets remain after the holders of Series A and Series B
preferred stock have received an aggregate of $4.45 and $7.51 per share, the
remaining assets will be distributed to the holders of the common stock pro rata
based on the number of shares of common stock held by each.
On or at any time after August 15, 2003, Marimba shall, upon written
request from the holders of a majority of the then outstanding shares of Series
A and Series B preferred stock, redeem in whole or in part the Series A and
Series B preferred stock by paying in cash a sum equal to the original issuance
prices of $1.48 and $5.01 per share.
Series A and Series B preferred stockholders have voting rights equal to
the common shares issuable upon conversion of the Series A and Series B
preferred stock.
F-14
<PAGE> 89
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY
Common Stock
In February 1996, Marimba issued and sold an aggregate of 10,000,000 shares
of its common stock to the founders of Marimba pursuant to Restricted Common
Stock Purchase Agreements. The stock vests ratably over a period of three years.
As of December 31, 1998, 556,000 shares are subject to repurchase.
At December 31, 1998, Marimba has reserved 5,770,000 shares of its common
stock for issuance upon conversion of its Series A and Series B preferred stock
and conversion of preferred shares issued upon exercise of outstanding warrants
and 3,422,341 shares of common stock for issuances upon exercise of options then
outstanding and available for grant under Marimba's 1996 Stock Option Plan.
In November 1997, Marimba granted 300,000 options to purchase common stock
under Marimba's 1996 Stock Option Plan to an officer of Marimba who immediately
exercised the options in exchange for a full recourse note receivable of
$150,000. This note, which bears interest at 5.69%, was collateralized by
certain personal assets of the officer and was paid in full on January 8, 1999.
These shares are subject to a right of repurchase that lapses over three years.
1996 Stock Option Plan
In November 1996, the Board of Directors adopted the 1996 Stock Option Plan
(the "1996 Plan") for issuance of common stock to eligible participants.
Incentive stock options and nonstatutory stock options may be granted under the
1996 Plan at prices not less than 100% and 85% of the fair value on the date of
grant. Options expire after 10 years. Options under the plan are immediately
exercisable; however, shares issued are subject to Marimba's right to repurchase
such shares at the original issuance price, which right lapses in a series of
installments measured from the vesting commencement date of the option. As of
December 31, 1998, 1,174,000 shares are subject to repurchase. Options generally
vest and the repurchase rights lapse ratably over a period of three or four
years from the date of grant.
Pro forma information regarding net loss and net loss per share is required
by FAS 123, and has been determined as if Marimba had accounted for its employee
stock options under the fair value method of that Statement. The fair value of
options was estimated at the date of grant using a minimum value option pricing
model with the following weighted-average assumptions: risk-free interest rate
of 6%, 6% and 5% in 1996, 1997 and 1998, and an expected life of four years and
no dividends for all years presented.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options using a
graded vesting method. The effects of applying FAS 123 for pro forma disclosures
are not likely to be representative of the effects on reported net loss for
future years.
F-15
<PAGE> 90
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
1996 Stock Option Plan (continued)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 21, YEARS ENDED
1996) TO DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss:
As reported.................................. $(1,245) $(7,718) $(5,681)
======= ======= =======
Pro forma.................................... $(1,249) $(7,771) $(6,123)
======= ======= =======
Pro forma basic and diluted net loss per share:
As reported.................................. $ (.37)
=======
Pro forma.................................... $ (.40)
=======
</TABLE>
Activity under the 1996 Stock Option Plan was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
SHARES NUMBER PRICE WEIGHTED-
AVAILABLE OF PER AVERAGE
FOR GRANT SHARES SHARE EXERCISE PRICE
---------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
Authorized........................ 3,174,603 -- -- --
Granted........................... (1,499,000) 1,499,000 $ .15 $ .15
---------- ----------
Balance at December 31, 1996...... 1,675,603 1,499,000 $ .15 $ .15
Authorized........................ 2,000,000 -- -- --
Granted........................... (2,529,610) 2,529,610 $ .15 - $ .75 $ .31
Exercised......................... -- (3,217,110) $ .15 - $ .50 $ .20
Repurchased....................... 150,000 -- -- --
Canceled.......................... 17,000 (17,000) $ .15 - $ .75 $ .68
---------- ----------
Balance at December 31, 1997...... 1,312,993 794,500 $ .15 - $ .75 $ .41
Authorized........................ 1,300,000 -- -- --
Granted........................... (2,017,800) 2,017,800 $1.00 - $8.50 $3.54
Exercised......................... -- (238,569) $ .50 - $2.00 $ .96
Repurchased....................... 253,417 -- -- --
Canceled.......................... 381,163 (381,163) $ .15 - $3.50 $ .84
---------- ----------
Balance at December 31, 1998...... 1,229,773 2,192,568 $ .15 - $8.50 $3.16
========== ==========
</TABLE>
F-16
<PAGE> 91
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
1996 Stock Option Plan (continued)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------
WEIGHTED-
AVERAGE
NUMBER WEIGHTED- REMAINING
OF AVERAGE CONTRACTUAL
EXERCISE PRICE RANGE SHARES EXERCISE PRICE LIFE
- -------------------- --------- -------------- -----------
(IN YEARS)
<S> <C> <C> <C>
$.15 72,000 $ .15 7.94
$ .50 - $ .75 341,500 $ .54 8.77
$1.00 - $1.50 255,818 $1.35 9.13
$1.75 - $2.00 132,000 $1.83 9.34
$3.00 - $3.50 1,042,000 $3.14 9.67
$7.00 - $8.50 349,250 $8.21 9.94
---------
2,192,568 $3.16 9.43
=========
</TABLE>
At December 31, 1997, options to purchase 14,249 shares of common stock
were vested at a weighted-average exercise price of $.18 per share. At December
31, 1998, outstanding options to purchase 188,289 outstanding shares of common
stock were vested at a weighted-average exercise price of $.57 per share.
The weighted-average fair value of options granted during 1996, 1997 and
1998 with an exercise price equal to the fair value of Marimba's common stock on
the date of grant was $.03, $.06 and $.73. The weighted-average fair value of
options granted during 1998 with an exercise price below the deemed fair value
of Marimba's common stock on the date of grant was $2.07.
In connection with the grant of certain share options to employees through
December 31, 1998, Marimba recorded deferred compensation of approximately
$1,367,000 for the aggregate differences between the exercise prices of options
at their dates of grant and the deemed fair value for accounting purposes of the
common shares subject to such options. Such amount is included as a reduction of
stockholders' equity and is being amortized on a graded vesting method. The
compensation expense of $251,000 in 1998 relates to options awarded to employees
in all operating expense categories. This amount has not been separately
allocated to these categories.
Warrants
In January 1997, in connection with the sale-leaseback transaction, Marimba
issued a warrant that entitles the holder to purchase 16,865 shares of Series A
redeemable convertible preferred stock at an exercise price of $1.48 per share.
This warrant is exercisable through the earlier of the effective date of a
merger of Marimba or January 31, 2004. Marimba determined that the value of the
warrant was immaterial.
7. INCOME TAXES
Marimba's provision for income taxes for the years ended December 31, 1997
and 1998 consists entirely of foreign withholding taxes.
F-17
<PAGE> 92
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (CONTINUED)
As of December 31, 1998, Marimba had federal net operating loss
carryforwards of approximately $11,100,000. Marimba also had federal research
and development tax credit carryforwards of approximately $400,000. The net
operating loss and credit carryforwards will expire at various dates beginning
on 2011 through 2018, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
Significant components of Marimba's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 3,300 $ 4,400
Research credit carryforwards............................. 200 600
Deferred revenue.......................................... 100 900
Other..................................................... -- 200
------- -------
Total deferred tax assets......................... 3,600 6,100
Valuation allowance......................................... (3,600) (6,100)
------- -------
Net deferred tax assets..................................... $ -- $ --
======= =======
</TABLE>
The valuation allowance for deferred tax assets increased by approximately
$3,100,000 in the year ended December 31, 1997.
8. LEGAL MATTERS
On March 3, 1997, Novadigm, Inc. filed a complaint against Marimba in the
United States District Court for the Northern District of California, alleging
infringement of a patent held by Novadigm. Novadigm alleges that Marimba's
infringement relates to certain methods for updating data and software over a
computer network used in the Castanet products. In its complaint, Novadigm
requests preliminary and permanent injunctions prohibiting Marimba and other
specified persons from making, using or selling any infringing products, as well
as damages, costs, and attorneys' fees. The complaint also alleges that Marimba
has willfully infringed Novadigm's Patent, and seeks up to triple damages
pursuant to the United States Patent Act. To date, both parties have conducted
substantial discovery. If the court does not enter judgment based on any
dispositive motions, a jury trial of this action is currently scheduled to begin
in September 1999.
Marimba believes that it has strong defenses against Novadigm's lawsuit.
Accordingly, Marimba intends to defend this suit vigorously. However, Marimba
may not prevail in this litigation. Litigation is subject to inherent
uncertainties, especially in cases such as this where sophisticated factual
issues must be assessed and complex technical issues must be decided. In
addition, cases such as this are likely to involve issues of law that are
evolving, presenting further uncertainty. Marimba's defense of this litigation,
regardless of the merits of the complaint, has been, and will likely continue to
be, time-consuming, costly and a diversion for Marimba's technical and
management personnel. However, the
F-18
<PAGE> 93
MARIMBA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEGAL MATTERS (CONTINUED)
failure of Marimba to prevail in this litigation could have a material adverse
effect on the Company's results of operations and financial condition.
9. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED)
1999 Employee Stock Purchase Plan
On February 2, 1999, the Board of Directors approved the adoption of
Marimba's 1999 employee stock purchase plan (the "1999 Purchase Plan"), subject
to stockholder approval. A total of 500,000 shares of common stock has been
reserved for issuance under the 1999 Purchase Plan, plus, commencing on January
1, 2000, annual increases equal to the lesser of 500,000 shares, 2% of the
outstanding common shares on such date or a lesser amount determined by the
Board of Directors. The 1999 Purchase Plan permits eligible employees to acquire
shares of Marimba's common stock through periodic payroll deductions of up to
15% of base cash compensation. No more than 500 shares may be purchased by each
employee on any purchase date. Each offering period will have a maximum duration
of 24 months. The price at which the common stock may be purchased is 85% of the
lesser of the fair market value of Marimba's common stock on the first day of
the applicable offering period or on the last day of the respective purchase
period. The initial offering period will commence on the effectiveness of the
initial public offering and will end on April 30, 2001.
1999 Omnibus Equity Incentive Plan
On February 2, 1999, the Board of Directors approved the adoption of
Marimba's 1999 Omnibus Equity Incentive Plan (the "1999 Omnibus Plan"), subject
to stockholder approval. A total of 2,000,000 shares of common stock have been
reserved for issuance to eligible participants under the 1999 Omnibus Plan. The
types of awards that may be made under the 1999 Omnibus Plan are options to
purchase shares of common stock, stock appreciation rights, restricted shares
and stock units. Any shares not yet issued under Marimba's 1996 Stock Plan as of
the date of Marimba's initial public offering will be available for grant under
the 1999 Omnibus Plan. The exercise price for incentive stock options may not be
less than 100% of the fair market value of Marimba's common stock on the date of
grant (85% for nonstatutory options). In the event of a change in control of
Marimba, an option or award under the 1999 Omnibus Plan will become fully
exercisable and fully vested if the option or award is not assumed by the
surviving corporation or the surviving corporation does not substitute
comparable awards for the awards granted under the 1999 Omnibus Plan.
1999 Non-Employee Directors Option Plan
On February 2, 1999, the Board of Directors approved the adoption of
Marimba's Non-Employee Directors Option Plan (the "1999 Directors Plan"),
subject to stockholder approval. A total of 150,000 shares of common stock have
been reserved per issuance to non-employee members of the Board. Commencing
January 1, 2000, the number of shares reserved per issuance will be increased
automatically to restore the total number of shares available under this plan to
150,000 shares.
F-19
<PAGE> 94
DESCRIPTION OF GRAPHICS
Narrative Description of Inside Cover Gate Fold
Landscape Gate Fold, Inside Cover Page; Title Heading Left Justified [Marimba
logo]; caption to the right of logo--"A leading provider of Internet services
management solutions for a new generation of e-business services."
Below the caption is a large disk with a cloud-like figure in the center. Inside
the cloud-like figure is the word "Internet". The disk is captioned "Castanet
Infrastructure."
From the Internet are five leader lines extending to the outer edges of the
disk. Each set of leader lines intersect a box or boxes representing packages
software applications.
One set of leader lines extends to a group of four persons standing on the disk.
The caption next to the persons reads "Customers-
- -- Home banking
- -- Financial portfolio management
Gain efficient access to powerful, up-to-date and personalized e-business
applications, even over low speed dialup connections."
The next set of leader lines extends to a group of three buildings. The
caption next to the buildings reads "Remote Offices-
- -- Office productivity software
- -- Point-of-sale information
Benefit from centralized management of corporate applications and services,
reducing the need for on-site support."
Another set of leader lines extends to a figure of a walking person. The
caption next to the person reads "Mobile Employees-
- -- Sales automation
- -- Expense reporting
Enables off-line use of applications and allows quick synchronization to the
latest information when reconnected."
Continuing around the disk, the next set of leader lines extends to a
building and a factory. The caption next to the building reads "Business
Partners-
- -- Supply chain management
- -- Order entry and tracking
- -- Financial services and trading
Improve operational efficiencies and strengthen relationships through
collaborative exchange of applications, data and services across multiple
enterprises."
At the top of the disk is a large building followed by three small boxes leading
to the cloud-like figure in the middle of the disk. The caption next to this
building reads "Host Enterprise--With Castanet, the host enterprise can
distribute more compelling and cost-effective e-business applications and
services to employees, customers and business partners and centralize the
ongoing management of these applications and services."
In the top right corner of the page is a square with five items in it. The five
items are a rectangle captioned "Application Server," another rectangle
captioned "Web Server," a depiction of a lock and key captioned "Security
Systems" and a cylinder captioned "Database Management System". In the middle of
the square is a cube captioned "Applications."
Below and to the right of the square is text reading "Marimba's
Strategy--Marimba intends to build upon the Castanet infrastructure to manage
the increasingly complex array of systems and components upon
which e-business applications depend."
To the left of the disk is text reading "Internet Services Management--Enables
centralized control of e-business applications and services, which encompass
business-to-business, business-to-employee and business-to-consumer
communications and transactions over corporate intranets, extranets and the
Internet." Below this is text reading "Marimba's Solution--The Castanet
product family provides automated distribution, updating and ongoing management
of e-business applications, data, documents and services throughout the extended
enterprise."
Along the bottom of the page, below the illustrations is the following text:
The Benefits of Marimba's Solution-
The Castanet product family enables companies to streamline business
processes and deploy new applications and services quickly and
efficiently in order to extend market reach and gain increased customer
loyalty
-- Delivers applications to a variety of operating systems, hardware
platforms and devices
-- Provides security features to authenticate users and safeguard data
integrity and confidentiality
-- Improves bandwidth efficiency, lowering network connection costs
-- Repairs damaged applications automatically, reducing support costs
-- Supports mobile/remote users who are intermittently connected to the
network
-- Enables personalization, making it easy to deliver tailored
applications for each user
-- Scales efficiently, supporting rapid increases in deployment size from
a limited number of users to large numbers of users worldwide
-- Streamlines application rollout across multiple administrative domains
-- Utilizes open standards and can integrate with existing business
processes
<PAGE> 95
LOGO
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 20,461
NASD fee.................................................... 7,860
Nasdaq National Market listing fee.......................... 50,000
Printing and engraving expenses............................. 250,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 200,000
Blue sky fees and expenses.................................. 10,000
Custodian and transfer agent fees........................... 10,000
Miscellaneous fees and expenses............................. 201,679
----------
Total............................................. $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities, including
reimbursement for expenses incurred, arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of our bylaws
provides for mandatory indemnification of our directors and officers and
permissible indemnification of employees to the maximum extent permitted by the
Delaware General Corporation Law. Our Certificate of Incorporation provides
that, pursuant to Delaware law, our officers and directors shall not be liable
for monetary damages for breach of the officers' or directors' fiduciary duty as
officers or directors to us and our stockholders. This provision in the
Certificate of Incorporation does not eliminate the officers' or directors'
fiduciary duty, and in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available under
Delaware law. In addition, each officer or director will continue to be subject
to liability for breach of the officer's or director's duty of loyalty to us for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the officer or director, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect an officer's or director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
We have entered into indemnification agreements with our officers and directors,
a form of which is attached as Exhibit 10.1 and incorporated by reference. The
indemnification agreements provide our officers and directors with further
indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is made to Section 9 of the underwriting agreement
contained in Exhibit 1.1 to this prospectus, indemnifying officers and directors
of ours against certain liabilities.
II-1
<PAGE> 97
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued and sold the following securities:
1. We granted direct issuances or stock options to purchase 6,259,910
shares of our common stock at exercise prices ranging from $.15 to $13.00
per share to employees, consultants, directors and other service providers
under our 1996 Stock Plan.
2. From inception through March 31, 1999, we issued and sold an
aggregate of 3,855,682 shares of our common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $1,640,242 pursuant to direct issuances or
exercises of options granted under our 1996 Stock Plan.
3. In February 1996, we issued and sold an aggregate of 10,000,000
shares of our common stock (which numbers reflect the one for two and
one-half stock split effected August 8, 1996) to each of Kim K. Polese,
Arthur A. van Hoff, Jonathan Payne and Sami Shaio, our founders, for
aggregate consideration of $10,000 pursuant to Restricted Common Stock
Purchase Agreements.
4. In August 1996 and January 1997, we issued and sold an aggregate of
2,765,870 shares of our Series A Preferred Stock for an aggregate purchase
price of approximately $4,100,125.
5. In February 1997, we issued a warrant to purchase 16,865 shares of
our Series A Preferred Stock at an exercise price of $1.4824 per share.
6. In August, September, October and November 1997, we issued and sold
2,987,696 shares of our Series B Preferred Stock for an aggregate purchase
price of approximately $14,959,991.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensation benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Certificate of Correction to Amended and Restated
Certificate of Incorporation.
3.3** Form of Third Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.4** Bylaws of the Registrant.
3.5** Amended and Restated Bylaws of the Registrant to be
effective upon the closing of the offering made pursuant to
this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Form of Registrant's Common Stock certificate.
</TABLE>
II-2
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.3** Amended and Restated Investors' Rights Agreement dated
August 25, 1997.
4.4** Form of Amendment and Waiver of Registration Rights under
the Amended and Restated Investors' Rights Agreement.
4.5** Warrant to purchase shares of Series A Preferred Stock of
the Registrant issued to Lighthouse Capital Partners II,
L.P.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1** Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.
10.2** 1999 Omnibus Equity Incentive Plan and forms of agreements
thereunder.
10.3** Employee Stock Purchase Plan.
10.4** 1999 Non-Employee Directors Option Plan.
10.5** Assignment and Assumption of Sublease between Quickturn
Design Systems, Inc. and ilicon, Inc. dated January 31,
1999.
10.6** Loan and Security Agreement between the Registrant and
Silicon Valley Bank dated May 27, 1998.
10.7**+ Original Equipment Manufacturer Agreement between Tivoli
Systems Subsidiary, Inc. and the Registrant dated March 6,
1998.
10.8**+ Amendment No. 1 to Original Equipment Manufacturer Agreement
between Tivoli Systems, Inc. and the Registrant dated
February 8, 1999.
10.9**+ Reseller Agreement between Tivoli Systems Subsidiary, Inc.
and the Registrant dated August 14, 1997.
10.10**+ Amendment No. 1 to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated June 1, 1998.
10.11** Amendment No. 2 to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated June 30, 1998.
10.12** Reseller License Guide to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated November 23, 1998.
10.13**+ Pricing Guide to Reseller Agreement between Tivoli Systems,
Inc. and the Registrant dated November 23, 1998.
10.14** Amendment No. 3 to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated February 9, 1999.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
99.1** Order of the United States District Court for the Northern
District of California, San Jose Division dated December 28,
1998.
99.2** Consent of the Hurwitz Group.
99.3** Consent of Blakely, Sokoloff, Taylor & Zafman, LLP.
</TABLE>
- -------------------------
** Previously filed.
+ Confidential treatment requested.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
II-3
<PAGE> 99
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing specified
in the underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or our bylaws, the underwriting agreement, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by us of expenses incurred or
paid by a director, officer, or controlling person of ours in the successful
defense of any action, suit or proceeding, is asserted by such director, officer
or controlling person in connection with the securities being registered
hereunder, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Mountain View, State of California, on this 7th day of April, 1999.
MARIMBA, INC.
By: /s/ KIM K. POLESE
---------------------------------------
Kim K. Polese
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ KIM K. POLESE President, Chief Executive Officer (Principal April 7, 1999
- ------------------------------------------ Executive Officer) and Director
Kim K. Polese
/s/ FRED M. GERSON Vice President, Finance and Chief Financial April 7, 1999
- ------------------------------------------ Officer (Principal Financial and Accounting
Fred M. Gerson Officer)
/s/ ARTHUR A. VAN HOFF* Chief Technology Officer and Director April 7, 1999
- ------------------------------------------
Arthur A. van Hoff
/s/ RAYMOND J. LANE* Director April 7, 1999
- ------------------------------------------
Raymond J. Lane
/s/ DOUGLAS J. MACKENZIE* Director April 7, 1999
- ------------------------------------------
Douglas J. Mackenzie
/s/ ANEEL BHUSRI* Director April 7, 1999
- ------------------------------------------
Aneel Bhusri
/s/ STRATTON D. SCLAVOS* Director April 7, 1999
- ------------------------------------------
Stratton D. Sclavos
*By: /s/ KIM K. POLESE
--------------------------------------
Kim K. Polese
Attorney-in-Fact
*By: /s/ FRED M. GERSON
--------------------------------------
Fred M. Gerson
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 101
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Certificate of Correction to Amended and Restated
Certificate of Incorporation.
3.3** Form of Third Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.4** Bylaws of the Registrant.
3.5** Amended and Restated Bylaws of the Registrant to be
effective upon the closing of the offering made pursuant to
this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Form of Registrant's Common Stock certificate.
4.3** Amended and Restated Investors' Rights Agreement dated
August 25, 1997.
4.4** Form of Amendment and Waiver of Registration Rights under
the Amended and Restated Investors' Rights Agreement.
4.5** Warrant to purchase shares of Series A Preferred Stock of
the Registrant issued to Lighthouse Capital Partners II,
L.P.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1** Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.
10.2** 1999 Omnibus Equity Incentive Plan and forms of agreements
thereunder.
10.3** Employee Stock Purchase Plan.
10.4** 1999 Non-Employee Directors Option Plan.
10.5** Assignment and Assumption of Sublease between Quickturn
Design Systems, Inc. and ilicon, Inc. dated January 31,
1999.
10.6** Loan and Security Agreement between the Registrant and
Silicon Valley Bank dated May 27, 1998.
10.7**+ Original Equipment Manufacturer Agreement between Tivoli
Systems Subsidiary, Inc. and the Registrant dated March 6,
1998.
10.8**+ Amendment No. 1 to Original Equipment Manufacturer Agreement
between Tivoli Systems, Inc. and the Registrant dated
February 8, 1999.
10.9**+ Reseller Agreement between Tivoli Systems Subsidiary, Inc.
and the Registrant dated August 14, 1997.
10.10**+ Amendment No. 1 to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated June 1, 1998.
10.11** Amendment No. 2 to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated June 30, 1998.
10.12** Reseller License Guide to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated November 23, 1998.
10.13**+ Pricing Guide to Reseller Agreement between Tivoli Systems,
Inc. and the Registrant dated November 23, 1998.
10.14** Amendment No. 3 to Reseller Agreement between Tivoli
Systems, Inc. and the Registrant dated February 9, 1999.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
</TABLE>
<PAGE> 102
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
24.1** Power of Attorney.
27.1** Financial Data Schedule.
99.1** Order of the United States District Court for the Northern
District of California, San Jose Division dated December 28,
1998.
99.2** Consent of the Hurwitz Group.
99.3** Consent of Blakely, Sokoloff, Taylor & Zafman, LLP.
</TABLE>
- -------------------------
** Previously filed.
+ Confidential treatment requested.
<PAGE> 1
EXHIBIT 1.1
DRAFT 4/05/99
_______________ SHARES
MARIMBA, INC.
COMMON STOCK ($0.0001 PAR VALUE)
UNDERWRITING AGREEMENT
__________, 1999
<PAGE> 2
_____________, 1999
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
c/o Morgan Stanley & Co., Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Marimba, Inc., a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several Underwriters named in Schedule II hereto (the
"UNDERWRITERS"), and certain stockholders of the Company named in Schedule I
hereto (the "SELLING STOCKHOLDERS") severally propose to sell to the several
Underwriters, an aggregate of 4,000,000 shares of the Company's Common Stock,
$0.0001 par value (the "FIRM SHARES"), of which 3,548,000 shares are to be
issued and sold by the Company and an aggregate of 452,000 shares are to be sold
by the Selling Stockholders, each Selling Stockholder selling the amount set
forth opposite such Selling Stockholder's name in Schedule I hereto.
The Company and certain of the Selling Stockholders also propose
to sell to the several Underwriters not more than an additional 600,000 shares
of its Common Stock, $0.0001 par value (the "ADDITIONAL SHARES"), of which
188,000 shares are to be issued and sold by the Company (the "COMPANY ADDITIONAL
SHARES") and 412,000 shares are to be sold by such Selling Stockholders, if and
to the extent that you, as Managers of the offering, shall have determined to
exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Section 3 hereof. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
"SHARES." The shares of Common Stock, $0.0001 par value of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK." The Company and the Selling Stockholders are
hereinafter sometimes collectively referred to as the "SELLERS."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement, including a prospectus, relating to
the Shares. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
2
<PAGE> 3
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in
California, Illinois and New York (which are the only jurisdictions in
which the conduct of its business or its ownership or leasing of
property require such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company).
(d) The Company has only one subsidiary, Marimba UK Ltd. (the
"SUBSIDIARY"). The Subsidiary has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business; all of the issued
shares of the Subsidiary have been duly and validly authorized and
issued, are fully paid and are owned directly by the Company, free and
clear of all liens, encumbrances, equities or claims. As of March 31,
1999, the total assets of the Subsidiary did not exceed $ _______ and
the net sales of the Subsidiary for the twelve months ended March 31,
1999 did not exceed $ ______.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms
as to legal matters to the description thereof contained in the
Prospectus.
3
<PAGE> 4
(g) The shares of Common Stock (including the Shares to be sold
by the Selling Stockholders) outstanding prior to the issuance of the
Shares have been duly authorized and are validly issued, fully paid and
non-assessable. Except as set forth in the Prospectus, and other than
options to purchase an aggregate of _____ shares of Common Stock granted
after March 31, 1999 pursuant to the Company's 1996 Stock Option Plan
(the "1996 PLAN"), the Company does not have outstanding any options to
purchase, or any preemptive rights or other rights to subscribe for or
to purchase, any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital stock
or any such options, rights, convertible securities or obligations. All
outstanding shares of capital stock and options and other rights to
acquire capital stock have been issued in compliance with the
registration and qualification provisions of all applicable securities
laws and were not issued in violation of any preemptive rights, rights
of first refusal and other similar rights.
(h) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to
any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or the Subsidiary that is material
to the Company, or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over the Company or the
Subsidiary, and no consent, approval, authorization or order of, or
qualification with, any governmental body or governmental agency is
required for the performance by the Company of its obligations under
this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of
the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and the Subsidiary, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company
and the Subsidiary have not incurred any material liability or
obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (2) the Company has
not purchased any of its outstanding capital stock, nor declared, paid
or otherwise made any dividend or distribution of any kind on its
capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and the
Subsidiary, except in each case as described in the Prospectus.
4
<PAGE> 5
(l) The Company and the Subsidiary each have good and marketable
title to all real and personal property owned by it, in each case free
and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and the Subsidiary;
and any real property, buildings and equipment held under lease by the
Company and the Subsidiary are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property,
buildings and equipment by the Company and the Subsidiary, in each case
except as described in the Prospectus.
(m) The Company and the Subsidiary each own or possess adequate
licenses or other rights to use, all patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
currently employed by them in connection with the business now operated
by them, or necessary to conduct their business in the manner described
in the Prospectus. Except as disclosed in the Prospectus, neither the
Company nor the Subsidiary has received any notice of infringement of or
conflict with asserted rights of others with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could have a material adverse
affect on the Company and the Subsidiary, taken as a whole. The
discoveries, inventions, products or processes of the Company and the
Subsidiary referred to in the Prospectus do not, to the knowledge of the
Company, infringe or conflict with any right or patent of any third
party or any discovery, invention, product or process which is the
subject of a patent application filed by any third party, known to the
Company which could have a material adverse effect on the Company.
(n) No material labor dispute with the employees of the Company
or the Subsidiary exists, except as described in the Prospectus, or, to
the knowledge of the Company, is imminent; and, without conducting any
independent investigation, the Company is not aware of any existing,
threatened or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that could have a
material adverse effect on the Company and the Subsidiary, taken as a
whole.
(o) The Company is insured by the insurers of recognized
financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the
Company is engaged; neither the Company nor the Subsidiary has been
refused any insurance coverage sought or applied for; and neither the
Company nor the Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a
material adverse effect on the Company and the Subsidiary, taken as a
whole, except as described in the Prospectus.
5
<PAGE> 6
(p) The Company and the Subsidiary possess all consents,
approvals, orders, certificates, authorizations and permits issued by,
and have made all declarations and filings with all, appropriate
federal, state or foreign regulatory authorities and all courts and
other tribunals, necessary to conduct their respective business, except
to the extent that the failure to obtain or file would not have a
material adverse effect on the Company and the Subsidiary, taken as a
whole, and neither the Company nor the Subsidiary has received any
notice of proceedings relating to the revocation or modification of any
such consent, approval, order, certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
Company and the Subsidiary, taken as a whole, except as described the
Prospectus
(q) The Company and the Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or
specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's
general or specific authorization; and (4) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(r) There are no legal or governmental proceedings pending or, to
the Company's knowledge, threatened to which the Company or the
Subsidiary is a party or to which any of the properties of the Company
or the Subsidiary is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to
be described in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement that are not described
or filed as required.
(s) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(t) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(u) The Company and the Subsidiary (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and
6
<PAGE> 7
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly
or in the aggregate, have a material adverse effect on the Company and
the Subsidiary, taken as a whole.
(v) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and the Subsidiary, taken
as a whole.
(w) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement, except in each case as described in the
Prospectus (and as to which any requirements to include any securities
in, or register any securities pursuant to, the Registration Statement
have been satisfied or duly waived).
(x) The section of the Prospectus entitled "Shares Eligible for
Future Sale" properly describes all agreements (collectively, the
"LOCK-UP AGREEMENTS") that restrict the holders thereof from selling,
making any short sale of, granting any option for the purchase of, or
otherwise transferring or disposing of, any of such shares of Common
Stock, or any such securities convertible into or exercisable or
exchangeable for Common Stock, for the respective periods of time
designated in such Lock-Up Agreements, without the prior written consent
of the Company or Morgan Stanley & Co. Incorporated.
(y) The Nasdaq Stock Market, Inc. has approved the Shares to be
issued by the Company for listing on the Nasdaq National Market upon
official notice of issuance.
(z) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
(aa) The Company has reviewed, and is continuing to review, its
operations and that of the Subsidiary to evaluate the extent to which
the business or operations of the Company or any of its subsidiaries
will be affected by the Year 2000 Problem (that is, any significant risk
that computer hardware or software applications used by the Company and
its subsidiaries will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1,
2000); as a result of such review, (i) the Company has no reason to
believe, and does not believe, that (A) there are any issues related to
the Company's preparedness to address the Year 2000 Problem that are of
a character required to be described or referred to in the Registration
Statement or Prospectus which have not been
7
<PAGE> 8
accurately described in the Registration Statement or Prospectus and (B)
the Year 2000 Problem will have a material adverse effect on the
condition, financial or otherwise, or on the earnings, business or
operations of the Company and the Subsidiary, taken as a whole, or
result in any material loss or interference with the business or
operations of the Company and the Subsidiary, taken as a whole; and (ii)
to the Company's knowledge, the suppliers, vendors, customers or other
material third parties used or served by the Company and the Subsidiary
are addressing or will address the Year 2000 Problem in a timely manner,
except to the extent that a failure to address the Year 2000 Problem by
any supplier, vendor, customer or material third party would not have a
material adverse effect on the condition, financial or otherwise, or on
the earnings, business or operations of the Company and its
subsidiaries, taken as a whole.
2. Representations and Warranties of the Selling Stockholders.
Each of the Selling Stockholders represents, warrants and covenants to and
agrees with each of the Underwriters that:
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(b) The execution and delivery by such Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations
under, this Agreement, the Selling Stockholder's Irrevocable Power of
Attorney appointing certain individuals as such Selling Stockholder's
attorneys-in-fact to the extent set forth therein relating to the
transactions contemplated hereby and by the Registration Statement (the
"POWER OF ATTORNEY"), and the letter of Transmittal and Custody
Agreement signed by such Selling Stockholder and
________________________, as Custodian, relating to the deposit of the
Shares to be sold by such Selling Stockholder (the "CUSTODY Agreement"),
will not contravene any provision of applicable law, or any agreement or
other instrument binding upon such Selling Stockholder or any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over such Selling Stockholder and no consent, approval,
authorization or order of, or qualification with, any governmental body
or agency is required for the performance by such Selling Stockholder of
its obligations under this Agreement, the Power of Attorney or the
Custody Agreement of such Selling Stockholder, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(c) Such Selling Stockholder has, and on the Closing Date will
have, valid title to the Shares to be sold by such Selling Stockholder
and the legal right and power, and all authorization and approval
required by law, to enter into this Agreement, the Power of Attorney or
the Custody Agreement and to sell, transfer and deliver the Shares to be
sold by such Selling Stockholder.
(d) The Shares to be sold by such Selling Stockholder pursuant to this
Agreement have been duly authorized and are validly issued, fully paid
and non-assessable.
8
<PAGE> 9
(e) The Custody Agreement and the Power of Attorney have been
duly authorized, executed and delivered by such Selling Stockholder and
each is a valid and binding agreement of such Selling Stockholder.
(f) Delivery of the Shares to be sold by such Selling Stockholder
pursuant to this Agreement will pass title to such Shares free and clear
of any security interests, claims, liens, equities and other
encumbrances.
(g) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; provided that with
respect to each of the Selling Stockholders other than Kim Polese and
Arthur van Hoff, the representation and warranty set forth in this
paragraph shall only relate to information in the Registration Statement
relating to such Selling Stockholder. Kim K. Polese and Arthur A. van
Hoff are together referred to in this Agreement as the "Founders."
3. Agreements to Sell and Purchase. Each Seller, severally and
not jointly, hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from such Seller at $______ a share (the "PURCHASE
PRICE") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) that bears the same proportion to the
number of Firm Shares to be sold by such Seller as the number of Firm Shares set
forth in Schedule II hereto opposite the name of such Underwriter bears to the
total number of Firm Shares.
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees to
sell to the Underwriters the Company Additional Shares, and each Selling
Stockholder agrees to sell to the Underwriters the number of Additional Shares
set forth with respect to such Selling Stockholder on Schedule I hereto, and the
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to _______________ Additional Shares, at the Purchase Price. If you, on
behalf of the Underwriters, elect to exercise such option, you shall so notify
the Company in writing not later than 30 days after the date of this Agreement,
which notice shall specify the number of Additional Shares to be purchased by
the Underwriters and the date on which such shares are to be purchased. Such
date may be the same as the Closing Date (as defined below) but not earlier
9
<PAGE> 10
than the Closing Date nor later than ten business days after the date of such
notice. Additional Shares may be purchased as provided in Section 5 hereof
solely for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. If any Additional Shares are to be purchased, each
Underwriter agrees, severally and not jointly, to purchase the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) that bears the same proportion to the total number of
Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule II hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.
Each Seller hereby agrees that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing, (C) options issued under the 1996
Plan, the 1999 Omnibus Equity Incentive Plan, the 1999 Non-Employee Directors
Option Plan, and the shares issuable upon exercise thereof, (D) shares issued
under the 1999 Employee Stock Purchase Plan and the shares issuable upon
exercise thereof, and (E) warrants issued pursuant to debt financing
transactions. In addition, each Selling Stockholder agrees that, without the
prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
Underwriters, it will not, during the period ending 90 days after the date of
the Prospectus, make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock.
4. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Sellers are further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be sold
by each Seller shall be made to such Seller in Federal or other funds
immediately available in New York City against delivery of such Firm Shares for
the respective accounts of the several Underwriter at 10:00 a.m., New York City
time, on ____________, 1999 [4 DAYS AFTER DATE OF AGREEMENT], or at such other
time on the same or such other date, not later than [5 DAYS AFTER DATE OF
10
<PAGE> 11
AGREEMENT], 1999, as shall be designated in writing by you. The time and date of
such payment are hereinafter referred to as the "CLOSING DATE".
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available against delivery of such Additional
Shares for the respective accounts of the several Underwriters at 10:00 a.m.,
New York City time, on the date specified in the notice described in Section 3
or at such other time on the same or on such other date, in any event not later
than _______, 1999, as shall be designated in writing by you. The time and date
of such payment are hereinafter referred to as the "OPTION CLOSING DATE".
Certificates for the Firm Shares and Additional Shares shall be
in definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The obligations
of the Sellers to sell the Shares to the Underwriters and the several
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date are subject to the condition that the Registration Statement shall
have become effective not later than 5:30 p.m. (New York City time) on the date
hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating
accorded any of the Company's securities by any "nationally
recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and the Subsidiary, taken as a whole,
from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing
Date a certificate, dated the Closing Date and signed by an executive
officer of the Company, to the effect set forth in Section 6(a)(ii)
above and to the effect that the representations and warranties of
11
<PAGE> 12
the Company contained in this Agreement are true and correct as of the
Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the Selling
Stockholders (or by their attorney-in-fact on their behalf), to the
effect that the representations and warranties of the Selling
Stockholders contained in this Agreement are true and correct as of the
Closing Date and that each Selling Stockholder has complied with all of
the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
(d) The Underwriters shall have received on the Closing Date an
opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP., outside counsel for the Company, dated the Closing Date, to the
effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing as a foreign corporation in
California, Illinois and New York;
(ii) the Company has the authorized and outstanding
capital stock as set forth in the Prospectus; except as disclosed
in the Prospectus and other than options to purchase an aggregate
of ___ shares of Common Stock granted after March 31, 1999
pursuant to the Company's 1996 Plan, to such counsel's knowledge,
there is no outstanding option, warrant or other right calling
for the issuance of, and no commitment, plan or arrangement to
issue, any share of capital stock of the Company or any security
convertible into or exchangeable or exercisable for capital stock
of the Company;
(iii) the shares of Common Stock (including the Shares to
be sold by the Selling Shareholders) outstanding prior to the
issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued and non-assessable and, to such
counsel's knowledge, fully paid;
(iv) the Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the
terms of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights pursuant to the
Company's certificate of incorporation or bylaws or applicable
federal or California law or Delaware corporate law or, to such
counsel's knowledge, any agreement,
12
<PAGE> 13
instrument, judgment, decree or order to which the Company is a
party or by which it is bound;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this
Agreement will not contravene any provision of applicable federal
or California law or Delaware corporate law or the certificate of
incorporation or bylaws of the Company or any agreement or other
instrument binding upon the Company that is material to the
Company, or, to such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Company, and no consent, approval,
authorization or order of, or qualification with, any
governmental body or governmental agency is required for the
performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer
and sale of the Shares (as to which such counsel need not opine);
(vii) the statements (A) in the Prospectus under the
captions "Management-Indemnification," "Management - Employee
Benefit Plans," "Management - Change of Control Arrangements,"
"Certain Transactions," "Description of Capital Stock," " Shares
Eligible for Future Sale" and "Underwriters" tot he extent of the
description of this Agreement and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the
information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein;
(viii) such counsel does not know of any legal or
governmental proceedings pending or threatened to which the
Company is a party or to which any of the properties of the
Company is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described
or of any statutes, regulations, or, to such counsel's knowledge,
contracts or other documents that are required to be described in
the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or
filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the
proceeds therefrom as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment
Company Act of 1940, as amended;
(x) the Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by the Company;
(xi) the Registration Statement has become effective under
the Securities Act; and, to such counsel's knowledge (based
solely upon oral advice from the
13
<PAGE> 14
Staff of the Commission), no stop order proceedings with respect
thereto have been instituted or are pending or threatened under
the Securities Act, and any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time
period required by such Rule 424(b); and
(xii) such counsel (A) shall state that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial data included therein as to which
such counsel need not express any opinion) comply as to form in
all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder, (B) has no
reason to believe that (except for financial statements and
schedules and other financial data as to which such counsel need
not express any belief) the Registration Statement and the
prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) has no reason to believe that (except for
financial statements and schedules and other financial data as to
which such counsel need not express any belief) the Prospectus
contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading.
(e) The Underwriters shall have received on the Closing Date an
opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP., special counsel for the Selling Stockholders, dated the Closing
Date, to the effect that:
(i) This Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Stockholders;
(ii) The execution and delivery by each Selling Stockholder of,
and the performance by such Selling Stockholder of its
obligations under, this Agreement and the Custody Agreement and
Power of Attorney of such Selling Stockholder will not contravene
any provision of applicable federal, California or Delaware
corporate law, or, to such counsel's knowledge, any agreement or
other instrument binding upon such Selling Stockholder or, any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over such Selling Stockholder, and no
consent, approval, authorization or order of, or qualification
with, any governmental body or agency is required for the
performance by such Selling Stockholder of its obligations under
this Agreement, or the Power of Attorney or Custody Agreement of
such Selling Stockholder, except such as may be required by the
securities or Blue Sky laws of the various states in connection
with offer and sale of the Shares and except such consent,
approval, authorization, order or qualification which, if not
obtained, would not have a material adverse effect on such
Selling Stockholder and would not impair the performance by such
Selling Stockholder of its obligations under this Agreement or
the Power of Attorney or Custody Agreement or such Selling
Stockholder.
14
<PAGE> 15
(iii) to such counsels' knowledge, each of the Selling
Stockholders has valid title to the Shares to be sold by such
Selling Stockholder and the legal right and power, and all
authorization and approval required by law, to enter into this
Agreement and the Power of Attorney and Custody Agreement of such
Selling Stockholder and to sell, transfer and deliver the Shares
to be sold by such Selling Stockholder.
(iv) The Power of Attorney and the Custody Agreement of
each Selling Stockholder have been duly authorized, executed and
delivered by such Selling Stockholder and are valid and binding
agreements of such Selling Stockholders; and
(v) Upon payment for the Shares to be sold by each Selling
Stockholder as provided in this Agreement, delivery of such
Shares, as directed by the Underwriters, to Cede or such other
nominee as may be designated by DTC, registration of such Shares
in the name of Cede or such other nominee and the crediting of
such Shares on the books of DTC to "securities accounts" (as
defined in Section 8-501 of the UCC) of the Underwriters
(assuming that neither DTC nor any such Underwriter has notice of
any adverse claim (as such phrase is defined in Section 8-105 of
the UCC) to such Shares), (A) DTC shall be a "protected
purchaser" of such Shares within the meaning of Section 8-303 of
the UCC, (B) under Section 8-501 of the UCC, the Underwriters
will acquire a valid security entitlement in respect of such
Shares and (C) no action based on any adverse claim to such
Shares may be asserted against the Underwriters with respect to
such security entitlement; it being understood that for the
purpose of this opinion, such counsel may assume that when such
payment, delivery and crediting occur, (x) DTC will be registered
as a "clearing corporation" within the meaning of Section 8-102
of the UCC, and (y) appropriate entries to the securities
accounts of the several Underwriters on the records of DTC will
have been made pursuant to the UCC.
(f) The Representatives shall have received a legal
opinion from Weil, Gotschal & Manges LLP, special patent counsel for the
Company, dated the Closing date, to the effect that the statements set
forth under the headings "Risk Factors - Novadigm Has Claimed That We
Infringe Its Intellectual Property," and "Business Legal Proceedings" in
the Registration Statement and the Prospectus, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, have been reviewed by such counsel and
fairly present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein, and such counsel has no reason to believe that such
information, (i) as of the effective date of the Registration Statement,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make such
information not misleading and (ii) as of the date of such opinion,
included or includes any untrue statement of material fact or omitted or
omits to state a material fact necessary in order to make such
information, in light of the circumstances in which they were made, not
misleading.
15
<PAGE> 16
(g) The Underwriters shall have received on the Closing Date an
opinion of Fenwick & West LLP, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections 6(d)(iv),
(d)(v), 6(d)(vii) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and "Underwriters") and 6(d)(xii) above.
With respect to Section 6(d)(xii) above, Gunderson Dettmer Stough
Villeneuve, Franklin & Hachigian, LLP, and Fenwick & West LLP may state
that their statements and belief are based upon their participation in
the preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification,
except as specified. With respect to Section 6(e) above, Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP may rely upon an
opinion or opinions of counsel for any Selling Stockholders and, with
respect to factual matters upon the representations of each Selling
Stockholder contained herein and in the Custody Agreement and Power of
Attorney of such Selling Stockholder and in other documents and
instruments; provided that (A) each such counsel for the Selling
Stockholders is satisfactory to your counsel, (B) a copy of each opinion
so relied upon is delivered to you and is in form and substance
satisfactory to your counsel, (C) copies of such Custody Agreements and
Powers of Attorney and of any such other documents and instruments shall
be delivered to you and shall be in form and substance satisfactory to
you counsel and (D) Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP shall state in their opinion that they are justified in
relying on each such other opinion.
The opinions of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, described in Sections 6(d) and (e) above, and the
opinion of Weil, Gotschal & Manges described in Section 6(f) above shall
be rendered to the Underwriters at the request of the Company and shall
so state therein.
(h) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Ernst & Young LLP, independent auditors,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus; provided that the letter
delivered on the Closing Date shall use a "cut-off date" not earlier
than the date hereof.
(i) The "lock-up" agreements, each substantially in the
form of Exhibit A hereto, between you and certain stockholders, officers
and directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
16
<PAGE> 17
(j) The Nasdaq National Market shall have approved the Common
Stock for listing, subject only to official notice of issuance.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of the
Additional Shares and other matters related to the issuance of the Additional
Shares.
7. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, five signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 10:00 a.m. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in Section 7(c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed
amendment or supplement and not to file any such proposed amendment or
supplement to which you reasonably object, and to file with the
Commission within the applicable period specified in Rule 424(b) under
the Securities Act any prospectus required to be filed pursuant to such
Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering
the twelve-month period ending [June
17
<PAGE> 18
30], 2000 that satisfies the provisions of Section 11(a) of the
Securities Act and the rules and regulations of the Commission
thereunder.
(f) that in connection with the reservation by the Underwriters
of a portion of the Shares for sale to the Company's directors,
officers, employees and business associates and other parties related to
the Company (collectively, "Participants"), as set forth in the
Prospectus under the heading "Underwriters," the Company will ensure
that such Shares will be restricted to the extent required by the
National Association of Securities Dealers, Inc. (the "NASD") or the
NASD rules from sale, transfer, assignment, pledge or hypothecation for
a period of three months following the date of the effectiveness of the
Registration Statement. BT Alex. Brown Incorporated will notify the
Company as to which Participants will need to be so restricted. The
Company will direct the transfer agent to place stop transfer
restrictions upon such securities for such period of time.
8. Expenses. Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, the Sellers agree to
pay or cause to be paid all expenses incident to the performance of their
respective obligations under this Agreement, including: (i) the fees,
disbursements and expenses of the Company's counsel, the Company's accountants
and counsel for the Selling Stockholders in connection with the registration and
delivery of the Shares under the Securities Act and all other fees or expenses
in connection with the preparation and filing of the Registration Statement, any
preliminary prospectus, the Prospectus and amendments and supplements to any of
the foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky memorandum in connection with the offer and sale of the Shares under state
securities laws and all expenses in connection with the qualification of the
Shares for offer and sale under state securities laws as provided in Section
7(d) hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky memorandum, (iv) all filing fees and the reasonable
fees and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the National
Association of Securities Dealers, Inc., (v) all fees and expenses in connection
with the preparation and filing of the registration statement on Form 8-A
relating to the Common Stock and all costs and expenses incident to listing the
Shares on the Nasdaq National Market, (vi) the cost of printing certificates
representing the Shares, (vii) the costs and charges of any transfer agent,
registrar or depositary, (viii) the costs and expenses of the Company relating
to investor presentations on any "road show" undertaken in connection with the
marketing of the offering of the Shares, including, without limitation, expenses
associated with the production of road show slides and graphics, fees and
expenses of any consultants engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expenses of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered (with the written approval
of the Company) in connection with the road show, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company hereunder
for which provision is not otherwise made in this Section. It is understood,
however, that except as provided in this Section, Section 9 entitled
18
<PAGE> 19
"Indemnity and Contribution", and the last paragraph of Section 11 below, the
Underwriters will pay all of their costs and expenses, including fees and
disbursements of their counsel, stock transfer taxes payable on resale of any of
the Shares by them and any advertising expenses connected with any offers they
may make.
The provisions of the preceding paragraph shall not supersede or
otherwise affect any agreement that the Sellers may otherwise have for the
allocation of such expenses among themselves.
9. Indemnity and Contribution. (a) The Company and each Founder,
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter, or any person controlling such Underwriter, from whom the person
asserting any such losses, claims, damages or liabilities purchased Shares, if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage or
liability.
(b) Each Selling Stockholder agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to information relating to such Selling Stockholder
furnished in writing by or on behalf of such Selling Stockholder expressly for
use in the Registration Statement, any preliminary prospectus,
19
<PAGE> 20
the Prospectus or any amendments or supplements thereto, except insofar as such
losses, claims, damages, or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability, unless such failure is the result of
noncompliance by the Company with Section 6(a) hereof.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Sellers, the Company's directors, its officers
who sign the Registration Statement and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only with reference to information
relating to such Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (i) the fees and expenses
20
<PAGE> 21
of more than one separate firm (in addition to any local counsel) for all
Underwriters and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act, (ii) the fees and expenses of more than one separate firm (in addition to
any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm (in addition to any local counsel) for all Selling
Stockholders and all persons if any, who control any Selling Stockholder within
the meaning of either such Section, and that all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for the
Underwriters and such control persons of any Underwriters, such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated. In the case of any
such separate firm for the Company, and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the Company.
In the case of any such separate firm for the Selling Stockholders and such
control persons of any Selling Stockholders, such firm shall be designated in
writing by the persons named as attorneys-in-fact for the Selling Stockholders
under the Powers of Attorney. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by the second and third sentences of this paragraph,
the indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(e) To the extent the indemnification provided for in Section
9(a), 9(b) or 9(c) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Sellers on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 9(e)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
9(e)(i) above but also the relative fault of the Sellers on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Sellers on the one hand and the Underwriters on the other hand in
connection with the
21
<PAGE> 22
offering of the Shares shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Shares (before deducting expenses)
received by each Seller and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus, bear to the aggregate Public Offering Price of the
Shares. The relative fault of the Sellers on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by any Seller on the one hand, or by the Underwriters, on the other
hand, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Underwriters'
respective obligations to contribute pursuant to this Section 9 are several in
proportion to the respective number of Shares they have purchased hereunder, and
not joint.
(f) The Sellers and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 9(e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 9, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 9 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 9 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares. The aggregate liability of each Selling Stockholder under the
indemnity and contribution agreements contained in this Section 9 and under the
representations and warrants contained in Section 2(g) hereof shall be limited
to an amount equal to the net proceeds received by such Selling Stockholder
(before deducting expenses) from the offering of the Shares sold by such Selling
Stockholder. In addition, notwithstanding the foregoing provisions of this
Section 9, the Company and each of the Underwriters agrees with each of the
Founders that any claim of such Underwriter against such Founder for
indemnification, reimbursement or advancement of expenses pursuant to this
Section 9(a) or for breach of any representation or warranty in Section 2(g)
hereof shall first be sought by such Underwriter to be satisfied in full by the
Company and,
22
<PAGE> 23
subject to the limitation on the aggregate liability of the Selling Stockholders
set forth above, shall be satisfied by the Founders only to the extent that such
claim has not been satisfied in full by the Company within the 60-day period
following the date on which payment therefor shall have been requested from the
Company.
10. Termination. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 10(a)(i) through 10(a)(iv), such event, singly
or together with any other such event, makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case
may be, any one or more of the Underwriters shall fail or refuse to purchase
Shares that it has or they have agreed to purchase hereunder on such date, and
the aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you and
the Company for the purchase of such Firm Shares are not made within 36 hours
after such default, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter or the Sellers. In any such case either you or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than
23
<PAGE> 24
one-tenth of the aggregate number of Additional Shares to be purchased, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase Additional Shares or (ii) purchase not less
than the number of Additional Shares that such non-defaulting Underwriters would
have been obligated to purchase in the absence of such default. Any action taken
under this paragraph shall not relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
24
<PAGE> 25
14. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
MARIMBA, INC.
By:____________________________
Name:
Title:
SELLING STOCKHOLDERS
By:____________________________
Name: Kim K. Polese
Title: Attorney-in-Fact
By:____________________________
Name: Arthur A. van Hoff
Title: Attorney-in-Fact
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
Acting severally on behalf of themselves
and the several Underwriters named in
Schedule II hereto.
By: Morgan Stanley & Co. Incorporated
By:__________________________
Name:
Title:
25
<PAGE> 26
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF ADDITIONAL
FIRM SHARES SHARES
SELLING STOCKHOLDER TO BE SOLD TO BE SOLD
------------------- ---------- ----------
<S> <C> <C>
Jonathan Payne 123,700 123,700
Kim K. Polese 124,300 124,300
Sami Shaio 80,000 40,000
Arthur A. van Hoff 124,000 124,000
------- -------
TOTAL 452,000 412,000
======= =======
</TABLE>
<PAGE> 27
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated
BT Alex. Brown Incorporated
Credit Suisse First Boston Corporation
Hambrecht & Quist LLC
--------------
TOTAL
==============
</TABLE>
<PAGE> 1
EXHIBIT 4.2
COMMON STOCK COMMON STOCK
NUMBER SHARES
MCS-______ MARIMBA
INCORPORATED UNDER SEE REVERSE FOR CERTAIN
THE LAWS OF DELAWARE DEFINITIONS AND RESTRICTIONS
CUSIP 56781Q 10 9
THIS CERTIFIES THAT IS THE
OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.0001 PAR VALUE, OF
MARIMBA, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Kim Polese /s/ Fred M. Gerson
PRESIDENT AND CHIEF EXECUTIVE OFFICER VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
MARIMBA, INC. CORPORATE SEAL
FEB. 21, 1996
DELAWARE
COUNTERSIGNED AND REGISTERED:
U.S. STOCK TRANSFER CORPORATION
TRANSFER AGENT AND REGISTRAR
By:
-------------------------------
AUTHORIZED SIGNATURE
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
January 13, 1999, in Amendment No. 3 to the Registration Statement (Form S-1)
and related Prospectus of Marimba, Inc. for the registration of 4,600,000 shares
of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
April 5, 1999
