##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549    FORM 10-Q/A   x
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004  o
    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 000-24677 BINDVIEW DEVELOPMENT CORPORATION  TEXAS
(State or other jurisdiction of
incorporation or organization)
  
  76-0306721
(I.R.S. Employer
Identification No.)5151 SAN FELIPE, 25th FLOOR, HOUSTON, TX
    
    77056(Address of principal executive offices)
    
    (Zip code)
 (713) 561-4000
(Registrants telephone number, including area code) 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 o No x Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes o No x As of August 10, 2004, the Company had 47,184,683 shares of Common Stock, no par value,
outstanding.    1




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TABLE OF CONTENTS  EXPLANATORY NOTEPART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSITEM 6. EXHIBITSSIGNATURESEXHIBIT INDEXCertification of Company's CEO pursuant to Section 302Certification of Company's CFO pursuant to Section 302Certifications of CEO pursuant to Section 906Certifications of CFO pursuant to Section 906    Table of Contents  
 EXPLANATORY NOTE BindView Development Corporation, Inc. (BindView or the Company) is filing this Amendment
No. 1 to its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004, which was
originally filed on August 13, 2004 (the Form 10-Q), to restate the consolidated financial
statements and related footnote disclosures for the three and six months ended June 30, 2004 to
correct an overstatement of revenues in our Latin America operations.
As more fully described in Note 9 to the consolidated
financial statements,
revenues were overstated by $698,000 and $829,000 for the three and six months ended June 30, 2004,
respectively. The overstatement resulted from five transactions (two in the first quarter and three
in the second quarter) that were recorded based on invalid documents that had been submitted to the
Companys accounting department by certain personnel in Latin America. In addition, the Company
has revised Part I Item 4 to include information about the impact of the restatements on its
internal controls. This Amendment No. 1 amends only the portions of the Form 10-Q listed in the
next paragraph below; the remainder of the Form 10-Q is substantively unchanged but is reproduced
in this Amendment No. 1 for convenient reference. This Amendment No. 1 does not reflect events
occurring after the original filing date of the Form 10-Q except as otherwise indicated. This Amendment No. 1 contains changes to the following disclosures:  
    
    Part I  Item 1. Financial Statements (Unaudited)  
    
    Part I  Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations  
    
    Part I  Item 4. Controls and Procedures  
    
    Part II  Item 6. Exhibits 2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 BINDVIEW DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands) JUNE 30,
    
    DECEMBER 31,2004
    
    2003(As Restated)
Note 9
    
    (As Restated)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,119
    
    
    $
    35,449Cash  restricted
    
    
    2,250
    
    
    
    2,250Short-term investments
    
    
    3,912
    
    
    
    Accounts receivable, net of allowance of $1,040
    
    
    10,590
    
    
    
    14,066Other
    
    
    2,353
    
    
    
    2,180Total current assets
    
    
    50,224
    
    
    
    53,945Property and equipment, net
    
    
    5,441
    
    
    
    6,564Other
    
    
    2,929
    
    
    
    2,498Total assets
    
    $
    58,594
    
    
    $
    63,007LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,463
    
    
    $
    2,066Accrued liabilities
    
    
    4,464
    
    
    
    4,879Accrued compensation
    
    
    3,624
    
    
    
    5,275Deferred revenues
    
    
    15,100
    
    
    
    13,253Total current liabilities
    
    
    24,651
    
    
    
    25,473Deferred revenues
    
    
    2,472
    
    
    
    1,477Other liabilities
    
    
    1,826
    
    
    
    2,087Commitments and contingenciesShareholders equity:Preferred stock, $0.01 par value, 20,000 shares authorized,
none issued
    
    
    
    
    
    
    Common stock, no par value, 100,000 shares
authorized, 47,251 and 47,034 shares issued and outstanding
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    105,110
    
    
    
    105,176Note receivable from shareholder
    
    
    (261
    )
    
    
    (392
    )Accumulated deficit
    
    
    (76,466
    )
    
    
    (72,207
    )Accumulated other comprehensive income
    
    
    1,261
    
    
    
    1,392Total shareholders equity
    
    
    29,645
    
    
    
    33,970Total liabilities and shareholders equity
    
    $
    58,594
    
    
    $
    63,007
 See notes to unaudited consolidated financial statements. 3




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BINDVIEW DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share amounts) THREE MONTHS
    
    SIX MONTHSENDED JUNE 30,
    
    ENDED JUNE 30,2004
    
    2003
    
    2004
    
    2003(As Restated)
    
    
    
    
    
    (As Restated)Note 9
    
    
    
    
    
    Note 9Revenues:Licenses
    
    $
    8,648
    
    
    $
    7,394
    
    
    $
    14,560
    
    
    $
    12,590Services
    
    
    9,231
    
    
    
    7,921
    
    
    
    18,152
    
    
    
    15,77217,879
    
    
    
    15,315
    
    
    
    32,712
    
    
    
    28,362Cost of revenues:Licenses
    
    
    190
    
    
    
    95
    
    
    
    330
    
    
    
    211Services
    
    
    1,910
    
    
    
    1,705
    
    
    
    3,741
    
    
    
    3,1372,100
    
    
    
    1,800
    
    
    
    4,071
    
    
    
    3,348Gross profit
    
    
    15,779
    
    
    
    13,515
    
    
    
    28,641
    
    
    
    25,014Operating costs and expenses:Sales and marketing
    
    
    9,739
    
    
    
    9,269
    
    
    
    18,919
    
    
    
    17,027Research and development
    
    
    5,396
    
    
    
    4,567
    
    
    
    9,972
    
    
    
    8,802General and administrative
    
    
    2,024
    
    
    
    1,956
    
    
    
    3,922
    
    
    
    3,733Restructuring
    
    
    149
    
    
    
    
    
    
    
    149
    
    
    
    549Operating loss
    
    
    (1,529
    )
    
    
    (2,277
    )
    
    
    (4,321
    )
    
    
    (5,097
    )Other income, net
    
    
    112
    
    
    
    134
    
    
    
    206
    
    
    
    253Loss before income taxes
    
    
    (1,417
    )
    
    
    (2,143
    )
    
    
    (4,115
    )
    
    
    (4,844
    )Provision for income taxes
    
    
    74
    
    
    
    
    
    
    
    144
    
    
    
    Net loss
    
    $
    (1,491
    )
    
    $
    (2,143
    )
    
    $
    (4,259
    )
    
    $
    (4,844
    )Loss per common share  basic and
diluted
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    (0.10
    )Number of shares used to calculate per share
amounts, basic and diluted
    
    
    47,432
    
    
    
    46,371
    
    
    
    47,380
    
    
    
    46,305Reconciliation of net loss to comprehensive loss:Net loss
    
    $
    (1,491
    )
    
    $
    (2,143
    )
    
    $
    (4,259
    )
    
    $
    (4,844
    )Gain (loss) from currency translation
    
    
    (168
    )
    
    
    276
    
    
    
    (131
    )
    
    
    465Comprehensive loss
    
    $
    (1,659
    )
    
    $
    (1,867
    )
    
    $
    (4,390
    )
    
    $
    (4,379
    )
 See notes to unaudited consolidated financial statements. 4




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BINDVIEW DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands) SIX MONTHS ENDEDJUNE 30,2004
    
    2003(As Restated)Note 9Cash flows from operating activities:Net loss
    
    $
    (4,259
    )
    
    $
    (4,844
    )Adjustments to reconcile net loss to net cash from operating
activities:Depreciation and amortization
    
    
    1,446
    
    
    
    1,894Stock compensation expense
    
    
    181
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    3,435
    
    
    
    3,464Other assets
    
    
    (429
    )
    
    
    817Accounts payable
    
    
    (595
    )
    
    
    (739
    )Accrued liabilities
    
    
    (2,384
    )
    
    
    (1,318
    )Deferred revenues
    
    
    2,844
    
    
    
    540Net cash provided by (used in) operating activities
    
    
    239
    
    
    
    (186
    )Cash flows
from investing activities:Capital expenditures
    
    
    (603
    )
    
    
    (688
    )Purchases of short term investments
    
    
    (3,912
    )
    
    
    Reimbursement of tenant improvements
    
    
    284
    
    
    
    Restrictions on cash
    
    
    (194
    )
    
    
    Net cash used in investing activities
    
    
    (4,425
    )
    
    
    (688
    )Cash flows from financing activities:Repurchase of common stock
    
    
    (1,236
    )
    
    
    Net proceeds from sale of common stock
    
    
    1,170
    
    
    
    366Net cash (used in) provided by financing activities
    
    
    (66
    )
    
    
    366Effect of exchange rate changes on cash
    
    
    (78
    )
    
    
    405Net decrease in cash and cash equivalents
    
    
    (4,330
    )
    
    
    (103
    )Cash and cash equivalents at beginning of year
    
    
    35,449
    
    
    
    37,760Cash and cash equivalents at end of period
    
    $
    31,119
    
    
    $
    37,657Non-cash financing and investing activities:Reduction of shareholder note in lieu of guaranteed bonus
    
    $
    131
    
    
    $
    226
 See notes to unaudited consolidated financial statements. 5




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BINDVIEW DEVELOPMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1.    GENERAL The accompanying consolidated financial statements of BindView Development Corporation, a
Texas corporation (the Company or BindView), included herein have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. The Company believes
that the presentations and disclosures herein are adequate to make the information not misleading.
The consolidated financial statements reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the interim periods. Certain reclassifications have
been made to the prior years consolidated financial statements to conform with the current year
presentation. The results of operations for the interim periods are not necessarily indicative of the
results of operations to be expected for the full year. These consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial statements included
in its Annual Report on Form 10-K/A, Amendment No. 1 for the year ended December 31, 2003. 2.    LOSS PER SHARE Options to purchase 11.0 million shares of common stock for the three and six
months ended June 30, 2004 and 9.0 million shares of common stock for the three and six months
ended June 30, 2003 were outstanding, but were not included in the computation of diluted loss per
share as their inclusion would have been anti-dilutive. 3.    STOCK BASED COMPENSATION The Company accounts for all stock-based employee compensation plans under the recognition and
measurement provisions of APB Opinion 25, Accounting for Stock Issued to Employees, (APB 25)
and related interpretations. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Companys common shares at the date of the grant
over the amount an employee must pay to acquire the common shares. The Company generally grants
options at prices equal to the market price of common shares on the date of the grant. However, if
options are granted at a price below fair market value, compensation expense is recorded in
accordance with the provisions of APB 25. Compensation expense may also be recognized for certain
options which are considered variable option grants. Statement of Financial Accounting Standards
(SFAS) No. 148, Accounting for Stock-Based Compensation  an Amendment to FAS 123, requires
companies that continue to account for stock-based compensation in accordance with APB 25 to
disclose certain information using tabular presentation as presented below. This table illustrates
the effect on net loss and loss per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation (in thousands, except per share amounts): THREE MONTHS
    
    SIX MONTHSENDED JUNE 30,
    
    ENDED JUNE 30,2004
    
    2003
    
    2004
    
    2003(As Restated)
    
    
    
    
    
    (As Restated)Note 9
    
    
    
    
    
    Note 9Net loss as reported
    
    $
    (1,491
    )
    
    $
    (2,143
    )
    
    $
    (4,259
    )
    
    $
    (4,844
    )Add: Stock-based
employee compensation
expense included in
reported net loss
    
    
    125
    
    
    
    
    
    
    
    181
    
    
    
    Deduct: Total
stock-based employee
compensation expense
determined under fair
value method for all
awards
    
    
    (1,510
    )
    
    
    (1,529
    )
    
    
    (2,742
    )
    
    
    (2,970
    )
 6




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THREE MONTHS
    
    SIX MONTHSENDED JUNE 30,
    
    ENDED JUNE 30,2004
    
    2003
    
    2004
    
    2003(As Restated)
    
    
    
    
    
    (As Restated)Note 9
    
    
    
    
    
    Note 9Pro forma net loss
    
    $
    (2,876
    )
    
    $
    (3,672
    )
    
    $
    (6,820
    )
    
    $
    (7,814
    )Loss per common share
(basic and diluted): As reported
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    (0.10
    ) Pro forma
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.14
    )
    
    $
    (0.17
    )
 4.    RESTRUCTURING EXPENSES AND ASSET IMPAIRMENTS The Company recorded restructuring charges totaling $0.1 million and $0.5 million in the first
half of 2004 and 2003, respectively. The 2004 charge was primarily attributable to reserves
established against rent payments due from the Companys sublease tenant which occupied its excess
office space in Arlington, VA. The $0.5 million charge in 2003 was for the Companys sales and
marketing reorganization plan. In January 2003, the Company approved a sales and marketing reorganization plan (the 2003
Restructuring Plan). The cost of this plan totaled approximately $0.5 million and consisted
primarily of (i) involuntary employee separation for approximately 20 employees (a reduction in
workforce of approximately 4 percent), (ii) closing the Companys Netherlands sales office, and
(iii) reserves for leasehold abandonment. All actions under the 2003 Restructuring Plan were
completed by December 31, 2003. In July 2002, the Company approved a restructuring plan to improve operating efficiency and
improve sales and marketing productivity (the 2002 Restructuring Plan). The cost of this plan
totaled approximately $1.9 million and consisted primarily of (i) involuntary employee separation
for approximately 30 employees (a reduction in workforce of approximately 5 percent), (ii) closing
the Companys Boston development center and certain European sales offices, (iii) reserves for
leasehold abandonment, and (iv) various non-personnel related cuts. The remaining accrual for the 2002 Restructuring Plan at December 31, 2003 was comprised of
the estimated carrying costs for the Companys remaining excess space in Houston, Texas. During the
second quarter of 2004, the Company received letters of intent to sublease the remaining excess
space. The Company recorded a $0.1 million adjustment to its restructuring accrual as a result of
receiving these letters of intent. The remaining accrual at June 30, 2004 is comprised of the
Companys carrying costs for the remaining space in Houston that are in excess of anticipated
sublease payments. Adjustments could be required in future periods if there are significant
changes to the terms and conditions of the sublease arrangements. The 2002 Restructuring Plan activity from December 31, 2003 to June 30, 2004 was as follows
(in thousands): REMAINING
    
    RESTRUCTURING
    
    
    
    
    
    REMAININGACCRUAL
    
    CHARGE
    
    CASH
    
    ACCRUAL12/31/2003
    
    ADJUSTMENTS
    
    EXPENDITURES
    
    6/30/2004Lease commitments
    
    $
    1,538
    
    
    $
    33
    
    
    $
    (256
    )
    
    $
    1,315
 In 2001, the Company completed a corporate reorganization and implemented a number of
cost-cutting measures to improve operating efficiency and to accelerate our return to profitability
(the 2001 Restructuring Plan). The cost of this plan totaled approximately $6.6 million and
consisted primarily of: (i) involuntary employee separation expenses for approximately 160
employees (a reduction in workforce of approximately 21 percent), (ii) downsizing or closing of the
Companys Boston and Arlington development centers and certain European sales offices, (iii)
reserves for leasehold abandonment, and (iv) various non-personnel related costs. The restructuring
costs included a $1.2 million charge related to asset impairments of leasehold improvements,
equipment and other assets of the closed or downsized offices. The 2001 Restructuring Plan activity from December 31, 2003 to June 30, 2004 was as follows
(in thousands): 7




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REMAINING
    
    RESTRUCTURING
    
    
    
    
    
    REMAININGACCRUAL
    
    CHARGE
    
    CASH
    
    ACCRUAL12/31/2003
    
    ADJUSTMENTS
    
    EXPENDITURES
    
    6/30/2004Lease commitments
    
    $
    453
    
    
    $
    13
    
    
    $
    (182
    )
    
    $
    284
 The remaining accrual for the 2001 Restructuring Plan consists of excess carrying costs
until the lease cancellation for the Companys two floors abandoned as part of said Plan is
effective in September of 2004. 5.    INVESTMENTS The Companys short-term investments include commercial paper, corporate bonds and
certificates of deposit that have original maturities of more than three months and less than one
year. These investments are intended to be held to maturity. 6.    INCOME TAXES The Company continues to provide a full valuation allowance against its deferred tax assets in
accordance with Financial Accounting Standard No. 109, Accounting for Income Taxes. As in its
prior assessments, the Company considered current and previous performance and other relevant
factors in determining the sufficiency of its valuation allowance. Objective factors, such as
current and previous operating losses, were given substantially more weight than managements
outlook for future profitability. Until such time as a consistent pattern of sufficient
profitability is established, no tax benefit will be recognized associated with the Companys
pre-tax accounting losses and a full income tax provision will not be provided on any future
pre-tax accounting income. 7.    SHAREHOLDERS EQUITY In April 2004, the Companys Board of Directors approved a stock repurchase program for the
second quarter of 2004. The Company purchased approximately 0.4 million shares of common stock
during the quarter ended June 30, 2004, at an average price per share of $2.77. The Company
retired these repurchased shares in June 2004. 8.    SUBSEQUENT EVENT In July 2004, the Companys Board of Directors approved a stock repurchase program for the
third quarter of 2004. Under this program, management of the Company can spend up to $2.0 million,
at its discretion, for the repurchase of the Companys common stock in the open market, subject to
Securities and Exchange Commission guidelines and restrictions set forth in Rule 10b-18. 9.    RESTATEMENT OF FINANCIALS In October 2004, as a result of information obtained by the Company in its efforts to collect
certain receivables from Latin American resellers, the Companys Audit Committee commenced an
investigation of the Companys Latin American operations. The Audit Committee retained independent
legal counsel and consultants to assist with the investigation. On December 6, 2004 with the
investigation substantially complete, the Audit Committee concluded
that the Company had inappropriately recognized approximately
$1.0 million in revenues, involving six transactions in Latin
America. The Companys reported revenues were overstated by
$173,000 in the
fourth quarter of 2003; $131,000 in the first quarter of 2004; and
$698,000 in the second quarter
of 2004. As a result of the overstatement of revenues, the Audit
Committee concluded the Company would restate its financial
statements for the year ended December 31, 2003, the first two
quarters of 2004 and the six months ended June 30, 2004 and also
concluded that the
previously issued financial statements for those periods
should no longer be relied upon. These conclusions were set forth in the Form 8-K dated December
6, 2004. The Audit Committee investigation was completed on December 8, 2004. Revenues
for the fourth quarter of 2003 were overstated by $173,000 related to a product return,
which certain Company personnel in Latin America knew to have occurred within the contractually
allowable return period, but which they did not report to the Companys accounting department. If
this return had been reported in a timely manner to the Companys accounting department, revenues
from this transaction would not have been recognized in the fourth quarter of 2003. Certain
personnel in Latin America who knew of the product return also made inaccurate representations as
to status of the receivable in response to the on-going collection efforts of the Companys
accounting department. Revenues
for the first quarter of 2004 were overstated by $131,000. This was comprised of (i) two
separate transactions with a single reseller and an end-user customer for which professional
services revenues were overstated by $122,000; and
(ii) maintenance revenue of $9,000 on the
fourth quarter 2003 transaction referred to above. The overstatement of professional services revenues
resulted from the recording of revenues based on invalid contracts and statements of work that had been
submitted to the Companys accounting department by certain personnel in Latin America. These
documents, certain of which the Company now believes were falsified prior to being submitted to its
accounting department, purported to show that the Company had entered into an arrangement with a
subsidiary of the reseller to provide services to the end-user customer on behalf of the Company. Revenues
for the second quarter of 2004 were overstated by $698,000, resulting from the recording
of three transactions based on invalid documents that had been submitted to the Companys accounting
department by certain personnel in its Latin America operations.
These documents, certain of which the
Company now believes were falsified prior to being submitted to its
accounting department, included
contracts and professional services statement of work and time sheets that purported to show that
valid arrangements supporting the underlying transactions had been entered into with third parties. Certain
personnel in
Latin America also made inaccurate representations as to status of these receivables in response to
the on-going collection efforts of the Companys accounting department. For
the three months ended June 30, 2004, total revenue decreased
$698,000 to $17.9 million, gross profit decreased $576,000 to
$15.8 million and net loss increased $576,000 to
$1.5 million, each as compared to the amounts previously reported by the Company on
its Form 10-Q on August 13, 2004. Basic and diluted loss per share was increased by $0.01 per share
as a result of the adjustments. For
the six months ended June 30, 2004, total revenue decreased
$828,000 to $32.7 million, gross profit decreased $706,000 to
$28.6 million and net loss increased $706,000 to
$4.3 million, each as compared to the amounts previously reported by the Company on
its Form 10-Q on August 13, 2004. Basic and diluted loss per share was increased by $0.02 per
share as a result of the adjustments. Consequently, the consolidated financial statements for the three and six months ended June 30,
2004 are restated in this Quarterly Report on Form 10-Q/A, Amendment
No. 1. The following table summarizes the impact of these adjustments on the Companys previously reported
quarterly results filed on Form 10-Q (in thousands): 8




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Consolidated Balance Sheet: ASSETS As of June 30, 2004As Reported
    
    Adjustments
    
    As RestatedCurrent assets:Cash and cash equivalents
    
    $
    31,119
    
    
    $
    
    
    
    $
    31,119Cash  restricted
    
    
    2,250
    
    
    
    
    
    
    
    2,250Short-term investments
    
    
    3,912
    
    
    
    
    
    
    
    3,912Accounts receivable
    
    
    11,580
    
    
    
    (990
    )
    
    
    10,590Other
    
    
    2,353
    
    
    
    
    
    
    
    2,353Total current assets
    
    
    51,214
    
    
    
    (990
    )
    
    
    50,224Property and equipment, net
    
    
    5,441
    
    
    
    
    
    
    
    5,441Investments and other assets
    
    
    2,929
    
    
    
    
    
    
    
    2,929Total assets
    
    $
    59,584
    
    
    $
    (990
    )
    
    $
    58,594LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,463
    
    
    $
    
    
    
    $
    1,463Accrued liabilities
    
    
    4,464
    
    
    
    
    
    
    
    4,464Accrued compensation
    
    
    3,624
    
    
    
    
    
    
    
    3,624Deferred revenue
    
    
    15,211
    
    
    
    (111
    )
    
    
    15,100Total current liabilities
    
    
    24,762
    
    
    
    (111
    )
    
    
    24,651Deferred revenue
    
    
    2,472
    
    
    
    
    
    
    
    2,472Other
    
    
    1,826
    
    
    
    
    
    
    
    1,826Shareholders equity:Preferred stock
    
    
    
    
    
    
    
    
    
    
    Common stock
    
    
    1
    
    
    
    
    
    
    
    1Additional paid-in capital
    
    
    105,110
    
    
    
    
    
    
    
    105,110Note receivable from shareholder
    
    
    (261
    )
    
    
    
    
    
    
    (261
    )Accumulated deficit
    
    
    (75,587
    )
    
    
    (879
    )
    
    
    (76,466
    )Accumulated other comprehensive income
    
    
    1,261
    
    
    
    
    
    
    
    1,261Total shareholders equity
    
    
    30,524
    
    
    
    (879
    )
    
    
    29,645Total liabilities and shareholders equity
    
    $
    59,584
    
    
    $
    (990
    )
    
    $
    58,594
 Statement of Operations and Comprehensive Loss: For the Three Months Ended June 30, 2004As Reported
    
    Adjustments
    
    As AdjustedRevenues:Licenses
    
    $
    9,070
    
    
    $
    (422
    )
    
    $
    8,648Services
    
    
    9,507
    
    
    
    (276
    )
    
    
    9,23118,577
    
    
    
    (698
    )
    
    
    17,879Cost of revenues:Cost of licenses
    
    
    190
    
    
    
    
    
    
    
    190Cost of services
    
    
    2,032
    
    
    
    (122
    )
    
    
    1,9102,222
    
    
    
    (122
    )
    
    
    2,100Gross profit
    
    
    16,355
    
    
    
    (576
    )
    
    
    15,779Operating costs and expenses:Sales and marketing
    
    
    9,739
    
    
    
    
    
    
    
    9,739Research and development
    
    
    5,396
    
    
    
    
    
    
    
    5,396General and administrative
    
    
    2,024
    
    
    
    
    
    
    
    2,024Restructuring
    
    
    149
    
    
    
    
    
    
    
    149Operating loss
    
    
    (953
    )
    
    
    (576
    )
    
    
    (1,529
    )Other income, net
    
    
    112
    
    
    
    
    
    
    
    112Loss before income taxes
    
    
    (841
    )
    
    
    (576
    )
    
    
    (1,417
    )Provision for income taxes
    
    
    74
    
    
    
    
    
    
    
    74Net loss
    
    $
    (915
    )
    
    $
    (576
    )
    
    $
    (1,491
    )Loss per common share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )Number of shares used to calculate per share amounts, basic and diluted
    
    
    47,432
    
    
    
    
    
    
    
    47,432Reconciliation of net loss to comprehensive loss:Net loss
    
    $
    (915
    )
    
    $
    (576
    )
    
    $
    (1,491
    )Unrealized loss from foreign currency translation
    
    
    (168
    )
    
    
    
    
    
    
    (168
    )Comprehensive loss
    
    $
    (1,083
    )
    
    $
    (576
    )
    
    $
    (1,659
    )
 9




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##### Table of Contents



For the Six Months Ended June 30, 2004As Reported
    
    Adjustments
    
    As AdjustedRevenues:Licenses
    
    $
    14,982
    
    
    $
    (422
    )
    
    $
    14,560Services
    
    
    18,558
    
    
    
    (406
    )
    
    
    18,15233,540
    
    
    
    (828
    )
    
    
    32,712Cost of revenues:Cost of licenses
    
    
    330
    
    
    
    
    
    
    
    330Cost of services
    
    
    3,863
    
    
    
    (122
    )
    
    
    3,7414,193
    
    
    
    (122
    )
    
    
    4,071Gross profit
    
    
    29,347
    
    
    
    (706
    )
    
    
    28,641Operating costs and expenses:Sales and marketing
    
    
    18,919
    
    
    
    
    
    
    
    18,919Research and development
    
    
    9,972
    
    
    
    
    
    
    
    9,972General and administrative
    
    
    3,922
    
    
    
    
    
    
    
    3,922Restructuring
    
    
    149
    
    
    
    
    
    
    
    149Operating loss
    
    
    (3,615
    )
    
    
    (706
    )
    
    
    (4,321
    )Other income, net
    
    
    206
    
    
    
    
    
    
    
    206Loss before income taxes
    
    
    (3,409
    )
    
    
    (706
    )
    
    
    (4,115
    )Provision for income taxes
    
    
    144
    
    
    
    
    
    
    
    144Net loss
    
    $
    (3,553
    )
    
    $
    (706
    )
    
    $
    (4,259
    )Loss per common share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.09
    )Number of shares used to calculate per share amounts, basic and diluted
    
    
    47,380
    
    
    
    
    
    
    
    47,380Reconciliation of net loss to comprehensive loss:Net loss
    
    $
    (3,553
    )
    
    $
    (706
    )
    
    $
    (4,259
    )Unrealized
loss from foreign currency translation
    
    
    (131
    )
    
    
    
    
    
    
    (131
    )Comprehensive loss
    
    $
    (3,684
    )
    
    $
    (706
    )
    
    $
    (4,390
    )
 Consolidated Cash Flows: None of the adjustments described above has any impact on cash balances for any period. However,
our consolidated statements of cash flows have been restated to reflect the restated net loss and
the effect revisions to certain balance sheet accounts has on changes in operating assets and
liabilities. For the Six Months Ended June 30, 2004As Reported
    
    Adjustments
    
    As AdjustedCash flows from operating activities:Net loss
    
    $
    (3,553
    )
    
    $
    (706
    )
    
    $
    (4,259
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    1,446
    
    
    
    
    
    
    
    1,446Stock compensation expense
    
    
    181
    
    
    
    
    
    
    
    181Changes in operating assets and liabilities:Accounts receivable
    
    
    2,716
    
    
    
    719
    
    
    
    3,435Other assets
    
    
    (429
    )
    
    
    
    
    
    
    (429
    )Accounts payable
    
    
    (595
    )
    
    
    
    
    
    
    (595
    )Accrued liabilities
    
    
    (2,384
    )
    
    
    
    
    
    
    (2,384
    )Deferred revenues
    
    
    2,857
    
    
    
    (13
    )
    
    
    2,844Net cash
provided by operating activities
    
    
    239
    
    
    
    
    
    
    
    239Cash flows from investing activities:Capital expenditures
    
    
    (603
    )
    
    
    
    
    
    
    (603
    )Purchase of short-term investments
    
    
    (3,912
    )
    
    
    
    
    
    
    (3,912
    )Reimbursement of tenant improvements
    
    
    284
    
    
    
    
    
    
    
    284Restrictions on cash
    
    
    (194
    )
    
    
    
    
    
    
    (194
    )Net cash used in investing activities
    
    
    (4,425
    )
    
    
    
    
    
    
    (4,425
    )Cash flows from financing activities:Repurchase of common stock
    
    
    (1,236
    )
    
    
    
    
    
    
    (1,236
    )Net proceeds from sale of common stock
    
    
    1,170
    
    
    
    
    
    
    
    1,170Net cash used in financing activities
    
    
    (66
    )
    
    
    
    
    
    
    (66
    )
 10




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For the Six Months Ended June 30, 2004As Reported
    
    Adjustments
    
    As AdjustedEffect of exchange rate changes on cash
    
    
    (78
    )
    
    
    
    
    
    
    (78
    )Net decrease in cash and cash equivalents
    
    
    (4,330
    )
    
    
    
    
    
    
    (4,330
    )Cash and cash equivalents at beginning of year
    
    
    35,449
    
    
    
    
    
    
    
    35,449Cash and cash equivalents at end of year
    
    $
    31,119
    
    
    $
    
    
    
    $
    31,119
 Pro Forma Stock-Based Compensation: For the Three Months Ended June 30, 2004As Reported
    
    Adjustments
    
    As AdjustedNet loss as reported
    
    $
    (915
    )
    
    $
    (576
    )
    
    $
    (1,491
    )Add: Stock-based employee compensation expense included
in reported net loss
    
    
    125
    
    
    
    
    
    
    
    125Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards
    
    
    (1,510
    )
    
    
    
    
    
    
    (1,510
    )Pro forma net loss
    
    $
    (2,300
    )
    
    $
    (576
    )
    
    $
    (2,876
    )Loss per common share (basic and diluted): As reported
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    ) Pro forma
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
 For the Six Months Ended June 30, 2004As Reported
    
    Adjustments
    
    As AdjustedNet loss as reported
    
    $
    (3,553
    )
    
    $
    (706
    )
    
    $
    (4,259
    )Add: Stock-based employee compensation
expense included in reported net loss
    
    
    181
    
    
    
    
    
    
    
    181Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards
    
    
    (2,742
    )
    
    
    
    
    
    
    (2,742
    )Pro forma net loss
    
    $
    (6,114
    )
    
    $
    (706
    )
    
    $
    (6,820
    )Loss per common share (basic and diluted): As reported
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.09
    ) Pro forma
    
    $
    (0.13
    )
    
    $
    (0.01
    )
    
    $
    (0.14
    )
 11




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##### Table of Contents



ITEM 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations Managements Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements which involve risks and uncertainties. The Companys actual results may
differ significantly from the results discussed in the forward-looking statements. Factors that
might cause such a difference include those discussed in the Cautionary Statements set forth in
the Companys Annual Report on Form 10-K/A, Amendment
No. 1 for the year ended December 31, 2003. The
following discussion should be read in conjunction with the Companys consolidated financial
statements included with this report and our consolidated financial statements and related
Managements Discussion and Analysis of Financial Condition and Results of Operations for the year
ended December 31, 2003 included in our Annual Report on
Form 10-K/A, Amendment No 1. In October 2004, as a result of information obtained by the Company in its efforts to collect
certain receivables from Latin American resellers, the Companys Audit Committee commenced an
investigation of the Companys Latin American operations. The Audit Committee retained independent
legal counsel and consultants to assist with the investigation. On December 6, 2004 with the
investigation substantially complete, the Audit Committee concluded that the Company had
inappropriately recognized approximately $1.0 million in revenues, involving six transactions in
Latin America. The Companys reported revenues were overstated
by $173,000 in the
fourth quarter of 2003; $131,000 in the first quarter of 2004; and
$698,000 in the second quarter
of 2004. As a result of the overstatement of revenues, the Audit
Committee concluded the Company would restate its financial
statements for the year ended December 31, 2003, the first two
quarters of 2004 and the six months ended June 30, 2004, and
also concluded that previously issued financial statements for those periods
should no longer be relied upon. These conclusions were set forth in the Form 8-K dated December
6, 2004. The Audit Committee investigation was completed on December 8, 2004. Revenues
for the fourth quarter of 2003 were overstated by $173,000 related to a product return,
which certain Company personnel in Latin America knew to have occurred within the contractually
allowable return period, but which they did not report to the Companys accounting department. If
this return had been reported in a timely manner to the
Companys accounting department, revenues from this transaction would not have been recognized in
the fourth quarter of 2003. Certain personnel in Latin America who knew of the product return also
made inaccurate representations as to the status of the receivable in response to the on-going
collection efforts of the Companys accounting department. Revenues
for the first quarter of 2004 were overstated by $131,000. This was comprised of (i) two
separate transactions with a single reseller and an end-user customer for which professional
services revenues were overstated by $122,000; and
(ii) maintenance revenue of $9,000 on the
fourth quarter 2003 transaction referred to above. The overstatement of professional services revenues
resulted from the recording of revenues based on invalid contracts and statements of work that had been
submitted to the Companys accounting department by certain personnel in Latin America. These
documents, certain of which the Company now believes were falsified prior to being submitted to its
accounting department, purported to show that the Company had entered into an arrangement with a
subsidiary of the reseller to provide services to the end-user customer on behalf of the Company. Revenues
for the second quarter of 2004 were overstated by $698,000, resulting from the recording
of three transactions based on invalid documents that had been submitted to the Companys accounting
department by certain personnel in its Latin America operations.
These documents, certain of which the
Company now believes were falsified prior to being submitted to its
accounting department, included contracts and professional services statement of work and time sheets that purported to show that
valid arrangements supporting the underlying transactions had been entered into with third parties. Certain
personnel in Latin America also made inaccurate representations as to
the status of these receivables
in response to the on-going collection efforts of the Companys accounting department. Consequently, the effects of the restatement have been reflected in the discussion of Managements
Discussion and Analysis of Financial Condition and Results of Operations in this Amendment No. 1 to
the Form 10-Q. This Amendment No. 1 to the Form 10-Q does not reflect any other events occurring
after the original filing of the Form 10-Q. Overview See
discussion under Item 1, General in our Annual
Report on Form 10-K/A, Amendment No. 1 for the
year ended December 31, 2003 for an overview of our business. Critical Accounting
Policies and Estimates There have been no significant changes to our critical accounting policies and estimates
during the six months ended June 30, 2004 compared with those disclosed in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K/A, Amendment
No. 1 for the year ended December 31, 2003. Results of Operations Three Months Ended June 30, 2004 Compared with the Three Months Ended June 30, 2003 Revenues.Revenues for the current quarter were $17.9 million compared with $15.3 million for
the second quarter of 2003. The year-over-year improvement in revenues resulted from a stronger
working sales pipeline entering the quarter, improved sales execution and strong demand for our
products. License revenues for the second quarter of 2004 were $8.6 million, or 48.4 percent of
total revenues, up from $7.4 million, or 48.3 percent of total revenues, in the second quarter of
2003. Services revenues for the second quarter of 2004 were $9.2 million, or 51.6 percent of
total revenues, up from $7.9 million, or 51.7 percent of total revenues, in the second quarter of
2003. Services revenues for the second quarter of 2004 were comprised of maintenance revenues of
$7.8 million and professional services revenues of $1.4 million, up from $7.0 million in
maintenance revenues and $0.9 million in professional services revenues in the second quarter of
2003. The increase in services revenues was primarily due to an increase in our installed customer
base and an increased focus on selling value-added consulting services. The
average sales price for transactions in the second quarter of 2004
was $33,000,
compared with $26,000 in the second quarter of 2003 and $28,000 in the first quarter of
2004. With respect to large 12




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transactions (sales greater than $130 thousand) we closed 22 during the current quarter having
an average sales price of approximately $316 thousand, compared with 18 in the second quarter of
2003 having an average sales price of $310 thousand. During the second quarter of 2004, revenues from our products for Microsoft-based platforms
totaled $12.4 million, an increase of 19.5 percent over the second quarter of 2003. Revenues from
these products accounted for approximately 69 percent of total revenues in the second quarter of
2004, up from 68 percent of total revenues for the second quarter of 2003. License revenues for
our Microsoft-related products for the second quarter of 2004 were $7.1 million compared with $6.1
million in the second quarter of 2003. Maintenance revenues for our Microsoft-related products in
the second quarter of 2004 were $5.2 million compared with $4.3 million in the second quarter of
2003. We expect revenues from our products and maintenance for Microsoft-based platforms will
continue to grow as a percentage of total revenues. Revenues from our products for Novell-based platforms for the second quarter of 2004 were $2.7
million, or 15 percent of total revenues, compared with $2.9 million, or 19 percent of total
revenues, in second quarter of 2003. Consistent with the trend seen in past quarters, total
revenues from these products were down year-over-year, reflecting both the maturity and our
penetration of the Novell market. License revenues for Novell-based platforms were $0.8 million in
both the second quarter of 2004 and 2003. Maintenance revenues for Novell-based platforms in the
second quarter of 2004 were $1.9 million compared with $2.1 million in the second quarter of 2003.
While we expect our Novell revenues will continue to decline in the future, we expect the revenue
decline will be modest relative to the declines over the past two years and expect the decline will
be offset by higher revenues from our products and maintenance for other platforms. Sales of our security focused bv-Control product line accounted for approximately 86 percent
of our license revenue in the second quarter of 2004 compared with 77 percent in the second quarter
of 2003. Sales of our system administration focused bv-Admin product line accounted for
approximately 14 percent of our license revenue in the second quarter of 2004 compared with 23
percent in the second quarter of 2003. The increase in our bv-Control product line revenues as a
percentage of total revenue has increased year-over-year primarily due to the increased demand in
the market for software to assist customers with policy compliance and vulnerability management
requirements. No customer accounted for more than 10 percent of our revenues during the second quarter of
2004 or 2003. Revenues recognized from sales to customers outside North America, primarily in
Europe, accounted for approximately 11 percent of total revenues in the second quarter of 2004
compared with 12 percent in the second quarter of 2003. Gross Profit.Gross profit for the current quarter totaled $15.8 million, up 17 percent from
the second quarter of 2003, due to the increase in revenues. Gross margin for the current quarter
was 88.3 percent, slightly up from 88.2 percent in the second quarter of 2003. Gross profit generated from license revenues for the second quarter of 2004 was $8.5 million,
compared with $7.3 million for the second quarter of 2003. The gross margin from license revenues
for the second quarter of 2004 was 97.8 percent, compared with 98.8 percent for the second quarter
of 2003. Gross profit from services revenues for the second quarter of 2004 was $7.3 million, compared
with $6.2 million for the second quarter of 2003. Gross margin from services revenues for the
second quarter of 2004 was 79.3 percent compared with 78.5 percent for the second quarter of 2003.
While we do not track and measure costs of performing services (i.e., technical support,
professional services) by product platform (i.e., Microsoft, Novell, etc.), we do not believe there
is a material difference in the gross margin by product line. Operating Costs and Expenses.Operating costs and expenses for the second quarter of 2004
totaled $17.3 million, up from $15.8 million for the second quarter of 2003. Operating costs for
the second quarter of 2004 included restructuring and severance charges of approximately $0.5
million. Excluding these charges in the second quarter of 2004, operating costs and expenses were
approximately $1.0 million, or 6.6 percent, higher in the second quarter of 2004 due to significant
investments in sales and marketing since the second quarter of 2003 and costs 13




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related to our planned expansion of our R&D operations in India, higher wage and health care
costs and expenses associated with Sarbanes-Oxley compliance. Sales and marketing expenses for the second quarter of 2004 were $9.7 million (54.5 percent of
revenues), up from $9.3 million (60.5 percent of revenues) for the second quarter of 2003. The
increase in sales and marketing expenses primarily related to investments in areas where we see
long-term growth opportunities, specifically our Federal, Latin American and European operations.
We also added personnel to our inside sales force and increased spending on marketing programs to
grow our working sales pipeline. We expect sales and marketing expenses as a percentage of
revenues to be lower in the second half of 2004 as a result of anticipated revenue growth. Research and development expenses for the second quarter of 2004 were $5.4 million (30.2
percent of revenues), up from $4.6 million (29.8 percent of revenues) for the second quarter of
2003. This increase related to our actions taken to affect the planned expansion of our R&D
operations in India to better execute on our product strategy, as well as severance costs of
approximately $0.3 million related to management changes within R&D. Primarily as a result of the
expansion in India, we expect R&D expenses in 2004 will be up $2.0 to $2.5 million over 2003. We
also expect that this initiative coupled with anticipated revenue growth will result in a decrease
in research and development expenses as a percentage of revenues. General and administrative expenses were $2.0 million in both the second quarter of 2004 (11.3
percent of revenues) and 2003 (12.8 percent of revenues). Direct costs associated with our efforts
to comply with Sarbanes-Oxley section 404 totaled approximately $0.1 million during the second
quarter of 2004. We expect future general and administrative expenses to decrease as a percentage
of revenues as a result of our restructuring initiatives to date to improve operating efficiencies,
as well as anticipated revenue growth. We recorded restructuring charges totaling $0.1 million in the second quarter of 2004
primarily to establish a reserve against rent payments due from our sublease tenant which occupied
our excess office space in Arlington, VA. In January 2003, we approved a sales and marketing reorganization plan (the 2003
Restructuring Plan). The cost of this plan totaled approximately $0.5 million and consisted
primarily of (i) involuntary employee separation for approximately 20 employees (a reduction in
workforce of approximately 4 percent), (ii) our Netherlands sales office, and (iii) reserves for
leasehold abandonment. All actions under the 2003 Restructuring Plan were completed by December
31, 2003. In July 2002, we approved a restructuring plan to improve operating efficiency and improve
sales and marketing productivity (the 2002 Restructuring Plan). The cost of this plan totaled
approximately $1.9 million and consisted primarily of (i) involuntary employee separation for
approximately 30 employees (a reduction in workforce of approximately 5 percent), (ii) closing our
Boston development center and certain European sales offices, (iii) reserves for leasehold
abandonment, and (iv) various non-personnel related cuts. The remaining accrual for the 2002 Restructuring Plan at December 31, 2003 was comprised of
the estimated carrying costs for our remaining excess space in Houston, Texas. During the second
quarter of 2004, we received letters of intent to sublease the remaining excess space. We recorded
a $0.1 million adjustment to our restructuring accrual as a result of receiving these letters of
intent. The remaining accrual at June 30, 2004 is comprised of our carrying costs for the
remaining space that are in excess of anticipated sublease payments. Adjustments could be required
in future periods if there are significant changes to the terms and conditions of the sublease
arrangements. The 2002 Restructuring Plan activity from December 31, 2003 to June 30, 2004 was as follows
(in thousands): REMAINING
    
    RESTRUCTURING
    
    
    
    
    
    REMAININGACCRUAL
    
    CHARGE
    
    CASH
    
    ACCRUAL12/31/2003
    
    ADJUSTMENTS
    
    EXPENDITURES
    
    6/30/2004Lease commitments
    
    $
    1,538
    
    
    $
    33
    
    
    $
    (256
    )
    
    $
    1,315
 14




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In 2001, we completed a corporate reorganization and implemented a number of cost-cutting
measures to improve operating efficiency and to accelerate our return to profitability (the 2001
Restructuring Plan). The cost of this plan totaled approximately $6.6 million and consisted
primarily of: (i) involuntary employee separation expenses for approximately 160 employees (a
reduction in workforce of approximately 21 percent), (ii) downsizing or closing of our Boston and
Arlington development centers and certain European sales offices, (iii) reserves for leasehold
abandonment, and (iv) various non-personnel related costs. The restructuring costs included a $1.2
million charge related to asset impairments of leasehold improvements, equipment and other assets
of the closed or downsized offices. The 2001 Restructuring Plan activity from December 31, 2003 to June 30, 2004 was as follows
(in thousands): REMAINING
    
    RESTRUCTURING
    
    
    
    
    
    REMAININGACCRUAL
    
    CHARGE
    
    CASH
    
    ACCRUAL12/31/2003
    
    ADJUSTMENTS
    
    EXPENDITURES
    
    6/30/2004Lease commitments
    
    $
    453
    
    
    $
    13
    
    
    $
    (182
    )
    
    $
    284
 The remaining accrual for the 2001 Restructuring Plan consists of excess carrying costs
until the lease cancellation for our two floors abandoned as part of said Plan is effective in
September of 2004. Provision for Income Taxes.We did not record an income tax provision or benefit for our
domestic operations in either the second quarter of 2004 or 2003, as we continue to provide a full
valuation allowance against our deferred tax assets in accordance with Financial Accounting
Standards No. 109, Accounting for Income Taxes. As in our prior assessments, we considered
current and previous performance and other relevant factors in determining the sufficiency of our
valuation allowance. Objective factors, such as current and previous operating losses, were given
substantially more weight than our outlook for future profitability. Until such time as a
consistent pattern of sufficient profitability is established, no tax benefit will be recognized
associated with the Companys pre-tax accounting losses and a full income tax provision will not be
provided on any future pre-tax accounting income. A provision of $0.1 million was recorded for
taxes related to our foreign operations during the second quarter of 2004. Net Loss.Due to the factors described above, net loss for the quarter ended June 30, 2004
was $1.5 million compared with $2.1 million for the quarter ended June 30, 2003. Six Months Ended June 30, 2004 Compared with the Six Months Ended June 30, 2003 Revenues.Revenues for the first six months of 2004 were $32.7 million compared with $28.4
million for the first six months of 2003. The year-over-year improvement in revenues resulted from
a stronger working sales pipeline entering the year, improved sales execution and strong demand for
our products. License revenues for the first half of 2004 were $14.6 million, or 44.5 percent of
total revenues, up from $12.6 million, or 44.4 percent of total revenues, in the first half of
2003. Services revenues for the first half of 2004 were $18.2 million, or 55.5 percent of total
revenues, up from $15.8 million, or 55.6 percent of total revenues, in the first half of 2003.
Services revenues for the first half of 2004 were comprised of maintenance revenues of $15.3
million and professional services revenues of $2.9 million, up from $13.9 million in maintenance
revenues and $1.9 million in professional 15




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services revenues in the first half of 2003. The increase in services revenues was primarily
due to an increase in our installed customer base and an increased focus on selling value-added
consulting services. With respect to large transactions (sales greater than $130 thousand) we closed 40 during the
first half of 2004 having an average sales price of $328 thousand, compared with 30 during the
first half of 2003 having an average sales price of $278 thousand. During the first half of 2004, revenues from our products for Microsoft-based platforms
totaled $22.5 million, an increase of 18 percent over the first half of 2003. Revenues from these
products accounted for approximately 69 percent of total revenues in the first half of 2004, up
from 67 percent of total revenues for the first half of 2003. License revenues for our
Microsoft-related products for the first half of 2004 were $12.2 million compared with $10.6
million in the first half of 2003. Maintenance revenues for our Microsoft-related products in the
first half of 2004 were $10.2 million compared with $8.5 million in the first half of 2003. We
expect revenues from our products and maintenance for Microsoft-based platforms will continue to
grow as a percentage of total revenues. Revenues from our products for Novell-based platforms for the first half of 2004 were $5.2
million, or 16 percent of total revenues, compared with $5.6 million, or 20 percent of total
revenues, in the first half of 2003. Consistent with the trend seen in past quarters, total
revenues from these products were down year-over-year, reflecting both the maturity and our
penetration of the Novell market. Licenses revenues for Novell-based platforms were $1.5 million
in the first half of 2004 and $1.3 million in the first half of 2003. Maintenance revenues for
Novell-based platforms in the first half of 2004 were $3.7 million compared with $4.3 million in
the first half of 2003. While we expect our Novell revenues will continue to decline in the
future, we expect the revenue decline will be modest relative to the declines over the past two
years and expect the decline will be offset by higher revenues from our products and maintenance
for other platforms. Sales of our security focused bv-Control product line accounted for approximately 85 percent
of our license revenue in the first half of 2004 compared with 77 percent in the first half of
2003. Sales of our system administration focused bv-Admin product line accounted for approximately
15 percent of our license revenue in the first half of 2004 compared with 23 percent in the first
half of 2003. The increase in our bv-Control product line revenues as a percentage of total
revenue has increased year-over-year primarily due to the increased demand in the market for
software to assist customers with policy compliance and vulnerability management requirements. No customer accounted for more than 10 percent of our revenues during the first half of 2004
or 2003. Revenues recognized from sales to customers outside North America, primarily in Europe,
accounted for approximately 11 percent of total revenues in both the first half of 2004 and 2003. Gross Profit.Gross profit for the first half of 2004 totaled $28.6 million, up 14 percent
from the first half of 2003 due to the increase in revenues. Gross margin for the first half of
2004 was 87.6 percent, slightly down from 88.2 percent in the first half of 2003. The decline in
gross margin related to the increase in professional services revenues, which have a lower gross
margin than our license and maintenance revenues. Gross profit generated from license revenues for the first half of 2004 was $14.2 million,
compared with $12.4 million for the first half of 2003. The gross margin from license revenues
for the first half of 2004 was 97.7 percent, compared with 98.3 percent for the first half of 2003. Gross profit from services revenues for the first half of 2004 was $14.4 million, compared
with $12.6 million for the first half of 2003. Gross margin from services revenues for the first
half of 2004 was 79.4 percent compared with 80.1 percent for the first half of 2003. The decline
in gross margin reflected higher personnel costs associated with our technical-support and
professional-services units . While we do not track and measure costs of performing
services (technical support, professional services) by product platform (i.e., Microsoft, Novell,
etc.), we do not believe there is a material difference in the gross margin by product line. Operating Costs and Expenses.Operating costs and expenses for the first half of 2004 totaled
$33.0 million, up from $30.1 million for the first half of 2003. The increase in operating costs
year-over-year is primarily 16




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attributable to significant investments in sales and marketing since the first half of 2003
and costs related to our planned expansion of our R&D operations in India, higher wage and health
care costs and expenses associated with Sarbanes-Oxley compliance. Sales and marketing expenses for the first half of 2004 were $18.9 million (57.8 percent of
revenues), up from $17.0 million (60.0 percent of revenues) for the first half of 2003. The
increase in sales and marketing expenses primarily related to investments in areas where we see
long-term growth opportunities, specifically our Federal, Latin American and European operations.
We also added personnel to our inside sales force and increased spending on marketing programs to
grow our working sales pipeline. We expect sales and marketing expenses as a percentage of
revenues to be lower for the remainder of 2004 as a result of anticipated revenue growth. Research and development expenses for the first half of 2004 were $10.0 million (30.5 percent
of revenues), up from $8.8 million (31.0 percent of revenues) for the first half of 2003. This
increase related to our actions taken to affect the planned expansion of our R&D operations in
India to better execute on our product strategy, as well as severance costs of approximately $0.3
million related to management changes within R&D. Primarily as a result of the expansion in
India, we expect R&D expenses in 2004 will be up $2.0 to $2.5 million over 2003. We also expect
that this initiative coupled with anticipated revenue growth will result in a decrease in research
and development expenses as a percentage of revenues. General and administrative expenses were $3.9 million in the first half of 2004 (12.0 percent
of revenues), up from $3.7 million (13.2 percent of revenues) for the first half of 2003. Direct
costs associated with our efforts to comply with Sarbanes-Oxley section 404 totaled approximately
$0.1 million during the first half of 2004. We expect future general and administrative expenses
to decrease as a percentage of revenues as a result of our restructuring initiatives to date to
improve operating efficiencies, as well as anticipated revenue growth. Restructuring costs were $0.1 million for the first half of 2004 and $0.5 million for the
first half of 2003 (See detailed discussion of these costs above). Provision for Income Taxes.We did not record an income tax provision for our domestic
operations in either the first half of 2004 or 2003, as we continue to provide a full valuation
allowance against our deferred tax assets in accordance with Financial Accounting Standards No.
109, Accounting for Income Taxes. As in our prior assessments, we considered current and previous
performance and other relevant factors in determining the sufficiency of our valuation allowance.
Objective factors, such as current and previous operating losses, were given substantially more
weight than our outlook for future profitability. Until such time as a consistent pattern of
sufficient profitability is established, no tax benefit will be recognized associated with the
Companys pre-tax accounting losses and a full income tax provision will not be provided on any
future pre-tax accounting income. A provision of $0.1 million was recorded for taxes related to
our foreign operations during the first half of 2004. Net Loss.Due to the factors described above, net loss for the first half of 2004 was $4.3
million compared with $4.8 million for the first half of 2003. LIQUIDITY AND CAPITAL RESOURCES Our capital requirements have principally related to working capital needs and capital
expenditures. These requirements have been met through a combination of issuances of securities
and internally generated funds. We had cash, cash equivalents and short-term investments of $35.0 million at June 30, 2004
compared with $35.4 million at December 31, 2003. Cash flows provided by (used in) operating activities were $0.2 million in the first six
months of 2004 compared with $(0.2) million in the first six months of 2003. The increase in cash
provided by operating activities in 2004 was due to an increase of cash collections on deferred
revenues of approximately $2.3 million compared with the first six months of 2003. Cash flows used in investing activities were $4.4 million in the first six months of 2004
compared with $0.7 million in the first six months of 2003. The increase in cash used in investing
activities was primarily due to 17




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the purchase of $3.9 million in short-term investments during the first six months of 2004.
Capital expenditures for the first six months of 2004 were $0.6 million compared with $0.7 million
for the first six months of 2003. Cash flows provided by (used in) financing activities were $(0.1) million in the first six
months of 2004 compared with $0.4 million in the first six months of 2003. During the first six
months of 2004, we generated proceeds of approximately $1.2 million from the issuance of common
stock through our Employee Stock Purchase Plan and employee stock option exercises. We also used
$1.2 million in cash to repurchase 0.4 million shares of our common stock. The $0.4 million in
cash provided by financing activities during the first six months of 2003 was primarily from
issuances of common stock under our Employee Stock Purchase Plan. We conduct operations in leased facilities under operating leases expiring at various dates
through 2011. The contractual obligations under these lease commitments were comprised of the
following as of June 30, 2004: Remainder ofCONTRACTUAL OBLIGATION
    
    TOTAL
    
    2004
    
    2005 - 2007
    
    2008 - 2009
    
    2010 - 2011Operating leases
    
    $
    23,448
    
    
    $
    2,576
    
    
    $
    11,372
    
    
    $
    7,101
    
    
    $
    2,399Sub-leasing arrangements*
    
    
    (109
    )
    
    
    (109
    )
    
    
    
    
    
    
    
    
    
    
    $
    23,339
    
    
    $
    2,467
    
    
    $
    11,372
    
    
    $
    7,101
    
    
    $
    2,399
 *  We have sub-leased portions of these facilities under operating leases. Anticipated cash
receipts from these executed sub-lease arrangements have been taken into account when deriving
expected cash outflow on operating lease commitments in the preceding
table. The above table does
not reflect estimated cash receipts for our sub-lease space in which we have received letters of
intent. Our expected principal cash requirements for the remainder of 2004 are: (i) capital
expenditures between $2.0 and $2.5 million, primarily for computer and software equipment, (ii)
working capital requirements, (iii) net payments on operating leases of approximately $2.5 million,
and (iv) stock repurchases of up to $2.0 million. We believe there is sufficient cash on hand to
meet these cash requirements, as well as our cash requirements for the foreseeable future. Stock Repurchase Program In July 2004, our Board of Directors approved a stock repurchase program for the third quarter
of 2004. Under this program, management may spend up to $2.0 million, at its discretion, for the
repurchase of our common stock in the open market, subject to Securities and Exchange Commission
guidelines and restrictions set forth in Rule 10b-18. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. 
 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes since December 31, 2003. See the Companys Annual
Report on Form 10-K/A, Amendment No. 1. 
 ITEM 4.  CONTROLS AND PROCEDURES The management of the Company, including the Chief Executive Officer and the Chief Financial
Officer, conducted an evaluation of the effectiveness of the Companys disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of June 30, 2004
(the Evaluation Date). Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that, as of the Evaluation Date, the Companys disclosure controls and
procedures were effective in ensuring that all material information relating to the Company,
including its consolidated subsidiaries, required to be filed in this quarterly report have been
made known to them in a timely manner. However, as more fully described below in Revenue
Recognition Issues in 18




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BindViews Latin American Operations, management later determined that the Companys
disclosure controls and procedures were not effective as of June 30, 2004, because the Company had
a material weakness in revenue reporting for its Latin American operations. There
have been no significant changes made during the period covered by
this Report in the Companys internal controls over financial reporting or in other factors that could
significantly affect internal controls over financial reporting. As discussed below, however, we
have implemented additional measures to improve our internal controls over financial reporting.
These measures took effect after the period covered by this report. Revenue Recognition Issues in BindViews Latin American Operations In October 2004, as a result of information obtained by the Company in its efforts to collect
certain receivables from Latin American resellers, the Companys Audit Committee commenced an
investigation of the Companys Latin American operations. The Audit Committee retained independent
legal counsel and consultants to assist with the investigation. On December 6, 2004, with the
investigation substantially complete, the Audit Committee concluded that due to errors with the
transactions described below, the Company would restate its financial statements for the year ended
December 31, 2003, the first two quarters of 2004, and the six
months ended June 30, 2004 and also concluded that previously issued
financial statements for those periods should no longer be relied upon. These conclusions were set
forth in the Form 8-K dated December 6, 2004, and were also discussed with the Companys
independent registered public accounting firm. The Audit Committee investigation was completed on
December 8, 2004. The Companys previously issued financial statements for the periods referenced above have
been restated to correct for an overstatement of approximately $1.0 million in revenues, involving
six transactions in Latin America. As a result, the Companys reported revenues were overstated by
$173,000 in the fourth quarter of 2003; $131,000
in the first quarter of 2004; and $698,000 in the
second quarter of 2004. Revenues
for the fourth quarter of 2003 were overstated by $173,000 related to a product
return, which certain Company personnel in Latin America knew to have occurred within the
contractually allowable return period, but which they did not report to the Companys accounting
department. If this return had been reported in a timely manner to the Companys accounting
department, revenues from this transaction would not have been recognized in the fourth quarter of
2003. Certain personnel in Latin America who knew of the product return also made inaccurate
representations as to the status of the receivable in response to the on-going collection efforts of
the Companys accounting department. Revenues for the first quarter of 2004 were overstated by $131,000. This was comprised of (i)
two separate transactions with a single reseller and an end-user customer for which professional
services revenues were overstated by $122,000, and (ii) maintenance revenue of $9,000 on the
fourth quarter 2003 transaction referred to above. The overstatement of professional services revenues
resulted from the recording of revenues based on invalid contracts and statements of work that had
been submitted to the Companys accounting department by certain personnel in Latin America. These
documents, certain of which the Company believes were falsified prior to being submitted to its
accounting department, purported to show that the Company had entered into an arrangement with a
subsidiary of the reseller to provide services to the end-user customer on behalf of the Company. Revenues for the second quarter of 2004 were overstated by $698,000, resulting from the
recording of three transactions based on invalid documents that had been submitted to the Companys
accounting department by certain personnel in its Latin American operations. These documents,
which the Company believes were falsified prior to being submitted to its accounting department,
included contracts and professional services statements of work and time sheets that purported to
show that valid arrangements supporting the underlying transactions had been entered into with
third parties. Certain personnel in Latin America also made inaccurate representations as to
the status of these receivables in response to the on-going collection efforts of the Companys
accounting department. Individuals who the Company believes were culpably involved in these transactions are no
longer employed by the Company. The Company has terminated relationships with resellers that it
believes may have been culpably involved in these transactions. 19




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As a result of the investigation into the above matters, the Company has determined that it
has a material weakness with respect to the reporting of revenues from its Latin American
operations. In addition to the actions taken with respect to personnel and resellers, as mentioned
above, the Company has also designed and implemented new procedures to improve controls to better
ensure revenues are recognized only on transactions that are based on valid arrangements,
which meet the Companys revenue recognition criteria. The significant enhancements to our
procedures and controls that have been implemented include:  
    
    We will obtain signed written representations from each sales and professional services
representative, manager, director and vice president prior to finalizing results for a quarterly or
annual period and prior to payment of sales commissions or any incentive-based compensation for
that period. Generally speaking, these representations state that
to the best of the individuals knowledge, (i) he or she has complied with the Companys Code of
Conduct, (ii) the documentation supporting the sales transactions with which he or she was involved
is valid, appropriately authorized and complete and (iii) no conditions to any sales transaction
have been agreed to with the customer that have not been explicitly stated in the documentation
supporting that sales transaction.  
    
    In geographies where the Company has a limited operating history (e.g. Latin
America or any other new geography the Company may enter), payment of commissions
will be deferred until collection of accounts receivable has occurred.  
    
    We are assigning non-sales personnel to communicate directly with foreign
resellers and end-user customers regarding past due accounts receivable.  
    
    We have made changes to our reporting structure to provide for more direct
communication. These changes include sales operations now reports to
our chief operating officer and the head of professional services now reports
directly to non-sales management.  
    
    We have implemented more extensive background and reference checks to be
performed on all prospective employees.  
    
    We have expanded the Companys disclosure committee to include representations
from a broader cross section of departments.  
    
    We are implementing enhanced pre-close analytical review procedures to identify
emerging changes in our business. By implementing its planned internal control improvements, the Company expects to remediate
this material weakness. However, if the Company is unable
to (i) demonstrate that its internal
controls over financial reporting are designed appropriately and operating effectively for a
sufficient period of time, (ii) assert that its internal controls over financial reporting are
effective as of December 31, 2004, and (iii) complete its evaluation on a timely enough basis for its
independent registered public accounting firm to complete their assessment of the Companys
internal controls over financial reporting by the due date for the Companys 2004 Annual Report on
Form 10-K, the Company will have to report the material weakness in such Form 10-K. 
 PART II. OTHER INFORMATION 
 ITEM 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES 20




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Total Number of Shares
    
    Maximum DollarPurchased as part of
    
    Value that canTotal Number of
    
    Average Price Paid
    
    Publicly Announced
    
    Still be SpentPeriod
    
    Shares Purchased
    
    per Share
    
    Plans or Programs
    
    Under the ProgramApril 1, 2004 to
April 30, 2004May 1, 2004 to May
31, 2004
    
    
    445,534
    
    
    $
    2.77
    
    
    
    445,534
    
    
    $
    0.00June 1, 2004 to
June 30, 2004
 The Company announced on April 29, 2004 that its Board of Directors had approved a stock repurchase program. The Company could
spend up to $2.5 million during the second quarter of 2004 under this program. 
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At an annual meeting of stockholders on May 27, 2004, the stockholders took the following actions,
described in more detail in the definitive proxy statement filed April 14, 2004, by votes as
indicated below: ABSTAIN /
    
    BROKERMATTER
    
    FOR
    
    AGAINST
    
    WITHHELD
    
    NON-VOTESReelection of
Eric J. Pulaski
to Board of Directors
    
    
    42,276,397
    
    
    
    0
    
    
    
    1,731,412
    
    
    
    0Reelection of
Peter T. Dameris
to Board of Directors
    
    
    41,868,053
    
    
    
    0
    
    
    
    2,139,756
    
    
    
    0Amendment to
Non-Employee
Director Stock
Option Plan
    
    
    13,892,209
    
    
    
    12,782,848
    
    
    
    132,184
    
    
    
    17,200,568
 Continuing in their terms of office as directors after the meeting were Richard A. Hosley II,
Edward L. Pierce, Robert D. Repass, and Armand S. Shapiro. 
 ITEM 5. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This
Quarterly Report on Form 10-Q/A, Amendment No. 1 includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of historical facts included
in this Report, including without limitation, statements regarding the Companys future financial
position, revenue and expense projections, business strategy, planned products, products under
development, markets, budgets and plans and objectives of management for future operations, are
forward-looking statements. Although we believe that the expectations reflected in these
forward-looking statements are reasonable, we cannot assure you that those expectations will prove
to have been correct. Important factors that could cause actual results to differ materially from
the Companys expectations are disclosed in statements set forth under Cautionary Statements in
our Annual Report on Form 10-K/A, Amendment
No. 1. 21




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ITEM 6. EXHIBITS (a)  Exhibits: The
following exhibits are filed with this Quarterly Report on
Form 10-Q/A, Amendment No. 1. Exhibits designated by the symbol * are filed with this Quarterly Report on Form
10-Q/A, Amendment No. 1. Exhibit 31.1*
    
    Certification of the Companys Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2*
    
    Certification of the Companys Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1*
    
    Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2*
    
    Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 22




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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. BINDVIEW DEVELOPMENT CORPORATIONDecember 20, 2004
    By:
    /s/      KEVIN P. COHNKevin P. CohnVice President, Controller and Chief
Accounting Officer
(Principal Accounting Officer) 23




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EXHIBIT INDEX Exhibit 31.1*
    
    Certification of the Companys Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002Exhibit 31.2*
    
    Certification of the Companys Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32.1*
    
    Certifications of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2*
    
    Certifications of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002