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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q








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




For the quarterly period ended June 30, 2002





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 000-25683





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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) Yes  x  No  ̈ , 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, 2002 was 24,498,355.





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##### Table of Contents




MARIMBA, INC.





INDEX





Page No.Part I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001

1Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001

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

3Notes to Condensed Consolidated Financial Statements

4Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

9Item 3.

Qualitative and Quantitative Disclosure About Market Risk

22Part II.

Other InformationItem 1.

Legal Proceedings

23Item 2.

Changes in Securities and Use of Proceeds

23Item 3.

Defaults Upon Senior Securities

23Item 4.

Submission of Matters to a Vote of Security Holders

24Item 5.

Other Information

24Item 6.

Exhibits and Reports on Form 8-K

24Signature

25






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PART I.    FINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS





MARIMBA, INC.





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)





June 30, 2002


December 31, 2001(1)(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
19,188


$
26,141Short-term investments


22,958



16,249Accounts receivable, net of allowances of $1,478 and $2,358, respectively


3,878



7,791Prepaid expenses and other current assets


1,120



1,164Total current assets


47,144



51,345Property and equipment, net


3,086



3,900Long-term investments


17,225



18,246Other assets


367



360$
67,822


$
73,851LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities

$
4,325


$
2,378Accrued compensation


3,169



3,408Deferred revenue


10,714



10,558Total current liabilities


18,208



16,344Long-term liabilities


289



265Stockholders equity:Common stock


2



2Additional paid-in capital


101,060



100,523Deferred compensation


(791
)


(1,542
)Accumulated other comprehensive income


167



141Accumulated deficit


(51,113
)


(41,882
)Stockholders equity


49,325



57,242$
67,822


$
73,851


---

|(1) |  | The balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting principles for complete financial statements.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




See accompanying notes.




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##### Table of Contents




MARIMBA, INC.





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share amounts)





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001(unaudited)


(unaudited)Revenues:License

$
5,050


$
8,281


$
9,018


$
15,264Service


3,988



3,904



8,081



7,925Total revenues


9,038



12,185



17,099



23,189Cost of revenues:License


2,099



137



2,226



260Service


1,407



1,462



2,863



3,327Total cost of revenues


3,506



1,599



5,089



3,587Gross profit


5,532



10,586



12,010



19,602Operating expenses:Research and development


2,042



2,711



4,100



5,966Sales and marketing


6,775



9,059



13,451



17,928General and administrative


1,875



1,781



3,440



3,907Restructuring costs






789







789Amortization of deferred compensation


508



526



1,060



1,118Total operating expenses


11,200



14,866



22,051



29,708Loss from operations


(5,668
)


(4,280
)


(10,041
)


(10,106
)Interest income, net


390



651



823



1,682Loss before income taxes


(5,278
)


(3,629
)


(9,218
)


(8,424
)Provision for income taxes


4



87



13



108Net loss

$
(5,282
)

$
(3,716
)

$
(9,231
)

$
(8,532
)Basic and diluted net loss per share

$
(.22
)

$
(.16
)

$
(.38
)

$
(.36
)Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share


24,360



23,708



24,290



23,642








See accompanying notes.




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MARIMBA, INC.





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





Six Months Ended June
30,2002


2001(unaudited)Operating activities:Net loss

$
(9,231
)

$
(8,532
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


1,000



1,045Amortization of deferred compensation


1,060



1,118Loss on disposal of property and equipment


3



Changes in operating assets and liabilities:Accounts receivable, net


3,913



943Note receivable from officer






(782
)Prepaid expenses and other assets


37



203Accounts payable and accrued liabilities


1,947



(1,124
)Accrued compensation


(239
)


(686
)Long-term liabilities


24



72Deferred revenue


156



(2,470
)Net cash used in operating activities


(1,330
)


(10,213
)Investing activities:Capital expenditures, net


(189
)


(1,556
)Purchases of investments


(21,158
)


(35,033
)Proceeds from matured investments


15,515



39,755Net cash provided by (used in) investing activities


(5,832
)


3,166Financing activities:Proceeds from issuance of common stock, net of repurchases


228



1,050Proceeds from transfer of financial assets






3,853Net cash provided by financing activities


228



4,903Effect of exchange rate changes on cash


(19
)


(5
)Net decrease in cash and cash equivalents


(6,953
)


(2,149
)Cash and cash equivalents at beginning of period


26,141



33,122Cash and cash equivalents at end of period

$
19,188


$
30,973Supplemental disclosure of noncash investing and financing activitiesDeferred compensation

$
309


$
36





See accompanying notes.




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





Net Loss Per Share





Basic and
diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase.





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





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001(in thousands, except per share data)Net loss

$
(5,282
)

$
(3,716
)

$
(9,231
)

$
(8,532
)Basic and diluted:Weighted-average shares of common stock outstanding


24,375



23,909



24,306



23,810Less weighted-average shares subject to repurchase


(15
)


(201
)


(16
)


(168
)Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share


24,360



23,708



24,290



23,642Basic and diluted net loss per share

$
(.22
)

$
(.16
)

$
(.38
)

$
(.36
)





Marimba has excluded all outstanding stock options and shares
subject to repurchase by Marimba from the calculation of diluted loss per share, because all such securities are antidilutive for all periods presented. Weighted-average options outstanding to purchase 7,469,584 and 7,398,316 shares of common stock
for the three and six months ended June 30, 2002 , respectively, were not included in the computation of diluted net loss per share, because the effect would be antidilutive. Such securities, had they been dilutive, would have been included in the
computation of diluted net loss per share using the treasury stock method.




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Revenue Recognition





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





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





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





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





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





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





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





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





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




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





Marimbas arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of
receipt of a written customer acceptance or expiration of the acceptance period.





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





Credit Risks and Revenue
Concentration





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





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





Financing





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




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2.    Comprehensive Loss





Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss) such as foreign currency translation
gain/loss and unrealized gains or losses on available-for-sale marketable securities. Our total comprehensive loss is as follows (in thousands):





Three Months Ended June 30,


Six Months Ended June
30,2002


2001


2002


2001(in thousands)


(in thousands)Net loss

$
(5,282
)

$
(3,716
)

$
(9,231
)

$
(8,532
)Other comprehensive income (loss):Change in unrealized gains and losses on available-for-sale securities


255



(20
)


45



77Foreign currency translation adjustment


(14
)


(4
)


(19
)


(5
)Comprehensive loss

$
(5,041
)

$
(3,740
)

$
(9,205
)

$
(8,460
)





3.    Legal Matters





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





4.    Restructuring





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




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5.    Stock Option Exchange





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





6.    Subsequent Events





Legal
Settlement





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





Restructuring





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




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ITEM 2.    
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





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





Overview





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





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





Revenues to date have been derived primarily from the license of our products and to a lesser extent from support and maintenance, consulting and training services. Customers who license our products generally purchase maintenance
contracts, typically covering a 12-month period. Additionally, customers may purchase consulting services, which are customarily billed at a fixed daily rate plus out-of-pocket expenses. We also offer training services that are billed on a per
student or per class session basis.




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Since inception, we have made substantial investments in sales, marketing and
research and development to expand and enhance our product lines and increase the market awareness of Marimba and our products. We have incurred significant losses since inception and had an accumulated deficit of approximately $51.1 million at June
30, 2002. We believe that our success depends on further increasing our customer base and on growth in our market overall. Accordingly, over the long term, we intend to continue to invest heavily in sales, marketing and research and development.





In view of the rapidly changing nature of our business and our limited operating history, we believe that
period-to-period comparisons of revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance, growth or financial results. Additionally, we do not believe that historical growth
rates or profitability are indicative of future growth or financial results.





Critical Accounting Policies and Estimates





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





For our other critical accounting policies and estimates, refer to Marimbas Annual Report on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on March 28, 2002.




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Results of Operations





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





Three Months Ended June
30,


Six Months Ended June
30,2002


2001


2002


2001Consolidated Statement of Operations Data:Revenues:License

55.9
%

68.0
%

52.7
%

65.8
%Service

44.1


32.0


47.3


34.2Total revenues

100.0


100.0


100.0


100.0Cost of revenues:License

23.2


1.1


13.0


1.1Service

15.6


12.0


16.7


14.4Total cost of revenues

38.8


13.1


29.7


15.5Gross margin

61.2


86.9


70.3


84.5Operating expenses:Research and development

22.6


22.2


24.0


25.7Sales and marketing

75.0


74.3


78.7


77.3General and administrative

20.7


14.6


20.1


16.8Restructuring




6.5





3.4Amortization of deferred compensation

5.6


4.4


6.2


4.9Total operating expenses

123.9


122.0


129.0


128.1Income (loss) from operations

(62.7
)

(35.1
)

(58.7
)

(43.6
)Interest income, net

4.3


5.3


4.8


7.3Income (loss) before income taxes

(58.4
)

(29.8
)

(53.9
)

(36.3
)Provision for income taxes




(0.7
)

(0.1
)

(0.5
)Net income (loss)

(58.4
)%

(30.5
)%

(54.0
)%

(36.8
)%





Revenues





Total revenues decreased $3.2 million or 26%, to $9.0 million in the second quarter of 2002 from $12.2 million in the second quarter of 2001. For the six months ended June
30, 2002, total revenues decreased 26% to $17.1 million from $23.2 million in the comparable period of 2001.





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




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





Costs of Revenues





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





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





Operating Expenses





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





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





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





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




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





Liquidity and Capital Resources





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





Net cash used in investing activities was approximately $5.8 million for the first six months of 2002, primarily related to purchases of investments, partially offset by sales and maturities of investments.





Net cash provided by financing activities was $228,000 for the first six months of 2002, which was the result of proceeds from the
exercise of stock options and purchases under the Employee Stock Purchase Plan.





Marimbas contractual
obligations consist of noncancellable operating lease agreements. As of June 30, 2002, future minimum lease payments under noncancellable operating leases are expected to be approximately $5.6 million, and become due as presented in the table below:





Operating Leases(in thousands)Less than 1 year

$
1,8961 to 3 years


3,6294 to 5 years


26Total minimum lease payments

$
5,551





We currently anticipate that our current cash, cash equivalents and
investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, cash generated from operations, if any, may not be sufficient to satisfy our liquidity
requirements. We may therefore need to sell additional equity or raise funds by other means. Any additional financings, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our
business and operating results. If additional funds are raised through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced. Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock.





Other Factors Affecting Operating Results, Liquidity and Capital Resources





The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ
materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to this Item 2 above.




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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 continue to encounter challenges and difficulties frequently encountered by early-stage companies in new and rapidly evolving
markets. We may not successfully address any of these challenges and the failure to do so would seriously harm our business and operating results. In addition, because of our limited operating history, we have limited insight into trends that may
emerge and affect our business.





We Have Incurred Losses and Expect to Incur Future Losses





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





Fluctuations in Quarterly Operating Results and Absence of Significant Backlog





Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. As a result, we
believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicators of our future performance. Our operating results have been below the expectations of securities analysts and investors
in the past and could be so in the future. Our failure to meet these expectations would likely harm the market price of our common stock. Operating results vary depending on a number of factors, many of which are outside our control. Our operating
results may also depend on general economic factors, including an economic slowdown or recession.





A substantial
portion of our revenues for most quarters has been booked in the last month of the quarter and the magnitude of quarterly fluctuations in operating results may not become evident until late in or even at the end of a particular quarter. As a result,
a delay in recognizing revenue, even from just one account, could have a significant negative impact on our operating results. In the past, a significant portion of our sales have been realized near the end of a quarter. A delay in an anticipated
sale past the end of a particular quarter could negatively impact our operating results.





We generally expect that
revenues in the first quarter of each year will not substantially increase over, and may be lower than, revenues in the fourth quarter of the preceding year due to the annual nature of companies purchasing and budgeting cycles and the
year-to-date structure of our sales incentive program.





Our expense levels are relatively fixed for a particular
quarter and are based, in part, on expectations as to future revenues. As a result, if revenue levels fall below our expectations for a particular quarter, our operating results will be adversely affected because only a small portion of our expenses
vary with our revenues. We have historically operated with little product backlog, because our products are generally delivered as orders are received. As a result, revenue in any quarter will depend on the volume and timing, and our ability to
fill, orders received in that quarter.





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





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




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We Expect Significant Long-Term Increases in Our Operating Expenses





Despite recent cost cutting measures implemented by Marimba, we intend over the long term 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 achieve and sustain profitability. These expenses will be incurred before we generate any revenues associated
with this increased spending. If we do not significantly increase revenues from these efforts, our business and operating results would be adversely affected.





Our Success Depends on our Desktop/Mobile Management Product Family





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





Our strategy requires our Desktop/Mobile Management products to be highly scalablein other words, able to rapidly increase deployment size from a limited number of
end-users to a very large number of end-users. If we are unable to continue to achieve this level of scalability, the attractiveness of our products and services would be diminished.





We Need to Grow Our Server Management and Embedded Management Product Revenues and Develop New Products and Services





During 2001, revenues from our Server and Embedded Management product lines accounted for 18% and 6% of total license revenues,
respectively. Revenues from our Server and Embedded Management product lines accounted for 17% and 8% of total license revenues, respectively, during the six months ended June 30, 2002. During the six months ended June 30, 2001, revenues from our
Server and Embedded Management product lines accounted for 17% and 6% of total license revenues, respectively. There can be no assurance that the revenues from each of these product lines will grow, in absolute amount or as a percentage of total
license revenues, or that our Server Management products and Embedded Management products will meet customer expectations or gain widespread market acceptance. To provide comprehensive systems management solutions, we will need to develop and
introduce new products and services, which offer functionality that we do not currently provide. We may not be able to develop these technologies, and therefore, we may not be able to offer a comprehensive systems management solution. In addition,
we have, in the past, experienced delays in new product releases, and we may experience similar delays in the future. If we fail to release new product on a timely basis, our business and operating results could be seriously harmed.




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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 provided by our new
products and may not ultimately license these products.





Because the total amount of maintenance and support fees
we receive in any period depends in large part on the size and number of licenses that we have previously sold, the downturn in our software license revenues negatively impacts our future service revenues. Any future downturn in our license revenues
would also harm our future service revenues. Our support and maintenance programs are sold on an annual basis. Renewal of annual support and maintenance is generally at the customers election. If customers elect not to renew their support and
maintenance agreements, our service revenues could be significantly adversely impacted. If support and maintenance revenues were to decline, or not grow as rapidly as expected, Marimba would need to increase its license revenues and other service
revenues in order to make up for the decline in support and maintenance revenues.





We Need to Develop
Third-Party Distribution 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. Our current agreements with our distribution partners typically do not prevent these companies from selling products of other companies, including
products that may compete with our products, and do not generally require these companies to purchase minimum quantities of our products. These distributors could give higher priority to the products of other companies or to their own products than
they give to our products. In addition, sales through these channels generally result in lower fees to Marimba than direct sales. As a result, while the loss of, or significant reduction in, sales volume to any of our current or future distribution
partners could seriously harm our revenues and operating results, a significant increase in sales through these channels could also negatively impact our gross margins.





Implementation of Our Products by Large Customers May Be Complex and Customers Could Become Dissatisfied if Implementation of Our Products Proves Difficult, Costly or
Time Consuming





Our products must integrate with many existing computer systems and software programs used by
our customers. Integrating with many other computer systems and software programs can be complex, costly and time consuming, and can cause delays in the deployment of our products for such customers. Customers could become dissatisfied with our
products if implementations prove to be difficult, costly or time consuming, and this could negatively impact our ability to sell our products.




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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, Richard Wyckoff, and our Vice President of Worldwide Sales, Matt Thompson. We have in the past lost senior management personnel. Several members of our senior management are relatively
new to Marimba, including Messrs. Wyckoff and Thompson, and our success will depend in part on the successful assimilation and performance of these individuals.





We may not be successful in attracting qualified senior management personnel or be able to attract, assimilate and retain other key personnel in the future. None of our senior management or other key
personnel is bound by an employment agreement. If we lose additional key employees and are unable to replace them with qualified individuals, our business and operating results could be seriously harmed. In addition, our future success will depend
largely on our ability to continue attracting and retaining highly skilled personnel. Like other companies in the software industry, we face intense competition for qualified personnel.





We Have a Long Sales Cycle that Depends upon Factors Outside Our Control





A customers decision to license our products typically involves a significant commitment of resources and is influenced by the customers budget cycles and internal approval procedures for
IT purchases. In addition, selling our products requires us to educate potential customers on our products use and benefits. As a result, our products have a long sales cycle which can take over six months. We face difficulty predicting the
quarter in which sales to expected customers may occur. The sale of our products is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers that typically accompany significant capital
expenditures. For example, customers frequently begin by evaluating our products on a limited basis and devote time and resources to test our products before they decide whether to purchase a license for deployment. In addition, sales cycles are
generally lengthening during the current economic slowdown. Customers may also defer orders as a result of anticipated releases of new products or enhancements by us or our competitors.





Our Markets Are Highly Competitive





Our markets are 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 products.
| | - |  | -------------------------------------




In addition, we compete with various methods of software distribution (including thin client systems and web browsers) and with application server vendors and others that have introduced software
distribution capabilities into their products.





Potential competitors may bundle their products or incorporate
additional components into existing products in a manner that discourages users from purchasing our products. Furthermore, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Our competitors may be
able to respond more quickly to new or emerging technologies and changes in customer requirements than we can.





Most of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies have more extensive customer bases and broader customer
relationships that they could leverage, including relationships with many of our current and potential customers. These companies also have significantly more established customer support and professional service organizations than we do. In
addition, these companies may adopt aggressive pricing policies which we are unable to match. In the past, we have lost potential customers to competitors for various reasons, including lower prices.




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Protection of Our Intellectual Property Is Limited





We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology. These legal protections afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use our
proprietary information. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could significantly harm our business and operating results. In addition, we sell our products internationally, and the laws of many countries do not protect our proprietary rights as well as the laws of
the United States.





We May Be Found to Infringe Proprietary Rights of Others





Other companies, including our competitors, may obtain patents or other proprietary rights that could prevent, limit or interfere with our
ability to make, use or sell our products. As a result, we may be found to infringe the proprietary rights of others. Furthermore, companies in the software market are increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. We have been involved in two such patent infringement suits in the past.





We could
incur substantial costs to defend any intellectual property litigation, and any such litigation could result in one or more of the following:





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




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




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




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




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




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




In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our
business and operating results would be significantly harmed.





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





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




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We Need to Develop and Expand Our Sales and Marketing Capabilities





We need to expand our direct sales and marketing efforts in order to increase market awareness of our
products, market our products to a greater number of enterprises and generate increased revenues. Our products and services require a sophisticated sales effort targeted at senior management of our prospective customers. New hires require extensive
training and typically take at least six months to achieve full productivity. There is no assurance that new sales representatives will ultimately become productive. In prior quarters, Marimbas license revenues have often resulted from
contracts closed by just a few sales representatives. If Marimba were to lose qualified and productive sales personnel, our revenues could be adversely impacted. Furthermore, the cost of hiring and training replacement sales personnel could be
significant.





We Need to Expand Our Professional Services





We believe that growth in our product sales depends on our ability to provide our customers with professional services and to educate
third-party resellers and consultants on how to provide similar services. Over the long term, we plan to increase the number of our services personnel to meet these needs. However, competition for qualified services personnel is intense. We may not
be able to attract, train or retain the number of highly qualified services personnel that our business needs.





Over the long term, we expect our total service revenues to increase as we continue to provide support, consulting and training services that complement our products and as our installed customer base grows. This could negatively
impact our gross margin, because margins on revenues derived from services are generally lower than gross margins on revenues derived from the license of our products.





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, and expanding internationally is expensive.
However, we may not be successful in increasing our international sales force or sales revenue. In addition, our international business activities are subject to a variety of risks, including the adoption of or changes in laws, currency
fluctuations, actions by third parties and political and economic conditions that could restrict or eliminate our ability to do business in foreign jurisdictions. To date, we have not adopted a hedging program to protect us from risks associated
with foreign currency fluctuations.





Export clearances, and in some cases, import clearances must be obtained
before our products can be distributed internationally. Current or new government laws and regulations, or the application of existing laws and regulations, could expose us to significant liabilities, significantly slow our growth and seriously harm
our business and operating results.




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We Rely on Third-Party Software and Applications





We integrate third-party software and digital certificates as a component of our software. There are inherent limitations in the use and
capabilities of much of the technology that we license from third parties. As a result, we face a number of challenges in integrating these technologies into our products. We would be seriously harmed if the providers from whom we license software
ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards. In addition, the third-party software may not continue to be available to us on commercially reasonable terms or at all. The
loss of, or inability to maintain or obtain this software, could result in shipment delays or reductions. Furthermore, we might be forced to limit the features available in our current or future product offerings. Either alternative could seriously
harm our business and operating results.





Almost all of our products are written in Java and require a Java
virtual machine in order to operate. Vendors offering these Java virtual machines may not continue to make these implementations of the Java virtual machines available at commercially reasonable terms or at all. Furthermore, if Sun Microsystems,
Inc. were to make significant changes to the Java language, if significant changes were to be made to Java virtual machine implementations of Sun Microsystems, Inc. and other vendors or if they fail to correct defects and limitations in these
products, our ability to continue to improve and ship our products could be impaired. In the future, our customers may also require the ability to deploy our products on platforms for which technically acceptable Java implementations either do not
exist or are not available on commercially reasonable terms. Our customers may also use particular implementations of the Java virtual machines that may not be technically or commercially acceptable for integration into our products.





Software Defects in Our Products Would Harm Our Business





Complex software products like ours often contain errors or defects, including errors relating to security, particularly when first introduced or when new versions or
enhancements are released. Our products extensively utilize digital certificates and other complex technology. Our use of this technology has in the past and may in the future result in product behavior problems, which may not be anticipated by us
or our customers. Defects or errors in our current or future products or in products comparable to ours could result in lost or delayed revenues, which would seriously harm our business and operating results.





Since many of our customers use our products for business-critical applications, errors, defects or other performance problems could
result in financial or other damage to our customers and could significantly impair their operations. Our customers could seek damages for losses related to any of these issues. A product liability claim brought against us, even if not successful,
would likely be time consuming and costly to defend and could adversely affect our marketing efforts.





Our
Stock Price Is Likely to Continue to be Volatile





The market price of our common stock has been and is likely
to continue to be highly volatile. The market price of our common stock may be significantly affected by factors such as actual or anticipated fluctuations in our operating results, announcements of technological innovations, new products or new
contracts by us or our competitors, developments with respect to patents or proprietary rights and related litigation, other material litigation involving Marimba, changes in our management or other key employees, adoption of new accounting
standards affecting the software industry, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for
the common stock of technology companies. These types of broad market fluctuations may adversely affect the market price of our common stock.




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





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





We Face Challenges Stemming from Our Emerging Markets





The market for certain of our products has only recently begun to develop, is rapidly evolving and will likely have an increasing number
of competitors. We cannot be certain that a viable market for these products will emerge or be sustainable. If this market fails to develop, or develops more slowly than expected, our business and operating results would be seriously harmed.





Furthermore, in order to be successful in this emerging market, we must be able to differentiate Marimba from our
competitors through our product and service offerings and brand name recognition. We may not be successful in differentiating Marimba or achieving widespread market acceptance of our products and services. In addition, enterprises that have already
invested substantial resources in other methods of deploying and managing their applications, content and/or services may be reluctant or slow to adopt a new approach that may replace, limit or compete with their existing systems.





We Must Respond to Rapid Technological Change and Evolving Industry Standards





The markets for our software change and configuration management solutions are characterized by rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. New solutions based on new technologies or new industry standards can quickly render existing solutions obsolete and
unmarketable. Any delays in our ability to develop and release enhanced or new solutions could seriously harm our business and operating results. Our technology is complex, and new products, enhancements and services can require long development and
testing periods. Our failure to conform to prevailing standards could have a negative effect on our business and operating results.





We Face Risks Associated with Potential Acquisitions





We may make acquisitions in
the future. Acquisitions of companies, products or technologies entail numerous risks, including an inability to successfully assimilate acquired operations and products, diversion of managements attention, loss of key employees of acquired
companies and substantial transaction costs. Some of the products acquired may require significant additional development before they can be marketed and may not generate revenue at anticipated levels. Moreover, future acquisitions by us may result
in dilutive issuances of equity securities, the use of a substantial portion of our cash and investment balances, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result
in significant impairment charges or amortization expense. Any of these problems or factors could seriously harm our business, financial condition and operating results.




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ITEM 3.    
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK





Interest Rate Sensitivity





Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments.





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





| |  |  | 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 particular credit rating and net worth requirements
with maturities of less than two years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Exchange Rate Sensitivity





We develop products in the United States, and sell our products and services primarily in North America, Europe and Asia. As a result, our
financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. A portion of our sales are currently transacted in British Pounds and Euros, thereby
potentially affecting our financial position, results of operations and cash flows due to fluctuation in exchange rates. Near-term changes in exchange rates may have a material impact on our future revenues, earnings, fair values or cash flows. We
have not engaged in foreign currency hedging transactions during the six months ended June 30, 2002. There can be no assurance that a sudden and significant change in the value of the British Pound or Euro would not seriously harm our financial
condition and results of operations.




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PART II.    OTHER INFORMATION





ITEM 1.    
LEGAL PROCEEDINGS.





Securities Litigation





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





Beck Systems, Inc. vs. Marimba Software, Inc.





On July 6, 2001, Beck Systems, Inc. filed a complaint against Marimba, Inc. and two of its customers in the
United States District Court for the Northern District of Illinois (Beck Systems, Inc. v. Marimba, Inc. et al., Civil Action No. 01 C 5207), alleging infringement of two patents held by Beck Systems. On July 19, 2002, the Company and Beck Systems,
Inc. executed an agreement settling the action, subject to court approval. On July 25, 2002, the court approved the settlement and the parties to the action dismissed the claims against each other in the action with prejudice. Under the agreement,
Marimba obtained a license to Beck Systems patents.





ITEM 2.    
CHANGES IN SECURITIES.





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





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 2002 Annual
Meeting of Stockholders held on June 6, 2002, our stockholders voted on and approved each of the below two proposals by the votes indicated below. A total of 20,112,678 shares were represented and voting in person or by proxy at the meeting.





1.  Proposal to elect the following directors to serve for a term ending upon
Marimbas 2003 Annual Meeting of Stockholders or until their successors have been duly elected and qualified:





For

Withheld

UnvotedKim K. Polese

19,357,233

775,445

0Richard C. Wyckoff

19,568,457

526,221

0Aneel Bhusri

20,058,755

53,923

0Eric J. Keller

19,451,266

661,412

0Raymond J. Lane

20,058,418

54,260

0Douglas J. MacKenzie

20,056,518

54,360

0Stratton D. Sclavos

19,456,916

655,762

0Anthony Zingale

20,053,491

59,187

0





2.  Proposal to ratify the appointment of
Ernst & Young LLP as Marimbas independent public accountants for the fiscal year ending December 31, 2002:





For:

20,073,794Against:

27,305Abstain:

11,579Unvoted:

0





ITEM 5.    
OTHER INFORMATION.





Effective August 1, 2002, Mark S. Garrett resigned as Vice
President, Finance and Chief Financial Officer of Marimba.





Effective August 1, 2002, Andrew Chmyz was appointed
Acting Vice President, Finance and Chief Financial Officer of Marimba.





On August 12, 2002, the Audit Committee of
Marimbas Board of Directors approved the following non-audit services to be performed by Marimbas independent accountants: tax preparation and other tax-related services.





ITEM 6.    
EXHIBITS AND REPORTS ON FORM 8-K.





(a)  Exhibits.





None.





(b)  Reports on Form 8-K.





None.




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MARIMBA, INC.





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.By:

/s/    ANDREW CHMYZAndrew Chmyz Acting Vice P
resident, Finance and Chief Financial Officer (Principal Financial and Accounting Officer)





Date:  August 14, 2002




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