<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 00025683
MARIMBA, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0422318
(State of incorporation) (IRS Employer Identification No.)
440 Clyde Avenue, Mountain View, California 94043
(Address of principal executive offices, including ZIP code)
(650) 930-5282
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares outstanding of the Registrant's Common Stock as of
July 31, 2000 was 23,434,277.
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MARIMBA, INC.
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 1
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three and Six Months
Ended June 30, 2000 and 1999 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Qualitative and Quantitative Disclosures About Market Risk 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit Index 24
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARIMBA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2000 1999 (1)
---------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $36,258 $22,263
Short-term investments 37,723 42,760
Accounts receivable, net 12,571 7,399
Prepaid expenses and other current assets 1,037 1,085
------- -------
Total current assets 87,589 73,507
Property and equipment, net 3,213 2,955
Long-term investments 4,463 13,989
Other assets 361 36
------- -------
$95,626 $90,487
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $2,165 $3,143
Accrued compensation 3,721 3,279
Current portion of capital lease obligations
and equipment advances 10 59
Deferred revenue 14,639 11,319
------- -------
Total current liabilities 20,535 17,800
Long-term portion of capital lease obligations
and equipment advances, and other long-term
liabilities 76 48
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 94,397 93,436
Deferred compensation (883) (1,680)
Cumulative translation adjustment (39) (22)
Unrealized loss on investments (197) (239)
Accumulated deficit (18,265) (18,858)
-------- --------
Stockholders' equity 75,015 72,639
-------- --------
$95,626 $90,487
See accompanying notes.
(1)Derived from audited financial statements contained in the Company's Form
10-K.
1
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MARIMBA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------ ----------------
(unaudited) (unaudited)
Revenues:
License $9,163 $4,929 $17,224 $9,438
Service 2,953 1,958 5,459 3,580
------ ------ ------- ------
Total revenues 12,116 6,887 22,683 13,018
Cost of revenues:
License 195 77 327 106
Service 922 774 1,813 1,409
------ ------ ------- ------
Total cost of revenues 1,117 851 2,140 1,515
------ ------ ------- ------
Gross profit 10,999 6,036 20,543 11,503
Operating expenses:
Research and development 2,476 1,918 5,018 3,757
Sales and marketing 6,710 4,379 13,624 8,635
General and administrative 1,475 1,334 2,821 2,190
Amortization of deferred
compensation 205 451 542 629
------ ----- ------ ------
Total operating expenses 10,866 8,082 22,005 15,211
------ ----- ------ ------
Income (loss) from operations 133 (2,046) (1,462) (3,708)
Interest income, net 1,150 563 2,204 607
------ ------ ------ ------
Income (loss) before income taxes 1,283 (1,483) 742 (3,101)
Provision for income taxes 31 28 149 30
------ ------- ------ -------
Net income (loss) $1,252 $(1,511) $593 $(3,131)
Other comprehensive income (loss):
Translation adjustment (12) (7) (17) (12)
Unrealized gain (loss) on investments 66 (184) 42 (184)
------ ------- ---- -------
Comprehensive income (loss) $1,306 $(1,702) $617 $(3,327)
Basic earnings (loss) per share $.05 $(.08) $.03 $(.20)
Diluted earnings (loss) per share $.05 $(.08) $.02 $(.20)
Shares used in per share calculation
- basic 23,142 18,910 23,068 15,557
Shares used in per share calculation
- diluted 24,739 18,910 24,950 15,557
Pro forma basic and diluted net
loss per share $(.07) $(.16)
Shares used in computing pro forma
basic and diluted net loss per share 20,828 19,393
See accompanying notes.
2
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MARIMBA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
2000 1999
----------------
(unaudited)
OPERATING ACTIVITIES
Net income (loss) $593 $(3,131)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 775 576
Amortization of deferred compensation 542 629
Other (19) (15)
Changes in operating assets and liabilities:
Accounts receivable, net (5,172) (1,078)
Unbilled receivables - 1,036
Prepaid expenses and other current assets 49 (306)
Other assets (298) 298
Accounts payable and accrued liabilities (979) 457
Accrued compensation 443 202
Deferred revenue 3,320 812
------ ------
Net cash used in operating activities (746) (520)
------ ------
INVESTING ACTIVITIES
Capital expenditures (1,033) (700)
Purchases of investments (17,245) (48,585)
Sales of investments 31,850 3,099
------- --------
Net cash provided (used) in investing activities 13,572 (46,186)
------- --------
FINANCING ACTIVITIES
Repayment of note receivable from officer - 160
Proceeds from sale of common stock in initial public
offering, net - 68,110
Proceeds from issuance of common stock, net of
repurchases 1,218 1,225
Principal payments on capital lease obligations
and equipment advances (49) (862)
-------- --------
Net cash from financing activities 1,169 8,633
-------- --------
Net increase in cash and cash equivalents 13,995 21,927
Cash and cash equivalents at beginning of period 22,263 3,700
------- -------
Cash and cash equivalents at end of period $36,258 25,627
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash financing activities:
Conversion of redeemable preferred stock to
common stock - $18,953
See accompanying notes.
3
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MARIMBA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared by Marimba and reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly the financial position and the results of operations for the
interim periods. The balance sheet at December 31, 1999 has been derived from
audited financial statements at that date. The financial statements have been
prepared in accordance with the regulations of the Securities and Exchange
Commission, but omit certain information and footnote disclosure necessary to
present the statements in accordance with generally accepted accounting
principles. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in Marimba's Annual Report on Form 10-K
for the year ended December 31, 1999 filed with the Securities and Exchange
Commission on March 27, 2000. Results for the interim periods are not
necessarily indicative of results for the fiscal year ending December 31, 2000
or future interim or full-year period.
Net Loss Per Share
Basic earnings per share is computed using the weighted-average number of
common shares outstanding. Diluted earnings per share includes the
weighted-average number of common share equivalents outstanding during the
period. Dilutive common share equivalents consist of employee stock options and
are calculated by using the treasury stock method. Pro forma basic and diluted
net loss per share, as presented in the statements of operations for the periods
prior to Marimba's initial public offering, have been computed as described
above and also gives effect, under Securities and Exchange Commission guidance,
to the conversion of the redeemable convertible preferred stock (using the
if-converted method) from the original date of issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------ ----------------
(in thousands, except per share data)
Net income (loss) $1,252 $(1,511) $593 $(3,131)
Weighted-average shares - Basic:
Weighted-average shares of common
stock outstanding 23,301 19,888 23,279 16,649
Less weighted-average shares
subject to repurchase (159) (978) (211) (1,092)
------- ------- ------- -------
Weighted-average shares - Basic 23,142 18,910 23,068 15,557
Effect of dilutive securities:
Employee stock options 1,597 - 1,882 -
------ ------ ------ -------
Weighted average shares - Diluted 24,739 18,910 24,950 15,557
Net income (loss) per share - Basic $.05 $(.08) $.03 $(.20)
Net income (loss) per share - Diluted $.05 $(.08) $.02 $(.20)
Pro forma:
Shares used above 18,910 15,557
Pro forma adjustment to reflect
weighted-average effect of the
assumed conversion of redeemable
convertible preferred stock 1,918 3,836
Shares used in computing pro forma ------- -------
basic and diluted net loss per share 20,828 19,393
Pro forma basic and diluted net loss per
share $(.07) $(.16)
4
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Weighted average options and warrants outstanding to purchase 3,042,000 and
2,507,000 shares of common stock for the three and six months ended June 30,
1999, respectively, were not included in the computation of diluted net loss per
share because the effect would be antidilutive. Such securities, had they been
dilutive, would have been included in the computation of diluted net loss per
share using the treasury stock method.
Revenue Recognition
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9,
"Software Revenue Recognition." These statements provide guidance on applying
generally accepted accounting principles in recognizing revenue on software
transactions. SOP 97-2, as amended by SOP 98-4, is effective for Marimba's
transactions entered into subsequent to January 1, 1998. The application of SOP
97-2 and SOP 98-4 has not had a material impact on Marimba's results of
operations.
SOP 98-9 amends SOP 97-2 and 98-4, extending the deferral of the
application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999. Marimba expects that SOP 98-9 may require more revenue to be
deferred for certain types of transactions.
License revenues are comprised of perpetual or multiyear license fees which
are primarily derived from contracts with corporate customers and resellers.
Such revenues are recognized after execution of a license agreement or receipt
of a definitive purchase order, and delivery of the product to end-user
customers, provided that there are no uncertainties surrounding product
acceptance, the license fees are fixed or determinable, collectibility is
probable and Marimba has no remaining obligations with regard to installation or
implementation of the software. Revenue on arrangements with customers who are
not the ultimate users (primarily resellers) is not recognized until the product
is delivered to the end user. If the fee due from the customer is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected. Advance payments are recorded as deferred revenue until the products
are shipped, services are provided, or obligations are met. Marimba's products
do not require significant customization.
Revenue recognized from multiple-element software arrangements are
allocated to each element of the arrangement based on the fair value of the
elements, such as software products, maintenance and support and consulting
services. The determination of fair value is based on objective evidence which
is specific to Marimba.
Service revenues are comprised of revenue from maintenance agreements,
consulting and training fees. Software maintenance agreements provide technical
support and the right to unspecified upgrades on an if-and-when available basis.
Service revenues from training and consulting are recognized upon
completion of the work to be performed. Revenue from maintenance agreements is
deferred and recognized on a straight-line basis over the life of the related
agreement, which is typically one year.
Unbilled receivables consist of contractually obligated amounts not yet
billable by Marimba.
Revenue Concentration
Three customers accounted for 21%, 16% and 13% of revenues in the second
quarter of 2000. In the second quarter of 1999, three customers accounted for
14%, 13% and 11% of revenues. In the first six months of 2000, two customers
accounted for 13% and 12% of revenues and in the comparable period of 1999, no
customer represented more than 10% of revenues.
5
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2. Legal Matters
Novadigm v. Marimba
On March 3, 1997, Novadigm, Inc. filed a complaint against us in the U.S.
District Court for the Northern District of California, alleging infringement of
a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm Patent").
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 the
Novadigm Patent, and seeks up to triple damages pursuant to the U.S. Patent Act.
On July 22, 1999, the court held a pre-trial conference at which the court
canceled the prior September 20, 1999 trial date in this matter. The court then
scheduled a trial on our defense of inequitable conduct by Novadigm to begin on
November 15, 1999 and stated that at the conclusion of that trial it would
schedule a jury trial for the remaining issues, which would include the
infringement claims against us and our other defenses. The court separated
Marimba's defense that the Novadigm Patent is invalid for inequitable conduct
before the U.S. Patent Office from Marimba's other defenses that the Novadigm
Patent is invalid on other grounds and that Marimba does not infringe the
Novadigm Patent. A trial on Marimba's inequitable conduct defense was held from
November 15 to November 18, 1999. In its subsequent findings of fact and
conclusions of law, the court found no inequitable conduct and struck Marimba's
inequitable conduct defense.
The trial on Novadigm's infringement claims, and Marimba's remaining
invalidity and non-infringement defenses, is scheduled to begin on November 7,
2000. A case management conference is scheduled to be held on September 18,
2000, at which the court may change the trial date. To date, both parties have
substantially completed their factual and expert discovery.
Marimba believes that it has strong defenses against Novadigm's lawsuit.
Accordingly, Marimba intends to defend this suit vigorously. However, Marimba
may not prevail in this litigation. Litigation is subject to inherent
uncertainties, especially in cases such as this where sophisticated factual
issues must be assessed and complex technical issues must be decided. In
addition, cases such as this are likely to involve issues of law that are
evolving, presenting further uncertainty. Marimba's defense of this litigation,
regardless of the merits of the complaint, has been, and will likely continue to
be, time-consuming, costly and a diversion for Marimba's technical and
management personnel. The failure of Marimba to prevail in this litigation could
have a material adverse effect on Marimba's results of operations and financial
condition. There also can be no assurance that Novadigm will not assert
additional claims against Marimba in the future under the Novadigm Patent or any
other patent later issued to Novadigm.
Marimba v. Novadigm
On July 30, 1999, Marimba filed a complaint against Novadigm in the U.S.
District Court for the Northern District of California alleging infringement by
Novadigm of a patent held by us (U.S. Patent No. 5,919,247, the "Marimba
Patent"). Our complaint seeks monetary damages, as well as an injunction to
prevent Novadigm from making, using or selling infringing software products. Our
complaint also alleges that Novadigm has willfully infringed the Marimba Patent
and seeks up to triple damages under the U.S. Patent Act.
3. Subsequent event
On July 21, 2000, Marimba named John Olsen its President and Chief
Executive Officer, succeeding Kim Polese who became Marimba's Chairman and Chief
Strategy Officer. Mr. Olsen will also serve as a member of Marimba's Board of
Directors. Concurrent with Mr. Olsen's appointment to Marimba's Board of
Directors on July 21, 2000, Arthur van Hoff resigned as a Board member.
6
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As part of his compensation package, Mr. Olsen was awarded on July 21, 2000
a restricted stock bonus of 100,000 shares of Marimba's common stock. These
shares will vest over a two-year period, with 50% of the restricted shares
becoming vested upon completion of 12 months of continuous service and the
remaining 50% becoming vested upon the next period of 12 months of continuous
service. Marimba will record deferred compensation of approximately $2.1 million
in connection with this restricted stock bonus, representing the aggregate fair
market value of the 100,000 shares of Marimba common stock on the date of grant.
Marimba plans to amortize the total deferred compensation amount over the
24-month vesting period of the restricted stock bonus grant using a graded
vesting method.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934, as amended. Such statements are based upon
current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions are intended to identify
forward-looking statements. Marimba's actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a discrepancy include,
but are not limited to, those discussed in "Other Factors Affecting Operating
Results, Liquidity and Capital Resources" below. Additional information about
factors that could affect future results and events is included in our fiscal
1999 Form 10-K, the Form 10-Q for our first quarter of 2000, and other reports
filed with the Securities and Exchange Commission. All forward-looking
statements in this document are based on information available to Marimba as of
the date hereof, and Marimba undertakes no obligation to release publicly any
updates or revisions to any such forward-looking statements.
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.
In January 1997, we released our first version of Castanet and since that
time have continued to develop and market the Castanet product line and enhance
the core Castanet infrastructure with additional Castanet products. In the first
half of 2000, Marimba released two products in a new product line called
Timbale. The Timbale products are designed to address many of the server
management challenges inherent in thin-client and Web commerce computing
environments today. The first Timbale product, Timbale for Server Management,
was released for sale in March 2000. The second Timbale product, Timbale for
Windows Terminal Services, was released for sale in June 2000. In the second
quarter of 2000, revenues from the Timbale products accounted for 21% of total
license revenues. There can be no assurance that revenues from the Timbale
product line will continue to grow in the future or that the Timbale products
will gain widespread market acceptance.
Revenues to date have been derived primarily from the license of our
Castanet and Timbale products and to a lesser extent from maintenance and
support, consulting and training services. Customers who license our products
generally purchase maintenance contracts, typically covering a 12-month period.
Additionally, customers may purchase consulting, 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.
7
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We recognize software license revenue in accordance with Statement of
Position 97-2 "Software Revenue Recognition," as amended by Statement of
Position 98-4. In December 1998, the AICPA issued SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition, with respect to Certain Transactions. SOP
98-9 amends SOP 97-2 and SOP 98-4 extending the deferral of the application of
provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999.
License revenues are comprised of perpetual or multiyear license fees which
are primarily derived from contracts with corporate customers and resellers. We
recognize license revenues after execution of a license agreement or receipt of
a definitive purchase order and delivery of the product to end-user customers,
provided that there are no uncertainties surrounding product acceptance, the
license fees are fixed or determinable, collectibility is probable, and we have
no remaining obligations with regard to installation or implementation of the
software. Revenues on arrangements with customers who are not the ultimate
users, primarily resellers, are not recognized until the software is sold
through to the end user. If the fee due from the customer is not fixed or
determinable, revenues are recognized as payments become due from the customer.
If collectibility is not considered probable, revenues are recognized when the
fee is collected. Advanced payments are recorded as deferred revenue until the
products are delivered, services are provided or obligations are met. Service
revenues are comprised of revenues from maintenance agreements, consulting and
training fees. Revenues from maintenance agreements are recognized on a
straight-line basis over the life of the related agreement, which is typically
one year. We recognize service revenues from training and consulting as such
services are delivered.
Since inception, Marimba has made substantial investments in sales,
marketing and research and development to expand and enhance our product lines
and increase the market awareness of Marimba and its products. Despite our
revenue growth, we have incurred significant losses since inception and had an
accumulated deficit of approximately $18.3 million at June 30, 2000. We believe
our success depends on further increasing our customer base and on growth in the
Internet services management market. Accordingly, we intend to continue to
invest heavily in sales, marketing and research and development.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our sequential
quarterly revenue growth to date and our achievement of profitability in the
second quarter of 2000, we do not believe that historical growth rates or
profitability are necessarily sustainable, nor indicative of future growth or
financial results.
Results of Operations
The following table sets forth certain statements of operations data as a
percentage of total revenues for the three and six month periods ended June 30,
2000 and 1999. This data has been derived from the unaudited condensed
consolidated financial statements contained in this Form 10-Q which, in the
opinion of management includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position and
results of operations for the interim periods. The operating results for any
quarter should not be considered indicative of results of any future period.
This information should be read in conjunction with the consolidated financial
statements and notes thereto included in Marimba's Annual Report on Form 10-K
for the year ended December 31, 1999.
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Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------ ----------------
Consolidated Statement of Operations Data:
Revenues:
License 75.6% 71.6% 75.9% 72.5%
Service 24.4 28.4 24.1 27.5
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
License 1.6 1.1 1.4 0.8
Service 7.6 11.2 8.0 10.8
------ ------ ------ ------
Total cost of revenues 9.2 12.3 9.4 11.6
------ ------ ------ ------
Gross profit 90.8 87.7 90.6 88.4
Operating expenses:
Research and development 20.4 27.8 22.1 28.9
Sales and marketing 55.4 63.7 60.1 66.3
General and administrative 12.2 19.4 12.4 16.8
Amortization of deferred compensation 1.7 6.5 2.4 4.8
------ ------ ------ ------
Total operating expenses 89.7 117.4 97.0 116.8
------ ------ ------ ------
Income (loss) from operations 1.1 (29.7) (6.4) (28.4)
Interest income, net 9.5 8.2 9.7 4.6
------ ------ ------ ------
Income (loss) before income taxes 10.6 (21.5) 3.3 (23.8)
Provision for income taxes (0.3) (0.4) (0.7) (0.2)
------ ------ ------ ------
Net income (loss) 10.3% (21.9)% 2.6% (24.0)%
Revenues
Total revenues for the second quarter of 2000 increased 76% to $12.1
million from $6.9 million in the second quarter of 1999. For the six months
ended June 30, 2000, total revenues increased 74% to $22.7 million from $13.0
million in the comparable period of 1999.
License Revenues. License revenues increased 86% to $9.2 million in the
second quarter of 2000 from $4.9 million in the second quarter of 1999. Total
license revenues in the six months ended June 30, 2000 increased 82% to $17.2
million from $9.4 million in the comparable period of 1999. Prior to March 31,
2000, substantially all license revenues were derived from sales of our Castanet
products. In the second quarter of 2000, revenues from sales of our Timbale
products accounted for 21% of total license revenues. The growth of license
revenues was due to increased product licenses sold, reflecting higher customer
demand for our products, continued diversification of customer uses for our
Castanet product line, growth in our sales organization and our launch of the
Timbale product line in the first half of 2000.
Service Revenues. Service revenues include maintenance and support,
consulting and training. Service revenues increased 51% to $3.0 million in the
second quarter of 2000 from $2.0 million in the second quarter of 1999. As a
percentage of total revenues, service revenues decreased to 24% of total
revenues in both the three and six month periods ended June 30, 2000 from 28%
and 27% in the comparable periods of 1999. The increases in service revenues in
absolute amount were due primarily to increased maintenance revenues from a
larger installed base of customers and increased revenue from consulting
services.
Costs of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of
the fees for third-party software products integrated into our Castanet products
and was less than 2% of total revenues in the three and six month periods ended
June 30, 2000 and 1999.
Cost of Service Revenues. Cost of service revenues increased to $992,000 in
the second quarter of 2000 from $774,000 in the second quarter of 1999,
representing 31% and 40% of service revenue. In the first six months of 2000,
cost of service revenues increased to $1.8 million from $1.4 million for the
comparable period in 1999, representing 33% and 39% of service revenues,
respectively. The increases in cost of service revenues in absolute dollars for
the three and six month periods ended June 30, 2000 from the comparable periods
of 1999 were due primarily to growth in our customer support organization and an
increase in consulting costs commensurate with the increase in consulting
revenues. The decreases in cost of service revenues as a percentage of service
revenues were primarily due to the economies of scale in our customer support
organization, with costs spread over a larger number of maintenance customers.
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Operating Expenses
Research and Development. Research and development expenses increased 29%
to $2.5 million in the second quarter of 2000 from $1.9 million in the second
quarter of 1999. For the first six months of 2000, research and development
expenses increased 34% to $5.0 million from $3.8 million in the comparable
period of 1999. The increases in research and development expenses were due to
increases in engineering personnel and related employee costs, as well as
increases in third-party consulting costs.
Sales and Marketing. Sales and marketing expenses increased 53% to $6.7
million in the second quarter of 2000 from $4.4 million in the second quarter of
1999. For the first six months of 2000, sales and marketing expenses increased
58% to $13.6 million from $8.6 million in the comparable period of 1999. The
increases in sales and marketing expenses were due primarily to growth in our
sales and marketing organizations, an increase in sales commissions resulting
from increased sales and expansion of our marketing programs and advertising.
General and Administrative. General and administrative expenses increased
11% to $1.5 million in the second quarter of 2000 from $1.3 million in the
second quarter of 1999. For the first six months of 2000, general and
administrative expenses increased 29% to $2.8 million from $2.2 million in the
comparable period in 1999. The increases in general and administrative expenses
were due, in part, to growth of our administrative organizations in support of
the overall growth of Marimba. Additionally, we continued to incur significant
outside legal costs in connection with our ongoing patent infringement
litigation with Novadigm (see Part II, Item 1 - Legal Proceedings herein). We
expect to continue to incur significant costs related to this litigation in the
future and expect these costs to materially increase in the shorter term as we
prepare for and conduct the trial for Novadigm's lawsuit against Marimba, which
is currently scheduled to commence on or about November 7, 2000. Additionally,
we have incurred legal expenses related to our patent infringement lawsuit
against Novadigm and also expect these expenses to increase in the future.
Deferred Compensation. We recorded deferred compensation of approximately
$1.4 million in 1998, representing the difference between the exercise prices of
options granted to acquire 940,500 shares of common stock during 1998 and the
deemed fair value for financial reporting purposes of our common stock on the
grant dates. In addition, we granted options to purchase common stock in April
1999 for which we recorded additional deferred compensation of approximately
$2.0 million. Due to cancelled shares, the remaining unamortized deferred
compensation amount was reduced by $257,000 in the first quarter of 2000.
Deferred compensation is being amortized over the vesting periods of the options
using a graded vesting method. We amortized deferred compensation of $1.4
million during fiscal 1999 and $251,000 during fiscal l998. This compensation
expense relates to individuals in all operating expense categories. Amortization
of deferred compensation was $205,000 and $542,000 for the three and six months
ended June 30, 2000, respectively.
In connection with a restricted stock bonus granted in July 2000 to John
Olsen, our newly-appointed President and Chief Executive Officer, Marimba will
record additional deferred compensation of approximately $2.1 million,
representing the aggregate fair market value of the 100,000 shares of Marimba
common stock on the date of grant. Marimba plans to amortize this deferred
compensation amount over the 24-month vesting period of the restricted stock
bonus grant using a graded vesting method.
The amortization of deferred compensation is anticipated to be
approximately $1,687,000 for 2000, $1,474,000 for 2001, $379,000 for 2002 and
$4,000 for 2003.
Interest Income, Net. Interest income, net, increased to $1.1 million in
the second quarter of 2000 from $563,000 in the second quarter of 1999. For the
first six months of 2000, interest income, net, increased to $2.2 million from
$607,000 in the comparable period of 1999. The increases are due to higher
interest income resulting from the invested cash from our initial public
offering completed in May 1999.
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Liquidity and Capital Resources
As of June 30, 2000, our principal sources of liquidity included
approximately $36.2 million of cash and cash equivalents and $42.2 million of
investments in marketable securities. Net cash used by operating activities was
$0.7 million and $0.5 million for the six month periods ended June 30, 2000 and
June 30, 1999, respectively. Net cash used in operating activities for the six
months ended June 30, 2000 reflects primarily the effect of our net income for
the second quarter of 2000, adjusted for non-cash expenses and an increase in
deferred revenue, offset partially by an increase in accounts receivable.
We currently anticipate that our existing cash, cash equivalents and
investments will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. Thereafter,
cash generated from operations, if any, may not be sufficient to satisfy our
liquidity requirements. We may therefore need to sell additional equity or raise
funds by other means. Any additional financings, if needed, might not be
available on reasonable terms or at all. Failure to raise capital when needed
could seriously harm our business and operating results. If additional funds are
raised through the issuance of equity securities, the percentage of ownership of
our stockholders would be reduced. Furthermore, these equity securities might
have rights, preferences or privileges senior to our common stock.
Other Factors Affecting Operating Results, Liquidity and Capital Resources
Our Limited Operating History May Prevent Us From Achieving Success in Our
Business
We were founded in February 1996 and have a limited operating history that
may prevent us from achieving success in our business. The revenues and income
potential of our business and market are unproven. We will encounter challenges
and difficulties frequently encountered by early-stage companies in new and
rapidly evolving markets. We may not successfully address any of these
challenges and the failure to do so would seriously harm our business and
operating results. In addition, because of our limited operating history, we
have limited insight into trends that may emerge and affect our business.
We Have Incurred Losses and May Incur Future Losses
Our failure to significantly increase our revenues would seriously harm our
business and operating results. We have experienced operating losses in each
quarterly period through March 31, 2000. Although Marimba recorded net income in
the second quarter of 2000, there is no assurance that we will maintain
profitability. As of June 30, 2000, we had an accumulated deficit of $18.3
million. We expect to significantly increase our research and development, sales
and marketing and general and administrative expenses. As a result, we will need
to significantly increase our quarterly revenues to offset these increasing
expenses and maintain profitability. We may not be able to sustain our recent
revenue growth rates. In fact, we may not have any revenue growth, and our
revenues could decline.
Our Quarterly Operating Results Are Volatile and Future Operating Results Remain
Uncertain
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. As a result, we believe that
period-to-period comparisons of our operating results are not meaningful and
should not be relied upon as indicators of our future performance. In the
future, our operating results may be below the expectations of securities
analysts and investors. Our failure to meet these expectations would likely
seriously harm the market price of our common stock. Operating results vary
depending on a number of factors, many of which are outside our control.
In addition, we anticipate that the size of customer orders may increase as
we focus on larger business accounts. As a result, a delay in recognizing
revenue, even from just one account, could have a significant negative impact on
our operating results. In the past, a significant portion of our sales have been
realized near the end of a quarter. A delay in an anticipated sale past the end
of a particular quarter could negatively impact our operating results.
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Despite our sequential revenue growth from the fourth quarter of 1999
through the second quarter of 2000, we generally expect that revenues in the
first quarter of each year will be lower than revenues in the fourth quarter of
the preceding year due to the annual nature of companies' purchasing and
budgeting cycles and the year-to-date structure of our sales incentive program.
Our expense levels are relatively fixed for a particular quarter and are
based, in part, on expectations as to future revenues. As a result, if revenue
levels fall below our expectations, our profitability will be adversely affected
because only a small portion of our expenses vary with our revenues.
We Expect Significant Increases in Our Operating Expenses
We intend to substantially increase our operating expenses as we:
* Increase our sales and marketing activities, including expanding our
direct sales force;
* Increase our research and development activities;
* Expand our customer support and professional services organizations;
and
* Expand our distribution channels.
With these additional expenses, we must significantly increase our revenues
in order to maintain profitability. These expenses will be incurred before we
generate any revenues associated with this increased spending. If we do not
significantly increase revenues from these efforts, our business and operating
results would be adversely affected.
Our Success Depends on Our Castanet Product Family
We expect to continue to derive substantial revenues from our Castanet
product line and related services. A decline in the price of Castanet or our
inability to increase sales of Castanet would seriously harm our business and
operating results. We cannot predict Castanet's success. We periodically update
Castanet to make improvements and provide additional enhancements. New versions
of Castanet may not provide the benefits we expect and could fail to meet
customers' requirements or achieve widespread market acceptance. Furthermore,
new products such as our recently released Timbale product line could fail to
meet customer expectations or achieve widespread market acceptance.
Our strategy requires Castanet to be highly scalable - in other words, able
to rapidly increase deployment size from a limited number of end-users to a very
large number of end-users. If we are unable to achieve this level of
scalability, the attractiveness of our products and services would be
diminished.
We Need to Grow Our Timbable Product Revenues and Develop and Introduce New
Products
During the second quarter of 2000, revenues from our Timbale product line
accounted for 21% of total license revenues. There can be no assurance that the
revenues from our Timbale product line will grow, in absolute amount or as a
percentage of total license revenues, or that our Timbale products will meet
customer expectations or gain widespread market acceptance. To provide a
comprehensive Internet infrastructure management solution, we will need to
develop and introduce new products which offer functionality that we do not
currently provide. We may not be able to develop these technologies and
therefore we may not be able to offer a comprehensive Internet infrastructure
management solution. In addition, in the past we have experienced delays in new
product releases, and we may experience similar delays in the future. If we fail
to deploy new product releases on a timely basis, our business and operating
results could be seriously harmed.
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We Depend on the Growth of Our Customer Base and Increased Business from Our
Current Customers
Our success is substantially dependent on the continued growth of our
customer base. If we fail to increase our customer base, our business and
operating results would be seriously harmed. Our ability to attract new
customers will depend on a variety of factors, including the reliability,
security, scalability and cost-effectiveness of our products and services as
well as our ability to effectively market our products and services.
If we fail to generate repeat and expanded business from our current
customers, our business and operating results would be seriously harmed. Many of
our customers initially make a limited purchase of our products and services for
pilot programs. These customers may not choose to purchase additional licenses
to expand their use of our products. In addition, as we deploy new versions of
our products or introduce new products, our current customers may not require
the functionality of our new products and may not ultimately license these
products.
Because the total amount of maintenance and support fees we receive in any
period depends in large part on the size and number of licenses that we have
previously sold, any downturn in our software license revenues would negatively
impact our future service revenues. In addition, if customers elect not to renew
their maintenance agreements, our service revenues could be significantly
adversely affected.
Implementation of our products by large customers may be complex and
customers could become dissatisfied if implementation of our products proves
difficult, costly or time consuming
Our products must integrate with many existing computer systems and
software programs used by our customers. Integrating with many other computer
systems and software programs can be complex, time consuming and expensive and
cause delays in the deployment of our products for such customers. Customers
could become dissatisfied with our products if implementations prove to be
difficult, costly or time consuming and this could negatively impact our ability
to sell our products.
We Must Retain and Attract Key Personnel
Our success depends largely on the skills, experience and performance of
the members of our senior management and other key personnel, including our
President and Chief Executive Officer, John Olsen, our Chairman and Chief
Strategy Officer, Kim Polese, and our Chief Technology Officer, Arthur van Hoff.
We have in the past lost senior management personnel. For example, in April
2000, we announced that our Chief Financial Officer, Fred Gerson, would resign
in October 2000, to be replaced at that time by our current Vice President of
Finance. Also, in May 2000, Steve Williams resigned his position as Executive
Vice President, Worldwide Sales and Chief Operating Officer.
We may not be successful in attracting qualified senior management
personnel or be able to attract, assimilate and retain other key personnel in
the future. None of our senior management or other key personnel is bound by an
employment agreement. If we lose additional key employees and are unable to
replace them with qualified individuals, our business and operating results
could be seriously harmed. In addition, our future success will depend largely
on our ability to continue attracting and retaining highly skilled personnel.
Like other companies based primarily in the San Francisco Bay Area, we face
intense competition for qualified personnel.
We Have a Long Sales Cycle that Depends upon Factors Outside Our Control
A customer's decision to license our products typically involves a
significant commitment of resources and is influenced by the customer's budget
cycles. In addition, selling our products requires us to educate potential
customers on their use and benefits. As a result, our products have a long sales
cycle which can take over six months. We face difficulty predicting the quarter
in which sales to expected customers may occur. The sale of our products is also
subject to delays from the lengthy budgeting, approval and competitive
evaluation processes of our customers that typically accompany significant
capital expenditures. For example, customers frequently begin by evaluating our
products on a limited basis and devote time and resources to 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.
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We Depend on Our Relationship with Tivoli
Pursuant to an agreement that expired in December 1999, Tivoli was a
reseller of our products. In addition, we also have an original equipment
manufacturer (OEM) agreement with Tivoli under which Tivoli built upon the
Castanet infrastructure to develop a product called Cross-Site, which was
released in April 1999. Revenues from Tivoli under the OEM agreement are derived
from per seat royalties on sales of Cross-Site that contain the Castanet
infrastructure. The per seat royalty under the OEM agreement are less than the
per seat license fee under our reseller agreement with Tivoli.
Tivoli has recently accounted for a decreasing percentage of our revenues.
During the first half of 2000 and in fiscal 1999 Tivoli accounted for less than
10% of our revenues, as compared to 18% of our revenues in fiscal 1998. The
decrease in Tivoli revenues as a percentage of total revenues was due primarily
to the growth in Marimba's direct sales compared to a relatively smaller revenue
contribution from Tivoli. There is no assurance that royalties from the sale of
Cross-Site will be sufficient to replace Tivoli's sales of Castanet or that such
revenues will be sustained or grow in the future. Any failure of Cross-Site to
achieve widespread market acceptance could significantly harm our business and
operating results. Additionally, because Cross-Site is built upon the Castanet
infrastructure, we expect Cross-Site to compete with our Castanet products.
Novadigm Has Claimed that We Infringe Its Intellectual Property
In March, 1997, Novadigm filed a complaint against us in U.S. federal
court, alleging infringement by us of a patent held by Novadigm. In July 1999,
we filed a complaint against Novadigm in U.S. federal court alleging
infringement by Novadigm of a patent held by us. For more information regarding
the Novadigm litigation, see Part II, Item 1 - Legal Proceedings of this report.
Litigation is subject to inherent uncertainties. In addition, cases like
this generally involve issues of law that are evolving, presenting further
uncertainty. Our defense of the litigation relating to the Novadigm Patent,
regardless of the merits of the complaint, has been, and will likely continue to
be, time consuming and a diversion for our personnel. In addition, publicity
related to this litigation has in the past, and will likely in the future, have
a negative impact on the sale of our Castanet products.
A failure to prevail in the litigation relating to the Novadigm Patent
could result in:
* Our paying monetary damages, which could be tripled if the
infringement is found to have been willful;
* The issuance of a preliminary or permanent injunction requiring us to
stop selling Castanet in its current form;
* Our having to redesign Castanet, which could be costly and
time-consuming and could substantially delay Castanet shipments,
assuming that a redesign is feasible;
* Our having to reimburse Novadigm for some or all of its attorneys'
fees;
* Our having to obtain from Novadigm a license to its patent, which
license might not be made available to us on reasonable terms,
particularly because Novadigm is a competitor; and/or
* Our having to indemnify our customers against any losses they may
incur due to the alleged infringement.
Any of these results would seriously harm our business and operating
results. These same results could also occur with respect to our other products
which rely on or are built upon the Castanet infrastructure. Furthermore, we
expect to continue to incur substantial costs in defending against this
litigation and these costs could increase significantly when the litigation
proceeds to trial. It is possible that these costs could substantially exceed
our expectations in the shorter term as we prepare for and conduct the trial for
this litigation, which we expect to begin on or about November 7, 2000. There
also can be no assurance that Novadigm will not assert additional claims against
Marimba in the future under the Novadigm Patent or any other patent later issued
to Novadigm.
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Our Markets Are Highly Competitive
Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. Our failure to maintain
and enhance our competitive position could seriously harm our business and
operating results. We encounter competition from a number of sources, including:
* Sellers of enterprise-wide management systems, which include
electronic software distribution;
* Companies that market products that support the distribution of
software applications and content; and
* Desktop software management suites.
In addition, we compete with various methods of application distribution
and management, including thin client systems and the web browser, and with
application server vendors and others that have introduced software distribution
capabilities into their products.
Potential competitors may bundle their products or incorporate an Internet
infrastructure management component into existing products in a manner that
discourages users from purchasing our products. For example, we expect that
future releases of Microsoft's Windows operating systems, which manage the
programs on a computer, will include components addressing Internet
infrastructure management functions. Furthermore, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have more extensive customer bases and broader customer
relationships that they could leverage, including relationships with many of our
current and potential customers. These companies also have significantly more
established customer support and professional service organizations than we do.
In addition, these companies may adopt aggressive pricing policies which we are
unable to match. In the past, we have lost potential customers to competitors
for various reasons, including lower prices.
Protection of Our Intellectual Property Is Limited
We rely on a combination of patent, trademark, trade secret and copyright
law and contractual restrictions to protect the proprietary aspects of our
technology. These legal protections afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use our proprietary information.
Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets and to determine the validity and scope of the
proprietary rights of others. For example, on July 30, 1999 we filed a complaint
against Novadigm alleging patent infringement (see Part II, Item 1 - Legal
Proceedings). Such litigation could result in substantial costs and diversion of
resources and could seriously harm our business and operating results. The
lawsuit is at a preliminary stage, and we cannot assure you that the outcome of
this litigation will be favorable to us. In addition, we sell our products
internationally, and the laws of many countries do not protect our proprietary
rights as well as the laws of the United States.
We May Be Found to Infringe Proprietary Rights of Others
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, or limit or interfere with our ability to
make, use or sell our products. As a result, we may be found to infringe on the
proprietary rights of others. Furthermore, companies in the software market are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. We could incur substantial costs to defend any
litigation, and intellectual property litigation could force us to do one or
more of the following:
* Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
* Obtain a license from the holder of the infringed intellectual
property right; and
* Redesign products or services.
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In the event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our business and
operating results would be significantly harmed. For a description of our
current litigation with Novadigm, Inc. please see Part II, Item 1 - Legal
Proceedings in this report.
We Depend upon Third-Party Distribution Relationships and Need to Develop New
Relationships
We have a limited number of distribution relationships and we may not be
able to increase our number of distribution relationships or maintain our
existing relationships. For example, Netscape, a former reseller of our
products, accounted for a significant amount of our revenues in 1998 and 1997,
but is no longer a reseller of our products.
Our current agreements with our channel partners do not prevent these
companies from selling products of other companies, including products that may
compete with our products, and do not generally require these companies to
purchase minimum quantities of our products. These distributors could give
higher priority to the products of other companies or to their own products,
than they give to our products. In addition, sales through these channels
generally result in lower fees to Marimba than direct sales. As a result, while
the loss of, or significant reduction in sales volume to any of our current or
future distribution partners could seriously harm our revenues and operating
results, a significant increase in sales through these channels could also
negatively impact our gross margins.
We Need to Develop and Expand Our Sales, Marketing and Distribution Capabilities
We need to expand our marketing and direct sales operations in order to
increase market awareness of our products, market our products to a greater
number of enterprises and generate increased revenues. Recently, we have not
been able to hire employees as quickly as planned. In particular, competition
for qualified sales personnel is intense and we may not be able to hire enough
qualified sales personnel in the future. Our products and services require a
sophisticated sales effort targeted at senior management of our prospective
customers. New hires require extensive training and typically take at least six
months to achieve full productivity. In addition, we have limited experience
marketing our products broadly to a large number of potential customers.
We Need to Expand Our Professional Services
We may not be able to attract, train or retain the number of highly
qualified services personnel that our business needs. We believe that growth in
our product sales depends on our ability to provide our customers with
professional services and to educate third-party resellers and consultants on
how to provide similar services. As a result, we plan to increase the number of
our services personnel to meet these needs. However, competition for qualified
services personnel is intense.
We expect our total service revenues to increase as we continue to provide
support, consulting and training services that complement our products and as
our installed customer base grows. This could negatively impact our gross margin
because margins on revenues derived from services are generally lower than gross
margins on revenues derived from the license of our products.
Expanding Internationally Is Expensive, We May Receive No Benefit from Our
Expansion and Our International Operations Are Subject to Governmental
Regulation
We plan to increase our international sales force and operations. However,
we may not be successful in increasing our international sales. In addition, our
international business activities are subject to a variety of risks, including
the adoption of or changes in laws, currency fluctuations, actions by third
parties and political and economic conditions that could restrict or eliminate
our ability to do business in foreign jurisdictions. To date, we have not
adopted a hedging program to protect us from risks associated with foreign
currency fluctuations.
Export clearances, and in some cases, import clearances must be obtained
before our products can be distributed internationally. Current or new
government laws and regulations, or the application of existing laws and
regulations, could expose us to significant liabilities, significantly slow our
growth and seriously harm our business and operating results.
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We Must Manage Our Growth and Expansion
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Any failure to manage
growth effectively could seriously harm our business and operating results. To
be successful, we will need to implement additional management information
systems, improve our operating, administrative, financial and accounting systems
and controls, train new employees and maintain close coordination among our
executive, engineering, finance, legal, marketing, sales and operations
organizations. In addition, our growth has resulted, and any future growth will
result, in increased responsibilities for management personnel.
We Rely on Third-Party Software and Applications
We integrate third-party security and encryption software and digital
certificates as a component of our software. There are inherent limitations in
the use and capabilities of much of the technology that we license from third
parties. As a result, we face a number of challenges in integrating these
technologies into our products. We would be seriously harmed if the providers
from whom we license software ceased to deliver and support reliable products,
enhance their current products or respond to emerging industry standards. In
addition, the third-party software may not continue to be available to us on
commercially reasonable terms or at all. The loss of, or inability to maintain
or obtain this software, could result in shipment delays or reductions.
Furthermore, we might be forced to limit the features available in our current
or future product offerings. Either alternative could seriously harm our
business and operating results.
Almost all of our products are written in Java and require a Java virtual
machine made available by Sun Microsystems, Inc. in order to operate. Sun may
not continue to make these implementations of the Java virtual machines
available at commercially reasonable terms or at all. Furthermore, if Sun were
to make significant changes to the Java language or its Java virtual machine
implementations, or fail to correct defects and limitations in these products,
our ability to continue to improve and ship our products could be impaired. In
the future, our customers may also require the ability to deploy our products on
platforms for which technically acceptable Java implementations either do not
exist or are not available on commercially reasonable terms. Our customers may
also use particular implementations of the Java virtual machine that may not be
technically or commercially acceptable for integration into our products.
Software Defects in Our Products Would Harm Our Business
Complex software products like ours often contain errors or defects,
including errors relating to security, particularly when first introduced or
when new versions or enhancements are released. Our products extensively utilize
digital certificates and other complex technology. Our use of this technology
has in the past and may in the future result in product behavior problems which
may not be anticipated by us or our customers. For example, most versions of
Castanet shipped before Castanet 4.0 contain digital certificates that cause
Castanet and any applications being delivered with Castanet to stop running when
the certificate used expires. We have developed an update which avoids this
problem and have distributed the update to customers. It is possible that we may
not have identified all affected customers. Customers that do not install the
update will experience this problem with respect to any applications they have
deployed with Castanet and signed with a certificate on the date of expiration
of the certificate they elected to use. Defects or errors in current or future
products could result in lost revenues or a delay in market acceptance, which
would seriously harm our business and operating results.
Since many of our customers use our products for business-critical
applications, errors, defects or other performance problems could result in
financial or other damage to our customers and could significantly impair their
operations. Our customers could seek damages for losses related to any of these
issues. For example, we could be subject to claims for losses by customers that
we are unable to identify and notify and, as a result, do not install our update
that avoids the digital certificate problem. A product liability claim brought
against us, even if not successful, would likely be time consuming and costly to
defend and could adversely affect our marketing efforts.
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Volatility of Stock Price
The market price of our common stock has been and is likely to continue to
be highly volatile. The market price of our common stock may be significantly
affected by factors such as actual or anticipated fluctuations in our operating
results, announcements of technological innovations, new products or new
contracts by us or our competitors, developments with respect to patents or
proprietary rights and related litigation, adoption of new accounting standards
affecting the software industry, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market price for the
common stock of technology companies. These types of broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against such a
company. Such litigation against Marimba could result in substantial costs and a
diversion of our attention and resources and seriously harm our business and
operating results.
Our Future Capital Needs Are Uncertain
We expect that our current cash, cash equivalents and investments will be
sufficient to meet our working capital and capital expenditure needs for at
least twelve months. After that, we may need to raise additional funds, and
additional financing may not be available on favorable terms, if at all. This
could seriously harm our business and operating results. Furthermore, if we
issue additional equity securities, stockholders may experience dilution, and
the new equity securities could have rights senior to those of existing holders
of our common stock. If we cannot raise funds, if needed, on acceptable terms,
we may not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
We Face Challenges Stemming from Our Emerging Markets
The market for Internet infrastructure management software has only
recently begun to develop, is rapidly evolving and will likely have an
increasing number of competitors. We cannot be certain that a viable market for
our products will emerge or be sustainable. If the Internet infrastructure
management market fails to develop, or develops more slowly than expected, our
business and operating results would be seriously harmed.
Furthermore, in order to be successful in this emerging market, we must be
able to differentiate Marimba from our competitors through our product and
service offerings and brand name recognition. We may not be successful in
differentiating Marimba or achieving widespread market acceptance of our
products and services. Furthermore, enterprises that have already invested
substantial resources in other methods of deploying and managing their
applications and services may be reluctant or slow to adopt a new approach that
may replace, limit or compete with their existing systems.
We Depend on Continued Use of the Internet and Growth of Electronic Business
Rapid growth in the use of and interest in the Internet has occurred only
recently. As a result, acceptance and use may not continue to develop at
historical rates, and a sufficiently broad base of consumers may not adopt, and
continue to use, the Internet and other online services as a medium of commerce.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and there exist few
proven services and products.
In addition, the Internet may not be accepted as a long-term commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Our success will depend, in
large part, upon third parties maintaining the Internet infrastructure to
provide a reliable network backbone with the necessary speed, data capacity,
security and hardware necessary for reliable Internet access and services.
We Must Respond to Rapid Technological Change and Evolving Industry Standards
The markets for our Internet infrastructure management solutions are marked
by rapid technological change, frequent new product introductions and
enhancements, uncertain product life cycles, changes in customer demands and
evolving industry standards. New products based on new technologies or new
industry standards can quickly render existing products obsolete and
unmarketable. Any delays in our ability to develop and release enhanced or new
products could seriously harm our business and operating results. Our technology
is complex, and new products and product enhancements can require long
development and testing periods. Our failure to conform to prevailing standards
could have a negative effect on our business and operating results.
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We Face Risks Associated with Potential Acquisitions
We may make acquisitions in the future. Acquisitions of companies, products
or technologies entail numerous risks, including an inability to successfully
assimilate acquired operations and products, diversion of management's
attention, loss of key employees of acquired companies and substantial
transaction costs. Some of the products acquired may require significant
additional development before they can be marketed and may not generate revenue
at anticipated levels. Moreover, future acquisitions by us may result in
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs and the creation of goodwill or other intangible
assets that could result in significant amortization expense. Any of these
problems or factors could seriously harm our business, financial condition and
operating results.
ITEM 3. 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 various
factors, including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
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 funds are invested in
instruments with maturities less than two years. Our policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting market and
credit risk. Funds in excess of current operating requirements are invested in
obligations of the U.S. government and its agencies and investment grade
obligations of state and local governments and large corporations. Due to the
nature of our investments, we have concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are required.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Novadigm v. Marimba
On March 3, 1997, Novadigm filed a complaint against us in the U.S.
District Court for the Northern District of California, alleging infringement by
us of a patent held by Novadigm (U.S. Patent No. 5,581,764, the "Novadigm
Patent"). Novadigm alleges that our infringement relates to specific methods for
updating data and software over a computer network that we use in our Castanet
products. Novadigm later identified claims 1, 4, 5, 23, 24, 25, 31, 33 and 34 of
the Novadigm Patent as being infringed. In its complaint, Novadigm requests
preliminary and permanent injunctions prohibiting us and other specified persons
from making, using or selling any infringing products, and claims damages, costs
and attorneys' fees. The complaint also alleges that we have willfully infringed
the Novadigm Patent and seeks up to triple damages under the U.S. Patent Act.
On May 2, 1997, we filed our answer to Novadigm's complaint and filed a
counterclaim against Novadigm. Our answer denies Novadigm's allegations and
asserts defenses to Novadigm's claim. Our counterclaim seeks a declaratory
judgment that we do not infringe the Novadigm Patent and that the Novadigm
Patent is invalid and unenforceable.
On August 25, 1997 and January 26, 1998, we filed motions for summary
adjudication asking the court to rule that one of the relevant claims of the
Novadigm Patent is invalid, because it was anticipated by two prior art
references. The court denied our motions in part, because: (1) discovery was
ongoing; (2) the court had not had an opportunity to construe the relevant
language in the Novadigm Patent; and (3) the court found there were triable
issues of fact as to the disclosures in those references.
On December 17, 1998, the court held a claims construction hearing on the
appropriate interpretation of particular terms in the Novadigm Patent, and on
December 28, 1998, the court issued an order defining those terms.
On February 12, 1999, Novadigm detailed its position as to why certain
versions of Castanet infringe the asserted claims of the Novadigm Patent and
contended that the alleged comparison of file level and channel level checksums
in non-optimized updating and the comparison of channel level checksums and
their associated update commands in optimized updating infringes the claims of
the Novadigm Patent. We do not believe that Novadigm accurately states the
functionality of Castanet or establishes that Castanet infringes the Novadigm
Patent.
During March and April 1999, Marimba and Novadigm each filed three
dispositive motions in advance of the April 9, 1999 deadline for filing
dispositive motions in this case. We filed two motions seeking summary judgment
that different versions of Castanet do not infringe the Novadigm Patent and a
motion seeking summary judgment that the Novadigm Patent is invalid because it
was anticipated by a prior art reference. Novadigm filed three motions seeking
to limit certain defenses we could raise at trial. The court denied all of
Marimba's and all of Novadigm's dispositive motions without a hearing. On May 1,
2000, Marimba filed a motion seeking summary judgment that the claims Novadigm
asserts to be infringed in this action are invalid for failure by the inventors
of the Novadigm Patent to disclose their best mode of making and using the
claimed invention. A court denied Marimba's motion after a hearing.
On July 22, 1999, the court held a pre-trial conference at which the court
canceled the prior September 20, 1999 trial date in this matter. The court then
scheduled a trial on our defense of inequitable conduct by Novadigm to begin on
November 15, 1999 and stated that at the conclusion of that trial it would
schedule a jury trial for the remaining issues, which would include the
infringement claims against us and our other defenses. The court separated
Marimba's defense that the Novadigm Patent is invalid for inequitable conduct
before the U.S. Patent Office from Marimba's other defenses that the Novadigm
Patent is invalid on other grounds and that Marimba does not infringe the
Novadigm Patent. A trial on Marimba's inequitable conduct defense was held from
November 15 to November 18, 1999. In its subsequent findings of fact and
conclusions of law, the court found no inequitable conduct and struck Marimba's
inequitable conduct defense.
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The trial on Novadigm's infringement claims, and Marimba's remaining
invalidity and non-infringement defenses, is scheduled to begin on November 7,
2000. A case management conference is scheduled to be held on September 18,
2000, at which the court may change the trial date. To date, both parties have
substantially completed their factual and expert discovery.
We believe that we have strong defenses against Novadigm's lawsuit.
Accordingly, we intend to defend this suit vigorously. However, we may not
prevail in this litigation. Litigation is subject to inherent uncertainties,
especially in cases such as this where sophisticated factual issues must be
assessed and complex technical issues must be decided. In addition, cases
similar to this involve issues of law that are evolving, presenting further
uncertainty. Our defense of this litigation, regardless of the merits of the
complaint, has been, and will likely continue to be, time-consuming, costly and
a diversion for our technical and management personnel. In addition, publicity
related to this litigation has in the past, and will likely in the future, have
a negative impact on the sale of our 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 a redesign is feasible;
* our having to reimburse Novadigm for some or all of its attorneys'
fees;
* our having to obtain from Novadigm a license to its patent, which
license might not be made available to us on reasonable terms,
particularly because Novadigm is a competitor; and/or
* our having to indemnify our customers against any losses they may
incur due to the alleged infringement.
Any of these results would seriously harm our business and operating
results. Furthermore, we expect to continue to incur substantial costs in
defending against this litigation and these costs could increase significantly
if our dispute goes to trial. It is possible that these costs could
substantially exceed our expectations in future periods.
Marimba v. Novadigm
On July 30, 1999, Marimba filed a complaint against Novadigm in the U.S.
District Court for the Northern District of California alleging infringement by
Novadigm of a patent held by us (U.S. Patent No. 5,919,247, the "Marimba
Patent"). Our complaint seeks monetary damages, as well as an injunction to
prevent Novadigm from making, using or selling infringing software products. Our
complaint also alleges that Novadigm has willfully infringed the Marimba Patent
and seeks up to triple damages under the United States Patent Act. The lawsuit
is at a preliminary stage, and we cannot assure you that the outcome of this
litigation will be favorable to us. In addition, due to the inherent
uncertainties in litigation we cannot determine the total expense or other harm
that we may incur as a result of litigation, arbitration or settlement of our
dispute with Novadigm.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Marimba's Annual Meeting of Stockholders on June 8, 2000, our
stockholders voted on the following proposals:
1. Proposal to elect directors:
For Withheld Unvoted
---------- -------- -------
Kim K. Polese 19,695,464 25,700 0
Arthur A. van Hoff 19,699,422 21,742 0
Steven P. Williams 19,699,422 21,742 0
Aneel Bhusri 19,699,422 21,742 0
Raymond J. Lane 19,699,422 21,742 0
Douglas J. MacKenzie 19,699,422 21,742 0
Stratton D. Sclavos 19,699,422 21,742 0
2. Proposal to ratify the selection of Ernst & Young LLP as Marimba's
independent auditors for the fiscal year ending December 31, 2000:
For: 19,707,913
Against: 5,501
Abstain: 7,750
Unvoted: 0
ITEM 5. OTHER INFORMATION.
On July 21, 2000, John F. Olsen was appointed President and Chief Executive
Officer of Marimba and Kim K. Polese became Marimba's Chairman and Chief
Strategy Officer. Mr. Olsen also was appointed a member of the Board of
Directors on such date. Concurrent with Mr. Olsen's addition to the Board of
Directors, Arthur A. van Hoff resigned as a Board member. Mr. van Hoff will
continue in his current role as Chief Technology Officer of Marimba.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule for the period ended June 30, 2000.
(b) Reports on Form 8-K.
On July 25, 2000, Marimba filed a report on Form 8-K to report under Item 5
the appointment of John F. Olsen as President and Chief Executive Officer and a
Board member, as well as the material compensatory terms of his employment with
Marimba.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARIMBA, INC.
Date: August 11, 2000 By: /s/ Fred M. Gerson
-----------------------------------------
Fred M. Gerson
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule for the period ended June 30, 2000.
